Volume 56, February 20 – February 28, 1937

DIARY Book 56 February 20 - February 28, 1937 A Book Page Alcohol, Smuggling of See St. Pierre, Island of Appointments and Resignations Baradel, Joseph R.: HMJr tells Senator Moore Treasury is removing Baradel; awaiting Helvering recommendation on successor - 2/23/37 LVI 62 a) HMJr tells FDR Baradel is to be moved to San Francisco and Senator Moore is willing to leave choice of successor to Treasury on merit basis Irey reports to HMJr on investigation of income tax affairs of Frank Hague under direction of Internal Revenue Agent in Charge Baradel - 2/26/37 340 Bates, Earl A.: Given thirty-day appointment in Disbursement Office at request of Senator Nye a) Resume 2/23/37-7/1/37 86 Wolfe, Joe (Democratic National Committeeman, Minnesota): See also Book LIV, page 6, in connection with proposed appointment as Internal Revenue Collector HMJr gives FDR document presented by Congressman Murphy (Minnesota) "which looks as though Joe Wolfe has been selling post offices" - 2/23/37 64,66 HMJr writes Congressman Elmer J. Ryan complete investigation will be made - 2/23/37 84 - B - Baradel, Joseph R. (Internal Revenue Agent in Charge, Newark, New Jersey) See Book LV, pages 29,86,225,227 " Appointments and Resignations Bates, Earl A. See Appointments and Resignations Board of Tax Appeals Memorandum on status of work by Shafroth (Morrison) shown to FDR - 2/24/37 191 - C - Copper See Taxation Customs, Bureau of For Goldberg, I., and Sons, Incorporated, see Books V (Part I) and VIII a) Offer in compromise: in view of Oliphant's recommendation, HMJr approves acceptance - 2/26/37 343 F Book Page Financing, Government Group meeting on financing - 2/23/37 LVI 89 a) Hass memorandum considered (See page 105) 1) HMJr does not feel that 3/15/37 is the time to try out a seven- to seventeen-year arrangement or anything else new; says the longer he stays here, the more conservative he grows Open Market Committee meets with Treasury - 2/24/37 154 (For February 17th meeting, see Book LV, page 311) a) HMJr announces there are three things to be decided: "(1) shall we start next week selling $50 million worth of bills into the 15th of June until we have sold $300 million; (2) shall we call the April maturities and refinance them on March 15; (3) shall we ask for any new money?" Flood Relief Coast Guard reports srrangements to evacuate forces from Mississippi Valley very soon - 2/20/37 12 Coast Guard: last daily report - 2/24/37 195 Foreign Capital: Restriction of Inflow HMJr tells 9:30 group, whatever State Department may say, he feels it considers any legislation discriminatory and therefore injurious to future trade treaties - 2/23/37 27 a) Memorandum to Feis prepared in State Department "Discriminatory Taxation of Foreigners" 47 b) HMJr reports above reaction concerning State Department to FDR - 2/23/37 65 Possible action by British authorities to hinder flow of funds to United States reported in Embassy cable - 2/23/37 114,134 a) HMJr shows FDR ticker comment (page 117) - 2/23/37 116 Treasury group meeting - - 2/23/37 118 a) Magill: "Plans under consideration are (1) transfer tax on non-resident aliens (on transfers of securities); or (2) some kind of tax on capital gains New York News Bureau: "High Government official predicts dropping of plan to levy high tax on foreign capital" 132 2/24/37 Fred I. Kent's letter enumerating certain points - 136 2/18/37 Rull 'phones HMJr - 2/23/37 137 a) Says that, during four or five years, Agriculture has done things contrary to State Department's policy and State Department has lived them down b) If Treasury wishes to control foreign capital inflow "by this method that has been suggested of making it permissive and raising from ten to thirty" he (Hull) does not think it will have desired effect but will go along in the sense stated in Feis' letter (see Book LV, page 407) 1) HMJr 80 informe Landis - 2/24/37 148 2) - . W FDR - 2/24/37 196 Regraded Uclassified - F - (Continued) Book Page Foreign Capital: Restriction of Inflow (Continued) Upham informs HMJr he does not think "hot money" should cause any great amount of worry - 2/24/37 LVI 152 Senator Nye inquires "what Treasury is doing about alien-owned American stocks; his Committee gave up matter because it WGS too difficult to handle" - 2/24/37 190 a) HAWJr replies "in case of war abroad, we are prepared to ask Congress for necessary legislation so that we may become custodian of all foreign-held American securities" b) Nye says he considers State Department branch office of British Foreign Office News comment in London states that "other schemes have been dropped as unworkable in favor of a gentleman's agreement with Britein" - - 2/25/37 240 Conference of Treasury, Federal Reserve, and Securities and Exchange Commission groups - 2/25/37 247 a) HMJr restates problem that FDR has in mind and which is basis of this study: "times of stress" money - money that is seeking refuge in United States owing to present world economic set-up; not speculative money 269 b) Magill memorandum to be studied 272 c) Oliphant memorandum giving results of further discussion in his room with Federal Reserve representatives 274 d) "Hot Money' versus Frozen Funds" by Francis P. Garvan, President, The Chemical Foundation, Incorporated 276 e) Memorandum as prepared for FDR - 2/25/37 277 France See St. Pierre, Island of - for smuggling of alcohol in Stabilization - G - Goldberg, I., and Sons, Incorporated See Customs, Bureau of El 1 I Hague, Frank (Mayor - Jersey City, New Jersey) See Appointments and Resignations: Baradel, Joseph R. Hoffman Island Discussion of transfer from Public Health Service to New York City - 2/23/37 36 "Hot Money" See Foreign Capital: Restriction of Inflow Regraded Uclassified - H - - (Continued) Book Page Housing Miss Lonigan reports on conference with Ihlder (Alley Dwelling Authority) - 2/24/37 LVI 182 a) Ihlder will think over problem of using unskilled labor in some form of housing project for District of Columbia Self-Help Cooperative HMJr tells FDR before Housing Bill is offered "he has something on financial side" - 2/24/37 196 - I - Internal Revenue, Bureau of Magill recommendations for improvements in administration - 2/25/37 236 Interstate Commerce Commission See Taxation: Undistributed profits tax Investigations, Treasury Personnel See also Wallace letter concerning certain irregularities in Procurement Division - 2/19/37 - Book LV, page 468 a) HMJr acknowledges receipt and encloses photostatic copy of letter for Agriculture files - 2/23/37 41 - J - Japan See also Taylor memorandum concerning call by Japanese Ambassador, et cetera - 2/19/37 - Book LV, page 476 Counselor of Japanese Legation also cells on Gaston 30 American Embassy (Tokio) cable 2/27/37 399 a) Japanese press carries report that Government intends to ship gold from specie reserve to United States in early March to value of 10 million yen; throughout year newly-mined gold purchased by Government will be shipped either to London or New York; total shipments for year will probably amount to 130 million yen b) Taushime reports to Commercial Attache of Embassy that above report is pure newspaper fabrication - M - Magill, Roswell See Internal Revenue, Bureau of: recommendations for improvements 236 in administration 2/25/37 Mint, Bureau of Silver Depository: See Book LIII, page 205 HMJr tells 9:30 group of competition between Wallis Simpson and Treasury Department for Rogers estate next-door to Roosevelt estate on Hudson - 2/24/37 145 Regraded Uclassified - If - Book Page Narcotics Graves reports break-up of largest smuggling gang on Pacific Coast - 2/23/37 LVI 85 a) Graves describes to 9:30 group - 2/24/37 138 HMJr asks Graves to talk to Hornbeck (State Department); Hull feels that State Department "has & place for Narcotics in the foreign field" - 2/24/37 138 Graves reports that Lew Kim Yuen failed to appear in court; $5,000 bond ordered forfeited - 2/27/37 368 Nye, Gerald P. (Senator, North Dakota) See Foreign Capital: Restriction of Inflow - 0 - Old Age Reserve Account Federal Reserve and Treasury to discuss economic problems involved - 2/23/37 55 Open Market Committee See Financing, Government - R - Reilroad Retirement Act 175 Resume 2/24/37-4/21/37 - S - St. Pierre, Island of See also Books III, IV, and LV Draft of Treasury reply to Bullitt's cable: objection to suggested modifications in definition of "alcohol de traite" since these would open the way for traffic in neutral Bullitt cables French now propose to leave Decree of 4/9/35 spirits or plain alcohol in bulk containers - 2/23/37 57 regarding bonding system for the exportation of alcohol from St. Pierre in full force and effect; French promise extra care and assure manufacture of alcohol in the Islands 232 will not be permitted - 2/24/37 Self-Help Miss Lonigan reports conference between Baker and Rawl (Works See also Housing Progress Administration), Street and other District people - 231 Miss 2/25/37 Lonigan making inquiries about fishing and fish 231 processing - 2/25/37 Silver HMJr explains at 9:30 meeting "we're going to introduce a law to domestically the price of silver by states, put the Congress adjourns, and then return to the original plan" silver pay purchasing program on & state basis from now until 27 Silver 2/23/37 Purchase Act: Senator Wheeler asks HMJr about repeal in connection with client's question; HMJr replies, "You don't think we'd make silver in the Supreme Court, do you?"- 2/23/37 Regraded Uclassified - S - (Continued) Book Page Silver Depository See Mint, Bureau of Speeches by HMJr Harvard-Yale-Princeton conference on Public Affairs at Harvard University: "Outline of Monetary Developments and Policies of United States" as presented by HMJr in opening round-table discussion - 2/27/37 LVI 360 a) Final draft 377 b) For Russell Leffingwell's congratulations, see Book LIX, page 390 Stabilization (arranged chronologically) France: Cochran reports substance of British correspondence expressing "anxiety and unhappiness over continued loss of gold by France" - 2/20/37 5 a) HMJr, from Farm, discusses with FDR; both agree to do nothing about this - 2/21/37 13 Cochran requested by HMJr to cable his suggestions on what the French might do to help themselves internally - 2/25/37 198,207 HMJr telle FDR he should do something to get French to devalue - 2/25/37 206 HMJr asks Knoke to be in his (HMJr's) office tomorrow morning; HMJr will again talk to Cochran - 2/25/37 206 Knoke-Bank of France 'phone conversations - 2/25/37 208 Bullitt-Delbos (Minister of Foreign Affairs) conversation - 2/25/37 - 211 a) Bullitt: Fears that despite new moderation in Hitler's policies, this is lull before the storm; Hitler may be speculating on possible collapse of French financial situation and overflow of Blum government; this would produce enormous series of strikes b) Delbos: A possibility, but financial situation will not get so far offhand as to lead to overthrow of Government; admits unpopularity of Labeyrie (Governor, Bank of France) and Auriol (Minister of Finance) c) Delbos proposes formation of National Economic Council to supervise end coordinate work of Ministers of Finance, National Economy, Commerce, and Agriculture - also some supervision over Bank of France; Rist to head Council Bullitt-Blum (Prime Minister) conversation - 2/25/37 212 a) Bullitt suggests time is ripe for France and Germany to remove barriers to international trade and armament restrictions b) Blum does not agree; thinks Hitler 1e speculating on fall of Blum government, with general strike following; states emphatically that financial situation will not bring about overflow of his Government; moreover, if he (Blum) should go into opposition, he would make the utmost efforts to prevent serious strikes instead of trying to bring such strikes about Regraded Uclassified - S - (Continued) Book Page Stabilization (Continued) France (Continued) Bullitt-Blum conversation - 2/25/37 (Continued) LVI 212 c) Blum: Most grateful for United States support; asks about possibility of some type of loan in United States; Bullitt replies Johnson Act would exclude any type of loan; Blum inquires about debt settlement and Bullitt says in that case a French loan would present quite a different aspect; Blum does not consider debt settlement impossible Meeting on "French situstion"; present: HMJr, Taylor, Lochhead, White, Knoke, and Feis - 2/26/37, 9:15 A.M 281 a) HMJr thinks "French situation is just about as bad as it can be" Further meeting - 2/26/37, 11 A.M 306 a) HMJr tells group that FDR is as pessimistic as he is; FDR suggests that word be sent to Chamberlain very secretly asking if there is anything Chamberlain and HMJr can do together; therefore Sir Ronald Lindsay has been asked to join group 1) For actual conversation with FDR, see page 341 b) Conversation with Cochran: HMJr asks Cochran to inform him after debate then in progress in France has been completed 1) Cochran's telegrams 320,403, 408,434 c) Sir Ronald Lindsay arrives 317 d) HMJr tells Feis not to inform Atherton in London but to leave entire matter in Lindsay's hands 319 Sugar HMJr-Taylor conversation after Cabinet meeting - 2/26/37 349 a) Wallace has double-crossed Treasury; therefore Treasury will take the position of complete disinterestedness - neither for nor against it HMJr-Wallace 'phone conversation - 2/26/37 351 - T - Taxation See also Foreign Capital: Restriction of Inflow Copper: HMJr asks Oliphant if FDR can treat the 4$ tax like the others, i.e., reduce it by half - 2/23/37 140 a) HMJr tells Oliphant "yesterday Treasury had to buy a hundred thousand sterling against copper that was exported from this country; we actually have & shortage of copper in this country - - 17$ price abroad b) Oliphent memorandum 88 prepared for FDR - 2/25/37 226 Undistributed profits tax: Eastman accepts HMJr's invitation for discussion of comments on undistributed profits tax in Interstate Commerce Commission report - 2/20/37 10 Regraded - U - Book Page Unemployment Relief Hopkins reports on plan to transfer 25,000 non-relief and administrative employees out of Works Progress Administration prior to January 1st - 2/27/37 LVI 401 a) Report (August, 1936, to January, 1937) shows that 6,000 administrative employees and nearly 29,000 non-relief workers have been dropped - W - Whiskey Federal Trade Commission starts action against five of the largest distillers and one wholesaler in New York City, charging restreint of trade, price fixing, and boycotting - - 2/23/37 50 a) Alexander asks transfer of this action to jurisdiction of Federal Alcohol Administration; Tumulty constant visitor at Alexander's office b) Taylor confers with Alexander, who finally withdraws request c) Tydings (Millard) proposed bill would validate and legalize distillers' actions which were bases of charges d) Oliphant resume read by FDR who then says "go ahead and press hard before Federal Trade Commission" Wolfe, Joe See Appointments and Resignations Regraded Uclassified 1 U GRAY London Dated February 20, 1937 Rec'd 7 a.m. Secretary pf State Washington 34, February 20, 11 a.m. FOR TREASURY FROM BUTT" (TORTH. I am confidentially informed that Board of Trade's balance of payments statement which is scheduled to be issued at the end of this week will probably show a figure between an adverse balance of 10,000,000 pounds and a favorable balance of 5,000,000. As reported in my 67, February 20, 1936, last year's statement gave a favorable balance of 37,000,000 pounds for 1935; during 1936 the adverse trade balance increased by 73,000,000 pounds and silver shipments amounted to 14,000,000. On the other hand, shipping income has increased by 20,000,000 pounds and foreign investments by 10,000,000 together with increases in miscellaneous items, I am given to understand that the British Treasury when it learned that the Poles intend to make statement in New York indicating that they would default on their sterling and dollar bonds made an unsuccessful last minute attempt to prevent its issue. The British Treasury does not believe Regraded Uclassified 2 U -2- 4, Feb. 20, 11 a.m. from London believe that the Poles have any intention of defaulting on their sterling obligations and maintain that they have and will continue to advise them not to default on their dollar securities. My own view is that the British will do what they can short of making difficulties for themselves to prevent default on the dollar tranches. ATHERTON RR:HPD 1001 X NEW Regraded Uclassified 3 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Paris, France DATE: February 20, 1937, 1 p.m. NO.: 247 FROM COCHRAN Exchange is relatively quiet on unofficial market this forenoon with Bank of France continuing to yield sterling. Forward franc more offered. Press carries Amsterdam Stock Exchange Committee protest to President Roosevelt on measures against foreign investors. At Socialist parliamentary group meeting yesterday Auriol denied that he would resign as Minister of Finance and said there was no thought of changing Labeyrie at Bank of France. It is the opinion of market observers that action towards solving present difficulties may be postponed until depletion of stabilization fund and of British credit are nearer. The influence of labor they fear is being strongly exerted through Jouaux upon the Government and that in the meantime there will be pushed the tendency toward nationalization of French key industries and insurance. I was informed by Pennachio that on Monday there would be announced a reduction in the Italian tourist lira from 105.40 to 102 francs per one hundred lire. Pennachio said that the Treasury preferred to take this loss through the currency rather than a reduction again of hotel and railway rates to meet competition for tourists due to French ex- position, Regraded Uclassified 4 - 2 - position, and so on. The meeting between Rueff and myself has been post- poned by him until six o'clock this evening, since at 3 o'clock he is to see Blum and Labeyrie. It is likely that I shall send a further cablegram tonight. BULLITT. % EA:LWW - we - mino Regraded Uclassified 5 Paraphrase of Paris Embassy strictly confidential telegram No. 249, February 20, 1937, 7 p.m., from Cochran. Please refer to the last paragraph of my telegram No. 247, February 20, 1 p.m. This evening between 6 and 7 o'clock I saw Rueff who had conferred with Premier Blum late in the afternoon. Rueff said he wished to keep me informed of developments in the French situation and he wanted particularly to tell me of an exchange of correspondence with the British. He said that Baldwin had written the French Premier under date of February 12 expressing the anxiety and unhappiness of the British over the continued loss of gold by France, indicating that the British feared this might lead to compromising the Tripartite Agreement and recalling to the French the provision therein for consultation among the appropriate authorities of the three parties to the agreement. Baldwin's letter crossed a brief personal note addressed by Auriol to Chamberlain expressing the desire of the French Minister of Finance to exchange views with the latter concerning the French Financial situation. Rueff shoed me the French text of a long communication dated February 17 which Auriol sent Chamberlain in contin- uance of his first note and in answer to the letter of the British Premier to the French Premier. Auriol's letter re- viewed the French situation at great length, emphasizing the economic recovery which had taken place and excusing heavy Regraded Uclassified 6 - 2 - heavy expenditures of the French Government on the ground that the international political situation makes it neces- sary for France to strengthen its armaments as the British are also doing. Auriol made the point that the French finan- cial situation is difficult as the result of an internal po- litical cause and also of an external factor. As remedy for the internal cause, he said, the French Government was considering the establishment of complete freedom for gold, was planning to check excessive expenditures, and would strive toward liberalization of trade. He felt that in the second place an international problem was involved because capital which is fleeing from France is going in part into the purchase of commodities and causing a sharp rise in their prices and in part into the purchase of foreign securities where it has a tendency to increase the speculative char- acter of such investments. It was in connection with this international phase of the matter that Aurio sought the cooperation of the British Chancellor of the Exchequer. He indicated willingness to stabilize the franc at its present level if the other par- ties to the Tripartite Agreement would make a public announcement pledging the union of the three currencies, i.e. indicating that in case one of the currencies moved, the others would move correspondingly and simultaneously. Auriol said that neither the French Government nor the Bank of Regraded Uclassified 7 - 3 - of France was considering French exchange control, as this would mean 8 rupture of the tripartite understanding. This morning, Norcy, Acting French Financial Attache in London, returned to Paris bringing two letters from the Chancellor d' the Exchequer to Auriol. The first was a general reply to the latter's letter. The second touched upon the more technical aspects of Auriol's suggestions. The British emphasized the domestic character of the question confronting France. They advised that the sterling rate be held less rigidly by the French stabilization fund than has been the practice until the last few days. They thought that anything that could be done by France to check speculation against the franc and to restore domestic con- fidence should be done at once. They pointed out that the heavy selling of francs evidently came from French sources and that no large proportion of it could be attributed to speculation of foreigners against the franc. The British were not sure just what Auriol had in mind concerning es- tablishing freedom for gold. They requested more explicit information on this. They very definitely rejected the idea of banida banding the three currencies together and said the British Government had gone as far in the statement of September 25 as it is possible for it to go. In other words the British cannot undertake to tie sterling to the dollar which Regraded Uclassified 8 - 4 - which is practically attached to gold as this would involve de facto attachment of sterling to gold for which the British Government has no authority. However, they were willing to consider making a declaration simultaneously with the United States to the effect that they did not object to XX any fluctuations of the franc within the limits established by the French monetary law of October 1. I was permitted to glance hastily at the long documents of which the foregoing is a very rough summary of the high points. Rueff said that the consultation with the French Premier this afternoon had not resulted in any decision being taken. The question will be studied Monday when Auriol, who is away, has returned to Paris. Blum, however, was insistent that there should be no resort by France to exchange con- trol. Rueff reported him as saying that exchange control would not be inconsistent with his political ideas but it would have a tendency to hurt the good relations with the United States and Great Britain which he greatly cherishes and wishes to maintain. I asked Rueff if he himself did not realize the truly domestic character of the French problem. He said he did fully realize this and that if it were not for the political complications the technical solution would be quite simple. I told him how frankly I had spoken to Auriol in the conver- sation Regraded Uclassified 9 - 5 - sation last Monday reported in my telegram No. 211, Feb- ruary 15, 5 p.m. Rueff told me that after our conversation reported in my telegram 233, February 17, 9 p.m., he had got in touch with Dean Jay of Morgans in Paris. The latter sub- mitted to Morgans in New York Auriol's inquiry concerning borrowing on the American market. The New York house, Rueff said, did not take the matter up with Washington or even put it before Morgan Stanley for consideration but advised Rueff through Jay not to pursue the matter of a loan on the American market any further since, in present circumstances, it would be unacceptable on the American market even if it were not prohibited by the Johnson Act. This message, Rueff said, entirely confirmed the personal opinion I had stated to Auriol and to him. Stressing the serious character of the Treasury's situation, Rueff promised to keep me informed of develop- ments next week. BULLITT. EA:FL:LWW Regraded Uclassified 10 INTERSTATE COMMERCE COMMISSION WASHINGTON JOSEPH B. EASTMAN February 20, 1937. COMMISSIONER My dear Mr. Secretary: I have your letter of February 19 stating that you would like to discuss with me toward the end of next week the comments in our Annual Report in respect to the undistributed profits tax. of course 1 shall be glad to do this, and will hold myself in readiness to call on you for that purpose at any time that you may suggest, although I shall be glad if you will give me a little advance notice. I am very sorry that the letter which I wrote you in regard to this matter went astray in some manner. How it reached the White House is a mystery to me. As it contained a tentative draft of 8 letter to the President, it occurred to me that the envelope might through careless- ness have been addressed to the President, but my office force is quite clear that this did not happen, and the fact that the White House, as I understand it, has no record of the receipt of the letter is further evidence that it did not happen. My office boy took a letter that day to the Treasury Building, but it went to the Bureau of the Budget and not to your office. He now believes that he put the letter to you in the mail. What actually did happen I do not know, but I assume the responsibility for the mistake, whatever it was, and regret it. Regraded Uclassified 11 Of course, the tentative draft of a letter to the President was intended only for your per- usal. It seemed to me a convenient way of presenting the matter, in view of the points made in your previous letter to the President, and that it would pave the way for our discussion. Very sincerely, Joseph S. Eastman Honorable Henry Morgenthau, Jr The Secretary of the Treasury, Washington, D. C. 12 20 February, 1937 Noon COAST GUARD OPERATIONS IN FLOOD AREA Coast Guard making arrangements to evacuate forces from Mississippi Valley as soon as need terminates, which is expected to take place first part of next week. Coast Guard force at present operating in the Missis- sippi flood zone numbers 19 seagoing units and 25 boats, the latter operating under the immediate direction of the DIONE at Natchez, Mississippi, where a shore office and communication center is being maintained, and two planes. GENERAL WATER LEVEL CONDITIONS: Crest at Vicksburg 52.9 this morning; Natches 57.8', a rise of 2/10ths a foot since yesterday; and New Orleans 18.8', a rise of 1/10th a foot. 13 February 21, 1936 I spoke to the President Sunday night, February 21, from the Farm, about the attached cable and he agreed with me that we ought to do nothing and just sit tight. Regraded me TELEGRAM RECEIVED 1-1536 THE FROM Paraphrase of Paris Embassy strictly confidential telegram No. 249, February 20, 1937, 7 p. m. from Cochran. Please refer to the last paragraph of my telegram No. 247, February 20, 1 P. m. This evening between 6 and 7 o'clock I saw Rueff who had conferred with Premier Blum late in the after- noon. Ruefi said he wished to keep me informed of developments in the French situation and he wanted particularly to tell me of an exchange of correspon- dence with the British. He said that Baldwin had written the French Premier under date of February 12 expressing the anxiety and unhappiness of the British over the continued loss of gold by France, indicating that the British feared this might lead to compromising the Tripartite Agree- ment and recalling to the French the provision there- in for consultation among the appropriate authorities of the three parties to the agreement. Baldwin's 15 TELEGRAM RECEIVED I-1336 FROM -2- letter crossed a brief personal note addressed by Auriol to Chamberlain expressing the desire of the French Minister of Finance to exchange views with the latter concerning the French financial situation. Rueff showed me the French text of a long com- munication dated February 17 which Auriol sent Chamberlain in continuance of his first note and in answer to the letter of the British Premier to the French Premier. Auriol's letter reviewed the French situation at great length, emphasizing the economic recovery which had taken place and excusing heavy expenditures of the French Government on the ground that the international political situation makes it necessary for France to strengthen its armaments as the British are also doing. Auriol made the point that the French financial situation is difficult as the result of an internal political cause and also of an external factor. As remedy for the internal cause, he said, the French Government was considering the 16 TELEGRAM RECEIVED FROM -3- establishment of complete freedom for gold, was planning to check excessive expenditures, and would strive toward liberalization of trade. He felt that in the second place and international problem was involved because capital which is fleeing from France is going in part into the purchase of commodities and causing a sharp rise in their prices and in part into the purchase of foreign securities where it has a tendency to increase the speculative character of such investments. It was in connection with this international phase of the matter that Auriol sought the cooperation of the British Chancellor of the Exchequer. He indicated willingness to stabilize the franc at its present level if the other parties to the Tripartite Agreement would make a public announcement pledging the union of the three currencies, 1.e. indicating that in case one of the currencies moved, the others would move correspondingly and simultaneously. Auriol said that neither the French Government nor the Bank 17 TELEGRAM RECEIVED 1-1536 FROM -4- of France was considering French exchange control, as this would mean a rupture of the tripartite under- standing. This morning, Norcy, Acting French Financial Attache in London, returned to Paris bringing two letters from the 18 TELEGRAM RECEIVED 1-1386 FROM -5- Chancellor of the Exchequer to Auriol. The first was a general reply to the latter's letter. The second touched upon the more technical aspects of Auriol's suggestions. The British Emphasized the domestic character of the question confronting France. They advised that the sterling rate bE hEld less rigidly by the French stabilization fund than has been the practice until the last few days. They thought that anything that could bE done by France to check speculation against the franc and to restore domestic confidence should bE done at once. They pointed out that the heavy sElling of francs svidently came from French sources and that no large proportion of it could bE attributed to speculation of foreigners against the franc. The British were not sure just what Auriol had in mind concerning Establishing freedom for gold. They requested more explicit information on this. They very definitely rejected the idea of banding the three curr/Encies together and said the British Government had gone as far in the statement for Septem- ber 25 as it is possible for it to go. In other words the British cannot undertake to tie sterling to the dollar which is 19 TELEGRAM RECEIVED )-1399 FROM ⑉6⑉ practically attached to gold as this would involve de facto attachment of sterling to gold for which the British Govern- ment has no authority. HOWEVER, they were willing to consider making a declaration simultaneously with the United States to the Effect that they did not object to any fluctuation of the franc within the limits Established by the French monetary law of October 1. I was permitted to glance hastily at the long documents of which the foregoing is a very rough summary of the high points. Rueff said that the consultation with the French Premier this afternoon had not resulted in any decision being taken. The question will bE studied Monday when Auriol, who is away, has returned to Pafis. Blum , however, was insistent that there should bE no resort by France to exchange control. Rueff reported him as sayingthat Exchange control would not bE inconsistent with his political ideas but it would have a tendency to hurt the good relations with the United States and Great Britain which hE greatly cherishes and wishes to maintain. I asked Rueff if he himself did not realize the truly domestic character of the French problem. HE said hE did 20 TELEGRAM RECEIVED I-1336 FROM -7- fully realize this and that if it were not for the political complications the technical solution would bE quite simple. I told him how frankly I had spoken to Auriol in the conver- sation last Monday reported in My telegram no. 211, February 15, 5 P. M. Rueff told me that after our conversation reported in my telegram 233, February 17, 9 P. M., hE had got in touch with Dean Jay of Morgans in Paris. The latter submitted to Morgans in NEW York Auriol's inquiry concerning borrowin on the American market. The NEW York house, Rueff said, did not take the matter up with Washington of EVEN put it before Morgan Stanley for consideration but advised Rueff through Jay not topursue the matter of a loan on the American market any further since, in present circumstances, it would bE unacceptable on the American market EVEN if it were not prohibited by the Johnson Act. This message, Rueff said, entirely confirmed thepersonal opinion I had stated to Auriol and to him. Stressing the serious character of the Treasury's situation, Rueff promised to keep me informed of developments next WEEK. Bullitt 21 BC Gray Paris Dated February 22,1937 Received 5:55 PM Secretary of State, Washington. 256 February 22, 5 p.m. FROM COCHR.'N. In spite of New York being closed today there was fair activity on Paris exchange market with dollar sought by both Paris and London. Bank of France lost considerable sterling, one bank alone taking 500,000,000 pounds. Rentes dropped two francs and general atmosphere was sad. Principal cause of today's unhappiness was considered to be Blum's speech of Sunday which indicated Government's opposition to changing its policies and again blamed capitalists for frustration of Popular Front Government's plans. Market observers fear tha this speech and remarks of Auriol last week mean that there will be no present change in officers at head of Ministry of inance and Bank of France. BULLITT TREATRATED - / CSB 22 PARTIAL PARAPHRASE OF TELEGRAM RECEIVED FROM: AMERICAN EMBASSY, PARIS DATE: February 23, 6 p.m. NO.: 260 CONFIDENTIAL FROM COCHRAN Paris exchange market slow. Bank of France reported to have yielded only small amount of sterling not because sentiment has improved but because domestic commercial need for funds as end of month approaches limits amounts available for export. Forward franc slightly better but rentes still declining. I spoke with Cariguel last evening. He said that Monday had been a bad day for the Bank of France. I spoke also with Simon who is head of the Societe Generale. He told me that the Government should understand that it is the middle (*) of the holders of government securities who are 80 numerous in France who fear most of all the government's program and get rid of their securities and hide or export their capital as a consequence. Simon felt resentful to the charge that the bankers are trying to wreck the government. Labeyrie asked me to call at the Bank of France some- time during the week and Auriol said last night that he would telephone me to come over sometime this week. Auriol was visited by Aragon, Paris Morgan partner, last night. The latter 23 -2- The latter did his best to convince Auriol that the holders of capital will have no faith in the government until the government has enough faith in the people as tax payers and investors to cease the threats and investigations that are continually being directed against them. I received calls today from Lee of Guaranty and Jay of Morgan's. Real concern over the French financial outlook was expressed by both. They both expect a scarcity of money on the Paris market at the next settlement date. In addition, they do not clearly see how the French Treasury will meet its needs of the next two or three months. Lee mentioned that in London an effort was being made to interest banks there including Guaranty in a loan to Haiti by the Haitian Minister. (END MESSAGE) st w " EA:DJW Regraded Jclassified 24 GROUP MEETING February 23, 1937 9:30 A.M. Present: Mrs Klotz Mr. Magill Mr. McReynolds Mr. Oliphant Mr. Lochhead Mr. Taylor Mr. Haas Mr. Upham Miss Roche Mr. Gaston Mr. Bell Magill: The Carriers Taxing Act we spoke of before has been reported favorably by the Finance Committee without any opposition. It's on the calendar of the Senate. They probably will recess today on account of Mr. Buchanan's death without taking action; but it seems to be properly cared for. I've had a couple letters from Mr. Burgess of the Federal Reserve Bank about alien investments in Governments. One of them here. H.M.Jr: Well, I've asked him to study it. Do you think we ought to get together in advance of hearing Mr. Hull? The way we left it was Mr. Hull would call me. Magill: Well, I'd like to get together myself with George and Herman to see what the boys have worked out. Oliphant: They'll have it ready by twelve o'clock; that is, the boys from the Bureau. Magill: Well, let's get together right after that. H.M.Jr: Joan and I were talking about it, and we want to know why we can't simply tax the alien just the way we tax an American citizen, and that way remove all objections of the State Department. Just tax any alien just like an American. Magill: If you can persuade him to file a return, why, I'm with you. 25 - 2 - H.M.Jr: Joan and I can't understand why we just can't tax any alien exactly the same as an American citizen. Magill: You tell her that they're nasty fellows and they won't file returns. H.M.Jr: Well, supposing we withhold all income until they do. Magill: Suppose they didn't have any income that you could withhold. H.M.Jr: Well then, we wouldn't file a return. Magill: That's your big problem on the capital gains, to find who to put the finger on. H.M.Jr: We just can't understand why they shouldn't be treated just the same. Magill: She may be right. H.M.Jr: We talked it over, and I was going to call you as soon as I could. She came down and said, "Have you called Dr. Magill?" "Not yet, Joan; there must be a catch." She said, "You better call him." Magill: Shall I write her a letter? H.M.Jr: If you do, make it stand up; that's all I can say. And incidentally, you might send me 8 copy. It's interesting; why, it seems that that's just the simplest thing. Mrs Klotz: Joan says that. Haas: It's a problem of administration. H.M.Jr: I mean if you just said we'll treat any alien just the same as an American citizen, then the State Department can't say there's any discrimina- tion. Incidentally, on that there is this thing which Herbert Feis gave us. Then - I don't know - he did some mumbling under his breath. Here it is: "Dis- crimination Taxation of Foreigners." And this is 28 - 3 - written by what's-his-name, Feis's assistant. Taylor: Livesey. H.M.Jr: Livesey. And he comes out in.... Written for "ivesey - I mean for Feis. And they come out here flatfootedly in this thing and say that any increase in tax on aliens will be harmful to their policy over there, which 1s just absolutely contradictory from what Feis wrote me in that letter. "In other words, the treaty with Canada is inter- nationally the most vulnerable aspect of the present proposal. If the United States wants to give resi- dents of Canada or Mexico this preference, it cannot simply stand on the position that it is imposing the 20 percent rate on other nonresident aliens in order to remove a preference they now enjoy over American taxpayers. Our policy is obviously and importantly discriminatory against Great Britain, France, and the Netherlands, Switzerland, and less importantly against other countries, so long AS we retain and implement the preference for contiguous countries. It appears therefore that the presentation of the matter to the public and to foreign countries should justify the measure at least in part on its actual grounds and not on grounds of equitable treatment of both American and alien investors." Well, that is just one hundred percent different than what Feis wrote me. And then after Feis gave it to us - I mean he did some mumbling. Then I said, "Why didn't you give it to me before, Herbert?" Magill: Why don't you give Joan this first sentence here? H.M.Jr: What's that? Magill: "Since it is impossible to obtain adequate informa- tion to tax foreigners residing abroad at the same income tax rates they would pay were they residing in the United States, it is impossible to give them 'national restment. H.M.Jr: I know, but - I mean the other thing. 27 - 4 - Oliphant: You've passed that. H.M.Jr: I know, but you read that and then take it and stack it up against what Mr. Hull said here for an hour and forty-five minutes, plus what Mr. Feis wrote That's what they really think. In other words, what they say in that memorandum is that anything we do in the circumstances is discriminatory and on that basis how can they make any more trade treaties. Haas: You know how the British handle theirs as far as discrimination is concerned. They put on this 23 and a fraction, then give a rebate to their own nationals but not to Americans. But the State Department has never objected to that discrimina- tion. Magill: No, that's British discrimination. That's allowed under the rules. H.M.Jr: And the memorandum you (Taylor) gave me from our friend just doesn't stand up either. Taylor: I didn't say that it did. I just said it would be interesting. H.M.Jr: It is interesting, but too pro-British. I mean - I can't lay my hands on it; I read it; but it's here; no, it isn't - it's entirely too pro-British. Magill: I have a bevy of letters on the subject this morning; said the thing to do is get at the source and quit paying so much for gold. Haas: Why go into that? H.M.Jr: Well, of course, the plan which I suggested to the President for the next move, I think, is a much better one. Have you heard about that one, Miss Roche? We're going to introduce a law that we're going to pay domes- tically the price of silver by states, put the silver purchasing program on a state basis; that is, from now on until Congress adjourns. Then we'll go back to the original plan. 28 - 5 - Roche: That ought to help with the Court, though. H.M.Jr: Exactly. You got it. Roche: I thought I had it. H.M.Jr: The President said, "You better announce it as the Morgenthau plan." Roche: I know two negative votes that would probably turn the other way. H.M.Jr: I told him it was good for eight or ten votes. And it's not so dumb. In the room, I think it is a good deal better argument than some that have been given on the radio. Oliphant: Much better. H.M.Jr: What? Oliphant: Much better, because more realistic. H.M.Jr: The more I think of it, the better I think it is in the way of getting votes. Well then, you fellows are going to - do you want me to keep this afternoon free - say, three o'clock - - for a meeting amongst ourselves? Oliphant: I think it would probably be a good idea. H.M.Jr: Well then, supposing we have a meeting at three o'clock. For those of you who don't read Lawrence Pegler, I suggest that you do. Gaston: Westbrook. H.M.Jr: Westbrook Pegler this morning. Taylor: Well worthy of consideration. H.M.Jr: What? Taylor: Well worthy of consideration. 2₱ - 6 - H.M.Jr: You've read him? Who's read Pegler this morning? Magill: I have. Oliphant: Later in the day. H.M.Jr: Do you want a transfer to the Department of Justice? Magill: He makes a great case. H.M.Jr: Well, anybody wants to be transferred, let me know. Anything else? And incidentally, you, young fellow - you (01iphant) were all hot and bothered and had me put my name on a certain signature for a letter to a gentleman, then get an answer; then nothing happens. Oliphant: The scene shifts a little. More work being done on it. We met on it for a good long session Friday. H.M.Jr: Well, I think you ought to. Oliphant: We're working on it. H.M.Jr: You're looking better. Oliphant: I feel fine. H.M.Jr: Herbert? Gaston: (Nods negatively) H.M.Jr: Archie? Lochhead: Nothing. H.M.Jr: Archie sent me up a telegram all the way to the country. This one for your (Mrs Klotz) notes. I spoke to the President at ten o'clock - what night did I say, Sunday? Mrs Klotz: Saturday night I thought you told me. Lochhead: Sunday night, it must have been. Regraded Uclassified 30 - 7 - H.M.Jr: He said just to sit tight, do nothing. Hello (On phone to Burgess; conversation not recorded on dictaphone) Hello, how are you? - You let George keep shooting the quail that Wayne Taylor didn't get. - No, you tell him a bird in a pot down there is worth two up here in Washington. - Yes, but you'll be down. - All right. - Well, Magill says he has some correspondence from you and he's going to try to digest it today and then I All right. - All right, 'bye. Burgess. Gaston: I should have reported that the Counselor of the Japanese Legation came in to see me Saturday and they were very curious about the laws about ship- ment of gold, and what would happen if Japan should ship gold to the United States, whether Japan could earmark gold, whether Japan could get gold out again, and whether they could purchase gold from us. H.M.Jr: Say, you fellows (Gaston and Lochhead) better get together. You two stay after school; the two of you, will you? The two of you better stay after school. Taylor: Four o'clock Friday I got the same questions. H.M.Jr: You two fellows better stay after school here; I mean right after this meeting. Gaston: It was Saturday noon this man came in to see me. H.M.Jr: All right. What do they say, those Japanese, you know? Two shells - there they are; then they are not. Taylor: Well, apparently they both asked the same questions. Gaston: I think they probably asked the same questions. Taylor: They didn't like the answers I gave them, apparently. H.M.Jr: Well, supposing the three of you stay after school and I'll talk to you. - 8 - Gaston: Yes. H.M.Jr: I mean I think we better get together. They shouldn't - I mean - well, I want to talk about it. Anything else? Gaston: No, that's all. H.M.Jr: That's the beauty of these meetings. We find out what each other are doing. Taylor: It's a long time ago. I'd just about forgot. H.M.Jr: Saturday? All right. You (Taylor)? Taylor: Senator Pittman. "My dear Mr. Secretary: There have been a number of articles written in the domestic and foreign press, in the last month or two, with regard to our silver policy. I have paid no attention to these articles because they were mostly instigated by bullion brokers who desire an open market for both gold and silver, for obvious reasons. "In view of statements made by the President in his campaign address at Denver, I am rather sur- prised to see an editorial in the Washington Post of this date not only attacking the silver policy but making this statement: 'The Secretary is now suggesting that the Senate Special Silver Committee should advise him as to the price they consider it proper to pay for newly mined domestic silver. Shall I continue? H.M.Jr: Please. Taylor: "This is the first time I have heard of any such suggestion. "I made a speech before the Mining Congress at Denver shortly before the President made his cam- paign speech there. My address will be published in a few days in the Mining Congress Journal. In 32 - 9 - this address I have discussed both the gold and silver policy of the United States. I will send you a copy of it when it is printed. "It would appear that no one has any knowledge of your policy to use silver in tying the curren- cies of certain countries to the dollar, as you Mexico. have very successfully done both in China and "None of our self-constituted monetary experts seem to realize the power that our Government would have in the future stabilization of curren- cies by having possession of large quantities of both gold and silver. I realize, of course, that we are faced with a temporary problem in the flight of gold into the United States. I still believe that it will be temporary, depending upon when the political situation in Europe is adjusted, either by war or otherwise. "The Senate Special Silver Committee, through assistance, has been preparing a report for some time, but changing conditions have delayed such report. It will be made at this session of Con- gress, after more important matters have been disposed of. "With best wishes, I am - Sincerely, Key Pittman." H.M.Jr: Well, the answer is very simple. "My dear Senator: Thanks for your letter of such and such a date. Yours sincerely." Oliphant: There was a fact I'd like to mention. H.M.Jr: "Looking forward to receiving your article, I am - Sincerely yours." And what's your point? Oliphant: Copper has passed fifteen cents. Just a psychological moment. H.M.Jr: No, you're wrong on the psychological basis. Listen, I don't want to be the fellow that they say, "If it hadn't been for .....) we would have gotten the Court 33 - 10 - through." See? Oliphant: Notice how he voted Saturday? H.M.J.: How did he vote? Oliphant: Against the bill. H.M.Jr: Against it? You mean with the President? Oliphant: No, against. H.M.Jr: No. Just like Mac's got a certain proposition in the State of Ohio. We looked it up and Bulkley for the moment is with the President. And believe me, before they get through they're going to be looking for goats, and I "aint" going to be it. And if - anything that waited for a year and a half could wait for a year and seven months. If it's waited a year and six months, it can wait a year and seven months. This thing is going to get down to a matter of two or three votes, and papa "aint" going to be the goat. I'm not around this town four years for nothing. Am I right? Oliphant: The water is running the other direction. H.M.Jr: Which way? Oliphant: Well, it's all material for the man across the street. H.M.Jr: Oh yes, if he wants to play with the price of silver, that's something different. Oliphant: No, my point is that the whole basis for the subsidy of silver disappears with the recovery of the price of copper. H.M.Jr: Well listen, I'll have to debate with you. May I remind you that I once talked to a Senator from Arizona by the name of Ashurst and asked him how he felt about the price of silver, and he said, "My dear boy, I can no more discuss the price of silver with you than I can discuss my religion." And I don't see where the price of copper comes in on that. I Just don't see where the price of copper enters on that. Am I right? Anybody? Does the price of 34 - 11 - copper make any difference in your (Roche) silver? Roche: We have silver. H.M.Jr: What? Roche: We have silver. H.M.Jr: Does it make any difference? Roche: I don't think SO. Taylor: You might read Mr. Pegler's piece again and change some of the words, change the subject. H.M.Jr: It doesn't in the State of Idaho, which is the big silver state. Roche: I don't know enough about these things. H.M.Jr: It isn't in Utah. What? Roche: If you talk about coal, I might have some comments that would be in order. H.M.Jr: Well, thanks for the suggestion, but... Oliphant: I think that's a notable event, when copper went above fifteen cents. H.M.Jr: But I think, in view of the general political situà- tion, certainly nobody should play with the price of silver except the President of the United States. Now, does anybody disagree with me? Oliphant: Of course not. H.M.Jr: What? Oliphant: Of course not. H.M.Jr: I think my suggestion was a much better one, that we pass a law that we pay for silver based on the cost of mining it in each S tate and buy it on a state basis. Taylor: Giving credit for copper. 35 - 12 - H.M.Jr: Or anything else. All right. But Herman, just - anybody should play with it except the President? Oliphant: No, sir. If the President decides the price of copper is very important - that's my only point, that he decide the price of copper is very impor- tant. H.M.Jr: Have I passed you (Taylor)? Taylor: Just that. The "Dear Key" letter - one of these, you know, "Dear Key" letters. H.M.Jr: George? Haas: I haven't got anything very important. There's one of those letters from Harvard (hands letter to Secretary). They get your advice on how to handle - it's that new school, I think. H.M.Jr: This question of administrative training? Haas: It's a question of training people for Government service. They're establishing a school. H.M.Jr: Well, you're the third person that got one of those. I understood that Mac got one and Herman got one. 1 mean they do this thing in such a funny way. They first write. Then the President writes me a letter. They've asked Mac and they've asked Oliphant; now they've asked you. Haas: They may want an economist if it"s a question of training people for Government service. H.M.Jr: I think I'll write President Conant a letter and say would he mind - would they make up their minds what they want, see? Because this is the third person. Next thing they'll be writing they want Bell. And - I mean I think they ought to let us know. Don't you think so? We've said yes. Why don't the three of us get together and then prepare a letter to Conant. But I think the letter ought to go to Conant. Wouldn't you (Magill), as a university man, say so? Magill: Who's writing this letter to us? 36 - 13 - H.M.Jr: His secretary. I've had one letter from Conant on that. Magill: Yes, I should think SO. H.M.Jr: What? I'd write a letter to Conant on that. That agreeable to you, George? Haas: Yes, fine. H.M.Jr: Miss Roche? Roche: Nothing special, sir. A Mayor LaGuardia item in the paper about taking our Hoffman Island. There's been no formal transaction or suggestion there, but we've been trying to find some use for it up in New York to take it off our hands - Public Health Service. H.M.Jr: Through Procurement. McReynolds: I've consigned it. H.M.Jr: Oh, did you? McReynolds: I've consigned it. H.M.Jr: Just check that with Mac. I'm quite sure that Admiral Peoples - for some reason seemed to be custodian - sent a letter over for me to sign. Roche: Well, I didn't know that it had definitely been signed. Mrs Klotz: In answer to a telegram. H.M.Jr: I think you'll find, if Mac will look it up, that Peoples gave it to the city; but from reading the publicity you wouldn't know the Treasury was in it. What? Roche: It didn't seem as though we had taken any initiative. H.M.Jr: Well, my impression is a letter from Peoples, I think. Roche: Well, I'll check. 37 - 14 - H.M.Jr: I think SO. But you wouldn't know we even were in it. Anything else? Roche: That's important. about all, sir, this morning. Nothing very Oliphant: May I ask if the Vandenberg study of the need for Social Security reserves - is that in the shop somewhere? H.M.Jr: George George. Haas called me up. You can tell the story, Haas: Bell probably knows more about it than I do. H.M.Jr: Well, tell them, though - tell them about the telephone conversation. Haas: Yes, O.K. Sunday morning I told the Secretary that on Saturday afternoon Altmeyer got in touch with Russell Reagh, who is the Government Actuary in my division, and showed him a copy of a letter which they were addressing to Senator Harrison, the Chairman - I don't know if it was in his capacity as Chairman of the Finance Committee or not. But it dealt with the Vandenberg resolution regarding an investigation of the old age reserve account, as I understand it. Reagh checked off the figures, which appeared to be all right except in a few minor instances. It was only one or two sentences, which dealt with the economic nature of the fund, wherein I suggested B. change, which I presume they accepted. I addressed this change to Altmeyer over Dan Bell's signature. And they also H.M.Jr: Have you got Dan signing on the dotted line? Bell: Blindly. Haas: As Assistant to the Secretary. H.M.Jr: I see. Bell: I signed another way as Acting Director of the Budget. Gaston: Did you agree, Dan? 38 15 I I Bell: Well, I don't think I did. Haas: Altmeyer thought it would be They were going to have this meeting on Washington's Birthday and Altmeyer thought it would be well if the Treasury Department, in addition to sending up a person who dealt with the finances, would send up an economist who would be in a position to answer the economic questions which arose - which arise from the building up of this large reserve fund. I suggested to Dan, and he agreed with me, that it would be better for us and better for the Social Security if we remained away from it at that time, particularly in view of the fact that the Reserve Board, I understand, had some opinions with regard to this fund and the handling of it, and I really don't know what their opinion is. bo nobody, as I understand it, from the Treasury went up there yesterday. Bell: That's right. H.M.Jr: Well, then you asked me would it be all right to talk to Goldenweiser and I said yes. Baas: That's right, and I'm going to do it. H.M.Jr: Oh, you haven't done it yet. Well, does anyone want to raise any - that's the beauty of these meetings. Bell: I asked Mr. Altmeyer if he'd give his testimony along the lines that the Board needed more experience in order to determine these larger questions of policy, and he said he would, and he thought that was a good line to take. There was only one thing I saw in the paper this morning that worried me, and that was that he told the Committee he thought they might start benefit payments a little earlier; and my understand- ing with him on that was the President didn't want anything done along that line in this year; he thought that ought to go over for another year until they could get their administrative feet on the ground. Haas: That's going to cost money to the Treasury. Bell: Sure. 39 - 16 - H.M.Jr: Well, everybody know where it stands? All right? You're all right, Miss Roche? Roche: Yes, sir. H.M.Jr: Dan? Bell: I don't believe I have anything. H.M.Jr: I'd like to see the crowd that works with me on financing at four o'clock this afternoon. See? I'd like to have a sort of preliminary at four. And the people - you (Haas) know, you're in on it - Haas, Bell, Taylor, and Archie. Let's have a meeting at four as a preliminary. Pretty well jelled in my mind, but Upham: The Comptroller said some very nice things about you Saturday night. I gave you a clipping, but I think perhaps it H.M.Jr: Sober? Upham: Yes, he never drinks. Mrs Klotz: Much. H.M.Jr: Is he a teetotaler? Upham: Yes, he does not drink. Taylor: Nor smoke. Upham: Maybe that's one of his troubles. Bell: May be one of mine too. H.M.Jr: What's that? Bell: We (Miss Roche and himself) don't either, so there must be something wrong with us. H.M.Jr: Do you (Upham) drink? Upham: Oh, once in a while. H.M.Jr: Now, Cy, you know Bell, I've never seen you drink. 40 - 17 - McR: Sure Cy drinks. Bell: Oh, I'm all right. Just Jefty and I. H.M.Jr: Just you and Jefty. He (Upham) can't join that club. He's got too many exceptions. Dan's - I've never seen Dan break it. Bell: I'd have to be pretty low. Mac gets me once in a while McR: I wasn't going to tell that. Bell: Well, I expected it to come out, so I thought I'd better protect myself, say it first. H.M.Jr: This is going to be a confessional. There's too many of us know each other around here. Next thing Archie will get up and say he never drinks or never smokes cigars. What's the matter, Mac? McR: Not a thing. (Hearty laughter) H.M.Jr: Anybody else want to join that club? McR: I never commit myself. That's the approval of the selection of Keith as Assistant Collector up there in New York. I think everybody's agreed that it ought to be done. H.M.Jr: Gregory's done a good job. (Signs appointment) McR: Gives him a fifteen hundred dollar promotion on the first of March. Everybody will be happy about that. H.M.Jr: What else? McR: That thing that you handed me from Wallace the other day. I'm afraid you won't get anything back on it today. Elmer couldn't get hold of the Agriculture people on Saturday at all. 41 - 18 - H.M.Jr: Mrs. Klotz, you write a letter to Henry Wallace in acknowledgment for that. Say: "Dear Henry: I beg to acknowledge receipt of your letter of such and such a date. I am enclosing herewith a photostatic copy of your letter to me for your files. "I have immediately started an investigation of these charges, and just as soon as the investigation is concluded, I will give you a copy of the same." I'm certainly not going to have anything like that. He wrote me 8 letter in which he said, "I am sending you the carbon copy in order not to have anything in my files." .It's a charge against a man in Procurement that works with Resettlement. Well, I'm sending him back & photostatic copy of his letter so it can go in his files. If there's anybody in Treasury, why shouldn't they be Oliphant: Every reason why it should be. H.M.Jr: What? Oliphant: Every reason why it should be. H.M.Jr: I'd like to have that go by hand. It's a most unusual thing. It was Procurement, wasn't it? McR: Yes. H.M.Jr: Two. Was one of them Bell's man? McR: No, they were both Procurement. H.M.Jr: All right. But I'm glad; I knew I had something on my mind. Anything else? Anything that I forgot? Mrs Klotz: I don't think SO. H.M.Jr: Any afterthought? All right. Well then, if Taylor - the three Japanese boys can tay 42 Tuesday February 23, 1937 10:20 a.m. Rep. Elmer J. Ryan Hello HMJr: Good morning R: Hello, Mr. Morgenthau HMJr: How are you? R: Oh, very well - HMJr: Ah - R: I wanted to get down and see you, you know? - This is Congressman Ryan. HMJr: Yes, I know. Well, do you want to come right away? R: Well, I guess I could. HMJr: I've got an eleven o'clock appointment. Could you get here before that? R: I think so. I'll be there. HMJr: I'll be glad to see you. R: All right, Mr. Secretary. HMJr: Goodbye 43 Tuesday February 23, 1937 11:19 a.m. HMJr: Hello Treas. Operator: Yes HMJr: yes T.O.: Shall I put him on? HMJr: Please T.O.: All right, go ahead. Burton "heeler: Hello HMJr: Hello, Burt W: Hello, Henry HMJr: How are you? W: I didn't know whether you'd speak to me this morning or not. HMJr: Well, what - have you said something nice about me? W: (Laughs) No, no, not about you, Henry. I did about - I mean about this court victory. HMJr: Oh, I'm in the Treasury. W: I know that. Say Henry - HMJr: Yes W: I have a letter from a man up my State saying that there is a report out there that's quite current to the effect that your - that the Administration is going to seek to repeal the Silver Purchase Act. I wrote him a letter in which I said to him that I ddn't think there was anything to it. But I did think I'd better call you up because I don't want to make a liar out of myself. HMJr: Well, Burt, you don't think we'd make silver in the Supreme Court, do you? W: No (laughs), no - 44 -2- HMJr: What? W: No (laughs) HMJr: What? W: No (laughs) HMJr: Well, I don't know. I mean you start by the Supreme Court and then you swing over to silver. W: Oh, well, I was just joking about the Supreme Court. HMJr: Are you sure? W: Yes, I was just joking about the Supreme Court. HMJr: Well, - W: I was kidding about that. HMJr: Oh - W: But really, seriously, about the other thing, is - have you anything in mind or - ? HMJr: The only thing - that all this stuff is in the paper. W: Yes HMJr: When I appeared before poor old Buck - W: Yes HMJr: - in the House W: Yes HMJr: He asked me a lot of questions. W: Yes HMJr: And Buck was very - wasn't very much opposed to it and I answered him as frankly as I could - W: Yes HMJr: And since then my mind - I told some people the 45 -3- other day, we've got too much to do down here and my mind is not on silver. W: Yes HMJr: And, perfectly frankly, I haven't discussed it with the President in six months. W: Yes - well - HMJr: And - you answered your constituent truthfully. W: Yes, all right. Well, that's all I wanted - HMJr: How's that? W: That's all right. HMJr: I mean, I don't know when it will come up. But I can say that up to twenty minutes past eleven on Tuesday, February twenty-third, I have done nothing on silver and haven't been thinking about it. W: Yes, well of course, Key Pittman and I will fight hell out of you if you try to. HMJr: What? W: I say, Key Pittman and I will have to scrap hell out of you if you seek to do anything of the kind. HMJr: Well, I'll have to go around and see Senator King and have him rescue me. W: (Laughs) All right. HMJr: What? W: All right. Yes. HMJr: Politics make strange bed fellows, you know. W: That's right, Henry. HMJr: All right, Burt - Now, I - that's the answer and I - if I was ever going to do anything - W: Yes Regraded Uclassified 46 -4- HMJr: I'd be man enough - W: Yes HMJr: - to let Key Pittman know and ask him to call a meeting and I'd tell him just what I was going to do. W: Yes HMJr: See? W: Absolutely HMJr: How's that? W: All right, that's fine, Henry. HMJr: O.K., thank you. Regraded Uclassified 47 2221 65 DEPARTMENT OF STATE Office of the Advisor February 15, 1937 DISCRIMINATORY TAXATION OF FOREIGNERS Mr. Feist Since 10 10 impossible to obtain adoquate information to tax foreigners residing abroad at the name Income tax rates they would pay were they residing in the United States, it is impossible to give them "national treatment." Any rate of taxation applied on American income of such foreigners will involve giving them better or worse treatment than American nationals residing in the United States receive. However, smoh foreigners can at least be given nest-favered-nation treatment even if 10 is impossible to give them national treatment. If the Executive recommends to Congress the enactment of a 20 percent withholding tax against nonresident aliens but with pro- visa that such rate shall be reduced, in the case of a resident of a contiguens country, to such rate (not less than five percent) as my be provided by treaty with such country. and them submite to the Senate a treaty with Canada reducing the withholding tax on residents of Canada to five percent, then of course there will be protest by foreign governments that they are not receiving most-favered-nation treatment. Here the word "discrimination" will be correctly used. It will also be discrimination based on applying the - rate that is applied against the United States. This will be an invitation to all countries having Lower rates to impose a 20 percent rate on American citizens, and will leave little complaint available to the United States in case this is doos. Regraded Uclassified 48 - 2 - Regraded Uclassified The people who will be hurt w & twenty percent withholding tax are British, French, Swice and other investors who have put funds in American securities with the expectation of holding them for a long time for Income rather than for appreciation of value. These are the individuals to whom the heighth of the American tax will be of importance. However, the@e is no government in the world that may not take notice of the discrimination involved in the Canadian treaty as an indication that the United States will not be in a good position to protest against discriminatory taxation applied to American citizens relative to that applied to, say. British citisens. If the increase in rates is to be recomended to the Congress, the sponsors and spokesmen for the proposal will need to know how to treat the Canadian treaty matter in their presentation of the in- creased rate proposal. If the increase 10 recomended as being the application of equitable rates on alien nonresidente because of the inability to apply identic rates on individuals in the name income status, then the concession to Camada by treaty of & reduction of 75 percent of the tax on residents of Granda will be oven harder to defend in case of protests w other governments. In other words, the treaty with Onnada is internationally the most vulnerable aspect of the present proposal. If the United States wate to give residents of Canada or Mexico this preference, 10 cannot simply stand as the position that it is imposing the 20 persent rate on other nouresident aliens in order to remove a preference they now enjoy over Americas taxpayers. Our policy is obviously and 10- portantly discriminatory against Dreat Britain, France, and the 49 - 3 - Netherlands, Switserland, and less importantly against other countries, w long as we retain and implement the preference for tentiguous countries. 10 appears therefore that the presentation of the matter to the public and to foreign countries should justify the neasure at least in part on its actual grounds and not on grounds of equitable treatment 07 of both incrices and alien investors. reer ЯАМ sity to brue to notelving EASFLIDJW Regraded Uclassified 50 February 23,193 The President read the attached memorandum from Oliphant on the "whiskey matter" very carefully and he said, "Go ahead and press it hard before the Federal Trade Commission." Regraded Uclassified TREASURY DEPARTMENT 51 INTER OFFICE COMMUNICATION FEB 20 1937 DATE TO Secretary Morgenthau Press at. FROM Herman Oliphant For your information - I am having Manning make a study in connection with the "whiskey matter." The developments so far are as follows: 1. Some time ago, there was an action started by the Federal Trade Commission against five of the largest distillers and one wholesaler in New York City charging restraint of trade, price fixing and boycotting. When this action was started, W. S. Alexander sent his General Counsel, Buck, to the Federal Trade Commission who requested that the action be transferred to the jurisdiction of the Federal Alcohol Administration. This fact was brought to the attention of Assistant Secretary Taylor and he took the matter up with W. S. Alexander, and the request was withdrawn. Tumulty, during this time, has been a constant visitor at W. S. Alexander's office. 2. A bill was introduced in the Senate by Tydings, and in the House by Miller which would, by its terms, validate and legalize the actions of these distillers which were the bases of the charges made by the Federal Trade Commission. Mr. Kelley, General Counsel of the Federal Trade Commission, has informed us, that pending the Regraded Uclassified 52 - 2 - outcome of this proposed legislation, the respondent distillers have been given indefinite time to answer the complaints, and the whole action has been "put on the shelf." We are the following the course of this legislation. x40 Regraded Uclassified M/terald Inbane 53 2/19/37 News of Celler to Ask TradeUnitQuiz Of Tydings Bill Plans Minority Réport to House on'HiddenDangers' of Forced Price Rises from Dive Horsid Tribune Barges WASHINGTON, 7vb. Declaion to Ask the Pederal Trade Commission to investigate the possible effecta of the Tydings-Miller mus before Cm- pm acts DO this proposal to legalisé relati price fixing of trademarked articles under state Isem. was an- DOUBLED today by Representative Emanuel Celler, Democrat, = New Ywk. vto plana to tile . eximarity N- port to the House - the "hidden dangers" at the measure, which. 200 "to to be used to form up prices unreasmably." I prepared a unimonity report call- Ing attention to indinations this bill a to be used as a. club on manufes- curers to france them to boost prices to certain pre-determined levela, and the statements which have been - sund by both its proposume and - since I endounced = tax- intion to file this report. ennvision me that the Indiestions are in reality fasta." Representative Caller declared. "As . result of DAM due closures, I titend to add to this minerity report . suggestion that the Hous Judiciary Committee MIL for . Federal Trade Commission Investiga- Lieb of the entire subject before the buill la placed before Crogres "If under the guise of curbing Inader willing. of which M hearthy in favor is order to protect Live email mas me abuse or ompetitive power. . commet drive is about to form manufacturers to the prices as or stare permitages which WYMTAGE the sont of both the efficient and indicient, mething must be done, end date to protect the A. drive to honst priors in that way la just as serings as a concerted drive to drive cown priness until the mail merchant is ruined If INSTRUCTIONS key hoyeotted in the process, (YII) questions of legality active Mr. Caller advanced the the of "Emiting r right to or pricess under the bill to standard that will shield the creatmer from expiritative and at the same time protest the small mershant from "Perhape invoice costa pita a reasonable presentage to COTRE efficient Isbor costa is the right leveL" ha suggested. "bot whatever 12 la. theme is ample data available from the K. R.A. Clas - which to base It fairty." Bia elled . statement lamed by the executive acceptary of - pharmaces. und association as reveling that - intention or the cealers - - enganization, actually to to got priness put - wert DOB peurs margins are without de - CARA = 28.0 per mot." The AMOCIATION tin the - Has le nime disclosing Be objective as so pm rect. be Tydings-Mil Bill Hit As "Hidden Ball Law Sammenz desails Measure as Club Over Mana/acturers The Tydimp-Miller ML permitting manufactures of trade-marked an tiches to the Funds prices la states WITH laws, 16, the Che art, . "Didden hall Iss:- visa the nat objective maxind under en certify rissa paryme." Waster managing directure of the of Distribution stated ymarday. The bill's read 4m. searding - Mr. is to alles the - bes of the resalt prin- cipally Involved 70 - the B/R, code - - - chale via was - Three manataciures to to resis prime hip eseugh to allow thre - 50 per - - they are, the as dispute the prem at - relation to pos the - the apot 02 this biddles ball bill - be naked so. Name Dental the Retits- a art, the Tyling-Miller MIL and the Partnes - price - trad taxes - The One Sesdamic of B1 - FOR may for "Ye sen tip- mg - plan." Regraded Uclassified FEDERAL RESERVE BANK xn 54 OF NEW YORK FFICE CORRESPONDENCE DATE February 23, 1937. CONFIDENTIAL FILES SUBJECT. TELEPHONE CONVERSATION WITH L. 1. Knoke BANK OF FRANCE Mr. Cariguel called me at 11:05 today and referred to our telephone conversation of February 11 and to our cable of the same day, dealing with the revocation or modification of the tripartite agreement. Cariguel stated that they had no objections to the sug- gestions made by us and that they agreed entirely. They understood our cable, he said, to be merely a clarification of the understanding concerning certain details of the monetary arrangement and that this clarification had been found necessary as a result of inquiries made by the Swiss. I replied that that was the situation. Discussing today's market, Cariguel stated that it had been very much quieter and that 80 far he had to do only about £300,000, which vas considerably less than for a long time. I referred to the orders which he gives us regularly and asked him to let me know whether we were handling them to his satisfaction. His reply was that we had handled them very well. With reference to the world's securities markets, Cariguel thought that they were all, if anything, too high. The best thing the French Government could do, he continued, would be to take those steps which were necessary to attract capital back to France. That being done, he thought our problem of "hot moneys would, at least in part, be solved. NECEIARD LWK:KMC 55 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE February 23, 1937. TO Secretary Morgenthau FROM Mr. Haas MA In accordance with your telephone call of Sunday morning, February 21, 1937, I have arranged with Dr. Goldenweiser for a joint consideration of the economic problems involved in the Old Age Reserve Account. He has designated Mr. Currie and Mr. Gayer of his staff, and I have designated Russell Reagh, Government Actuary, and Henry Murphy to meet and discuss this matter. After preliminary meetings, Dr. Goldenweiser and I plan to join the discussion. As 8. consequence of these joint meetings, we should know on which points the two staffs are in general agreement, and also those aspects of the problem on which our views may differ, if such be the case. St OFFICE OF 56 THE SECRETARY OF THE TREASURY February 23, 1937. MEMORANDUM FOR THE SECRETARY: Herewith I hand you a copy of a further telegram from Bullitt regarding the St. Pierre matter, which was phoned me from the State De- partment this morning; also a copy of a draft of a reply which I furnished the State Depart- ment at their request. GRAVES. Si 57 February 23, 1937. Treasury Department objects to suggested modifications in definition of "alcool de traite" since these would open the way for traffic in neutral spirits or plain alcohol in bulk containers. Stop. They call attention to the fact that run if imported in quantity into St. Pierre from Martinique would undoubtedly be for smuggling purposes, although conceding that the smuggling of rua as such from St. Pierre would probably be directed at the maritime provinces of Conada rather than at the United States where the market for this beverage is comparatively small. Stop. They feel strongly that there would be no unfairness to the people of St. Pierre if the French should restrict the importation of alcohol and alcoholic beverages to such as are bottled and packaged under trade or brand names by reputable manufacturers as contemplated by the suggested definition. Stop. They say, however, that if the French Government should insist upon an amendment of the proposed definition so as to permit the impor- tation of rum into St. Pierre in bulk containers, this can more safely be done by preserving the definition as originally submitted and adding the following: "and not including run when bottled or casked by reputable manufacturers and bearing justification of origin." 58 PARIS, February 22. Referring Department's No. 99, February 19, 6 p.m.: Foreign Office, at the instance of the Ministry of Colonies, suggests modification of proposed definition of "alcool de traite," as follows- In place of "when bottled and packaged by reputable manufacturers," it suggests, "when bottled or casked by reputable manufacturers"; and in place of "and labeled as such under appropriate trade or brand names," it suggests, "and bearing justification of origin." The Foreign Office adds that certificate of origin would be issued by the French liquor exporter and visaed by the French customs authorities at the port of export. The Ministry of Foreign Affairs states that these changes in phraseology are desired to permit the importation of run from Martinique. I would appreciate a reply at your earliest convenience. BULLITT. Regraded Uclassified 59 23 February, 1937 4 p. m. COAST GUARD OPERATIONS IN FLOOD AREA Coast Guard making arrangements to evacuate forces from Mississippi Valley as soon as need terminates, which is expected to take place this week. The Memphis Headquarters will probably be closed on Wednesday, leaving only one radio truck there. Coast Guard force at present operating in the Missis- sippi flood zone numbers 19 seagoing units and 25 boats, the latter operating under the immediate direction of the DIONE at Natchez, Mississippi, where a shore office and communication center is being maintained. GENERAL WATER LEVEL CONDITIONS. Crest between Natchez and New Orleans, gradually flattening out - Natches 58', a rise of 2/10ths foot since Saturday; New Orleans 18.7'. a fall of 1/10th foot since Saturday. Regraded 60 Tuesday February 23, 1937 4:43 p.m. Senator Elmer Thomas - Mr. Secretary - HMJr: I got your letter in regard to Howard. T: Yes HMJr: - asking about the Register of the Treasury - T: Yes HMJr: And I just wanted to tell you that before Jim Farley left he talked to me about that position and asked me to do nothing until he got back. T: I see. HMJr: And he's still away. T: I see. HMJr: And, until he gets back I'm not doing anything. T: Well, Mr. Secretary, we have prepared some data in the form of - oh, some endorsements and re- commendations giving Howard's background and placed them in your hands in the event - so they can be used. HMJr: All right. T: And then some good time at your convenience we would like to come down, if it's open for con- sideration, and present Howard. He's here in town. HMJr: Well - the other - what I'd like to suggest is that - I really think that you ought to see Farley, because he's taken a great interest in this vacancy. T: Well, that's - that's a good suggestion then. You think it wold be proper then to see him? HMJr: I think it would, because, as I say, he's got some- body that he says he's been trying to place for four years. T: Oh, I see. 61 -2- HMJr: And he's very kéen to place this man. T: Yes, I see. HMJr: It's somebody that goes back to the campaign of thirty-three. T: Yes, I see. Well, then, that's a good lead and we'll take it up along that line. HMJr: Well, thank you, Senator. T: Then when you're ready why we'll just come down and see you for a few minutes, if it's open. HMJr: Thank you, Senator. T: All right then. 62 Tuesday February 23, 1937 4:46 p.m. Treas. Operator: Go ahead. HMJr: Hello A. Harry Moore: Hello, Mr. Secretary. HMJr: How's Senator Moore? M: I'm sorry to trouble you after a hard day's work. (Laughs) HMJr: You haven't troubled me yet. M: (Laughs) Thank you. How are we making out with our proposition? HMJr: Well, the way it stands is - we're moving Baradelle. M: Yes HMJr: And then I'm waiting to hear from Helvering for a recommendation on a successor. M: I see. It's up to Helvering then to - ? HMJr: That's right. M: I see. All right, thank you very much. HMJr: Having made the difficult decision, I mean, on moving Baradelle, as to his successor, I'm waiting for a recommendation from Helvering and I haven't got one yet. M: Well, that's the big thing - is the - getting the successor. HMJr: Well, that - I'm waiting for a recommendation from Guy. M: All right. HMJr: How are things with you? M: Oh, pretty good. We're bumping along. HMJr: All right, Senator. Regraded Uclassifie -2- 63 M: I'm sorry to trouble you. HMJr: You haven't troubled me a bit. M: All right. Thank you. HMJr: Goodbye. Regraded Uclassified 64 February 23d I told the President that General Hugh Johnson came in to see me about import tax on copper; that I pointed out to Johnson jokingly that Senatur Ashurst was both the senior Senator from Arizona, the biggest copper producing state in the Union, and also Chairman of the Judiciary Committee. I told the President that this tax expired on June 30th and how would he feel about letting it die if we could get away with it. He said he certainly would be for it because copper was one of the biggest worldwide trusts and that we ought to try to bust it up; that he felt that the price of copper in the United States of 84 to 120 was high enough. I told the President that Congressman Murphy of Minnesota had been in to see me and left the attached document. It looks as though our friend Joe Wolfe had been selling Post Offices and I suggested that nothing be done until we could get a chance to investigate. The President agreed. (Attachment marked No. 1) I asked the President whether we should continue to let the question of Collector of Internal Revenue of Georgia rest. He said, "Yes, do nothing for the time being". (See attachment marked No. 2) I told the President that Senator Moore had been in to see us; that we had agreed to move Baradel, Agent in Charge for New Jersey, to San Francisco and that Senator Moore was willing to leave it entirely to us to choose his successor on a merit basis. (See attachment No. 3) I spoke to him about his suggestion of Sally Jaymes of Springfield, Ohio, for Register of the Treasury. I told him that I had told Senator Bulkley that I had promised Jim Farley to do nothing until Farley returned; that Farley wanted me very much to take a certain doctor from the State of Montana and give him this job. The President said, "Remind Jim Farley to remind the doctor that before we can give anything to Mon- tana - what about Senator Wheeler." (See attachment No. 4) I told the President about my conversation with Senator Wheeler who was worried about silver. The President was very much interested. (See attachment No. 5 - H.M.Jr's conversation with Senator Wheeler). 65 - 2 - When I came in for lunch McIntyre came in and told the President that the ex-Governor of Florida, Sholtz was in to see him and wanted to know how the President feels about Sholtz opening a law office in Washington. The President said it was no concern of his and jokingly said, "Let him see the Secretary of the Treasury". Then several sentences passed between the President and McIntyre which tipped me off that McIntyre knew that Sholtz was having income tax troubles. I think McIntyre was trying to find out just how serious they were. McIntyre said, "I have a lunch date with Sholtz and I am just on the fence as to whether I should or should not lunch with him". The Presi- dent said two or three times, "The matter does not concern me. It is in the hands of the Secretary of theTreasury". Finally I said, "Why no it is not Mr. President, we have concluded our work and turned the case over to the Attorney General for prosecution. n I will be interested in seeing what happens to our case against ex-Governor Sholtz from now on. I briefly sketched my plan for financing to the President who was not particularly interested and simply nodded his head as I went along and outlined it to him. The President asked me what we were doing about "hot money". I told him about our conference with Hull Thursday afternoon and that Hull had taken the matter under advisement; that I had found that Hull was opposed to our doing anything along the lines that we were working on as he felt it might interfere with his trade treaties. The President said, "That my advice to you to see Hull was good." I said, "It was excellent". He said, "The person from the State Department who had gotten in touch with him on this matter was Judge Moore. STATE OF MINNESOTA se COUNTY 03 JACKSON F. J. Stenzel being duly BOUTH on oath deposes and says that is is B resident of the township of Weamer, village of Heron Lake, county of Jackson and state of Minn- esota, that he was a candidate for the post office at Heron Inke, Minnesote: that he is R member of the Jackson Democratic county committee: that in the winter of 1933 he called on Joseph Wolf, National Committeemnn for the State of Minnesota and talked with him with reference to the said post office. That he called on Joseph Wolf on two or three different occasions. That Mr. Wolf informed him on one of these occasions that he would have to go to Washington to have the post office at Heron Lake declared vacant 60 that he could have Mr. Stenzel appointed as acting post- master. That Wolf then told affiant that he would have to have some money to pay his expenses. That lie stated that $250.00 was necessary, That he then requested this affiant to make the money-orders he sent in payable direct to him 30 that he could use it how he saw fit. That this affiant went home and arranged for the $250.00 to be sent to Joseph Wolf as per his request: That prior to this meeting and the day following the Jeffersonian banquet at St. Paul, this affient in company with other members of the committee at Jackson, who were applicants for post offices in Heron Lake, Jackson and Lakefield, in Jackson county, viz., Mrs. Bernice Kenevan who was applicant for the post office at Lakefield; J. T. Malone who was applicant for the post office at Jackson, all called on Mr. Wolf with reference to these nost offices and that Mr. Wolf after listening to them stated that the finances of the Democratic partywere in very bad shape: that one of the committee said: "Well, we are willing to contribute towards the deficiency of the party. How much do you want?" That Mr. Wolf stated that they were paying in different amounts, some $250.00 end some more, and he stated: "If you folks will send in some money I will see that you get the post offices," That Mr. Wolf further stated: "I owe a personal note of $9000.00 for money which I had to borrow on my own personal note and have to get a hold of some money. When you send this money in, send it to me direct, so I won't have to account for it to the National body. I want this money BO I can use it where I want it." That in compliance with the request of Joseph Wolf $250.00 who sent in to the said Joseph Wolf: that this affiant had repeatedly called on Joseph Wolf with refer- ence to the Post Office, which the said Joseph Wolf promised would be declared vacant July 1, 1933 but that said nost office has not been declared vacant. That this affient has always been a good loyal Democrat: has supported the party and contributed generously towards its carroaign fund and that this affirnt makes this affidavit for the purpose of informing the National Democratic committee as to the manner in which Post of ices have been disposed of in the State of Minnesota: further affiant saith not. F.J.Stenzel Subscribed and sworn to before this 11th day of July, 1934. Julia Meurer NOTARY PUBLIC Julia Meurer Notary Public Blue Earth County, Minn. Ky commission expires Ang. 29, 1340 (SEAL) SATE OF MINNESOTA sa COUNT or JACKSON John Wilhelm being first duly sworn on oath deposes and says that he is a resident of Jackson, Mihnesota, and is treasurer of the Jackson county Democratic ittee; that on the 7th day of June, 1933 he accompanied Mr. F. J. Stenzel of Heiron Lake on a visit to Joseph Wolf, National Committeeman for Minnesota at the Lowry Hotel, St. Paul, and that while there he heard conversation between Joseph Bif and Mr. Stenzel and took part in the conversation himself. That at that time E. Stenzel was an applicant for the Post Office at Heron Lake and that Joseph Welf said: "I need money badly and would like to get it by the 1st of July." That Xr. F. J. Stenzel said: "How much?" That Joe Wolf replied: "Two hundred fifty dollars." That Mr. Stenzel then said: "Well, we can pay you that amount of money, but we must have some assurance for it, so that when I get home the fellows mon't leagh at me." Mr. Wolf then asked Mr. Stenzel what he wanted and Mr. Stenzel told his he wanted what he applied for, and Mr. Wolf made answer and said: "Well, I'll have you in the post office at Heron Lake by July 1, 1935 as acting Postmaster." " Mr. Wolf stated that he should go to Washington and had no money to go with. Mr. Stenzel said: "Well, I will see that you have the money here as soon as I get home. That Mr. Wolf then said: "Well, you do that and everything will be taken care of by the 1st of the month." John L. Wilhelm Subscribed and sworn to before no this 10th day of July, 1934. A.J. Malek Justice of the Peace WALTER F. GRONGE, can CHAIRMAN a KING, UTAH DANIEL o. HASTINGS, DEL Jake to White Hown SMITH, d. c. WARREN e. AUSTIN, VT. ALLY, TEX. L LA DICKINSON, IOWA MILKLEY, oneo HERAM W. KHINSON, CALIF. P. BORK, DELA. SERALD P. NYK, N. BAK. KY. United States Senate L SACHMAN, TEHN. bed Hundred Mr IL H. N. DUFFY, wis. COMMITTEE ON & MATCH, a MEX. MINTON, IND. PRIVILEGES AND ELECTIONS CHRISTIE a. KENNEDY, CLERK January -1, 1937. Honorable Hunry Morgentheu, Jr., Secretary of the Treasury, Department of the Tre: sury, Washington, D. C. My docr Mr. becretary: with reference to the Callector of Internal Revenue for Ceorgie, purolt 17. to The 72 - present of Höhorable E, Les antheson, Sortwall, G orgin. AT. Mothoson in the tile, cotton, the fertilizer buriness from 1906 to 1927. H. also owner and operated LA Ice plant friends to He WBS named Consissioner of Pevenue Pay 14 stote (di Georgia in November, 1929, and served under is first and second appointment until the stat bevenue Commission was created when hs became E member of the Ocarlasion. In this capacity he served the State with&grent di until be Was dismissed by Governor for refund to sign an illegal warrant in Jarch, 1936. 2-. anthedity is now manager of D manufacturing company at Partiell, Georgia. Mr. Mathsson 1 in Mindle TIFE, in welled health, 69% 1: one of the best uipped tentin for the position of Collector of Internal Franue. Sincé the press of the state mentioned his name Few TAYS LEO, I have received L creat number of - :ná letters In which his peculiar fitness for ::- positIve 13 uniformly recognized. I strongly incoment in. the 11 LA from my knowledge of 112- character, billty, courage, -nd his peculier qualifications for decline with the problems necessarily Incident to : office, I do nut 1 WALTER F. GEORGE, CAN CHAIRMAN of KING, VITAR DANIEL o. HASTINGS, DEL. SMITH, a. c. WARREN R. AUSTIN, VT. LLV. YEX. L 1. DICKINSON, IOWA + SULHLEY, OHIO HIRAM W. JOHNSON, CALIF. P. some. BKLA. GERALD P. HYE, N. DAK. United States Senate LIMAR KY. - BACHMAN TENAL - N. H. COMMITTEE ON DUPPY, wis. MATCH, N. MEX. PRIVILEGES AND ELECTIONS - MINTORY, IND. CHRISTIC B. KENNEDY, CLERK 2. hesitate to say that he is the best man that I can recommend in Georgia for the position. Sincerely yours, 70 THE WHITE HOUSE WASHINGTON #3 1/7 1 - Sen. Moore was in and wanted to know "whether the President got in touch with Sec. Morgenthau on the matter he (Sen. Moore) and Mayor Hague were in to see the President about. "The President was going to get in touch with Sec. M. in connection with the Hogan matter at Newark." 1 Vincent M. Hogan, originally appointed from Kensas, seventeen years in Internal Revenue Department. Mr. Baridell is now Agent in Charge; appointed under Coolidge Administration. Republican. Lives in Brooklyn. Was transferred from lower New York to Newark Office. Title of position is Agent in Charge of New Jersey District, Internal Revenue Department, Newark, N. J. Regraded Uclassified 72 TREASURY DEPARTMENT WASHINGTON OFFICE OF DMMISSIONER OF INTERNAL REVENUE ADDRESS REPLY TO COMMISSIONER OF INTERNAL REVENUE AND REFER TO January 12, 1937. MEMORANDUM FOR THE SECRETARY: Joseph R. Baradel is Internal Revenue Agent in Charge at Newark, New Jersey. He was born in llew York City, is 46 years of age, married, was appointed to the Bureau of Internal Revenue as an Auditor in January, 1919, and has served continuously in the Bureau since that date. Prior to his appointment, he was employed by the Public Service Commission of New York in the Bureau of Statistics and AC- counts for a period of 11 years. Since 1919 Mr. Baradel has been promoted through various positions having to do with accounting, succeeding to the position of Internal Revenue Agent in Charge at Brooklyn, New York, on November 16, 1928. He was transferred to Revenue Agent in Charge of the Second New York Division on September 1, 1932, and on April 1, 1935, was transferred to the same posi- tion at Newark, New Jersey, which position he now holds. During the two or three years immediately preceding his transfer to Newark, Mr. Baradel was the target for considerable complaint of an indefinite nature, particularly by anonymous letter writers. The position which he held was one of the most difficult in the Service from this point of view. He had super- vision of a group of officers who were inclined to be dissatis- fied and critical. Numerous inquiries were made concerning the allegations against Mr. Baradel, but nothing was ever learned to justify a conclusion that he was conducting himself in an improper way. Since his transfer to the Newark Division, I have heard no complaints against him. I have known Mr. Baradel officially for a number of years and have confidence in his integrity and ability to handle all classes of income tax cases, He is recognized as a good man on technical matters and it is my thought that his ability runs rather along this line than as an administrative officer. 73 -2- Memo. for the Secretary. Vincent M. Hogan is 44 years of age, was born in Iowa and listed Kenses as his legal residence at the time of his entrance in the Service. He was appointed in March, 1918, as a Narcotic officer at Wichita, Kensas, but left on June 1 of the seme year to enter the army. He reentered the service in September, 1919, as a Deputy Collector in Kansas, in which position he remained until May, 1923, when he became an Internal Revenue Agent 8.8- signed to work on sales and miscellaneous tax work. In 1926 he took an examination to qualify on income tax work and in November of that year was appointed an agent with assignment to that type of work at New Orleans, Louisiana. After a short period in New Orleans, Mr. Hogan served in the Dallas, Texas Division, and in November, 1928, was trans- ferred to the Newark, New Jersey Division, where he has since been employed. He was promoted through the various grades until June 1, 1936, when he received his present salary of 04600 per annum. He is at this time employed under the direction of Revenue Agent in Charge Baradel at Newark, New Jersey. Agent Hogan was assigned at various times to work in 00- operation with special agente of this Unit on tax fraud cases. I have communicated with Special Agent in Charge McQuillan at New York, and have received the attached report of Special Agent Baldwin, with whom Mr. Hogan Was principally employed in the investigation of certain cuses of notorious gangsters in New York City, among them being Wexey Gordon, Max Hassell and Max Greenberg. During the course of the investigation in the Waxey Gordon case, Rogan inadvertently mentioned to Special Agent Baldwin that he had recently seen llexey Gordon. As none of the investigating officers had ever admitted meeting or seeing Gordon, Hogan Was questioned concerning the matter. He then stated that upon request of one Gessler, an accountant for the Union City Brewing Company, he went with him to B. beer drop in Hoboken, where Gessler introduced him (Hogan) to one Blackie Cohen, Wexey Gordon's lieutenant, on which occasion Waxey Cordon was present. Then Agent Hogan was questioned e.B to why he had not gotten in touch with Special Agent Baldwin or the Internal Revenue Agent in Charge, he stated he did not know. Hogan was questioned on a number of occasions concerning this instance prior to the triel of the Waxey Gordon case, and 74 -3- Memo. for the Secretary. although he gave the District Attorney the same information he had given to Special Agent Baldwin, upon cross examination during the course of the trial in November, 1933, it was dis- closed that Hogan had visited Gordon on two occasions and had discussed his income tax affairs with him. On April 12, 1933, when Max Hassel and Max Greenberg, associates of Waxey Gordon, were slain in Gordon's office at Elizabeth, New Jersey, there was found on the body of Greenberg a piece of paper containing Revenue Agent Hogan's name and telephone number. It was signifi- cant that Hogan's number was not at that time in the telephone book. Special Agent Baldwin was also informed by attorneys Culhare and Dillon during the course of an investigation of the Yonkers Brewing case, that Revenue Agent Hogan had contacted his client and had accepted money from him. Agent Hogan denied this charge, and while there is no definite evidence to prove the charge, there are certain circumstances indicating that he had at least been guilty of indiscretion. There are other items of interest with respect to Mr. Hogan in the attached report of Mr. Baldwin. Aside from the above, I am informed by several of the most reliable agents of this Unit that it is their opinion Agent Hogan is not above the average agent in ability. 7st Enc. 75 TREASURY DEPARTMENT INTERNAL REVENUE SERVICE INTELLIGENCE UNIT New York New York, N. Y., Jan. 11, 1937. (Name of Division) EAB:lac MEMORANDUM FOR: INTERNAL Mr. Hugh McQuillan, Special Agent in Charge, New York, N. Y. In re: Vincent M. Hogan, Internal Revenue Agent Newark Division, Newark, New Jersey. Pursuant to your instructions with reference to the above- named Revenue Agent, the following information is submitted by me: In connection with the investigation of Irving Wexler, alias Waxey Gordon, (SI-9740-F), Revenue Agent Hogan and I visited the Second Bank & Trust Company, Hoboken, N. J., on or about January 23, 1931, for the purpose of making inquiry as to the bank account operated by one James Henderson. In- formation had been received by us that James Henderson was an alias used by Waxey Gordon and that this was one of Gordon's beer accounts. Revenue Agent Hogan and I went to the Second Bank & Trust Company on the above-mentioned date, upon your instructions, and examined this account; we left the bank and made no return to it thereafter. About four months later, Revenue Agent Hogan inadvertently mentioned to me that he had seen Waxey Gordon. As none of the investigating agents had ever admitted meeting or seeing Gordon, I immediately questioned Hogan as to when he had seen Gordon. His explanation was as follows: He stated that on the day following our visit to the Second Bank & Trust Company, Hoboken, he had been called on the phone by one Gessler, whom he identified as the accountant for the Union City Brewing Company. Gessler advised him, he said, that he knew of our visit to the Second Bank & Trust Company on the day before, and that he wanted to speak to Hogan with reference 76 to the Henderson account. The Revenue Agent further advised that he met Accountant Gessler at the Lackawanna entrance to the Hudson & Manhatten tubes at Hoboken, and went with him to a beer drop in Hoboken where Gessler introduced him to Blackie Cohen, Waxey Gordon's lieutenant. He said that Waxey Gordon was present on this occasion and that Blackie Cohen introduced him (Hogan) to Waxey Gordon. When Revenue Agent Hogan was asked by no why he had not gotten in touch with me before making this visit, or Internal Revenue Agent in Charge Jens P. Jenson, his explanation was that he didn't know why he had not done 80. He gave the same explanation when I asked him why he had withheld for such a length of time his meeting with Waxey Gordon and the circumstances attending same. Prior to the trial of Waxey Cordon, I communicated this in- formation to Special Agent Walter P. Murphy and I know that Agent Murphy, District Attorneys Dewey, Tarbell and Sharpe, questioned Hogan on a number of occasions about this incident and that he then appeared before the Grand Jury. Although he gave the District Attorneys and Special Agent Murphy only the same information he had given me, cross-examination of Agent Hogen during the course of the Gordon trial, in November, 1933, developed from him the further fact that he had visited Cordon on two occasions and had discussed his income tax affairs with him. On April 12, 1933, Max Hessell and Max Greenberg, bootlegger associates of Waxey Gordon, were slain in Waxey Gordon's office on the 8th floor of the Elizabeth Carteret Hotel, Elizabeth, N. J. There was found on the body of Mex Greenberg, in his vest pocket, B. piece of paper containing Revenue Agent Eogan's name and his telephone number. It is significant to note that Revenue Agent Hogan had moved and that his telephone number at this time was not carried in any telephone directory. During the investigation of the Waxey Gordon case, in the Spring of 1931, Revenue Agents James Connolly, Jonas Rutt, Hogan and I were also making an income tax investigation of the Yonkers Brewery, which establishment, it subsequently developed, was owned by Patrick F. Dillon, alias "Frenchy Dillon" and James Culbane. During this investigation, we agents had discussed Dillon and Culhane and it WELB understood among us that none of the four of he had ever seen Culhane or Dillon or even knew what they looked like. -2- -2- 77 After this Yonkers Brewery investigation had been pending some time, Moses Polakoff, the attorney representing Messrs. Culhane and Dillon, advised me confidentially that Revenue Agents Connolly and Hogan had met his clients on the outside and had taken money from them, advising his clients that they would see to it in writing their report that no fraud case would be developed against them. With Mr. Polakoff's information in mind, I kept Agent Hogan's movements under closer observation. Some time thereafter, I sent a letter to Mr. Dillon to appear at this office on B. certain afternoon. Cn the prior afternoon, Revenue Agent Hogan was working with Revenue Agent Rutt at the Steneck Trust Company in Hoboken, N. J. On the morning of the day in question, Revenue Agent Hogan advised me that he was going to the office of Down & Heffernan, 250 West 57th St., New York City, as the result of a telephone call that he had re- ceived from Mr. Down. Knowing that Messra. Down & Hefferman were attorneys who had represented Culhane and Dillon in a number of bootlegging cases, I insisted on accompanying Revenue Agent Hogan to Mr. Down's office, although he was reluctant to have me go with him. When Revenue Agent Hogan and I arrived in the lawyer's office, we found Mr. Down present with B. client who later proved to be Mr. Dillon. Mr. Down, upon learning of my identity, became greatly disturbed and wanted to know from me why Revenue Agent Hogan had Insisted upon seeing his client (Dillon) prior to Mr. Dillon's appearance before me that afternoon. Mr. Down stated that Mr. Hogan had contacted Mr. Dillon end told him that I was going to ask him a lot of questions about his income tax affairs and that he first wanted to see him in order to prime him as to the nature of my questions. When Revenue Agent Hogan denied this charge, Kr. Down stated that he had had a telephone conversation on the afternoon before with Revenue Agent Hogan, when he learned that Hogan wanted to see Mr. Dillon, and had arranged with Hogan that Mr. Dillon would be present in his [Down's) office on the morn- ing of the next day. In confirmation of his charge, Mr. Down ad- vised me that when Hogan called him up on this matter be told him that he was calling from a bank bhilding over in Hoboken, N. J. At the time, I verified with Revenue Agent Rutt that while be and Hogan were working in the Steneck Trust Company at Hoboken, N. J. Revenue Agent Hogan left him for the purpose, Bill be stated, to make 6 telephone call. During the discussion in Mr. Down's office, I eaked Mr. Dillon if he knew Mr. Hogan. He said that he did, but Mr. Hogan denied this. Mr. Dillon then stated that he bed first not Mr. Hogan when the Revenue Agent we.s making an investigation several Regraded Uclassified 78 years before of Frank Dunne, a New Jersey bootlegger, who had been slain in a gang war. Mr. Dillon advised me that he had re- ceived my letter and had intended to come to my office that same afternoon, but that Mr. Hogan had called him up and had insisted that he should first see him (Hogan) before he (Dillon) appeared in my office. He said that he had instructed Mr. Hogan to call Mr. Down and that the appointment had been made for him to meet Hogan in Mr. Down's office. After this discussion in Mr. Down's office was concluded by us, we returned to Room 1, Old Post Office Building, and I reported the incident to you in the presence of Revenue Agent Hogan. Several days later, Mr. Irey came to New York and at your request I again discussed this incident with him. Shortly thereafter, and as a result of this incident, Revenue Agent Hogan was returned to his Division at Newark, New Jersey. Edwin A. Baldwin, Special Agent. Nmf THE WHITE HOUSE WASHINGTON Jully Jaymers of Junisfield THID - Enlowed mn. for I Reg. of Through FUR Regraded Uclassified Tuesday February 23, 1937 #85 80 11:19 a.m. HMJr: Hello Treas. Operator: Yes HMJr: Yes T.O.: Shall I put him on? HMJr: Please T.O.: All right, go ahead. Burton Wheeler: Hello HMJr: Hello, Burt W: Hello, Henry HMJr: How are you? W: I didn't know whether you'd speak to me this morning or not. HMJr: Well, what - have you said something nice about me? W: (Laughs) No, no, not about you, Henry. I did about - I mean about this court victory. HMJr: Oh, I'm in the Treasury. W: I know that. Say, Henry - HMJr: Yes W: I have a letter from a man up my State saying that there is a report out there that's quite current to the effect that your - that the Administration is going to seek to repeal the Silver Purchase Act. I wrote him a letter in which I said to him that I didn't think there was anything to it. But I did think I'd better call you up because I don't want to make a liar out of myself. HMJr: Well, Burt, you don't think we'd make silver in the Supreme Court, do you? W: No (Laughs), no - 81 -2- HMJr: What!? W: No (Laughs) HMJr: What? W: No (Laughs) HMJr: Well, I don't know. I mean you start by the Supreme Court and then you swing over to silver. W: Oh, well, I was just joking about the Supreme Court. HMJr: Are you sure? W: Yes, I was just joking about the Supreme Court. HMJr: Well, - W: I was kidding about that. HMJr: Oh - W: But really, seriously, about the other thing, is - have you anything in mind or - ? HMJr: The only thing - that all this stuff is in the paper. W: Yes HMJr: When I appeared before poor old Buck - W: Yes HMJr: - in the House W: Yes HMJr: He asked me 8 lot of questions. W: Yes HMJr: And Buck was very - wasn't very much opposed to it and I answered him as frankly as I could - W: Yes HMJr: And since then my mind - I told some people the other day, we've got too much to do down here and my mind is not on silver. -3- 82 W: Yes HMJr: And, perfectly frankly, I haven't discussed it with the President in six months. W: Yes - well - HMJr: And - you answered your constituent truthfully. W: Yes, all right. Well, that's all I wanted - HMJr: How's that? W: That's all right. HMJr: I mean, I don't know when it will come up. But I can say that up to twenty minutes past eleven on Tuesday, February twenty-third I have done nothing on silver and haven't been thinking about it. W: Yes, well of course, Key Pittman and I will fight hell out of you if you try to. HMJr: What? W: I say, Key Pittman and I will have to scrap hell out of you if you seek to do anything of the kind. HMJr: Well, I'll have to go around and see Senator King and have him rescue me. W: (Laughs) All right. HMJr: What? W: All right. Yes HMJr: Politics make strange bed fellows, you know. W: That's right, Henry. HMJr: All right, Burt - Now, I - that's the answer and I - if I was ever going to do anything - W: Yes HMJr: I'd be man enough - W: Yes 83 -4- HMJr: - to let Key Pittman know and ask him to call a meeting and I'd tell him just what I was going to do. W: Yes HMJr: See? W: Absolutely HMJr: How's that? W: All right, that's fine, Henry. HMJr: 0. K., thank you. 84 February 23, 1937 My dear Mr. Ryan: I beg to acknowledge receipt of your letter of today. I an taking all of the documents which you have given me and am asking that a complete investigation be made. Thanking you for bringing this matter to my attention, I remain Sincerely yours, Henry Morgenthall; IF: Honorable Elmer J. Ryan, House of Representatives. you w offe matter. Uclassified 85 OFFICE OF TREASURY DEPARTMENT WASHINGTON THE SECRETARY February 23, 1937. MEMORANDUM FOR THE SECRETARY: I received the following telegram from Hanke at Seattle this morning: "As an result of combined evidence of Narcotic and Customs officers working together Portland, LEW KIM YUEN, BURTON LEE, YOUNG KOW SHEK, and HIN KAN indicted Federal Grand Jury nine counts for conspiracy violate narcotic laws. Bond for each twenty-five thousand. BURTON LEE under arrest. LEW KIM YUEN who was under five thousand bond for Grand Jury action can not be found at present but expect locate soon. Consider this case very in- portant as LEW KIM YUEN largest smuggler Pacific Coast." These are the first important indictments obtained as the result of our special investigations on the West Coast. I am confident that others will follow. GRAVES. emfidential 86 Senator Nye February 23,1937 Nye telephoned Secretary asking for appointment to discuss patronage matter. February 24, 1937 Nye came in to see Secretary and asked position for Earle A. Bates, one of his constituents. February 25, 1937 Senator Nye's letter to Secretary, submitting background of Earle A. Bates. p.224 March 3, 1937 HM,Jr's telephone conversation with Vice President Garner asking his advice about Senator Nye's request. Garner said Nye wasn't worth anything, but $1200 "is little enough to get rid" of any Senator for 30 days. March 4, 1937 HM, Jr telephoned Senator Nye and told him he would give Bates a 30-day appointment. Merch 4, 1937 Memo from McReynolds' office that Bates went to work in the Disbursing Office this morning. July 1, 1937 Senator Nye telephoned HM, Jr and asked promotion for Earle Bates. HM, Jr admitted slipping up on retention of Bates as his appointment was only for 30 days. HM, Jr promised to look into matter of promotion. Tuesday 87 February 23, 1937 5:28 p.m. HMJr: - Gaston to come in. Treas. Operator: All right. T.O.: Go ahead. HMJr: Hello Senator G.P. Nye: Hello HMJr: Yes N: Mr. Secretary HMJr: Morgenthau, right - N: Yes, this is Nye HMJr: Hello - N: What's your - what's your convenience in the morning, are you going to be at your office? HMJr: Sure - N: What time? HMJr: Now let me see, I'm all mixed up on my I've got - well, I've got people coming in - from the Hill - different people. I'm free at ten-thirty. N: Good! HMJr: Could you give me an inkling of what's on your mind? N: Well, I want to talk to you a little bit about that matter of foreign ownership of securities.here. HMJr: Oh yes N: And then I'm going to do something with you that I've never done before; I'm going to bother you about a single patronage matter. HMJr: I see. N: It's one that I've taken up with others in the depart- ment. -2- 88 HMJr: Oh yes. Well,is ten-thirty all right? N: That's fine. HMJr: I'll be delighted to - - N: Thank you a whole lot. HMJr: Thank you. Regraded Uclassified 89 FINANCING GROUP February 23, 1937 4:00 P.M. Present: Mr. Taylor Mr. Lochhead Mr. Bell Mr. Murphy Mr. Seltzer Mr. Upham Mr. Haas Mr. Harris H.M.Jr: Well, the only new memorandum I've got is the one that George gave me about fifteen minutes ago. I don't know how many copies you've got, George. Haas: I think Wayne has a copy, and Cy, and Dan has one. Murphy: I have a rather poor carbon that I can donate to anyone. Haas: I have one in my pocket. H.M.Jr: Well, talking in my usual frank manner, the way I feel is this: that at this particular stage - and if anybody disagrees with me, even those who didn't have anything to do with writing the memorandum, see - I don't feel that March 15 is the time to try out a seven-seventeen year or something new. The longer I am here the more conservative I get. I don't say that the time isn't coming when we may. But the way I feel - then you fellows can all shoot at me, see, all of you - is this: No question that this is one of the - this has been one of the most difficult decisions to make from the tandpoint of what is the statesmanlike thing to do. And we have squeaked along without any money up to now. I feel we ought to go ahead with the three hundred million dollars worth of bills into June 15 and 16 and 17, and let them pay them from the War Loan account. I don't think I'll argue that. There's going to be some of them for War Loan account. And I think if you're going to do it from the War Loan account, do them all. George was arguing doing them half the regular way and the other half the War Loan account. Haas: Just those around the fifteenth. 90 - 2 - Bell: I think you ought to let your money market, your income taxes, take that up. H.M.Jr: Well, when we started out with this group of three hundred million Bell: What I'd like to do is make the third and the tenth payable in cash and then the seventeenth and twenty-fourth payable in War Loans. Haas: That's about the same. H.M.Jr: That's what he (Haas) said. Bell: That is when some of your income taxes come in, and they - they may not come in in that period, and then you can decide later what to do. H.M.Jr: You mean the first one you do on March third would be Bell: Cash. Otherwise you call on the War Loan account for money the first ten days or you'd be putting into the War Loan account the issues of Treasury bills and drawing out the old balances. H.M.Jr: I see. Well, I don't know how Burgess will feel on that. We can ask him tomorrow whether he wants us to do the first one, then decide each one. Then, when it comes to what we do with the April, again my inclination is to offer them the last two and a half that we offered, but making them pay a premium for it, see? How much I don't know. We don't have - I mean I've never done it that way before. I'd like to try it. But that was certainly well-distributed. That would take care of us on along until the end of May, wouldn't it? Bell: Yes, sir. H.M.Jr: And then on the 15th of June we can take 8 nice good wad of new money. The Federal Reserve's regulation will be into effect and that will be behind us. June's always been a good time to finance. And we want to get enough money to last us through to 91 - 3 - December. I don't like to - - I'm not very anxious to take new money in September. And then by that time the bulk of the legislation will be behind us and we'll know much better what they're going to do about Social Security, whether they're going to do anything or whether it's going to stay the way it is. And I don't know - I don't see what's the matter with it. It will fit in all right. I don't want to sell them a note because the note market is sloppy. I could sell a note if I wanted to in June. And that's about the way I feel. Now, it's a field day. Anybody can jump on me. I mean nothing has jelled yet, and won't be until noon tomorrow. But by noon tomorrow I'm going to make up my mind. Haas: You have to make up your mind not necessarily on the issues. H.M.Jr: Only on the bills. Haas: Well, I think H.M.Jr: Only on the bills tomorrow. Haas: Well, I think our shop would line up the way you want to handle it. H.M.Jr: The only decision I've got to make tomorrow is on the bills. I think I ought to make up my mind on three things tomorrow. First, that we are going to sell bills. Two, are we or are we not going to call the April and pay it off on the 15th of March? And then I think we also ought to decide whether we are or are not going to take any extra cash. I think all three of those decisions should be made tomorrow. Then, as to what - the only thing we don't have to decide tomorrow is what kind of a security are we going to offer these fellows in exchange for the April note. I think we'd help the market a lot if on Thursday morning I could say these three things: One, we are going to sell 300 million 92 - 4 - dollars worth of bills. Two, we are going to call the April note. Three, we are not going to ask for any more cash. Then they've got that - then the market has a week to settle down and adjust itself to that. Then the following week we decide what we're going to offer in exchange. But I do think that by noon tomorrow - I think the market - I'd like to give the market that extra week, because that brings it around to the following week and we'd have to make up our mind what we're going to offer. What? Bell: Yes, sir. Taylor: That is, if you are calling April bills - I mean if you are calling April notes. H.M.Jr: Yes. I mean there are three things we ought to make up our minds on by noon tomorrow: Bills. Will we or won't we call the April notes? Will we or won't we ask for any additional cash? Taylor: Well, there's no disagreement about the bills, is there? H.M.Jr: Anybody disagree on the bills? Harris, you're in here. Talk up, don't be bashful. Harris: All right. Lochhead: I was going to say I think the bills are tied in with that other program. I'd hate to see an announce- ment of three hundred millions of bills go out unless you did say what you were going to do. I mean I understand this is tied together. Taylor: Yes, but regardless of what the enswer to the others may be, I think the three hundred million bills maturing in June is tied into all of them, isn't it? Lochhead: Yes, we agree that the bills - I think we agree on the bills. H.M.Jr: I think those three things are pretty well tied up together. Those three: Bills. Yes or no on the 93 - 5 - April note. Yes or no on additional cash. I think that's almost a joint decision. As I say, you've got from now until noon tomorrow. But I thought I'd get my own gang together tonight and tell you how I was feeling and let you punch holes in me. Seltzer: The bond market's been doing well and it can improve & whole lot without your being able to do any better in a bond issue in June. It might be worse. Harris: I might say that since the meeting last Wednesday long b onds have made gains, whereas short bonds have been very steady; but the Federal Reserve Bank have been selling out some of their April notes, and in replacement capacity - it runs somewhere between ten and fifteen millions - they have taken up short bonds out of the market, which has helped. Those bonds are not floating in the market. Some short bonds have been pretty steady in the last week. H.M.Jr: They've been selling the April notes and taking Harris: Taking short bonds. For 8 while they were selling out some two and a halves and buying longer bonds, but now they are selling these April notes and buying these shorter bonds. H.M.Jr: Have you (Upham) got anything to contribute? Upham: No. It seems to me you've covered it pretty well. I was very much intrigued by this idea of a seven- seventeen year bond. But of course, being a con- servative, I wouldn't be in favor of it too much. H.M.Jr: Wayne? Taylor: This morning I didn't know about George's memoran- dum, and I was going over Dan's memorandum of April 8 - - I mean of February 8. I came to almost an identical conclusion. H.M.Jr: With Taylor: With George. Only I wouldn't talk about E. seven. 94 - 6 - - I wouldn't talk about anything longer than a five, and I would talk in terms of all future refunding, in a long term bond with an early call date, every time you had a chance to do 1t. I think the market will take it and it is a problem that you have to face, because according to Dan's figures and accord- ing to the other figures here, why, you've got a definite shortage, all other things being equal, of around six or seven billion dollars. H.M.Jr: Where? : Taylor: In what you might be able to take out of the market. H.M.Jr: I mean over what period? Taylor: Over the period indicated in Dan's memorandum. Bell: That's about thirteen years. H.M.Jr: What? Bell: Over a period of about thirteen years. H.M.Jr: I mean from when to when? Bell: '37 to about '50, isn't it? H.M.Jr: Well, this bond I'm talking about is.... Haas: '49-'54. H.M.Jr: '49-'54, That's - one year comes in that period. Taylor: But you've got these technical shortages which appear first in 1942, then in '43. H.M.Jr: Well, I think from a straight technical argument they are on safe ground; they are on safe ground. But I think that too many - I mean if I just had myself to consider - I mean the Treasury - I'd go full steam ahead. But why take any unnecessary chances with the whole country watching this thing? And if it goes wrong why should we be the goat? Taylor: I don't think it can go wrong. - 7 - 95 H.M.Jr: Well, certainly another five hundred million thrown into '49-'54 - that's 8 good period, isn't it? Seltzer: Uh-huh. H.M.Jr: What? Seltzer: Well, the '54 is your limit. Harris: '53. H.M.Jr: Was it '49-'53? Harris: (Nods yes) H.M.Jr: Throwing another five hundred million into '49-153 is throwing it into the right time, isn't it? Seltzer: Yes. H.M.Jr: And that's all I'm proposing to do. What you want me to do is throw in some more stuff from 142 to '50. But '49-'53 is a good period to have it. Seltzer: One of these days, though, you'll have to come around to something like this: That is, you can't go on having your maturities, your first call date, that far removed. Haas: You can do it this time. Seltzer: You can do it this time, and the question was one whether this isn't a good time to try this other one, when you are raising three hundred million new money. H.M.Jr: Supposing we don't raise any new money and we are taking about an eight hundred million dollar or billion dollar issue in June. Then I'll try some of your trick stuff, see? In June. With a nice clean issue, billion dollars, in June. Taylor: The way to try it is on the little one. H.M.Jr: What? Taylor: The way to try it is on the little one. 96 - 8 - H.M.Jr: No, there's too much confusion. There's too much confusion, cross currents. Things have changed. I've never seen the bonds and the notes and the things shift - really shift so much as they have lately. Harris: It's E very nervous market, although the prices don't indicate it so much. Purchase of one million can have a great effect on the market. The dealers' portfolios are very low. They don't know what to do, and they don't know whether to take them or sell short or buy or what. Seltzer: Of course, the chief reason their portfolios are low is it is just before a financing. Harris: No, it's been that way for some time. H.M.Jr: You fellows - unfortunately I've got to let my sixth sense influence me, and when I'm nervous I don't want to do anything. I mean unfortunately I've been right - I mean it isn't unfortunately. I've developed over three years & sense on this thing, see, because I've had to carry it more or less alone, and the records will show, going back over the three years, time and again I've stood by myself. Now, I just don't feel comfortable at this time, I mean. What? Haas: It's one of those decisions - whether you do it or don't do it, it's a very close thing. H.V.Jr: Now, George, one thing that you've got - and if you don't mind, you boys have entirely left it out - and that is again we are in that period where commercial issues are going very slow and the shelves of the financial houses handling private issues are loaded. In other words, the private issues are sticking. Now, you've left that out entirely, and you can't overlook that, George. And the last issues - how long now on the private issues? Haas: Oh, since that reserve thing they started to go down. H.M.Jr: They're sticking, and whenever that's happened I 97 - 9 - consider that a very important danger signal. Haas: Well, what I was about to say, Mr. Secretary, is that there is Wayne's argument and so forth for doing it: you've got 8 small issue. On the other hand, you have this that you have mentioned, this uncertainty in the market. You have a narrow and nervous market. But nothing will happen much one way or another, which way you decide this thing, I think. And if something should happen in the market, there would be 8 tendency to say, "If the Treasury Department had financed regular, that might not have happened." I mean you might have that. So the real safe play would be to follow your own hunch and be regular at this time, prob- ably. H.M.Jr: I'll put it another way. If I follow the plan that I suggested at the opening, nobody can say, can they, that that isn't a sensible way of financing? Hass: No. H.M.Jr: I mean can anybody criticize it? If I'd add another five hundred million to the two and a halves '49-'53 and sell three hundred million dollars worth of bills, can anybody say that that isn't a sensible and sane way of doing it? Murphy: I for one remain intransigent. I think you'd be open to grave criticism, perhaps not on the basis of the financial news of next month, but when the retrospect of your administration was being cast ten years from now. If the contingencies which were recounted in our memorandum should develop, and I have no way of knowing whether they will or will not develop, you will be expected to have foreseen - everybody is always expected to have foreseen what happened. And I can easily imagine, if I may be permitted to say so, that the financing recounted in retrospect for the next forty years will reflect such policy in American finance as shortsighted. H.M.Jr: Well, I'm willing to take that chance. S8 - 10 - Murphy: I hope you'll pardon my saying H.M.Jr: I asked you. I'm willing to take that as against putting out my neck unnecessarily at this time to do what I call a trick financing - a trick piece of financing. Taylor: It is the most orthodox type of financing in the world - is that type of financing. H.M.Jr: Well, I'll make anybody in this room a bet, and I'll give them odds of three to one, that there won't be a single man in a Government bond house - if you put this up to him, that he'll say go ahead and do it now. Taylor: Wouldn't that be true any time you asked him? H.M.Jr: I don't know. Now, I don't know. Murphy: "ell, don't you think, Mr. Secretary. Taylor: I mean long term, non-callable issues just lock you in. H.M.Jr: Well look, let me ask you, if you were in a private banking business at this time and you had a client that needed five or ten million dollars, wouldn't you be apt to say, "Well now, listen, Bill, let's wait until after the first of May. Can't you wait for your money?" Taylor: Well, I'd tell him that, but I'd never tie him up with a long term non-callable issue. H.M.Jr: Perfectly true, and if we didn't have anything maturing before '49 then I'd say that is so, but how much is coming due between now and 149? Murphy: Not nearly as much as the requirements. Taylor: Not as much as you need. Heas: Of course, he can still meet the requirements that were set up if he starts to do it in June. In June is time enough. S9 - 11 - Murphy: I think there will be B. set of circumstances in June which will render it inexpedient, and there will be a set in September, and there will be a set next December. I cen't help but feel that it is an issue which it is just as good to face now, when we have a small financing. Suppose the market starts to recede; we'll want to keep our coupon rate fixed and we'll want to postpone it for another three months. H.M.Jr: Well, that's all right. Always that extra year. If we hadn't changed the other time, it might not have gone through. I mean you've got a theoretical thing that you want to meet; then we've got a prac- tical one. And in this memorandum, you completely overlooked the fact that the private issues this time are sticking. You don't mention that. Murphy: What we have called attention to is that the market doesn't consider that a seven-seventeen year issue is disadvantageous. Seltzer: Your two and a halves are selling a hundred one and a half just the same. H.M.Jr: Well, I still say You may be right, I may be right. I don't want to take the risk. And I may not take it in June; I don't make any commitments. But right now I wouldn't want to come out with that kind of an issue, and I'm perfectly willing to put it up to Burgess tomorrow morning cold, and see how he'd react. Haas: He really should have the background of that memorandum. H.M.Jr: But you've got - my heavens, here you've got in the next seven years - you've got in the next seven years - you've got Seltzer: About 17 billion. H.M.Jr: How many billion have you - now much have you got here? 100 - 12 - Seltzer: We have callable or maturing 17.3 billion. H.M.Jr: How much? Seltzer: 17.3 billion. H.M.Jr: about? In the next seven years. Well, what are you worrying Seltzer: Folks have got a lot of money coming in in the next seven years. You've got 14.8 there. This 17.3 includes all your bills. H.M.Jr: Well, I asked you to come in and advise me, but I've got to weigh it. We're having another meeting tomorrow. You, Taylor, favor this seven-seventeen? Taylor: No, I figure fives. H.M.Jr: Five what? Taylor: Five - whatever maturity you want on the other end. Bell: Five-ten, five-fifteen, or five-twenty. H.M.Jr: Well, Dan, how do you feel about it? Taylor: Seven years is tricky; I think the fives are not so tricky. Murphy: We would prefer the five. We put in the seven as a concession to form. H.M.Jr: Dan? Bell: Well, I do think the market is a little nervous, and every time we start something new, why, the cry goes up that the bond dealers will disrupt their hands. Whether they would or not, I think, is a question. But you don't have to really decide this particular question until the first week in March. H.M.Jr: True. Bell: You can decide now that you will finance in March. Certainly on the refunding - what you do with it, whether you put it into a five-fifteen or five year note, you don't have to decide now. You can see 101 - 13 - what the market is the first week of March. It may change. H.M.Jr: What I'd like to do is to decide now, between now and tomorrow noon, three things. Let me get you on the record. One, bills. Yes or no? Three hundred million bills. Bell: I agree with that. H.M.Jr: All right, shall we call the April note March 15? Bell: Well, I'll go along with you on that. I don't think it makes much difference, but you want quarterly financing. H.M.Jr: Yes. Bell: O.K., let's go along with that. H.M.Jr: Any new money? Bell: No. H.M.Jr: What? Bell: No. H.M.Jr: That's the three things. That's all I want to know. That doesn't involve the type of financing. Now, Archie, do you mind being put on the record? Lochhead: No, I check entirely with those answers. H.M.Jr: You check. Wayne, do you want to get on the spot? Taylor: 1 check with those. H.M.Jr: What? Taylor: I check with those. H.M.Jr: George? Haas: It's all right with me, in view of the discussion. 102 - 14 - H.M.Jr: Cy? Upham: Yes indeed. I have 8 very slight preference, for no reason at all, for waiting until April, but I wouldn't - I couldn't even substantiate it very comfortably. H.M.Jr: Harris? Harris: (Nods yes) H.M.Jr: Seltzer? Seltzer: It's perfectly possible if you say SO, I personally would prefer raising new money in March. You've got a nice market for it despite the nervousness. H.M.Jr: Murphy? Murphy: I'd prefer to raise the new money now. H.M.Jr: All right. Well, at least now I know how to go into the meeting tomorrow. We'll put it up to them and see what they think, and we won't say what we think; let them talk first. What? Bell: All right. H.M.J.: Let them talk first and we'll listen. Huh? Bell: Yes. H.M.Jr: All right, gents. Seltzer: You know, one thing we don't always keep in mind is that most corporation issues are callable any time; they are callable at a premium. Thirty years issues callable on any interest payments - 105, 106. This isn't tricky or out of line. It is the standard practice. Murphy: The Los Angeles Gas and Electric Corporation is calling as of April first an issue which it put out last year. In the 40 millions. Seltzer: You can scarcely buy a bond that isn't callable right off the bat. Regraded Uclassified 103 - 15 - H.M.Jr: Well, that may have been done last year. Murphy: The structural situation has changed, Just as it may change in our case. In their case it changed once, when the city bought their properties; they then had no further use for the money. H.M.Jr: Well, the only danger I could see for the Treasury is if we sold two or three billion dollars of fixed maturity. That, I think, would be a dangerous thing; I mean coming due on a fixed date, with no call provisions. As long as we've got so much of this thing Haas: But I think it is important, this point that if you don't do it now - I mean on that long call period - it seems to me imperative that you do do it very soon. H.M.Jr: All right. That's all right. Taylor: Just a question of when. I don't think that the problem alters at all. I don't think it is unor- thodox. H.M.Jr: Well, I don't say - I didn't say that, Wayne. But if I - if we got by this thing, then I'd start about the first of May beginning to talk this thing in the Street, see, and give them about six weeks to get used to the idea, see? Taylor: Well, the only place where we disagree is I think they'd get used to it in fifteen seconds, because they're used to it completely in all other issues. H.M.Jr: Yes, but not the Governments. And I don't want to do anything new and I'm nervous myself; too many uncertainties around. Until we get by the first of May I don't think anybody can rush a ticket. And what's happened the last two or three weeks proves it. I mean the best things we had for years, for a couple years, have been our five year notes. You could always count on those. And that's the softest thing you've got now. You could always figure you could always sell the five year note. And right now - is that right, Harris - it's the softest? 104 - 16 - Harris: Yes, the long notes and some of the high coupon Treasury bonds are particularly weak - long callable period bonds. H.M.Jr: The long callables are? Harris: Yes. H.M.Jr: Well, I'll listen tomorrow and see what they got and then between eleven and twelve we'll try to make up our minds. Regraded Uclassified Prepared by: Lawrence H. Seltser Assistant Director of Research and Statistics; Assisted by: Henry c. Murphy, and Sidney G. Tickton. 105 DATE February 23, 1937 TO Secretary Morrenthau FROM Mr. Heas MR Subject: Financing Considerations I. The Secretary's Dilemma There has rarely, if ever, been a time in the history of the Treasury when the choice of proper maturities for new and refunding issues of securities presented so difficult a problem as it does at this moment. Despite the recent decline, market conditions are exceedingly favorable for any length of maturity that might reasonably be contem- plated. We can sell a 5-year note carrying a 1-3/8 percent coupon, or, at worst, a 18 percent coupon; & 17-year bond with a 21/2 percent coupon; or a 25-year bond with a 21 percent coupon. A Secretary of the Treasury, blest with such highly favorable conditions for short-, medium-, and long-term financing, would ordinar- ily count himself lucky indeed. He would count himself particularly lucky, if, as in your case, these well-nigh perfect market conditions existed at a time when he faced the necessity of formulating a program for the refinancing (and partial retirement), during the next 5 years, of some $13.4 billions of maturities. Yet the Secretary really faces a dilemma. All the dictates of orthodox finance urge that he take advantage of the present exceptional opportunity to refund the bulk of the existing short-term indebtedness as soon as possible into bonds of medium or long maturities. At the same time, even B, casual examination of the probable reductions in the publicly held Federal debt to be accomplished during the next 7 years through the funds made available by the Sinking Fund, the 01d-Age Reserve Account, the Unemployment Trust Fund, and other Government trust funds, clearly indicates that he cannot follow this path - that he must maintain a very large volume of short-term or callable obliga- tions. The Secretary's dilemma is no less real merely because the esti- mates based upon existing statutes appear to give him ample warrant for disregarding the normal dictates of prudent finance and for adopt- ing, therefore, a program confined almost exclusively to short-term Secretary Morgenthan - 2/23/37 - 2 106 securities. These estimates may be conservatively made and yet be subject to drastic alteration by new developments. Consider, for example, the enormous error that would have been involved in an esti- mate made in 1928 of the future course of the public debt. Who could have foressen the length and severity of the recent depression? The Secretary is particularly bound at the present time to pro- tect the Treasury against the potential dangers of an undne concen- tration of near-term maturities because, in addition to the fact that the future is always uncertain, several specific contingencies cannot be ignored. These include: (a) The possibility that the Social Security Act will be declared unconstitutional; (b) that it will be placed on a pay-as-you-go basis, or the reserve accumulations reduced by an increase in the benefits, a reduction in the tax rates, or boths and (c) that the country may experience another major depression or a war within the next five to ten years. Should WG face either a war or a major depression in the next five to ten years, for example, the unfortunate consequences of a refinancing of the present debt in short- term securities need no elaboration. It is clear, then, that the Secretary cannot prudently arrange his debt schedule solely on the basis of the anticipated receipts from trust funds and the like; and that he cannot, on the other hand, dis- regard the obligation to arrange his maturities so that they will conform to the probable requirements of existing law. II. Meeting the Dilenma There is only one method of financing that can provide a complete answer to this dilemma. This method is to refinance a large part of the existing near-term indebtedness by medium- or long-term bond issues callable after 5 to 7 years. Such issues alone would both fully meet the now-scheduled requirements of our trust and sinking funds and, at the same time, meet the dictates of prudent finance. Such issues are ao clearly essential to B. sound program of finan- cing at this time as to justify, if necessary, the payment of EL higher rate of interest thereon than would be needed for issues with shorter maturities or with more deferred and less extended call periods. To be concrete, the interests of the Treasury would be better served in the refinancing of the next few years by 2ᵗʰ percent 25-year bonds that are callable after five years, or by 2½ percent or slightly higher 7-17 year issues, than by 21 percent 13-17 year issues, or by 11 per- cent 5-year notes. Secretary Morgenthau - - 2/23/37 - 3 107 But, in the present market, it would not be necessary to add any- thing to the coupon rate in order to sell issues of the character now needed: and this fact only adds further force, if such were needed, to the advantages of the type of issues just described. We have had little experience with low-coupon issues having early and extended call periods. It is to be noted, however, that the cou- pon rate of our 23's of 1949-53 is so low that it provides no reason- able assurance to the investor that this issue will be called for refunding at the end of 13 years; and, hence, this issue should be regarded as a 17-year bond. Nhen it was suggested last December that the first call date of this issue be made at the end of ten years in- stead of at the end of 13 years, the only objection raised was that it would make the issue too rich. We have had no reason to change our opinion that this objection had no real merit whatever. We are inclined to believe, moreover, that the market in the future will place more weight upon the final maturity date, as contrasted with the first call date, than it has in recent years. We believe, therefore, that a 21 percent 7-17 year issue should be given very serious consideration as one of the major vehicles for our future financing: and, if our longest-term bonds continue to 1m- prove in the market relative to our short- and medium-term securities, that very serious consideration be given later to a 25-year maturity with a call period beginning 5 to 7 years after the date of the issue. III. Answering the Objections There are three objections that will probably be raised to a proposal for a 7-17 year 21, percent issue. These are, first, that it would constitute 8. step backward in maturity from our 13-17 year offer- ing of last December: second, that the 7-year call date will nake the issue too rich; and, third, that the extended call period will make the issue too difficult to price. None of these objections, in our opinion, has any substantial morit. The first two objections have no logical basis and, from the standpoint of the Treasury, no merit whatever. Te would be getting 17-year money at 21 percent, just as no did last December, and the investor would be getting a 17-year bond, just as he did last December. The only difference is that the Treasury would be getting the additional option to call the bond 6 years earlier. This is worth nothing to the investor and is worth much to the Treasury. The outstanding 23's are selling at 101-17/32. The proposed issue should logically sell on a somewhat higher yield basis, but may, if the bankers are correct, com- mend a slightly lower yield basis. In either event, the Treasury would be getting what it needed at minimum cost. Secretary Morgenthau - 2/23/37 - 4 108 The fear that an early call date will make an issue sell too high really arisee out of the fact that most of our outstanding issues with early call dates have been high-coupon issues. In these cases, the market has acted rationally in assuming that the Treasury would call such Issues for redemption at the call date or soon thereafter rather than defer redemption to final maturity. In the case of low-coupon issues, there is no logical basis upon which the market can make a higher evaluation of Treasury bonds with early call dates than of other Treasury bonds of similar final maturity but remoter call dates. If, by reason of habit, the market nevertheless continues for a time to place a special premium upon early call dates, the Treasury should take full adventage of it. The third objection - that the extended call period might make the issue difficult to price - does not withstand analysis. If the issue be regarded in the market as likely to have en effective matur- ity of somewhere between 13 and 17 years (which is the only safe assumption for the investor), it should sell on substantially the same basis ae the outstanding 28'80 If the market should regard its prob- able effective maturity as somewhat less than 13 to 17 years, it might sell on a somewhat lower yield basis. But the short period to the carliest call date narrows the range of probable prices very sharply, and thereby makes pricing much more certain than it can be in the case of issues with remoter call dates. This is true because the market must allow for absorbing the entire premium during the non-callable period. The narrow range of prices for the proposed issue on various yield bases is shown below: If the issue sold on a 2.25% yield basis, its price would be 101-20/32 " If If If If 2.30% # il If II # 101-9/32 " # If If Il If 2.35% # # If If # a 100-31/32 # " is # II # 2.40% # If il # # If 100-21/32 II B # # # # 2.45% H # " # It # 100-10/32 The outstanding 23's are selling on & 2.36 percent yield basis. If, nevertheless, it were feared that the proposed 7-17 year 24's would sell on a 2.25 percent yield basis, and that the premium of 1-20/32 points would be too great, it would only be necessary to move the earli- eat call date forward by another year or two. If the issue were for 6-17 years, the price would be 101-13/32 on a 2.25 percent yield basis, 101-4/32 on a 2.30 percent yield basis, and 100-27/32 on & 2.35 percent yield basis. A 5-17 year issue would sell at 101-6/32 on B. 2.25 percent yield basis, at 100-30/32 on a 2.30 percent yield basis, and at 100-23/32 on B. 2.35 percent yield basis. In citing probable prices based upon a yield basis of 2.25 per- cent or thereabouts, we by no means intend to imply that the proposed Issue could be safely regarded by either the Treasury or investors 88 entitled to sell on such a yield basis in the present market. A bond 109 Secretary Morgenthau - 2/23/37 - 5 carrying such a low coupon can be conservatively evaluated by the investor only on the basis of its final meturity. On this basis, the premium in the present market would be about one point. The 3% percent FFMC bonds of 1944-64 are now 7-27 year bonds. They are selling on a 2.37 percent basis. In this case, the relatively high, but not abso-> lutely high, coupon offers a fair chance that the issue will be called for redemption well in advance of 27 years. An excellent illustration of the fact that the market, even with its present predilections, does not ignore final maturity dates. 1s given by the comparative yields of two HOLC issues. The 1 ² percent HOLC bonds of 1939 are selling to yield 1.13 percent. The 24 percent HOLC bonds that are callable only two months after that issue, but do not finally mature until 1949, are selling to yield 1.58 percent. In this case, moreover. the market's interpretation of the probable effective maturity 1a undoubtedly in- fluenced by the general opinion that HOLC collections will be suffi- cient to permit B redemption of the issue well in advance of final naturity. The Federal Land Bank 41g of 1944-46 are selling on a 2.36 percent basis. The Federal Land Bank 34's of 1945-55 are callable only ten months later then the 415, but, as noted, their final maturity date is nine years later, and they are selling to yield 2.72 percent. It appears reasonably certain, therefore, that a 7-17 year 2) per- cent bond will not be priced by the market on a yield basis appropriate for a 7-year maturity. IV. Estimated Reductions in Privately Held Public Debt to be made Possible During the next Seven Years In an attempt to provide a useful measure of the amounts of funds to be made available during the next 7 years for reductions in the pri- vately held public debt, we have added to the current estimates for the Sinking Fund and Old-Age Reserve Account very conservative estimates of additional funds to be provided by the Unemployment Trust Fund, the Civil Service and similar retirement funds, and the sale of United States Savings Bonds. From these sources alone, if the estimates are realized, et total of $14.8 billions will become available for such public debt reductions by the end of the fiscal year 1944. The aggre- gate amount of the privately held debt, callable or maturing in this period, is only $17.3 billions. If, from this figure, we subtract $13 billions of Treasury bills that we shall presumably wish to main- tain because of their low rates, their flexible maturities, and their great value to the banking system, the net excess of privately held debt callable or naturing in the next 7 years over the amounts made available for reduction 1s less then $1 billion. 110 Secretary Morgenthau - 2/23/37 - 6 It should be noted, moreover, that we have made no allowance in the estimates of funds for debt reduction for any budgetary surpluses, and these may well be substantial, with our present tax structure. Nor have we made any allowance for the possible use of any portion of our gold profit nor for a fuller monetary use of our silver bullion. Our estimates of the accumulations of the Unemployment Trust Fund are, in the opinion of our Actuary, at a bedrock minimum. These factors will probably far more than offset any increases in the privately held public debt that may occur this year and next as a result of budgetary deficits. The following table shows the estimated funds available for reductions in the privately held public debt for the fiscal years 1938 to 1944, inclusive, individually and cumulatively; and the amounts of privately held public debt securities maturing or callable in these years: Regraded Uclassifi Estimated Investment Requirements of the Treasury By Fiscal Years (In millions of dollars) : : : : : : : -- Total- # 1938 : 1939 : 1940 : 1941 : 1942 I 1943 # 1944 : seven : : : : : : : years Sinking Fund 404 859 874 639 655 672 689 4,792 Old-Age Reserve Account 540 555 709 862 871 1,001 1,124 5,662 Unemployment Trust Fund 1/ 577 250 250 250 250 250 250 2,077 Retirement Funds 2/ 45 45 45 45 45 45 45 315 Federal Deposit Insurance Corporation 30 30 30 30 30 30 30 210 Sale of United States Savings Bonds 250 250 250 250 250 250 250 1,750 Miscellaneous Investment Accounts Secretary Morgenthau 2/23/37 7 - - - - - - - - Use of gold and silver for debt. retirement - - - - - - - - Use of present Working Balance for debt retirement - I - - - - - - Use of net budgetary surpluses for debt retirement - - - - - - - - Total investment requirements 1,846 1,989 2,158 2,076 2,101 2,248 2.388 14,806 Cumulative total investment requirements 1,846 3.835 5,993 8,069 10,170 12,418 14,806 Privately held public debt securities becoming due or callable 5/ 6/4,908 2,812 2,957 2,420 1,001 425 2,733 Cumulative total privately held public debt securities becoming due or callable 5/ 6/4,908 7,720 10,677 13,097 14,098 14,523 17,256 1/ Net additions to the Fund; after 1938 this allowance amounts to only one-third of receipts. Contemplates no change in present laws. 3/ Net sales - allows for substantial volume of redemptions. 4/ Estimated to offset each other. 51 Excludes public debt securities held by Government agencies and trust funds. 6/ Includes maturities in fiscal year 1937. 111 Regraded Uclassified 112 Secretary Morgenthau - 2/23/37 - 8 V. Immediate Financing 1. In order to provide mid-June bill maturities to moderate the strain on the money markets incident to income-tax payments at that time, $50 millions of additional bills of such maturity may be issued on each of the six Wednesdays beginning with March 3. or with March 10, with payment allowable by war-loan deposits for the issues of March 10, 17, and 24. At the end of April and May, the Treasury balances, with no other financing, would approximate $804 millions and $539 millions, respectively. 2. We could, on this basis, raise no other new money until June 15, merely refunding the April 15 note maturity in either March or April: and raise $500 millions of new money in June. 3. Another, and in some respects superior, possibility would be, in addition to the offering of mid-June bill maturities, to raise $300 millions of new money on March 15 in conjunction with the refund- inc of the April notes. Any further new money that might be needed in June could then be provided either by means of $200 millions of additional bill issues for mid-September or mid-December maturity, or by a further offering in June of the same bond issue offered in March. While something might be said for confining the March 15 finan- cing to refunding in order to keep the market hungry, two contrary considerations, in our opinion, are more important. In the first place, the market expects some new financing. The holdings of dealers have been sharply reduced. As a rule, it is better to meet the market's expectations because these expectations have themselves prepared the way. And $300 millions of new financing would be regarded by the market as only a replacement of the mid-March bill maturity rather than as new money. Even more important, however, is the consideration that we know the present level of interest rates, whereas we cannot know what they will be three months hence. The know, further, that the present rates are distinctly favorable for a bond financing: and a very considerable improvement in the market could take place without permitting us to do any better in June as respects coupon rate or maturity than we can do in March. And it is not impossible that the sharp decline in the Brit- ish bond market may, if continued, find a more pronounced sympathetic response in our market than it has so fer, 4. The ease of raising only $300 millions of new money in con- junction with the note refunding on March 15 addo greatly to the attractiveness of this alternative. In our opinion, this would be an excellent time to offer the 7-17 year 21 percent bonds previously discussed in this memorandum. 113 Secretary Morgenthau - 2/23/37 - 9 If it were desired to give full latitude to the present holders of the maturing notes, a 5-year 1-3/8 percent note could be offered for refunding only, and the holders given the option of preferential subscriptions to the new bonds. While a 1-3/8 percent 5-year note might have some difficulty if offered for new cash, it should have little difficulty if confined to exchange subscriptions; although it might be desirable to offer the month's overlapping interest between March 15 and April 15 on such exchanges -- the interest overlap being equivalent to 8/32 of a point. Even with the overlap of interest allowed on exchanges into the new notes, there is every probability that the bulk of the maturing notes would be tendered for the new bonds. Regraded Uclassified 114 LMS GRAY London Dated February 23, 1937 Rec'd 3:30 P. m. Secretary of State, Washington. 92, February 23, 7 p. m. FOR treasury FROM BUTTERWORTH. STRICTLY CONFIDENTIAL. Inasmuch as there have recently been rumors in the city regarding possible action by the British authorities to hinder flow of funds to the United States, I made inquiries at the British Treasury today and was informed in confidence that the Foreign Transactions Advisory Committee (the formation of which was reported in my 192, April 8, 1936) with the Chancellor of the Exchequer's approval, has informed the Association of Investment Trusts that in cases where proposals by trusts for new issues come before the committee, the committee will (a) when the proportion of existing foreign holdings of 8 particular trust is unusually high ask the trust to reduce that proportion as occasion serves in the course of business, (b) ask trusts to confine future investment abroad to the minimum necessary to the conduct of the business of the trust in accordance with the ordinary Regraded Uclassified 115 LMS 2-No. 92, February 23,7 P. m., from London. ordinary practice of investment trusts. In this connection the British Treasury stated that they felt that to the extent that these measures put the brake on investments in the United States they will be in accordance with the general policy of the American authorities, ATHERTON WVC.KLP BECEIAED VAU2A38T will la soillo - all Issued - Regraded Uclassifie 116 February 23, 1937 I let the President read this and asked him what to do and he said to get a report from London on what really happened and to make no comment until I had heard directly from London. 117 Foreign FouignFunds Funds 1152 BRITISH STATEMENT ON INVESTMENTS IN U S LONDON - THE PRESS ASSOCIATION ISSUED A STATEMENT MONDAY NIGHT THAT THE BRITISH TREASURY HAD RECENTLY REQUESTED INSURANCE AND INVESTMENT TRUST COMPANIES NOT TO MAKE ANY FURTHER INVESTMENTS IN THE UNITED STATES LEADING BROKERS HOWEVER ARE INCLINED TO THE VIEW THAT THERE is NOTHING PARTICULARLY NEW IN THIS STATEMENT AS THE TREASURY-S POLICY FOR MANY MONTHS HAS BEEN TO DISCOURAGE OVER- INVESTMENT IN UNITED STATES SECURITIES AS INSTANCED BY TREASURY REFUSAL LAST MAY TO ALLOW THE FORMATION OF A FIXED TRUST CONFINED TO DOLLAR SECURITIES AND ALSO THE BAN ON LIST- ING OF ANY NEW AMERICAN SECURITIES ON THE STOCK EXCHANGE IF THE TREASURY HAS GIVEN FURTHER DISCOUR- AGEMENT IT IS PROBABLY ONLY A REMINDER OF ITS GENERAL POLICY AND IS AIMED MORE AT CAPITAL APPRECIATION FUNDS OF INSURANCE AND TRUST COMPANIES AND NOT AT INVESTMENT FOR INCOME - THE TREASURY POLICY ORIGINALLY WAS AIMED AT PROTECTION OF STERLING AND POSSIBLY IS NOW COOPERATING TO SOME EXTENT WITH PRESIDENT ROOSEVELT-S CAMPAIGN AGAINST -HOT MONEY- - IN ANY EVENT NO SUGGESTION HAS BEEN MADE THAT BRITISH INVESTORS SHOULD REALIZE ON ANY AMERICAN SECURITIES NOR ARE THEY DISCOURAGED FROM TAKING UP ADDITIONAL STOCK ACCRUING FROM STOCK BONUSES - NOR HAS ANY PRESSURE BEEN PUT UPON PRIVATE INVESTORS TO DISCOURAGE THEM FROM BUYING UNITED STATES SECURITIES IN ANY CASE THE STATEMENT HAS PASSED WITH- OUT MUCH COMMENT HERE AND WITHOUT EFFECT ON THE AMERICAN SECURITY MARKET FEB 23 1937 -0- Regraded Uclassified 118 TREASURY GROUP ON RESTRICTION OF February 23, 1937 FOREIGN CAPITAL INFLOW 3:10 P.M. Present: Mr. Magill Mr. Oliphant Mr. Seltzer Mr. Kent Mr. Opper Mr. Taylor Mr. Haas Mr. Zucker Mr. White Mr. Lusk (Bur. of Int. Rev.) Magill: We have been speculating upon the possibility of either a transfer tax on non-resident aliens - on transfers of securities, or the possibility of some kind of a tax on capital gains. What we had in mind was that, since we have a little breathing spell at the moment, we ought to do some affirmative work of our own to see whether it is really possible to work out either one of these taxes, rather than consider that there are insuper- able difficulties to proposals made by other people. Well, this particular - we discussed all of these several propositions at some length the other day, and the boys have been working particularly on the proposal for a transfer tax as affecting securities. The background of that, as I understand it, is this: that a tax upon the transfer of stocks, let's say, either to or from an alien, could be imposed at such 8. rate as not to deter the investor but to deter completely the speculator. We have had proposals in the shop, for example, for the same kind of a tax with respect to our own citizens on the transfer of securities. That is, it has been suggested by Mr. Pell, who, as you may or may not know, wrote us a letter, that if a tax was imposed at one percent, which I understand is the rate the British do employ, on the value of securities, that it would prevent the in-and-out trader from engaging in his activities but would not prevent an investor from buying. Regraded Uclassified 119 or , # Well, this proposal we have here is of the same character, except simply as applied to non-resident aliens; that if you sell stock through a broker to a non-resident alien, or if the non-resident alien sells stock through a broker to you, in either case a transfer tax shall be imposed, probably, as it's been outlined here in rough form, at some such rate as one percent, with E further provision similar to that we discussed before for a series of standards on the basis of which the President might increase the rate somewhat. Now, you notice what we have in mind there is to meet one of the points that's been made with respect to this foreign money; that if an emergency should arise and foreigners should start dumping their securities in our markets, this kind of B device would enable the President to put something of a brake on that. And it would also psychologically act ES a good deal of a brake if the alien knew that at any time an emergency came the President could slap on a heavy tax on the transfer of securities from aliens to Americans. Well then, the other problem that we have mainly considered has been whether or not this kind of a proposal could be carried out, in view of the fact that it would not affect transactions on foreign markets. Well, the men who have been working on it have, as I understand it, two answers. First, that the tax could be so framed that if an American sold securities on the Montreal market to a Canadian or Britisher, the tax would still apply, the American would be liable for the tax, and that penalties can be imposed severe enough so there isn't very much danger of evasion in that particular phase. Now, obviously, transactions between Canadians on the Montreal market will not be affected at all. Those can 80 on. But it is further true that from those transactions there is no flow of money to this coun- try, so that the fact that those transfers exist doesn't particularly bother us. Hence, with that background - I don't know whether - it isn't very well organized - the conclusions that the economic and legal staffs have come to, as I understand it, are these: First, that to attempt Regraded Uclassified 120 - 3 - to increase the withholding rate and then to provide for adjustments for non-resident aliens who have held securities for a long time - that that is administratively highly impractical; that it can be done but it is shrouded with a great deal of difficulty. H.M.Jr: That's the one according to the length of time? Magill: That's right. Arrange a lower rate in the event the alien had held the security for a long time. Oliphant: That, you recall, was what the President asked us to do more work on. The answer to that is no. H.M.Jr: You'll have to give him a pretty good reason, explain it. As a matter of fact, I'd have a pretty tech- nically correct brief on it, because he's got it in his mind. I think we ought to give him a work- manlike paper rather than an inter-office memorandum. I think we ought to have a workmanlike document in case he shows it around anywhere - "Why, this is the reason," and somebody else won't come along and say, "Well, they haven't covered the field." So take that position and be awfully sure. I would put it up in a legal, workmanlike manner. I mean I'd take plenty of time on it. Magill: Then the second proposition is that, rather than do that or attempt to do that, it would be much better to have a transfer tax of the sort that I have out- lined here. H.M.Jr: Well, that's El new one, isn't it? Magill: Yes. H.M.Jr: That would 80 both ways. That would be the alien selling to the American - be one percent, or the American selling to the alien, that would be another one percent. Is that right? Magill: Yes Oliphant: Yes. This group, this study group that's been working for Regraded Uclassified 121 - 4 - two or three months, have worked on three possi- bilities: the possibility of this transfer tax; the possibility of a tax on the income - that's the withholding tax; and the possibility of the capital gains tax. Now, the possibility of capital gains tax drops out on the basis of what you said the other day to this group. And then, when you take this withholding tax and try to work in the exception for the Scottish insurance compan- 1es that the President wants, it becomes much more complicated and undesirable than the transfer tax, good or bad BS the transfer tax is. The withholding tax, the one we took over there the other day - if you put in the exemption that he wants for the Scottish insurance companies, it is much worse from an administrative standpoint. H.M.Jr: Do I understand you are recommending the two taxes, the transfer tax and the withholding tax? Magill: The present recommendation of these men - and both Mr. Oliphant and I have seen this thing just a short time before we have come in here - but the recommendation, as I understand it, of the legal and economic experts is that the transfer tax, as they at present envisage it, would be a better tax to put a brake on this flow of foreign capital than the increase in withholding rate, and they feel that that is clearly true if there are to be some exceptions in the withholding rate in the case of people who have held the securities a long time. H.M.Jr: What would be the State Department's objection? On what ground did they object to the transfer tax? Magill: I should suppose on the same ground that they object to the increase in the withholding rate. We have a transfer tax on our own securities transferred among our own people. I don't know that you could say it's nominal but it's very much smaller in amount than this would be in most cases. H.M.Jr: Of course, from their standpoint, their approach, I should say this transfer tax would be much more ob- jectionable then the withholding, because you are setting up a new barrier over which you've got to jump before you do business between two nations. Regraded Uclassified 122 - 5 - Magill: I'm not so sure, because this - they might feel I think they probably would object to it, but they might feel this: that the income tax represents the established mode of taxation which we apply to our own people and apply to aliens, and that if we left that thing alone but then said that for the sake of stopping in-and-out speculation by non-resident aliens, which is bothersome to us, we are going to put on this tax, it would be perfectly clear that we are not hitting the Scottish investment trusts or not hitting the foreign insurance company or the foreign long term investor; that we are after 8. breed of pup that we think is. damaging our market. Oliphant: Hull, you remember, the other day spoke rather at length that if you had something aimed - if the world understood that you were gunning for the Bass: He said "speculators. Oliphant: unnatural movements, he said that would be one thing, and I gather that he was ready to join us if we had something that was aimed at this unnatural and abnormal - unnatural and abnormal, that's what he called it - in-and-out flow of capital. H.M.Jr: But I think this - to me, I mean, just - here's a new barrier which E fellow - I'm looking at it now from the standpoint of the State Department. Here's 8 new barrier which you set up which you've got to jump over before you can do business between two nations. Seltzer: On the other hand, if he keeps that security B long time, that barrier, BS amortized over that period, doesn't amount to much, because H.M.Jr: But the more you go into the State Department objec- tions, the more they are opposed to doing anything. Haas: You really have to drop the subject almost, Mr. Secretary, unless you want to put a barrier up, because that's the only way you can stop a flow. Magill: I think this is true: I think in arguing with the Regraded Uclassified 123 - 6 - State Department we would feel that we are on better ground in arguing against their discrimina- tion point with respect to this tax than we would be on the other. H.M.Jr: Well, personally I'd be for both. I mean leaving - I mean now that you Magill: Well, I think that depends on how strongly - or what you think the psychological effect is going to be. Oliphant: You mean the withholding tax with or without the exception of the Scottish insurance companies? H.M.Jr: I won't say on that. Well look, I've listened to this thing, and Scottish trusts or any other trusts - why shouldn't those fellows pay the approximate tax that our citizens pay on approximately the same amount of income? Now I - and then George popped one out at me this morning, just sort of on a leap. But you (Haas) say that the English have a twenty- three and three-quarters withholding tax but they've got a refund? Haas: Uh-huh. I.M.Jr: Now, what's that? Haas: Well, that's - Ros knows the details better than I do - but they - the people with small incomes can apply for a refund - British nationals; but that doesn't apply to Americans. DO If we had our State Department over there they would say that was great discrimination. They wouldn't let the British - they'd object to the British Treasury, whoever handles the tax, doing that. H.M.Jr: Has anybody got the actual facts on that? Zucker: We don't have the facts, but in so far as the twenty- three and three-quarters percent rate paid by cor- porations is in excess of what the individual stock- holder would pay on his portion of the income earned by the corporation, ne is permitted to ask for a rebate for the difference. Regraded Uclassified 124 - 7 - Magill: I can explain if you want the technique. The British individual has a personal exemption just as we have in this country. Furthermore, although the British normal tax is twenty-three and three- fourths percent, it is only half that much on the lower part of the income. Now, the corporation pays this twenty-three and three-fourths percent tax on dividends which it is distributing, for instance. If I, as an individual, receive this amount and have this exemption within this lower bracket, I apply for a refund and get it. And get it quick. Oliphant: Put not if you are a foreigner. Magill: But not If I am B foreigner. H.M.Jr: Well, has that ever been pointed out to the State Department? Haas: I don't think SO. Sucker: Yes, they know that. Magill: I don't know whether you could turn their eyes in that direction or not. H.M.Jr: Let me ask you a question. Have you people explored the facts - for instance, if we passed a law saying that this increase in the withholding tax for the calendar year 1937 would not apply to any alien inves- tor who owned this stock prior to December 31, 1934, and then each year we put that forward one year. Have you done it that way? Oliphant: Yes, that's what we've done. H.M.Jr: And that won't work? Oliphant: No, that gets you into tremendous complications as soon as you introduce the time element, because in order to get that time element H.M.Jr: You can't do it? Kent: It places an enormous burden upon the withholding Regraded Uclassified 125 to I I agent - really an unfair burden because they are liable to withhold the tax in all cases where, on the facts of the law, the withholding is due. Seltzer: You could do it on all registered holdings. Kent: Yes. Seltzer: and I think in that case you'd take care of a great bulk of the people who should be exempted. H.M.Jr: Well, let me, just as an amateur, poke at this thing & minute or two. Let's just say that the State De- partment has its way and we can't do this thing, but this thing gets worse. Supposing we have a little clearing house for all checks that should go abroad - all dividend checks - and set up a little organization in the Federal Reserve in New York, and all checks go through there and all people have to register, and we take the burden off the corporation. And General Motors sends all their dividend checks for foreigners to the Federal Reserve of New York, and then the Federal Reserve of New York is our agent and makes these people declare and they do the work that we pay them for. Have E little clearing house there. Oliphant: The difficulty comes at the first step, in telling General Motors to send all checks going to foreigners; they can't tell. H.M.Jr: Well, they know if they're going to mail them out of the country. 011phant: well, it may be 8 street name. It may be intended for a foreigner and still the name of a resident. H.M.Jr: Well, I mean Zucker: They also send a good deal to nominee accounts in the United States, who in turn will do the shipment abroad. That is, the General Motors Corporation may have as stockholder of record the Chase National Bank, and the Chase National Bank may have non-resident aliens for whom it holds. So the scheme filters down to where you have several second parties involved. Regraded Uclassified 126 - 9 - White: Nevertheless, it is possible to pursue that, even where a bank makes payment to an alien. Aven though it may be deposited within the same bank, if the payment urises from an interest or dividend - even though they may be an intermediary in it, it still would fall under the same category. Zucker: It falls down in 30 far as the dividend item - the amount itself is kept in this country and not shipped abroad. White: It could still be caught there, as long as any check was available upon the records of the bank. Clarence suggested something like that about B month ago. It was dropped out of the picture, but it has possi- bilities. It wasn't explored. H.M.Jr: Well, I'm going to say this to the study group while you're on it. I don't say that this is the immediate thing. I think that this group certainly ought to be preparing what We would do in case of war and now we'd nandle this whole matter - this question of dividends going out, funds in this country being used for purchase of war materials. I haven't looked at this neutrality bill. I don't know whether it covers any of that stuff or not. I think somebody should look at the neutrality bill. But I think we certainly oughtn't to be caught with a declaration of war any- where and then suddenly, say, have the President send for me - "How are you going to handle this?" I'd like to have e machine which I could just put in gear and let her go; and have people like Burgess and the other people come down and let's get all the bugs out of the thing now. After all, he asked me point blank to study how we would handle eight billion dollars worth of securities owned by aliens in case of war. And with all this neutrality talk and every- thing else, you turn loose those funds and the possi- bility of another country seizing the stocks which are owned and they having a transfer association and pooling those stocks - American-owned stocks, and then directing the sale, etc. I mean how are we going to counter that sort of thing? I think our whole thing ought to be worked out so we have as near foolproof a machine as possible. White: This transfer tax was designed in part for that con- tingency - the flexible provision. Regraded Uclassified 127 - 10 - H.M.Jr: But I think we ought to have that thing. There's Kent's thing that came in. I haven't read it. Might circulate it. (Hands to Magill). Is that addressed to the President or to me? Magill: You. H.M.Jr: I haven't read it. Oliphant: Has it been acknowledged? H.M.Jr: No. Oliphant: Well, that might envision the necessary procedure. H.M.Jr: Tell you what I'll do. Let me send an scknowledgment. Then I'll send it to you (Oliphant). Oliphant: We probably ought to have in mind either the machine necessary in case we had to take it all over H.M.Jr: That's what I had in mind. And if - we're going to go the whole way and then work backwards, and then say, "We can do this thing in certain degrees," see? What I mean, we can do all of it or we can do sectors of it. I mean, say, we'll go the whole way; we'll have an alien property custodian for all stocks and go the whole way, and then work backwards; say we can do 90 percent, 80 percent, 70 percent, so far back. I think we ought to let the State Department know we're working on it. I mean go on the thing backwards. Haas: I think the State Department is very illogical. For example, Great Britain puts forward a great armament program; we build battleships, etc. They converge on the same ground they objected to. If they object to this, they should object to our building battleships. H.M.Jr: They most likely do. Haas: The Navy puts up this armament program. We try to protect our economic system; but they object. Maybe they are objecting, but on the equal ground they would have to object to the building of battleships. Regraded Uclassified 128 - 11 - H.M.Jr: Well, as I say, I'd like to go the whole way, then go backwards. And I think the Federal Reserve people in New York would be very helpful on this thing - technique. And, very, very confidentially - extra confiden- tially - in talking with the President today he asked me just where this matter stood, and I told him I was to hear from Mr. Hull today. He said if I didn't hear from him today I should take it up with him tomorrow, because he does want to go ahead. The President doesn't want to leave it die; he def- initely wants to go ahead. So he said - after I explained what I said to Mr. Hull, he seid, "Get in touch with Mr. Hull tomorrow. I want you to go ahead on it." Oliphant: Well, I think what that means to this group H.M.Jr: So you're not wasting your time. And the way the President talks - "Wait until tomorrow" - and he wanted to know, and he'll want something, see? Olipnant: I think that what that means from the standpoint of the group - while the thing we are bringing in to you has not progressed SO that you could call it a recommendation of this group, certainly it is the general group feeling that the transfer tax is a good deal more feasible than the withholding tax with the exception that the President wants. H.M.Jr: But supposing we point out to the President, say, "We can't differentiate between alien investors as to the length of time; we've got to keep them all as one." See? Then he could say, "Well, all right, go ahead," or "I don't want you to go ahead, " or "Do these transfers too, and do both." But I thought you'd like to know that he has not lost interest. Magill: Well then, this is where we are. We've got several different projects here. We ought first of all to formulate E document to show why it is administra- tively impractical to do what the President had in mind. H.M.Jr: And for that I want a good enough piece of paper that anybody can see it. You know what I mean; I mean it Regraded Iclassified 129 - 12 - gets around. I want it good enough - I want it the best that the Treasury can do. Magill: Then next we want a formulation of this transfer tax proposal in definite form. H.M.Jr: That's right. Magill: Pretty close to legislation, I mean. H.M.Jr: What I think we ought to do is prepare this document and I'll ask Mr. Landis and Eccles to get together and give them this document in advance so they can look at it and study it. We'll say, "This is what we've arrived at. This is why the Treasury feels we can't comply with the President's request. But we have another proposal and we'd like to put it up to you." Magill: And then the third thing to go ahead on is this more general proposal. H.M.Jr: But that's purely Treasury. There's no reason why we should take in the other two organizations on that. I want to keep that very secret. Magill: We darn well better do it just the same. H.M.Jr: I mean if you want to keep it secret you've got to do it - keep it in the Treasury. White: Are you ruling out the possibility of having both this transfer tax and the original withholding tax? H.M.Jr: No. Magill: No. White: Because if you do have them both, it will be possible to reduce the transfer to a lower rate and still get the degree of effectiveness you want. H.M.Jr: They're going to prepare a legal document which, as soon as it's ready, I'm going to send over to the President, showing why we can't differentiate between investors. Is that right? Well then, I'll wait until Regraded Uclassified 130 - 13 - I hear from you people again. Magill: Yes. H.M.Jr: Again, I'm sorry - we'll have to go ahead. I'm sorry in this way, that it takes so much time. But I think we might just as well concentrate and try to get it out of the way. I didn't know how the President felt about it, because after all when he was asked a few days ago about "hot" money he said, "Well, it's not so hot." But he said that last week. But today he definitely told me he wants to go ahead. Magill: Well, I guess that's where we are. Oliphant: Well, whatever is finally done, it's going to be something that the Treasury has to live with, and the Treasury has to make good. H.M.Jr: True, true. All right. Regraded Uclassified 131 February 23, 1937. Excerpt from Mr. Magill's "Memorandum of the Day's Activities for February 23rd," to the Secretary: NON-RESIDENT ALIENS. We conferred this morning and again this afternoon regarding the possibilities of the tax on the transfers of American securities to and from non-resident aliens. The tax should be at a rate which would discourage speculative transactions but which would have little effect upon pur- chases for investment. This rate would be approximately 1% of the value of the securities purchased or sold. I think the Act should contain a provision enabling the Presi- dent to raise the rate in the event of emergencies to be described in the Act. It would seem possible to frame the Act in such a way as to afford considerable protection a- gainst a sudden withdrawal of capital from this country. Regraded Uclassified 132 R, Y. News Bureau 11:33 A. M. Feb. 26, 1937 Eigh Government Official predicts dropping of plan to levy high tax on foreign capital. Washington: Plans for B. drastic penalty tax on the eight billion dollars of foreign capital now in the United States will be dropped in favor of 8. gentlemen's agreement between the United States and Great Britain to discourage the continued influx of foreign capital to this country in the opinion of a high Government Cfficial close to the administration. The prickly question of how to stop the influx of gold to the United States has been under detailed consideration for several months by the government's financial experts including Secretary of the Treasury Morgenthau, Chairman Eccles of the Federal Reserve Board, and Chairman Landis of the Securities Exchange Commission. In mid-November President Roosovelt urged action towards a solution of the dangers inherent in the presence of these huge funds and in further inflows of foreign gold. Means are being sought for discouraging the entry of more gold and for control of capital already here to prevent disastrous results should with- drawals take place. At present approximately $6,500,000,000 of the foreign capital here 16 invested in American long-term sccurities, while the remaining $1,500,000,000 is short-term capital, Ae B. result of the recent White House visit of Walter Sunciman, British Cabinet member for Trade, it is reported that the British Treasury has already taken steps towards controlling the outflow of gold to American investments, namely, in advising investment trusts, investment houses. and insurance companies to discourage such investments on the part of their clients. The British Treasury, it was stated, can exert considerable pressure on banks and other financial in- stitutions which will have A strong deterring effect in the decired direction. Also, the Official pointed out, It is in conformance with British domestic policy to stop the outflow of capital, especially in view of the need for funds in the forthcoming $7,500,000,000 rearmament program. The next step, he said, will probably be an increase in the tax by the British Government upon the income received by British residents from foreign investments. British nominees for foreign holders of securities would be taxed through deductions before transmitting dividends to the owners. Although French, Dutch, Swise, Canadian, and other funds have been flowing in large quantities to the U. S. markets, the only agreement necessary is with Great Britain, he continued, as the only free gold market is in England. Canada, he pointed out, offers no real problem, as Canadian purchases and sales do not fluctuate much and Canada in fact is & part of the U. S. financially. Regraded Uclassified 133 -2- According to all indications, therefore, he continued, the administra- tion has decided that a gentlemen's agreement with Great Britain would be the most practicable solution and that it can be effected in view of the fact the objectives coincide with those of that country. Further, it has been found that taxation such as proposed would prove ineffective. It would require a record of all transactions involving a spy system equal to the Ogpu. Also, he declared, it would cause retalliation on the part of foreign nations resulting in further instability in international exchange and would put off indefinitely any possibility of currency stabilization. In addition, he continued, to widen the difference between the tax on American and foreign incomes from securities by an exhorbitant tax would cause foreigners to use American names to escape the tax and result in the setting up of American holding companies which would act as shields to the real cwners of the securities. Regraded Uclassified 134 LMS GRAY London Dated February 24, 1937 Rec'd 2:45 P. m. Secretary of State, Washington. 93, February 24, 5 P. m. FOR TREASURY FROM BUTTERWORTH. The information regarding the action taken by the Foreign Transactions Advisory Committee reported in my 92, February 23, 7 P. m., will probably be authoritatively made public by means of an answer to a question in the House of Commons shortly. The FINANCIAL TIMES and FINANCIAL NEWS this morning contained officially inspired denials that the British Treasury had approached the insurance companies and it is implied that merely the "cooperative attitude" of the Association of Investors Trusts has been sought. The FINANCIAL TIMES adds that two motives explain the Treasury's action "firstly, there 1.9 the desire to assist President Roosevelt in checking the inflow of foreign money to the United States; secondly, it is reasonable to suppose that as the British Government is committed to heavy borrowing for defense the Treasury should make use of every avail- able opportunity to keep as much money as possible in the country Regraded Uclassified 135 LAS 2-10. 93, February 24, 5 P. m., from London. country and thus preserve its cheapness". My own inquiries in the city lead me to doubt whether this action of the British authorities will in itself directly affect a large amount of British capital in or going to the United States (one) because the regulations only affect trusts applying for new issues; (two) most British investment trusts already have substantial hold- ings in America, which in most cases have sufficiently increased in value to bring the total to that point beyond which an investment trust following a normal distribution of assets policy cannot go. This action may, however, have some additional value if it is Interpreted as indi- cating that the British authorities oppose the excessive flow of funds from this country to the United States. ATHERTON WVC:CSB 03V13333 Regraded Uclassified 136 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE February 24,1937 TO Secretary Morgenthau FROM Mr. Magill Mr. Fred I. Kent's letter of February 18,1937 makes the following points: 1. Foreign investments are still valuable to this country, since we have not yet reached our maximum growth. 2. Movement of bank balances is not normally of sufficient moment to be serious. 3. The flight of foreign capital to this country is small as compared to the total values of securities listed on the New York stock exchange ($107 billions). It is inconceivable that all the foreign owners would want to liquidate at once. The danger of 8. stock exchange debacle is not worthy of consideration, 4. There are three natural checks on selling: (1) declines in prices due to selling; (2) lack of urge to transfer funds abroad as the cost of transfers rises; (3) disparity of interest among the various foreign owners. 5. Some withdrawal of gold by foreigners would do no harm; and the government can control or stop large scale gold exports. 6. The foreigner who deals in this country should not be cal- led on to pay the same taxes 8.8 an American does. The stand to lose, if foreign countries increase tax rates in retaliation. 7. All the State Department's work on reciprocal trade agree- ments may be destroyed, if the free money market is destroyed. We must also try to avoid international resentment, due to the belief that we are striving for isolation. 8. Emergencies require emergency action, but the United States should not anticipate an emergency which may never happen. Regraded Uclassified 137 GROUP MEETING February 24, 1937 9:30 A.M. Present: Mrs Klotz Mr. Magill Mr. Oliphant Mr. Gaston Mr. Lochhead Mr. Haas Mr. Taylor Mr. Graves Mr. Upham Miss Roche Mr. Bell Mr. McReynolds H.M.Jr: I'll dictate this. Then the others can take this up, see? Mr. Hull called me last night and said that, after thinking this whole question over - after thinking this thing over very carefully I mean I've got to repeat but what I am saying is ultra-confidential. He said that, after all, during the last three or four years, Agriculture has a number of times done things which were contrary to the State Department's policy, but the State Depart- ment has been able to live them down; and that if the Treasury wished to go ahead in this matter of trying to control foreign capital, their position would be the position as stated in Herbert Feis's letter. But he hoped I would be very slow about it and very careful, because he - if I didn't mind his giving me his personal opinion, this method that had been suggested of making it permissive and raising from ten to thirty - that he didn't think it would have the effect we wanted. Therefore, his personal advice to me was that we go. very slowly, but whatever we do, well, he'd go along in the sense as stated in Herbert Feis's letter. But his personal advice to me was to take it easy. Now, I want Harold Graves to come in on this thing so we can clear that. (To Kieley) Ask Mr. Graves to come in. (Graves comes in) If you will sit down, please. There are two things I'd like to cover. Then I'll excuse you. Regraded Uclassified 138 - 2 - Then Mr. Hull said that he had been giving quite a lot of time to narcotics and studying it, and that he felt that the State Department did have a place in narcotics in the foreign field, and that they could be helpful. So I said, well, I'd be very glad to sit down and spend an hour with Mr. Hull going over the narcotics situation, and he said that he didn't consider it was important enough to give it an hour. Well, what he suggested - he asked if we had somebody who could come over and sit down, or have somebody over here meet with their people and try to argue the thing out. And I said yes, I had such a person. He asked was he connected with Narcotics and Customs and I said no, it was Harold Graves. And I said they knew you over there - their Assistant Chief of Western Europe. He said that was fine and he would designate Mr. Hornbeck. I spoke to Wayne Taylor; it's entirely agreeable to him. And the way I gathered was that they would get in touch with you (Graves). I said if they wanted to know about you, he could talk to Ickes; I said he knew all about you. And Mr. Hull didn' But he's designated Hornbeck. And Taylor's entirely satisfied. So if you'll carry the ball for us, but keep Mr. Gibbons advised, and Customs and Narcotics. So the ball is yours. And would you just take E minute and tell the crowd of that raid we Just pulled off in Seattle. I think they'd be interested. Graves: Well, the telegram that I sent you yesterday reported the indictment of four Chinese narcotic distributors at Portland, and all were held under $25,000 bond after indictment. The conversations that were inter- cepted out there H.M.Jr: Well, we'll skip that. Graves: I was just going to say merely that that was the basis of the apprehension of a man that Mr. Hanks characterizes as the most important narcotics smug- gler on the West Coast. He W&S apprehended while Regraded Uclassified 139 3 1 1 making delivery personally to a friend of his, a white man, and Mr. Hanks indicates that this is the first time this man has himself ever personally made a delivery. H.M.Jr: These were all Chinese? Graves: All Chinese. And it was just that H.M.Jr: But I think it is evident that the size of the bond and all is quite significant. Graves: Oh yes. H.M.Jr: And you consider it most important. Graves: Yes. As I said to you in my note, we were very optimistic that we could get other important fellows out there by the same methods. H.M.Jr: This is Seattle, isn't it? Graves: Well, that was Portland. H.M.Jr: Could you (Gaston) get the Portland and Seattle papers and see how they handled the story? Gaston: Yes. These indictments were yesterday? Graves: The indictments, I think, were the 22nd, day before yesterday. H.M.Jr: I'd be curious to see how Boettiger's paper handles it and how Mr. Fussell handles it. Gaston: Yes, he was to go to work Monday. H.M.Jr: Well, Harold, on this thing, if you don't hear today I'd simply call up Hornbeck. Graves: Yes, I shall. H.M.Jr: And will you keep me advised? Graves: Yes, sir. H.M.Jr: I'm putting my money in you. Regraded Uclassified 140 - 4 - Graves: All right. (Leaves) H.M.Jr: The other thing, do you suppose that you gentlemen would be ready - would you people be ready at 3:15 tomorrow for me to have Landis and Eccles over? 011phant: (Nods yes) We've been trying to get something over to them today - this morning, I mean - about that. H.M.Jr: (On phone) Mr. Landis and Mr. Eccles, whoever you can get first. Well, we'll find out at 3:15 tomorrow and keep the ball rolling, nuh? Magill: I think it would be a good thing. H.M.Jr: Well, I'll just wait until we clear those calls. Will you (011phant) please get me a memorandum on - this is extra confidential, triple confidential - can the President treat the four cent tax on copper like he can others, reduce it by half? I'd like 8 memorandum by this afternoon - at the house, see? Oliphant: All right. I'll have it to you by noon. H.M.Jr: Would you? If there is any doubt, bring it in personally between twelve and twelve-thirty. I mean I don't want to rush you. He'd like to know. I'm seeing him tomorrow morning, so - I mean I don't need it until nine tomorrow morning. But he'd like I don't want anybody to breath a word of this to anybody. He wanted to know whether he could - I mean treat it like any other. And then if it is, then you might go so far as to draw up El proclamation. What? Oliphant: (Nods yes) H.M.Jr: But I wouldn't let it get out of my own shop. Oliphant: I'll handle it myself, and one other man. H.M.Jr: Because yesterday we had to buy a hundred thousand sterling against copper that was exported from this country, and we actually have a shortage of copper in this country - 17 cent price abroad. Regraded Uclassified 141 - 5 - Lochhead: Mr. Oliphant would be interested in knowing these figures showing that sharp rate in the stock market - heavy buying. Magill: They were? Oliphant: Bought more than they sold? Lochhead: Yes, considerably more. H.M.Jr: Now, who wants to shoot something at me? Magill: I have this letter from the Interstate Commerce Commission. They want to see us some time this week. H.M.Jr: Well, I thought that if you didn't mind calling Eastman up on the phone and telling Eastman I have asked you to handle it, I'd like him to see you. Would you call him? Do you mind doing that? Magill: No. H.M.Jr: I'd just call him up on the phone. (On phone) Hello? Good morning, how are you? (Short conversation with Landis). We'll get Eccles, then we'll go on. Or I can tell Eccles when I see him. Hello (to Operator). If you haven't got Mr. Eccles, let it go. You (Upham) remind me when he comes over. All right, now that's that. Will you (Mrs Klotz) put down 3:15 tomorrow. Open market at eleven and closed market at 3:15 tomorrow; how's that? All right, what else? And you (Magill) are going to call up Mr. Eastman and invite him to come over. Magill: Now, the only thing holding me up - I asked Kent to prepare a response to that 13-page draft, which curiously got into the President's hands. H.M.Jr: Well, I leave it to you. There's no smut about it. We're going to be here all summer, so why worry? Regraded Uclassified 142 - 6 - Oliphant: Be here until dawn. Magill: Well, I'll call him up today and start things. H.M.Jr: What else has anybody got? Haas: This man Curtis, you know, that was in to see you one time, came in Saturday again; wanted me to refer him to Ros. H.M.Jr: What about it? Haas: Well, that's the tax, you know, on sporting goods. H.M.Jr: I haven't got my golf set from Spalding's. Magill: Neither have I. I complained about it yesterday. Haas: He'd like very much to see you. H.M.Jr: No, no, I want my golf set first. Magill: I want some of these baseball bats that are used on the sandlots and are being taxed. H.M.Jr: All right, what else? Haas: That's all. Taylor: (To Magill) If they've owned them more than three years? Haas: That's hard to administer. H.M.Jr: Anything more except Joe Eastman and Curtis of Spalding's? Magill: No. I've got a thing I want to take up with you on that matter you were speaking of yesterday. I've got it outlined any time you're ready. Do you want a memorandum on Mr. Kent's letter? H.M.Jr: Yes, please. Magill: I've got a digest of it here if you want it. H.M.Jr: Swell. Regraded Uclassified 143 - 7 - H.M.Jr: Your friend Bill Nye has got the nerve to call me up at twenty minutes of six. (To Gaston) Gaston: Gerry Nye? What did he say? H.M.J.: Coming down for the first time on a patronage matter. After his speech on gold. Haas: Maybe that's why he made the speech. Gaston: That's very appropriate. H.M.Jr: I'm not going to be so very dumb as to turn him down and have him make another speech. What have you got, Herbert? Gaston: Nothing at all. Oliphant: Nice called me yesterday about E job for a lawyer in his office. H.M.Jr: Where does he stand on gold? Gaston: Just that those two men for tomorrow H.M.Jr: All right. Did you say to the press last night that Wayne Taylor's not going to drop the price of gold and he's going to build a silver wall. Oliphant: You know what Wayne told me? He said, "Oliphant, I got the business." H.M.Jr: All right. Gaston: I told Bob Kintner what I thought of some of his associates in New York. H.M.Jr: Did you? Gaston: Oh yes, I told him that after all this stuff they now come and ask us a question which is practically accusing you of lying in your press conference the last time. I said they got a nerve to put up such a question as that up to you. H.M.Jr: What did he say? Regraded Uclassified 144 - 8 - Gaston: Well, he said he didn't know about this editorial stuff, of course, but he thought that something might - he thought the question wasn't just that direct, because he thought that they thought some- thing might have come up since then. Well, I told him that if he printed that - they could ask about it in the press conference, but just for his own sake, if they printed the story in the meantime that that was the case, that it was being considered, they'd be making a mistake. H.M.Jr: I'd like you to go through the Tribune for the last month and - I'd like a photostat of the edi- torials they have written about me the last twelve months. Gaston: Yes. H.M.Jr: Will you? Gaston: Yes. They're a very bitter partisan bunch there. H.M.Jr: While you're making the photostats, you might as well make three of each editorial. Will you? Gaston: Yes. H.M.Jr: Archie? Lochhead: Nothing. H.M.Jr: George? Haas: Nothing. H.M.Jr: Archie's got a haircut. I flatter myself and - George and I get a haircut once a month. Taylor: Well, the commodity department over here - as I understand it, sugar will wait until next week. H.M.Jr: Yes, sugar. Sugar will wait. Sugar and silver. I haven't heard Herman Oliphant laugh so in a year as he did last night when he called me up to say, "I've got Wayne Taylor to call up King about whether we'll have a silver wall or build one." Regraded Uclassified 145 - 9 - Taylor: No, you were wrong about that, Herman, because he called me up. You got him to call me up. Oliphant: You're just spoiling & good story. H.M.Jp: Well, I guess I can tell a good story that happened. As a matter of fact, David, ex-Prince of Wales, ex-King of England, and I are in competition. This is very much in the family. Roche: Racing for Wally? - he (Bell) wants to know. Bell: For Wally? H.M.Jr: Not for Wally. Wallis "impson has been staying with Mr. and Mrs. Herman Rogers, and Mr. and Mrs. Herman Rogers happen to be part of the Rogers estate next to Mr. Roosevelt. And two years ago Mr. Herman Rogers told his family that he would assume the sole respon- sibility of selling the Rogers estate. He's got it about half sold to Mrs. Simpson. The President is very enxious that Henry Morgenthau, in his capacity as Secretary of the Treasury, buy the Rogers estate in order to keep the records of the trees, which are being kept for twenty-five years. So it's going to be a snowdown whether we have a silver vault and keep the records of the trees on the Rogers estate, or whether Herman Rogers sells the place to Mrs. Simpson. And, giving the whole story, Mrs. Herman Rogers is the ex-wife of a former naval officer, and she and Mrs. Simpson used to be Navy widows together. Those that don't know what that means can call up the Chief of Naval Operations. He'll give you an idea. - - Look at Miss Roche. Mrs Klotz: Blushing. H.M.Jr: Chief of Naval Operations. All right. Well, that's very much in the room. McR: You're infringing on the jurisdiction of another department. H.M.Jr: And some of the Roosevelt family are all "tizzy-wizzy" at the thought that David may be their neighbor. This Regraded Uclassified 146 - 10 - is no joking - no joking about this. Gaston: You've got even stronger reasons for putting the silver depository on the Rogers estate, I'd say. H.M.Jr: That's that. But it's very much in the 9:30 group. All right. Taylor: I can tell Senator King that? I mean very confi- dentially. H.M.Jr: Tell Senator King and also Mrs. - what's her name? Taylor: Nellie? H.M.Jr: Tell Nellie why the silver vault is dragging its feet. We want to know (to Bell and Roche, referring to their aside conversation). Bell: I was laughing because you were hesitating about the name. H.M.Jr: Oh. Now, do you (Roche) want to follow with anything? Roche: I'm demoralized completely, sir. Nothing to say this morning. Gaston: Want that just for background? H.M.Jr: That's for background only. Dan? Bell: No, I have nothing. Roche: Demoralized too. H.M.Jr: Mac? McR: The only thing I have is this letter to George Haas from Harvard. I think George ought to answer it directly to this chap and tell him he'll be up there for a couple days sometime within the period. H.M.Jr: All right, George. Regraded Uclassified 147 - 11 - Now, this thing of Captain Birkett in Arkansas and Joe Robinson - I've held it up here. Mac, is there any chance of making Birkett District Supervisor? Do you know anything about that? McR: Of course. He's already in charge of one of the divisions. There is nothing to do unless and until the consolidation of those units is made. That can only be made after a law is passed. He is in charge of a unit now. H.M.Jr: He is? McR: Yes. H.M.Jp: And there's nothing McR: All he's urging is that some time in the future, if, as, and when that consolidation of enforcement units is made, he be put in charge of one of the divisions. H.M.Jr: Will you (Upham) explain that to Mr. Robinson's secretary and ask him if that is satisfactory? And if it is satisfactory I don't hear from you; it isn't, I do. Upham: O.K. McR: Birkett's a very decent fellow. H.M.Jr: Have you (Upham) got it? Upham: Yes. I've had this before. H.M.Jr: Well, that closes that. What else? All right, thank you. Regraded Uclassified Wednesday February 24, 1937 148 9:41 a.m. Treas. Operator: Go ahead. HMJr: Hello James Landis: Good morning HMJr: How are you? L: Fine, thank you. HMJr: Look, to keep you posted on what we're doing on this foreign capital - Hull called me last night and, to boil it all down, he's now taking the position that he's going to stand by what Feis wrote us. L: Yes HMJr: And so, I also saw the President. I mean, this was before Hull called me. The President wants it to go ahead. L: He does? HMJr: Yes L: Yes HMJr: On some basis, he doesn't say what, but he wants us to go ahead. L: Yes HMJr: Now, I wondered if it would be convenient - if you could come tomorrow - Thursday - about three-fifteen to the office here - - L: Gosh, I've got to be out of town for the rest of the week. HMJr: Oh L: Could I send anybody else? HMJr: Surely, surely - But we won't be ready before that. L: Yes Regraded Uclassified 149 -2- HMJr: We've got a new angle on it. L: You have? HMJr: I tell you, I'll tell Magill to get in touch with you and give it to you before you go, and get your reaction. L: All right. HMJr: What are you leaving on, the Federal tonight? L: Yes, I'm going up on the Federal. HMJr: Well, Magill will get in touch with you before nine o'clock tonight. L: And you are not actually going to the Hill this week, though? HMJr: Pardon me? L: You are not going to the Hill this week? HMJr: No, no, no, no, no - L: No? HMJr: No, no, no - L: All right. HMJr: This thing - the more I see it the more difficult it gets. L: Yes - The - don't - don't the attitude of the foreign governments here help the Secretary? HMJr: How do you mean? L: Well, you saw the British statement - and - ? HMJr: Yes - well, we - L: - and the Belgian Statement and the Canadian Statement. HMJr: Yes, well we've cabled for the British Statement - L: Yes Regraded Uclassified 150 -3- HMJr: And we haven't got it yet. 3 Yes HMJr: When we get it I'll send it over to you. L: That ought to help the Secretary a bit, I should think. HMJr: I should think SO. Then - and particularly that they don't ask us. L: Yes HMJr: What? L: Yes HMJr: Yes - Well, Magill will get in touch with you and then, you send anybody over you want and - but we won't do anything until you get back. All right. HMJr: You'll be back Monday? L: Yes, I'll be back Monday. HMJr: Thank you. I'll be at Harvard Saturday. L: I may run into you up there. HMJr: Good! Are you staying with Conant? L: No, I'm not. HMJr: Oh - Well, I'm going there - following your advice - I'm going there for breakfast. L: Good! (Laughs) HMJr: And what do they eat Saturday, do they eat the beef in the morning or at night? L: I think they eat the beef of a night. HMJr: Fine L: (Laughs) Pie in the morning. Regraded Uclassified -4- 151 HMJr: Pie in the morning? L: Yes HMJr: All right. Well, I'll be seeing you anyway. Regraded Uclassified 152 COPY Note in Secretary's handwriting: February 24, 1937 "Mrs. Klotz Speak to me about this. "M" For the Secretary: 2-23-37. When I attended the meeting/at which the experts reported to you and Landis and Eccles on "hot money" I found myself very skeptical of their recommendations. In view of their extended and intensive study of the subject, however, I was reluctant to make objection and become the usual nuisance. As a later press conference, when one of the news- paper men asked if any advice on the matter had been sought from outside private interests, and was answered in the negative, I feared a "dirty" story to the effect that here, in a matter peculiarly the concern of the financial com- munity, the Treasury was not following its usual policy of outside consultation, which it is generally understood we follow. Perhaps my fear was based on a feeling that the experts were somewhat academic in their approach. There was no such dirty story, however. In listening since to the Tories with whom I associ- ate, my own feeling has been confirmed that "hot money" should not cause any great amount of worry, that the pro- Regraded Uclassified 153 -2- posals advanced so far to deal with it would be inef- fective and perhaps penalize the wrong people rather than the right, and would raise questions much broader in scope than the immediate one of reducing the flow of gold. I think some of these people, who have been stu- dents of the subject for years, are thoroughly honest and disinterested in their attitude. I have kept quiet in the meetings I have attended, but have argued my point of view some with Eccles pri- vately, mainly by way of raising questions for him to answer. Upm Regraded Uclassified MEETING WITH EXECUTIVE COMMITTEE OF February 24, 1937 154 FEDERAL RESERVE OPEN MARKET COMMITTEE 11:00 A.M. Present: Mr. Taylor Mr. Upham Mr. Haas Mr. Lochhead Mr. Burgess Mr. Bell Mr. Harris Mr. Goldenweiser Mr. Eccles Mr. Szymczak Mr. Piser Mr. Chester Davis Burgess: The market has been a little better since you met here last. It seems to have leveled off. It hasn't gone up any particularly, but the long bonds have had a little gain and the notes seem to have sort of steadied at about this level. The new one and a quarter notes have neld around par, par one and two. The note market is still rather vulnerable and hasn't got much steam in it, but the bonds look B little better. That's been simultaneous with a little improvement in the corporate market. The corporate market has been sliding pretty steadily until the latter part of last week, when it stiffened up. Been a little recovery of a point or so in some issues, so there is some feeling around that perhaps the adjust- ment has been made, at least for the time being, to new money conditions. But there is no very considerable change. There is no change in level really since you met here last. The only change is in the feel of the market being a little steadier. H.M.Jr: We've got to decide three things today. We'd like your advice. They really all pretty much go together. One is, shall we start next week selling 50 million dollars worth of bills into the 15th of June until we have sold 300 million? Two, should we call the April maturities and refinance them on the 15th of March? Three, should we ask for any new money? If we decide those three things - I mean we should Regraded Uclassified 155 - 2 - decide to do all of them, then what kind of & piece of paper we give for the April maturity; we wouldn't have to decide that until next week. Burgess: In some ways, the easiest way to discuss those would be in the reverse order, wouldn't it, because the asking for new money is in a sense the key to what you'd do. H.M.Jr: Well, I don't care how, but that's the problem and we've got to make up our minds today on that. Eccles: well, the situation with reference to new money is about like it was a week ago, isn't it, Dan? Bell: Not changed materially. The only point in the pic- ture where we might at all be worried would be the end of May, where the balance might possibly drop below five hundred million dollars. And if it did drop down there and then it Looks as though we needed some money, we could have a little hundred million dollar issue of bills in May and put them in September. Eccles: Yes. Well, I still feel that it would be much more desirable to get along without new money this time. I think it would be very helpful to the market. I'd like to suggest the refunding of the April maturity in March. H.M.Jr: Well, of course, what we have done here is - I have had a policy that we wanted to keep a billion dollar balance. Well, we let that go by the board and we are running much closer to the wind than we ever have before, and I don't particularly like it. But on the other hand, if we kept up our balance to a billion dollars we'd have to ask for more new money and we might tighten things up and see money rates go up, and we'd all get blamed for it. Accles: It just isn't the best time to ask for it. Then, with the tax money coming in, if it should be more than you expect, why, you may not need as much new money. H.M.Jr: As I say, I don't like to run as close to the wind as we are now, but we're doing it; and as far as Regraded Uclassified 156 - 3 - the Treasury goes, we've about made up our mind that by using the bill market, why, We can squeeze through to the 15th of June without asking for new money. AS I say, we are doing it only for one reason, and that is not to aggravate the situation between now and the first of May, while you fellows are raising your requirements. Eccles: Give the market a chance to adjust itself to these increases, and of course after the first of May we'll be able to know fully just what the effects are and what the situation is at that time. Golden.: with your deficit not increasing any longer, you haven't the same motive for keeping your billion dollar balance intact as you did before. H.M.Jr: No, but it was so inexpensive. Golden.: Yes. H.M.Jr: It cost us about a million and a half, two million dollars, a year - that billion dollars - which WES awfully cheap. I mean that's what it did cost us. Golden.: While you had to be constantly making new offerings in large amounts. H.M.Jr: And we couldn't tell. I always wanted to be in the position that if the market tried to hold me up and I couldn't borrow for three months, I wouldn't have to borrow for three months. But, as you say, that situation seems to be passing. Huh? Golden.: Seems to be. Eccles: Do you think, Randolph, that the bill market would be able to take fifty million commencing next week at about the present rates? Burgess: Very nicely, I think. I think the June bills will sell at around a quarter or even less. As & matter of fact, there are transactions now in June bills. There were some this last week at .05. Of course, that doesn't mean that you can sell new bills at that rate. But I would expect them to go at around a quarter, if not under that. Regraded Uclassified 157 - 4 - Missouri has a tax law which makes it advantageous for people in Missouri to hold June Treasury bills, so that you could expect some substantial bidding from that quarter. H.M.Jr: When does that Illinois Taylor: Illinois is April first. Eccles: What's that, a tax on deposits? Taylor: 1 think SO. On bank deposits. Burgess: Personal property tax of some sort. H.S.Jr: Would the State of Missouri buy altogether fifty million dollars? Wouldn't that pretty well mop them up? Burgess: Well, they'd be in on each offering for ten or fifteen million, I guess. It's an item. Then there are corporations that want short bills; so there would be a very good demand for those bills. Now, it may affect a little the rate on the longer bills, but I don't think very much. That is, I think that will stay under a half. H.M.Jr: Well, I'm going - I mean I'm planning this whole thing on the assumption that we can sell these 300 million on top of the nine months. Burgess: Yes, I have no question about that. H.M.Jr: You do or don't? Burgess: I have no question about that, especially if you are not asking for new cash in the March offering. That will make a difference. That will make a real difference in the feeling of the market about the bills. H.M.Jr: We had a little meeting last night, and We feel that by using the bill market and perhaps starting in May to sell into September, why, we can squeeze through. Not have too much of 3 margin, will we? Bell: No. Regraded Uclassified 158 - 5 - Eccles: And selling a hundred million in May if necessary - the last of May, for September maturity. H.M.Jr: Start whenever necessary after the first of May. I mean we wouldn't start before. Bell: That's right. H.M.Jr: But we'd start any time starting after the first of May. Eceles: You may find after you sell your three hundred of bills maturing in June that the situation is such that you want to continue to sell them instead of stopping after selling for your Bell: You mean start the middle of April and put them into September? Eccles: Yes, Either new, if you need new money, or the outstanding bills as they come due; instead of nine months, put some of them in September. Of course, you can cross that bridge when you get to it. H.M.Jr: Well then, the only other thing is the question of calling the April note on the 15th of March. Bccles: You feel there is an advantage, don't you, in keeping them on a quarterly period, inasmuch BS H.M.Jr: Well, what's this, the fourth or fifth meeting? Eccles: Third or fourth. H.M.Jr: I mean we'd like to get it over, concentrate on the thing, clean it up, and then we'll go on to something else. I mean I like to get it behind us. Burgess: Well, I think it particularly advantageous to get it behind you, in connection with putting out these new bills. It tells the market the whole story, so they know what the situation is and they can be prepared to deal with it and have It well out of the way before May first - the whole thing laid out. H.M.Jr: But we agree on this three-way program. I'd announce Regraded Uclassified 159 - 6 - at my press conference that this is what we're going to do and the only thing we haven't decided is what kind of B piece of paper we'll give the April holders in exchange for their notes. And that would give the market a week to shake down. Burgess: I think that's E good program. H.M.Jr: Then we'd announce it on the eighth. That's a Monday, huh? Burgess: (Nods yes) H.M.Jr: Exchange. And let it run through until Thursday - Thursday or Wednesday. Burgess: I've gone into that. H.M.Jr: That's plenty of time to handle it. Burgess: If just exchange, yes. There's no question about padding and no question about going over subscrip- tions on an exchange. That is just a simple mechan- ical operation. Èccles: You won't need so long then, will you? Burgess: If he does it on March eighth, that's all right. H.M.Jr: Open three days, two days. Burgess: Three days is a little better, I think. H.L.Jr; You lean a little towards doing the April in March, don't you? Burgess: Yes. I think that you have announced from time to time that as far as possible you were going to do it on quarterly dates. I think that's a pretty good principle. Now, while on this particular occasion it might be a little easier to price your new issue if you waited until April, the market has settled down a bit since we were here last, and I think the principle of doing the thing on quarterly dates offsets any advantage there would be in waiting, although I see the point of waiting and Iwas at Regraded Uclassified 160 - 7 - first wholly sympathetic with that while the market seemed to be very unsettled. But right now the market seems to be in very good shape to take an issue. Eccles: Who are the principal buyers of long bonds? Bank buying? Burgess: No, not banks much. Eccles: I mean in the interior banks. Burgess: Oh, a little scattered buying. Insurance companies go into the market every once in a while and take B little Jag of them. Eccles: Mostly insurance companies are the investors? Burgess: Yes, but there is still some bank buying here and there. Eccles: You see, since we have announced the increase of reserve requirements, since January 30, the ten-twenty year bonds have increased seven thirty- seconds, so it did to the long market about what we expected. Burgess: Intermediates have gone off about the same, haven't they, Marriner? Eccles: Yes. The less than five year ones have gone off seven, and the five to ten have gone off five thirty-seconds, but the long ten-twenty's have gone up. H.M.Jr: But your note market is shot. I mean where we got a five year at one and a quarter, we'd have to do it at one and a half now. Burgess: That's right. Eccles: Yet they haven't gone off a great deal. It's just a weak market. H.M.Jr: I mean we couldn't sell a five year note unless we paid one and a half. Regraded Uclassified 181 - 8 - Burgess: That's right. H.M.Jr: What? Burgess: That's right. Eccles: Don't you think there is another reason for it, though? The exchange privilege is far less certain. In other words, people were H.M.Jr: You know what's happened to your premium of your Aprils. They've come right up again. Eccles: What's that? H.M.Jr: Come right back up again. Eccles: Yes, because they know - they expect to get the right, of course, to take some of the security bond. H.M.Jr: I mean for a while it disappeared and now it's come right up again. Eccles: Of course, if it becomes apparent, I think, that at each note maturity there is going to be a refunding and an opportunity to convert, they'll have a premium. But as you get surplus revenue and begin to retire some of them, don't you think - don't you think that has had an influence on the note market generally, the thought that during the next five years there will be very little oppor- tunity to convert, and that in itself has been worth fully one - has been worth a point? I think that, as well as the increase in reserves, has been a big factor in the note market. Burgess: Yes, I think it is quite extraordinary how well the note market has held up under present circum- stances. H.M.Jr: I think there's been a minimum disturbance. Eccles: The New York banks are getting gradually adjusted, so as the reserve increase goes into effect they will be prepared for it. Regraded Uclassified 182 - 9 - purgess: For the March first increase, there is only one bank that shows any shortage to amount to anything - last night or the night before last - and that was the National City, 24 million. But they had a whole wad of Treasury bills, eighty million of cell loans, and a portfolio of acceptances, so there's not the slightest difficulty about the March first increase. Now, for May first there are still some adjustments to be made, but the way it's worked out for March first makes it clear that they'll be able to work that out without any serious difficulty. Scoles: But the deficiency is getting less each week. Burgess: Yes, that's right. Taylor: It hasn't affected the call money market yet, has it? Burgess: No, everybody - quite a number of clearing house banks have been talking about - have had some meet- ings about what to do about the call rate. I think at present the inclination is just leave it alone, the idea being that anything they did now would be rather artificial and they'd better let nature take its course; that if they should put the rates up now they'd be pushing them up ahead of the trend. I think their feeling is, too, that if they pushed those rates up they'd draw out-of-town money and their own call loans would go down, and their earnings would decrease. So that is the way, of course, your - a way, of course, your New York position could be equalized: if the New Yorkers are slack, get those rates up a little bit and out-of-town money would begin to come in. H.M.Jr: Well, there isn't much argument here today, is there? Burgess: Hard to get a fight here today. H.M.Jr: What? Burgess: Nice place to rest. You asked us last week about selling Treasury bills for book credit. Regraded Uclassified 163 - 10 - H.M.Jr: Yes Burgess: And we have explored that some. I think that both the Board people and ourselves see no objection to that, if it is desirable on certain occasions to do it. Of course, it isn't quite in accordance with the practice and the usual form on Treasury bills. They are regarded as a cash obligation. But that's rather B formal matter and we don't think that needs to stand in the way of doing it if we want to from time to time. H.M.Jr: Well, we wouldn't want to do it on the first issue, Burgess: No. If you're selling an issue that falls right around the 17th of March, it might be well on that occasion to do it. Bell: We might want to do it on the 17th and 24th. Burgess: Yes, depending on what your cash position looks like. Bell: That's right. Lecles: It would certainly give you flexibility in regulating or controlling the balances that you've got with the Reserve Banks, wouldn't it? Bell: That's right. Burgess: That will be more important after May first. Bell: Yes, I think that's right. Burgess: On tax dates after May first. H.M.Jr: Well now, I'll - let's put it this way. Does anybody have any suggestions why we shouldn't do the three things that I spoke of: No new cash, call the April note on the 15th of March, and 300 million bills? Eccles: Commencing next week? H.M.Jr: Un-huh. Eccles: You'd go right through the 17th? Regraded Uclassified 164 - 11 - Szymczak: Every week. H.M.Jr: Every week until we'd sold three hundred million. We'd do it for six weeks. I don't like to break the thing. I mean it attracts too much attention. It might be interpreted as E. sign of weakness. We ought to be strong enough that we could go right through and sell for six weeks. Eccles: Well, giving book credit would help the situation if it happened to be that your balances were - due to taxes, were abnormally high and that it reduced reserves accordingly. It would immediately offset it so that you could go right through without having any effect at all on the market. H.M.Jr: We'll watch it very closely. Bell: There being two issues in the picture, we could give book credit on either one or both, so that we could take in effect - put 50 million dollars credit or 100 million dollars credit, and then pay off the maturing bills out of our cash balance, which would work both ways really. Eccles: Well, it's nice to have everything so agreeable, isn't it? H.M.Jr: Well, how many meetings has it taken? Eccles: Four or five. H.M.Jr: Well, the only other thing, while you're here - does anybody want to offer any ideas what kind of a piece of paper we'll give in exchange for these April notes. Burgess: Want me to start? H.M.Jr: Sure. Burgess: Well, I - my present view is that it would be wise to offer additional amounts of the bond that we issued in December - of the 21 percent '49-153 bond. That is in the group of bonds that have stood up very well, for which there is a good demand. If you go into much shorter bonds than that, you get into Regraded Iclassified 165 - 12 - an area where the price read justment nas been going on. I think there would be no difficulty about selling an additional amount. It is within the range where it gives you maturities that you could call or refund with the money that may come through in those periods. Now, the alternative H.M.Jr: Wait a minute, you didn't say how much premium. Burgess: Well, you set it at a premium - that is something you can't do until just the week ahead of time, just a few days shead of time. Eccles: What's today's premium on that? Burgess: You can sell or half to three quarters of a point as premium. H.M.Jr: What's worrying me - if we sold it at 101, there would be five million dollars. What would we do with the profit? Burgess: Well, there's another argument for using the obliga- tion. It's just as good for you as the alternative. The alternative bond would be a little longer maturity, say a '50-'54. But I can't see any advantage whatever to the Treasury in that additional year on the ma- turity. It is one year shorter - longer on the call date. You couldn't call It in us early, you couldn't refund it as early, and the additional year on the maturity is no great advantage, I think. H.M.Jr: Well, Burgess, how much - I've never done this since I've been here - how much premium, how many points difference between the market and what we'd ask - price the new bond? How much spread should there be? Burgess: Oh, there ought to be at least half a point on El refunding. H.M.Jp: Half 8 point? Burgess: Yes, you can cut it fairly close on a refunding of this sort; you don't have to offer a point. We usually offer a point on a bond issue where you are Regraded Uclassified 1C6 - 13 - selling it for new cash, But on a refunding half a point is adequate. Now, you have to remember that the Aprils on March 15 are worth a quarter of E point - just the interest from them. H.M.Jr: We only pay them interest once. Burgess: Yes. Well, if you're refunding in smaller coupons, you've got to offer something that's valuable enough to make up the difference. H.M.J.: But we wouldn't pay them double interest. Burgess: No, no, we'd pay them just one interest. Eccles: You mean the bond would have to be worth the quarter point before they get any premium. The bond would have to be worth & quarter more than par to offset the other. Burgess: Otherwise they could cash it in and buy something when they got the cash. Eccles: Yes. Burgess: But if you had something that was worth three quarters of a point premium, it would go all right; that is, a quarter of à point for the interest end half a point velvet. You could even cut a little finer than that. Eccles: The '51 is worth close to that. Burgess: '51 is worth 101-14 - the 149-153s are worth 101-14. Eccles: No, I mean the '51 call date. H.M.Jr: You mean a new bond. Eccles: I was just thinking you wouldn't want to put out a new bond on this small issue. Bell: '51-'55.. Regraded Uclassified - 14 - 167 Eccles: I wasn't thinking of Bell: selling on a 2.46 basis. Eccles: I was thinking of a two and a half bond with a '51 call date - would give you just about the premium that you are talking of here. Piser: Be just about a little less, I should think. About a half point premium. Eccles: On a '51? Piser: On a '51 call date. Burgess: Of course, the maturity - if you look at this chart, any maturity beyond '51 ought to sell on better than a two and 8 half percent basis. The line crosses in '52. Of course, this last issue is perfectly cock- eyed. It shouldn't be selling where it is on the basis of the maturity. It is because the market prices it on the call date. And the minute you had any change in interest rates, so that they began to price it on the maturity date Eccles: And it gets below par; that's where it will go. Burgess: And the thing drops two points right off the bat. So I don't see why the market likes this bond. But they do. It doesn't make any sense. H.M.Jr: What? Burgess: It doesn't make any sense. H.M.Jr: It is a popular bond. Burgess: It's a very popular bond, but it doesn't make any sense. Piser: It is still high, even on the call basis. Burgess: Yes. Eccles: That's the two and a half. Burgess: People don't like to buy premium bonds. Just a matter of bookkeeping; put premiums on their books and write them off. Perfectly silly thing. Regraded 168 - 15 - H.M.Jr: Well, do I gather your inclination today is we use this two and a half bond? Burgess: Yes. Becles: Sell it at a premium - whatever premium the market would call for at the time. Burgess: That's right. Eccles: Giving - you think about half a point is all that it's necessary to give. Burgess: That's right. Ecoles: On the conversion. Burgess: h little over half a point. Bell: Have to allow for a little sagging after you make your announcement. Burgess: Give them an additional amount. H.M.Jr: Allow them their interest the 15th of April? Bell: Be a nice premium. Burgess: Well, you can do that or not, just as you wish; do that either way, allow them the interest or cut it off, and you can price it accordingly, either way you want to. Harris: May I suggest that the market is now - I think the April notes are selling about 22 thirty-seconds above B no yield basis. If the 25's were priced at par and three quarters, that would be e difference of about 22 thirty-seconds. Burgess: That's right. Not allowing them any interest. Harris: No, exchanging them flat on the 15th. Eccles: About 22 thirty-seconds is what you would be allowing. Harris: That would be half a point gravy, so to speak, and six or seven thirty-seconds interest. Regraded Uclassified 169 - 16 - Eccles: If you don't give them that, then they are selling 8 little bit too high today, aren't they? Harris: Yes. Burgess: Well, I'd try to cut it a. little close, because I - these rights ought not to be worth as much. You ought not to have to give as much gravy if you are not raising new money. We have been pretty generous with the market, and it was a wise policy, but you were raising new money all the time and you had to appeal constantly to a new market. But if your debt is steady and there are prospects of beginning to retire it, you don't have to make so large a present to the market; you don't have to put as much honey on it to attract the bees. H.M.Jp: Well, unless somebody has got something else, Marriner, I think we've gone as far as we can. Eccles: I haven't unless some of the rest of you have got some questions. I'm well satisfied personally. I think this is fine. It pleases me a hundred percent. H.M.Jr: I should think you would be. Eccles: Why? H.M.Jr: We changed - if we changed and came out on a billion dollar issue on the 15th of March, and the rate came up, and we just had to raise the money, you'd have to go up and explain to Congress. I've already done that. You'd have to explain all over again. Davis: You'd have to go up and change your testimony. Eccles: Yes. H.M.Jr: Well, I want to take pity on the Congressmen, so I won't do that. Eccles: Well, I'm glad you've got pity for somebody. Anyhow, I don't care who, just so the program's right. H.M.Jr: I talked to the President about this yesterday and I said, "Talking seriously, this is important - demon- strates how important it is that two organizations Regraded Uclassified 170 - 17 - work together, because the one can absolutely nullify the other." I mean we've Just got to work together. Eccles: Yes, sir. Bell: On the matter of these rights, I'm wondering if we haven't about reached a point where it would not be a bad policy if the Secretary would announce very definitely that the banks couldn't in the future, certainly after this refunding, expect an exchange issue for the entire amount - cut off some of this negative yield business. Eccles: You mean before this? Bell: Yes, I think it ought to be done a month before. Eccles: You mean before or after this March 15? Bell: This announcement would not apply to the April, because he would say at the same time that he was going to offer full exchange for April. But let it apply to the September, which is now selling for a two dollar premium. Eccles: Got to be done some time before. You always treat your customers right, glve them advance notice, so Heas: How about giving them a leak on that, Dan? Burgess: Let's see, your next maturity is in September, isn't it, Dan? Bell: Right. Burgess: You think you're going to want to retire some of those for sinking fund? Bell: I think that all depends on what we do in June. Burgess: or course, I've never been worried about these rights things 29 much as some people have. After all, it's a child of these very cheap money rates, largely. You get money rates up & little bit, short term money rates, and these short Governments would be worth a Regraded Uclassified 171 - 18 - little something. The giving of the exchange privilege, after all, doesn't cost the Treasury a thing, but on the contrary it makes its short term obligations sell at better prices, so that it saves the Treasury money, and I don't see that it does a great deal of damage. Now, if the Treasury program requires that you shall retire some maturing obligations for sinking fund, that is snother question. But 1f there isn't any ques- tion from the point of view of the Treasury program of changing it, I don't see any necessity from the point of view of the money market of doing it. Bell: What I am thinking of is supposing we announce on September eighth that we are only going to allow a privilege of exchanging eighty percent of the outstanding notes. Burgess: Why should you want to do that? Bell: Well, for some reason, of course: that we are going to retire the 160 million through sinking fund or some other operation. Burgess: Now, aren't the holders going to have a kick and say, "Why didn't you tell us this? We paid B dollar and two dollar premium for this exchange privilege. Now you've deprived us of that." and I don't think the Secretary ought to be put in that position at any time. Eccles: Justly or unjustly, some of them say that. Bell: No justification, because you've really made no promise or obligation. Burgess: On the other hand, 1f the Secretary announces that at the present time, it will immediately affect adversely your whole note market. Becles: That's why I asked you if you meant it should be done now. It seems to me you might wait until June. Bell: That's sufficient time. Regraded Uclassified 172 - 19 - Eccles: I would suggest that nothing be said about it, certainly, at this time. Wait Bell: until after this refunding. Eccles: Yes, after this refunding. And when your June - by the time of your June financing, say something about it. H.M.Jr: or course, Bell approaches this from a purely disinterested viewpoint, you see; we don't own any notes. I just knew what Burgess would say. Burgess: As B. matter of fact, I never thought of that. H.M.Jr: How many do you own - the System and the banks and everybody else? Burgess: Well, we've been very generous in our support of the note market. Taylor: There is a perfectly logical reason for doing it, which is that subscriptions for cash are at such a low rate the people are kidding about it like the devil, and you do give an unnecessary premium to the original holder. Bell: As a matter of fact, they drive your rate up by offering those high rights. Never able any more to cut the rate thin because of those rights. Burgess: No, I don't think that hinders your cutting the rate thin at all. Bell: Sure, Burgess, we used to finance - used to get by with eight or ten thirty-seconds; now you've got to give a dollar or more. Burgess: If the Treasury is in a position where it is not asking for new money, I think you can cut the premium very thin. Bell: I question whether you can cut it thin if your rights are so high; maybe that will drive your rights down, I don't know. Regraded Uclassified 173 - 20 - Burgess: I think it will drive them down. H.M.Jr: Well, that's a pleasant worry. Burgess: That's a swell thing to be worrying about. Bell: Well, there wasn't any controversy here; I thought there ought to be something. *aylor: Like to bring Henry Murphy in; he'd start something. H.M.Jr: Well, do you think we ought We'll have to make up our mind next week what we'll do. Do you fellows want to come over once more? Eccles: Well, I don't think it is necessary, unless you H.M.Jr: Well, I'd like Burgess to come down anyway. Eccles: Well, if he's coming down and if we'll be here, we'll be glad to come over. I don't think it would be necessary to ask Fleming; he's not feeling good and ne's had the flu, and he said unless it was absolutely essential ne'd prefer not to make the trip down from Cleveland. I told him it wasn't. So I wouldn't ask him to come down or ask George unless Szymczak: Is he coming down next week? Recles: Do you know, Randolph? Burgess: I think he may be back next week, but I don't know just what day he comes. H.M.Jr: Well, even if it's only The thing may change again. I'd like very much to have a - I'd like to have another meeting a week from today. I mean it hasn't every time been so easy; when we first started it wasn't so clear. Eccles: It's been a question of clarification through the general situation. H.M.Jr: If you don't mind, I'd like your crowd to come over once more. Regraded Uclassified 174 - 21 - Eccles: All right, that will suit - it's convenient for us. I don't know whether these men will be here or not, next week. Szymezak: Oh yes. Eccles: You'll be here. You be here, Chester? Davis: Yes. Eccles: If not, Ronald or maybe Joe Broderick. They're both away. But at least three of us will come over. H.M.Jr: Good. And then I'll announce tomorrow morning what we are going to do - everything except what the exchange will be. Burgess: All right. H.M.Jr: That gives them a chance on it. Burgess: That's fine. Eccles: Have you sold a bonded premium. Bell: Ever? Eccles: Recently. Burgess: Not recently. Eccles: I didn't mean ever. Burgess: Not for several years. Bell: About 128 or '29. Burgess: It won't bother anybody. H.M.Jr: All right. Thank you for coming over. Regraded Uclassified 175 Railroad Retirement Act February 24, 1937 Mngill's memo to Secretary reporting on Latimer's conference with Magill and Oliphant when Latimer submitted three proposals: that funds from Social Security be diverted to pay part of cost of railroad retirement allowances; that administration of rail- road retirement taxes be transferred to reilroad retirement board and that Carriers Taxing Act and Railroad Retirement Act be consolidated. (p.187) March 1, 1937 Magill's memo to Secretary reporting phone conversation with Latimer concerning Dow-Jones ticker report of agreement between railroads and employees on retirement plan. BK 09:44 March 2, 1937 HM, Jr saw President and gave him memo on reilroad retirement allowances in which it was suggested that the President call a meeting to discuss it. President suggested that Altmyer, Latimer, Magill, Bell and HM, Jr discuss it and then report back to the President. P.131 March 2, 1937 Meeting, as suggested by President, in HM, Jr's office. Altmeyer said Pelley and Harrison, railroad representatives, went away from conference with President on Friday with understanding that President had committed himself to a plan for extending the pro- tection of Social Security to railroad industry which would be financed out of additional taxes than those provided in Social Security Act. Draft of telegram to railroad people prepared for checking with White House. 08.189,192 March 3. 1937 Copy of Latimer's memorandum on the Railroad Retirement Situa- tion. 8.228 March 4. 1937 HM, Jr's telephone inquiry of Latimer to know whether telegram had been despatched. Latimer said he had been trying to find out from McIntyre. f.510 Regraded Uclassified D: MISS DIAMOND Br. 2069 - Room 352 Treasury Library Regraded Uclassified 176 March 4, 1937 HM,Jr's telephone conversation with President. President said he would give the telegram to McIntyre. p.366 March 5, 1937 Magill's memorandum to Secretary reporting on events to date on the Railroad Retirement matter. HM,Jr took this to Cabinet today. BK 58:8.38 March 6, 1937 Copy of Gaston's memo to Magill in which he reported that Steve Early asked for some statement he could make to Pelley and Harrison to stall off publicity. March 8, 1937 Mr. Haas' memo to Magill giving an analysis of the proposed railroad retirement bills. March 8, 1937 Magill's report of conference on the legislation. Treasury and Budget estimate Treasury will lose serious amount of revenue from adoption of the plan. Copy of this report went to Presi- dent today. March 8, 1937 Mr. Reagh's memorandum to Haas, disagreeing with the actuarial estimates of the Railroad Retirement Board. March 16, 1937 Magill's telegram to President that rates of tax in proposed legislation are much too low to meet requirements and Treasury, Budget and Social Security think it better to continue present legislation. March 17, 1937 Mr. Magill's memorandum reporting his conference with Congress- man Doughton in which he told Mr. Doughton that our calcula- tions indicate that the proposed bill would fall short by several hundreds of millions of dollars of meeting requirements of the retirement act. Mr. Doughton recommended Treasury press announcement to this effect. Altmeyer also agreed on having a press statement. Regraded Uclassified 177 March 17, 1937 Magill's memorandum reporting Latimer's telephone call in which the latter said he had heard from newspaper men that we disapproved of the agreement between the Carriers and the railroad men for retirement allowances. Magill explained to Latimer that Treasury did not disapprove of the agreement but that our calculations showed returns were too low to pay the agreed allowances. When Magill reported this conversation to the Secretary, HM,Jr asked Magill if he had checked with Senator Harrison, Congress- man Doughton and Mr. Altmeyer and Magill said he had with the exception of Harrison, who was out of town. March 17, 1937 Record of Magill's conversation with Mr. Latimer, giving text of press release. March 17, 1937 McIntyre's telephone call to Magill seying President would prefer that no statement be made or, if it should be, that it be made clear that calculations of insufficiencies were preliminary actuarial computations. Magill called his at- tention to fact that statement was almost exact wording as suggested by the President. McIntyre asked Magill to call HM,Jr. Magill did so and HM,Jr then telephoned the President. March 18, 1937 Press release 9-86. March 18, 1937 Mr. Haas' memorandum to Mr. Magill in which he states that the Treasury actuary has found information which indicates posi- tively that the Railroad Retirement underestimated cost of the proposed bill. March 18, 1937 Magill's memo in which he reported that, acting upon the Secre- tary's suggestion, he had informed Mr. Altmeyer that the Presi- dent had approved the form of our press release. Magill tele- phoned Doughton and suggested a conference with him and Senator Harrison and Doughton thought that was a good idea. Regraded Uclassified 178 March 18, 1937 Memorandum of conference held in Magill's office on March 16, 1937 to discuss the proposed railroad retirement bill. March 23, 1937 Magill's memorandum of luncheon meeting with Mr. Altmeyer in which Altmeyer reported that his actuary, Mr. Williamson, had computed the cost and found it would run between 8 and 9 per- cent of the railroad payrolls and thought Latimer's estimated retirement age of an average age of 70 was too high. March 24, 1937 Copy of the bill entitled "An Act to establish a retirement system for employees of carriers subject to the Interstate Commerce Act, and for other purposes," approved August 29, 1935. March 24, 1937 Mr. Reagh's memorandum of probable cost of the proposed rail- road retirement Bill. March 24. 1937 Magill's memorandum of his conference with Representatives Doughton, Cullen and Cooper at the Capital at 2:15 p.m. Doughton stated there was disagreement between actuaries as to probable cost and Cooper remarked that the Ways and Means Committee always accepted Treasury's estimates. March 24, 1937 Meeting in Senator Harrison's office following meeting with Representatives Doughton, Cullen and Cooper. Doughton sug- gested that principal questions at issue should be referred to the President. Agreement reached that legislation should not be introduced until next week. March 25, 1937 Magill's telephone conversation with Secretary reporting con- ference on the Hill 3/24/37. March 25, 1937 Latimer's call on Mr. Magill to discuss his calculations of the necessary tax. Latimer reported that Harrison had given him the impression that the President approved of the agreement in the form in which it had been made. Regraded Uclassified 179 March 26, 1937 Magill's memorandum in which he stated that Altmeyer's actuary had reported that after conference with Mr. Glenn, the actuary for the Retirement Board, both men agreed there was no evidence to show any differential in favor of the railroad employees prior to the year 1890. Altmeyer thought, therefore, present tax rate of 7% should be retained. March 31, 1937 Magill's report of conference between HM,Jr., Senator Harrison, Congressman Doughton, Mr. Bell and Mr. Magill. Herrison is to confer with George Harrison, representing the brotherhoods, and Mr. Pelley, representing the railroads to have them accept proposed compromises on rate schedule. March 31, 1937 Press conference following meeting of Senator Harrison and Congressman Doughton in Secretary's office. April 1, 1937 Magill's memorandum of conference with Senator Harrison and Messrs. George Harrison and Pelley. Last two will consult their respective groups and advise Senator Harrison of the result. April 2, 1937 HM,Jr's telephone conversation with Senator Harrison in which the latter reported he had not been successful in selling the Treasury's plan to the reilroad groups. April 2, 1937 Board of Actuaries' letter to Secretary giving analysis of the various actuarial computations and Board's opinion in respect to the assumptions upon which the calculations were based. April 2, 1937 Doughton telephoned HM, Jr to inquire present status of railroad retirement matter. HM,Jr told him Harrison had heard from Pelley that railroads would not go along and Vice President and he had discussed it at Cabinet and President asked that Harrison not introduce any bill and that he, the President, would send him a letter telling him why. Regraded Uclassified 180 April 2, 1937 HM,Jr's memo to Magill giving today's events in connection with the railroad retirement matter. He wrote Magill that he had told the President Magill would have a letter prepared by 12 o'clock Monday, April 5th, to go to Doughton and Harrison. April 5, 1937 Conference in Secretary's office from 4:30 to 7 p.m. at which was used the memo from Magill (attached to minutes of meeting) giving history of the matter from beginning to date. Decided because of disagreement among various actuaries to have actuaries get together at one conference and try to ascertain the actuarial cost, etc., on this plan and report to the Secretary next week. April 8, 1937 Meeting of actuaries for general discussion of points of issue. April 12, 1937 Copy of letter from actuaries in which they state they unani- mously agree that scale of tax rates is inadequate and advise against proceeding on the basis of the proposed agreement. April 12, 1937 Buck's telegram that he concurs in letter signed by actuaries and authorizes the affixation of his signature. April 13, 1937 Meeting of all concerned to discuss report of actuaries. HM,Jr said he was willing to start on a flat 7% basis with the under- standing that the matter will be reviewed at the end of three years. April 13, 1937 Magill's memo that Treasury people are examining latest drafts of the tax bill for the railroad retirement matter. Senator Harrison inquired if Treasury would agree to revision of the rate schedule to 5% to begin with, increasing in the course of 12 years to a permanent rate of 5½% Magill reported this to Congressman Doughton. Regraded Uclassified 181 April 13, 1937 Copies of the legislation (two bills) for the railroad re- tirement matter. April 13, 1937 HM,Jr's memo that he had reported to the President on the railroad retirement matter and had said he would take either plan suggested by the actuaries. April 14. 1937 Magill's memo of Harrison's second call about altering the tax rates. Magill told the Senator that HM, Jr's position was matter was now out of the Treasury's hands and up to the Congressional leaders. April 15, 1937 Magill's memo that Doughton had introduced the bill this afternoon with the 5% - 7% rate schedule. April 15, 1937 Copy of the bill introduced by Mr. Doughton. April 21, 1937 Magill's memo that Ways and Means Committee today started hearings on the railroad retirement legislation. George Harrison testified and Kent goes up tomorrow to present actuaries' letter and statement of Treasury views. TREASURY DEPARTMENT 182 INTER OFFICE COMMUNICATION DAYSFebruary 24, 1937 TO The Secretary FROM Miss Lonigan I an attaching a full report of my interview yesterday with Mr. John Ihlder of the Alley Dwelling Authority, because of high quality of Mr. Ihlder's judgment and accomplishments in the housing field. Mr. Ihlder has promised to think over the problem of using unskilled labor in some form of housing project for the District self-help cooperative. Similar experiments were carried out in Vienna. Mr. Ihlder agrees that it is not at all hopeless to invent new housing projects for the self-help cooperative in Washington in 1937, but they will have to be somewhat different from those found useful in Richmond in 1932. 183 Miss Katherine C. Bauer was in charge of advertising copy for Harcourt Brace end Company, publishers, until 1932 or 1933. When they reduced their advertising staff, Miss Bauer went to Europe for six months. She visited housing demonstrations in Germany, Austria, and England under the direction of Lewis Mumford. On her return, again under his guidance, she wrote a book on her travels. Since then she has worked with the Labor Housing Conference of the A ? of L, and has done consulting work for the National Resources Board, PWA, and Resettlement. She is now working for the World's Fair in New York. Miso Bauer has a vivid personality and a quick mind. Her approach to housing is that of n high-grade publicity worker, and assembler of prevailing ideas. She has energy rather than judgment. ...... Mr. John Ihlder has the following experience in housing. His judgment is of extraordinarily high quality. Field Secretary, Natl. Housing Acan. 1910-1916 Managing Director, Philadelphia Housing Assn. 1917-1920 Manager, City Development Dept., U. S. Chamber of Commerce 1920-1928 Executive Director, Pittsburgh Housing Assn. 1928-1933 Consultant, Natl. Capital Park and Planning Commission 1929 Executive Officer, Alley Dwelling Authority for the D. C. 1934 Section Chairman, President's Conference on Home Building 1931 Member, Philadelphia Zoning Commission 1917-1920 Advisory Committee on City Planning, Commerce Dept. 1921-1934 Board of Governors, American City Planning Institute Ex-President, Natl. Conference of Social Work Executive Committee, Intl. Housing Assn. Member Council, Intl. Federation for Housing and Town Planning ALLEY DWELLING AUTHORITY 184 Mr. John Ihlder of the Alley Dwelling Authority has done the finest piece of work in the housing field in the United States in the last four years. He is limited by law to buying land in congested areas in the District and rebuilding only on those sites. He has had appro- priations of about $700,000. In spite of these serious handicaps, Mr. Ihlder has solved the principal problem in low-rent housing - the development of design so good that houses can be built at low cost without subsidy. All Mr. Ihlder's remodelling has been kept within cost limits which can be repaid out of rents from low-income tenants. He has built some new houses and remodelled some dwellings, putting in running water, stoves and ice boxes in what were formerly the worst slums. He has clearly in mind the need for better housing, rather than good housing. The housing experiments of the last four years have fallen down from two principal weaknesses - a desire to give low-income families ideal housing at once; and insufficient skill in design and cost control to build cheaply. Mr. Ihlder knows that it will never be possiboe to rehouse the masses of ill-boused Americans unless construction costs can be kept very low. He also knows that the small-unit house is frequently lower- cost housing than large-scale units, because of less overhead. Mr. Ihlder sees clearly the distinction between short-term and long-term housing plans. He hoped to describe to the President a program for five-year or ten-year houses, of cheap construction which 185 - 2 - would be immediately effective in meeting the housing shortage. Owner- ship of these houses would be retained by the Government which would be under obligation to tear them down in ten years, to prevent develop- ment of new slums and new vested interests. In the meantime, the more slow moving program of substantial construction for the long-term could get under way without sacrificing emergency needs. At the same time, tenants who had been living in slums would be slowly adjusted to better living conditions, and be mentally ready to take care of high-grade housing. Mr. Ihlder's funds for construction are used AS capital for a revolving fund, with one exception. If the Alley Dwelling Authority has to buy land which has a high cost because it is overcrowded with buildings, and they decide that the land should be rebuilt with few buildings, they write off the decline in land values at once, and know exactly what their losses are. This is in line with the best practices of urban land use - to decide on the best social uses of the land, to fit the capitalization to real income, and to admit the loss of speculative profits at the beginning. Mr. Ihlder favors no other subsidy for housing but this. His low-rent buildings repay full construction costs and normal capitalized value of the land. Mr. Ihlder's present difficulty is that under the law he can operate only in congested alleys. Frequently it is not the best use of such land to build low-rent housing on it. It may be best fitted for a farmer's market, or it may be a natural high-rent area. Uclassified 186 - 3 - Mr. Ihlder, therefore, can rebuild fewer units than he tears down. He has immediate need for authority in the act to build new housing equivalent to the amount he tears down, even if he has to acquire new sites. Obviously he should also be permitted to go into new construc- tion on low-cost land, instead of being limited to alley clearance. When rents go up as a result of a housing shortage they never come down, even after the extra housing is built. Mr. Ihlder is fully able to apply the methods he has worked out so carefully in Washington to a national program superior to those now under way. Regraded Uclassified TREASURY DEPARTMENT 187 INTER OFFICE COMMUNICATION MEMORANDUM OF THE DAY'S ACTIVI- TIES FOR FEBRUARY 24 DATE February 24, 1937 TO Secretary Morgenthau FROM Mr. Magill 1. Railroad Retirement Allowances Mr. Latimer spent an hour with Mr. Oliphant and myself today, He did not make clear precisely what he wanted, probably because he wes not too sure in his own mind that he could persuade us to agree with him. His proposals, however, seemed to be three: (1) That enough revenue be diverted from the Social Security taxes to pay a part of the cost of railroad re- tirement allowances which the railroads and their employees are unwilling to pay themselves; (2) That the administration of the railroad retirement taxes be transferred to the Railroad Retirement Board (3) That the Carriers Taxing Act and the Railroad Retirement Act be consolidated into one law He told us that the railroads and brotherhoods have virtually agreed upon the now provisions for retiring allowances and that the railroads, accord- ingly, will drop their fight on the constitutionality of the Carriers Taxing Act. 2. Interstate Commerce Commission -- Undistributed Profits Tax Mr. Eastman is coming over on March 3d at 3:00 P.M. with Mr. Boles, to see Mr. Kent and myself. 3. Non-resident aliens Mr. Burgess said he thought the proposed transfer tax on sales to or by non-resident aliens would cause n. furore among the brokers. He is going to discuss the tax with some of his own men in New York who are familiar with the security markets. Mr. Rent met with Mr. Malcolm Bryan of the staff of the Federal Reserve Board and Dr. Goldschmidt of the staff of the Securities & Exchange Commission this afternoon, to consider the kinks in the Transfer Tax. Another matter we need to consider is the possible amendment of the tax on transfers between our own citizens, since the present scheme of taxation bears no relation whatever to the values of the securities bought and sold. Regraded Uclassified 188 Report of day's activities to Secretary - 2/24/37 - 2 4. Translation of foreign tax laws Mr. Haas has agreed to go forward with this project at once. We have just had an example of our need for such a compilation in the fact that it has taken us all day to find out the stock transfer taxes imposed by the principal foreign countries and we have not yet been able to ascertain the Dutch taxes. The legislative division would use & translation of the foreign tax laws virtually every day in the year and so would a number of other divisions in the Department. Attachment -- Conference with Mr. Latimer Rm Regraded Uclassified 189 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE February 24, 1937. To The Secretary FROM Mr. Magill Mr. Latimer had e lengthy conference with Mr. Oliphant and myself this morning regarding the proposed changes In the Rail- road Retirement Act, which are in process of negotiation between the railroads and the brotherhoods. Mr. Latimer said that an agreement had been reached on the principal points and would be put before the President on Friday. The details to be considered in the remainder of this memorandum are not to be laid before the President. Latimer put up to us essentially three questions, although in his conference be covered practically the entire background of railroad retirement legislation. In the first place, he would like to know whether we are agreeable to a utilization of a part of the proceeds from the Social Security taxes to pay the cost of retirement allowances for railroad men. Railroad men, 88 a group, are older than other employees. Retiring allowances of the amounts which they desire will not be provided by taxes in the amounts which they are wil- ling to pay (a total of Th on the pay-rolls divided equally between the railroad and the employee). Mr. Latimer thinks that it is fair to make other employees bear this excess cost although I was not satisfied with the reasons which he gave, and it would seem to me that we may be creating E very undesirable precedent for similar special treatment in other industries, His second question is whether it would be legally safe to place the taxing provisions and the provision for retirement allowances in the same act. This kind of an act was held unconstitutional but Latimer thinks that conditions have changed due to the fact that rail- road executives are now supporting the act, and testify that the ef- ficiency of railroad operation will be improved by provisions for re- tirement allowances. In the third place, Mr. Latimer inquires whether it will be possible in some way to place the administration of the tax provision under the jurisdiction of the Railroad Retirement Board. He says there is considerable lost motion at present erising from the fact that the taxes are solicited by one agency and the pay- ment of the allowances is under the jurisdiction of another agency. I asked Mr. Latimer to give us, first, a categorical state- ment on the questions which he wished us to consider and, second, e memorandum of his views with respect to these questions. He told us that the railroads and the brotherhoods hope to have the precise legislation in shape by the first of April, and to obtain its passe(* in Congress shortly thereafter. Pm 190 February 24, 1937 Senator Nye called. Wanted to know what we were doing about alien-owned American stocks. That his Com- mittee had given the matter up because it was too diffi- cult to handle. I explained to him that we were studying the problem here and were hopeful of finding a solution. That in case of war abroad we were prepared to ask Congress for the necessary legislation to make it possible for us to become custodian of all foreign-held American securities. He said that he was delighted to know it. He said, strictly between us, he simply considered the State Depart- ment & branch office of the British Foreign Office. He then said, "Did you read my speech on the Supreme Court?" I said, No; that I had heard about it. He said, "I just wanted to let you know that I have not closed the door to going along with the President, II and then he went ahead and asked me two small political favors, which would be cheap. Regraded Uclassified WHITE HOUSE FDR 2/24/37 TREASURY department 191 WASHINGTON OFFICE OF CHIEF COUNSEL BUREAU OF INTERNAL REVENUE February 24, 1937. MEMORANDUM FOR THE SECRETARY: In re: Status of Work of Board of Tax Appeals. In accordance with memorandum of February 19, 1937, transmitted by Mrs. H. S. Klotz by memorandum of same date, statistics have been prepared showing: (1) The status of the work of the Board of Tax Appeals, and (2) The number of cases pending on its docket on a comparative basis. These statistics are incorporated in the attached memorandum which is self-explanatory. Moneson Haproth Chief Counsel. sed you Show to rhe 3/4 192 MEMORANDUM IN RE STATUS OF WORK OF BOARD OF TAX APPEALS 1. The total of the cases pending before the Board regardless of status, 1.0. whether awaiting trial, ewaiting decision, awaiting expire- tion of appeal period, or otherwise, on the dates indicated below, are as follows: June 30, 1930 16,035 June 30, 1931 21,233 June 30, 1932 20,469 June 30, 1933 18,080 June 30, 1934 12,474 June 30, 1935 10,423 June 30, 1936 10,102 December 31, 1936 9,512 2.* The total of the cases which had been heard by the Board, and submitted to it for its decision, but in which no final decision had been entered on the dates indicated below, are as follows: June 30, 1930 1,223 June 30, 1931 963 June 30, 1932 1,103 June 30, 1933 1,763 June 30, 1934 1,894 June 30, 1935 1,477 June 30, 1936 907 December 31, 1936 781 3. The total of the cases which have been submitted to the Board end in which no opinions (as distinguished from decisions) have been promulgated as of February 23, 1937 1a set out below. A division of such total into periods 18 also given as follows: Period in which submitted Number of cases April 16, 1931 to Dec. 31, 1934 11 Jan. 1, 1935 to June 30, 1935 25 July 1, 1935 to Dec. 31, 1935 B Jan. 1, 1936 to June 30, 1936 94 July 1, 1936 to Dec. 31, 1936 251 Jan. 1, 1937 to Feb. 23, 1937 105 Total 494 *This table includes cases in which the Board's opinion had been rendered but which were, on the dates given, awaiting recomputation prior to entry of final decision, and also cases returned from appellate courte awaiting entry of decision by the Board. Regraded Uclassified 193 February 19, 1937 MEMORANDUM FOR MR. SHAFROTH: The Secretary asked me to send this to you with a request that you prepare the memorandum asked for by the President. H.S.Klotz Regraded Uclassified 194 COPY THE WHITE HOUSE WASHINGTON February 19, 1937. MEMORANDUM FOR THE SECRETARY OF THE TREASURY Would you ask Shafroth to let me have a confidential memorandum showing status of work of Board of Tax Appeals; also showing cases before them and cases on docket on a compara- tive basis for four or five years past? F. D. R. Regraded Uclassified 185 24 February, 1937 COAST GUARD OPERATIONS IN FLOOD AREA With the improved situation throughout the Mississippi Valley, Coast Guard operations are now confined to the final stages of assistance work and in winding up affairs. Captain Reinburg, Commander, Coast Guard Relief Force, at Memphis, is returning to his regular station at Chicago this afternoon, but will continus to exercise general jurisdiction over Coast Guard flood relief operations. The remaining Coast Guard force, totaling 16 seagoing units and approximately 25 boats, 1s under the immediate di- rection of Lieutenant Eskridge, Commanding Officer of the DIONE, at Natches, Mississippi. The need for the services of this force is nearing a close. OK, Unless otherwise instructed, no further daily reports will be submitted. General Water Level Conditions. Water 58' at Natches, with a falling tendency. New Orleans up 1/10th a foot this morning to 19', which level is Hell not expected to be exceeded upon the arrival of crest tomorrow. Regraded Uclassified 156 February 24, 1937 Talking to the President over the phone today the Secretary said to him, "I saw you said something in your press conference about the Housing Bill and I wanted to tell you that I have been working on it from the financial side and I hope to have something to present to you. I forgot to mention it yesterday when I saw you, but it will take our people the balance of this week the complete the study. Before I announce our financing plans, I would like to see you tomorrow morning. "On the foreign thing, the only thing that is new Synyt nyt Bagan Regraded Uclassified 197 February 24, 1937 Excerpt from Minutes of Group Meeting in Secretary's Office, February 24, 1937, at 9:30 a.m. H.M.Jr: I'll dictate this. Then the others can take this up, see? Mr. Hull called me last night and said that, after thinking this whole question over - after thinking this thing over very carefully I mean I've got to repeat but what I am saying is ultra-confidential. He said that, after all, during the last three or four years, Agriculture has a number of times done things which were contrary to the State Department's policy, but the State Department has been able to live them down; and that if the Treasury wished to go ahead in this matter of trying to control foreign capital, their position would be the position as stated in Herbert Feis's letter. But he hoped I would be very slow about it and very careful, because he - if I didn't mind his giving me his personal opinion, this method that had been suggested of making it permissive and raising from ten to thirty - that he didn't think it would have the effect we wanted. Therefore, his personal advice to me was that we go very slowly, but whatever we do, well, he'd go along in the sense as stated in Herbert Feis's letter. But his personal advice to me was to take it easy. Regraded Uclassified 138 Thursday February 25, 1937 8:50 a.m. Treas. Operator: Go ahead. B. M. Cochran: Hello HMJr: Hello, Cochran C: Hello, Mr. Secretary HMJr: Where are you? C: I'm at the Embassy office now. HMJr: Yes C: But my friend sailed this afternoon; I was just down to see him off, at the station. HMJr: Yes C: The boat train left at four-fifteen. HMJr: Well, Cochran, I want to tell you something and I'll try to do it in as guarded a way as possible. C: Yes HMJr: It seems to me at this end that there are certain things that the people over there could do, you know? - In your - the country where you are now. C: At your end there is what? HMJr: There are certain things that they might do to help themselves, see? C: Yes HMJr: And what I thought you might do is this, why don't you get me off a cable - ? C: Get - get what? HMJr: Send me a cable - C: Yes HMJr: Of what you think the French might do to help them- selves internally. Regraded Uclassified -2- 199 C: Yes HMJr: And your reasons for it, see? C: Yes HMJr: And then I can digest it and then I can give you an answer. C: All right, fine. HMJr: Now, I've got certain ideas myself. C: Yes HMJr: But, I'd like to get yours first. C: I have been sort of planning to give you a summary of the situation the next three or four days. HMJr: Well, I wish you'd send it not later than - they're so slow here; if you could get it off Friday night they might get it decoded and get it to me by Monday. C: If I get it off tomorrow night? HMJr: Friday night C: Friday - ? but tomorrow's Friday. HMJr: Yes C: I can get it off tomorrow night. HMJr: But,- in the thing - C: - morning I am going to see Fournier - HMJr: Yes C: - the Under-Governor. And I'm also going to see Cariguel. HMJr: But the thing that I'm asking you is, what - from sitting there - do you think that they might do to help themselves? C: I understand and I have some ideas on that. HMJr: See? - And if - - C: I'll just sort of sound out to see what's going on. Regraded Uclassified 200 -3- HMJr: Yes - And if you want to you - in this cable you can say, in order - "Complying with your request I am giving you the following information," you see? If you want to say that in your cable. C: - some way. HMJr: Hello? C: Yes HMJr: I mean, if you want to, you could say in your cable that you're giving me this information at my request. C: Just as you wish. I'd really planned and I told Wilson that I was going to send a summary - HMJr: Yes C: - the next day or two, trying to show what measures are opposed to them - HMJr: Yes 0: - and what the situation exactly is. HMJr: Yes - Well, I mean - now, on that - you notice I keep emphasizing - what the French can do to help themselves? C: Yes, yes, I understand. HMJr: Do you get what I mean? C: Yes HMJr: Do you? - Hello? C: Yes HMJr: And I'd like a cable along those lines, see? C: I'll get that off tomorrow evening surely. HMJr: Yes, because I've got certain ideas and - - C: Well, I've heard nothing more from the Minister. On Monday night at this Washington's Birthday Dinner - HMJr: Yes Regraded Uclassified 201 -4- C: - he said he was going to give me a telephone call during the week - HMJr: Yes C: But I haven't heard from him. HMJr: All right. C: And I'm going to see these other people tomorrow. HMJr: All right. C: And in the wire today which went out, I told you of my talk with the men up at Amsterdam - HMJr: Yes C: - when he confirmed today that they had turned my friends here down - HMJr: Yes C: - the request for five billion. HMJr: Yes - Well, that - that isn't the kind of thing that I've got in mind, see? C: No, no, but I mean, what I'm trying to show is that the possibilities over here of borrowing are blocked. HMJr: Yes C: And they've got to do something to HMJr: Yes, well now, that's just what I've got in mind. C: Yes - well, that I'll work toward tomorrow. HMJr: All right. C: One or two things involved in it I'd like to tell you. HMJr: I have time. C: Fine, because, on the night of the twenty-third or the morning of the twenty-fourth - HMJr: Yes Regraded Jclassi 202 -5- C: - an additional telegram went through here - I haven't a copy but I saw it. HMJr: Yes C: In which a conversation with the Federalist Govern- ment was reported - HMJr: Yes C: And he again brought up, or someone brought up - this question of getting a loan from us - HMJr: Yes C: - on our market. HMJr: Yes C: And the man here told him of his pact with Morgan - HMJr: Yes C: - in which their representative indicated that if the War Debt unit was settled a loan there might be possible. HMJr: Yes C: Now, the language that my friend here used was more optimistic, - HMJr: Yes C: - than Morgan's man used to Wilson and me on the same point. HMJr: I see. You mean the interpretation of what Morgan said was more optimistic? C: That's it. HMJr: I get you. I mean - C: Morgan's man told me, after this other thing - after their turn-down here had taken place - you see? HMJr: Yes Regraded Uclassified 203 -6- C: I kept out of touch with them while that was going on. HMJr: I see. C: But after the thing was over he told me the whole thing and told me - the wire which we are to send them. HMJr: I see. C: And they're - they're not nearly as optimistic as our friend here, and his paper. HMJr: Yes C: See? HMJr: I see. C: I have a feeling that he'll take that proposition up when he gets there. HMJr: I see. C: His attitude toward me has been very nice - HMJr: Good! C: He said that he wants me to stay here, that I can be foot-loose and so on. HMJr: Well - that - I'm glad to hear that. C: Well - and I said, "Well, you write to Secretary Henry, when you're over there," - I mean you. HMJr: Yes C: He said, "Well, Henry already knows it from my first visit," I mean, from seeing you before he came. And I said, "Well, you've been here four months now, and if you can let him know that you're glad to have me go on with this I'm sure he'll feel much happier." HMJr: Yes Regraded Iclassified 204 -7- C: And he said, "Well, I'll certainly tell him." The only thing where there has been any question at all was in regard to sending some of this highly confidential stuff the last ten days - HMJr: Yes C: - across the Channel. HMJr: I don't' get that. C: I mean, you know I have an inspection - HMJr: Yes C: - of topics through my twelve colleagues - HMJr: Yes C: The man here does not think - HMJr: Yes C: - that these highly confidential things, such as I'll send tomorrow to you - HMJr: Yes C: - that those should go across the Channel. HMJr: I see. Well, that's a matter of judgment. C: - on that point, I think. HMJr: Well, if they can't - if we can't trust our own representative in London, then we ought to change him. C: Well, he thinks that you can't. HMJr: He thinks we can not? C: Yes HMJr: What? C: Yes, that's exactly what he thinks. HMJr: He thinks we can not? Regraded Uclassified 205 -8- C: Yes, sir HMJr: Well, that's a matter for Mr. Hull. C: Well, I mean, I can't express any opinion on that. He picked me up on it and I said, "Well, please take it up when you go back," - HMJr: That's right. C: And, I said, "We'll be careful what we say in the meantime." HMJr: Well, I'm glad that the relationship between you and him has been good. C: It's been very nice and I think he's really sincere in wanting me to do this. HMJr: Good - C: And that was the only point - and the one about this telegram HMJr: Well, I'll make some - I won't do it myself but I'll make some indirect inquiries and see whether we can get hold of it. C: Yes, yes HMJr: Anything else? C: No, no, that's everything. And I'll get busy and get you this wire tomorrow evening. HMJr: All right, thank you. C: All right, sir. HMJr: Thank you. C: Goodbye. 206 February 25, 1937 Called thePresident and told him that he had to do something to get France to devalue. He liked the idea and I am going to see him at 10:10 tomorrow. Called Haas and told him to have White work right through the night and be ready at 9:15. I asked Knoke to take the midnight and be in my office at 9:15 in the morning. I also arranged to speak to Cochran at 7:30 tomorrow morning over diplomatic channel. Regraded Uclassified 207 February 25th I have about come to the conclusion that we should take the initiative and recommend to the French government that they go ahead and devalue further. My purpose in call- ing up Cochran was to get his angle on this matter and I am going to ask Haas and White to give me a study on Monday as to whether the United States could stand a further devaluation of the French franc at this time. AS I understand it under the tri-partite agreement they could devalue another 8% which would put the Franc down to 4.35 and that we would then take it up with the English that they and ourselves would permit the French to do this without lowering the pound or the dollar. If we do not do something like this it is a matter of weeks that they will do something much more serious and the Blum government just cannot continue. The fact that the people are figuring that the French are going to devalue further is rushing the money out of France so that they can get the profit out of it and if the French would devalue it would possibly slow up the rush of French money here. MISC / I.ADM 0-36 du FEDERAL RESERVE BANK OF NEW YORK 205 OFFICE CORRESPONDENCE DATE February 25, 1937. TO CONFIDENTIAL FILES SUBJECT: TELEPHONE CONVERSATION WITH FROM L. 1. Knoke BANK OF FRANCE. I called Mr. Cariguel at 10:06 today, having been unable to speak to him when he tried to reach me yesterday. He explained that he had tried to find out who had seld the 15,000,000 francs which we had bought for the Bank of France on February 25. I told him that the Manhattan Company had been the seller and that I assumed that it was for Lazard's account with whom they work jointly. Cariguel replied that that checked with his information. He continued that they had had a very quiet day, and that so far, at least, today also had been quiet, they having been called upon up to this moment to support the franc only to the extent of £180,000. I asked whether that signi- fied an improvement and Cariguel replied that there was no reversal of the tendency. I referred to the rumor that the French Government had con- cluded a loan in Holland, which rumor, I said, had reached here from London. Cariguel said that it was not his understanding. Although officially he knew absolutely nothing about it, he rather gathered from the market that an effort had been made to raise the money but that the Dutch were adamant and unwilling. GM 03V1303H LUK:KMC VIDAMIET / Regraded Uclassified FEDERAL RESERVE BANK OF NEW YORK in hadhead 209' OFFICE CORRESPONDENCE DATE February 25, 1937. To CONFIDENTIAL FILES SUBJECT: TELEPHONE CONVERSATION WITH L. B. Knoke FROM BANK OF ENGLAND I called Mr. Bolton at 11:45 today and reverted to our telephone conversation of the twenty-third in connection with the cable regarding "24 hours notice" which no sent them on the eleventh. I reminded his that in this conversation he had briefly put the case as follows: "All dealings in gold cosse immediately upon receipt of notification." I confirmed that this was the correct interpretation but stated that he should add "vithout projudice to past transections." Bolton replied that that was his understanding and that after all, it was a matter of complete confidence as far as they were concerned. I also referred to his suggestion of the twenty-third that we insert the words "by either party" before "under the monetary arrange- sent." I mentioned that the lawyers agreed with him entirely and that according to them there was no question as to the earnark or release applying to both. Nevertheless, I suggested that we leave the text as is, as otherwise we would have to go back at all the others. Would that be all right with him? Bolton agreed. I inquired about market conditions in Europe and Bolton said that after the slump an the London stock exchange last Monday, the London and continental markets had had rather 1 bad shake-up with the result that, for the time being, everything vas stopped. Under the eircumstances it was very difficult to tall which way the trend was. In France, things were a little quieter although there will no sign of real improvement. Speaking about the continued flow of gold towards this ent- try, I asked whether he know anything shout the shipment of $5,500,000 Regraded Uclassified 210 MISC. 3,8 50M 5/4 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE DATE February 25, 1937. To CONFIDENTIAL FILES SUBJECT: TELEPHONE CONVERSATION WITH L. 1. Knoke FROM BANK OF ENGLAND - 2 - of gold on the way from Egypt. Bolton replied that as for as he knew, this was gold which in the ordinary way would be sent to London for sale there but was now being sent to us by parcel post. It represented, he said, the accumulation of all the odds and ends of gold coin and jewelry paid in to the National Bank. It had nothing to do with production. W LWK:KMC RECEIVED - sit si Regraded Uclassified ADDRESS OFFICIAL COMMUNICATIONS TM 211 THE SECRETARY OF STATE WASHINGTON, a. c. DEPARTMENT OF STATE WASHINGTON STRICTLY CONFIDENTIAL. February 25, 1937. My dear Mr. Secretary: I am forwarding herewith paraphrases of cables recently received from Ambassador Bullitt in London re- porting conversations with the Minister of Foreign Affairs: "I said that despite what appeared to be new moderation in Hitler's policies, I had some fear lest this might prove to be the lull be- fore the storm. I ventured to express the possibility that Hitler was speculating on a possible collapse of the French financial sit- uation and the overthrow of the Blum Government. This, in the opinion of the Germans, would re- sult in the Socialists, the Communists, and the Left Wing Radical Socialists going into united opposition which would produce an enormous series of strikes of the greatest nature. That all this, indeed, was a possibility Delbos admitted, but he stated that he did not himself believe that the financial situation would get 80 far out of hand as to lead to the overthrow of the Govern- ment. He added candidly that he knew that both Labeyrie, Governor of the Bank of France, and Auriol, Minister of Finance, did not possess the country's confidence. There might be some slight return of this confidence if Labeyrie was re- placed, which was a possibility. I questioned him as to whether there was any chance that Auriol might be replaced and if there might be other Cabinet modifications. He replied that he did not believe there would be. Mr. Blum would face extreme The Honorable Henry Morgenthau, Jr., Secretary of the Treasury. Regraded Uclassified 212 - 2 - extreme difficulties in making any. He himself, he added, had suggested to Blum a few days ago a possible solution and he, Delbos, expected to attempt to carry this plan through at the earliest possibility. Delbos's proposal was the formation of E. National Economic Council which would have the duty of supervising and coordinating the work of the Ministers of Finance, National Economy, Commerce, Agriculture, and possess as well some supervision over the Bank of France. Delbos was of the opinion that if Blum would appoint Rist to this position an immense return of confidence would occur." - "I asked the Prime Minister, Blum, whether he did not feel that the present moment might be a promising one for France and Germany to get to- gether on the basis of a removal of barriers to international trade and armament restriction. He replied that he did not believe that the propi- tious moment had yet arrived. He stated his belief that Hitler was speculating on the fall of the Blum Government with the idea that if he should fall from power, the Socialists, the Communists, and the Left Wing Radical Socialists would make a united opposition which would make impossible any Government in France, and would bring about a series of strikes and possibly even a general strike. I queried him as to whether the Germans might not be close to the truth in their anticipation His reply was that they were not close to the truth. First he expressed the belief that the financial situa- tion would not bring about the overthrow of his Government. He called attention to the beginnings of the increase in confidence. I quoted to him the remarks of two prominent persons who had told me during the course of the previous two days that it was their opinion that a considerable return of confidence would occur if the Government got rid of Labeyrie, the Governor of the Bank of France, who did not seem to inspire confidence in anyone and if the Government at the same time put out a re- assuring statement making clear that it wac not contemplating the confiscation of private property. The Prime Minister responded that he knew there wes Regraded Uclassified 213 - 3 - was a campaign on against Labeyrie and admitted he thought Labeyrie is not a practical banker. "I asked him in what further forms the German diagnosis might be incorrect. I stated that if the Blum Government 16 overthrown on monetary ques- tions, did he believe they would be able to have another general election. Mr. Blum repied he was not at all sure of this. Before there could be another general election it would be necessary to have the consent of the Senate and it was doubtful whether the Senate would give this consent because it would know that the result of another general election would be to strengthen the Left - the Socialists gaining considerably at the expense of the Communists and the Radical Socialists, while the Radical Socialists would retain their present number of places by taking away a number of seats from the Senate, while the Right would gain nothing. He concluded that under the circumstances he would return with increased power. "The Prime Minister then made what appeared to me to be the most impor tant statement. He said that the third respect in which the German diag- nosis was not correct was as follows: That if he went into opposition a Radical Socialist Government would then be formed with the support of the Senate and that he, Blum, would make the utmost effort to prevent serious strikes instead of trying to bring such strikes about. He stated that he would do his utmost to make possible in France an orderly govern- ment, because he considered that the international situation was too grave and the possibilities of action by Hitler too great for him to envisage for an instant any action that might lessen French strength in the field of international affaire. "I asked Mr. Blum if he was satisfied with the attitude that the United States had manifested. Mr. Blum requested me to thank the President most profoundly for the general support which his whole line of political activity was giving to the French forces of democracy. "Then he asked whether it might not be possible for France to secure in the United States some type Regraded Uclassified 214 - 4 - type of loan. I replied that it was my opinion and the opinion of the American Government that the Johnson Act excluded absolutely any type of loan. In further reply to his question as to what the situation would be if a debt settlement was reached, ending the application of the Johnson Act, I stated that I could not give him an expert opinion on this subject, but I related an opinion of one of the partners of Morgan and Company to the effect that in case France met its debt to the United States, a French loan in the United States would present quite a different aspect. Mr. Blum said that he did not consider impossible a debt settlement. Bonnet, it is true, had been given no instructions to try to make a debt settlement, but only to try to develop further the existing trade agreement and the general collaboration between the United States, France, and Great Britain. He believed, nevertheless, that it ought to be possible in the near future to make a debt settlement. I pointed out that he must realize the position of the American Congress was extremely stiff and that I did not believe he could persuade the French Senate and Chamber of Deputies to accept any settlement which would also be regarded as acceptable by the American Congress. He replied that on the contrary he is confident the French Parliament is beginning to realize that the existing danger of European war was making it ab- solutely essential to have the good will of the United States by doing everything possible. Fur- ther, he stated, it is his belief that he could pass through the French Chamber of Deputies and Senate a debt settlement proposal which by ex- tending the payments over a very great number of years would be satisfactory to the American Congress. He stated further that he could not make e settle- ment which would on its face be illusory, which everyone would know is in excess of the ability of France to acquire foreign exchange, but he believed he could get the Senate and the Chamber of Deputies to put through a debt settlement of a serious character. "Further I asked him if he had anything else to suggest in the present situation. To this he responded that the Germans should come to realize that their speculations on disorder in France were destined Regraded Uclassified - 5 - 215 destined to be disappointed. He believed that the moment would come when it would be possible to make some move towards the limitation of armaments with the hope of success. He hoped that the President and the American Government would give support at that time." Sincerely yours, Regraded Uclassified 216 Thursday February 25, 1937 12:30 p. m. HMJr: Hello Treas. Operator: Dr. Burgess HMJr: Hello W. R. Burgess: Hello, Sir HMJr: How are you? B: I'm fine. HMJr: Say, Burgess, do you suppose I could pick up a couple of million of two and a halves around last night's closing? B: Of the new two and half? HMJr: Yes B: You want to buy on this market while you're working on a new issue? HMJr: Well, I thought if I could buy them around-last night they closed around a hundred and one and ten thirty-seconds. B: Well, they're quoted a hundred and one and fourteen sixteen right now. HMJr: Oh! oh! they've gone up today? B: Yes HMJr: Ha, ha,ha! B: (Laughs) HMJr: Well, I see. Well then, I can't buy at last night's - - - - B: I'm afraid you can't. HMJr: Well, there, you see - B: And you really wanted to, didn't you? Regraded Uclassified -2- 217 HMJr: No, I was just kidding you. B: (Laughs) HMJr: You rose for a fly. B: (Laughs) I rose very nicely. HMJr: Yes, yes B: (Laughs) Well, I guess they liked the idea. You've given - you've made your statement, haven't you, to the press? HMJr: Sure, don't you have a Dow-Jones news ticker? B: Well, I've been so damn busy I haven't looked at it. HMJr: Well, have somebody bring you in a Dow-Jones news ticker - about ten forty-five. B: Yes, yes HMJr: Sure - B: Well, that looks pretty good, doesn't it? HMJr: They went up-immediately after they went up. B: Yes, yes - yes HMJr: Yes, Well, it looks as though they like it. B: Well, that's very nice. HMJr: And incidentally - I love to rub this into you, see? - figuring that we say we give them at a hundred and one, see? B: Yes HMJr: - and a three per cent as against - they're giving them three per cent interest for the full - you know? B: Yes HMJr: - for the last month. B: Yes Regraded Uclassified 218 -3- HMJr: As against doing it - doing it for two and a half, you see, from the fifteenth of March on? B: Yes HMJr: - at a hundred and three-quarters. It works out exactly 'even Stephen'. B: Is that so? HMJr: Yes, I thought that was very amusing. B: (Laughs) Yes HMJr: See? B: Yes HMJr: I mean, it works out exactly the same from the stand- point of the Treasury and of course from the stand- point of the public we're selling - offering the bond at a hundred and one. B: Yes, yes HMJr: Isn't that interesting? B: Well, I thought sure - the way this market looked - I thought it would go up when you announced it. HMJr: Yes B: I thought sure you could sell them at a hundred and one without any interest. HMJr: I know, but I just thought that for an amateur sitting down here, you know, it's - B: It's damn good, yes. HMJr: - That's what I thought. B: (Laughs) HMJr: All right, thank you. B: Righto HMJr: Goodbye B: Goodbye Regraded Uclassified 219 Thursday February 25, 1937 2:54 p. m. HMJr: Hello - Treas. Operator: He's ready now. HMJr: Go ahead. T.O.: Go ahead. HMJr: Hello Gordon Rentschler:Hello, there, Mr. Secretary man, how are you? HMJr: I'm all right. Where are you, at the - ? R: I'm down here on one of your islands loafing and I thought I'd better check up and see whether I was loafing too long or not? HMJr: Are you down there at Jeckel Island? R: Down at Jeckel, yes. HMJr: I see. R: It's perfectly lovely down here today, too. HMJr: Well, it's very nice up here in Washington. R: We've had some pretty bad storms but now it's bright and sunshiny so everything is going pretty good. HMJr: Well, how's your golf? R: Oh, it was not so good this morning. HMJr: I see. R: Still can't - still have a hard time doing better than a ninty-two. HMJr: Well, well, well - well, that's - R: It cost me a dollar this morning and I don't like it. I'll have to work like a dog tomorrow to get it back. HMJr: I see. Well I'm sorry. (Laughs) R: Tell me, on your financing on the fifteenth, is everything all set? Regraded Uclassified -2- 220 HMJr: Well, we made an announcement this morning. R: Yes HMJr: Did the boys tell you? R: No, I haven't talked with them. I thought I'd check with you first. HMJr: Well, we announced that we'd do three things this morning: That we'd raise no new cash; - R: Good HMJr: That we'd sell from two to three hundred million dollars worth of bills the fifteenth of June; - R: Yes HMJr: And that we'd offer an exchange - a new security for the April fifteenth on March fifteenth. R: Good HMJr: We told them everything except what that security would be. R: I see. HMJr: See? R: Well, that puts you in very good shape. HMJr: And on the strength of that the bond market went up - oh - a couple of thirty-seconds. R: Yes, I see. Well, that puts it in a comfortable position. HMJr: Yes R: I'm glad you did it that way, because there's a little hesitancy on what the net rate should be. HMJr: Well, I - R: And it's pretty evident now what you can do and it'll work out pretty well. HMJr: I have never fussed so over a financing as I have over this. Regraded Uclassified 221 -3- R: No, because there's too many outside things that have nothing to do with you. HMJr: Exactly R: And on your own things you can do one thing but on the general situation you've got another problem. HMJr: Exactly R: So this puts you safe so that you can do something with the last two and a half and not get in any trouble with it after you can trust it a year and - Something of that sort would be all right. HMJr: Well, now, don't think too much on me. R: No, no, that's all right. HMJr: You do your - - R: Whatever you do - - HMJr: Listen - R: - will move along. HMJr: - you do your fishing down there. R: That's all right. HMJr: (Laughs) R: No, that's all right. Whatever you do will be all right. HMJr: Yes (Laughs) R: Now, tell me, what else is new? HMJr: Well, I haven't got much else that I can talk about. R: Yes, I see. HMJr: (Laughs) But - R: Is the European situation behaving itself on exchanges? Regraded Uclassified 222 -4- HMJr: It's orderly. R: It's orderly? HMJr: It's orderly, yes. R: But it - still there's a severe operation there that'll have to come some time. HMJr: That's right. R: And you're - they're not - they're frank with you about that. HMJr: They'll what? R: They're frank with you about that. HMJr: Well, I mean, how shall I put it? They can't hide anything from me. R: Yes, well, it's very - it has to come some time. HMJr: But, the thing is - it's still orderly. R: Yes HMJr: Yes R: Well, I think the rest of this other is in pretty good shape, then. - That's all right. HMJr: Yes R: And there's nothing really, that you want done, that we can do in this present situation, is there? HMJr: No, I would say that you could stay down there perfectly well and be back Monday a week. R: I see. Well, that's all right. That's just exactly the way we've timed it, you see. Then we'll be per- fectly good loafers. HMJr: All right. Well, you can be down there until Monday a week and you'll be back - R: And we'll be in New York the Sunday afternoon a head of time. Regraded Uclassified 223 -5- HMJr: Well, you'll be there in plenty of time. R: That's all right, that's fine. HMJr: All right. (Laughs) R: Goodbye - and it was nice to say 'hello'to you. HMJr: Righto R: Byebye HMJr: Goodbye. BERALD P, NYK, N. BAK., CHAIRMAN WALTER F. GEOMGE, GA, ARTHUR N. VANDOMIENS, MICH, BENNETT CHAMP CLARK. MO. W. WARREN BARBOUR, N. J. 224 HOMER T. SONE. WASH JAMES P. POPK, IDAHO United States Senate SPECIAL COMMITTEE INVESTIGATING THE MUNITIONS INDUSTRY felis February 25, 1937 Honorable Henry Morgenthau, Jr., Department of the Treasury Washington, D. 0. Dear Mr. Secretary: Yesterday morning, I talked to you about Earle A. Bates, a constituent who is here at my home at the present time. You were BO good as to indicate a wish to strive to make place for him and I am fulfilling my promise to you by submitting, herewith, a statement by him concerning his background and previous work with the Treasury at Bismarck. After seeing you, I went in and had a word with Mr. O'Connor and incidently made mention of my interest in Mr. Bates. You might find him equally anxious to help build the way for Mr. Bates. I have never given an individual an indorsement with larger pleasure than I have in indorsing Mr. Bates. If you were to see him and visit with him you could not be other than impressed with the man. His ability is certainly well recongnized and his personality is one which would please anyone. It will please me mightily if you can indicate to me at my office at an early hour the prospect of opportunity for this young man. Needless to say, he is quite eager about it all and anxious to get going. Sincerely Regraded Uclassified 225 Washington, D. C. February 24, 1937 Earle A. Bates, a resident of North Dakota at 610 Ave. A., Bismarck Born November 16, 1913 at Huron, South Dakota. I was graduated from Huron High School in course which included typing, shorthand and bookkeeping in June 1931. I entered Western Union Telegraph service at Huron as clerk-messenger in 1929. Then I became operator at Virginia, Minnesota and later Branch Manager at Bismarck, North Dekota. A reduction in personnel brought about my release November 15, 1934. On November 26, 1934 I started in the FERA Disbursing office at Bismarck. Disbursing Clerk F. A. Holmes placed me in several types of work including mailing, numbering, examining and proof reading before assigning me to position of Lot Clerk May 1, 1935. The office, including myself, was transferred to the U. S. Treasury depart- ment - State Disbursing Office July 1, 1935. This position was held until February 17, 1937. It consisted of ar- ranging and recording vouchers and payrolls to facilitate their passage through the office. I also assisted in the preparation of reports and in check statement reconcilement during which time I used adding machines and occasionally a calculator. January 21, 1937 I was released from the Disbursing Office because of the loss of work volume, due to payments being transferred to other states. I received my discontinuance of service notice, without prejudice, from Washington soon thereafter. Eark a. Bates Regraded Uclassified 226 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE February 25, 1937 To Mrs. Klotz FROM Mr. Oliphant The Secretary asked me at the 9:30 Meeting yesterday to ascertain whether the President had authority to reduce by 50% the present import tax on copper. This information he said he wanted for the President at 9:00 o'clock this morning. I said I could have it by noon, but the Bureau's statistician could not give us the principal countries shipping copper to the United States until late in the day. I attach copy of the memorandum which W&S sent to the Secretary's house by special messenger as soon as I revised it last night, which was 7:30. do Regraded Uclassified 227 Regraded Uclassifie February 24, 1957 Secretary Morgenthau Herman Oliphant Present Toriff Status of Conner Paragraph 1658 of the Teriff Act of 1930 (U.S.C., title 19, sec 1201, par. 1658) provides for the free entry of "Copper ore; regulus of, and black or coarse copper, and cenent copper, old copper, fit only for remanufacture, copper scale, clippings from nov copper, and copper in platos, bars, ingots, or pige, not manufactured or specia ly provided for." Section 601(c) (7) of the Revenue Act of 1952 (U.S.C., title 26, and of chapter 20) imposes as "import tex" (customs duty) of 4d per poked on the copper content of the materials just described, us well as on certain other copper products. This tax will expire on June so, 1937, unless further extended by new legislation. This tax on the classes of copper enumerated above is yielding little if any net revenue because the sums collected have been, or will be, refunded by my of drawback, A bill to extend the tax for two years has been introduced in Congress (s. 1105) by Senator Brown of Wichigan and is in the Treasury Deposit ment for report. Representative O'Connell of Montana has introduced a bill (H.R. 4800) to increase the tax rate to 9 cents per pound. The import tax is not subject to reduction under the flexible tariff, section 336 of the Tariff Act of 1930 (U.S.C. title 19, sec. 1336), in view of the express provision in section 601(b)(2) of the Revenue Act that such tax shall not be considered 4% duty for the pur- pose of section 356 of the Tariff Act. It 1s, however, subject to 50% reduction under the authority conferred upon the President by the Trade Agreements Act of June 12, 1934 (U.S.C., title 19, sec. 1351). The principal difficulty presented under this provision of law is the necessity of negotiating a trade agreement in connection with which the import tex might be reduced and arrenging with the for- sign country concerned for an early date for application of the agree- ment. 228 - 2 - Precedents for a reduction of the import tax in connection with a trade agreement are to be found in the Trade Agreement with Cuba (tax on mahogany boards reduced) and the Trade Agreement with Canada (tax on lumber reduced, subject to & teriff quota on Bouglas fir and Testera healock). The principal suppliers of imported copper ores, and refined and unrefined supper are Canada, Chile, Mexico, and Peru. No trade agreement negotiations are pending with any of the three countries last named, and the time required to institute and consumnate such negotiations would apparently preelude action to change the copper tax in connection with a trade agreement with one of these countries. In connection with Canada, there remains for consideration the passibility of a new Presidential proclamation reducing the rate of tax on copper pursuant to 4b finding by the President that such action is "required or appropriate to carry out" the trade agreement already entered into with Canada. Prepared by (Signed) Herman Oliphant Mr. Johnson typed by Mbk 2/24/37 Regraded Uclassified TREASURY DEPARTMENT 229 INTER OFFICE COMMUNICATION DATE February 24, 1937 To Secretary Morgenthau FROM Herman Oliphant Present Tariff Status of Couper Paragraph 1658 of the Tariff Act of 1930 (U.S.C., title 19, sec.1201, par. 1658) provides for the free entry of "Copper ore; regulus of, and black or coarse copper, and cement copper, old copper, fit only for remanufacture, copper scale, clippings from new copper, and copper in plates, bars, ingots, or pigs, not manufactured or specially provided for." Section 601(c)(7) of the Revenue Act of 1932 (U.S.C., title 26, end of chapter 20) imposes an "import tax" (customs duty) of 4d per pound on the copper content of the materials just described, as well as on certain other copper products. This tax will expire on June 30, 1937, unless further extended by new legislation. This tax on the classes of copper enumerated above is yielding little if any net revenue because the sums collected have been, or will be, refunded by way of drawback. A bill to extend the tax for two years has been introduced in Congress (s, 1105) by Senator Brown of Michigan and is in the Treasury Depart- ment for report. Representative O'Connell of Montana has introduced a bill (H.R. 4800) to increase the tax rate to 9 cents per pound. The import tax is not subject to reduction under the flexible tariff, section 336 of the Tariff Act of 1930 (U.S.C. title 19, sec. 1336), in view of the express provision in section 601(b) (2) of the Revenue Act that such tax shall not be considered a duty for the pur- pose of section 336 of the Tariff Act. It is, however, subject to 50% reduction under the authority conferred upon the President by the Trade Agreements Act of June 12, 1934 (U.S.C., title 19, Bec. 1351). The principal difficulty presented under this provision of law is the necessity of negotiating a trade agreement in connection with which the import tax might be reduced and arranging with the for- eign country concerned for an early date for application of the agree- ment. Regraded Uclassified 230 - 2 - Precedents for a reduction of the import tax in connection with a trade agreement are to be found in the Trade Agreement with Cuba (tax on mahogany boards reduced) and the Trade Agreement with Canada (tax on lumber reduced, subject to a tariff quota on Douglas fir and Western hemlock). The principal suppliers of imported copper ores, and refined and unrefined copper are Canada, Chile, Mexico, and Peru. No trade agreement negotiations are pending with any of the three countries last named, and the time required to institute and consummate such negotiations would apparently preclude action to change the copper tax in connection with a trade agreement with one of these countries. In connection with Canada, there remains for consideration the possibility of & new Presidential proclamation reducing the rate of tax on copper pursuant to a finding by the President that such action is "required or appropriate to carry out" the trade agreement already entered into with Canada. Prepared 4 have Chinbanks m Johnson Regraded Uclassified 231 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE February 25, 1937 TO The Secretary EG FROM Miss Lonigan I have seen Mr. Baker and Mr. Rall again. They have been conferring with Mr. Street and other District people in connection with organization of the District self-help cooperative. I am making inquiries about the possibility of fishing and fish processing for the District cooperative. This suggestion was made by my secretary, Miss Epps. I will carefully avoid any appearance of suggesting projects, but the weakness of the Washington experiment is going to lie in the greater ingenuity needed in developing industrial and housing projects than in Richmond in 1932. I think it is advisable for us to do considerable exploratory work to discover what new types of projects are feasible. I have also made appointments with most of the welfare officials of the District to got further background material about unemployed families. Regraded Uclassified 232 OFFICE OF THE SECRETARY OF THE TREASURY February 25, 1937. MEMORANDUM FOR THE SECRETARY: Herewith I hand you a copy of Ambassador Bullitt's latest telegram on the St. Pierre decree, phoned to me from the State Department this morning, together with a copy of a draft of a suggested reply which I have furnished the State Department. The expression of your appreciation, to be added only if Mr. Bullitt is still at Paris, has Mr. Gaston's approval. GRAVES. MM 233 Draft of reply to Ambassador Bullitt. February 25, 1937. Treasury Department advise they consider present proposal satisfactory. Stop. They believe that any modification of present decree, even though surrounded with apparently satisfactory safeguards, would be interpreted by smugglers as a change in the restrictive policy which has been in force since the promulgation of the present decree on April 9, 1935, and might lead to increased illegal activity. Stop. They say further that the bonding system now in force at St. Pierre is likewise in force in Mexico and in Newfoundland, Canada, and other British colonies in the Western Hemisphere, and that, therefore, the present decree leaves St. Pierro in precisely the same position as virtually all other potential smuggling bases. Stop. They call attention, however, to the fact that there has been a gradual escape of alcohol from St. Pierre in violation of the present decree, and express the hope that the importation of alcohol into St. Pierre will be carefully supervised 50 as to prevent any building up of present stocks, in accordance with the assurances mentioned in your telegram. HNG/mff Regraded Uclassified 234 To be added to telegram to Ambassador Bullitt if he is still at Paris. Secretary Morgenthau asked no specially to express his very great appreciation of your fine cooperation and helpfulness in this matter. HNG/mff Regraded Uclassified