Volume 553, July 23 – July 26, 1942

DIARY Book 553 July 23 - 26, 1942 - A - Book Page Airport - New Hackensack (New York) Airport Plans for improvement reported to HMJr - 7/23/42 553 85 "Out of bounds" designation suggested by HPJr because of private planes and plans for Hyde Park protection - 8/3/42: See Book 556, page 29 Alaska See U.S.S.R.: Gold American Viscose Corporation Arbitration between British Treasury and Messrs. Courtald's, Ltd., announced by Chancellor of Exchequer in House of Commons - 7/23/42 89 Appointments and Resignations Foley, Edward H., Jr: Letters in connection with entering Army - 7/24/42 221 Argentina See Latin America - C - Correspondence Mrs. Forbush's resume - 7/24/42 243 Cowen, Samuel HMJr arranges for transfer to New York Procurement office at Mrs. FDR's request - - 7/23/42 77 - F - Financing, Government Warren comment on Treasury policy of conversion from peace to war finance - 7/23/42 46 Victory Fund Committee: Summary of views as to type of issue Treasury should offer during August, etc. - 7/24/42 165 War Savings Bonds: For address to Navy Department employees, see Speeches by HMJr Scherman's (Harry) "Invisible Greenbacks": No member of staff associated with re-print - 7/23/42 65 Labor-Management conferences (regional) - Gamble memorandum - 7/23/42 68 Payroll Savings Plan: Analysis as of July 18, 1942 - 7/24/42 213 Government Departments report - 7/25/42 281 Foley, Edward H., Jr. See Appointments and Resignations - G - Gold See Post-War Planning: United Kingdom . U.S.S.R. *Secret Service (Reilly) report - 8/15/42: Book 559, page 84 Regraded Unclassifi - I - Book Page Inflation Conference; present: HMJr. Bell, White, Cairns, B. Bernstein, and Paul - 7/24/42 553 153 a) FDR's attitude at Cabinet meeting discussed by HMJr; possibility of FDR's sending up message for Executive Order b) Bernstein memorandum showing how freezing control statute gives President power to control wage levels and prices of agricultural commodities - 7/24/42 256 c) Cost-of-living Executive Order: Rosenman, Byrnes, and Ginsburg working on - 7/25/42 280 d) Paul sends to Rosenman proposed draft orders - one covering wages and the other agricultural prices - 7/26/42 294 e) Conference; present: HMJr, Paul, Buffington, Gamble, Thompson, Schwarz, Odegard, Cairns, Haas, Bell, and White - 7/27/42: Book 554, page 2 f) Bernstein memorandum explaining FDR's future plans following conference - 7/28/42: Book 554, page 33 g) Conference; present: HMJr, Bell, White, Haas, and Friedman: Book 554, page 49 h) National Grange resolution - 7/27/42: Book 554, page 60 1) Conference; present: HMJr, Bell, Paul Stewart, Haas, Cairns, Friedman, Viner, White, and B. Bernstein - 7/28/42: Book 554, page 197 1) FDR decides "to get tough" on agricultural prices and wages 1) Rosenman-HMJr conversation on New York Times article - 7/28/42: Book 554, page 246 1) "Leak" through Bernstein's wife: Book 554, page 279 k) Conference on New York Times article; present: HMJr, White, Cairne, Paul, and B. Bernstein: Book 554, page 251 1) Babcock (Farm Bureau) and HMJr conversation: Book 554, page 272 "Invisible Greenbacks" See Financing, Government: War Savings Bonds - L - Latin America Argentina: Immediate action on financial controls as proposed by Argentine Committee - White memorandum - 7/24/42 270 Lend-Lease United Kingdom: Federal Reserve Bank of New York statement showing dollar disbursements, week ending July 15, 1942 - 7/24/42 263 Regraded Unclassified - и - Book Page Military Reports British operations - 7/23/42, etc 553 97,98,274, 291,293 "The War This Week, July 16-23, 1942" - Office of Strategic Services report 100 Hoflich reports: British YS. German tactics in North Africa - 7/24/42 276 Russo-German Front - 7/24/42 278 - I - - Navy Department See Financing, Government: War Savings Bonds . Speeches by HMJr New Hackensack (New York) Airport Plans for improvement reported to HMJr - 7/23/42 85 "Out of bounds" designation suggested by HMJr because of private planes and plans for Hyde Park protection - 8/3/42: See Book 556, page 29 Secret Service (Reilly) report - - 8/15/42: Book 559, page 84 - P - Post-War Planning United Kingdom: British Treasury discussions reject idea of return to gold standard - 7/25/42 268 House of Lords debate - 7/27/42: Book 554, page 140 - R - Rubber Scrap: 102,000 pounds turned in by Treasury - 7/24/42.. 102 - S - Scherman, Harry "Invisible Greenbacks": See Financing, Government (War Savings Bonds) Second Front Knox tells HMJr that Hopkins, King, and Marshall (in England) instructed by FDR not to return until British agree to attack with us this summer - 7/24/42.. 146-A Speeches by HMJr War Savings Bonds: Remarks to Navy Department employees in connection with announcement of results of 10% deduction plan - - 7/23/42 8 a) Reading copy - 7/24/42 147 - U - Book Page U.S.S.R. General Doolittle--HMJr conversation: Litvinov has told HMJr American aviators will be treated like officers of similar rank in Red Army - 7/23/42 553 12 Gold: Delivery of $3 million plus at Nome reported by Treasury to Secretary of War - 7/24/42 269 a) Air Force will fly gold from Nome to Denver - 7/27/42: See Book 554, page 161 Delivery of 28 cases at Brooklyn - 7/27/42: Book 554, page 162 a) Resume of: Book 554, page 382 United Kingdom See Lend-Lease . Post-War Planning # Second Front - V - Victory Fund Committee See Financing, Government Viscose Corporation, American See American Viscose Corporation - W - War Department Banking facilities discussed in Stimson-HMJr correspondence - 7/24/42 241 War Savings Bonds See Financing, Government Warren, Mr. See Financing, Government 1 July 23, 1942. 2:40 p.m. HMJr: Hello. (W.H.) Operator: One moment, Mr. Secretary. HMJr: Hello. Hello. Operator: Shall I ring you back? HMJr: I'll hold on a minute. Operator: All right. HMJr: Hello. Operator: Yes, sir. Shall I ring you back? HMJr: What did they say over there? Operator: It was a man operator - he.... HMJr: Yes. Operator: ....I told him I was going to ring you. There you are. HMJr: Hello. Grace Tully: Hello. HMJr: Hello, Grace? T: Yes, Mr. Secretary. HMJr: How are you? T: Fine, sir. HMJr: Two things.... T: Yes, sir. 2 - 2 - HMJr: the President talked to me yesterday about what he was going to - thinking of doing in regard to this cost of living T: Yes. HMJr: and he said he wanted to get the Attorney General to give him a ruling. T: Yes. HMJr: Well, over if you make a note - our boys here are working along some entirely independent lines on the authority that the President could work along T: Yes. HMJr: ....on the monetary authorities, I mean, which may or may not lead anywhere, but we're working very hard on it. T: Yes. HMJr: And I was thinking if he's going to do something on this, I'd like to suggest that he get Sam Rosenman down here T: Yes. HMJr: because I don't think the Attorney General will give him much, and I think he needs Sam on this. T: Uh huh. HMJr: But I'd like T: That's the whole inflation program, 1s it? HMJr: Yes, it's a question - if the President goes the way he talked yesterday, he's going to do it through an Executive Order. T: Yes. HMJr: I mean - now we've got some suggestions. I understand that Henderson's people worked all last night on some suggestions. 3 - 3 - T: Yes. HMJr: ....and I suppose the Attorney General has. Well, it needs somebody like Sam to put it together. T: Uh huh. HMJr: See? T: Yes. HMJr: And the President laid great stress on it. T: Yes. Well, I think he is coming down tomorrow. HMJr: Oh, he 1s? T: Yeah. HMJr: Well, that's wonderful. T: He called today, and I think Mac called him back and suggested that he come down here tomorrow. HMJr: Well, do you suppose the President would mind my suggesting he put Sam on that? T: No, I think it's the kind of thing he will put him on, when he gets the data together. HMJr: Right. Now the other thing 18 that about ten days or two weeks ago the President saw Dr. Weizmann. T: Yes. HMJr: And he - the President said he'd like to see him again in ten days T: Uh huh. HMJr: and Dr. Weizmann called up McIntyre, and McIntyre never knew who he was and 80 forth.... T: Uh huh. HMJr: ....and 80 on, and at the President's pleasure he - he'd like to come down and see him again. 4 - 4 - T: Yes. HMJr: He's working on rubber, you know. T: Yes. All right, fine, I'll mention it to him and ask him if he'd like to see him and when. HMJr: I thank you. T: Right, sir. HMJr: You sound very serious. T: Do I? HMJr: Yes. T: I don't mean to. (Laughs) HMJr: Well, now let me see, who said that they saw the great Grace Tully last night - somebody that I.... T: I was over to Kintner's last night. Did you see Bob? HMJr: It - no, it wasn't - somebody that had never met.... T: oh! Ferd Kuhn. HMJr: What? T: Kuhn. HMJr: Oh, that's who it was. T: That's right. He - he and his wife were there to dinner. HMJr: Yeah, they're very much impressed with you. T: Very nice, I liked them both. HMJr: They are nice. T: Awfully nice people. Grand.... HMJr: All I could remember was that they said you were great, but I couldn't remember who said it. -- 5 - 5 - T: (Laughs) You couldn't remember who said it. HMJr: No. T: But you knew it was somebody who was crazy probably. (Laughs) HMJr: No, I told him I'd known it a long time. T: I see. Well, that was very nice. HMJr: Thank you. T: Grand, Mr. Secretary, and I'll call you back on it. HMJr: Goodbye. T: Fine, goodbye. 6 July 23, 1942. 4:20 p.m. Secretary Knox: Hello, Henry. HMJr: How are you? K: Fine. Say, Henry, tomorrow - or Saturday noon just - Friday noon.... HMJr: Yeah. K: just at twelve, we're going to have a little ceremony out in front of the - out in front of the building here on our ten percent business. HMJr: Yeah. K: And there's a marine band's going to be there, and Ralph Bard and I are going to make a little talk, and we want you to come along and make a little talk too. HMJr: Well, what time would that be? K: Get here at twelve o'clock, and the party begine at twelve-ten. HMJr: You mean at your office at twelve? K: Yeah, come to my office and have break.. - have lunch with me. HMJr: Is it Friday or Saturday? K: Friday. HMJr: Friday. K: Yeah. HMJr: Ah - I'd like to do it. K: That will be fine. We'll go from here to Cabinet. HMJr: and - 2 - K: Have lunch with me, and we'll have a good talk. HMJr: Ah - I don't know that I'll talk, but I'll stand up there and grin anyway. K: (Laughs) Well, you've got a very elocuent grin, Henry. HMJr: Who are you - who are you talking at? K: Oh, all the people in the - the - the crowd here in the Navy Department. HMJr: Fine. K: They - we got the street closed off, and we'll have the band, and we'll have quite a crowd, I think. HMJr: Well, I - - I - - I'd be delighted to come. K: And the Department, incidentally, is going over like a house afire. HMJr: Well, they would under your leadership. K: (Laughs) Thank you, Henry. HMJr: All right. K: All right, that will be fine. HMJr: Thank you. K: Goodbye. 7/23/42 8 Draft of HM, Jr's remarks to Navy Department employees in front of Navy Building when Secretary Knox will also address them on results of their 10% Deduction Plan. Draft 7/24/42 9 Mr. Knox, Mr. Bard, Ladies and Gentlemen: This is certainly a stirring and heart-warming demonstration. I share with you the pride and satis- faction that all of you must feel over the outstanding success achieved by the Navy Bond Campaign. There is always satisfaction in a job well done. That is par- tioularly true in this case, for sound and adequate financing is one of the most important phases of our all-out war effort. To prosecute the war during this next year, it will be necessary for the Government to borrow at least $50,000,000,000, more than $4,000,000,000 12 a month. We hope that at least $1,000,000,000 & month of this will come through the sale of War Bonds to wage earners and salaried employees. It is essential not only for the successful conduct of the war but for the economic welfare of the nation that as much as possible of the income of individuals be invested in Government securities. This 18 imperative for a number of reasons. One is that this money is actually needed to finance the war. It helps to pay for the books wespons our courageous fighting forces need to defeat the enemy. Another reason is that by investing as much as possible of our current income in war bonds, we reduce unnecessary spending and thus help to keep prices down. Every bird dollar me get thing means one dollar bee that we shall have to bonow from the banks 10 We all know that the supply of civilian goods is being drastically curtailed by the demands of war production. with more money to spend for fewer goods, prices are bound to increase unless we deliberately resolve to spend less and save more. In war time spending as usual is as bad as business as usual. By investing every cent we can in War Bonds, we can kill three birds with one stone. First we can help buy planes and guns and ships, for our fighting men. Second we can help keep down the cost of living for ourselves and for the government. And third, we can protect our own future security with the savingswe accumulate now. To accomplish these objectives the slogan of our War Bond Campaign has been "Everybody -- Every Pay Day -- 10%.* It is proper that we who are in Government ser- vice should set an example for those employed in business and industry. The Treasury Department last month, and now the Navy Department, have gone over the top in this campaign. Over 90% of their The employees, are investing of both departments more than 10% of their total pay in War Bonds every pay day. We of the Treasury and you of the Navy have thus said to employees everywhere, in other Government Departments and in private business and industry, "We have shown the way. This job can and must be done." associate Personally and on behalf of my fellow employees in the Treasury Department, I congratulate you. By your Regraded Unclassified 11 success in this campaign you have demonstrated the truth of your War Bond slogan, "Navy Dollars are Fight- ing Dollars." My thanks and congratulations to you all. Keep up the good work. 12 July 23, 1942. 4:52 p.m. General Doolittle: Ah - Doolittle, Mr. Secretary. How are you, sir? HMJr: I'm all right, General. Ambassador Litvinov left here a little while ago - hello.... D: Yes, sir. HMJr: ....and he gave me this sort of peculiar message. He said that we had been misinformed, and he wanted to know who told us thirty thousand rubles a month. Well, I told him.... D: Yeah. HMJr: I didn't know who the message came from. But I told him that - he said - if you've got a pencil - hello D: Yes, sir. HMJr: that they proposed to charge seven thousand five hundred rubles a month for five men.... D: Yes. HMJr: ....which works out at $280 per man per month. D: Yeah. HMJr: Then he said, "However, we will treat the American aviators in a manner similar to their rank of our own.... D: Uh huh. HMJr: soldiers. # D: Yeah. HMJr: So I said, "Well, does that mean you're going to charge them or not charge them?" He said, "Well, my impression is that they're not going to be charged anything." D: Uh huh. 13 - 2 - HMJr: But he said, "That's the message that I got, that they're going to be treated just like officers of similar rank - given the same food and shelter." D: Yes. Well, now in our army, and I presume in theirs, an officer HMJr: Yes. D: ....1s obliged to furnish his own quarters, his own food and shelter, and his own uniforme. An enlisted man has all that furnished for him. HMJr: Yes. D: So (laughs) I suppose that they are supposed to - to - or at least our Government 18 supposed to pay this $280 per man per month for them. Now they get $6 & day HMJr: Yes. D: when they're on a mission of this kind. Our people all got a per diem of six dollare per day. HMJr: Yeah. D: Now that's & hundred and eighty bucks, and they're only a hundred bucks in the hole according to that. HMJr: Well - ah - at least we've gone from seventy- five hundred rubles.... D: Well, we've got it down to & quarter of what it was. HMJr: We have a quarter. D: It's a pretty good stroke of business. HMJr: Well, I - - we've got him down from thirty thousand rubles to seventy-five hundred. D: Yes, sir. That's a quarter. 14 - 3 - HMJr: And that's a quarter, and - you might check up on it and let me know whether that is 80, see? D: Yes, sir. HMJr: Now I - - don't tell me where you heard it from because I don't think it's any of his business. D: Right. HMJr: Because if he knew he might want whoever it was disciplined, and if I don't know I can't tell him. D: Right. HMJr: So - but I would be curious to know whether that - what he's told me today checks, and you have ways of finding out, haven't you? D: I will get in touch with our Cable Department and see if we have any further information on it. HMJr: Right. Well D: Okay, Mr. Secretary, I'll call you back as soon as I get any information. That might be in the morning. HMJr: That - that's all right. D: Right, sir. HMJr: Thank you. D: Goodbye. 15 July 23, 1942. 4:57 p.m. HMJr: Hello. Operator: Miss Tully stepped out of her office for a moment. HMJr: Is Mrs. Brady there? Operator: I'll see. The operator went off the line. I'll have her in just a moment. 4:59 p.m. HMJr: Hello. Operator: Mrs. Brady. HMJr: Hello. Kathryn Brady: Yes, Mr. Secretary. HMJr: Mrs. Brady, would you make a note for Grace Tully? B: Uh huh. HMJr: There's a letter coming over from Edward Foley mesigning as General Counsel. He's going in the army. B: Uh huh. HMJr: And - I'd appreciate it if she'd see that the President writes him a nice letter... B: Uh huh. HMJr: for the work he's done here in the Treasury, which has been excellent. B: Uh huh. All right, sir. I'll take care of it. HMJr: I thank you. B: All right. Regraded assified 16 Secretary Morgenthau's statement before Senate Finance Committee on July 23,1942 17 You will recall that in his Budget Message of January 5th, President Roosevelt asked for additional taxes for the fiscal year 1943, exclu- sive of Social Security taxes, of seven billion dollars. On March 3rd, I appeared before the Committee on Ways and Means of the House and presented recommendations for a tax program to produce seven billion, six hundred million dollars in additional annual revenue from taxes. On May 6th I wrote a letter to the Chairman of the Committee on Ways and Means recommending a reduc- tion in personal income tax exemptions to produce approximately one billion, one hundred million dollars more revenue. - 2 - 18 These two recommendations together involved a tax program of eight billion, seven hundred million dollars of additional revenue. These amounts represented what I believed, and still believe, was the very least that the American people could afford to provide. It is only against the background of our war expenditures that we can tell whether the Revenue Bill before you will fulfill its purpose. We are now spending one hundred fifty million dollars a day, or almost five billion dollars a month. In the fiscal year that is beginning we expect to spend the almost inconceivable sum of seventy-seven billion dollars to win this war for human freedom. 19 - 3 - There can be no compromise with these war expenditures. We would not reduce them if we could. Our whole effort must be to translate our spending as fast and as effectively as possible in the actual production and use of our war materials. If our expenditures this year reach seventy-seven billion dollars, our receipts in revenue from the people must bear some reasonable relationship to that colossal figure. If the House Bill were to become law it would be necessary to borrow from the public during this fiscal year about fifty-three billion dollars. Regraded Unclassified 20 - 4 - To the extent that we enlist our current income in taxes to cut down this borrowing, we shall be protecting the future economic soundness of our country and our free institutions. To the extent that we fail, we shall be endangering the survival of all that we are fighting to preserve. It 1s interesting to remember that only two years ago, in the fiscal year 1941, we were devoting only about seven percent of our national income to defense expenditures. In the present fiscal year we shall be spending about half of our national income on the war. 21 - 5 - Thanks to the foresight of President Roosevelt and the splendid cooperation of Congress, we expect to devote to the war effort in our first complete fiscal year of war a proportion of our national income roughly comparable to the pro- portion being spent by Canada and approaching that being spent in Great Britain. We get a different picture, however, if we look at the percent of expenditures financed through taxes in the three countries. In the fiscal year 1941 Canada financed about seventy percent of all its expenditures by taxation, and in the fiscal year 1943 it expects to raise about fifty-five percent from taxes. 22 - 6 - The United Kingdom, in the fiscal year 1941, financed forty-four percent of all its expendi- tures by taxation, and in the fiscal year 1943 it expects to raise fifty-three percent from taxes. In the United States, however, including Federal, State, and local governments, only thirty- seven percent of all fiscal 1943 Government expendi- tures would be financed by taxation on the basis of the Revenue Bill now before you. It 18 clear that we are substantially behind Great Britain and Canada in the proportion of our expenditures which we are raising from taxes. Quite frankly, I do not see why we should not do at least as well as Great Britain and Canada. 23 - 7 - Taxation and the Cost of Living Taxation does more than supply money to finance the war. It does more than apportion the war burden now, once and for all, instead of leaving it for further distribution through taxes after the war. Wartime taxation also plays an important part in preventing rapid and continued increases in the cost of living. The President has announced a seven-point program for holding down the cost of living. Ceilings have been placed on prices. This fact may have caused many people to be unduly optimistic about the future of the cost of living. 24 - 8 - It cannot be too strongly emphasized that if the price ceilings are to be maintained and rapid and continuous price rises avoided, the pressure of the large and expanding volume of consumer purchasing power on the diminishing supply of goods must be reduced. To reach a much larger volume of consumer purchasing power, the Bill now before you includes such a broad reduction of personal exemptions that it will affect almost seven million indi- viduals who have never paid direct taxes to the Federal Government before. If this section of the Bill 18 passed as it stands, some thirty-one million income tax returns will be filed in 1943 as against only seven million, seven hundred thousand in 1940. 25 - 9 - For the first time in our history the income tax is becoming a people's tax. Taxes cannot, by themselves, win the battle against inflation. The battle must be fought with determined and coordinated effort on many fronts. Taxation can be fully effective in this battle only if it 1s accompanied by restraint and self-denial in other fields. Nevertheless, taxation by itself can make the price situation more controllable and less dangerous than it otherwise would be, and it 18 an essential anti- inflationary weapon that must be used to the utmost. 26 - 10 - Inflation has been well described as "the ruth- less process whereby sacrifice is imposed inequitably upon a people who have lacked the unity, the courage and intelligence to impose that sacrifice equitably upon themselves." It 18 for us to show that we have the unity, the courage, and the intelligence to check inflation now. Treasury Program a Minimum Program The Administration's revenue program was presented last Spring as a minimum. On March 3rd, when I first came before the Ways and Means Com- mittee, our total contemplated expenditures for the fiscal year 1943 were sixty-three billion dollars. 27 - 11 - Since then they have risen by fourteen billion dollars, and the total war appropriations, authorizations and requests for this and succeed- ing fiscal years have risen by seventy-five billion dollars. It is true that the B1ll before you would produce by far the greatest revenues in our history, and I would not wish for one moment to minimize the task performed by the Ways and Means Committee. Yet this B1ll would provide only six billion, three hundred million dollars additional revenue in place of the eight billion, seven hundred million dollars we recommended in the Spring. It would fail by about two billion, four hundred million dollars to reach that minimum of last Spring, which 18 even more emphatically the very least we can afford to provide today. 28 - 12 - In presenting its revenue program to the Committee on Ways and Means, the Treasury out- lined methods of taxation which it considered most desirable and appropriate to raise the required amounts. I still believe that these proposals are sound and present the best sources for a revenue program of this size. They are based upon the principle of ability to pay, and they avoid such devices as a general sales tax, which would fall with the greatest impact upon those least able to bear the burden. The various provisions of the Administration program are well known and it is not necessary to repeat them here. I should like, however, to emphasize certain points which I hope will be most carefully considered by the Committee. 29 - 13 - 1. Special Privileges The Revenue B1ll as it stands violates the basic principle of equity which 1s so important to an all-out war finance program. It does this by leaving certain highly privileged groups free from tax on large portions of their income. The first of these especially favored groups are the recipients of tax-free interest from State and municipal securities. Exemption of interest on State and local securities 18 a serious breach in our system of taxing according to ability to pay. For example, in the case of one individual, out of a total reported income of approximately nine hundred seventy-five thousand dollars, over six hundred sixty-eight thousand dollars came from State and local securities. - 14 - 30 If the B1ll as it passed the House should become law, this individual would pay only two hundred forty-three thousand dollars; if, on the other hand, your Committee would adopt my suggestion and remove this pre-Pearl Harbor exemption, he would pay eight hundred thirty-two thousand dollars. Let me put the illustration another way. If this exemption 18 retained he would have seven hundred thirty-two thousand dollars left after taxes; if it 1s abolished, he would have one hundred forty- three thousand dollars left. The glaring unfairness of this exemption may be seen in another way. 31 - 15 - Under the tax rates in the House Bill, a person with a surtax income of one hundred thousand dollars from other sources who holds a three per- cent tax exempt security receives as much net return after taxes as from a taxable security yielding 20 percent. The existence of this special privilege for all holders of tax-free securities costs the Government and the people of the United States, under the House rates of tax, about two hundred million dollars a year; and it will cost still more as our wartime taxes tempt more and more wealthy individuals to shift their investments into the hide-out of tax exempt securities. 32 - 16 - How can we expect to obtain an all-out war effort from all our people if we go on permitting a group of individuals and corporations owning fourteen billion dollars of State and local securities to go tax free on the income from these securities? We are asking our young men to give their lives for their country, and at the same time we are allowing many wealthy persons, safe behind the lines, to escape their fair share of the war's financial burden. At a time when we are straining our energies to the utmost to defeat a powerful and ruthless foe, common decency requires that we abolish these special tax shelters, and do it now. 33 - 17 - Another highly privileged group having large amounts of income exempt from income tax are the owners of oil wells and mines. I refer to those provisions of the law dealing with percentage depletion. Percentage depletion is a serious breach in our system of taxation according to ability to pay. I cannot believe that the taxpayers of America would knowingly sanction a provision of the law which allows owners of oil and gas wells to deduct from their income twenty-seven and one- half percent of their gross receipts from such wells--not for one year, two years, or the period necessary to return investment, but for an unlimited period. 34 - 18 - For example, a leading oil company owned a number of oil properties which had cost it three million dollars. At the time the case was examined per- centage depletion of three billion, six hundred million dollars had already been allowed and the properties still had three-fourths of the oil left. Certainly we cannot justify this exemption on the ground that it encourages exploration and drilling for oil. There 18 grave doubt that it has a substantial effect on oil discovery. It would have cost the Federal Government about one- third as much to have paid all the cost of every wild-cat well that was drilled in 1941 as to have allowed percentage depletion and the associated intangible drilling expenses. 35 - 19 - The annual cost of these allowances under the proposed rates would be about two hundred million dollars. The privilege of filing separate income tax returns furnishes another example of special tax advantage to many married couples having larger than ordinary incomes. In families in which the income is earned partly by the husband and partly by the wife and in families in which income-earn- ing property can be divided between husband and wife, the tax on the family income is less than where the husband or wife receives the whole income. 36 - 20 - The family 18 the true economic unit, and it is unfair for the amount of tax on the family to vary depending upon who earns the income or upon who in the family has income-producing property. Ability to pay taxes must be judged in terms of family incomes and not the incomes of members of the family. The failure to require joint income tax returns constitutes a violation of the funda- mental principle upon which our tax system has been based. The adoption of mandatory joint returns would also eliminate another discrimination prevailing under existing law. 37 - 21 - Married couples living in the eight so-called community property States receive tax advantages which are in no way commensurate with any special relationship that may exist between husbands and wives in those States. For example, take a family in which the husband has a salary of ten thousand dollars after deductions. If the family has its residence in, say, California, and filed community property returns, the family tax would be one thousand, seven hundred eighty-eight dollars, while if the family lives in, say, Iowa, the tax would be two thousand, one hundred fifty-two dollars, or over twenty percent more. The dis- crimination 18 even more pronounced with larger incomes. 38 - 22 - In this national emergency, how can we complacently permit the citizens of these community property States a more favorable tax status than those of the rest of the country? These examples of special privileges are intolerable at a time like this, when we are imposing heavy taxes on persons with small incomes and there is pressure for limiting wages and farm prices. The country is in greater danger today than ever before in its history. The war is now in its most critical phase, and only by pulling together as a united people can we make the effort that will turn the tide toward victory. 39 - 23 - At such a time any special privilege for any group not only deprives the Treasury of revenue that is badly needed for the war effort, but it hinders the war effort by undermining the morale without which the war cannot be won. 2. Excess Profits Tax Another similar hindrance to the prosecution of this "people's war" is the existence of exces- sive profits in wartime. There 18 no easier way to stir the righteous anger of the American people than to let them hear constantly of excessive war- time profits that are not being recovered by adequate taxation. I have said repeatedly that we are determined to take the profit out of war, and the Treasury's recommendations have been framed with this determination in mind. 40 - 24 - An effective excess profits tax does much more than produce badly needed revenue in time of war. It also reassures the masses of our farmers and factory workers that industry is not being rewarded unduly for its part in the winning of the war. I do not believe that any patriotic American needs the "incentive" of profits to produce for war at this time. Millions of our people are willing to pay new and genuinely burdensome taxes, to buy War Bonds without stint, and to do without many of the accustomed luxuries and even con- veniences of daily life. Their only "incentive" 18 their firm resolve to win this war and build a better future. 41 - 25 - Experience has shown, however, that when excess profits taxes are too high they may result in extravagance and waste in the conduct of busi- ness. It 18 vitally important that we stimulate business to produce for war purposes as economi- cally and efficiently as possible, if for no other reason than to avoid a waste of war materials and labor and to hold down the cost of the war to the Government. Moreover, a post-war credit to industry will help toward the rebuilding of our economic life. For these reasons we have recom- mended a ninety percent excess profits tax coupled with a ten percent credit for return to the corpe- ration after the war. 42 - 26 - The credit should, of course, be restricted in such a manner that it would be used for the direct employment of labor, the conversion of plant to peacetime business or for other uses promoting economic adjustment and growth. 3. Tax on Freight and Express One tax that would be imposed by the B1ll before you directly threatens the stability of prices. This 18 the tax on freight and express which would add to the cost of producing and supplying practically every commodity and service. In great numbers of cases the added cost would make it impossible for businesses to continue to operate under the price ceilings which have been imposed and the breaches in the price ceilings which would thereby be caused would threaten the whole price structure. 43 - 27 - Conclusion I shall not attempt today to discuss the more technical aspects of the long and complex Bill before you, nor to enlarge further upon the subjects I have mentioned already. The Treasury staff stands ready, as always, to assist you in every way possible in carrying out your difficult and responsible task. I should like, however, to make just one more appeal. Every day consumed in your Committee's work will lose us substantial amounts of revenue under the excise tax portions of the Bill. Every day that can be saved in en- acting this Bill will enable it to produce just so much more in needed revenue. Every day saved will give our citizens additional time to adjust them- selves to the impact of the most severe tax bill in all our history. 44 - 28 - I am discussing our tax problem with you today on broader grounds than that of revenue alone. It 18 my conviction that the people of this country want a courageous tax bill, and want it with the least possible delay. They are ready for greater sacrifices than some of us imagine. The overwhelming majority of them, I am convinced, want us in Washington to show a determination that 18 worthy of their own. They will be critical of us only if we seem to palter or haggle, or if we pay too much attention to the demands of selfish groups, or if we seem half-hearted in asking self- denial of the people as a whole. Our acceptance of sacrifice on the home front is a yardstick of our determination to win the war. 45 - 29 - For this reason 1t is unthinkable to me that we should be straining every effort on the fighting fronts abroad and on the production line at home, and at the same time be anything less than all- out in the financing of the war effort. This war, above all others, can be won only by hard fighting, by the acceptance of risks and deprivations, and by the united effort of civilians and fighting men alike. In this kind of war a tax bill can be a decisive battle. It could be lost by narrow vision and faulty leadership. It can be won by boldness and courage. I am confident that this Committee will live up to its high responsibilities and keep faith with a united people. 47 Warren 7/23/42 Comments on Treasury Policy As one surveys the record of the Treasury in the con- version of the country from a peace to a war basis, he finds much reason for congratulations and enough reasons for com- placency. In two years, the production of the country has doubled; and most of the increase of production has been on government account. Not only have 10 million persons been added to the list of gainfully employed, but other millions who were then employed have been transferred to new occupa- tions, often remote from their former residence. Whole new cities and new industries have been built, and armies and fleets assembled and equipped. On the financing of these programs, the Treasury has raised both by taxation and borrowing sums unparalleled in American history; and perhaps in the whole of universal history. All this has been done without imposing on the public anything that could be called privation or hardships; without visibly disturbing the credit structure; without even causing a ripple in the pattern of what are called money rates. By the usual pragmatic tests of fiscal achievement, this is a record of outstanding success; certainly in 00m- parison with the analogous period a generation ago the 48 - 2 - operation of the Treasury has demonstrated an efficiency, a sort of professional competence that, as I said above, not only silences criticism, but afford reasons for congratulation and for complacency; but none for confidence. So gradual, for our economy, were the successive trans- itions from peace to neutrality, from neutrality to non- belligerency, from non-belligerency to participation short of war, and finally to war itself, that one finds it difficult to remember that peace, even an uneasy peace, is one kind of world and war is another kind. As each of these successive phases made its increasing demands upon the Treasury, those demands were readily met by a new enlargement or an elabora- tion of an existing mechanism; and these several mechanisms carried the additional load without betraying any con- spicuous evidence of over-load. This is the occasion for what I have called both gratification and complacency. We may be gratified at the magnitude and efficiency of the achievement to date, but in my opinion we are only complacent, if we project their past into the future. The fact that no individual part of the mechanism has as yet broken under the load, does not prove that the whole machine is not overloaded. While I can see that there is no qualitative difference between a budget of, say, $6 billion and one of $12 billion; and while I would 49 - 3 - not be sure that there is a qualitative difference between a budget of $12 billion and one of $20 billion, I am willing to make the flat assertion that a budget of #75 billion differs from a budget of #6 billion or $12 billion or #20 bil- lion not merely in mathematical magnitude, but in its character -- that it differs in kind as war differs from peace; and that however well the individual elements of our financial structure seem to be carrying their specific load, the structure in its present form was never designed to carry a load of this weight and bulk; and that, flatly, it cannot carry it. To be specific, if we are confronted (as we are) with a budget equal to one-half (or more) of the so-called national income, either the structure must be re-designed from the ground up specifically to carry this load, or the load itself, in its own blind way, will determine the shape of the structure. And, if the structure is re-designed to carry the indicated load, the new design will be totally unlike the America that we know; if we allow the burden of the load itself to determine the shape of America, it will be totally unlike the America we have known. Because we have no idea of the duration of this load, we can offer no assurance that, when the war is over, we can, under either alternative, reshape the country at will. We can only say that some 50 4 alternatives appear to leave more opportunity for a future exercise of optional will, and that others appear to offer less. We will begin with a very simple but completely neglected figure. The figure 65 is one-half of 110; but there is a world of difference whether with a war budget of $65 billion and a national income of $110 billion, we spend half our national income on the war effort; or spend a sum of dollars equal to half the national income. If we choose the first alternative, the Treasury under- takes to recapture out of the national income one dollar out of every two in that total. If we choose the second alternative, the Treasury undertakes to recapture some frac- tion less than half of an estimated national income, and to provide the balance by the creation of dollars. Since these dollars, as created, and expended, will be added to the previously estimated income, the latter total will rise, and with it the uncaptured fraction. Under the latter alternative, the methods of creating dollars is determinable by relative cost and convenience. In its relevance to the main problem, it does not matter whether the Treasury employes the Bureau of Printing and Engraving to fabricate the dollars it creates; employs the Reserve banks on a cost plus contract, as pro- posed by Mr. Patman; or employs the existing mechanisms of 51 - 5 - the banking system. As an element in war finance, each of the three is identical, and preference can be discovered by consulting costs and conveniences rather than tradition or inapplicable canons of imputed monetary orthodoxy. There are, then only two alternative methods of shaping our structure to carry its over-load; recapture or inflation. Every proposal falls under one of these heads. Both require laying the hand of force upon the individual's entire income, in a manner beyond American experience. By either choice, we break with our monetary and financial past; and as we break with our monetary and financial past, we break many strands from our social and political past. For some of these strands, the rupture will be irreparable; for others the reparability will depend upon the duration of time; but broadly speaking, the degree to which we will retain any sort of volitional control of our future will depend upon the quality of thought expended on the present decision. A con- tinuance of the present mixed design of recapture and in- flation, inherited from an earlier period to which it was adapted and perpetuated in a present to which it is, by agree- ment, not applicable, is almost the surest, if not the surest way of surrendering our future to the casualities of time and circumstance. Regraded Unclassified 52 - 6 - While mathematically we would say it was possible to recapture half of a national income, it must be remembered that the national income -- or rather that figure of $110 bil- lion commonly called the national income -- is a sum of individual income, including innumerable duplications of simple and complex type. Its very existence depends upon its kinetic quality and we have no real idea of the extent to which this may be interrupted or even destroyed by efforts of recapture. But, mathematically, it is at least conceivable that it is possible to recapture half the national income. Some idea of the implication of this phrase is indicated by two ostensible faots. If we assume that there are about 55 mil- lion persons gainfully employed at the present time, the residual income after recapture would average $1200 or less. Or, put another way, if the present exemptions were converted into ceilings and the tax were 100 percent of all income above the present exemptions, it will recapture approximately the required sum. This gives some impression -- not a very exact impression, but the most exact I have -- of what is implied in the glib phrase "devoting half our national income to the war effort." Unless one is prepared to look that statement in the face, he need not both to read farther, because I intend to argue that if the alternative method is used, the fact will come out the same. 53 - 7 - Having looked at these figures, I recall the expression I used earlier. Only force -- the full force of the state -- can effect such a recapture; and all ideas of voluntary sav- ing can immediately be dismissed. One could not expect the individual voluntarily to reduce his expenditures to such ceilings, nor, if his maximum income was his present exemption, could he be expected to do much saving. When I spoke of the kinetic quality of income, the term was obscure and I will now give an example. For most home owners in New Jersey, the state property tax would constitute the first lien on retained income, and will constitute roughly 50 per cent of this income. These taxes, of course, are the source of income of the office holder of New Jersey, and to the extent that the proposed recapture induced tax delinquency, the incomes of these office holders would cease. Several methods of recapture have been proposed, but they are all expressive of two basie ideas. One of these may be called the ceiling income principle, the other the ration- ing principle. Under the former, the income tax would be a uniform 100 per cent of all income above specified maximum, which, as shown above, would be in the vicinity of the present exemptions. This 100 per cent tax could be divided into a simple tax (a non-recoverable contribution) and an element Regraded Unclassified 54 - 8 - of forced saving (a contribution recoverable at some time and on some terms in the future). With incomes at this level, there would, of course, be no problem of wage controls, price controls, rationing or even consumers preference. The retained income would in no case exceed the closest minimum of absolute necessities. The rationing principle is much the same. That is, the individual would receive a coupon book entitling him to buy specific amounts of enumerated necessities; and either no articles or only a limited list of articles could be purchased without the coupon. In short, his money would not be legal tender for the purchase of any goods except as accompanied by its appropriate coupon. The remainder of his income would literally have no value except for hoarding, (1.e., the pur- chase of small denomination, non-interest bearing public debt) or for investment (in interest bearing public debt). This would not entirely eliminate the need of wage control, but it would eliminate the need for price control, since supply could be equated to an absolutely limited demand. Neither Germany nor England seem to have accepted either of these principles in a pure form; but seem to have adopted elements of each; and, since they are both mere variants of the principle of recapture, they are not in mutual conflict. In both countries, there seens to be a margin of optional 55 - 9 - spending money left for the purchase of unrationed goods and services; but in both countries the limits of domestic production and the isolation of the blockade greatly reduce the amount and variety of unrationed articles. In both countries, a flourishing black market exists, which would, of course, be impossible if either plan of recapture were strictly in use. I do not know about Germany, but for England, it is more than doubtful if anything like half the national income is recaptured by the Treasury. Both schemes, or a combination of the two, present no serious administrative difficulties when applied to persons in receipt of regular income from a single source. More dif- ficulties would arise in the cases of the self-employed, such as farmers, or the casually employed by several employers. These groups can certainly be more easily reached by the ration or coupon method than by the ceiling income method. For the farmers, this is no great matter, for the total of farm income is so small that if it were all recaptured or all exempted, it would have little effect on war finance. Superficially, both forms of recapture seen more drastic than inflation; seem to be more of a break with the past; seen to be less in accord with the "American Way." While verbal horror of inflation is widespread, even unanimous, this opposition to date has been merely verbal. As a matter 56 - 10 - of fact, we have employed and are employing inflation or a major element in our war finance; it has been se employed somewhere and in other times as a method of war finance; at least as much is known of the social and economic conse- quences of inflation as a method of war finance as is known of the social and economic consequences of drastic income taxation; and much more than is known of the social and economic consequences of such devices as income oeilings and non-spendable money. This knowledge has given it a bad name -- BO bad, indeed, that there is an impulse to experiment with devices which are more favorably regarded principally because they are less known. For myself, I admit a certain propensity toward the oeiling income scheme -- of which there is no example in history; and of a deep dread of inflation, of which history affords many examples, and about which I know & good deal. I suppose that one could readily assemble 50 tax experts among American universities; but he would have a dreadful time collecting five tax economists. Even England, which has had a long experience with relatively large taxation, has never developed more than two or three, and those none too good. Now, with all its evil reputation, a case can be made for inflation as a measure of war finance; and I will undertake the office of devil's advocate. There are three initial Regraded Unclassified 57 - 11 - facts in its favor: (1) the mechanism already exists and its utilization is fully subject to administrative action, without additional legislation, (2) it can be used to provide large sums with great rapidity, (3) it has demonstrated its capacity to capture larger fractions of the national income than any other demonstrated type of taxation. For inflation is not a peculiar financial monstrosity; it is a form of taxation and should be regarded as objectively as any other form of taxation. As a form of taxation, inflation has two unique qualities apart from those listed above. (1) It 1s not merely a tax on current income, but a levy on capital, or invested saving -- for which saving converts income into capital, the capital levy in the form of infla- tion converts capital into income accessible to the state, without conflicting with the mass of contractual relationships that impose real obstaoles to the maximizing of other forms of taxation. (2) When every other form of taxation rouses resentment against the state, as the responsible party, the incidence of inflation is such that the resentments are not directed against the "Hidden Hand," but against a succession of groups in the community. In the present instance, when inflation has already aroused some feeling, in the population, the public resentment has been successively diverted against farmers, organized labor, the black market, Leon Henderson, Treasury Department 46 Division of Research and Statistics Date July 31, 1942 To: Secretary Morgenthau From: Mr. AM. Hass Attached is a memorandum on Treasury Finance, prepared by Mr. Warren in response to your request. 58 - 12 - the Standard 011, and other groups whose responsibility is inconsiderable. The charge is often made that inflation is inequitable. Non-schematic inflation, like any other form of inflation, is conspiouously erratic. Strategic groups and adroit individuals are able to avoid its incidence; while weak groups and the vast majority of the population thus contribute cor- respondingly more than their theoretically equitable share. This is not peculiar to taxation by inflation. Equity is of course difficult to define, but I have never seen it demon- strated that inflation was more inequitable than any other form of taxation, attempting to capture an equal proportion of the national income. In any form of taxation the oon- sideration given to equity varies inversely with the amount of revenue required; and when one is considering budgets equal to half the national income, equity must be considered in very elementary terms; such, for example as those applied by draft boards. There is, however, one definite pragmatic test of equity. The administration of taxation by inflation must be suffi- ciently equitable to prevent the inevitable group antagonisms from reaching the stage where they disrupt national unity; but this would be true of any other form of taxation of equal magnitude. Treasury Department 46 S Division of Research and Statistics Date July 31, 1942 To: Secretary Morgenthau From: Mr. AA. Hear Attached is A memorandum on Treasury Finance, prepared by Mr. Warren in response to your request. 47 Warren 7/23/42 Comments on Treasury Policy As one surveys the record of the Treasury in the con- version of the country from a peace to a war basis, he finds much reason for congratulations and enough reasons for com- placency. In two years, the production of the country has doubled; and most of the increase of production has been on government account. Not only have 10 million persons been added to the list of gainfully employed, but other millions who were then employed have been transferred to new occupa- tions, often remote from their former residence. Whole new cities and new industries have been built, and armies and fleets assembled and equipped. On the financing of these programs, the Treasury has raised both by taxation and borrowing sums unparalleled in American history; and perhaps in the whole of universal history. All this has been done without imposing on the public anything that could be called privation or hardships; without visibly disturbing the credit structure; without even causing a ripple in the pattern of what are called money rates. By the usual pragmatic tests of fiscal achievement, this is a record of outstanding success; certainly in 00m- parison with the analogous period a generation ago the Regraded Unclassified 48 - 2 - operation of the Treasury has demonstrated an efficiency, a sort of professional competence that, as I said above, not only silences criticism, but afford reasons for congratulation and for complacency; but none for confidence. So gradual, for our economy, were the successive trans- itions from peace to neutrality, from neutrality to non- belligerency, from non-belligerency to participation short of war, and finally to war itself, that one finds it difficult to remember that peace, even an uneasy peace, is one kind of world and war is another kind. As each of these successive phases made its increasing demands upon the Treasury, those demands were readily met by a new enlargement or an elabora- tion of an existing mechanism; and these several mechanisms carried the additional load without betraying any con- spicuous evidence of over-load. This is the occasion for what I have called both gratification and complacency. We may be gratified at the magnitude and efficiency of the achievement to date, but in my opinion we are only complacent, if we project their past into the future. The fact that no individual part of the mechanism has as yet broken under the load, does not prove that the whole machine is not overloaded. While I can 800 that there is no qualitative difference between a budget of, say, #6 billion and one of $12 billion; and while I would Regraded Unclassified 49 - 3 - not be sure that there is a qualitative difference between a budget of $12 billion and one of $20 billion, I an willing to make the flat assertion that a budget of #75 billion differs from a budget of #6 billion or $12 billion or $20 bil- lion not merely in mathematical magnitude, but in its character -- that it differs in kind as war differs from peace; and that however well the individual elements of our financial structure seem to be carrying their specific load, the structure in its present form was never designed to carry a load of this weight and bulk; and that, flatly, it cannot carry it. To be specific, if we are confronted (as we are) with a budget equal to one-half (or more) of the so-called national income, either the structure must be re-designed from the ground up specifically to carry this load, or the load itself, in its own blind way, will determine the shape of the structure. And, if the structure is re-designed to carry the indicated load, the new design will be totally unlike the America that we know; if we allow the burden of the load itself to determine the shape of America, it will be totally unlike the America we have known. Because we have no idea of the duration of this load, we can offer no assurance that, when the war is over, we can, under either alternative, reshape the country at will. We can only say that some 50 - 4 - alternatives appear to leave more opportunity for a future exercise of optional will, and that others appear to offer less. We will begin with a very simple but completely neglected figure. The figure 65 is one-half of 110; but there is & world of difference whether with a war budget of $65 billion and a national income of $110 billion, we spend half our national income on the war effort; or spend a sum of dollars equal to half the national income. If we choose the first alternative, the Treasury under- takes to recapture out of the national income one dollar out of every two in that total. If we choose the second alternative, the Treasury undertakes to recapture some frac- tion less than half of an estimated national income, and to provide the balance by the creation of dollars. Since these dollars, as created, and expended, will be added to the previously estimated income, the latter total will rise, and with it the uncaptured fraction. Under the latter alternative, the methods of creating dollars is determinable by relative cost and convenience. In its relevance to the main problem, it does not matter whether the Treasury employes the Bureau of Printing and Engraving to fabricate the dollars it creates; employs the Reserve banks on a cost plus contract, as pro- posed by Mr. Patman; or employs the existing mechanisms of Regraded Unclassified 51 - 5 - the banking system. As an element in war finance, each of the three is identical, and preference can be discovered by consulting costs and conveniences rather than tradition or inapplicable canons of imputed monetary orthodoxy. There are, then only two alternative methods of shaping our structure to carry its over-load; recapture or inflation. Every proposal falls under one of these heads. Both require laying the hand of force upon the individual's entire income, in a manner beyond American experience. By either choice, we break with our monetary and financial past; and as we break with our monetary and financial past, we break many strands from our social and political past. For some of these strands, the rupture will be irreparable; for others the reparability will depend upon the duration of time; but broadly speaking, the degree to which we will retain any sort of volitional control of our future will depend upon the quality of thought expended on the present decision. A con- tinuance of the present mixed design of recapture and in- flation, inherited from an earlier period to which it was adapted and perpetuated in a present to which it is, by agree- ment, not applicable, is almost the surest, if not the surest way of surrendering our future to the casualities of time and circumstance. Regraded Unclassified 52 - 6 - While mathematically we would say it was possible to recapture half of a national income, it must be remembered that the national income -- or rather that figure of $110 bil- lion commonly called the national income is a sum of individual income, including innumerable duplications of simple and complex type. Its very existence depends upon its kinetic quality and we have no real idea of the extent to which this may be interrupted or even destroyed by efforts of recapture. But, mathematically, it is at least conceivable that it is possible to recapture half the national income. Some idea of the implication of this phrase is indicated by two ostensible facts. If we assume that there are about 55 mil- lion persons gainfully employed at the present time, the residual income after recapture would average $1200 or less. Or, put another way, if the present exemptions were converted into ceilings and the tax were 100 percent of all income above the present exemptions, it will recapture approximately the required sum. This gives some impression not a very exact impression, but the most exact I have of what is implied in the glib phrase "devoting half our national income to the war effort." Unless one is prepared to look that statement in the face, he need not both to read farther, because I intend to argue that if the alternative method is used, the fact will come out the same. Regraded Unclassified 53 - 7 - Having looked at these figures, I recall the expression I used earlier. Only force -- the full force of the state -- can effect such a recapture; and all ideas of voluntary sav- ing can immediately be dismissed. One could not expect the individual voluntarily to reduce his expenditures to such ceilings, nor, if his maximum income was his present exemption, could he be expected to do much saving. When I spoke of the kinetic quality of income, the term was obscure and I will now give an example. For most home owners in New Jersey, the state property tax would constitute the first lien on retained income, and will constitute roughly 50 per cent of this income. These taxes, of course, are the source of income of the office holder of New Jersey, and to the extent that the proposed recapture induced tax delinquency, the incomes of these office holders would cease. Several methods of recapture have been proposed, but they are all expressive of two basic ideas. One of these may be called the ceiling income principle, the other the ration- ing principle. Under the former, the income tax would be & uniform 100 per cent of all income above specified maximum, which, as shown above, would be in the vicinity of the present exemptions. This 100 per cent tax could be divided into a simple tax (a non-recoverable contribution) and an element Regraded Unclassified 54 - 8 - of forced saving (a contribution recoverable at some time and on some terms in the future). With incomes at this level, there would, of course, be no problem of wage controls, price controls, rationing or even consumers preference. The retained income would in no case exceed the closest minimum of absolute necessities. The rationing principle is much the same. That 1s, the individual would receive a coupon book entitling him to buy specific amounts of enumerated necessities; and either no articles or only a limited list of articles could be purchased without the coupon. In short, his money would not be legal tender for the purchase of any goods except as accompanied by its appropriate coupon. The remainder of his income would literally have no value except for hoarding, (1.e., the pur- chase of small denomination, non-interest bearing public debt) or for investment (in interest bearing public debt). This would not entirely eliminate the need of wage control, but it would eliminate the need for price control, since supply could be equated to an absolutely limited demand. Neither Germany nor England seem to have accepted either of these principles in a pure form; but seem to have adopted elements of each; and, since they are both mere variants of the principle of recapture, they are not in mutual conflict. In both countries, there seems to be a margin of optional Regraded Unclassified 55 - 9 - spending money left for the purchase of unrationed goods and services; but in both countries the limits of domestic production and the isolation of the blockade greatly reduce the amount and variety of unrationed articles. In both countries, a flourishing black market exists, which would, of course, be impossible if either plan of recapture were strictly in use. I do not know about Germany, but for England, it is mere than doubtful if anything like half the national income is recaptured by the Treasury. Both schemes, or a combination of the two, present no serious administrative difficulties when applied to persons in receipt of regular income from a single source. More dif- ficulties would arise in the cases of the self-employed, such as farmers, or the casually employed by several employers. These groups can certainly be more easily reached by the ration or coupon method than by the oeiling income method. For the farmers, this is no great matter, for the total of farm income is 80 small that if it were all recaptured or all exempted, it would have little effect on war finance. Superficially, both forms of recapture seem more drastic than inflation; seem to be more of a break with the past; seem to be less in accord with the "American Way." While verbal horror of inflation is widespread, even unanimous, this opposition to date has been merely verbal. As a matter Regraded Unclassified 56 - 10 - of fact, we have employed and are employing inflation or a major element in our war finance; it has been so employed somewhere and in other times as a method of war finance; at least as much is known of the social and economic conse- quences of inflation as a method of war finance as is known of the social and economic consequences of drastic income taxation; and much more than is known of the social and economic consequences of such devices as income ceilings and non-spendable money. This knowledge has given it a bad name -- so bad, indeed, that there is an impulse to experiment with devices which are more favorably regarded principally because they are less known. For myself, I admit a certain propensity toward the ceiling income scheme -- of which there is no example in history; and of a deep dread of inflation, of which history affords many examples, and about which I know a good deal. I suppose that one could readily assemble 50 tax experts among American universities; but he would have a dreadful time collecting five tax economists. Even England, which has had a long experience with relatively large taxation, has never developed more than two or three, and those none too good. Now, with all its evil reputation, a case can be made for inflation as a measure of war finance; and I will undertake the office of devil's advocate. There are three initial Regraded Unclassified 57 - 11 - facts in its favor: (1) the mechanism already exists and its utilization is fully subject to administrative action, without additional legislation, (2) it can be used to provide large sums with great rapidity, (3) it has demonstrated its capacity to capture larger fractions of the national income than any other demonstrated type of taxation. For inflation is not & peculiar financial monstrosity; it is a form of taxation and should be regarded as objectively as any other form of taxation. As a form of taxation, inflation has two unique qualities apart from those listed above. (1) It is not merely a tax on current income, but & levy on capital, or invested saving -- for which saving converts income into capital, the capital levy in the form of infla- tion converts capital into income accessible to the state, without conflicting with the mass of contractual relationships that impose real obstacles to the maximizing of other forms of taxation. (2) When every other form of taxation rouses resentment against the state, as the responsible party, the incidence of inflation is such that the resentments are not directed against the "Hidden Hand," but against a succession of groups in the community. In the present instance, when inflation has already aroused some feeling, in the population, the public resentment has been successively diverted against farmers, organized labor, the black market, Leon Henderson, Regraded Unclassified 58 - 12 - the Standard 011, and other groups whose responsibility is inconsiderable. The charge is often made that inflation is inequitable. Non-schematic inflation, like any other form of inflation, 16 conspiouously erratic. Strategic groups and adroit individuals are able to avoid its incidence; while weak groups and the vast majority of the population thus contribute cor- respondingly more than their theoretically equitable share. This is not peculiar to taxation by inflation. Equity 16 of course difficult to define, but I have never seen it demon- strated that inflation was more inequitable than any other form of taxation, attempting to capture an equal proportion of the national income. In any form of taxation the con- sideration given to equity varies inversely with the amount of revenue required; and when one is considering budgets equal to half the national income, equity must be considered in very elementary terms; such, for example as those applied by draft boards. There is, however, one definite pragmatic test of equity. The administration of taxation by inflation must be suffi- ciently equitable to prevent the inevitable group antagonisms from reaching the stage where they disrupt national unity; but this would be true of any other form of taxation of equal magnitude. 59 - 13 - Finally, we have abundant evidence that taxation by inflation can be applied on a large scale over an extended period of time without disrupting the economy as a going concern. We do not positively know that to be true of any other form of taxation of comparable magnitude. While as far as the Treasury is concerned, inflation is by far the easiest administered method of war finance the general problem of schematic management of the inflation tax requires a more complex set of controls than either of the two forms of re-capture. Whether an absolute ceiling on all individual income; or with a complete rationing of consumer expenditure, only a single control is required, the whole civil economy is, BO to speak, frozen in its tracks. Under inflation, exactly the opposite occurs. Under the continuous and progressive depreciation of the currency, society itself as well as its economic components, acquires an exaggerated fluidity. Everything is in motion, and the regulation of this movement requires the most devious controls, armed with the full force of the state. Yet even this 1s not beyond precedent. For some years, it is said that the Russian government exacted about one-half of the national income for budgetary purposes, by the mechanism of inflation. The feel- ing against inflation as a method of war finance, in spite of Regraded Unclassified 60 - 14 - its utility, is that it commonly terminates in revolution. Its very success enables it to overload the entire structure to a point where the whole fabric bursts under the over-load. I do not know that this is inevitable, and it is not necessarily immediate. Some ten years elapsed between the German inflation and the installation of the Nazi regime, which as Spengler anticipated, was its consequence. As to its inevitability, one might argue that there have been no examples of "managed" or "schematic" inflation except the Russian; and that this experience is the best evidence of the time capacity. In short, I do not think we should rule out the applicability of inflation as an element of war finance, under one condition -- namely, that it is frankly acknowledged, and that the appropriate controls be accepted as essential to the scheme. While one can make a case for either recapture or inflation, I do not think it is possible to make a case for a combination of the two. That is, to combine taxation with inflation, does not mean that the taxation "offsets" the inflation, or that it possesses any magical anti-inflationary quality. It means a duplication of burdens, & compounding of inequities; and such a disturbance of the economy as a going concern that I should say that the war effort, instead of getting the best of two worlds, would get the best of neither. Regraded Unclassified 61 - 15 - Nor, when one considers the magnitudes involved, can I see anything but harm in maintaining the voluntary element in war finance. Voluntary subscription, like voluntary enlistments, were an appropriate element of wars of lesser magnitude; but in an effort of this magnitude, in which half the national income is involved -- 1.e., all the national income above a bare subsistence -- I can see no place for voluntary cc.itributions. I do not think we realize that a budget of $75 billion, whether financed by recapture or by inflation, means taking from the individual, one way or another, everything above a bare subsistence. It obviously has not taken anything like that yet; but we have not yet even approached that figure. As the #75 billion budget is now visualized, it is proposed to take about one-third in taxes, and less than a third more out of income. Approximately half is to be derived from inflation. I believe this distribution invites disaster. The element of inflation 1s too large, if inflation 1s not to be the focal element; yet it is too small to derive for the effort the full benefit of taxation. Or, conversely, taxes are far too high if inflation is to be the focus and too low if inflation is to be avoided. In short, I believe the war effort can be financed either by recapture or by inflation; that the two might be combined (as they were a Regraded Unclassified 62 - 16 - generation ago) if one can postulate a war as brief as that of 1917-18 -- namely 18 months. But given the uncertainties of duration, I believe that there is a better than even chance that an attempt to finance the war by a combination of recapture and inflation will lead to social and economic disaster. 63 RKO KEITH'S THEATRE WASHINGTON, D.C. July 23, 1942.. HARDIE MEAKIN Dear Mr. Secretary: I deeply appreciate your very kind note of July 22, in reference to the recent visit of the heroes to Washington. Let me assure you that at anytime I can be of service, I will be honored if you will oall upon me. Hon. Henry M. Morgenthau, Jr. Secretary of the Treasury Washington, D. C. DARD FORM No. 14 LOVED ST THE PRESIDENT FROM 898 64 MARCH 10, 1926 BUREAU War Savings Staff TELEGRAM CHG. APPROPRIATION Expenses of Leans OFFICIAL BUSINESS-GOVERNMENT RATES - - - 10-1708 July 23, 1948 Mr. Fred: 4. Dragonette Chairman War Savings Committee for Pima County Southern Arisona Bank and Trust Company Tucson, Arisona It is a pleasure to send you the greetings of the Treasury Department for Pima County's bond breakfast, at which I understand you are undertaking to sell one hundred thousand dollars or more in War Savings Bonds. The people of Pima County are participating loyally and generously in the Bar Savings Program and you have our best wishes for continued success in your efforts. Henry Morgenthau, 3re Secretary of the Treasury. HNGzeps 65 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE July 23, 1942. To Secretary Morgenthau FROM Harold Graves I attach hereto a memorandum from Mr. Sloan regarding the reprint of Mr. Scherman's "Invisible Greenbacks," from which you will note-- (1) That the War Savings Staff had nothing to do with the preparation or publication of this pamphlet; and (2) That no distribution of the pamphlet has been made to our Administrators or to others in the field. 66 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE TO Mr. Graves FROM Eugene Sloan qWZ123uz 7/23/42 Regarding Harry Scherman's article, "Invisible Greenbacks", I have the following to report: 1. No member of the Staff had anything to do with re- prints of this article. 2. Mr. Buffington was in no way concerned in the re- printing and has sent none of this reprint to the field. 3. There are about 3,000 copies of this reprint in the Press Section, which are to be destroyed. 4. It was intended to distribute copies of this re- print to the State Administrators, in & routine manner, as other informatory data is distributed, The Field Division, however, had insufficient copies to provide the State Administrators. The only distribution effected, therefore, was an intra- office distribution. There is attached hereto a list of the persons re- ceiving the pamphlet, which was attached to Field Memorandum #355, dated July 18, 1942. Instructions have been issued that there shall be no further dis- tribution of this article. Attach. 67 MEMORANDA (Distributed within the office) MAIN TREASURY HLDG. Graves 4 Mills 1 Bryce 1 Milton 1 Gamble 1 Buffington 2 Odegard 1 DEMOLL BLDG. Poland 1 Daklas (Miss) 1 James Clarke 1 Tomkins 1 Prior 1 J. Graves 1 Houghteling 6 Hyatt 2 Pulte 3 Elliott (Miss) 1 Morgenthau (Mrs.) 1 NAVY DEPT. Miss Wooten 3 Div. Savings Bonds Navy Dept. Washington, D.C. SLOANE BLDG. Hirzel 1 Powel 3 Read 2 Buckley 1 Coyne 1 Legler 1 Blyth 15 Hall 1 Paige 1 Horner 1 Stephens (Mrs.) 1 Rapp 1 McDonald 5 Wolfe 1 O'Malley 1 Betts (Mrs.) 1 Adams 3 R. Barrett 1 Bray 1 Callahan 3 Mahan 3 Duffus 3 Gilchrist 1 Jones (Mrs.) 2 McCarty 2 68 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE July 23, 1942 TO: THE SECRETARY FROM : TED R. GAMBLE Subject: Regional Labor-Management Conferences Arrangements have been completed for a series of Labor-Management Con- ferences on Payroll Savings suggested by yourself, and listed below is a brief outline of programs: 1. Purpose - our purpose is to bring labor and management together to investigate, discuss and work out means of diverting 10% of America's payrolls into War Bonds through the proper use of the Payroll Savings Plan. 2. Invitations - (a) invitations to these meetings have been issued by the National Committee for Payroll Savings. Its members are: Thomas C. Cashen - Chmn., Railway Labor Exec. Asso. William Green - A. F. of L. Philip Murray - C. I. 0. J. J. Pelley - Asso. of American RR C. P. Witherow - National Asso. Mfgrs. Eric A. Johnston - Pres., U. S. Chamber of Commerce (b) invitations are being sent to: 1. executives of all firms with over 500 employees 2. labor representative of each such firm 3. women chairmen in each district 4. such volunteer chairmen who may be selected by the Administrator 5. President of the local Federal Reserve Bank 6. local civic leaders 3. The meetings will take place at: Richmond, Va. July 30 Atlanta, Ga. Aug. 13 St. Paul, Minn. Aug. 5 New York City Aug. 17 Kansas City, Mo. Aug. 7 Dallas, Texas Aug. 17 Philadelphia, Pa. Aug. 11 San Francisco Aug. 17 Cleveland, Ohio Aug. 11 Seattle, Wash. Aug. 20 Chicago, n. Aug. 11 Boston, Mass. Aug. 25 2. 69 The first meeting will be held at Richmond, Va. on July 30. It is planned to take our entire committee and field representatives to observe this meeting and return to Washington the next day to discuss any possible improvements for future meetings. 4. Preparation - Treasury field representatives are now in the several states bringing la bor and management together and making all necessary arrange- ments. 5. Method of Conducting Meeting: a. introduction of Treasury Chairman by local official b. remarks by Treasury Chairman - purpose and background C. actual demonstration of successful 10% plans by both manage- ment and labor d. part played by women e. questions and answers f. how to put on a 10% drive g. urge all present - both labor and management - to form committees and set machinery in motion for a new 10% drive within their respective plants by September 1st 6. Luncheon - in most cities Federal Reserve Bank has kindly offered to invite all in attendance to luncheon. 7. Press - proper publicity will be arranged for the national, local and labor press. 8. Displays - there will be numerous displays by companies, unions, and the Treasury itself of successful Payroll Savings Plans now in operation (literature, posters, billboards, etc.) 9. Labor Month - meetings will be keyed to activity by and for labor as planned in September. 10. Follow-Up - (a) each Administrator will be expected to arrange for similar meetings of smaller firms in his respective state. (b) a check on results of firms participating 11. Administrators' Meeting - following these meetings the Administrators Regraded Unclassified 3. 70 from neighbo 2ng states in attendance will meet with Washington representatives to discuss detailed follow-up of Payroll Savings Program. 71 SCHEDULE OF LABOR - MANAGEMENT MEETINGS July 30 Richmond, Virginia Engelsman (all attend) August 1-2 (Return to Washington for check on Richmond meeting August 11 Atlanta, Georgia Glenn August 11 Philadelphia, Pa. Engelaman August 11 Chicago, Illinois Fisher August 5 Minneapolis, Minn. Ross August 13 Boston, Mass. Engelsman August 13 St. Louis, Mo. Fisher August 7 Kansas City, Mo. Rose August 14 New York, N. Y. Sparks August 17 San Francisco, Cal. Odegard August 20 Seattle, Washington Odegard August 17 Dallas, Texas Engelsman August 17 Cleveland, Ohio Fisher CONFIDENTIAL 70 UNITED STATES SAVINGS BONDS - TOTAL Comparison of July sales to date with sales during the same number of business days in June and May 1942 (At issue price in thousands of dollars) : July : Cumulative sales by business days Date : daily : : June : July May : July as : sales : : : :percent of June July 1942 1 $ 28,418 $ 28,418 $ 29,539 $ 19,981 96.2% 2 24,269 52,687 45,442 39,430 115.9 3 27,277 79,964 67,046 72,048 119.3 6 46,531 126,495 98,208 88,605 128.8 7 31,110 157,605 132,341 122,575 119.1 8 43,451 201,056 154,085 157,866 130.5 9 39,918 240,974 192,659 181,431 125.1 10 47.755 288,729 206,523 201,464 139.8 11 36,127 324,856 236,552 232,801 137.3 13 47,164 372,020 259,772 246,756 143.2 14 30,102 402,122 281,724 271,525 142.7 15 33,807 435,929 303,163 296,152 143.8 16 31,670 467,599 334,398 317,861 139.8 17 37,659 505,257 345,497 337.371 146.2 18 21,929 527,186 368,782 371,066 143.0 20 53,257 580,443 387,369 385,098 149.8 21 21,686 602,129 414,804 409,987 145.2 22 34,511 636,640 429,158 439,987 148.3 ffice of the Secretary of the Treasury, July 23, 1942. Division of Research and Statistics. ource: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals. CONFIDENTIAL 73 UNITED STATES SAVINGS BONDS - SERIES È Comparison of July sales to date with sales during the same number of business days in June and May 1942 (At issue price in thousands of dollars) : July : Cumulative sales by business days Date : daily : : : : July June : sales : : : May July as :percent of June July 1942 1 $ 15,821 $ 15,821 $ 19,834 $ 12,679 79.8% 2 14,880 30,701 27,841 24,263 110.3 3 16,822 47,523 40,811 46,532 116.4 6 29,797 77,320 58,199 55,460 132.9 7 17,724 95,044 82,988 73,824 114.5 8 21,599 116,643 98,197 97,049 118.8 9 22,746 139,390 125,245 114,218 111.3 10 24,772 164,161 134,157 128,670 122.4 11 19,077 183,238 154,242 151,956 118.8 13 26,550 209,787 169,920 161,346 123.5 14 15,744 225,532 186,470 177,133 120.9 15 18,407 243,938 201,700 194,047 120.9 16 17,828 261,766 225,684 208,939 116.0 17 22,345 284,111 233,218 223,242 121.8 18 12,233 296,344 249,033 247,532 119.0 20 31,368 327,712 261,321 257,374 125.4 21 12,239 339,951 280,742 271,079 121.1 22 18,184 358,135 291,729 290,485 122.8 Office of the Secretary of the Treasury, July 23, 1942. Division of Research and Statistics. Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to nearest thousand and will not necessarily add to totals, CONFIDENTIAL 74 UNITED STATES SAVINGS BONDS - SERIES F AND G COMBINED Comparison of July sales to date with sales during the same number of business days in June and May 1942 (At issue price in thousands of dollars) : July : Cumulative sales by business days Date : daily : : : : July June : sales : # : May July as :percent of June July 1942 1 $ 12,597 $ 12,597 $ 9,705 $ 7,302 129.8% 2 9,389 21,986 17,601 15,168 124.9 3 10,455 32,441 26,235 25,516 123.7 6 16,734 49,175 40,009 33,145 122.9 7 13,386 62,561 49,353 48,751 126.8 8 21,852 84,413 55,888 60,817 151.0 9 17,172 101,585 67,414 67,213 150.7 10 22,983 124,568 72,366 72.794 172.1 11 17,050 141,618 82,310 80,845 172.1 13 20,614 162,232 89,852 85,410 180.6 14 14,358 176,590 95,254 94,391 185.4 15 15,400 191,991 101,464 102,106 189.2 16 13,842 205,833 108,715 108,923 189.3 17 15,314 221,147 112,279 114,129 197.0 18 9,696 230,842 119,749 123,534 192.8 20 21,888 252,731 126,048 127,724 200.5 21 9,447 262,178 134,062 138,908 195.6 22 16,327 278,505 137,429 149,502 202.7 ice of the Secretary of the Treasury, July 23, 1942. ivision of Research and Statistics. rcet All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. te: Figures have been rounded to nearest thousand and will not necessarily add to totals. Sales of United States Bustings Bonts From July 1 through July 22, 1942 75 Compared with Bales quite for Same Period (At issue price in millions of dollars) : Series & Series In and G Total : Actual Sales : Quota, : Sales : Actual Sales 1 Quota, : Sales : Actual Sales : Quota, : Sales Date # : July 1 I July 1 # to Date I # July 1 # July 1 : to Date I July 1 2. July 1 E to Date : Daily : to I to $ as x of I Daily = to 1. to I as $ of I Daily 1 1a If to E : : Date # Date I Quota # : Date 1 Date I Quota - $ Date I Date 1 $ 15.8 $ 15.8 $ 23.6 66.9% $ 12.6 $ 12.6 $ 19.4 64.9% $ 25.4 $ 23.4 4 43.0 66.06 2 14.9 30.7 47.9 64.1 9.4 22.0 36.4 60.4 24.3 58.7 84.3 62.5 3 16.8 47.5 73.0 65.1 10.5 32.4 50.6 64.0 27.3 80.0 123.6 64.7 6 29.8 77.3 126.0 61.3 16.7 49.2 82.6 59.6 46.5 126.5 208.6 60.6 7 17.7 95.0 139.3 68.2 13.4 62.6 94.2 66.5 31.1 157.6 233.5 67.5 8 21.6 116.6 162.2 71.9 21.9 84.4 114.5 73.7 43.5 201.1 276.7 72.7 9 22.7 139.4 189.8 73.4 17.2 101.6 129.5 78.5 39.9 241.0 319.3 75.5 10 24.8 164.2 216.0 76.0 23.0 124.6 139.9 8911 47.8 288.7 355.9 51.1 11 19.1 183.2 236.6 77.4 17.1 141.6 147.7 95.9 36.1 324.9 384.3 84.5 13 26.5 209.8 273.2 76.8 20.6 162.2 160.6 101.0 47.2 372.0 433.8 $5.8 14 15.7 225.5 287.6 78.4 14.4 176.6 168.0 105.1 30.1 402.1 455.6 88.3 15 18.4 243.9 311.6 78.3 15.4 192.0 181.8 105.6 33.8 435.9 493.4 88.3 16 17.8 261.8 335.5 78.0 13.8 205.8 193.5 106.4 31.7 467.6 529.0 88,4 17 22.3 284.1 358.7 79.2 15.3 221.1 202.5 109.0 37.7 505.3 561.5 90.0 18 12.2 296.3 377.4 78.5 9.7 230.8 210.5 109.6 21.9 527.2 587.9 89.7 20 31.4 327.7 411.8 79.6 21.9 252.7 223.9 112.9 53.3 580.4 635.7 91.3 21 12.2 340.0 425.9 79.8 9.4 262.2 231.8 113.1 21.7 602.1 657.7 91.5 22 18.2 358.1 451.1 79.4 16.3 278.5 247.0 112.8 34.5 636.6 698.1 91.2 23 477.5 260.1 737.6 24 503.8 270.7 774.5 25 525.0 279.5 804.5 27 562.7 295.1 857.8 28 577.2 304.3 881.5 29 601.3 322.1 923.4 30 625.8 337.5 963.3 31 650.0 350.0 1,000.0 Office of the Secretary of the Treasury, Division of Research and Statistics. July 3, 1942 Source: Actual sales figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Figures have been rounded and will not necessarily add to totals. Note: Quota takes into account both the daily trend during the week and the monthly trend during the month. 76 UNITED STATES SAVINGS BONDS, SERIES I TOTAL DAILY SHIPMENTS BY DENOMINATIONS FROM JULY 1 TO JULY 22, 1942 : : Denominations - Number of Pieces Date of : : Total Shipment : : : : : : Pieces : $25 : $50 : $100 : $500 : $1,000 : uly 1 441,453 79,590 78,344 2,256 2,527 604,170 2 515,964 94,404 93,481 3,068 3,510 710,427 3 464,350 80,760 79,220 8,320 3,565 636,215 6 736,205 82,647 89,767 8,475 2,235 919,329 7 678,221 163,951 160,712 24,510 13,894 1,041,288 8 558,650 106,000 115,461 15,039 3,790 798,940 9 440,389 89,212 112,623 7,807 5,816 655,847 10 672,288 117,122 107,512 5,508 5,967 908,397 11 643,310 121,615 135,412 5,062 15,649 921,048 13 654,983 118,591 98,816 6,314 8,528 887,232 14 673,000 109,750 102,000 7.775 10,000 902,525 15 548,501 156,626 152,361 12,270 14,535 884,293 16 384,250 91,600 107,800 13,010 19,955 616,615 17 555,023 138,080 124,232 8,378 10,066 835,779 18 599,366 109,552 98,646 6,052 9,777 823,393 20 629,367 60,200 98,900 4,150 9,885 802,502 21 603,350 57,130 93,272 11,947 10,035 775.734 22 583,946 82,850 92,000 6,535 9.777 775,108 otal 10,382,616 1,859,680 1,940,559 156,476 159,511 14,498,842 ly 23, 1942. MRL/kwk MRLX 77 July 25, 1942. Dear Eleanore Your letter of July 22 evidently crossed mine of July 21, telling you that as arrangement was being mode to transfer No. Goven to New York in connection with the Lend-Lease work there. I an very glad that this san be done. Affectionately, (Signed) Henry Mrs. Tranklin D. Receevelt, The White House. via Secret Service Agent 7/24/42 5:25 GEF/dbs nmc Doaraded 78 THE WHITE HOUSE WASHINGTON July 22, 1942 Dear Henry: I am enclosing a letter from Mrs. Cowen. You will remember you gave her husband a job in the Treasury sometime ago at my request. Do you think it is possible to have him transferred to the Lend-Lease program? They seem to be very nice people and have nothing in the world but his salary. If you find that his work has been satisfactory, I shall be grateful for any- thing you can do. Affectionately, Than Roodwell J a ,142 Dear I' 5% you have what they Co a job. ) 1 to this There i T.M .00F 102 deduct il = way ive 1t - month for the a tric J.D. ... sopey 1 Visa have izlenis -...0 :..e Lett -Lease time- THE a 0 if = e brutch for 240 - opening :- to trani I S.... 20 to. 1.4. :: ve look- 1 into some very dark hours but I cannot re- ember any that looked as hoveless as those OW pros. I I 2 te Ella Cower El C D. Bod 360 ueral 00 nyc Regraded Unclassified 81 JUL 21 1942 Dear Eleasers I - returning the letter which you enclosed with your note of July 14th, in reference to Mr. Sammel Comes. It will be possible to transfer Mr. Cover to the New York effice of the Presurement Division and this will be arranged. Affectionately, (Signed) Henry Mrs. Franklin D. Ressevelt, The White House. WNT:jc the Comm is Original file NMC Copy of file to Thompson. By Measenger Veach 4:12 7/21/42 Regraded Unclassified 82 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE July 21, 1942. TO Secretary Morgenthau FROM Mr. Thompson Cliff Mack advises that in reducing his Emergency Relief force he is taking all possible steps to assist displaced employees to acquire transfers to other positions. In New York he has been able to take care of about 30 such employees by transfers to Lend-Lease work. He can take care of Mr. Cowen in this way and will be glad to arrange for his transfer to the New York office. of 83 THE WHITE HOUSE WASHINGTON July 14, 1942. Dear Henry: The enclosed letter is in reference to Mr. Samuel Cowen. Would it be pessible to have him transferred to the New York Office? I know he needs this employment. Affectionately, Thank Rescuets July 7,1942 ear Mrs. Roorevelt: Mr. Coven came home to-night with he news that the Newark o fice, Procurement Division, 18 being closed as of the end of this month and that 11 of the work of that office as well as of the en- ire Eastern section, Pennsylvania, New Jersey andNew ork would be carried on from the New York office, and he Newark office employees would be out of work at le end of this month. Can you help 1n having him transferred to the York o Lice? The money he earns and that I receive to your orders is the only income we have. These will be more than anxious days until he again placed. I will ampreciate anything you can do have hi, placed. Gratefully, Ella Comen ) Box 360 eral 0.0 with ye Regraded Unclassified 85 July 23, 1942 My dear Captain: Thank you 80 much for sending me a copy of the letter from Captain Ralph Davison to Mr. C. I. Stanton. I an sure that as a result of your efforts something will be done at last to make the New Hackensack airport safe. Sincerely yours, 101amoR) % Morganthan, N Captain J. L. McCrea, USN, Aide to the President, The White House, Washington, D.C. Delivered by SS Agent 7/24/42 5:25 Original enclosure returned to Capt McGrea. nmc Regraded Unclassified 86 THE WHITE HOUSE WASHINGTON July 22, 1942 MEMORANDUM FOR THE SECRETARY OF THE TREASURY. Knowing your interest in the New Hackensack Airport, I take pleasure in forwarding the attached copy of a letter which has recently been sent by the Bureau of Aeronautics to the Civil Aeronautics Administration in connec- tion with that airport. Very respectfully, John me an - Aer-PL-3-LG N1-9(1-875) A2-13(1) NA6 July 20, 1942 097190 My dear Mr. Stanton: The assistance of the Civil Aeronautics Administration 18 requested in obtaining improvement of landing and take-off facilities at the New Hackensack, New York, civil airport. This field 1s frequently used by transport planes of the Navy in transporting high Government officials of this country and of other United Nations on visits of Government business to Hyde Park, New York. The pilots of these planes report most unsatisfactory safety conditions for the landing of multi-engine aircraft, particularly at night, due to the many obstructions around the field together with lack of adequate lighting of obstructions and of runways. In a report submitted by the Commanding Officer, Naval Air Station, Anacostia, and forwarded to this bureau by the Naval Aide to the President, the following recommendations for improvement of the field were made: (a) Remove all obstructions for a distance of 1000 feet out from the end of each runway extended and to a width of 200 feet on either side of the centerline of each runway extended, (b) Place red obstruction lights above all obstruc- tions near the field in accordance with standard practice. At present some of the obstruction lights are twenty to thirty feet below the objects marked. (c) Place standard flood lights at the head of each runway. (a) Surface the extension of the SE end of the SE-NW runway. Regraded Unclassified Aer-PL-3-LG N1-9(1-875) A2-13(1) NA6 097190 It 18 hoped that remedial action can be taken at en early date to effect improvement in the reported dangerous operating conditions at the New Hackensack airport, which might so easily result in fatalities to important Government officials as well as to naval personnel. Very truly yours, RALPH DAVISON Captain, U.S.N. Assistant Chief of Bureau Mr. C. I. Stanton, Acting Administrator, Civil Aeronautics Administration, Commerce Department, Washington, D. C. Copy to: Capt. J.L. McCrea, USN, Aide to the President, CO, NAS Anacostia. Regraded Unclassified 89 DIE PLAIN London Dated July 23,1942 Rec'd 11:30 p.m. Secretary of State, Washington. 4099, twenty-third. FOR THE SECRETARY OF THE TREASURY FROM CASADAY The Chancellor of the Exchequer made the following announcement in the House of Commons yesterday: "I, have to inform the House that the arbitration between the Treasury and Messrs. Courtaulds Limited in respect of the sale of the Viscose shares has been concluded. The award of the unpire Hr. Justice Simmonds determines that the sum to bE paid by the Treasury to Messrs. Courtaulds Limited in respect of the Viscose share: transferred by the company to the government shall bE 127,125,000 with interest at the rate of 3 percent. from March 1941 (the date when the shares were transferred) to the date of payment. I an informed that the directors do not propose to make a distribution to the stockholders during the war period of any part of the award above referred to. In this they have the approval of His Hajesty's Government. 90 -2- #4099, July 23 from London. Government. I an also informed that it has been decided to invest the sum awarded in subscriptions to current government issues. The sun awarded is greater than the sur: realized in the United States by the sale of the Viscose shares. That sun was approximately £15,000,000 gross and approximately £13,500,000 net after deduction of Expenses in connection with the transaction. The House will remember that the transaction was an EX- ceptional one, carried through in very special cir- cunstances." Asked whether the government is pledged to accept the award "in view of the fact that the sharsholders in the company and many other American companies had their shares requisitioned by the government at a loss" Sir Kingsley Wood replied: "The Award is final". Asked whether the nation will bE told "why this company is to have double value for its stock in comparison with what the nation actually received". The Chancellor of the Exchequer said that the circumstances were Exceptional, adding "the honorable gentlenen will no doubt remember the need WE were in at the time. It showed WE were determined to do our utmost to realize 91 -3- #4099, July 23, from London. realize resources for Expenditure in America." 3ir Parcy Harris asked on whose advice the government acted originally in this matter. This reference to the deal itself was the only reflection in the questions following the announcement, of the bitter attitude given wide Expression at the time of the deal (reported in the Embassy's despatch no. 185 of March 31, 1941 and previous despatches and telagrams) 1s. Another attitude towards the matter found Expression in a question by a labour member who asked whether the Chancellor is aware. "that this statement will cause a great deal of disquist in view of the fact that he now proposes that $13,500,000 more than has been actually received by the Government should be paid to these sharsholderss at a time when he is giving a parsimonious £1,000,000 to a large number of old-age pensioners?" In serious press consient this morning there is a notable absence of any tendency to hark back to the bitterness which was frankly and forcefully expressed at the time of the deal, the discussion of the announcement being practically confined to opinion en the fairness of the award itself, its Effect on Courtauld shares and on the future prospects of that company. Two Exceptions are the DAILY HERALD'S Regraded Unclassified -4- 4099, July 23, from London. 92 the DAILY HERALD'S headline "±14,000,000 lost on dollar deal" a bill which it said British taxpayers would have to foot, and the DAILY MIRROR'S headline "millions of your money". The award is considered on the whole fair though commentators regard the sun as by no means too high. The TIMES city Editor for Example points out ,OPE that "in their statement issued in June, 1941 the 10439 Courtculd's directors put the written down value of the corporation's assets at $128,000,000 --this before adding anything at all for goodwill; 91 percent of this figure is $116,500,000 or nearly £29,000,000. No specific estimate was made by the Board of the value of the goodwill of the American business. But they pointed out that the prospects of continuing and increasing prosperity for the 5895 corporation with the largest home market in the 7 / world TAXE real and substantial, and that at the date of the sale an Expensive programme of plant reconstruction and Expansion had not had time to bear fruit". The FINANCIAL NEWS characterizes the award as "fair without being generous" also pointing out as does the FINANCIAL TIMES that the sum falls short of any allowances for good will. WINANT Regraded Unclassified 93 DI! PLAIN London Dated July 23,1942 Rec'd 11:30 p.m. Secretary of State, Washington. 4099, twenty-third. FOR THE SECRETARY OF THE TREASURY FROM CASADAY The Chancellor of the Exchequer made the following announcement in the House of Commons yesterday: "I have to inform the House that the arbitration between the Treasury and Massrs. Courtaulds Limited in respect of the sale of the Viscose shares has been concluded. The award of the unpire Hr. Justice Simonds determines that the sun to be paid by the Treasury to Messrs. Courtaulds Limited in respect of the Viscose share: transferred by the company to the government shall bE £27,125,000 with interest at the rate of 3 percent from March 1941 (the date when the shares were transferred) to the date of payment. I an informed that the directors do not propose to make a distribution to the stockholders during the war period of any part of the award above referred to. In this they have the approval of His Majesty's Government. Regraded Unclassified 94 -2- #4099, July 23 from London. Government. I an also informed that it has been decided to invest the sum awarded in subscriptions to current government issues. The sum awarded is greater than the sun realized in the United States by the sale of the Viscose shares. That sum was approximately $15,000,000 gross and approximately £13,500,000 net after deduction of EXPENSES in connection with the transaction. The House will remember that the transaction was an EX- captional one, carried through in very special cir- cumstances." Asked whether the government is pledged to accept the award "in view of the fact that the sharsholders in the company and many other American companies had their shares requisitioned by the government at a loss" Sir Kingsley Wood replied: "The Award is final". Asked whether the nation will bE told "why this company is to have double value for its stock in comparison with what the nation actually received". The Chancellor of the Exchequer said that the circumstances were Exceptional, adding "the honorable gentlenen will no doubt remember the need VE were in at the time. It showed WE were determined to do our utmost to realize 95 -3- #4099, July 23, from London: realize resources for Expenditure in America." Sir Parcy Harris asked on whose advice the government acted originally in this matter. This reference to the deal itself was the only reflection in the questions following the announcement, of the bitter attitude given wide Expression at the time of the deal (reported in the Embassy's despatch no. 185 of March 31, 1941 and previous despatches and telegrams) is. Another attitude towards the matter found Expression in a question by a labour member who asked whether the Chancellor is aware "that this statement will cause a great deal of disquist in VIEW of the fact that hE now proposes that $13,500,000 more than has been actually received by the Government should bE paid to these sharsholderss at a time when he is giving a parsimonious £1,000,000 to a large number of old-age pensioners?" In serious press comment this morning there is a notable absence of any tendency to hark back to the bitterness which was frankly and forcefully Expressed at the time of the deal, the discussion of the announcement being practically confined to opinion on the fairness of the award itself, its Effect on Courtauld shares and on the future prospects of that company. Two EXCEPTIONS are the DAILY HEMLD'S -4- #4099, July 23, from London. 96 the DAILY HERALD'S headline "±14,000,000 lost on dollar deal" a bill which it said British taxpayers would have to foot, and the D..ILY MIRROR'S headline "millions of your money". The award is considered on the whole fair though commentators regard the sum as by no means too high. The TIMES city Editor for example points out that "in their statement issued in June, 1941 the Courtculd's directors put the written down value of the corporation's assets at $128,000,000 --this before adding anything at all for goodwill; 91 percent of this figure is $115,500,000 or nearly £29,000,000. llo specific Estimate was made by the Board of the value of the goodwill of the American business. But they pointed out that the prospects of continuing and increasing prosperity for the corporation with the largest home market in the world were real and substantial, and that at the date of the sale an Expensive programme of plant reconstruction and Expansion had not had tine to bear fruit". The FINANCIAL NEWS characterizes the award as "fair without being generous" also pointing out as does the FINANCIAL TIMES that the sum falls short of any allowances for good will. WIN..NT 97 COPY NO. 13 BRITISH MOST SECRET US. SECRET OPTEL No. 251 Information received up to 7 A.M., 23rd July, 1942. 1. MILITARY EGYPT. Late on 21st and during night 21st/22nd fighting was resumed in the central sector in the area of the RUWEISAT RIDGE. Early on the morning of 22nd we attacked on both the northern and southern flanks. Infantry and armoured units were involved on both sides. Our troops have gained ground at certain points, no details available. RUSSIA. In the VORONEZH area the Russians retain the initiative and are launching heavy attacks against the German bridgehead over the River DON. German thrust towards the Lower DON has now reached that River east of the DONETS. West of the DONETS the Germans are attacking towards ROSTOV from the northeast, north and west. 2. AIR OPERATIONS WESTERN FRONT. In the operations on night 21st/22nd over 550 tons of bombs including 62 4,000 lb. and 137 2,000 1b. were dropped over DUISBURG. Good fires were reported in the town and dock area. 22nd. Successful low level attacks carried out by four Bostons on a power station and chemical works in HOLLAND. In addition fighters carried out five harassing operations against grounds targets, two Spitfires missing. 22nd and 22nd/23rd. Enemy aircraft operated on a very small scale, one JU 88 shot down by fighters. EGYPT. 20th/21st. 36 bombers attacked TOBRUK, starting fires in dock ,area and on a ship. Mines were also laid off TOBRUK and MERSA MATRUH. 21st. Light bombers and fighter bombers effectively attacked enemy M.T. and damaged or destroyed a substantial number of vehicles. Two enemy fighters shot down and five of ours missing. CRETE. Liberators bombed shipping in SUDA BAY and started fires on two ships and on the pier, a near miss also made on one large ship. MALTA. Between 1:22 P.M. 21st and 9:15 A.M. 22nd, nine enemy bombers and a number of fighters were reported. Three enemy aircraft shot down and another probably destroyed. Two Spitfires missing. Regraded Unclassified 98 COPY NO. 13 BRITISH MOST SECRET U.S. SECRET OPTEL No. 259 Following is supplementary resume of operational ovents covering period 16th - 23rd July, 1942. 1. NAVAL H.M.S. WELSHMAN returned safely from taking personnel and stores to MALTA. During her outward passage she was attacked by 28 aircraft in all, but in spite of several near misses sustained no damage. On the return journey, after being shadowed for 8 hours, she was attacked by & combination of 5 JU 88's and 15 Italian torpedo bombors. She was narrowly missed by 2 bombs and 1 torpedo, but again 68- caped damage. 2 Cruisers from NAPLES failed to intercept her. There were few con- voya between ITALY and NORTH AFRICA but there are indications of n resumption of this traffic on a large scale in the very near future. Shipments of iron ore from BILBAO and neighbouring ports to BAYONNE and BORDEAUX which have been continually increasing were lower in June. Attacks on Shipping. Shipping losses for first three wooks of Jun show marked improvement over June. Provisional figures for the week ending 19th July give 8 ships sunk in Atlantic by U-boats. The number of U-boats in the Atlantic is increasing and attacks have been made on convoys both in Eastern Atlantic and the American zones. There are continued signs that the enomy has sent submarines to West African waters. 13 attacks by surface craft on U-boats were reported during week and 20 by aircraft, 6 attacks were promising. 3 or 4 Japanese submarines were operating in Australian waters and the same number off East Africa. Importe in convoy into UNITED KINGDOM for the week ending 18th were 362,000 tons, including 73,000 tons of oil, Imports for June amounted to 2,131,100 tons, including food 1,083,200 tons, raw materials 970,000 tons, aircraft vehicles and machinery 77,900 tons. 2. MILITARY RUSSIA and EGYPT. All available information given in Daily OPTELE. JAPAN. War against CHINA. Thore has been a rosumption of pressure to the Northeast of KALGAN in SUIYUAN but 80 far thore is nothing to indicate the beginning of large scale operations. To the South the Japanose having completed their operations in CHEKIANG and NIANGSI may be withdrawing. WENCHOW changed hands soveral times last woek but it was re-occupied by the Japanese on the 18th July. It has been reported that a Japanese Division has boon withdrawn from Central CHINA but its destination is at present unknown. 3. AIR OPERATIONS WESTERN FRONT. A total of 83 bombers carried out daylight attacks on objoctives in North-West GERMANY. Bomber Command operated on 2. nights against DUISBURG and VEGESACK respectively. The former attack was made under good conditions, the results of the Intter raid were mainly unobserved. Very little enomy shipping was sighted by Constal Command Aircraft and no sinkings were claimed. MEDITERRANEAN. Our air operations continued on a large scale. Light bombers and fighter bonbers wore very active against objectives in the bettle aron and also made particularly effective attacks on enemy landing grounds causing heavy losses among Axis grounded aircraft. Fighters carried out numerous offensive patrols and successfully intercepted formations of escorted dive bombors. Medium bombers and Noval Albacores bombed concentrations in rear of the battle front at night. In the course of 5 night and 2 day attacks 180 Wellingtons and 41 heavy bombers raided TOBHUK Harbour on which 1,300 tons of bombs wore dropped in 3 wooks ending 22nd July. Enemy aircraft were more active. Their bomber offort was directed chiefly against objectives in the battle area. Little bombing of back areas was attempted and no operations were reported at ALEXANDRIA or in the CANAL 20NE. MALTA. A total of about 50 bombers escorted by 150 Fighters attacked the Island, the main objective being LOQA aerodrome. SEA COMMUNICATIONS. Attacks against enemy shipping in the MEDITER- LANEAN were continued in the IONIAN SEA and in the vicinity of the ports of CYRENAICA und the Western Desert. Regraded Unclassified 99 - 2 - 4. EXTRACTS FROM PHOTOGRAPHIC AND INTELLIGENCE REPORTS ON RESULTS OF AIR ATTACKS ON ENEMY TERRITORY IN EUROPE. WILHELMSHAVEN. 10th. Photographs taken 13th, although poor, show severe damage to two shops in the Deutsche Werke, the Armour Plate Shop and four other buildings in the Marine Werke gutted, six or seven large sheds gutted at the Bauhafen. PARIS. At the Lorraine Dietrich Works 200 engines for fast motor- boats and 52 aeroplane engines are reported to have been completely destroyed. 5. OPERATIONAL AIRCRAFT BATTLE CASUALTIES METROPOLITAN AREA British In the Air Bombers 24 Fighters 12 Constal 4 Army Co-Operation 2 Total 42 3 pilots are safe. Enemy Destroyed Probably Destroyed Damaged Bombers 4 1 5 Fighters 2 2 7 Total 6 3 12 MIDDLE EAST (including MALTA British In the Air Bombers 12 Fighters 33 Others 1 Total 46 One bomber crew, and four out of six of a second, and eight fighter pilots are safe. Enemy Destroyed Probably Destroyed Damaged Bombers 13 5 9 Fighters 15 9 26 Miscellaneous 4 Nil 1 Total 32 14 36 Of the above total 3 were destroyed by A.A. NOTE: No account is taken of enemy aircraft destroyed on the ground in any theater or of British Naval Aircraft casualties. 6. HOME SECURITY Some damage to Hoffman's (Ball Bearings) and Marconi Works at CHELMSFORD. Estimated vivilian casualties for week ending 6 A.M. 22nd, killed 17, seriously wounded 26. Regraded Unclassified 100 NUMBER 41 SECRET OFFICE OF STRATEGIC SERVICES THE WAR THIS WEEK July 16-23, 1942 Printed for the Board of Analysts Copy No. 6 The Secretary of the Treasury Regraded Unclassified JULY 16-23, 1942 SECRET Office of Strategic Services THE WAR THIS WEEK The German offensive in southern Russia has now split into two distinct operations-a drive down the Don toward Stalingrad, and an encirclement of Rostov from three sides. Meanwhile, in the face of strong Soviet counterattacks, the Germans have with difficulty held the northern anchor of the offensive, the Don bridgehead at Voronezh. Despite the sweeping character of Nazi successes in general, some obser- vers believe that the Germans may soon bring the first phase of the campaign to a close in the interests of consolidation. Time is a critical factor for both sides, and the German offensive has now consumed more than a month of the fighting season. The general view persists that in Egypt Rommel must shortly resume the offensive or move back to a position where his supply routes will be less vulnerable. Latest press reports indicate a fresh British attack which may impel him to adopt the latter course. Advices from Vichy portray Laval as losing ground both at home and with the Germans. Our chargé d'affaires at Vichy believes that German action in support of Doriot or an openly Nazi orientation of the Laval government may soon precipitate a crisis in the relations of France and the United States. Spanish troops are moving to the Canaries and Morocco, it is reported, and soon nearly half of the Spanish army will be overseas. On the other hand, Franco's most recent speech made no fresh promises to the Axis. 1 Regraded Unclassifie SECRET SECRET In the Far East, the Japanese have been withdrawing troops and yielding some previously occupied areas in the from the west-one toward Rostov and one toward Likhaya Chekiang theatre; and they have been developing their (largely consisting of Italian troops)-now threaten to cut the positions in the western Aleutians at heavy cost. In Man- bulk of Timoshenko's army into three parts. Two of these churia there is no significant fresh evidence of Japanese groups, those defending the triangle between the lower Don, preparations, but military authorities now believe that an the lower Donets, and the Rostov-Likhaya railway, have attack in eastern Siberia in the next few weeks is likely. In faced encirclement for several days now. In fact, the re- India, finally, Nehru has expounded the Wardha resolution ported Soviet landing behind the German lines east of Mari- as demanding an immediate extrusion of British rule, after upol probably represented an effort to relieve Nazi pressure on which the new India would welcome the aid of Allied armed this triangle. Some of its defenders may already have with- forces. drawn to safety. The third group, the troops south of the Don, will doubtless retreat southward to join the Army of the Caucasus-unless the Germans move sufficient forces across the river to intercept them from the east. Rostov Faces Encirclement With the Russian admission of the loss of Voroshilovgrad, it has become apparent that the Nazis are already closing in The Nazi Timetable on Rostov from the north and east. One attack has probably "Slowed only by rainfalls," the eastern phase of the Nazi pushed south from Millerovo to Kamensk, where the main offensive may now have progressed down the Don as far as Moscow-Rostov railway crosses the Donets river. Moscow Yelansk, against what appears to be fairly weak Russian now acknowledges that this thrust has reached the area of resistance. Some observers believe that the Germans will Novocherkassk, only 20 miles from Rostov. Farther east, now drive straight for Stalingrad without waiting for the another drive has apparently turned south (perhaps at fall of Rostov. Others maintain that difficulties of supply will Migulinsk) and pushed across the Rostov-Likhaya-Stalin- necessitate a pause for consolidation and regroupment before grad railway, striking the Don near Tsimlyansk, far below the Nazis try to establish a bridgehead at the great bend of the "great bend", and above the point where it is joined by the Don. the Donets. This last operation has probably cut off the In any case there are certain signs that the German defenders of Rostov from direct rail communication with offensive may be slowing. Allied air observers suggest that Stalingrad. Furthermore, the Germans now maintain that the Luftwaffe may now be experiencing difficulty in moving advance elements of this attack have crossed the lower Don forward with the main offensive. Russian reports of the and turned west toward Rostov. number of planes shot down during the week of July 12-18 Meantime, the Luftwaffe has been bombing Rostov from confirm this impression. During this period, the Soviet the west, and, according to German reports, has destroyed communiqués claimed the destruction of 217 German planes, the bridges over the Don. Simultaneous ground attacks admitting the loss of 136 Russian aircraft. Compared to 2 3 Regraded Unclassified SECRET SECRET Soviet claims for the previous week, these figures indicate a Even the capture of Stalingrad, however, might not en- decline in activity of about 50 percent. tirely cut off Russian rail communication with the Caucasus. The reduction of Rostov itself may be a difficult operation, A reliable report suggests that the Soviets have completed & and any delay in the progress of the German offensive can railroad running along the west shore of the Caspian Sea scarcely fail to be of importance in a campaign where time and from Kizlyar to Astrakhan. Here, the report states, there space are the prime factors. From the beginning of their is & bridge over the Volga which links the new railroad with large-scale offensive-June 22-the Nazis had about five a line running east of the river to join the main Russian net months in which they might hope to complete the destruction at Saratov. of the Red Army. Already they have spent one month on the current phase of their offensive-a phase that may not be over for many days. Moreover, despite the success of the Action on the Egyptian Front German holding attack around Rzhev, there has not yet been According to press reports a battle is now under way in any indication of a major offensive anywhere north of the Egypt in which the British are striking along all three sectors Kursk region. In other words, about two-thirds of the of the front. This attack is still in its preliminary stages, Rostov-Leningrad front is inactive. Yet Allied observers but there is the possibility that it may develop into a major are almost unanimous in maintaining that the destruction of action. the Russian army in the Moscow sector-estimated as includ- Prior to this attack the desert stalemate had continued. ing perhaps 40 percent of the Soviet forces on the Eastern Both sides had established front line defenses behind which front-would be the only way for the invaders to reach 8 they withdrew the bulk of their armor, and the week's clearcut decision this year. activity consisted largely of patrols, raids, testing actions, and sharp fighting for the control of ridges in the northern and central sectors. Contrary to press reports, last week's The Russian Position fighting in the central sector was not a major engagement. Finally, there is some evidence that up to now the Russians Observers note that both sides directed their attacks against have not been losing men and equipment at the same critical opposing infantry, the British perhaps hoping to force rate as in the great German encirclements of last summer and Rommel to withdraw his armòr by whittling down its autumn. According to one British source, the Soviet armies infantry support. More than 4,000 enemy prisoners were have followed a new policy of withdrawal after a relatively taken during the week following July 14. short period of active fighting. Such a point of view finds Allied air forces have been giving close and effective support confirmation in the comparatively small number of prisoners to ground operations, in addition to continuing their attacks that the Germans are claiming. Of course a successful en- on enemy supply lines, ports, and airdromes. Tobruk has circlement at Rostov would entirely alter this picture. And been especially heavily bombed. Although targets have the fall of Stalingrad would severely limit the reinforcements recently been more dispersed, it is stated that in one day that the Russians could send to the extreme south. Allied aircraft destroyed 23 tanks and 59 artillery pieces. 4 5 Regraded Unclassified SECRET SECRET Light units of the Royal Navy have three times returned to shell Matruh, which Rommel is using as a forward depot Near Eastern Tensions supplied by coastal shipping. During June there was & The Near East continues to be relatively quiet. Observers marked increase in the rate of sinking of shipping going be- feel that the Egyptian king and his people will continue a tween Italy and North Africa. cautious policy pending a decisive turn in the battle. In the Lebanon there have been minor bread riots, apparently instigated either by local interests or outside agents. At the Opinion as to the Next Turn in the Battle same time the government of Iran is reported to be frantically Military observers have felt that the stalemate could not trying to locate wheat supplies to tide over the critical period continue indefinitely, that probably within a fortnight Rom- between now and August harvests. Meanwhile Rashid Ali, mel would either strike or be forced to fall back to positions the exiled premier of Iraq, was received by Hitler and Ribben- where his supply lines are less exposed. The key question is trop, according to a DNB despatch. one of reinforcements. Auchinleck has received and is In Turkey it is expected that Numan Bey, who has been expecting further troops and armored equipment, and is very cordial to American representatives at Ankara, is to be believed to be numerically superior in men, tanks, guns, appointed foreign minister, as soon as he has been elected a and planes. deputy, as the constitution requires. The Turkish govern- The Axis has probably been resting and regrouping its ment, also facing a critical wheat shortage, has raised by forces behind its forward lines. There is some doubt as to 50 percent the prices it will pay for cereals in 1942. Ship- whether large German air or land reinforcements are avail- ments of wheat are to be given first priority, even ahead of able for Rommel, in view of the unexpectedness of his war material. The Nazis are reported to have promised advance into Egypt and the size of German commitments in Turkey some badly needed rolling stock and locomotives, Russia. A limiting factor on air reinforcements may also despite Germany's own tight transport situation. be lack of fuel and servicing facilities in western Egypt. It is believed, however, that Rommel has received some air Laval Loses Ground replacements, and that several thousand Germans will have Laval has lost considerable ground in recent weeks accord- been flown to Egypt by the end of July, in addition to Italian ing to the American chargé d'affaires at Vichy. While alienat- reinforcements arriving by boat. Rommel's supplies appear ing elements in France by his expressions of hope for a to be adequate, and his efficient tank recovery system may German victory, Laval has in large measure failed to satisfy have established a tank reserve. Nazi demands for collaboration. The German army and Reports of Axis troops moving into the Greco-Aegean ares the SS are said to be backing Doriot. This situation has persist, and some observers continue to speculate about an already brought about a new understanding between Laval Axis attack on Auchinleck's weakened Syrian flank. No and Déat, whose Rassemblement National Populaire now signs of immediate preparations for such an assault are evi- supports Laval and may join Laval's Legion. Our source dent, however. feels that a crisis-even a rupture-in Franco-American 6 7 Regraded Unclassified SECRET SECRET relations may shortly be precipitated, either by German German Influence in French North Africa action in support of Doriot, or by an openly Nazi orientation of the present government, springing from Laval's tenacious In Casablanca control of commercial vessels arriving in desire for power. Continued German victories will tend to the port has been initiated by a German Commission, whose accelerate this tendency in France. "arbitrary" manner in exercising the control is reported to be One of the principal German complaints is Laval's failure causing considerable annoyance to ship officers. Vichy to produce more than about 20,000 workers in the current defended its action in meeting the German demands for this commission by stating that it wished to avoid any difficulties campaign (despite larger Vichy claims to the contrary). Labor conscription appears inevitable and Laval is said to be with Berlin that might imperil the "important" economic preparing already to draft some affectés spéciaux. agreement with the United States. At the same time mate- rial drawn from intercepted letters reveals increasingly close Minority groups in France are being made the scapegoats control of all movements in North Africa by Axis personnel, of Laval's policy of collaboration. He seems to be discussing whose numbers seem to be steadily growing. with the Nazis the idea of sending as many as 100,000 Spanish Republican refugees from France to work in Germany; and many of those who have already departed were unskilled Spain and Portugal Czechs, Poles, Belgians, or North Africans-only a small Reports indicate that Spain is planning to send at least fraction consisting of skilled French workers. Renewed 25,000 troops to the Canaries and Morocco, of whom more demands on the part of Rome and Berlin for the return of than 1,000 have already left. When all present troop move- political refugees from France are reported-demands to ments are completed, almost half of the Spanish army will be some of which Laval has already yielded. At the same time, overseas. At least one observer believes that the program the situation of the Jews in France is becoming worse each is German inspired, for the purpose of closing the Straits and day. New restrictions against their appearance in public seizing Casablanca if Egypt should fall. places have been followed, according to one informant, by On the other hand, it is apparently believed in Lisbon that an order that some 15,000 Jewish males be rounded up for the Axis does not intend to draw Spain and Portugal into the work in eastern Poland and western Russia. war. Portugal has nevertheless had to accede to German Bastille Day brought forth widespread demonstrations restrictions confining Portuguese shipping to the United throughout the unoccupied zone. In Nice it is reported that States to the port of Baltimore. Franco in turn, in a recent about 4,000 participated by singing the Marseillaise and speech announcing elections for the new Cortes (the majority shouting "vive de Gaulle, vive les Etats Unis, vive l'Angle- of which will presumably be stooges), attacked outworn terre," while from other cities came word of demonstrations liberalism and cited Bolshevism as the great threat against with great crowds shouting "down with Doriot the traitor" which Spain, if necessary, might again crusade. But the and "down with Laval," according to unconfirmed reports. Caudillo avoided making any promises to Berlin and praised Spanish neutrality, adding the warning that Spain could 8 9 Regraded Unclassified SECRET SECRET raise an army of three million men. His position fitted the Optimistic Note in China general policy pattern that seems to prevail in the Latin bloe -Pétain, Franco, Salazar and the Vatican-a policy of con- The slackening of Japanese pressure and the bombing of servatism and non-belligerency looking forward to a nego- Hankow and Canton by American air forces appear to have tiated peace, after which the bloc would emerge as the coun- added a mildly optimistic overtone to current public opinion terweight in Europe. in Chungking. A member of the Chinese foreign office is reliably reported to have said that popular belief in eventual victory is as strong as ever, and that talk of a negotiated peace Japanese Withdrawals in Chekiang and Kiangsi is absurd. There is a strong feeling that China needs more In China it now appears that the Japanese are in the proc- help, particularly planes, according to this official, but even ess of relinquishing at least a part of their recent gains in if China fails to obtain these, she will continue as before. Chekiang and along the Chekiang-Kiangsi railway. Chung- Inflation and military defeats have not been causes of particu- king announces that Chinese troops have reoccupied several lar anxiety, and the Chinese are fully expecting that the cities along the are which the Japanese had extended through Japanese will soon attack Siberia. Chekiang Province-Chien-te, inland rail center southwest of the Japanese base at Hangchow; and Jui-an and Ch'ing- Nehru Explains the Wardha Resolution t'ien, in the southeast. The Japanese evidently still hold Wenchow at the southeastern extremity of the arc. Chinese In two interviews with an American representative at New troops, according to Chungking, have also recaptured Heng- Delhi, Pandit Nehru has made it abundantly clear that the feng and I-yang in Kiangsi, thus regaining at least temporary Wardha resolution of the Congress Working Committee railway. control over a fifteen-mile stretch of the Chekiang-Kiangsi admits of no compromise with Great Britain. Even if the British should grant the demands put forth by the Congress Japanese withdrawal of forces from these areas is the chief at the time of the Cripps mission, it would not be enough, explanation for the Chinese successes. Chinese reports indi- Nehru believes, since those proposals were merely a tem- cate that Japanese troops taken from the Chekiang-Kiangsi porary expedient in the face of the Japanese invasion menace. sector are destined for service in Inner Mongolia or Man- Furthermore, since that time, Indian hatred for the British churia, although there is also some possibility that the Japa- has increased greatly, Nehru declares. nese may be simply redistributing and reorganizing their This hatred, in the Pandit's opinion, threatens to make of troops in China, perhaps preliminary to & thrust against India another Burma, inasmuch as British policy is creating Changsha. In Central and North China, three independent pro-Japanese sentiment all over the country. The only brigades recently were expanded to divisions, and a reorgani- way to stop the growth of this feeling, which Nehru deplores, zation in any case appears to be already in progress. is to launch such a campaign as the Working Committee has now proposed. That is the ethical justification for a move- ment which, viewed superficially, might seem to interfere 10 11 Regraded Unclassified SECRET SECRET with the Allied war effort. In any case, Nehru concludes, the campaign would interrupt war activities only briefly- be at the mercy of the Hindus. According to Gandhi, since its results would not long be in doubt. however, Jinnah has failed to reveal just what he means by Concretely, what the Congress demands is the formation of Pakistan. An American observer on the spot suggests that an Indian provisional government by representatives of all this vagueness is an intentional maneuver. Pakistan is parties. In turning over their powers to this government, essentially & bargaining point, and Jinnah cannot be expected the Viceroy and the provincial governors would be obliged to to reveal what it really implies until he has extracted the last withdraw immediately. Minor officials, however, would ounce of concessions from the Congress and the British on remain, and their removal would occur only gradually-to this issue. Furthermore, he is probably not anxious to dis- obviate the dangers of a sudden administrative revolution. play before his own followers the economic drawbacks of the The new Indian nation, in Nehru's view, would assume Brit- scheme-that is, the separation of such deficit areas as ain's obligation to the princes. But an upsurge of Indian Baluchistan, the Northwest Frontier Province, and Sind patriotism among the inhabitants of the native states would from the central government of India, on which they are probably soon force the princes to join the new union. As financially dependent. for the Allied troops now in India, a free India would not In short, Jinnah can be relied on to oppose the Wandha demand their withdrawal, but on the contrary would welcome resolution root and branch-since it calls for an immediate their aid. To the commander-in-chief of the United Nations British withdrawal prior to a Hindu-Moslem settlement. As forces the provisional government would give unstinted for the British, confidential advices suggest that the Viceroy's cooperation. Council will take no action before the meeting of the All- India Congress Committee next month. Meantime, the Viceroy has apparently referred the whole issue to London The Pitfalls of Pakistan for decision. As for the Moslem issue, Nehru declares that the Congress leaders can reach an understanding with Jinnah in two days, Significance of Brazilian Government Changes if the British do not interfere in the negotiations. Such a point of view is similar to that of Gandhi, who feels that the Colonel Alcides Gonçalves Etchegoyen has now replaced withdrawal of the British should precede a Hindu-Moslem Felinto Muller, recently removed as chief of police in Rio settlement; so long as the British remain, they will be able to de Janeiro. Colonel Etchegoyen is a popular Army officer pit the two communities against each other on the principle whose sympathies are definitely pro-Ally but whose previous of "divide and rule." career has not brought him into the public eye. Jinnah, on the other hand, fears that an abdication of the This is one of a series of recent government changes. British Raj before the establishment of Pakistan-a separate Two members of the cabinet have resigned-Lourival Fontes, Moslem state-would mean that the Moslem minority would as minister of press and propaganda, long known for his pro-Nazi sentiments; and Francisco Campos, as minister of 12 13 Regraded Unclassified SECRET SECRET justice, who is also pro-Nazi. Major Coelho dos Reis now has the former post, while the latter has been placed tem- porarily under the jurisdiction of Marcondes Filho, the APPENDIX I minister of labor. In general it is felt that these changes notably benefit our STRENGTHENING THE GERMAN WAR ECONOMY position in Brazil, although there is some difference of During the present year the Germans have carried out fundamental changes opinion regarding the new minister of press and propaganda. affecting economic output, organization, and control, according to & study of the Economics Division made in collaboration with the Central European Section of Although it is said that Aranha approves the choice, the fact the Office of Strategic Services. These changes have come gradually and unsen- remains that Major dos Reis was the former right hand man sationally, but taken together they form the most significant mutation in the German economy since the war began. Impelling reasons were the miscarriage of the minister of war, General Dutra, one of the members of of plans in Russia and the entry of the United States into the war, which has now President Vargas' cabinet who long opposed the cooperation turned from a series of short campaigns-interspersed with periods of economic of Brazil with the United Nations. recuperation-to an enduring conflict. Manpower shortages have precipitated the changes. The minimum goal is presumably the maintenance of past output, even in the face of & new draft on industry of two to three million men to replace losses on the Eastern Front. A maximum goal might aim to increase production for & war on two fronts. The measures taken undoubtedly reflect a considerable degree of economic strain, and they will leave no appreciable slack in the German economy If they prove successful. But no basis exists for concluding that the Nazi economy must soon collapse, or even that the present scale of the peak effort will soon be reduced. Future efforts to obtain really large increases in output will necessarily be confined to European areas outside the Reich. These changes have been accompanied by no noteworthy evidence of friction among the three chief power-wielding groups concerned. The Nazi Party, in executing the economic reorganization program, has retained and consolidated its position of leadership, but it appears also to have received the full cooperation and support of the army and the industrialists. Five Categories of Changes The measures taken fall into five main categories designed (1) to increase efficiency and production in the armament industry; (2) to maintain output with a reduced labor force in basic industry and civilian manufacture; (3) to simplify administrative organization and procedure; (4) to coordinate all labor-saving and recruiting activities; and (5) to conserve food stocks. Agriculture, which was already highly centralised, does not appear to have been the subject of special attention, although attempts have doubtless been made to increase the supply of prisoners and other foreign labor used in the fields. Last April's reduction in rations probably reflected the impossibility of increasing food supplies within the next year. 1. The Armament Industry Administrative Control. Various measures over & period of six months have brought the armament industry finally under full control of the newly appointed Minister of Armaments and Munitions, Albert Speer, the successor to Todt and 14 15 Regraded Unclassified SECRET SECRET a trusted party member, One of the latest and most significant steps in direction was taken when the regional Armament Inspection Bureaus and Arms. the nized firms. By concentrating production in the latter, they point out, the number ment Commands, formerly under the Supreme Command of the Army, of workers employed in the industry can be reduced by 22 percent (12,500 to 9,800). transferred to Speer's Ministry. Speer also has assumed great influence In m The tobacco industry offers a relatively favorable example. Although similar field of labor. The important labor "Combing-out" Commissions (Prüfungstel- the conditions probably exist in other consumers' goods industries, employment len) operate under his authority. Perhaps most significant of all is the already has been reduced to & low level. It in probable that the actual saving in tration and unification of control over armament production, accomplished one by the manpower in this sector of the economy will be small. In heavy industry, the establishment of committees of technical experts (Hauptauschüsse) for each of more efficient firms probably are producing at capacity already. However, the major armament products. These committees are designed to hasten offorts intensified efforts to concentrate production in the most efficient plants doubtless to nationalize production and to see that technical information in exchanged will economise some further manpower. In addition, the long-term process of between plants. They are coordinated by a new Armament Council, and all financial amalgamation and combination of large concerns seems to be moving operate under Speer's direction. more rapidly, both in Germany and, under German control, over most of the Contract System. A new contract system for armaments items has been European Continent. In many cases this development prepares the way for instituted, favoring competitive prices. Formerly, a relatively unrefined version actual physical integration of formerly independent units and aims, therefore, to of the "cost-plus" principle appears to have been used. Under the new system, speed up the processes of concentration. all producers of & given article are classified into not more than five groups, based 3. Simplification of Economic Structure on relative efficiency as reflected in costa of production. A uniform prioe in fixed within each group, 50 that there can be from one to five group prices for Administrative Machinery. Simplification of the administrative machinery for every armament item. The uniform price la determined by the costs of produc- control of prices, markets, raw material allocations, and other general economic tion of a relatively efficient firm in each group, hence less efficient firms in the activities is expected to result in increased efficiency and & saving of manpower. group face sharply curtailed profite or financial loss If they do not lower their Existing trade organizations, cartels, and syndicates for certain industries are coste. The fate of firms which consistently produce at costa higher than the being abolished and their place is being taken by Reich Associations (Reichaver- or being closed down. group price la not known, although the alternatives would seem to be bankruptay einigungen). The functions of these associations are far-reaching: they regulate "market conditions" by drawing up production and import plans; establish sales A further incentive to efficient production is provided by making it advants- quotas; fix prices; and in some instances have taken over the allocation of raw geous for businesses to move up the scale to Group I. Firms in this group are materials-formerly the function of the Reichestellen. The Reich Associations are not subject to the excess profits tax, and they are given priority with respect to designed to form the nucleus for the European post-war economy, and in a few labor and materials. cases seem already to have extended their influence over allied industries in occu- "Protection of the Armament Industry." A decree of March 21, 1942 "for the pied and "friendly" countries. protection of the armament industry" increases the penalties (to include death) While the German press hails the reorganization as an increase in self-admin- for any person who makes incorrect statements regarding needa for manpower or istration in industry, pointing to the fact that the heads of the associations are supplies of essential raw materials and machinery. Excessive requests-antic- leading industrialists, these high officials nonetheless must be approved by Nasi ipating cuta by the Allocation Boards-appear to have become all but universal. functionaries. The associations actually are administrative instruments designed While the decree does not constitute a new approach, the penalties are more to carry out state-determined policy. Decrease in Government Personnel. Simplification of administration, and severe than formerly, and clearly are designed to tighten administrative control. At the same time, an effort is made to end the "paper-work war" which had reorganization of the complicated structure of industry and trade organizations, in expected also to relieve the overburdened Germany bureaucracy, whose personnel resulted from the mutual distrust of business and governmental bureaucracise. has been cut about 40 percent by heavy drafts for the armed forces. All post- 8. Output of Basic Industry war planning and administrative activities not directly connected with the conduct of the war have ceased. In addition, it is expected that these changes will greatly Concentration of Production. In basic industry, and especially in civilian reduce the amount of existing paper-work, in 80 far as they eliminate duplication manufacture where there is extensive idle plant capacity, an intensified effort in of offices and overlapping functions. The result will be relief for the personnel being made to concentrate production among the most efficient producers. Con- of both industry and government. centration of production has long been a part of Nazi economic policy, but the new need for manpower has given it impetus. Nazi leaders cite the case of the 4. Measures Relating to Labor 25,400 be among small-scale producers and certain large-scale and highly mecha- cigarette industry, where output per worker per day varies between 4,000 and Centralisation of Labor Control. Administration of labor has been further centralized under Frita Sauckel, former party Gauleiter of Thuringia and high 88 officer, who was appointed Commissioner General for Labor in March, 1942, 16 17 Regraded Unclassified SECRET SECRET to work in close cooperation with Speer. He is charged with the "combing out" APPENDIX II of men from industry, and will be required to relate this process with memium to raise industrial efficiency in such a way that production will not suffer. He RUBBER-THE UNITED NATIONS AND THE AXIS is also expected to obtain increased supplies of labor from domestic and foreign REVERSE POSITIONS sources. Sauckel has various agencies at his disposal. He has appointed the Nazi Party The Japanese conquests and the careful preparation for war of the German Gauleiters to newly created posts of Gau Controllers of Labor Allocation, to an Wehrmacht have in effect reversed the respective rubber positions of the United as his watchdogs alike over officials, businessmen, and workers. Existing organ- Nations and the European Axis. Now that the main rubber-producing regions izations dealing with labor problems have been placed at his disposal, and various of the world are in the hands of Japan, the availability of crude rubber to Axis intensive campaigns to recruit new workers and speed up production are under Europe is limited only by the amount of merchant shipping at their disposal, and way. Compulsory methods of recruitment already are being introduced is by their ability to run the blockade. The British believe that blockade-running certain of the occupied countries, and these measures are likely to be extended has assumed considerable proportions and that the Germans have succeeded in 5. Conservation of Food Stocks running through at least 25,000 metric tons of crude rubber in the first six months of this year. At the same time, the German synthetic rubber program has reached Reductions in Rations. Germany entered the war with an elaborate and highly the point of large scale production, and can in itself supply more than half of the organized agricultural control mechanism, centering in the Reich Food Estate European Axis requirements. Since additional capacity for synthetic rubber is (Reichanährstand). This estate, established as early as 1933, regulates every under construction, production may be expected to expand even further in the aspect of agricultural production and distribution. The only present change next year. affecting this control mechanism was the recent replacement of its director, The United Nations, on the other hand, and especially the United States, are Albert Darre, a party member since 1930, by Herbert Backe, & former Secretary in the unhappy position of having lost their principal source of rubber, and of not of State. yet having solved the problem of alternative sources of supply. The synthetic Tightening up in this sector took the form on April 6 of substantial reductions rubber program, in spite of discussion and planning in the last two years, is still in the food rations. It was apparent that administrative changes alone could in its infancy and cannot be expected to contribute in any notable degree to our not at this time remedy the food problem. Early indications of poor erops rubber supply until next year. In the meantime, the United States is dependent through most of Europe and the failure of plans to expand agricultural output mainly upon its stockpile of crude rubber and at the same time is expected to in the European area outside Germany seem to have provided the immediate contribute from this supply to the military requirements of the other United motivation for the reduction. The new ration levels, however, will tend to keep Nations. Fortunately, our stockpile of crude is considerable, while that of Axis consumption in line with the longer-run supply outlook. Even at this lower level, Europe is believed to be reduced to almost nothing. rations are nutritionally adequate, especially for the major categories of workers. Azis and Allied Positions Compared In comparing the rubber position in the United States and Axis Europe, two considerations must be taken into account: (1) normal consumption of rubber is on a very different scale in the two countries, and (2) consumption of rubber by motor vehicles for essential civilian transportation in the United States is on a scale unknown in any other country. For both reasons our civilian consumption cannot be cut to anything like the level to which it has been reduced in Axis Europe, without disrupting the economy. A comparison of the respective positions of Axis Europe and the United States in 1942 follows: 18 19 Regraded Unclassified SECRET SECRET Aris Europe Supply: United Synthetic production¹ [In Housands 135 of metric - Ind gressed to the point where they have at least two large-scale units (at Hüls and Crude imports: # Schkopau) and five small units operating in Germany proper, with five small units in the occupied and other Axis countries. There are various reports, as yet Far East 50 270 unconfirmed, that some twenty-six other plants are either operating or being Africa 5 10 constructed. Undoubtedly Germany has planned sufficient synthetic expansion Western hemisphere ? 10 to take care of almost all her requirements, although blockade running may reduce the need for carrying out this expansion. Total imports 55 29) Our own synthetic program has been hampered by & number of factors, such as competition of interests, shortages of strategic materials for plant construction, TOTAL SUPPLY 190 311 and so on. Among these factors, the controversy over the chemical process to be used (aleohol vs. petroleum) has recently assumed prime importance. Butadiene Consumption: has been made successfully from alcohol for years in Russia, though the process Military requirements 194 is not as well known in this country as that using petroleum. Whatever the merits 229 Foreign requirements 0 of the controversy, in which the adherents of the alcohol process claim that their 125 Industrial and civilian requirements 30 149 method is simpler chemically and could be set up for large-scale production more quickly, our synthetic program in now fixed at 800,000 tons annually, the majority TOTAL CONSUMPTION 224 503 of which is to be derived from petroleum. Perhaps a quarter of the total amount will be derived from alcohol. WPB estimates that nearly 400,000 tons will be Stocks of crude: available by the end of 1943, and that we will be producing at the rate of 800,000 On hand 1/1/42 0 538 tons per year by the end of 1944. If the program is achieved on schedule, our rubber problem will be largely solved in two years' time. If Estimates based to a considerable degroe upon data from the British Ministry of Economic Warfare. Figures from War Production Board. Stockpiles and Scrap Utilization Including all kinds of synthetic rubbers. Industrial and civilian requirements will be met in part from production of reclaim rubber, not shown In the meantime, we have & crude stockpile on which to draw, one which in above. sufficient for two years' military consumption, or about one year's normal peace- Azis Blockade Running time consumption. We likewise have an annual reclaim capacity of about 400,000 tons. Since only crude has been accepted as suitable for military and No imports into the United States from the Far East are expected in 1943, and foreign requirements, our present program envisages withdrawals from our only some 30,000 tons from Africa and the Western Hemisphere. The produe- stock of crude this year and next, coupled with severe civilian rationing and tion of Ceylon and India, if still available, will go to Great Britain. Far Easters greater utilization of reclaim rubber. The voluntary scrap drive has been die- imports into Axis Europe, however, may well increase, unless blockade running appointing in its results, but additional scrap undoubtedly exista which could be can be stopped. If Germany conquers the Near East and makes & junction with requisitioned by the government, as well as the tires on many of our 30,000,000 Japan, the Axis rubber problem will be solved. cars. We are now riding on our principal stock of scrap. The Germäns have Even though Germany fails to join hands with Japan, sufficient ships are avail- already requisitioned tires throughout Occupied Europe. able for blockade running on a greater scale. Japan has requisitioned about The fact that the Germans have little or no stockpile, and may be drawing to 300,000 tons of ships in the Far East, distributed as follows-German, 19 ships; the end of available scrap supplies in Occupled Europe, has spurred them to Italian, 15; and French, 24. Although it is not known specifically how many of expand their synthetic production, and run crude through the blockade. Without these ships are available to the European Axis, sufficient tonnage certainly exista success in these two factors, their 1942 position would be considerably worse than to fill the Axis needs for crude rubber. The route used by most of the blockade that of the United States, since they have long since economised on rubber uses runners appears to be through the South Pacific, around the Horn, and across as far as possible without producing disruptive effects. We in the United States the South Atlantic to a West African port (Dakar or Casablanca), & route very have not yet carried our economies that far. If blockade running could be elimi- difficult for the United Nations to patrol, even if air and naval equipment were nated and the two main synthetic factories in Germany permanently put out of not needed elsewhere. action by aerial bombing, the contrast between the Axis and United States rubber positions would be turned in favor of the latter, and there is also little doubt that American and German Synthetic Programs the Axis military machine would suffer. United States synthetic rubber production is now in the preliminary, experi- mental stage that German production reached in 1938. The Germans have pro- 20 21 Regraded Unclassified SECRET SECRET APPENDIX III The Socialist units, like those of the trade unionista, work more or less on THE UNDERGROUND MOVEMENT IN AUSTRIA their own, but with a thin network of cells forming a tenuous district and area organization. Loosely organised and relatively cautious in action, Austria's underground Activities of the Revolutionary Socialists are very limited, and for the present movement nevertheless has managed to survive, according to recent reports are relatively harmless. No activities are undertaken which might endanger the received from a source whose information is considered very reliable. The existence of the underground movement, which the Socialista wish to safeguard, groups from which the movement receives its chief strength are the former trade feeling that revolutionary mass action can take place only after the Germans unions Socialists." and the Socialists-the latter now calling themselves the "Revolutionary have suffered decisive military defeat. Meanwhile the Socialists engage in propaganda activity: so-called "Schmierak- Both trade unions and socialista were forced underground initially by the Doll- tionen" or "splashing expeditions-painting hasty alogans and symbols on walls fuss regime in 1934. Following Austria's annexation in 1938, the clandestine and pavements; or "Streuaktionen"-scattering small propaganda leaflets. trade unionista were obliged to abandon any attempt at contralized organization When Nazi orators are speaking, the Socialists occasionally manage to break up and eling to their fectory units. Inter-union contacts are limited to near-by a meeting by the uninterrupted shouting of the Nazi alogan, "Sieg Heil," our factories, and sometimes even the maintenance of contacts within & factory informant notes. Organized market brawls are started by small women's groups involves incredible difficulties. In some munitions works, women in different who vociferously dispute with each other about the food situation, promeers, departments have been forced to wear different colored dreases, to facilitate the war victims, and the hopelessness of the war. efforts of supervisors to prevent unauthorized movement within the plant. Organization and Functions In many of the larger factories, particularly the metal works, underground unions are represented in every workshop, and there are executive committees for the whole factory. Dues and subscriptions are regularly collected and the funds properly administered. A wage dispute in one such factory resulted in selection by the underground of a slate of delegates whose election caught the employer completely by surprise. When he refused to deal with them and the Destache Arbeitsfront threatened to call in the Gestapo, the underground union provided 400 marks each for the five delegates in case they should suddenly need it. In the past the factory groups have concerned themselves chiefly with mutual aid and support, especially in caring for relatives of imprisoned workers. More recently, longer working hours, unpaid overtime, wage reductions, and generally harsher working conditions have led to occasional open conflicts, with outspokes and vigorous protests. There have even been some short strikes, limited to 5. single department in a given plant. In general, however, our source believes that the strength of the underground trade unionists should not be overestimated- they are valuable primarily in maintaining the fighting spirit of the industrial possible. workers in individual factories, at a time when no legal trade union movement is The "Revolutionary Socialists" After the suppression of the Social Democratic Party by Dollfuss, the Revo- lutionary Socialists formed strong underground mass organizations. With the advent of the Nazis, the Revolutionary Socialists themselves put an end to the mass character of the movement, organizing instead a limited number of small "conspiratorial centers," led by new militants unknown to the police. There new organizations are factory "cells," and while they are separated from the loose trade union groups, some members participate in trade unionist activity as well. 22 23 U.S. GOVERNMENT PRINTING OFFICE) 1842 Regraded Unclassified 101 July 24, 1942 9:30 a.m. GROUP Present: Mr. Bell Mr. Sullivan Mr. Graves Mr. Buffington Mr. Gamble Mr. Thompson Mr. Paul Mr. Cairns Mr. Blough Mr. White Mr. Odegard Mr. Schwarz Mrs. Klotz H.M.JR: Norman? I thought we might all get acquainted again. MR. THOMPSON: General Lewis has indicated that he would like you to visit the Morgenthau barracks some time. H.M.JR: Is that on his own? MR. THOMPSON: That is on his own, yes. It came to me directly, so I assume it is on his own. H.M.JR: I will go over there next week. MR. THOMPSON: He said he would like personally to take you through, and he can't do that until he gets through with this board that he is on that is trying these German saboteurs. H.M.JR: Is he on that? MR. THOMPSON: So I understand. He said he was. Regraded Unclassified 102 - 2 - H.M.JR: Harold was saying last night it takes nine Generals to try nine Germans. MR. GRAVES: Eight - I said eight. H.M.JR: You mean to say that they have tied Lewis up on that? MR. THOMPSON: That is what he said. He said he could from twelve-thirty to one-thirty any time - luncheon time. H.M.JR: We could do it before the board sits. They can't start much before ten; most boards don't. Remind me next week. MR. THOMPSON: Elmer Davis has asked for a detail this week of one of Eddie Bartelt's organization men for two or three weeks to help him out. H.M.JR: Good. MR. THOMPSON: So we can do that? H.M.JR: Sure. MR. THOMPSON: We turned in a hundred and two thousand pounds of scrap rubber from the Treasury. That is quite a contribution. H.M.JR: A hundred and two thousand pounds? Wonderful. MR. THOMPSON: A lot of rubber mats are missing around here. MR. BELL: I have heard a lot of complaints about rubber cushions. People went out of the office, and when they came back found their rubber cushions gone, some of them private property. H.M.JR: Really? Regraded Unclassified 103 - 3 - MR. BELL: Yes. MR. THOMPSON: We had to call a few of them back. MR. BELL: One Red Cross lady had a rubber cushion, her own property. She went out of the room, and when she came back it was gone. H.M.JR: A hundred and two thousand pounds? MR. THOMPSON: A hundred and two thousand - that is quite a lot of rubber. H.M.JR: What else? MR. THOMPSON: That'is all. MR. BELL: I have nothing. H.M.JR: Mr. Graves? MR. GRAVES: You asked me to speak to you about a letter which Mr. Bartholomew has written you about Professor Welch. H.M.JR: Oh, yes. Well, I just thought that you and your associates could talk it over; and if you think Bartholomew is right, then do something about it. MR. GRAVES: Yes, I will. H.M.JR: How is that? MR. GRAVES: Fine. Nothing more. H.M.JR: Well, I have got a memo here. I asked you to get Mr. Arthur Szyk, the cartoonist. MR. GRAVES: Yes, our people have been in con- tact with him, and I haven't heard with what result. Regraded Unclassified 104 - 4 - I have no doubt he is working, but I will find out and report to you. H.M.JR: Want to bet on it? MR. GRAVES: Our people have been in contact on it. H.M.JR: You know that he is working? MR. GRAVES: I mean he is going to work, that he is going to mak e some cartoons. H.M.JR: Do you want this? MR. GRAVES: Yes. (The Secretary handed Mr. Graves a follow-up memorandum dated July 24, 1942.) H.M.JR: What else? MR. GRAVES: I have nothing. H.M.JR: White? MR. WHITE: There are a number of questions all related to the silver; a couple of them should be answered today. H.M.JR: Well, look, the way this meeting is going, if you silverites want to stay behind maybe we can answer a couple of them. I mean, stay now. I know what you have got on your mind. I mean, stay after this meeting, harry. MR. WHITE: Yes, sir. That is all. There is a matter of Swiss francs which I will bring up at the same time. MR. GAMBLE: Mr. Bruce Barton is doing that article for us that you suggested he do on the New York campaign. It will be ready later this week. Regraded Unclassified 105 - 5 - H.M.JR: Good. MR. GAMBLE: The Richmond people have set a meeting for August the twenty-first, and they expect to have the whole community, an area for a hundred miles surrounding it - Blue Flag Day. H.M.JR: Blue Flag Day? MR. GAMBLE: Blue Flag Day they are calling it. They are going to try to get every firm in that area up to ninety and ten on that date, and that is the date they want you to come and speak to these plants. I know it is quite a ways off, but that is an answer to your suggestion that we set these meetings-- H.M.JR: August twenty-first? MR. GAMBLE: August twenty-first. H.M.JR: Blue Flag Day I don't like that. Can't you call it Treasury Flag Day? MR. GAMBLE: That is the administrator's phrasing in this. H.M.JR: I don't like it. MR. GAMBLE: They want to have the first Blue Flag City in America. Our Minute-Man flag was a blue flag. H.M.JR: Yes. MR. ODEGARD: Change it to New Flag Day. MR. BELL: Minute-Man Flag Day. MR. GAMBLE: Treasury Flag Day would be better. Regraded Unclassified 106 - 6 - H.M.JR: I don't like it. What color was the Confederate flag? MR. GRAVES: Red, white and blue. MR. SULLIVAN: Stars and bars. H.M.JR: Anything but Blue Flag - Freedom Flag, anything. What day is that, August-- MR. GAMBLE: August twenty-first - twilight meeting. MR. SULLIVAN: Voluntary Flag. H.M.JR: That is a Friday. Does it have to be a Friday? MR. GAMBLE: We could make it the twentieth. H.M.JR: What? MR. GAMBLE: Yes, sir. H.M.JR: Wait & minute - yes, I can do it on the twentieth. MR. GAMBLE: Fine. Another item, Mr. Skouras would like to have us come to New York for the subject that he is talking about. H.M.JR: Would like what? MR. GAMBLE: He would like to have you come to New York for the subject - this film subject. He says it can't be properly made here, and it only would require an hour or two of your time there. He would like to do it either next Wednesday, the twenty- ninth, or Friday, the thirty-first. Regraded Unclassified 107 - 7 - H.M.JR: Do you mind bringing it up again Monday? MR. GAMBLE: Yes, sir. H.M.JR: I will know better where I am at. MR. GAMBLE: All right, sir. These drug people, representatives of the drug industry, would like to meet with you on Tuesday to talk to you about the three-million-dollar campaign. H.M.JR: If I am going to go up there, you know, somebody has got to write what I am going to say. Then I have got to learn it, thon forget it, so to speak - I mean, in the sense that I can't read from notes. It is something - I would have to learn that part the way any actor does, so somebody would have to write the thing. What do you want on Tuesday? MR. GAMBLE: Representatives of the drug industry. H.M.JR: The drug people have six hundred radio programs a year advertising stomach remedies. I didn't know that there was so much stomach trouble in the country. MRS. KLOTZ: I thought there was more, judging from the way people behave. (Laughter) MR. GAMBLE: Mr. Harry White says that the reason we have so much stomach trouble in the country is because they have the programs. (Laughter) MR. PAUL: The power of suggestion. H.M.JR: What time do you want me to see the stomach people? (Laughter) Regraded Unclassified 108 - 8 - MR. GAMBLE: Any time on Tuesday, Mr. Secretary. H.M.JR: I don't know who Colonel Sherrill is. He is down for three o'clock. MR. BELL: He is the Manager of the City of Cincinnati, and he wanted to see you. He came in through Mr. Julian, and I think it is about taxes. H.M.JR: Three-fifteen. MR. GAMBLE: Fine. H.M.JR: Yes, sir? MR. GAMBLE: The only other item I have is the breakdown of the program for the Richmond meeting on the thirtieth. I thought you might want to see it. (Paper handed to the Secretary.) That is the first of the twelve regional meetings. H.M.JR: I am still waiting for somebody to give me a report on Heroes' Day. MR. GAMBLE: On Heroes' Day? H.M.JR: Yes. MR. GAMBLE: You knew that was the reason for' this display. We thought we would have a couple of minutes with you when you could look at this dis- play. H.M.JR: I want the money, money, money. MR. GAMBLE: I don't think we will be able to give you that information until Monday of this coming week. (Mr. Schwarz entered the conference.) Regraded Unclassified 109 - 9 - MR. GAMBLE: You see, these people had this bond stock on consignment. Until they replenish their bond stock and we get a report from the merchants themselves, we won't know exactly how much money they took in. H.M.JR: When is it going to show up in the Federal Reserve? Harold says they don't pay up until the twenty-fourth. MR. GAMBLE: It should start showing up as of today. That is, they report to the Federal Reserve the end of the week, which would mean yester- day or today, in the instance of most of those merchants. If they have replenished their bond stock it would be a little earlier than that. H.M.JR: Last night I finally got WMAL. They put on this Treasury program from ten-fifteen to ten-thirty, and they went through this rigmarole and then they said, "We are very sorry, we are moving from one station to another; until we get moved to our new place, we will not be able to do anything about it." MR. WHITE: Was that after Hull's speech, ten- fifteen? H.M.JR: Yes. MR. WHITE: It doesn't matter because I think everybody was asleep by then. (Laughter.) H.M.JR: Will somebody tell me why the President gave Mr. Hull the great build-up he did on that speech? What was the purpose of it? MR. WHITE: Why also did anybody let him read a sales speech like that? Regraded Unclassified 110 - 10 - MR. SULLIVAN: Yes, but the President's remarks made it ten times as bad. MR. SCHWARZ: The President said he read it first and it was a great speech. MR. WHITE: I was wondering whether it was - in the first part whether it was for Argentine's and Chile's benefit. That is the only explanation. H.M.JR: The only other thing was that he would even give one, and whether - I mean, who was it to influence? I don't know. Anybody that listened to it and heard the poor old man cough every two min- utes - did you listen? MRS. KLOTZ: No. H.M.JR: I mean to hear him cough all the time. MR. WHITE: I thought that was the radio. H.M.JR: You know, it was tragic - I mean, you felt sorry for him. MR. SULLIVAN: He appeared to be very uncomfort- able. MR. WHITE: I don't think that was the worst of it. I think the speech was at least twice too long for what it contained. It was very uninspiring except for a few early paragraphs. I can't under- stand any of his assistants writing a speech like that for him to say. Regraded Unclassified 111 - 11 - H.M.JR: I only listened a very few minutes. I didn't get much, but then I read the summary in the New York Times today. There is absolutely nothing in it. MR. WHITE: I listened to the whole of it. MR. SULLIVAN: I did. I kept waiting for the reason for the speech. H.M.JR: We were waiting for the Treasury pro- gram. That is the only reason we listened. MR. SULLIVAN: We both got the same results. H.M.JR: I just can't understand it. I think it is the worst thing that has happened in I don't know when. To build people up and then give them that! And it is not because I don't love the State Department. (Laughter) Anything else? MR. GAMBLE: That is all. MR. GRAVES: May I ask you this. You told me last night you wanted to talk quotas with me today. I will not be here Monday, Tuesday, and Wednesday. H.M.JR: That is all right, but it ought to be very carefully explained to the press. Who is going to explain it? MR. GRAVES: We will prepare a release, and Mr. Odegard and I will see to it that it is carefully done. H.M.JR: You know, Kuhn told me a month or two ago he had brought in somebody to help him on my mail. He was going to bring him in and introduce him. to me. Regraded Unclassified 112 - 12 - MR. THOMPSON: Mr. Crampton. H.M.JR: Is he still with us? MR. ODEGARD: Yes. MR. THOMPSON: Kuhn says he is very good, too. H.M.JR: O.K. Peter? MR. PAUL: Mr. Secretary, may I go ahead? I have to be up on the Hill at ten o'clock. I haven't anything except that if there is any time set - are you leaving this afternoon? H.M.JR: I hope so. MR. PAUL: Well, I just wanted to see you a few minutes, if possible. H.M.JR: What about? MR. PAUL: About giving you & final report on the taxes. H.M.JR: Well-- MR. PAUL: Never mind, let it go until Monday - let it go until Monday. I don't know what time I will be back or whether they will have an afternoon session or not. H.M.JR: Will there be a session tomorrow? MR. PAUL: No, no session tomorrow. H.M.JR: Well then-- MR. PAUL: I think they will finish about one today. Regraded Unclassified 113 - 13 - H.M.JR: Anything else? MR. PAUL: No. (Mr. Paul left the conference.) H.M.JR: Blough? MR. BLOUGH: Well, I will wait just a few minutes and let Mr. Odegard go ahead. MR. ODEGARD: The only thing I have was on this survey that you want made. We were to have a meeting in Mr. Sullivan's office, but this Navy speech and the nine-thirty meeting precluded any discussion of that this morning. My own feeling.is that we ought to rely, probably, upon Mr. Blough's people to get the information as to the mechanical problem in connection with the withholding. So far as the attitude of the employees, the workers themselves, is concerned, we ought to get a regular polling group to do that. H.M.JR: I am disappointed. I asked to have it cleared Wednesday night and get it out in the field. MR. BLOUGH: Mr. Secretary, you recall I spoke to you Wednesday afternoon. We were still working on the statement late, and I said that we couldn't hold the meeting Wednesday. We hoped to hold it yesterday. H.M.JR: Why can't you hold it right now - after this meeting? MR. SULLIVAN: We have some of the men in my office. MR. BLOUGH: We had it scheduled for nine o'clock. Regraded Unclassified 114 - 14 - H.M.JR: Why can't you stay down, not go on the Hill? MR. BLOUGH: I have to go on the Hill, but we can stay long enough to get this straightened out. H.M.JR: Why not do it right away? MR. SULLIVAN: Mr. Kanne was coming in at ten- thirty - the Collector from Hawaii. Shall I bring him in? H.M.JR: All right. You fellows had better go to work. You had better go ahead on that. MR. BLOUGH: I had nothing except that, Mr. Secretary. (Mr. Sullivan, Mr. Blough and Mr. Odegard left the conference.) MR. CAIRNS: Bernie spoke to you yesterday, I believe, about the use of the first War Powers Act. We will get you the memorandum before Cabinet meeting. H.M.JR: Good. Be sure I get that. MR. CAIRNS: That is all. We got Ed off last night. H.M.JR: When does he have to come back? MR. CAIRNS: Either the tenth, eleventh, or twelfth. H.M.JR: He got the extension? MR. CAIRNS: Yes. He was to report Monday, but he complained bitterly, and they said, "You can come back on the tenth, eleventh, or twelfth," and he didn't decide last night which date he would pick. MR. BELL: There isn't any question, is there? (Laughter) Regraded Unclassified 115 - 15 - MR. CAIRNS: He is anxious to get in the fight. H.M.JR: I say he is lucky that the War Department will wait until the tenth, eleventh, or twelfth. MR. CAIRNS: That is all I have. H.M.JR: Chick? MR. SCHWARZ: I have nothing. MR. BUFFINGTON: Mr. Purcell is still after me to see if I can arrange a brief appointment with you, possibly Tuesday of next week, if that was convenient. H.M.JR: I gave him one. He didn't like it. MR. BUFFINGTON: He didn't call me until eleven o'clock that morning, and he said he had a meeting of his securities people in Philadelphia. H.M.JR: He is doing a lot of stuff in the newspapers. MR. BUFFINGTON: Yes. H.M.JR: I can see him at three-thirty. MR. BUFFINGTON: Tuesday? H.M.JR: Tuesday, and I don't want - I want you to get it right from the horse's mouth that I don't want any more publicity for the Victory Fund Committee until you have got something to sell in your hands. See? I know you don't agree with me, but it is like Purcell; he keeps calling meetings, is going to organize, and they are going to do things. I don't like to do it that way. I mean when you boys have got something to sell I will help you with all the publicity that you are entitled to - when you have got something. But, again, to give out something two Regraded Unclassified 116 - 16 - weeks - I would much rather let it rest the way it is until we have got something to give you to sell, and then we will give you the story. MR. BUFFINGTON: I might say that that suggestion came from all the executive managers who were trying to get something ahead of that two and a half percent. H.M.JR: All right. I just - here in the Treasury I don't mind your suggesting it. I don't like to keep talking about what I am going to do two or three weeks in advance. I like to say, Here is something for the Victory Fund to do tomorrow." I know they are restless, but they will just have to be patient, and then they can make it up by showing how good they are. But let's not keep - I mean the papers are just flooded with stuff about people either excusing themselves for what they should have done or making promises of what they are going to do. MR. BUFFINGTON: That is all. MR. BELL: There is a good deal of that in the Districts. Do you want that sort of curtailed, too? H.M.JR: I would like them to stop until they go to work. MR. BELL: Then have it all come out at once. H.M.JR: Yes. Now, I will go right into silver, Bell and White, and you had better get hold of Bernstein, and Huntington, you stay, will you? Regraded Unclassified 117 July 24, 1942 10:00 a.m. SILVER Present: Mr. Bell Mr. White Mr. Cairns Mr. B. Bernstein Mr. E. M. Bernstein H.M.JR: Go ahead, Harry. MR. WHITE: There are several questions. The most immediate is the order which WPB wants to issue, and they have asked for the Treasury's approval. The order- H.M.JR: Let's see now, I get all mixed up. Call it either Henderson or Nelson. MR. WHITE: This is Nelson. The order restricts the use of silver in the United States with the intent, first, of confining the uses to the most important purposes, war industries; and secondly, with the purpose of making the price ceiling which has been established by Henderson's organization effective. The mere estab- lishment of a price ceiling by Henderson's organization, which is thirty-five and three-eighths cents, does not prevent American manufacturers from going into Mexico and Canada and paying what they wish for it. They have been going down there, and we just got & cable saying that one transaction is taking place at sixty cents; but there are a number of transactions. H.M.JR: Now, wait, you have got to give me the whole picture. Let me do it, and where I am wrong tell me, because I can't keep track of it. I haven't had time. This is the way - I sent you a little notice, 118 - 2 - no manufacturer - let me start with the silver manufac- turer in the United States, see? MR. WHITE: Right. H.M.JR: Now, a silver manufacturer in the United States can't import any more from Mexico because somebody got out an order this week that you can't import unless you get a license. Is that right? MR. WHITE: He can import, but he can't use it. In effect he can't unless he has a license. It isn't an import restriction; it is & use restriction, but in effect that is what it amounts to. H.M.JR: The net effect is that a silver manufac- turer can no longer import silver. MR. WHITE: Unless he complies with certain con- ditions. H.M.JR: All right. Also if he wants to buy it now, he has got to pay more than seventy-two cents, hasn't he? Can he buy it - can he go to the market? MR. WHITE: He has got to have an allocation even for domestic silver; in other words, there have to be priorities. They are establishing a priority system. If they are willing to pay seventy-two cents, that will add so much to the silver supply that probably the non-essential users will be able to get all they want. They now figure that there will be enough silver to satisfy some of what they call non- essential users. H.M.JR: Wait a minute. You made a statement that if they begin to pay seventy-two cents it will so increase-- MR. WHITE: Yes. Then if they pay seventy-two cents, they will get all the domestic supply, and the Regraded Unclassified 119 - 3 - domestic supply is about five million ounces a month in addition. H.M.JR: Well, will they? MR. WHITE: Will they pay seventy-two? I think a good many of them will. H.M.JR: Wait a minute. Again let me go back. You think if domestic users could get a priority to get silver at seventy-two cents - are you implying it is going to increase the production? MR. WHITE: No, but instead of silver going to the Treasury, it will all go to industry so it will be an additional supply so far as industry is con- cerned. We get it now-- H.M.JR: All right. Now, what is this particular thing that you are putting up - that Henderson is putting up to me this morning? MR. WHITE: This is Nelson. Nelson's group is asking our approval on that order. H.M.JR: Now, what does the order do? MR. WHITE: The order restricts the ability to use silver according to licenses. In other words, it gives the authority to the WPB to say, "You cannot use this silver unless you will fulfill these con- ditions." And one of the conditions which they are going to establish, though it doesn't appear in the order, is that they can't pay more for silver abroad than the price ceiling established here. H.M.JR: What is the price ceiling here? MR. WHITE: Thirty-five and three-eighths cents on foreign silver. H.M.JR: It doesn't make sense. They have just got out this order now, haven't they? Is this another order? Regraded Unclassified 120 - 4 - MR. WHITE: I just read about it in the paper, but they asked us - I don't know whether it is official. MR. BELL: That is Henderson's order. H.M.JR: There is something confusing here to me. MR. B. BERNSTEIN: I think there will be in effect three orders, the first one of which has gone out. That regulates the importation of foreign silver. The order currently being considered provides the system of priorities covering foreign silver and how foreign silver will be used. Now, on top of that there will be the order fixing the price. H.M.JR: Do that again. There will be three things? MR. B. BERNSTEIN: The first one controls the importation. H.M.JR: And that will be done through which agency? MR. B. BERNSTEIN: WPB has already furnished that order in the form of an amendment. The second one will fix the order of priorities with regard to foreign silver, and in effect it will mean that the non-war producers will get very little, if any, foreign silver. The third step will be perhaps a reconsideration or, in any event, a fixing by Henderson of the price of foreign silver. MR. WHITE: That, I think, is all right, except for the last point. The last point is as follows: They have fixed the price of silver along with the prices of all other commodities in the general price ceiling. It happened to be thirty-five and three-eighths cents. Regraded Unclassified 121 - 5 They didn't specify silver; silver came in among the others. They are confronted with two problems. One, shall they have a special price applying to domestic silver, because if they don't make a special exception for domestic silver the American producers, manufacturers, will not be able to offer seventy-two cents for domestic silver. If they can't offer seventy- two cents, the silver will go to the Treasury instead of to the domestic manufacturers, so they want to place a ceiling, a special ceiling, on newly-mined silver which would be just enough to divert silver from the Treasury to the domestic users. H.M.JR: That would be seventy-two cents? MR. WHITE: Seventy-two cents. H.M.JR: But they will have the domestic price of seventy-two cents for the silver manufacturer, and they will tell them that, "You can't pay in Mexico more than thirty-five cents. MR. WHITE: That is right, that is the way it will be now. I have raised the question with them informally. H.M.JR: Do you agree on it? MR. B. BERNSTEIN: Yes, I would have thought that they were also reconsidering or being subjected to pressure, by us and by others, on the question of the thirty-five cent price. MR. WHITE: They weren't by others, but they were by us. We raised the question with them informally, and it arose out of Betata's discussion that until Nelson's outfit implemented the price ceiling it didn't worry anybody because they could go down to Mexico and buy more. But in the light of the new order, what it would mean would be that Mexico wouldn't be able to get more than thirty-five cents for its silver. Now, Mr. Betata came in here and asked your opinion or 122 - 6 - approval on the establishment of an export tax. He told us that he was thinking of a ten-cent tax, which would mean that if the thirty-five cent ceiling price still remained here that the miners in Mexico, or the miners, silver owners, would be able to get only twenty-five cents out of their share, and the Government would get ten cents, which would mean that the supply of silver would be curtailed. Besides that, certainly the Mexicans are going to be very disturbed and very angry by an arrangement which doesn't permit them to get more than thirty-five cents at a time when they could get much more, and at a time when domestic manufacturers are sending it into industry at seventy-two cents. So I asked the Henderson outfit to consider the feasibility of raising the ceiling on foreign silver to forty-five cents; what would they think of that proposal, explaining what the Mexican Government had in mind. They are now considering it. They indicate that they might look favorably upon that, but I didn't ask them for a formal opinion yet. If they raise it to forty-five, then Nelson's outfit will put that into effect. Nelson's outfit says, "We don't care what the price is; that is not our business; that is OPA's business; but whatever price OPA sets, we are going to effectuate, and we will also see that what- ever silver comes in will be used for the most important uses." H.M.JR: Do you know - for instance, does OPA say tothe chocolate manufacturers that, "You can only pay so much for cocoa in Brazil?" MR. WHITE: They are going to do that. H.M.JR: But I mean, have they? MR. WHITE: No, not to my knowledge. Regraded Unclassified 123 - 7 - H.M.JR: I would like to know of any case - that is as good an example as any - if they say to a chocolate manufacturer, "You can only pay so much for cocoa in Brazil.' MR. WHITE: They haven't been able to do that; it wouldn't have meant anything, Mr. Secretary, but that point has been troubling them a great deal. I think it is because that has been troubling them that they got Nelson's outfit to issue this order, which would make it possible for them to put a ceil- ing on the foreign silver; but they can't do it alone. They don't have the authority to do it alone. H.M.JR: Personally, this stuff - oh, Gawd, everybody makes everything just as difficult as they can for you instead of just as easy. Let me ask you this: For the American manufacturer, why should they try to put a ceiling above the price that we pay our own silver miners? MR. WHITE: They do that in order to increase the supply of silver, because the silver that we buy is gone, so far as the users are concerned - the market is concerned. H.M.JR: You don't understand me. I mean, if they want to try to control what the man pays, the prices, and they are going to permit the manufacturer - in order to get any silver in this country, he is going to have to pay seventy-two cents. Right? MR. WHITE: For newly-mined domestic silver he would have to pay seventy-two. He might get some, I don't know how much, but not as much as he wants. H.M.JR: What? 124 - 8 - MR. WHITE: Of foreign silver. H.M.JR: No, but I mean - don't make it more confusing, Harry. Provided he gets the license, the manufacturer in this country who is going to buy domestic silver would have to pay, roughly, seventy- two cents. MR. WHITE: If he gets the license. H.M.JR: So what I am trying to say is this, why is it any of our business to say to the manu- facturer, "Well, you can buy this silver anywhere in the world that you want as long as your cost, landed, in New York does not exceed our own domestic price." MR. WHITE: Their answer to that is as follows: They say, "Silver is not any different from cocoa or anything else," and they say that our price ceil- ings which we have established are being threatened on a broad front. H.M.JR: But that is ridiculous; the price ceiling is seventy-two cents. It isn't thirty-five cents. MR. WHITE: Well, the seventy-two cent price doesn't apply to all the silver; it only applies to part of the silver. H.M.JR: It applies to any silver that a manu- facturer wants to use. MR. WHITE: The non-essential uses. 125 - 9 - MR. B. BERNSTEIN: In the past, Mr. Secretary, for all the materials that were produced in which they used silver the price those people paid for silver was thirty-five and three-eighths cents. H.M.JR: When they bought outside of the country. MR. B. BERNSTEIN: And since what they tried to do was freeze the prices on the basis of it, the situation as of March thirty-one this year - at that time manufacturers were able to get silver at the thirty-five and three-eighths price. H.M.JR: But, Bernie, I mean I am not arguing for higher-priced silver. Personally, I still stand where I did. I would remove all silver re- strictions and just have it treated like anything else, but treat silver just like a commodity. Let's say that the sugar price in this country, using sugar - we can grow sugar, and let's say the ceil- ing in this country is five cents, see? Then, why should we say that in Cuba you can't pay more than two and a half cents for sugar? MR. E. M. BERNSTEIN: Three-fifths of the im- ported silver goes into essential war uses; it is for those war uses they want to keep the price down, and for them they reserve the greater part of the foreign silver. They don't want them to have to pay seventy-two cents an ounce. MR. WHITE: In other words, it-- 126 - 10 - H.M.JR: Yes, but the whole thing is so incon- sistent. On the one hand you say for the war uses it is going to be thirty-five cents, and for the silver- smith it is going to be seventy-two cents. MR. WHITE: That is precisely what they are say- ing in the conservation order. H.M.JR: You haven't told me that. I have had to dig that out. No one has told me that, if that is what it is. MR. WHITE: It is to discourage non-essential users by charging them a higher price and yet providing a new supply for them which otherwise wouldn't be available to anybody because it would go into the Treasury. H.M.JR: How do you get that? Can't they get it now - if I wanted to go out today, and I am Inter- national Silver Company, wherever they are, and buy silver in Utah at seventy-two cents, can't I buy it? MR. WHITE: Not if their old price ceiling stayed in effect, which was thirty-five cents. Then the Government was the only one that could pay more than thirty-five. MR. BELL: Didn't that apply to foreign silver only? MR. WHITE: No, they excluded domestic silver. MR. BELL: Yes, but why isn't the Secretary's statement correct then? MR. B. BERNSTEIN: I think it has. Gorham has paid seventy-two cents. The point Harry was making-- H.M.JR: Gorham has paid seventy-two? 127 - 11 - MR. B. BERNSTEIN: Yes. The point Harry was making, it seems to me, is this, that only those manufacturers who could afford to absorb the differ- ence between the thirty-five cent price and the seventy-two cent price were in a position to go out and pay the seventy-two cent price. Other important manufacturers, the price on whose product was fixed, couldn't afford to pay seventy-two cents where they previously had been paying thirty-five; and they are bringing pressure on OPA to let them raise the price of their product 80 that they in turn could come down here and pay seventy-two cents for silver. H.M.JR: Well, to make it thoroughly cockeyed, they should leave it at thirty-five cents, and then these people sell their goods, and then ask them, "How much money did you lose on it?" Then we pay up the difference in the losses, whatever it is on the books. That would be the perfect set-up. You see, leave it at thirty-five, they will sell at the other - some can pay seventy-two, others can't - and then say, "How much are you losing on your silver spoon?" "I am losing so much." Just draw & check on the Treasury." MR. B. BERNSTEIN: I don't know whether you are serious or kidding. H.M.JR: I am not kidding. MR. B. BERNSTEIN: That is right. I talked to one of the boys last night, and they feel it is cheaper to have subsidies to make up the losses. H.M.JR: No, that is what is-- MR. BELL: They are talking about that in other commodities. H.M.JR: They will have to do that on meat right now. Boston is getting no meat because the packers can't stand the fifteen-cent price on hogs, so they Regraded Unclassified 128 - 12 - say, "To hell with it; we are not going to butcher any hogs. MR. WHITE: You remember, we said a long time ago that fixing prices does not meet the situation, and we are beginning to see all the rips opening up in the seams. The first one was the import goods. The second is that matter you are raising; but the further reason is they want to put a ceiling on domestic silver because they are afraid that even with the uses restricted to non-essential uses the bidding up of domestic silver might cause the price to go to a dollar an ounce. So they want to set a ceiling even on domestic silver of seventy-two cents so as to prevent the bidding up of that. MR. M.BERNSTEIN: There will be three categories of silver users as a result of the import order and the forthcoming conservation order. There will be the essential users of silver for war purposes, at thirty-five and three-eighthscents first claim on the foreign; there will be priority users who will have foreign silver, and they will pay thirty-five and three-eighths cents; they have priorities from l-a to 10-a. There will be those beyond that level of priorities who will not be able to get foreign silver, and if there is domestic silver for them they will all get domestic silver and they will pay seventy- two cents an ounce. H.M.JR: Well, this thing is unusually com- plicated because we have the seventy-two cent price that the industries buy at, the thirty-five cent world price which will be fixed, and then Harry White comes along and suggests that we add an extra ten cents so that Mexico can collect a tax. MR. WHITE: It is a complicated situation, but I think-- H.M.JR: Supposing Canada wants to put on fifteen cents. They need a fifteen-cent tax. Then what are you going to do? Regraded Unclassified 129 - 13 - MR. WHITE: Well, it is a question of reasonable- ness. H.M.JR: Now, this is the way I feel. This situation is like cocoa. I personally think, Harry, this. I mean, left to myself - I mean I would say, let them have a free-for-all on silver up to seventy - two cents. That is what I would say, but you can't do it that way. So I think - I don't see how the position is tenable - your ten cents tax. I think they had better go ahead and try to freeze the foreign price at thirty-five cents, put a ceiling of seventy-two cents on for domestic, and then let these fellows go to the State Department - Mexico, and so forth and so on - and then let the State Department take the burden if they want to increase the price above thirty-five cents. MR. WHITE: That was our original position, Mr. Secretary, and the only reason it is revised is because Mr. Betata came to you. H.M.JR: Certainly he got nothing out of me. MR. WHITE: He hasn't gotten anything out of us, either. H.M.JR: I just think the thing is so cockeyed that we had better just be ultra-cons ervative on this thing and say, "The price is thirty-five cents; that is what it is." Let them freeze the foreign silver at thirty-five, the domestic at seventy-two, and if Mexico and Canada or Peru or somebody else doesn't like it let them go to the State Department and complain. MR. CAIRNS: That gives Nelson what he wants? MR. WHITE: Yes, that gives Nelson what he wants. We answer Mexico by saying, "We have great sympathy but unfortunately that is not & matter which relates to us", and they immediately will bring pressure to Regraded Unclassified 130 - 14 - bear on the State Department and on OPA, and it will be their baby. We are not in any way overlooking a responsibility which we have - I really don't see it - because at that point it is a question of international relations; and it is no different, it seems to me, than cocoa or any' one of the other imported articles about which we are troubled. Why should we ask them to make a difference on silver for Mexico and not ask a difference for cocoa for Columbia? It isn't our affair. H.M.JR: Sure, or long staple cotton from - which country did we buy from? MR. WHITE: Well, Peru - we used to buy it from Egypt. H.M.JR: Another way would be to have one of Jesse Jones' Metal Reserve Corporations buy the silver from Mexico at forty-five cents and let Jesse take the ten-cent loss, you see, and sell it to Nelson at thirty-five cents. MR. WHITE: They are doing the same thing with some things, with copper. MR. B. BERNSTEIN: Mr. Secretary, before the discussion is closed, and I am glad you gave me an opening-- H.M.JR: That is another way out, let Jesse buy it at forty-five cents, absolve the ten-cent loss, and Nelson gets it at thirty-five. MR. WHITE: Bernie has his foot in the door with his scheme. (Laughter) MR. B. BERNSTEIN: Doing what you are suggesting here neither increases the supply of silver for war and non-war uses nor eliminates the possible hardship Regraded Unclassified 131 - 15 - that will exist for Mexico and other countires. Now, I am not attempting to argue the propriety of the position that you are suggesting, but assuming that a solution must some time be found-- H.M.JR: I am not arguing, but I will now proceed to go ahead and argue. (Laughter) MR. B. BERNSTEIN: Not at all. I just say that some time a solution will be found which will both make more silver available for the market and at a price which will be deemed to be fair by the foreign countries. The Metals Reserve Company can do it by redeeming silver certificates at the Treasury for silver coins, melting the silver and selling it to the market, say, at fifty cents an ounce. H.M.JR: But that is the thing, Bernie - listen, before we go into that - just hold that a minute - I want to ask Bell if the thing that I suggested - you hold yourself a minute. MR. BELL: Yes, I think that is all right. I was going to raise the question as to whether you should warn Henderson or Nelson, one or the other, that undoubtedly they will get this pressure through the State Department so they are prepared to meet it. MR. WHITE: I have already informed Henderson's men that they can expect considerable pressure. We can repeat it higher up. H.M.JR: Are you satisfied? Do you see any- thing else - I mean from a Treasury standpoint? MR. BELL: I think that is the way to do it. H.M.JR: At least we are doing it then as strictly Treasury people. 132 - 16 - MR. BELL: I think that is right. I don't see how you can distinguish between commodities. H.M.JR: You are all right? MR. BELL: Yes. MR. CAIRNS: Yes. H.M.JR: White? MR. WHITE: I think that is the thing to do. I don't think we have any special responsibility to Mexico. H.M.JR: Now, going back to my conversation with McCabe of Lend-Lease, in which he told me that he didn't see how they could redeem silver certificates for coinage purposes but that they could do it for strategic purposes, I told him on the phone that my chief interest was in getting silv er for England and for Australia for coinage purposes. He seemed to be surprised at that. I said, "Well, that is what I am interested in." Now we have got, gentlemen, to do something about helping England and Australia and these other countries, Iran and Iraq, whatever they are, to get this silver so that they can have it for small coins. I think we have just got to move on it. MR. WHITE: Mr. Secretary, I think one of the reasons we have our difficulties is that the negotiations with Lend-Lease have been through Mr. Ecker. I have explained them in great detail at least five times, and the man doesn't assimilate easy. H.M.JR: That man Wyzanski is nobody's fool. Didn't Wyzanski come over? 133 - 17 - MR. WHITE: No. They will come over now. In the memo they say they are ready to come over, but I mean all the negotiations have been by Ecker. He would call me up after every meeting and I would have to go over it all again, so I don't think it has been adequately represented to them. H.M.JR: I would like to really go to town on that. I think that is really a Treasury responsibility when another treasury calls up and says, "We need silver." MR. BELL: I think we should do everything we can to get silver for coinage in those countries where we have caused the shortage. H.M.JR: So if you and Judge Wyzanski, who has been brought down off the bench to help on this thing-- MR. WHITE: Their memo doesn't foreclose it. H.M.JR: No, it is very nice. MR. WHITE: So that the next step is to call them and show them the emphasis. H.M.JR: And McCabe said he would be interested if it was a coinage thing I wanted. MR. BELL: We did get a reply from McCabe that it couldn't be done? MR. WHITE: Not that it couldn't be done, but that they didn't like the policy. H.M.JR: He sent over an unsigned draft for us to consider. They didn't want to close the door. MR. BELL: He will do it; if he can do it, he will. 134 - 18 - MR. WHITE: I don't think we will have difficulty convincing him. H.M.JR: Do you remember Wyzanski? MR. BELL: Very well. He is very able. H.M.JR: They have brought him down to help out. MR. WHITE: He has another idea in there, which he said they wouldn't like, to redeem silver certificates at a dollar twenty-nine cents an ounce. That seems to them a little bit preposterous a price, but what they would be willing to do would be to direct the Treasury, as their agents, to buy domestic silver at seventy-two cents. Now, it may be that can work out. They may be able to buy it directly but pay just a little more than we pay and get seventy-two cent silver. That, however, is not the understanding you had with the Silver Comi- mittee and the Silver Committee might object to it. A third change in your idea to them is with reference to the terms. You remember that you sug- gested that it would be an ounce-for-ounce return. They don't wish to make those special terms. They prefer not to now. It may be possible to convince them, but that is another distinction between their position and the Silver Committee's position. MR. BELL: Why isn't that a good suggestion of buying at seventy-two cents for the Lend-Lease? MR. WHITE: It would be better if the Silver Committee - if it would be all right with the Silver Committee. H.M.JR: Now, I think, gentlemen, that we have spent about all the time that silver is worth, forty- five minutes. MR. WHITE: There is a letter that you have to sign, if that is the case. 135 - 19 - MR. B. BERNSTEIN: The industrial users of silver want to buy some of our seventy-two cent silver, but for the processors to sell it to them you have got to give them an extension of time under certain contracts that they have to deliver the silver to you. We have done it in the past. We have given them an additional six months' time. Then they will sell that silver to Gorham and Handy and Harman, and so on. Ed signed a memorandum to you. H.M.JR: Wait a minute, you are going a little bit fast. Explain it to me once more. MR. B. BERNSTEIN: On newly-mined domestic silver the customary way it is delivered to us is as soon as the smelter gets it he pays his seventy- two cents to the miner and gives you a transfer of title. That protects him in case legislation is changed. The delivery date on that silver is now here. H.M.JR: Is now what? MR. B. BERNSTEIN: Now arrived. Under the con- tract they have got to make deliveries to you this month. If you will give them an additional six months in which to deliver that silver they are going to turn around and be able to sell silver to industrial users at seventy-one point eleven cents. H.M.JR: If they get a license. But that re- leases- - that makes it possible? MR. B. BERNSTEIN: Yes. H.M.JR: I want you gentlemen to know this, that there are two things - I think it is & great mistake to shut down these silversmiths unless - I mean on the price business, you see - only on the price business. But if it is a question of a silver- Regraded Unclassified 136 - 20 - smith or a straight war need then it should go for war purposes. But if it is a question of the silver- smiths not being able to function on account of this price tangle I think we should be sympathetic to the silversmiths. MR. WHITE: That is right. They have asked for our approval of their order. I don't know whether we have to answer. H.M.JR: Do I have to? MR. BELL: You are just saying there is no objection. MR. WHITE: That is the order establishing priorities and conservation. MR. BELL: Can you get away with that, just saying there is no objection? MR. WHITE: It would satisfy them better. There is one other matter that I would like to raise. We are negotiating with the Swiss now on the question of the acquisition of Swiss francs. We would like to ask to buy two million dollars' worth, more, of Swiss francs. H.M.JR: We bought two million. MR. WHITE: We bought one, and we didn't use it but we are saving it. We expect to need about ten million. So that the Stabilization Fund, if they acquiesce to our-- H.M.JR: I thought you bought two. MR. WHITE: It was one. We bought two million Swiss francs, wasn't it? 137 - 21 - MR. E. M. BERNSTEIN: One million Swiss francs. H.M.JR: Wait a minute, we gave the Vatican - made available to them two hundred and fifty thousand dollars' worth of Swiss francs. MR. WHITE: Not out of this. It was other Swiss francs. H.M.JR: But that was two million dollars, wasn't it? MR. WHITE: Two hundred and fifty thousand Swiss francs - no, it would be much less than that. H.M.JR: Wasn't there two million dollars' worth of Swiss francs? MR. E. M. BERNSTEIN: In an option fund there was - we had the right to buy it at any time. We didn't have the right-- H.M.JR: Am I not right, it was two million dollars? MR. E. M. BERNSTEIN: Yes, sir, it was that much at one time. H.M.JR: What has happened to that? MR. E. M. BERNSTEIN: It has been apportioned to the Vatican and to some other places. H.M.JR: The State Department, the Red Cross - have you used that all up? MR. E. M. BERNSTEIN: No, sir, there is still a little left. H.M.JR: You didn't buy that outright? MR. E. M. BERNSTEIN: No, sir. 138 - 22 - H.M.JR: Option from whom? MR. E. M. BERNSTEIN: - From the Swiss National Bank. H.M.JR: But you haven't used that all up? MR. E. M. BERNSTEIN: No, sir. H.M.JR: And that wasn't through the Stabiliza- tion Fund? MR. E. M. BERNSTEIN: No, sir. H.M.JR: Now you want to buy a million dollars' worth? MR. WHITE: Two million dollars' worth. H.M.JR: Of Swiss francs? MR. WHITE: Yes, that would be how many-- H.M.JR: From whom do you want to buy? MR. WHITE: From the Swiss, and negotiations are going forward. H.M.JR: Swiss National Bank? MR. WHITE: I think it will be the Swiss National Bank that will make it available, but the Swiss Government will have to give its approval. H.M.JR: And the Stabilization Fund-- MR. WHITE: The Stabilization Fund would then have two million and a third - two and & third million dollars' worth of Swiss francs, and the State Depart- ment anticipates a need for ten million the rest of the year. So I don't think we will get stuck with it unless the war ends-- 139 - 23 - H.M.JR: What price? MR. WHITE: The par price. MR. BELL: Par? That is nineteen, isn't it? MR. WHITE: Twenty-three cents. H.M.JR: What was that other two million dollars - what did we pay for that? MR. E. M. BERNSTEIN: We always get it for par when we get it from the Swiss. MR. BELL: You pay gold for it, don't you, 80 they give you par? MR. E. M. BERNSTEIN: Not because we pay gold. It is because when they sell it to us we give them dollars. They get gold if they want it. MR. WHITE: Twenty-three cents is the official-- H.M.JR: What is it in the market? MR. WHITE: It was twenty-eight and thirty-two, and I think it even went as far as thirty-four. H.M.JR: So it is a good buy? MR. WHITE: Yes, it is a good buy. H.M.JR: Could we make a little money on it? MR. WHITE: We can if you want to. We can charge the State Department. H.M.JR: What are we in business for, our health? (Laughter) MR. WHITE: Since it is the State Department, maybe we can make a little money. (Laughter) 140 - 24 - H.M.JR: I would charge them something. All right, that is approved. Anything else? MR. WHITE: That is all. This letter to the Senator on silver will have to wait because it speaks of coinage. 141 July 15, 1942 Secretary Morgenthau Mr. Foley The shortage of silver available for use in industry and the arts has created a market demand for newly-mined domestic silver at a price in excess of 71.11 per ounce, the price now paid for such silver by the coinage mints. In the immediate future this type of silver will probably be sold to consumers. However, title to more than 6,000,000 ounces of the production of the refineries for the months of July through November has already been transferred to the United States under Instruments of Transfer. An Instrument of Transfer vests title to the silver in the United States immediately upon its acceptance and the silver is required to be delivered at some future time, usually within the next five months. Some of the refin- eries that have executed Instruments of Transfer calling for deliveries in the months of July through November are anxious to have them cancelled or modified in order that Regraded Unclassified 142 - 2 - this silver may be sold to industrial and artistic con- sumers. Instruments of Transfer have been modified on numerous occasions in the past to permit late deliveries. It is my opinion that you have the legal authority to agree to & modific of the Instruments of Transfer so as to postpone the delivery dates until sometime in the future. If you approve our taking steps to modify the Instruments of Transfer, will you please indicate your approval below. (Signed) E. H. Foley, Jr. General Counsel. APPROVED: (Signed) H. Morgenthau, Jr. Secretary of the Treasury. RB:FH:ecr- 7/14/42 143 JUL 24 1942 Attention: Mr. Lund Dear Sirs: Reference is made to your inquiry as to the views of the Treasury Department conserning the proposed Order M-199 to be issued by the War Production Board. It does not appear that the problems dealt with by the Conservation Order M-199 affects the functions of the Treasury Department with respect to silver, and accordingly the Treasury Department raises no objection to the issuance by the War Production Board of the proposed Order. Very truly yours, (Signed) H. Morgenthau, Jr. Secretary of the Treasury. War Production Board, Washington, D. c. BB:nrd - 7/22/42, 144 Regraded Unc July 25, 1942 MEMORANDUM FOR THE FILES Subject: Meeting on the Lend-Leasing of Silver Mr. White's office, July 24, 1942 Present: For Lend-Lease: Mr. Boker, Mr. Van Buskirk, Mr. Mysensky For Treasury: Mr. White, Mr. B. Bernstein, Mr. B. M. Bernstein Mr. White opened the meeting by stating that the proposed letter from the Lend-Lease Administration met part of the requirements for an adequate program of lend-leasing silver to friendly foreign countries. The willing- ness of the Lend-Lease Administration to provide silver for industrial purposes fully not that part of the silver problem. However, some of the most important requirements are not net by the Lend-Lease Administration's proposal. The two most important are the need for silver for coinage purposes, and the failure to provide for a separate lend-lease agreement for the return of silver on an ownes-gram basis after the war. Mr. White made a brief statement on the position of the Senate Special Silver Com- mittee and the desirability of shaping the program in a manner that would be approved by the Committee. Mr. Ecker stated that it was difficult to say how silver coinage could be regarded as a defense article. The Lend-Lease Act limits the Lend-Lease Administration, he said, to the provision of defense articles. Mr. B. Bernstein painted out that the effective production of defense articles depends upon an adequate coinage, and that silver coinage is an essential part of a satisfactory monstary system. The question was raised by Lend-Lease people whether the additional silver coinage required was solely due to the presence of troops of the United Nations in these areas. Mr. White replied that clearly the presence of the troops was an important factor in the need for additional silver for coinage. Nevertheless, the principal reason for the increased need for coinage is the expansion of production and employment as a conse- quence of war production. Mr. White pointed out that if we do not lend- lease silver to England for coinage that England will, of necessity, divert silver from industrial uses to provide itself with the necessary coinage. This silver will come out of the war effort whether silver is diverted from use in England and replaced by other metals or whether silver is acquired in the open market, which will reduce the available supply for the American war effort. 145 Regraded Uncla - 2 - Division of Monstary Research Mr. Wysensky admitted that the Lend-Lease Administration can lend-lease silver for coinage where it is 80 clearly connected with the war that no doubt exists of the connection. He cited a hypothetical case of the reconquest of Norway. If silver coinage should be needed to re- establish the monetary system of Norway, the Lend-Lease Administration would feel justified in providing such coinage. Mr. B. M. Bernstein inquired whether the Land-Lease Administration would honor a requisition from one of the United Nations for silver for coinage if the requisition stated that such silver was needed because of the presence of troops and war production. Mr. Van Buskirk replied that the request would be investigated and a decision based on that. He offered little hope that silver for coinage would be made available. The Lend-Lease people made it clear that the principal reason they objected to the provision of silver for coinage is that silver provided for this purpose might be regarded by the public as a direct lending of money or equivalent to a direct lending of money. The question was briefly discussed on the desirability of having silver lend-leased for war production uses and returned after the war on an ounce-for-ounce basis. Mr. Van Buskirk said he saw no more reason for the separate agreement for the return of silver than for the return of any other material that is lend-leased. Mr. White pointed out that it is difficult to ignore the Silver Committee's desires in this respect. The strength of the Silver Com- mittee is not to be measured nerely by their attitude towards silver. Their dissatisfaction with the silver program will be manifested in their attitude on every important measure. Mr. White added that the Senate Special Silver Committee has in mind the Pittman Act under which Treasury silver was made available for sale to foreign countries during the last war and the Treasury required to repurchase the silver at a dollar an ounce, which was more than twice the market price. While the Senate Special Silver Committee is in no position to ask for such generous treatment this time, they would like to see post-war demand created for silver for replacing silver provided the United Nations out of the Treasury's stocks. The meeting adjourned with the Lend-Lease Administration still holding firaly to the view that the lend-leasing of silver for coinage purposes is in general outside the functions of the Lend-Lease Adminis- tration and would be misunderstood by the public; that there is no need for a separate lend-lease agreement on industrial silver provided for war uses. B. M. Bernstein 146 July 24, 1942 Conference in Secretary Morgenthau's Office Thursday, July 24, 1942 11:05 A. M. Present: Secretary Morgenthau Sir Frederick Phillips Sir Frederick Leith-Ross Mr. D. W. Bell Mr. H. D. White The meeting had been arranged at the request of Phillips, who had said that Sir Frederick Leith-Ross would like to call on the Secretary. After some preliminary pleasantries, Leith-Ross spoke to the Secretary about the proposal to establish an International Relief Organization and remarked that the Secretary was the person most neces- sary to talk with since there was the question of financing the relief. The Secretary said he did not know much about it yet inasmuch as he was busy with problems that were more immediate. Leith-Ross said he hoped the Secretary would find time to go into the matter as he felt it was something that ought to be initiated in the not too distant future. Leith-Ross also intimated he would be glad to talk about the details with the Secretary any time the latter felt interested. The Secretary responded that he would be glad to go into it some time. Sir Frederick Phillips also said the people in London had been thinking about post-war monetary problems and would like to discuss it sometime with the Secretary and the Secretary said he would be glad to. Secretary Morgenthau asked Phillips and Leith-Ross whether they were familiar with the point rationing system. Leith-Ross said he wasn't in on that end of it but made a few comments; Phillips said he had observed some of the things about it from his recent sojourn in London. The Secretary asked whether it would be possible for Phillips to have prepared a memorandum setting forth briefly some of the characteristics of the point rationing system in England and whether he had any memoranda or reports available which he could send to the Treasury. Phillips said he would be glad to have prepared such a memorandum and see what was available. The meeting adjourned after about fifteen minutes. Regraded Unclassified 146- A July 24, 1942 Knox told me at lunch today that Hopkins, King and Marshall were over in England, and that the President's instructions were not to come back from England until they have gotten an agreement from the British that they would attack somewhere on the Second Front with us this summer. Regraded Unclassified 7/24/42 147 Reading copy of HM, Jr's remarks to Navy Department employees in front of Navy Department Building at noon today, when Secretary Knox also addressed them, on their Payroll Deduction Plan. IT RAINED! 148 Mr. Knox, Mr. Bard, Ladies and Gentlemen: This 1s certainly a stirrir ind heart-warming demonstration. I share with you the pride and satisfaction that all of you must feel over the outstanding success achieved by the Navy Bond Campaign. There is always satisfaction in a job well done. That is particularly true in th: case, for sound and adequate financing is one de the most important phases of our all-out war effort. To prosecute the war during this year, it will be necessary for the Governm to borrow at least $50,000,000,000, more than $4,000,000,000 a month. We hope that at least $12,0 ,000,000 of this will come through the sale of War Bonds to wage earners and salaried employees. 149 - 2 - It is essential not only for the successful conduct of the war but for the economic welfare of the nation that as much as possible of the income of individuals be invested in Government securities. This is imperative for a number of reasons. One is that this money 18 actually needed to finance the war. It helps to pay for the weapons our courageous fighting forces need to defeat the enemy. Another reason 1s that by investing as much as possible of our current income in War Bonds, we reduce unnecessary spending and thus help to keep prices down. Every War Bond dollar we get means one dollar less that we shall have to borrow from the banks. Regraded Unclassified 150 - 3 - We all know that the supply of civilian goods is being drastically curtailed by the demands of war production. With more money to spend for fewer goods, prices are bound to increase unless we deliberately resolve to spend less and save more. In war time spending as usual is as bad as business as usual. By investing every cent we can in War Bonds, we can kill three birds with one stone. First, we can help buy planes and guns and ships for our fighting men. Second, we can help keep down the cost of living for ourselves and for the government. And third, we can protect our own future security with the savings we accumulate now. Regraded Unclassified 151 - 4 - To accomplish these objectives the slogan of our War Bond Campaign has been "Everybody -- Every Pay Day -- 10%". It 1s proper that we who are in Government service should set an example for those employed in business and industry. The Treasury Department last month, and now the Navy Department, have gone over the top in this campaign. Over 90% of the employees of both departments are investing more than 10% of their total pay in War Bonds every pay day. We of the Treasury and you of the Navy have thus said to employees everywhere, in other Government Departments and in private business and industry, "We have shown the way. This job can and must be done." Regraded Unclassified 152 - 5 - Personally and on behalf of my associates in the Treasury Department, I congratulate you. By your success in this campaign you have demonstrated the truth of your War Bond slogan, "Navy Dollars are Fighting Dollars". My thanks and congratulations to you all. Keep up the good work. 153 July 24, 1942 4:15 a.m. INFLATION Present: Mr. Bell Mr. White Mr. Cairns Mr. B. Bernstein Mr. Paul Mrs. Klotz H.M.JR: In order to save me and also for efficiency, I hope you agree to what I am doing. Until the tax bill is through - you see, at Cabinet - I mean - you see what I am leading up to - at Cabinet I brought up - I gave the President this memorandum which Bernstein prepared. As I understood it, it was his idea; he did the work on it. I think I am correct. I mean, I am a little bit - I don't know just who to work with. You are through with the bill, so I am just a little bit hamstrung - or am I confusing you? MR. PAUL: No, not at all. I can tell more after you get on a little bit. H.M.JR: The point is I have got to work I mean, normally, once the tax bill is over, and I have got something, then I would say to you - I would say, Paul, do this as General Counsel," but in the mean- time, with you up on the Hill and wanting to keep the thing - I will try my best to keep you informed when you can do something, and I will let you tell me - I would like to work with the fellow direct. That is what I am getting at. MR. PAUL: That is right, and I think you should work with - depending on which-- Regraded Unclassified 154 - 2 - H.M.JR: O.K.? MR. PAUL: Yes, which part it is, whether it is Foreign Funds or another part. H.M.JR: And it is up to these fellows to keep you posted as much as possible, and when you are here, like I said, "If he is here, tell him to come in." If not, they would have had to tell you. Is that right? MR. PAUL: That is all right. H.M.JR: When I get through any of - these two can have their day in court if they are not satisfied, but in the meantime let's keep winning the war. I will tell you what I have done. Then, if you are not satisfied - anyway, instead of the President - to my amazement he took the memorandum and as a basis of that, he read the first page. He discussed the whole question of inflation and prices for about fifteen or twenty minutes, and he asked me if we were in tune with the Attorney General. I said, "It isn't a question of being in tune; we just haven't discussed it with anybody outside the office," and I take it that is right. MR. BERNSTEIN: That is correct. H.M.JR: And so he was sparring around a lot, and in view of the fact that Jim Forrestal just before Cabinet got hold of me and said, "Wasn't it terrible the President wasn't going to go ahead, the House leadership had licked him on the thing, and he wasn't going to do anything." So the President - from his discussion nobody at Cabinet could tell whether he was going to go to Executive Order, because he asked, "What would you say if I sent a message to Congress?" So finally I turned to the President, and I said, "Well, I don't understand. Are you going to do this by Executive Order, or aren't you?" I thought I might as well nail him down, and in a very disagreeable manner Regraded Unclassified 155 - 3 - he turned to me and said, "Of course I am going to do it by Executive Order," 80 - well, that was the first I think anybody in the room knew it. But I wanted to know it, so he said-- (Mr. Murphy entered the conference.) H.M.JR: Harry will tell you, Henry. He will post you. You haven't missed much. Then at the end of Cabinet I said to the President, "Is it agreeable if I give a copy of this memorandum of Bernstein's to Sam Rosenman," and he said, "It is." I then got hold of Sam, and Sam knew nothing about it. He didn't know. He said, "Don't tell me after three weeks' discussion in the papers there isn't an Execu- tive Order drawn." I said, "No, Sam, if there is I don't know about it, and I also understand Ginsberg has been sitting up every night trying to work one out, but I would be amazed if there was one." MR. PAUL: I was at dinner last night with Leon, and he said, "The President has had something written for several days there," and I don't know whether he meant a message or-- H.M.JR: It was a message; I saw it. It was a message to Congress. MR. PAUL: That clears that up then. H.M.JR: But Leon hadn't seen any Executive Order, had he? MR. PAUL: No, that is what I couldn't tell. He was just talking along, and this was kind of incidental, and I couldn't tell whether he was refer- ring to an order or a message, but whatever it was, he said it had been there for several days. H.M.JR: It was a message. I told him that the President told me I could see the Order before it was in its final form, that Bernstein was here and 156 - 4 - available, and at the Judge's disposal. I explained to him about what you (Paul) were going to be in the future. That seemed to please him very much, and I also told him that if they got along anywhere during the week end I would like to know, see? So Bernie will hear from Judge Rosenman, see? Now, the point that I am making - I don't know whether you want to get in on this thing or not. That is the point. MR. PAUL: I may as well get in on the fringe of it because we just finished our preliminary session with the Senate Committee and I may as well break into some of this stuff I know nothing about. H.M.JR: Well, anyway, I told them that Bernstein - and if he calls you and you want to go over with him when he goes over to Sam, that is up to you. MR. PAUL: You will get in touch with me? MR. BERNSTEIN: Sure, I will. H.M.JR: Is that - I mean, I am moving very fast because I want to get out of the office, but-- MR. PAUL: That is fine as far as I am concerned. H.M.JR: Is that all right with you? MR. PAUL: Yes. H.M.JR: All right, Now, the other gentlemen in the room are also all very much interested in prices and inflation, and I would like all three of them kept posted, and their advice asked and sought as you go along on this thing. That is why they were invited in here. They all have done a lot of work on it for a couple of years, and as we go along - because there is nothing that is more important to the Treasury than this, see, Bernard and Paul and Huntington? So as you go along, would you please let Bell know, and White, and Murphy, who is here, or Haas. Regraded Unclassified 157 - 5 - MR. PAUL: What about this further idea of yours, Huntington? MR. CAIRNS: I found another statute which specifically named you, which is, I think, preferable to the one discussed here: "Such regulations and re- strictions as may be prescribed by the Secretary of the Treasury." I think in scope that it may be just as advantageous, or more advantageous, than section 5-b. MR. PAUL: Shouldn't we write that up in the same way? MR. CAIRNS: I think we ought to rewrite this memo. MR. BELL: Use both. MR. CAIRNS: Use both, yes. H.M.JR: Judge Rosenman is starting from scratch. He knows nothing about it. He doesn't bluff. I could tell from the way the President took it that he is very much in the dark, because Judge Rosenman said, "For three weeks they have been talking about it." He just couldn't believe that there wasn't somewhere an Executive Order giving the President the powers. MR. WHITE: If the President said he intended to do it by Executive Order he must have had some power in mind under which he could do it. H.M.JR: No, you don't know the President. I mean, you don't know the people around him as well as I do. I mean they would let him get out on the end of this limb and he wouldn't have anything. MR. WHITE: The answer is he doesn't know of any power he has? Regraded Unclassified 158 - 6 - H.M.JR: The answer is I am willing to bet ten to one that he has nothing in his hand. That is all the more reason-- MR. WHITE: You fellows have explored all the powers of the President? MR. BERNSTEIN: No, I wouldn't put it that way. I mentioned this idea yesterday, and the Secretary was interested enough in it that we worked that idea up, namely, the 5-b idea. We didn't attempt to look up all existing legislation or the commander-in-chief powers. The newspapers indicated that Biddle was supposed to be working on that problem of canvassing all existing legislation to see whether the President had any power under the legislation or under the Constitution. H.M.JR: Listen, gents, all I want to do is to lay the ground for you. I want to get out of here, and if you want to continue the discussion go into Mr. Bell's room, will you? MR. WHITE: Yes. H.M.JR: But the idea is everybody please put his brain on this thing - everybody. Regraded Unclassified 159 July 24, 1942. 4:33 p.m. HMJr: Harry. Harry White: Yes, sir. HMJr: Stimson told me before Cabinet that he'd read your memorandum and that Hull had sent Herbert Feis over to see him to discuss it. Hello.... W: I'm listening, sir. HMJr: ....and that both he and Herbert Feis are reluctant about having special currency. W: Did.... HMJr: Well, I didn't discuss it. I said, "Well, Stimson, the next move is up to you and Hull, and when you're ready, we're ready." W: I see. HMJr: I thought you'd like to know. W: Yes - 80 that we just stay put. HMJr: We stay put. W: Yeah. HMJr: Okay. W: Goodbye. Regraded Unclassified s 160 Nathan Straus 630 Sixth Avenue New York, N.Y. July 24th, 1942 Dear Henry, Accept hearty congratulation on your statement printed in the New York Times this morning. It is the most lucid analysis of a complex tax problem that I have ever read. Please do not trouble to reply. As ever Cordially yours, N.S. Hon. Henry Morgenthau Jr. 2434 Belmont Road Washington, D. C. Regraded Unclassifie V 161 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE July 24, 1942 TO Secretary Morgenthau FROM Mr. Murphy HCM Subject: Recent Changes in Prices and Yields of Government Securities During the week ended last night, there was little movement in the prices of Government securities. Most issues showed no change or declined 1/32, while no issue moved more than 2/32. Both the taxable 1-1/2 percent notes and the 2-1/2 percent bonds of 1967-72 declined 1/32, closing last night at 100-5/32 and 101-5/32, respectively. The new 2's of December 1949-51 were unchanged at 100-6/32. The restricted 2-1/2's of 1962-67 continued unchanged through the week at 100-8/32 bid and 100-16/32 asked, a mean of 100-12/32.* This price appears high in view of the announcement that the issue will be reopened early in August, but we are informed that bonds can actually be sold at the bid. As the interest loss which a prospective pur- chaser of this issue would suffer by awaiting the reopening would amount to not more than 3/32, the remainder of the premium must be due to the preference of some purchasers for early delivery of actual securities. We are informed that the extraordinarily wide spread in this issue - amounting to 8/32 - is due in large part to the time required for transfer of registration, during which time the bond must be "carried" by the dealer. Prices of short- and medium-term securities continue substantially below their March 19 levels, reflecting both amortization of premiums and, in the case of the shorter issues, real market declines. Prices of longer-term bonds, however, are generally above their levels of that date. (See attached chart and tables.) # Except as otherwise indicated, all quotations given in this memorandum and in the attached tables are means of bid and asked quotations. Regraded Unclassified 162 Secretary Morgenthau - 2 Certificates of indebtedness improved slightly during the week. The average rate on the weekly offering of bills, which was increased to $350 millions, rose fractionally to 0.368 percent. Purchases by the Federal Open Market Account during the week were unusually light, totaling only $7 millions, and consisted of $5 millions of bills and $2 millions of certificates. Sales of bills amounted to $2 millions, which, with bill maturities of #42 millions, resulted in a net decrease in the portfolio of #37 millions. Attachments Table II 163 Price and Yield Changes of United States Securities March 19, 1942 to July 23, 1942 (Based on mean of closing bid and asked quotations) : Prices Yields : Security March 19, 1942 July 23, 1942 Change March 19, 1942 July 23, 1942 Change (Decimals are thirty-seconds) (Percent) TAXABLE SECURITIES ills - - - Average rate last issue .20 .37 +,17 ertificates 11/1/42 100.024 - - .41 - - 1/2% 2/1/43 - 100.014 - - .60 - 5/8 axable Notes 3/4% 3/15/43 100.12 100.04 -.08 -37 .56 +.19 -,08 .76 .85 +.12 3/4 9/15/44 99.31 99.23 3/4 12/15/45 99.21 99.08 -.13 .84 .98 +.14 1 3/15/46 99.29 99.11 -.18 1.02 1.18 +,16 1-1/2 100.05 1.46 , 12/15/46 - - - axable Bonds 3/15/48-50 101.28 101.04 -.24 1.67 1.79 +.12 2% 6/15/49-51 101.04 100.10 -.26 1.83 1.95 +.12 2 - 100.08 1.96 I 2 9/15/49-51 - - 100.06 1.97 - - 12/15/49-51 - - 2 a 12/15/51-55 100.12 100.02 -.10 1.96 1.99 +.03 2-1/2 3/15/52-54 103.23 103.31 +.08 2.09 2.04 -.05 2-1/4 6/15/52-55 101.06 101.06 .00 2.12 2.12 .00 3/15/56-58 103.05 103.04 -.01 2.24 2.23 -.01 2-1/2 100.12 - 2.48 - 2-1/2 6/15/62-67 - - 2-1/2 9/15/67-72 100.27 101.05 +.10 2.46 2.44 -,02 TAX-EXEMPT SECURITIES holly Tax-exempt Notes -.27 5/32* .05 -5/32* 2% 9/15/42 101.04 100.09 1-3/4 12/15/42 101.11 100.19 -,24 2/32* ,24 -5/32° 1-1/8 6/15/43 101.04 100.22 -.14 .22 .35 +.13 1 9/15/43 101.03 100.23 -.12 .26 .37 +.11 1-1/8 12/15/43 101.16 101.00 -,16 .26 .40 +.14 1 3/15/44 101.10 -.14 .34 .47 +.13 100.28 3/4 6/15/44 100.27 100.15 -.12 .37 .50 +.13 101.03 -.13 .39 .49 +.10 1 9/15/44 101.16 3/4 3/15/45 101.00 100.18 -.14 .41 .54 +.13 Partially Tax-exempt Bonds 3-3/8% 6/15/43-47 103.21 102.16 -1.05 .41 .57 +.16 3-1/4 10/15/43-45 104.06 103.02 -1,04 .57 .74 +.17 3-1/4 4/15/44-46 105.06 104.06 -1.00 .72 .80 +.08 4 108.11 -1.04 .91 .94 +.03 12/15/44-54 107.07 106.06 -.24 .94 .99 +.05 2-3/4 9/15/45-47 105.14 105.04 -.24 .90 .96 +.06 2-1/2 12/15/45 105.28 3-3/4 3/15/46-56 110.08 109.02 -1.06 1.11 1.20 +.09 106.31 -.29 1,09 1.16 +.07 3 6/15/46-48 107.28 107.12 -.28 1.13 1.18 +.05 3-1/8 6/15/46-49 108.08 10/15/47-52 115.01 -.19 1.33 1.27 -,06 4-1/4 115.20 -,08 1.15 1.14 -.01 2 12/15/47 104.23 104.15 2-3/4 3/15/48-51 107.16 -,12 1,38 1.36 -.02 107.28 2-1/2 9/15/48 107.07 106,28 -.11 1.33 1.33 .00 2 104.16 1.28 1.27 -.01 104.21 -.05 12/15/48-50 -,04 1.65 1.60 -,05 3-1/8 12/15/49-52 110.22 110.18 1.60 1.57 -.03 2-1/2 12/15/49-53 106.16 106.16 .00 +.08 1.66 1.60 -,06 2-1/2 9/15/50-52 106.20 106.28 108.18 108.22 1.74 1.69 -.05 +.04 2-3/4 6/15/51-54 1.78 1,74 -.04 3 9/15/51-55 110.20 110.20 .00 +.10 1.70 1.65 -,05 2-1/4 12/15/51-53 104.29 105.07 1.64 +.08 1.68 -.04 2 6/15/53-55 103.10 103.18 +.19 1.80 1.74 -.06 2-1/4 6/15/54-56 104.25 105.15 2.00 1.94 -.06 2-7/8 110.14 +.14 3/15/55-60 110.00 +.11 2,01 1.97 -.04 2-3/4 9/15/56-59 109.10 109.21 2.07 2.02 -.05 2-3/4 6/15/58-63 109.12 109.30 +.18 2.10 2.07 2-3/4 12/15/60-65 110.00 110.14 +.14 -.03 July 23, 1942. Treasury Department, Division of Research and Statistics. Decimals in prices of certificates are cents. Excess of price over zero yield. Regraded Unclassified 164 Table I Price and Yield Changes of United States Securities July 16, 1942 to July 23, 1942 (Based on mean of closing bid and asked quotations) : Prices Yields : : Security : July 16, 1942 July 23, 1942 Change July 16, 1942 : July 23, 1942 Change TAXABLE SECURITIES (Decimals are thirty-seconds) (Percent) Average 11s rate last issue - - - .36 .37 +.01 rtificates 1/2% 11/1/42 100.019 100.024 +.005 .43 .41 -.02 5/8 2/1/43 100,008 100,014 +,006 .61 .60 -.01 rable Notes 3/15/43 100.04 100,04 .00 .56 .56 .00 3/46 3/4 9/15/44 99.24 99.23 -.01 .87 .88 +.01 3/4 12/15/45 99.09 99.08 -,01 .96 AS8 +.02 1 3/15/46 99.12 99.11 -.01 1.17 1.18 +.01 1-1/2 12/15/46 100.06 100.05 -,01 1,46 1,46 .00 irable Bonds 3/15/48-50 101.05 101.04 -.01 1,78 1.79 +.01 2 2 6/15/49-51 100.10 100.10 .00 1.95 1.95 .00 9/15/49-51 100.08 100.08 .00 1.96 1.96 .00 1.97 1.97 .00 2 12/15/49-51 100.06 100,06 .00 2 12/15/51-55 100.03 100.02 -.01 1.99 1.99 .00 2-1/2 3/15/52-54 104.00 103.31 -.01 2.04 2.04 .00 2-1/4 6/15/52-55 101.05 101.06 +.01 2,12 2.12 .00 2-1/2 3/15/56-58 103.04 103.04 .00 2.23 2.23 .00 2-1/2 6/15/62-67 100.12 100.12 .00 2.48 2.48 .00 2-1/2 9/15/67-72 101.06 101.05 -,01 2.44 2.44 .00 TAX-EXEMPT SECURITIES olly Tax-exempt Notes -.01 .08 .05 -.03 2% 9/15/42 100.10 100.09 1-3/4 12/15/42 100.20 100.19 -,01 .23 .24 +.01 1-1/8 6/15/43 100.22 100.22 .00 .37 .35 -.02 1 9/15/43 100.22 100.23 +.01 .41 .37 -.04 1-1/8 12/15/43 101.00 101.00 .00 .41 .40 -.01 1 3/15/44 100.28 100.28 .00 .47 .47 .00 3/4 6/15/44 100.15 100.15 .00 .50 .50 .00 101.03 .00 .49 .49 .00 1 9/15/44 101.03 3/4 3/15/45 100,18 100.18 .00 .54 .54 .00 artially Tax-exempt Bonds 3-3/8% 6/15/43-47 102.18 102.16 -,02 .56 .57 +,01 3-1/4 10/15/43-45 103.03 103.02 -,01 .75 .74 -.01 3-1/4 4/15/44-46 104.06 104.06 .00 .83 .80 -.03 12/15/44-54 107.07 107.07 .00 .97 .94 -.03 2-3/4 9/15/45-47 105.14 +,02 1,02 .99 -.03 105.12 2-1/2 105.04 +.01 .98 .96 -.02 12/15/45 105.03 3-3/4 3/15/46-56 109.04 109.02 -.02 1.20 1.20 .00 107.00 106.31 -,01 1.16 1.16 .00 3 6/15/46-48 3-1/8 6/15/46-49 107.12 .00 1.19 1,18 -.01 107.12 4-1/4 115.00 115.01 +.01 1.28 1,27 -.01 10/15/47-52 104.16 104.15 -,01 1.14 1,14 .00 2 12/15/47 2-3/4 -.01 1.36 1.36 ,00 3/15/48-51 107.17 107.16 106,28 -,01 1.33 1.33 .00 2-1/2 9/15/48 106.29 104.15 104.16 +.01 1.27 1.27 .00 2 12/15/48-50 .00 1.61 1.60 -.01 3-1/8 12/15/49-52 110,18 110.18 2-1/2 106.16 106.16 ,00 1.57 1.57 .00 12/15/49-53 .00 1.60 1,60 .00 2-1/2 9/15/50-52 106.28 106,28 +3/4 6/15/51-54 108.21 108,22 +.01 1.70 1.69 -,01 1.74 1.74 .00 3 9/15/51-55 110.20 110.20 .00 .00 1,65 1.65 .00 2-1/4 12/15/51-53 105.07 105.07 1,64 1,64 .00 2 6/15/53-55 103.18 103.18 .00 1.74 1.74 ,00 2-1/4 6/15/54-56 105.15 105.15 ,00 1,94 1.94 .00 2-7/8 3/15/55-60 110.15 110.14 -.01 -.01 1.96 1.97 +.01 2-3/4 9/15/56-59 109.22 109.21 2.01 2-3/4 -.02 2.02 +,01 6/15/58-63 110.00 109.30 2,06 110.15 -.01 2.07 +.01 2-3/4 12/15/60-65 110.14 July 23, 1942. Treasury Department, Division of Research and Statistics. Decimals in prices of certificates are cents, Excess of price over zero yield, Regraded Unclassified 165 UNITED STATES TREASURY VICTORY FUND COMMITTEE FIRST FEDERAL RESERVE DISTRICT CHAIRMAN FEDERAL RESERVE BANK BUILDING WILLIAM W. PADOOCK Borrow, MASSACHUSETTS BOSTON, MAIL EXECUTIVE MANAGER July 24, 1942. JOHN o. STUBIN BOSTON. MASS. DISTRICT COMMITTEE AND STATE CHAIRMEN Honorable Henry Morgenthau, Jr., EDWARD K. CHASE Secretary of the Treasury, PORTLAND, MAINE Washington, D. C. #. NELSON MCDOUGALL PORTLAND, MAINE Dear Mr. Secretary: NORWIN s. BEAM MANCHENTER, N. H. HARRY J. FILMEN In compliance with the request contained in CONCORD. N. H. your telegram of July 7,1942, there is quoted below a CHARLES L LEBOURVEAU aumary of the views of the Victory Fund organisation WHITE RIVER JUNCTION, VT. of the First Federal Reserve District as to the type of D. ARNOLD SKELLY VALINGTON, VT. issue the Treasury should offer during the month of CRT T. ARMITAGE August and suggestions for the next three months period, BOSTON, MASE. prepared by Mr. J. 0. Stubbs, Executive Manager of the LAURDICE R. CONHOR Committee: PITTSFIELD. MASS. ALBERT M. CREGHTON BOSTON, MABS. "1. It has been predetermined by the JOHN G. FLINT Treasury that the tap 20% issue due 1962/67 BOSTON, MASS. will be reopened in August. The consensus of CHARLES E. EPENCER, Ja. BOSTON, MASS, opinion is, however, that it should be supple- G, BURTON HISBERT mented by a short (6 to 8 months) certificate PROVIDENCE, R. 1. issue. GOOPREY B. SIMONDS PROVIDENCE, R. 1. 2. The opinions expressed as to the JOHN J. MCKSON NEW HAVEN, COMIL procedure over the next three months were pre- R. a. NEWELL dominantly in favor of the following: HARTFORD, CONN Re Periodic drives, three or four EXECUTIVE COMMITTEE times a year, rather than an attempt to sustain W. W. PADDOCK, CHAIRMAN a steady sales effort day in and day out. A BOSTON, MASS. volunteer organisation will be much more of- ALBERT T. ARMITAGE fective in drives of this sort rather than the BOSTON, MASS, HENRY J. NICHOLS present method of frequent offerings. A BOSTON, MARK. sufficient preparatory period should be allowed CHARLES I. BRENCER JR. to perfect details of organisation, mechanics 1 BOSTON. MARS, of procedure and education of solicitors as to JOHN o. STUDIO BOSTON, MASS. all the aspects of the securities to be offered, holding back a few details concerning the now offering which could be announced signalis- PUBLICITY ADVISOR inc the start of the drive; drives to last two LOUIS W. MUNRO BOSTON, MASS. to three weeks, depending on amount of money to be raised. After completion of the drive, members of organisation to be permitted to go about their own business for B. month or six Regraded Unclassified Honorable Henry Morgenthau, Jr. - 2 - July 24, 1942. 166 weeks before starting to prepare for the next drive. During this period paid staff and key men of the organization could be correcting flaws that have developed and lay plans for the future. b. During the drive, solicitors should have a. variety of issues to offer, such as: 1. A six to eight months' certificate suitable for corporation, and other buyers of this type of paper. 2. A medium term issue. This might be a serial one-ten year issue with different rates for different maturities, a five-year bond oon- vertible at maturity into a higher rate longer term bond, or an issue similar to the recent July Treasury issue. 3. A long term tap issue of registered bonds similar to the outstanding one, primarily for the insurance market. 4. Most important, an issue which would be avail- able for purchase by all types of investment buying covering the whole field of institutions, banks, trusts and individuals. In order to insure a wide sale, this bond should incorporate the following features: a. Full negotiability at all times. There is very real sales resistance to any restrictions covering resale of bonds. b. In coupon form with six months' interest pay- ments with the privilege of registration. Individuals, particularly, are adverse to registered bonds for obvious reasons. 0. Complete freedom for hypothecation. Inability to use securities as collateral naturally hurts their sale. d. Acceptance at par for payment of inheritance taxes after the cessation of hostilities. Although there have been many suggestions as to interest rates, We feel that that is a matter completely in the hands of the Treasury and we have, therefore, prepared this memorandum from the point of view of merchandising, both in the manner of procedure and type of security to be sold." Respectfully yours, Chairman. Regraded Unclassified 167 UNITED STATES TREASURY VICTORY FUND COMMITTEE ALLAN SPROUL CHAIRMAN BECOND FEDERAL RESERVE DISTRICT N. #. ADDINSELL WINTHPOP - ALDRICH FEDERAL RESERVE BANK a. e. CORBIN ALBERT m. GORDON OF NEW YORK BEORGE L. HARRISON AUGUST IHLEFELD 33 LIBERTY STREET PERRY 4. HALL ADBERT LEHMAN EXECUTIVE MAMAGER WALTER di MONRO NEW YORK, N. Y. WILLIAM c. POTTER GRORGE F. RAND ILEWIR e. HARRIMAN ALTERNATE FOR MR. RANDI GORDON a. RENTECHLER JOSEPH F. RIPLET EMIL SCHRAM # c. TRAPHAGEN July 24, 1942. The Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D.C. Dear Secretary Morgenthau: Enclosed is confirmation of a telegram which I sent to you today, setting forth the views of the Victory Fund Com- mittee of the Second Federal Reserve District, concerning the Treasury's August financing and its program for the next three months, as requested in your wire of July 7th. Yours faithfully, Chairman. Eno. VICTORY BUY ENITED STATES WAR BONDS AND Regraded Unclassified VICTORY FUND COMMITTEE - SECOND FEDERAL RESERVE DISTRICT. NT 14. CONFIRMATION OF TELEGRAM 168 FEDERAL RESERVE BANK OF NEW YORK TO BE MAILED July 24, 1942. WE HAVE TODAY TELEGRAPHED YOU AS FOLLOW& SECRETARY OF THE TREASURY WASHINGTON DC A meeting of the Victory Fund Committee of the Second Federal Reserve District was held July 20th to consider the request contained in your wire of July 7th for the views of the Victory Fund organisation concerning the Treasury's August financing and its program for the next three months. Subsequently, the views expressed by the full Committee, together with views obtained from the Regional Chairmen, were comsolidated by its Executive Committee for submission to you. They are as follows: 1. It was assumed that the Treasury would have to borrow approximately # billion of new money during the months of August, September and October, 1942, exclusive of funds received from the sale of War Savings Bonds, tax savings notes and increased offerings of Treasury bills. 2. In addition refunding of $2.1 to $2.3 billion of naturing securities will be necessary during this period. 3. The Committee suggests that these sums be raised on about the following schedule and with the offerings indicated: A. August 1st or thereabouts reopen the 2 1/2% Treasury bonds of 1962-67 to realise $500 to $750 million. This bend should be issued in coupon (bearer) as well as in registered form, if possible, and provision should be unde for redemption in case of death, termination of trant, etc., as in case of Series 1 and G be Sevings Bender: and if these changes are made the outstanding bends of this issue should be brought into confuruity with the new issue. The books for this issue should be leaget open three or four weeks. 1. August 15th of thereabouts effer a are year certificate of indebtedness in amount of about # 1/2 billion. It would be anticipated that oventually the Treasury would have unterstanding approximately # billion of such certifi- cates, mtering is February, May, August and November. Regraded Unclassified MISC 87 2M 5-38 CONFIRMATION OF TELEGRAM 169 Unclassified FEDERAL RESERVE BANK OF NEW YORK TO BE MAIL Regrad -2- WE HAVE TODAY TELEGRAPHED YOU AS FOLLOWS: c. Early September refund $662 to $894 million maturities of September 15, October 15, and December 15 with a Treasury note plus a cash offering of the same note to realise $500 to #750 million. It is suggested that a three, four, or five year note be considered. D. Late September or early October offer an issue or issues of intermediate Treasury bonds totaling approximately $4 or #5 billion. This would be a step toward larger less frequent offering and should involve extensive prior preparation of the market, a selling campaign and a period of about two weeks for completion of the sale. If such a program is to be adopted an early decision is necessary in order to allow sufficient time for adequate preparation. 1. Late October refund November 1st naturity of $1 1/2 bill- lion certificates of indebtedness with another case year issue of certificates of indebtedness. 4. General suggestions included the view thats (a) Limit on Series A tax savings notes should be increased to $5,000 or $10,000, (b) The interest rate on Series B tax savings notes should be increased to .72 of 151 (e) The Victory Fund Committee if given responsibility for sales of Beries 1 and G Bar Savings Bonds as wall as market and seni-market issues, would be able to - trate sales effort more affectively; (d) Market bond issues under war financing conditions should be limited to fixed maturities without option of prior payment by the Treasury. The Victory Fund Committee had available to it, in considering your No quest for its views, the report submitted to you by the principal member banks in New Tast City presenting their suggestions as to the general outlines of a. desirable Treasury financing program. The Victory Fund Committee deemed the general principles suggested w the New York City banks to be constructive, and expressed satisfaction that its recommendations for Treasury financing during the mark three months are as these general principles. Allen Sproul, that 94 above 1 - - P. 170 E A S U R Y T E' L E G R W62WASH LONG B126 NY 24-1235P A P MORGENTHAU H R A MEETING OF THE VICTORY FUND COMMITTEE OF THE SECOND FEDERAL RESERVE E A DISTRICT WAS HELD JULY 20TH TO CONSIDER THE REQUEST CONTAINED IN YOUR S U WIRE OF JULY 7TH FOR THE VIEWS OF THE VICTORY FUND ORGANIZATION R CONCERNING THE TREASURY'S AUGUST FINANCING AND ITS PROGRAM FOR THE Y NEXT THREE MONTHS. SUBSEQUENTLY, THE VIEWS EXPRESSED BY THE FULL T E COMMITTEE, TOGETHER WITH VIEWS OBTAINED FROM THE L E REGIONAL CHAIRMEN, WERE CONSOLIDATED BY ITS EXECUTIVE COMMITTEE FOR G R SUBMISSION TO YOU. THEY ARE AS FOLLOWS: A P 1. IT WAS ASSUMED THAT THE TREASURY WOULD HAVE TO BORROW APPROXIMATELY $8 BILLION OF NEW MONEY DURING THE MONTHS R E OF AUGUST, SEPTEMBER AND OCTOBER, 1942, EXCLUSIVE OF A S FUNDS RECEIVED FROM THE SALE OF WAR SAVINGS BONDS, TAX U R SAVINGS NOTES AND INCREASED OFFERINGS OF TREASURY BILLS. Y T 2. IN ADDITION REFUNDING OF $2.1 TO $2.3 BILLION OF MATURING E L SECURITIES WILL BE NECESSARY DURING THIS PERIOD. E G R A P H Regraded Unclassified R 171 E 3126 - SHEET TWO A S U R 3. THE COMMITTEE SUGGESTS THAT THESE SUMS BE RAISED ON ABOUT Y THE FOLLOWING SCHEDULE AND WITH THE OFFERINGS INDICATED: E A. AUGUST 1ST OR THEREABOUTS REOPEN THE 2 1/2 0/0 TREASURY BONDS OF 1962-67 TO REALIZE $500 TO $750 MILLION. A THIS BOND SHOULD BE ISSUED IN COUPON (BEARER) AS WELL P H AS IN REGISTERED FORM, IF PASSAR POSSIBLE, AND PROVISION T SHOULD BE MADE FOR REDEMPTION IN CASE OF DEATH, TERMINATION OF TRUST, ETC., AS IN CASE OF SERIES F AND G WAR SAVINGS BONDS; AND IF THESE CHANGES ARE MADE THE OUTSTANDING BONDS OF THIS ISSUE SHOULD BE BROUGHT INTO CONFORMITY WITH THE NEW ISSUE. THE BOOKS FOR THIS ISSUE SHOULD BE KEPT OPEN THREE OR FOUR WEEKS. B. AUGUST 15TH OR THEREABOUTS OFFER A ONE YEAR CERTIFICATE OF INDEBTEDNESS IN AMOUNT OF ABOUT $1 1/2 BILLION. IT WOULD BE ANTICIPATED THAT EVENTUALLY THE TREASURY WOULD HAVE OUTSTANDING APPROXIMATELY $6 BILLION OF SUCH CERTIFI- CATES, MATURING IN FEBRUARY , MAY , AUGUST AND NOVEMBER. $ Regraded Unclassified 26 - SHEET THREE F 172 C R C. EARLY SEPTEMBER REFUND $662 TO $894 MILLION MATURITIES A P OF SEPTEMBER 15, OCTOBER 15, AND DECEMBER 15 WITH A H TREASURY NOTE PLUS A CASH OFFERING OF THE SAME NOTE TO REALIZE $500 TO $750 MILLION. IT IS SUGGESTED THAT A T R THREE, FOUR, OR FIVE YEAR NOTE BE CONSIDERED. E A S D. LATE SEPTEMBER OR EARLY OCTOBER OFFER AN ISSUE OR ISSUES U R OF INTERMEDIATE TREASURY BONDS TOTALING APPROXIMATELY Y $4 OR $5 BILLION. THIS WOULD BE A STEP TOWARD LARGER T E LESS FREQUENT OFFERINGS AND SHOULD INVOLVE EXTENSIVE L PRIOR PREPARATION OF THE MARKET, A SELLING CAMPAIGN AND E G A PERIOD OF ABOUT TWO WEEKS FOR COMPLETION OF THE SALE. R A IF SUCH A PROGRAM IS TO BE ADOPTED AN EARLY DECISION IS P H NECESSARY IN ORDER TO ALLOW SUFFICIENT TIME FOR ADEQUATE T PREPARATION. R E À E. LATE OCTOBER REFUND NOVEMBER 1ST MATURITY OF $1 1/2 BIL- S U LION CERTIFICATES OF INDEBTEDNESS WITH ANOTHER ONE YEAR ISSUE OF CERTIFICATES OF INDEBTEDNESS. E L E G R Regraded Unclassified P H 26 - SHEET FOUR 173 T GENERAL SUGGESTIONS INCLUDED THE VIEW THAT: S (A) LIMIT ON SERIES A TAX SAVINGS NOTES SHOULD BE INCREASED R Y TO $5,000 OR $10,000; T 1 (B) THE INTEREST RATE ON SERIES B TAX SAVINGS NOTES SHOULD BE INCREASED TO .72 OF 1 0/0; G $ R (c) THE VICTORY FUND COMMITTEE IF GIVEN RESPONSIBILITY FOR H SALES OF SERIES F AND G WAR SAVINGS BONDS AS WELL AS MARKET AND SEMI-MARKET ISSUES, WOULD BE ABLE TO CONCEN- T TRATE SALES EFFORT MORE EFFECTIVELY; S (D) MARKET BOND ISSUES UNDER WAR FINANCING CONDITIONS SHOULD BE LIMITED TO FIXED MATURITIES WITHOUT OPTION OF PRIOR Y PAYMENT BY THE TREASURY. T 174 126 - SHEET FIVE A $ THE VICTORY FUND COMMITTEE HAD AVAILABLE TO IT, IN CONSIDERING YOUR REQUEST FOR ITS views, THE REPORT SUBMITTED TO YOU BY THE PRINCIPAL Y EMBER BANKS IN NEW YORK CITY PRESENTING THEIR SUGGESTIONS AS TO THE ENERAL OUTLINES OF A DESIRABLE TREASURY FINANCING PRIXX PROGRAM. L THE VICTORY FUND COMMITTEE DEEMED THE GENERAL PRINCIPLES SUGGESTED BY G HE NEW YORK CITY BANKS TO BE CONSTRUCTIVE, AND EXPRESSED SATISFACTION A HAT ITS RECOMMENDATIONS FOR TREASURY FINANCING DURING THE NEXT THREE ONTHS ARE CONSISTENT WITH THESE GENERAL PRINCIPLES. T ALLAN SPROUL, CHAIRMAN, VICTORY FUND COMMITTE A $ SECOND FEDERAL RESERVE DISTRICT. U Y Regraded Unclassified 175 FEDERAL RESERVE BANK OF PHILADELPHIA OFFICE OF THE PRESIDENT July 18, 1942 The Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. My dear Mr. Secretary: Upon receipt of your telegram of July 7, I asked each of the twelve Regional Members of the Victory Fund Committee in this district to obtain the views of their County Chairmen concerning the forthcoming Treasury financing and to be prepared to discuss the subject in a private meeting scheduled for Wednesday, July 15, at this Bank. This meeting was held as planned, with Mr. George Buffington attending. Permit me to say that it we.e a real pleasure to have had Mr. Buffington with us. His presence added greatly to the interest and enthusiasm of every one of us and he was most helpful in exploring the various phases of the fiscal problems confronting the Treasury and in search- ing for effective solutions. We also have conferred on the usual confidential basis with respon- sible officials representing commercial banks and trust companies, mutual sav- ings banks, and insurance companies to obtain independently their views on the types of issues most appropriate to meet Treasury requirements during the next three months. This was done in a desire to cover our market discreetly yet as comprehensively as possible in view of the magnitude of the task sheed of us. The results of our inquiry may be summarized in two parts: (1) Com- ments and suggestions relating to various issues that the Treasury might offer during the next three months in the light of prevailing conditions in the mar- ket, and (2) specific recommendations month by month for your consideration. Comments and suggestions. 1. Increased supply of short-term securities. bills was be increased gradually to $400 sillion a week in August It the general consensus that the weekly offerings of Treasury and to $500 million might in September. with the continued efforts of the Federal bills Reserve Banks, be further by in order to relieve pressure on money centers, in increase met- assisted the Victory that Committees, the market for the to can the broadened of short-torm surplus funds, and to aid the Treasury in- bank funds oun be and that the outlook for continued interest is reasonably good. tarest ing current aroused in the hills as a means of liquid investment effectiveness its needs. Our - educational attempt shows that considerable for surplus Regraded Unclassified FEDERAL RESERVE BANK OF PHILADELPHIA 176 PAGE NO. 2 To The Honorable Henry Morgenthau, Jr. 7/18/42 Regraded Uncla Similarly, we believe that Certificates of Indebtedness could be utilized to good advantage in spite of recent weakness in the market. These certificates are looked upon with favor in our district and no know of no disposition on the part of investors to sell them for profit. Over a suit- able period of time the supply of these certificates might be increased by $5 billion. Moreover, our experience with the certificates does not indicate valid objections to an increase in supply on a quarterly basis. Taking into account the maturity spacing of the two certificate issues now outstanding, another issue of the certificates due in May 1943 might well be offered in August. It is believed that, together with the Treasury's 25% registered bonds, due 1962-67, to be soon reoffered, Certificates of Indebtedness would meet the Treasury requirements during August. of course, as an alternative, Treasury Notes could be offered, but the difficulty with this suggestion is that there seems to exist some unbalance in the market with respect to the notes, particularly the 13% issue due in December 1946, and it would appar- ently take Bome time to correct the situation. Nor would it be advisable to offer in August any intermediate bond issue for the obvious reason that some time should be allowed to elapse for market adjustment incident to the issue just completed. 2. The Treasury 25% Registered Bonds due 1962-67. The views on this issue in our district are mixed. It is generally felt that these bonds are designed primarily for insurance companies and sav- ings banks. The representatives of our insurance companies indicated that they would be interested in this issue but not to the same extent as they were when first offered. Mutual savings banks, on the other hand, expected to in- crease their purchases over the amount they bought last time. Outside of these two sources, it was believed that the market for this issue is limited, prin- cipally because of the rate differential between these bonds and open market issues of longer maturity and the restriction that arises from registration. The consensus was that if $500 million could be obtained through these bonds during August it would be worth the effort. Members of our Victory Fund Com- mittee are prepared to push this issue to the utmost, emphasising patriotic reasons to offset or minimise such objections as may be raised on business grounds. 3. Short, nonmarketable Treasury notes. The majority favored & new issue designed principally for the employ- ment of business funds, rising primarily from surplus earnings, liquidation of assets such as receivables and inventories, and depreciation accruals. Trust, estate, and a great variety of public funds can be more readily attracted through such an issue than through bills and certificates. The principal argument in favor of this issue is that it would meet the needs of those who will invest funds only in a security that is liquid and is not subject to market fluotus- FEDERAL RESERVE BANK OF PHILADELPHIA 177 PAGE NO. 3 To The Honorable Honry Morgenthau, Jr. 7/18/42 tions. This is important from the standpoint of merchandising and reaching available funds of all types. As to the mount of funds of this type avail- able, the only way to find out is to seek them out through suitable offer- ings. An addition of one or two more new issues would hardly complicate the present securities structure insuruch as there are already BOME 75 varieties outstanding. The sale of such a short-term issue could be vigorously pro- moted on a selective basis by the Victory Fund Committee. The books could be kept open indefinitely as in the case of War Savings Bonds. Several members of the Committee cited examples of available funds from business concerns in their regions and believed that they could attract these funds if they had suitable securities. Such an issue could well be offered in August but if not in August it should then be seriously considered for October. September would be inopportune because of the quarterly instalment due on income taxes. The principal features of this issue may be as follows: Maturity: 3-5 years. Issue price: $100. Redeemability: Not callable but redeemable after 30 days from issue date upon 60 days' notice, at par and accrued interest, except no interest will be paid if held less than 6 months. Marketability: Not negotiable, but eligible as col- lateral. Limitation: None on the amount of ownership. Denomination: $1,000 and over. Rate: As follows: Years held Rate Years held Rate 6 months. 1/2% 32 years.. 1 3/8% 1 year 3/4" 4 years.. 1 1/2" 1/2 years.. 7/8" 42 years.. 1 5/8" 2 years 1" 5 years.. 1 3/4" 22 years.. 1 1/8" Average 3 years 1 1/4" for 5 Average. .90% years.. 1.1175% The rates suggested here are not out of line with those in the open market and are not likely to disturb the existing short and intermediate term rate structure. The only possible conflict might be with the Tax Savings Notes. To meet this, the rate of Series B Tax Savings Notes could be adjusted to the rates now prevailing in the short-term market. The sale of Tax Savings Notes should be promoted vigorously by the Victory Fund Committee. Regraded Unclassified FEDERAL RESERVE BANK OF PHILADELPHIA 178 PAGE No. 4 To The Honorable Henry Morgenthau, Jr. 7/18/42 4. Mar Savings Bonds. It was the consensus that the lack of greater success than has been achieved in the sale of Series 7 and G War Savings Bonds is largely attribut- able to two factors: (1) Shortoomings in the organisational set-up and selling methods, and (2) certain features of the bonds themselves, particularly the discount feature of Series G. Difficulties have been cited in connection with Trust funds wherein & minor comes of age and desires to redeem the bonds. Pay- ment in this case is accomplished by partial refunding of prior interest paid through deduction from the principal amount redeemed. This feature is compli- cated and the payment of less than par for early redemptions other than in the event of death, is generally distasteful. Psychologically, it is a deterrent to sales. It was suggested that some of the objections to Series G could be removed by eliminating the discount feature and providing for gradually rising rates on successive coupons. It was also suggested that a supplemental bond might be offered on an open-end basis to be on sale continuously. It might be similar to the G Bond except that it could be sold at par, made redeemable at par and carry & low rate of interest. It was agreed that the entire subject of War Savings Bonds should receive renewed consideration by the Treasury if the sales are to be built up and maintained. Specific suggestions. Compilations below are rough approximations based on the assumption that weekly offerings of Treasury bills are increased to $400 million in August and to $500 million in September, and that war expenditures are increased as indicated by the present trend. August financing Billion Total requirements $4.4 Regular borrowing - trusts, war savings, tax notes and Treasury bills 2.2 Additional issues $2.2 Suggested: (a) 25% bonds, 1962-67, open-end. (b) Short-term, nonmarket, open-end issue, or 3/4% Certificates of Indebtedness, due May 1943. September financing $2.6 Total requirements Regular borrowing - trusts, war savings, 2.0 and Treasury bills $.6 Additional issues Regraded Unclassified 179 FEDERAL RESERVE BANK OF PHILADELPHIA PAGE NO. 5 To The Honorable Henry Morgenthau, Jr. 7/18/42 Billion Suggested: 1-1 1/4% Treasury note, due September 1945. October financing Total requirements $5.1 Regular borrowing - trusts, war savings, Treasury bills, tax notes 2.0 Additional issues $3.1 Suggested: (a) Short-term, nonmarket, open-end issue. (b) 23% bonds, 1962-67, open-end. (c) 2 1/8-2 1/4% bonds, 1951-53, or 1953-55. Conclusion. We believe that the financing program suggested here is feasible and will meet the requirements of the Treasury. The views in this district are that the general program should include types of issues that will meet well- defined needs. The Victory Fund Committees can then exert vigorously intelli- gent efforts in the marketing of Treasury securities, particularly if issues could be publicised several days in advance of subscriptions. A definite policy expressed in appropriate issues will contribute substantially to the solution of fiscal problems. The greatest problem is how to arouse the public to realize the serious- ness of the war situation. Probably national drives of the former Liberty Loan type extended over a few weeks several times a year might serve as a general stimulus not only to the sale of all kinds of Treasury securities but also to public morale. Some such program might accomplish desirable results and give Committeemen respite from monthly drives. No greatly appreciate the opportunity of sharing these comments and suggestions with you and hope they will be of some value to the Treasury. Sincerely yours, alfred Holleram Regraded Unclassified 180 "A good market on which business can be transacted frequently is the best method to obtain and perpetuate placement on an investment basis. "In dealing with large investors, one cannot violate two time tested principles of sound investment practice, 1. e., quick marketability, emergency collateral value, and get results even though the actual exercise of those privileges would be exceedingly remote. In summation, offer marketable coupon bonds with optional registration privileges to all experienced investors, and use the maturity principle to accomplish the kind of placement desired." Another suggestion was that & TAP issue be offered to nature- say in thirty years, available in coupon form, fully negotiable, available as collateral, and with three variations as to interest: 1 - A 2% rate for the first ten years, with option at the end of the ten years of presenting the bond for payment, or retaining it at the investors option, the interest rate for the remaining twenty years to be 23%. 2 - A progressive coupon rate over the period of thirty years to average 21% over the entire period if held to maturity. 3 - A 25-year bond, with a 2% rate for the first ten years, and a 3% rate to maturity after that. Obviously, this suggestion would have many variations, again, an attempt to give the investor who holds his bond an incentive to hold it, and not offer for resale. As a further suggestion - a. Government Bond with an annuity feature 50 that individuals could be paying in - say for five years, and then hold for a given mumber of years, without drawing any interest at all, and then on an annuity basis receive I Dollars per month for a given mmber of months representing accrued interest plus gradual disbursement of principal. Lastly, there could be offered Corporations and individual tax payers, a ten-year Note acceptable for Income Taxes, with a graded coupon rate, to be of ample inducement to hold them, tenderable for taxes, 7 181 after having held them - say for three years. The opinion was unanimously expressed that occasional conventional type offerings should come in pairs - say & three-year offering and a seven-year offering, or a two-year offering and a ten-year offering, so that the salesmen could have an alternative to offer to suit individual requirments. The following could be a summary of the issues offered, and the money raised for the fiscal year 1942-43: War Savings Bonds - all types $ 12,000,000,000 Long Term 200 9,000,000,000 Maturities from 7 to 10 years 5,000,000,000 Ten-year Notes, receivable for all taxes 6,000,000,000 Short-term issues from 2 to 5 years 6,000,000,000 Bank open credit 15,000,000,000 TOTAL $ 53,000,000.000 Our whole thesis is an all-out effort to increase sales to the public, and by "public" we include Corporations, Partnerships, Trustees, Endowment Funds and individuals. To do this, bonds should be available as collateral, for at some stage the Banks may be asked to cooperate in financing the investor who can make - say & 25% down payment, borrow the rest at Bank, on an agreed formula of installment payments. Corporations will probably have to be persuaded to work with smaller cash balances in Bank, buy bonds that are fully negotiable, and borrow periodically should their depleted cash balance demand it, instead of the present policy of such large cash balances, that borrowing at all is completely outside of their plan. 8 Regraded Unclassified 182 The local Committee is anxious to bring its efforts into uniformity with what is being done in other districts. It will welcome, as soon as they can be formulated, the Treasury's outline of what the program of financing is to be for as far ahead as it can be projected. What degree of pressure is to be put upon the public, particularly corporations? To what extent is it desired that part of the financing load be carried by individuals and corporations pledging their private credit to assume the burden? Respectfully submitted, 100 Chairman Third Regional Committee Fourth Federal Reserve District VICTORY FUND COMMITTEE July 22, 1942 -g - Regraded Unclassified 183 UNITED STATES TREASURY VICTORY FUND COMMITTEE DISCUTIVE MANAGER MAN Fifth Federal Reserve District EDWARD c. ANDERSON LEACH MBERS FEDERAL RESERVE BANK BUILDING 10. GRAHAM. RICHMOND, VIRGINIA will MD. as GARLAND. will MD. TV. FLEMING. WASTON, D.C. LIFFORD FOLGER. July 22, 1942. INSTON D. c. ER HARRIS, MOND, VA. OC. ANDERSON, MOND. VA. DICKINSON, LESTON, W. VA. ON G. YOUNG LESTON, - VA. TM. M. HANES. TON-SALEM, N. c. ICKSON. LOTTE N. c. DWARDS, Dear Mr. Secretary: MBIA, 8. c. X G. FURMAN. JM., WILLE N.C. In response to your telegram of July 7, I am pleased to submit herewith a memorandum containing the suggestions of the Victory Fund Committee of the Fifth Federal Reserve District on financing the cash require- ments of the Treasury for the three months beginning August 1, 1942. This memorandum presents the views of the ten members of the District Committee who met in Richmond on yesterday. Sincerely yours, Jangh Leah HL:CCP HUGH LEACH, Enclosure Chairman, Victory Fund Committee, Fifth Federal Reserve District. The Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. PYICTORY BUY UNITED STATES WAR BONDS ARD STAMPS Regraded Unclassified 184 SUGGESTIONS ON FINANCING TREASURY CASH REQUIREMENTS FOR THE THREE MONTHS BEGINNING AUGUST 1, 1942 SUBMITTED JULY 22, 1942 BY VICTORY FUND COMMITTEE FIFTH FEDERAL RESERVE DISTRICT 185 Any plan for financing Treasury cash requirements for a three months' period involves the necessity for an estimate of those requirements. Such an estimate cannot readily be made even though the estimated budget deficit for the fiscal year 1943 as revised on April 24, 1942, is available. The plen outlined in this memorandum is based on the probability that the Treasury will require $7 billion and possibly a little more in the three months' period. This estimate allows for receipts from the sale of special issues to trust accounts, from war savings bonds, from tax anticipation notes, and from. the weekly issuance of $350 million of Treasury bills. On the basis of the above estimate, the following plan for financing the cash requirements is presented: Amount (In Millions) 1. Increase the weekly issue of Treasury bills from 6350 million to $400 million on August 5, to provide $ 650 2. Reopen the 255 bonds of 1962-67 about August 1, to provide 550 3. Sell in the market in August a Certificate of In- debtedness with & maturity of one year and a coupon of 7/8 (a maturity of around nine months and a coupon of 3/4 is the next choice), to provide ... 1,500 4. Offer in September & 61,500 million note issue with a maturity of around two and one half to three years to refund three issues maturing in September, Octo- ber and Docember, amounting to $894 million, or two separate issues - one for refunding and one for new 600 money, to provide 5. Scll in the market in October a bond with E. some- what longer maturity and a somewhat higher coupon than the 2% bond issued in July, to provide 3,000 Total $ 6,300 In addition to the above, offer during the latter part of August or the first of September a non-market issue with & maturity of 2% or 3 years, to remain open indefinitely. It is thought by some that such an issue might provide at least $1 billion, but there appear to be no available date upon which a reliable estimate could be based. Regraded Unclassified DISCUSSION 186 TREASURY BILLS: There was formerly little interest in Treasury bills outside of New York and Chicago, except occasionally for special purposes. However, when the bill rate rose to around 0.37 per cent there was manifested an increased interest on the part of banks outside those cities. This. interest has been stimulated somewhat through the efforts of Federal Reserve banks in explaining the advan- tages of bills as short-term investment paper and also through the action of the Federal Reserve banks in establishing a 3/8 of one per cent buying rate on all Treasury bills offered to them. The rise of short-term rates to present levels has occurred without pressure on the long-term rate and it is thought that the rate on ninety-one day bills could go to 1/2 of one per cent without affecting long-term rates. Such a rate would undoubtedly result in & much wider distribu- tion of bills among banks, thus lessening the strain on the principal money mar- kets. Moreover, it would probably attract additional funds from investors other than banks. This implies that the buying rate of the Federal Reserve banks would be raised to 1/2 of one per cent with suitable protection to the holders of out- standing bills. While there has been an increased interest in Treasury bills in the Fifth Federal Reserve District, it is thought that the distribution is not &B broad as it should be and the Victory Fund Organization is planning to stimulate the sales of this security. REOPENING THE 2-1/2% BONDS OF 1962-1967: It is suggested that this issue be reopened about August 1 and that it be left open a month. This bond appeals to many insurance companies and to some other investors because of the 2-1/2% coupon and because of its marketa- bility even though it cannot be purchased by banks; but it is doubted that its reopening will yield at this time much more than $550 million. It is not likely that there will be any considerable demand for this issue in the Fifth Federal Reserve District. - 2- - 2 - Regraded Unclassified 187 MARKET FINANCING: There appear to be at least three plans that could be followed in raising $1,500 million in August, as follows: (1) Issue & bond with & somewhat longer maturity and & some- what higher coupon than the 2 per cent bond that was issued in July. (2) Issue & note. (3) Issue & Certificate of Indebtedness with a maturity of one year and & coupon of 7/8, or with & maturity of around nine months and a coupon of 3/4 per cent. Some banks prefer to hold maturities within & ten-year limit; others will go to twelve years, or beyond, in order to got & higher coupon. When the 2 per cent bond was issued in July, there were many investors who desired & 2-1/8 or 2-1/4 per cent bond with a longer maturity. It is entirely possible that another bond issue in August would be a success, but it seems desirable to refrein from crowding this area BO soon. The amount of new Loney which will be needed by the Treasury in September will be relatively small, but the require- ment for October will probably justify B. bond issue of unusual size. By that time there should be & good demand for such an issue. There appears to be little market demand for a note at this time. Moreover, it is thought that the Treasury might issue a note in September to refund maturing issues, as follows: Amount Maturity (In Millions) Issue U. S. Treasury Notes September 15, 1942 $ 342 R. F. C. Notes October 15, 1942 320 U. S. Treasury Notes December 15, 1942 232 Total $ 894 If this is done, the Treasury might very well make the note issue large enough to provide some new money. A favorable market at that time wight absorb an issue of $1,500 million, with a maturity of two and a half to three years. Mile the practice of separating refunding from new money issues is generally desirable, it might be well in this instance to consider one issue for both purposes, in - 3 Regraded Unclassified 188 view of the fact that all three issues maturing in the remainder of the calendar year aggregate only $894 million. A decision as to the relative merits of one or two note issues can be made more appropriately when the time of this financing approaches and more data on cash requirements are available. It might develop that the bond issue suggested for October could be offered to greater advantage during the latter part of September. There remains for consideration for August financing & certificate of indebtedness. Since this method of financing was resumed, the Treasury has sold two $1,500 million issues, as follows: Issue Maturity Issue Date Date Rate A-1942 4-15-42 11-1-42 1/2% A-1943 6-25-42 2 -1-43 5/8% It is thought that the market will readily take another $1,500 million of certificates, especially if the maturity is long and the interest rate is higher than 5/8 of one per cent. A maturity of one year and - coupon of 7/8 is suggested. The next choice would be & maturity of around nine months and 11 coupon of 3/4 per cent. In this connection, it might be well for the Federal Reserve banks to consider the advisability of establishing preferential discount rates on loans secured by Government obligations maturing within one year. NON-MARKET ISSUE WITH MATURITY OF 2-1/2 TO 3 YEARS: The plan of financing Treasury requirements for the next three months also contemplates the offering of a new special issue in the form of & 2-1/2 to 3 year non-marketable Treasury obligation. It would be the purpose of this issue to attract the idle funds of various types of business organizations. Business concerns without war orders are expected to have smaller inventories and receivables and larger cash balances then usual. In addition, some busi- ness concerns will have available reserves for depreciation and depletion which cannot be utilized in the customary manner. while the proposed issue would not be marketable, it would be redeemable at par upon sixty days' notice. Its - / - Regraded Unclassified 189 appeal would be enhanced if it were made eligible as security for leans. an notes sold during & month would be dated on the first of that month. the issue would be available to all classes of purchasers except banks receiving demand deposits, without limit as to amount. The interest rate should be sufficient in comparison with market rates to attract funds and yet not so high 45 to disrupt the short-term market and should be arranged to induce the investor to hold the security. It is highly desirable that the security be in coupon form, if peso- ticable. There appears to be a growing impatience on the part of investors with respect to the mechanical difficulties incident to registered securities. Use of the word "tap" in connection with Government issues should be avoided. In view of the tremendous sums that must be borrowed to finance the war, it seems desirable to carry a suitable variety of "merchandise on the shelf." dany investors prefer the usual types of market issues; others are interested in guarantee of principal and other special features. Why not give them an oppor- tunity to buy what they like? There is no way to tell in advance of & trial how much appoal a given issue would have. To the extent that it attracts funds that are not invested in bills, certificates, or other types of issues, it would dimin- ish the large amount that must inevitably be borrowed from commercial bunks - e result that is greatly to be desired. The Victory Fund Committees are now in a position to determine the investment appeal of such an issue. MISCELLANEOUS SUGGESTIONS It is believed that the sale of tax anticipation notes could be in- creased, if (a) the amount of Series A notes which can be purchased and used in any one calendar year were fixed at $5,000 to $10,000, and (b) the rate of interest paid on Sories B notes were increased to 0.72 per cont. The present limit of $1200 on Sories A notas seems much too small and short-term rates have firmed since the rate of 0.48 per cent was established for Series B notes. -5- E Regraded Unclassified 190 C 0 P Y 1942 JUL 28 AM 10 15 #25WASH F12 ATIA 28-10A HENRY MORGENTHAU JR SECTY OF THE TREASY fil RETAL REGRET MISUNDIERSTAND.ING DELAYED OUR SENDING VIEWS an FUTURE FINANCING. CONCENSUS or OPINION BREMS TO BE THAT LONG 2 1/2 REGISTERED ARE SUITABLE FOR PERIODICAL OFFERING. ALSO THAT SOME CONSIDERATION BE GIVEN TO NEW TYPE OF BOND WITH REDEMPTION FEATURES DESIGNED TO APPEAL TO LARGE CORPORATIONS WHO MAY HAVE EXCESS CASH. NOLARIN. Regraded Unclassified 191 FEDERAL RESERVE BANK OF CHICAGO July -5, 1942 OFFICE of THE PRESIDENT Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. Dear Secretary Morgenthau: On July 8th I wrote the banks, investment denlers and Victory Fund Committeemen of the Seventh Federal Reserve District quoting your telegram and asking for their views with respect to Treasury financing. Many have responded and I believe good feeling was engendered and good public relations served by your request. Naturally some suggestions are not feasible and others are too general to be helpful. I an enumerating those which have substantial support: 1. The following suggestions have been made in connection with the 2 1/2% issue due 1962-67, known as the "tap issue" (a) The bonds be issued in bearer form with a provision engraved on the face that they cannot be held by tenks. (b) The issue be eligible at par for ayment of Federal inheritance Taxes and those Federal income Taxes already accrued and payable after death. 2. Investment bankers unanimously favor a negotiable coupon bond suitable for funds of investors. 3. An issue maturing in five years is suggested by many banks. 4. Several widely separated banks believe that a 2 1/4% bond in registered form and maturing in from twelve to fifteen years would te popular. 5. Substantial sentiment was expressed for an issue which would pay a rate depending upon the length of time held. This would provide an incentive for institutional buyers to hold to maturity. Insurance companies especially are interested in this type. One important insurance executive suggested a twenty-five year bond paying two rates of interest; i.e., 1 1/2% for five years and 3% for twenty years, giving an effective yield of 2.62% if held to maturity. The issue would be non-negotiable for five years. The funds of one large insurance company would be attracted by an Issue of twenty year 2 1/2% bonds which would mature at 110 but only if held to maturity by the original purchaser. Regraded Unclassified 192 FEDERAL RESERVE BANK OF CHICAGO Honorable Henry Morgenthau, Jr. July 25, 1942 D. There are several expressions of sentiment for a lottery feature, through which drawings would be made every month of & certain number of E and F bonds, the numbers selected by the drawing to be paid at par. 7. One large bank suggests that if reserve requirements in New York and Chicago are adjusted prior to the financing, it would be feasible for the Treasury to: (a) Expand the bill market from week to week until 500 million a week is being offered. (b) Offer early in August a 3/4% certificate issue due May 1, 1943, but if the bill rate is changed to 1/2 of 15, a certificate issue should not be offered until such change has been made effective. (c) This suggested procedure would care for August require- ments and leave the market clear for an offering by the Treasury of a note issue in September at a price that would be in line at that time. At present, in the judgment of this bank, it would appear that a 1 5/8% note due July 15, 1947 should be worth about a 1.60 basis, or 100 1/8. Perhaps in September this issue would bring 100 1/4. Another possibility in September would be a 1 3/8% note due September 15, 1946 which should sell on about a 1.32 basis or about 100 10/32. (d) Treasury has 342 million 2% notes due September 15, 1942. By holding the note issue off until September, the Treasury could at the same time offer an exchange for this September maturity. 8. One outstanding trust company has recommended that a non-market risk, short term security be issued with maturity not to exceed five years, redeemable after six months and carrying progressively higher interest rates for each six months period held by the purchaser. It believes that if such an issue would be eligible as collateral to secure trust deposits under the Trust Acts of the various states and for borrowing at commercial banks, many institutions would purchase the issue in large amounts. 9. One outstanding mutual life insurance company has the following recommendations: (a) Issue longer term Treasury Bonds with interest rates higher than 26. (b) Issue Treasury Bonds at present yield rates: Regraded Unclassified FEDERAL RESERVE BANK OF CHICAGO 193 -3 Honorable Henry Morgenthau, Jr. July 25, 1942 1. Noncallable and payable, however, at a premium above par at maturity if held to maturity from date of issue by the original subscriber. 2. If callable and so held to bear a higher rate of interest from the first call date at par to the maturity date. 10. Several have indicated that such a gradually scaling up of the yield as maturities are lengthened would not upset the market for outstanding issues. 11. Numerous suggestions have been rece ved indicating that an incentive for institutional investors to hold bonds to maturity should not be overlooked. Our Regional Victory Fund Committees have been organized and are in a position to render efficient service in the sale of any Treasury issue. They are assisting the State Administrators in every state in the district in the sale of F and G bonds. Very truly yours, Expressing Regraded Unclassified Buffington 194 H W40G24WASH ( LONG) H46 8TL 25-1027 MORGENTHAU 1942 JUL 25 DM 12 07 RE BUR YOUR TELEGRAM OF JULY 7, FOR AUG FINANCING MAJORITY OF DISTRICT VICTORY FUND COMMITTEE FAVORS AN ISSUE OF EITHER CERTIFICATED OF INDEBTEDNESS OR TREASURY NOTES IN ADDITION TO REOPENING 2-1/2'S OF 1962-67. A 3/4 PC CERTIFICATE WOULD BE MORE POPULAR IN THIS AREA BOTH AMONG LARGE ABD SMALL BANKS THAN THE PREVIOUS TWO CERTIFICATES WHICH H CARREEDXXX CARRIED LOWER COUPONS. SEVERAL MEMBERS FELT THAT TREASURY BILL T OFFERINGS SHOULD BE INCREASED TO $400,000,000 WEEKLY BEGINNING WITH THE ISSUE DATED AUG 2XXX 22 WHEN MATURITIES INCREASE TO $250,000,000 ALSO, SOME FAVOR EARLY CONSIDERATION OF REGISTERED SHORT-TERM VARIABLE COUPON NOTE DESIGNED TO ATTRACT IDLE CORPN FUNDS THAT ARE NOT BEING CURRENTTY INVESTED IN BILLS OR CERTIFICATES LETTER BEING SENT airmail TODAY OUTLINING VIEWS ON FINANCING PROGRAM DURING NEXT THREE MONTHS DAVIS. H 195 FEDERAL RESERVE BANK OF ST. LOUIS July 25, 1942. Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. My Dear Mr. Secretary: This is the letter outlining the views of the Eighth District Victory Fund Committee on the Treasury financing program for the next three months which I mentioned in my telegram today. As reported in the telegram, there was general agreement that a. public offering of marketable securities in August should be either certificates of indebtedness or notes. In addition, there was considerable sentiment, particularly among the bank representa- tives, for an increase to $400,000,000 per week in the ourrent weekly offerings of Treasury bills. As a. basis for making recommendations, it was assumed that $2 billions would be raised in August and that the necessary financ- ing in September and October will total around $5 billions in addition to funds raised through War Savings Bonds and Treasury bill offerings at the present rate of $350,000,000 a week. This amount could be raised as follows: September and October Financing (In millions of dollars) Additional Treasury bills $ 550 Treasury notes (Assuming August financing in certificates) 2,500 Registered short-term variable 2,000 coupon notes Total 5,050 There was considerable divergence of opinion among the Committee members with respect to the advisability of issuing a registered short-term variable coupon note designed primarily to attract idle corporation funds. On the one hand those favoring such an issue recognized that it would keep the financing out of the commercial banks and thus aid in combatting inflation. Also it would be a type of security that the Victory Fund Committee organiza- tions are well qualified to distribute and through their efforts it Regraded Unclassified 196 Page 2. Honorable Henry Morgenthau, Jr., July 25, 1942. Secretary of the Treasury, Washington, D. C. might bring in a very substantial volume of funds to the Treasury. Up to date corporations have not invested in marketable Treasury bills and certificates to the extent their cash resources warrant. This has been largely due to their unwillingness to assume even the small market risks involved, the relatively low interest return on recent short-term issues, and general unfamiliarity with methods of purchas- ing Government securities on original offering. The figure of #2 billions shown for sales of a registered short-term note which would be "on tap" during September and October is purely a guess. Unquestionably this amount of funds is available for investment in such an issue. The main problem is the inertia which exists among corporation executives that would have to be overcome by a well-organized, vigorous, and intelligent sales program. The members who oppose such an issue question its popularity with corporate investors. While the amount of corporate funds that might be attracted has perhaps been emggerated, the only way to find out definitely is to try the issue. If the results prove disappoint- ing the offering could be stopped at any time without interfering with the general Treasury financing program. My personal opinion is that much of the opposition to this type of issue comes from bankers who are apprehensive about the temporary loss of deposits resulting from corporations using their funds to purchase it. The primary reason for recommending Treasury notes is their appeal to the banks of the district at this time. An increase in - weekly bill offerings and an issue of certificates of indebtedness in August would fairly well meet the liquidity requirements of the banks for the time being. Moreover, the recent offerings of Treasury bonds have been in the intermediate-term section of the list 80 that it would appear advisable to avoid that market for a few months. Since the banks have thus recently acquired substantial amounts of inter- mediate bonds and very short-term securities, three- to five-year notes would fit in well to their portfolios from the standpoint of a balanced maturity distribution. The banks also are partial to Treasury notes because they have a fixed maturity rather than an optional call period. The fact that the Treasury has fairly small debt maturities in 1947 is another reason for considering & five-year note now. Regraded Unclassified 197 UNITED STATES TREASURY VICTORY FUND COMMITTEE Fourth Federal Reserve District Federal Reserve Bank Building CLEVELAND Chairman July 24, 1942. Executive Manager J. Fleming Hugh D. MacBain X George Buffington, Assistant to the Secretary, Treasury Department, Washington, D.C. De I' Mr. Buffington: - Some time ago, the Secretary suggested that he would be pleased to hoar the views of the various Victory Fund Committees on the type of issues to be offered for sale in the next several months by the Treasury. In line with this, the Victory Fund Committee of the Fourth Federal Reserve District asked representative bankers and securities dealers in this district to submit their views. As was to be expected, there was no unanimity of opinion and therefore it is not possible to submit a composite view of this district. The following views, however, represent the majority opinion: (1) It was felt by most of the individuals consulted that it would be vory helpful if larger allotments in full were made on new issues of Treasury Bonds and Notes. In this connection we are developing new outlets for Government issues and in the case of the recont 2,0 issue, 1949-51, we experienced some difficulty with inexperienced buyors in explaining that on their subscriptions they received only a 52% allotment. We believe that if subscriptions could be alloted in full up to, say, 250,000, it would be very helpful. We believe it would do away to quite a degree with purchasers trying to guess the success of any issue, and padding their subscriptions accordingly. This might be a disastrous experience for a new buyer of Government Bonds. (2) There was a majority opinion to the effect that the present time is propitious for a long term Tap issue. It was felt quite strongly, however, that considerable sales resistance could be broken down if the 60-day waiting period before the issue became negotiable, which existed it the outstanding issue, were climinated. Needless to say, a Tap issue in coupon form is also much moro salable than a registered issue. Regraded Unclassified 198 UNITED STATES TREASURY VICTORY FUND COMMITTEE Fourth Federal Reserve District Federal Reserve Bank Building CLEVELAND Chairman Executive Manager J. Fleming Hugh D. MacBain Mr. George Buffington. -2- July 24, 1942. (3) There was a decided preference for a "split" offering, that is, a Tap issue for part of the desired amount and a shorter term issue eligible for banks for the remainder of the desired amount. For that part of the issue which would be largely bought by banks and corporations, the Pittsburgh market felt that a ten to twelve year issue would be readily salable in conjunction with the Tap. The Cleveland area felt that a Certificate of Indebtedness, say, a ten or eleven month issue, would be the most attractive from the bank angle in conjunction with a long term Tap. Mr. Rowe of Cincinnati, who is Chairman of the Third Area of the Victory Fund Committee of the Fourth Federal Reserve District, prepared a lengthy memorandum outlining the various points of view of that Area which he would like submitted to the Treasury, and it is enclosed herewith. Very truly yours, FRD Hugh D. MacBain, Hugh 4 one Executive Manager. Regraded Unclassified 199 - GOVERNMENT FINANCING - Southwestern Ohio presents the following opinion on "GOVERIMENT FINANCING" - in response to Secretary Morgenthau's request that sub-divisions of the nation-wide VICTORY FUND COMMITTEE express themselves on the subject. The suggestion for the offering to be made in August is a split between a two-year note and a seven-year bond, with perhaps only the total to be raised being amounced, with allotments to be made on the basis of subscriptions received. Something other than a reopening of the long term TAP issue is definitely desired. In addition to the above specific suggestion, the members of the Southwestern Ohio Group offer not a composite, but a collection of the views expressed at the various conferences held on this subject. It was the general feeling that intelligent consideration could not be given to individual monthly offerings without taking account of the two-year job which lies ahead. Our question is - What kind of financing can be successful which will raise #75 Billions over the next two years, not counting the $24 Billions, to be raised by sales based upon 10% of income? As a premise, let us take $30 Billions as an amount for the Banks for the two-year period. How facing the problem of what kind of bond the public, namely individuals of large means, corporations, trustees and institutions, would want or be expected to purchase. The amount involved, namely $45 Billions, is so huge that four questions naturally arise. 199-A Regraded Uncla 2 - The second school of thought says: Recognition should be given both to what is good for the invester of all classes, and what is wise policy for the Government. No. 1 above would end up with a large demand obligation, built up by the issuance of Series B, 7 and G bonds, and & stupendous turnover and large aggregate of short term obligations, calling for renewal, plus issuing more obligations in addition, mainly of maturities less than ten years. The minority who are of this belief contends (a) - It is not & certainty that money is easy because of management alone. It is easy because it is very hard to make money with borrowed money. Private debts have been liquidated steadily since 1929. We have no foreign competition for money as we had in the other war. Capital took flight to this country, etc. etc. (b) - The program ahead of us of borrowing another $100 Billions over the next two years might inject 4. "fear" element, which could upset quotations badly. Every time a Bank officer decides upon an additional large purchase of Governments, he has to a greater or lesser degree a stirring within him of "fear" about next day's quotations. (c) - The amount of demand obligations and short term maturities will grow and grow if the orthodox pattern is continued, and is there not a market risk which must be weighed and considered? Is this risk great enough to call for planning and devising some method by which TO my have a larger proportion of the new debt really funded? The above two schools of thought, in our opinion, present the problem as & whole. If the first school of thought is right, the subject needs no further discussion. If the second school of thought has merit in it, we are faced with suggesting a Treasury program designed to give weight to their contentions. The minority offer, in order to provide time for a careful study of what kind of publicly offered bonds can be devised, that will have proper attraction for investors, and have features which will assist after market stability, the following suggestion: 3 200 200 1 - Can there be an active quoted market for all of this additional amount of Government obligations, without danger to our whole general sconomy? 2 - How large can the United States Government demand obligations become? 3 - How large can the total short-term obligations become? 4 - Is it advisable to give the buyers of long maturities some reasonable assurance of a constant market value approximating par? The Government may not be able to indefinitaly sell enough bonds to the public, not only to meet its deficit needs, but to provide funds to buy back, either directly or through its many agencies, all bonds offered for sale not absorbed by the open market. It is the opinion of some people that the Defense Bonds or War Bonds, namely Series E, 1 and G, constitute and will constitute as large an ohligation to redeem on demand as the Treasury has any right to have outstanding. As we see it, the fundamental problem can be stated as two schools of thoughts 1 - One school of thought - a majority of the local Committee says: The method of Federal borrowing which has been built up during this whole deficit period can safely be continued without changing the pattern. No are in a period of regulated prices; the Government has maintained easy money, and can continue to do 60; it is wise, however, for Banks to limit their maturities to ten years and less, with staggered maturities desirable; the Banks should provide a tremendous portion of the funds needed during this fiscal year. Corporations, if they can buy any bonds, should buy short ones, and rely upon the open market. Institutions should buy long ones, but the market on them should not be restricted. It is not necessary nor advisable now to work up ideas or anything which might be considered a departure from the orthodox pattern set up over this period. To depart from the pattern wight break down the entire managed or controlled structure. 2 Regraded Unclassified 202 For Banks, could not the Treasury Department to some extent copy the British Deposit Receipt plan, so that Banks could carry some portion of their loans to the Government under another caption in their balance sheet than their Government Bond account, with the advantage of segregating the unquoted portion of Government holdings. This could be in the form of a revolving credit agreement, with a large group of Banks participating voluntarily, the amount of each Bank's commitment to fluctuate upward or downward as their own deposits shift, based upon a percentage of deposits. As the receipts would be renewed rather automatically, this should have a fair rate of interest. This would retard the increase in quoted bonds outstanding, and give the Treasury Department time to plan open market offerings. It would also give existing markets more time to digest outstanding issues. The open Bank credit might be argued as giving the Treasury too great power of naming the rate from time to time, and become almost compulsory upon the Banks. On the other hand, if - for example, 1,000 Banks participate in this open Governmental credit group, they could choose & group of - say ten Bankers representing all sections of the country, who would meet with the Treasurer from time to time, andhold a normal conference between lender and the buyer, and it might become & salutary discussion of Federal fiscal policies, as is the case when a group of Banks is formed to handle a Regulation v loan, and certain Banks undertake what servicing is necessary, and expect to confer from time to time with the borrower on behalf of the group. The following suggestion, also from the minority, is an effort 4 Regraded Unclassified 203 Page 3. Honorable Henry Morgenthau, Jr., July 25, 1942. Secretary of the Treasury, Washington, D. C. Should the Treasury not wish to use the short-term market during the next three months to the extent suggested, consideration might be given to offering a 2-1/4 per cent bond. Several members of the Committee recommended such an issue. No doubt it would appeal to certain individuals who have purchased their limit of War Savings Bonds and who want an issue with a wider market than is enjoyed by the 2-1/2's of 1962-67, or for one reason or another do not like registered securities. Also it would find some market from institutional savings. However, a very substantial amount would be purchased by banks with the smaller banks particularly attracted because of the higher yield. In view of the fact that banks will have to be relied upon for a substantial amount of the new financing over the next year, it is questionable whether they should be given the opportunity to acquire on original offering a type of security that is not especially adapted to bank needs. Very truly yours, Chester C. Davis, Chairman, Victory Fund Committee, Eighth Federal Reserve District. Via Air Mail. Regraded Unclassified 204 FEDERAL RESERVE BANK OF MINNEAPOLIS OFFICE OF HE PRESIDENT July 18, 1942 Hon. Henry Morgenthau, Jr. Secretary of the Treasury Washington, D. C. Dear Secretary Morgenthaus At a meeting of the Victory Fund Committee of the Ninth Federal Reserve District held here yesterday, the contents of your tele- gram of July 7 were discussed, in which you requested such suggestions as might seem pertinent to the committee for your consideration in con- nection with the next three months' Treasury financing. I give below a summary of the conclusions of the committee's discussion. The committee believes: 1. A higher maximum limit on Tax Anticipation Warrants Series A and a higher rate on Series B would be helpful. 2. The upper limit for sales of Series F and G Bonds might well be raised to at least $250,000. 3. Corporations would be attracted by a 3 to 5 year issue unlimited as to individual subscription, but not available for purchase by banks. These notes would sell better if they were made eligible for borrowing at banks. 4. At least one of the larger institutional purchasers favors a 14-year 24% issue. 5. The reopening of the 23% long term tap issue will be wel- come and sales should be in satisfactory volume. 6. Country banks would welcome a "package issue", 1.0., a serial issue with equal amounts ranging from 1 to 10 years and sold in units including the same proportion of each year's maturity. Country banks could use this issue as the basic part of their bond portfolio and thereafter they would buy general issues as their funds became available. One comittee member recomended that these package issues should also be limited to sale in the same package. The main advantage of this arrangement would be that one-tenth of the issue would mature each year and this would furnish BUY a reliable measure of liquidity. sup) Regards, PRESIDENT nPey JNP:B Regraded Unclassified 205 FEDERAL RESERVE BANK OF KANSAS CITY July 24, 1942 lionorable Henry Morgenthau, Jr. Secretary of the Treasury Treasury Department Washington, D. C. Dear Kr. Morgenthau: In response to your wire of July 7, I em glad to communicate to you the views of the Victory Fund Com- mittee for this district with respect to the types of issues which the Treasury should offer during the month of August. These views were formally adopted at a meeting of the Dis- trict Victory Fund Committee which was held here on Wednesday of this week, at which all members of the committee were pres- ent except two. Prior to the meeting, the members of the com- mittee had conferred with members of the regional and other committees in their respective localities, and all views thus obtained were reported and considered at the meeting. While some discussion was held with reference to the types of issues which should be offered during the next three months, it was agreed that the committee should undertake to make suggestions only concerning the issues which should be offered during the month of August. In formulating their views, the committee assumed that the August offerings would total approximately two bil- lion dollars, and that the issue of 2½ per cent registered bonds of 1962-67, which is to be reopened, would be included in that total. The presumption was indulged that as much as $500,000,000 may be obtained from the reopening of the 25 per cent issue, although it was generally thought that this was a somewhat liberal estimate. For the balance of the financing, it was the view of the committee that the following two issues should be offered: (1) A note issue with a maturity of not to exceed three years, which would be designed to attract idle cor- porate and public funds. Such an issue would be regis- tered and nonmarketable, and would remain open for such period as the Treasury might determine. Without attempt- ing to otherwise specifically suggest its features and terms, it was agreed that it should be redeemable after Regraded Unclassified RAL RESERVE BANK OF KANSAS CITY 206 Page 2--honorable Henry Morgentheu, Jr.--7-24-42. a specified time from its issue, and thereafter fol- lowing notice of a fixed number of days. Interest would be payable semiannually at progressively hi ther rates for each six months' period to provide an induce- ment to purchasers to hold the issue to meturity. It would not be available for subscription or purchase by commercial banks but could be purchased by others without limitation. It was generally believed that such an issue could be readily marketed, and that the Victory Fund Or enization would be of great assistance in placing it. Each member of the committee separately expressed his approvel of an issue of this type, except one, who stated that he did not favor it. (2) An issue of certificates of indebtedness, or a note issue with a maturity of not more than two years. Either of such issues would be designed primarily for commercial banks, and the rate on either issue would con- form closely to the market rate at the time of offering. ith respect to the 2½ per cent bonds of 1962-67, which are to be reopened, the following suggestions presented by one of the members of the committee were approved: "(1) That the Treasury announce the issue by advertisements in the newspapers in the larger cities, and, if possible, follow up such advertisements with newspaper stories. In connection with the advertise- ments attention should be called to the fact that the issue is fully marketable after 60 days with the excep- tion that it cannot be purchased for ten years by banks. Emphasis should also be placed upon the fact that the bonds, being fully negotiable, would constitute acceptable colleteral. In connection with newspaper publicity, I think that the Treasury might better obtain this publicity if press releases were sent not only to the papers but to key bankers who might, in turn, request the papers to carry appropriate publicity. "(2) That members of the Victory Fund Committee be given selling arguments why the bonds are attractive rather than having the unattractive features emphasized. Regraded Unclassified DERAL RESERVE BANK OF KANSAS CITY 207 Page 3--Monorable Lenry Morgenthau, Jr.--7-24-42. "(3) To expedite the actual delivery of the bonds. AS matters now stand deliveries are in some cases being held up from 60 to 90 days which makes it exceedingly difficult to sell such people the second time." The committee also was of the view that Treasury bills should be continued to be offered in such volume each week 6.8 the market would absorb them at or slightly under the buying rate for Treasury bills which has been established by the Federal Reserve banks. In that connection, several mem- bers expressed themselves as feeling that the rete on Treas- ury bills has now been pegged by the establishment of the buying rate by the Federal Reserve banks. It was also sug- gested that Treasury bills up to some fixed amount remain on tap et the highest bid price at which bills were awarded on the last previous offering. It was reported that many in- dividuals and corporations are unwilling to submit bids, but that they would purchase bills if they were available in stipulated amounts at around 3/8 per cent discount. Bearing on the general financing program, one of the members of the committee expressly requested that I communicate to you his opinion that the F and G war Savings Bonds should be discontinued. He feels that these issues are building up an enormous demand liability which is potentially dangerous. In substitution for them he suggested that longer term market- able issues be offered at a rate not exceeding 22 per cent. On behalf of the Victory Fund Organization for this district, I express sincere appreciation for the opportunity and privilege of expressing these views. Respectfully yours, H. G. Leedy President HGL:FN Regraded Unclassified 208 to meet the desire to issue a long term bond in sisable amounts, and preserve principal by a device that would provide a continuous quotation of approximately par: A Government Bond, with & 50-year maturity, available for purchase by Corporations, Trustees, Insurance Companies, Endowment Funds, and other large investors; this bond to be offered as a TAP issue for the duration of the war in coupon form, with coupon sheets, similar to interest warrants, payable at a value as announced periodically. An appropriate formula could be worked out under which periodically. - say every second year for example, the going rate for long term money of the highest credit in the world would be reviewed, and if the initial rate on the bonds was shown to be too high or too low, & rate would be named for the next two years, similar review and rate naming to be done each two years to maturity. Proponents suggested that this should insure an approximate continuous value of par for such an issue of bonds. They made further comment as follows: "Obvioualy, every single detail of an issue of this kind needs careful study, and the suggestion is made as a broad outline only. "With a large mumber of salesmen in the field, under the direction of the Victory Fund Comittees, selling a bond of this kind continuously, the Banks and Dealers could easily be in a position to take modest blocks offered for and deliver from this temporary stock as the salesmen resale, hold them in their own portfolio for a few days, brought in orders day after day, so that this could be a great factor in after market stability. "As additional method to help future marketability, when this bond an also might be given the privilege of being used paying the bond should drop to a slight inheritance taxes. If between the rate reviewing dates each it two would years be attractive to Estates getting advanced ready years to pay thinking inheritance of having a wall rounded Estate available discount, taxes, and to individuals of with cash equivalent for inheritance taxes. 5 Regraded Unclassified 209 Regraded Unclas "It can be argued that a Bond issue, with an adjustable coupon rate, would be unsatisfactory to the Treasury Department, in that its future cost for service од the issue is unknown. On the other hand, the future cost for all renewals is unknown, particularly as one looks ahead. say ten years. "The power to name the rate, without consulting the lender, can be argued as smacking of totalitarianism; on the other hand, a free money market has always in the past determined money rates, and BOMO of this is now reason why the free money market in itself would demonstrate any change in long term money rates which occur." People we consulted here are unanimously opposed to reopening the previous TAP issue, on the ground that after market is seriously affected by registration, the sixty-day clause before offering for resale, and particularly the fact that with Banks excluded from the market for ten years, and Banks making an important part of the general market structure, great fears are expressed about lack of liquidity. One of those consulted about this TAP issue, made the following statement: "The so-called "tap" issue was obviously offered to meet the anticipated needs of this market. However, the "tap" issue ran afoul of the traditional orthodox yardstick for measuring a standard investment. Registration, sixty-day delayed open market quotations, absolute limitation as to the permissible field of investment, etc., unintentionally, but nevertheless, effectively established a barrier to a maximum accomplishment. It is our belief that placement on & desirable basis, and avoidance of any widespread use of the collateral privilege, could have been achieved, and many more bonds sold, if the mandatory provisions had been eliminated and length of maturity relied upon to naturally restrain purchase (except in a nominal way) by those for whom the issue was not intended. Further, that nominal interest on the part of Banks, primarily as a pairoff against a limited amount of time money, would be compensated for by the contribution it would make to the establishment of a better quoted market, which, in turn, would foster and encourage greater investment and retention on the part of those who should own the hond. 210 C 0 P Y W11G22WASH LNG M7 DLS 23-510P SECRETARY OF THE TREASURY 1942 JUL 24 AM 9 44 Referring your telegram July 7. After conf erring with members of seven regional Victory Fund Committeess in this District, I am pleased to give you their views with reference to types of issues they think the Treasury should offer during next three months. They believe a short-term tap issue of Treasury notes, with graduated interest rates, designed to attract temporarily idle funds held by corporations other than banks, would be well received in this district. The notes should be ineligible for purchase by banking institutions but should be eligible as collateral for bank loans. The committees also feel that an issue similar to the Treasury 2 1/2 percent registered bonds, due 1962-67, should be offered and that the subscription books should be kept open for sometime. A number of committee members have suggested that it would be desirable to make these bonds payable at par in the event of the death of the holder 80 the funds could be used in payment of estate taxes. There is considerable feeling that a seven to ten year bond issue would be well received by commercial banks desiring to invest trust funds. Some interest was expressed in reports that serial bond issue might be offered, but the discussion did not indicate that there would be any particular demand in this district for securities of that type. Securities of the types mentioned above in addition to Treasury bills, certificates of indebtedness, tax anticipation notes, War Savings, Savings bonds, and regular market issues would seem to fairly well provide for the needs of nearly any investor. Gilbert 24th Regraded Unclassified 211 H A 6 P R 1865 T E L Y E U W05G13WASH L77 SF 24-446 T MORGENTHAU of E A REURTEL 7TH S FROM INQUIRIES MADE THROUGH VICTORY FUND COMMITTEE GENERAL R Y CONSENSUS IS THAT G'S AND TAP WILL TAKE CARE OF INTERMEDIATE I AND LONG TERM NEEDS AND TO BALANCE THE PATTERN THERE IS E L CURRENTLY NEEDED A 12-MONTH C OF I WITH ALTERNATIVE OF E NOTE YIELDING 1 PERCENT DAY. NITON H Pi 212 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE July 24, 1942. TO Secretary Morgenthau FROM Harold Graves Mr. Callahan reports that Mr. Arthur Szyk has agreed to do some cartoons for us. He will come to Washington within the next week or two for a conference, and in the meantime will be at work upon some ideas. I am assuming that you will want to meet Mr. Szyk when he is in Washington, and have so advised Mr. Callahan. himh comes want to when see Regraded Unclassified 213 Analysis of Exposure to Payroll Savings Plans July 18, 1942 Total number Number exposed in the Percent to payroll country of total savings plans (estimated) exposed Part A - Summary by Number of Organizations Exposed I. Business organizations (1) Firms with 5,000 employees or more 479 483 99 (2) Firms with 500 to 4,999 employees 5,064 6,129 83 (3) Firms with 100 to 499 employees 20,760 27,024 77 (4) Subtotal - large firms 26,303 33,636 78 (5) Firms with less than 100 employees 94,997 # * (6) Total business organizations 121,300 # # II. Governmental organizations * III. Grand total 121,300 Part B - Summary by Number of Employees Exposed I. Business organizations (1) Firms with 5,000 employees or more 7,805,861 # # (2) Firms with 500 to 4,999 employees 6,796,879 # * (3) Firms with 100 to 499 employees 4,842,942 + # (4) Subtotal - large firms 19,445,682 # (5) Firms with less than 100 employees 2,407,652 + (6) Total business organizations 21,853,334 30,000,000 73 II. Governmental organizations (1) Federal Government 957,603 2,100,000 46 (2) State and local governments 1,160,838 2,700,000 43 (3) Total governmental organizations 2,118,441 4,800,000 44 III. Grand total 23,971,775 34,800.000 69 Office of the Secretary of the Treasury, July 24, 1942. Division of Research and Statistics. Excludes agricultural employees, military personnel, employees on WPA or NYA or CCC projects, proprietors, firm members, self-employed, casual workers and persons in domestic service. * Data not available. Regraded Unclassified 214 Firms Employing 100 to 499 Persons Participating in Payroll Savings Plans (As reported by the War Savings Staff's State Administrators) : Number of firms with payroll : Total : Percent of total having payroll State : savings plans number : savings plans : : : : of firms : : : : Apr. 18 : July 11 : July 18 : (estimated) : Apr. 18 : July 11 : July 18 Alabama 149 229 229+ 285 52 80 Bo Arisona 43 61 64 64 67 95 100 Arkansas 44 51 53 142 31 36 37 Northern California 512 630 631 631 81 99 100 Southern California 756 883 890 1,178 64 75 76 Colorado 113 124 125 125 90 99 100 Connecticut 277 345 363 622 45 55 58 Delaware 21 51 51 87 24 59 59 District of Columbia 52 98 101 152 34 64 66 Florida 147 182 186 186 79 98 100 Georgia 133 303 334 410 32 74 81 Idaho 31 31 31 34 91 91 91 Illinois 1,300 1,692 1,716 2,253 58 75 76 Indiana 415 593 600 600 69 99 100 Towa 165 201 202 272 61 74 74 Kansas 276 279 279* 279 99 100 100 Kentucky 136 184 185 313 43 59 59 Louisiana 179 257 266 385 46 67 69 Maine 60 137 141 198 30 69 71 Maryland 177 247 248 405 F 61 61 Massachusetts 639 813 840 1,532 42 53 55 Michigan 689 875 881 1,030 67 85 86 Minnesota 376 424 424* 424 89 100 100 Mississippi 59 63 63 143 41 44 44 Missouri 472 634 635 664 71 95 96 Montana 40 45 45 45 89 100 100 Nebraska 103 112 112 123 84 91 91 Nevada 14 16 16 21 67 76 76 New Hampshire 89 123 128 145 61 85 88 New Jersey 463 768 794 870 53 88 91 New Mexico 33 38 38 41 80 93 93 2,060 3,113 3,180 4,257 48 73 75 New York North Carolina 282 409 409 499 57 82 82 North Dakota 14 19 19 19 74 100 100 Ohio 1,126 1,260 1,317 1,740 65 72 76 166 217 218 348 48 62 63 Oklahoma Oregon 211 273 275 275 77 99 100 Pennsylvania 1,682 1,982 2,006 2,035 83 97 99 Rhode Island 225 226 335 46 67 67 154 78 South Carolina 71 133 138 176 40 76 South Dakota 25 25 25 84 100 100 21 Tennessee 199 290 305 449 44 65 68 Texas 506 1,378 24 36 37 326 490 44 44 82 100 100 Utah 36 Vermont 59 61 61 63 94 97 97 Virginia 281 365 371 371 76 98 100 326 72 99 100 Washington 234 325 326 West Virginia 134 182 186 272 49 67 68 403 407 680 41 59 60 Wisconsin 278 Wyoming 17 18 19 19 89 95 100 2 2e 2 100 100 100 Alaska 2 Railroads 49 49 49 52 94 94 94 Total 15,365 20,374 20,760 27,024 57 75 77 July 24, 1942 Office of the Secretary of the Treasury, Division of Research and Statistics. # Data are for July 11, inasmuch as no July 18 report was received. Regraded Unclassified 215 Firms Employing 500 Persons or More Participating in Payroll Savings Plans (As reported by the War Savings Staff's State Administrators) : Number of firms with payroll : Total : Percent of total having payroll State : Savings plans : number : savings plans : : : : of firms : : : : Apr. 18 : July 11 : July 18 : (estimated) : Apr. 18 : July 11 1 July 18 Alabama 41 62 62» 83 49 75 75 Arizona 9 11 13 13 69 85 100 Arkansas 16 16 17 22 73 73 77 Northern California 122 125 129 173 71 72 75 Southern California 121 134 135 142 85 94 95 Colorado 25 30 30 30 83 100 100 Connecticut 114 125 129 157 73 Bo 82 Delaware 15 18 18 22 68 82 82 District of Columbia 32 37 37 40 Bo 93 93 Florida 28 32 32 62 45 52 52 Georgia 86 113 118 120 72 94 98 Idaho 11 11 11 11 100 100 100 Illinois 391 437 440 556 70 79 79 Indiana 88 126 127 165 53 76 77 Iowa 22 29 29 39 56 74 74 Kansas 23 24 240 24 96 100 100 Kentucky 38 48 48 72 53 67 67 Louisiana 29 43 43 76 38 57 57 Maine 48 57 57 60 Bo 95 95 Maryland 84 93 93 105 8o 89 89 Massachusetts 237 282 283 334 71 84 85 Michigan 265 281 281 303 87 93 93 Minnosota 79 80 BoHK 82 96 98 98 Vississippi 26 31 31 38 68 82 82 Vissouri 103 121 121 138 75 88 88 Montana 3 3 3 3 100 100 100 Nebraska 23 24 25 32 72 75 78 Nevada 4 4 4 5 Bo 80 80 New Hampshire 29 32 32 32 91 100 100 New Jersey 142 174 175 208 68 84 84 New Mexico 5 5 5 5 100 100 100 835 840 1,086 70 77 77 New York 759 North Carolina 103 129 129 139 74 93 93 North Dakota o o 0 o - - Ohio 412 429 432 497 83 86 87 31 39 40 49 63 80 82 Oklahoma Oregon 48 54 54 54 89 100 100 Pennsylvania 551 583 585 628 88 93 93 Rhode Island 73 97 63 75 75 61 73 94 103 82 91 91 South Carolina 84 94 South Dakota 5 5 100 100 100 5 5 50 64 65 114 44 56 57 Tennessee Texas 79 82 140 45 56 59 63 8 10 10 11 73 91 91 Utah Vermont 12 12 12 12 100 100 100 105 105 89 99 100 Virginia 93 104 64 88 88 Washington 67 67 76 49 West Virginia 36 66 66 70 51 94 94 127 138 138 154 B2 90 90 Wisconsin 1 1 2 2 50 50 100 Wyoming Alaska 3 30 3 100 100 100 3 Railroads 109 115 95 95 95 109 109 Total 864 5,543 6,612 74 B3 64 5,502 July 24, 1942 Office of the Secretary of the Treasury, Division of Research and Statistics. # Data are for July 11, inasmuch as no July 18 report was received. Regraded Unclassified