Volume 66, April 23 – April 30, 1937

DIARY Book 66 April 23 - April 30, 1937 Regraded Uclassified - A - Book Page Agriculture Farm Tenancy Bill: Conference after Cabinet between FDR, HMJr, Wallace, and Bell - 4/23/37 LXVI 9 a) Wallace suggests cutting his road appropriation ($30 million) Altschul, Frank See Stabilization Anderson, Benjamin M. See Chase National Bank Appointments and Resignations Wolfe, Joe: Gibbons reports investigation is completed: cancelled checks showing money deposited to personal account; HMJr will recommend to FDR dismissal of Landy and turning over to Department of Justice all remaining material - 4/28/37 217 Memorandum for FDR 377 - B - Budget Garner tells FDR people on Hill are right behind him in perfecting the budget - 4/23/37 27 FDR explains to HMJr that Housing Bill should function as follows: - 4/26/37 71 1) $1 million project: city should provide out of its own budget $200,000; Federal Government will give grant of 45%, or $360,000; Federal Government will give 10% of relief labor, or $80,000; balance of $360,000 should be raised on first mortgage 2) FDR also tells HMJr he will either send a message to Congress or letter to Harrison and Doughton going into detail concerning the shortage of $600 million in revenue; wants to emphasise that Treasury estimate and method of estimating are correct but that taxpayers find too many loopholes Garner tells HMJr time may come when he will have to resign if he does not get the cooperation of FDR on spending; Garner tells HMJr, "Frankly, I am talking to the President through you" - 4/27/37 88 Business Conditions Daggit memorandum: "The Business and Price Situation" - 4/29/37 292 - C - Book Page Chase National Bank Aldrich and Anderson (Benjamin M. - - Economist) going to Europe; Anderson is seeing Hull and wishes to see HMJr also before sailing - 4/28/37 LXVI 231 a) HMJr discusses interview with Aldrich; tells Aldrich, Anderson "rubbed him wrong way" and he (HMJr) thinks interview was most unfortunate - - 4/30/37 340 Haas memorandum on conference 372 - E - England See Great Britain Engraving and Printing, Bureau of HMJr asks that Major Berry be informed that his request for the 15% differential for night workers has been approved - 4/27/37 103 - F - Famous Brands Ohio, Incorporated See Investigations, Treasury Personnel Farm Tenancy Bill See Agriculture Federal Trade Commission HMJr's letter to FDR, which was referred to Federal Trade Commission; Federal Trade Commission's reply to FDR; FDR's proposed letter transmitting this reply to the Speaker and to Senator Robinson; and the letter from Federal Trade Commission approving this use of its letter; together with Oliphant resumd of case - 4/23/37 17 HMJr tells Oliphant matter was cleared at Cabinet - 4/26/37 63 Financing, Government Taylor memorandum on gross amounts of bills which banking system can properly handle, the proper maturities, maximum amount which should mature on quarterly dates, et cetera - 4/28/37 260 - G - Germany White reports on conversation with Dr. Otto Jeidels, one of the owners of the largest wholly privately-owned bank in Germany, the Berliner Handelsgesellschaft - 4/29/37 306 Regraded Uclassified - G - - (Continued) Book Page Government Bond Market Eccles explains Federal Reserve action to HMJr when "the market went off pretty badly" - 4/26/37 LXVI 49 a) See Burgess memorandum 46 Harrison tells HMJr he is going to have a series of talks with principal banks to find out, if possible, what is worrying them 4/27/37 91 HMJr aska Butterworth to ask American brokers in London why people are selling American stocks - 4/27/37 104 a) Butterworth reply 133 HMJr asks Cochran also to make inquiries - 4/27/37 117 Knoke tells HMJr, Bolton reports whispering campaign mostly in academic circles, the so-called "semi- intelligentsia" - 4/27/37 124,129,131 Great Britsin See also Stabilization HMJr reports discussions that Cabinet is having concerning talks Bingham and Davis are having with Chamberlain; Garner thoroughly displeased and wants to know subject of discussions - 4/29/37 280 HMJr-Arthur Krock conversation - - 4/29/37 284 a) Ferdinand Coons' erticle "Stocks Fall in London" discussed 1) HMr suggests article: due to FDR's constant warnings, investigation shows United States banks have not made commodity loans, brokerage houses are in good shape, et cetera Butterworth reports that Clay (Economic Adviser to Bank of England) has emphasized that decline in London Stock Exchange prices has reached panic proportions - - 4/29/37.. 324 - H - Harper, Williem G. (Secret Service Operative in Charge) See Investigations, Treasury Personnel Housing See Budget - I - Investigations, Treasury Personnel Yellowley-Igoe case: See also Books LIX, LX, end LXIV Treasury Department's reply to Igoe's charges transmitted to Department of Justice - 4/27/37 139 Yellowley and his chief assistent, Levi 2. Baker, ordered cited for contempt of court because of conversations with a Federal Grand Jury foreman - 4/29/37 283 a) HMJr discusses with Oliphant - 4/29/37 286 - I - (Continued) Book Page Investigations, Treasury Personnel (Continued) McReynolds memorandum to HMJr reporting further on alleged participation of Collector of Internal Revenue Carl E. Moore, Assistant Collector of Customs C. W. Pollock, and Secret Service Operative in Charge William G. Harper, of Cleveland, Ohio, in 8 liquor sales agency - 4/27/37 LXVI 188 a) For Oliphent memorandum on above, 4/27/37, see page 192 b) Oliphant reports at 9:30 meeting that nothing has ever been turned over to charity and they have taken at least three more checks - 4/28/37 222 Harper-Moore-Pollock case discussed by HMJr, Oliphant, McReynolds, Manning, and Helvering - 4/28/37 234 - Second conference; present: HMJr, Oliphent, Helvering, and McReynolds - 4/28/37 245 a) HMJr reports on conference with Senator Bulkley 1) Bulkley seems stunned that nothing has been done - J - Japan American Embassy, London, reports unsatisfactory conversations with Arakaws; thinks Arakawa has no instructions to do anything specific - 4/23/37 32 Resume of financial and economic policy &8 explained in a speech delivered by Japanese Minister of Finance at the Conference of Clearing Houses held in Tokio on 4/20/37 65 Telegram from American Embassy, Tokio, quotes Minister of Foreign Affairs 88 saying that a check should be placed on trend toward extreme trade protection and that Japan should participate in movement with Europe and America; in spite of this, Ministry of Finance has decided to retain in force after July 1st measures adopted on January 8th for import exchange control and to expand the scope of the measures in order gradually to restrict imports into Japan of luxury goods and non- essential materials - 4/23/37 96 American Embassy, Tokio, reports on foreign policies of Sato, recently appointed Minister for Foreign Affairs - 4/28/37 249 Jeidels, Otto (one of the owners of the largest wholly privately-owned bank in Germany, the Berliner Handelsgesellschaft) See Germany - K - Book Page Krock, Arthur HMJr decides to talk to Krock - 4/26/37 LXVI 57 See also Great Britain " " Stabilization - M - Mellon, Andrew W. Tax case discussed at Cabinet - 4/26/37 64 Methodists HMJr tells 9:30 group of plan for shrine at Oglethorpe, Georgia, where Wesley landed, where, in time, they will have a national home and national cemetery for preachers - 4/23/37 1 Moore, Carl E. (Collector of Internal Revenue - Cleveland, Ohio) See Investigations, Treasury Personnel - N - Narcotics Strike at Parke-Davis plant in Detroit reported at 9:30 meeting; $1 million worth of narcotics there; HMJr tells McReynolds to watch situation very closely - 4/29/37 274 Article in North China Daily News, Shanghai, on Taybank case - 4/30/37 380 - P - Pollock, C. W. (Assistant Collector of Customs - Cleveland, Ohio) See Investigations, Treasury Personnel Public Health Dispensary: HMJr asks Miss Roche, McReynolds, and representative of Secretary Ickes to investigate - 4/28/37 221 McReynolds reports on space available in Loans and Currency Building; will cost very much to put it in shape - 4/30/37 360 - R - - Russia See U.S.S.R. - 6 - Book Page Smith Company, E. M. Conference in Cummings' office; present: Cummings, Assistant Attorney General Morris, Oliphant, and Magill - 4/23/37 LXVI 14 a) Following conference, HMJr writes Cummings: "In view of unusual character of these cases, ***** any consideration of settlement of civil liabilities at present is untimely and these criminal cases should be pressed to trial *****; thereafter the collection or settlement of the tax liability can be taken up" - 4/27/37 138 Stabilization See also Government Bond Market American Embassy, London (Butterworth), reports further exchange of information: Phillips reports complete understanding of United States point of view; thinks it desirable to keep matter in the back of one's mind for it is not pressing at this time 33 B) HMJr also asks Cochran to make inquiries 117 French situation also discussed in above conversation; Phillips thinks & crisis point may be approaching 33 a) Cochran resume of situation in France - 4/23/37 and 4/24/37 35,43 1) Cochran reports Minister of Finance bitterly complained before Chember of Finance Committee yesterday against circulation of stories of imminent peril in finance situation and suggests that campaign is the work of political enemies - 4/29/37 331 Frank Altschul writes HMJr at length concerning "hot money" - 4/26/37 83 Knoke reports to HMJr on conversation with de Jong, of De Nederlandsche Bank, concerning change in Instructions with regard to sale of guilders - 4/27/37 110 Four principal causes of present uneasiness on exchange, security, and commodity markets in Europe reported by Cochran - 4/28/37 200 1) American gold scare 2) French situation 3) Remarks by FDR on commodity prices 4) Taxation by Great Britsin and borrowing for rearmament HMJr-Arthur Krock conversation - 4/29/37 284 a) Ferdinand Coons' article: "Stocks Fall in London" discussed 1) HMJr suggests article: due to FDR's constent warnings, investigation shows United States banks have not made commodity loans, brokerage houses are in good shape, et cetere Butterworth reports that Clay (Economic Adviser to Bank of England) has emphasized that decline in London Stock Exchange prices has reached panie proportions - 4/29/37 324 - T- - Book Page Taxation For FDR's request that HMJr investigate loopholes in tax system, see page 72 Conference in HMJr's office; present: Magill, Oliphant, Helvering, and McReynolds - 4/29/37 LXVI 315 a) Reorganization of Bureau of Internal Revenue discussed so that number of places for review of additional tax cases before reaching Board of Tax Appeals may be lessened - U - U.S.S.R. For resume of conferences on gold, 4/11/37-7/17/37, see Book LXIV, page 79 Federal Reserve Bank of New York reports cable from U.S.S.R. State Bank indicating desire to open an account 4/28/37 213 a) HMJr discusses with Eccles, who hopes Board will approve request this morning; HMJr asks Eccles to take personal interest because he fears & little resistance in New York - 4/29/37 266 Taylor reports on luncheon conversation he and Lochhead had with Oumansky - 4/29/37 263 Haas digest of two articles on Russien foreign trade written by A. Rosenhols, People's Commisser for Foreign Trade - 4/30/37 368 United States Savings Bonds McReynolds reports on conference with Comptroller General to discuss Treasury's proposal to designate depository banks as fiscal agents of the Treasury to sell "baby bonds" - - 4/27/37 191 HMJr tells Sloan and Bryan he wants to "pep up" sale between now and July lst - 4/29/37 289 - V - Veto Messages Oliphant calls HMJr's attention to necessity of accurate records at White House and at Senate of exact time at which bills are returned to the Senate with the veto message of FDR 4/26/37 47 - W - Book Page Wallace, Henry A. (Secretary of Agriculture) Doughton-HMJr conversation concerning Wallace speech "Boom Feared Behind New Deal Fiscal Policy" delivered at University of North Carolina - 4/29/37 LXVI 328 a) Doughton feels only HMJr should represent Administration on fiscal and tax policies Wolfe, Joe (Democratic National Committeeman, Minnesota) See Appointments and Resignations 1 April 23, 1937 9:30 group meeting. Present: H. S. Klotz Mr. Magill Mr. Oliphant Mr. Gaston Mr. Taylor Miss Roche Mr. Haas Dr. Viner Mr. Upham Mr. Lochhead Mr. McReynolds Mr. Bell HM,Jr: Mac, there 1s a Mr. Jones coming in at ten o'clock and I would like to have you here. He wants to know how they can go about making a national park of a place down at Sea Island where this British gentleman landed in 1770. He's got a very interesting idea. You will be interested. The secretary of this general was the man who founded the Methodist Church. Who founded the Methodist church? Dr. Haas: Wesloy. HM,Jr: There were two Wesley brothers. What was the name of the place? Mr. Magill: Oglethorpe. HM,Jr: I thank you. They are trying to do two things. One, 18 to get a national park where Wesley landed, at Oglethorpe, and next to at they want to have a shrine for the Methodists, combined, in 1940, and have a national home and national cemetery for Methodist preachers. On account of their moving around, they don't have a home. Very interesting idea. Dr. Haas: The cemetery part is all right. HM.Jr: What he wants to know 18 does the National Park Service buy land or does Georgia have to buy the land. Who 2 -2- can he 800 and how can he go about to buy Fort Oglethorpe. The Methodists will take care of their part. Mr. Bell: Act of Congress on the books which authorizes the National Park Service to establish historical points and make national monuments or shrines. HM.Jr: Personally I am tremendously impressed with this. I think he has a marvelous idea. Mr. McReynolds: All the Methodists would have to do would be to furnish the money. HM,Jr: They will take care of themselves, but the two things will be next to each other. What he 18 interested in 18 having Fort Oglethorps made a national park. The other thing 1s next to it. They are not asking for any money, only to have Fort Oglethorpe as & national park. Mr. Bell: The general policy is that somebody furnishes the ground. HM,Jr: I want to put him in touch with the right party. The Congressman from that district comes from Sea Island. Personally I think it is a good idea -- the combining of the two -- and put the whole business where Wesley first preached. The oak 18 still there. Evidently I am more religious than some of the people in the room. Of course he was not a Methodist when he arrived here. That's the point. But out of that came the Methodist Church. Mr. Upham: Jake Viner has read a very scurrilous his- tory of Wesley's life. Dr. Viner: I don't think the book stressed the Georgia part of his lift. It W8.8 his life in England that it stressed. Mr. Bell: I am in favor of it if it does not cost money -- that and the Jefferson Memorial. HM,Jr: I thought we might take this out of Soil Conser- vation! Mr. Bell: I am in favor of that too. Mr. Magill: Can't you put a three-strand barbed wire 3 -3- fence around 1t? HM,Jr: It only needs to be a three-strand wire fence. I want you to write a letter to Henry Wallace and ask if I get more if the wire 1s barbed? For an hour and a half Henry Wallace explained it and Bell said he understood it perfectly! Mr. Bell: I had a lesson in agriculture. HM,Jr: The trouble was the President was sleeping 80 he did not stop anybody from talking. Mac? Anything? Mr. McReynolds: No. Graves 18 back this morning. Mr. Bell: I haven't anything. HM,Jr: You and I, what do we do? Just sit tight until we get a call from the White House? Mr. Bell: I think that's the best thing? You mean on the agricultural thing? HM,Jr: Yes. Mr. Bell: They have had '8 rule and they were holding it up in Committee -- the Agricultural Bill. Does it come up for vote today? Mr. Oliphant: That's what they said. Mr. Bell: I thought it was being held until the Speaker heard something from the White House. Mr. Oliphant: Has word gone to the Speaker to hold it? HM,Jr: Yes. But no word from this shop. Please get that straight. We haven't done a thing. We Just sit tight. Mr. Bell: I don't know what else to do. We suggested a way to get the money and no one agrees with us, 80 they ought to suggest something. HM.Jr: 0. X. Would you make a note, Dan. In view of 4 -4- the fact that Mr. Wallace throws down his own statement as the thing is written, how much cash he would draw on the Treasury. You see? He threw down his own statement. This 18 the only copy I have. You might give no one to take to Cabinet. Mr. Bell: You mean based on Budget figures? HM,Jr: Yes. Mr. Bell: Get figures from our standpoint. HM,Jr: Yes. Ezekiel fixed up figures on how much they are going to spend and I use the figures and they show that on a cash withdrawal basis that Wallace gets one dollar out of every six. Then yesterday he throws down his own figures. Mr. Oliphant: Ezekiel wasn't there? HM,Jr: Oh, no. Mr. Upham: I have nothing. HM,Jr: The figures are right. Jump said they were right. Dr. Viner: Is that the Department or all agricultural programs. HM,Jr: Everything that goes through Wallace. Dr. Viner: I would throw in any agricultural expenses -- Farm Credit -- all agricultural expenses. HM,Jr: Supposing you have someone do that, Dan. Dr. Viner: You ought to make a functional analysis. Mr. Lochhead: Nothing. Dr. Viner: Nothing. HM,Jr: Eleven o'clock, Jake, will you come in? Dr. Viner: What's this investigation they are making of the Alcohol Tax Unit in Chicago. The papers are full of a Grand Jury investigation. Mr. Oliphant: We heard of that. 5 -5- HM,Jr: Did that just reach you? What do you read? The Chicago Herald, one month late? Dr. Viner: Chicago Tribune. McReynolds: Yesterday evening they had it, only the other side of it. "April Grand Jury bawls out the United States Attorney's Office andthrows bouquets at Alochol Tax." HM,Jr: God! Has it taken us that long to get it across? Did you (Viner) notice somebody just returned from Chicago? Are you interested in it? Dr. Viner: Yes. HM.Jr: Send for Harold Graves if you are interested. It's & long story, but he can give it to you. Dr. Haas: Nothing. HM,Jr: Will you (Haas) get in touch with Professor Merriam? He's the fellow with National Resources and he wants us to put on a show for them. You see, the President has these meetings supposedly once a week, but he will not have one next week be- cause he will be away, and what Merriam wants is to look at the picture from the Treasury's angle. Talk to him and 600 just what he wants. Find out what he wants. He whispered to me and said that the next time they would like me to read a paper on it from the Treasury angle. I don't want to do it unless it's absolutely top-notch, unless we have something to say. Anything else, George? Dr. Heas: No. HM,Jr: (To Miss Roone) Denver still there? Miss Roche: Very much, sir. HM,Jr: After you have read the report on that hospital I would like to talk to you about it. Miss Roche: I would like to talk to you, too, Sir, but I would want first to talk to some other people about it. Mr. Taylor: Nothing. 6 -6- Mr. Gaston: Magill, do you have any objection to my doing what MacKellar wants? Mr. Magill: No. Fine. Unless Mac objects. Mr. Gaston: Might get Mac to write it. The President has no press conference this morning. HM,Jr: Why? Mr. Gaston: On account of Forbes Morgan's funeral. What other reason, I don't know. HM,Jr: You notice I wasn't asked to be a pallbearer. Also, my picture wasn't among those in the advertising book. You know. I felt hurt! Was there anything more about my nice side remarks about the New York Times and their gold story? Krock didn't call me up. Mr. Gaston: No. No. Both Rodney Bean and Bob Thornburgh acted kind of guilty and shamefaced about it. Rodney was told to ask and then Rodney wished it off on to Bob Thornburgh. HM,Jr: Lucky for me, after Walter Lippmann had been in to 600 me he went up to see Bell and Bell told him word for word what I had told him without any preliminaries. But he walked in just the same to Bell and said, What I want to know is do they mean what they say? Mr. Oliphant: I sent you the files and record of what we did in connection with the so-called joker in the liquor bill. It's just for your records. HM,Jr: Not for action? Mr. Oliphant: No. You remember we communicated with the Commission and I will have before you go to Cabinet meeting a one-page summary of the Federal Trade Commission's bill. HM,Jr: May I say to you people that on account of the work Bell and I have been doing, I an just three weeks behind and if anybody wants any action on anything, don't send it to me; handit personally to Mrs. Klotz because everything else is Just piling up for a rainy day. But if anybody wants 7 -7- anything done, you had better actually hand it to her be- cause I All three weeks behind on my reading. I have never been so badly off. Mr. Magill: Nothing. HM,Jr: You fellows are going over at 11 o'clock? Mr. Magill: Yes. HM,Jr: Who do you take with you? Mr. Magill: Secret Service! Mr. Oliphant: A couple of machine gune! HM,Jr: I want to say, if all of you could keep your ears open, because I think the Treasury 18 going to come in for sabotage from now on, the like of which we have never had before. Bell and I are always in a tough spot, but I think we will be in an even more difficult spot because as the President turns to us and says, If Wallace wants a Farm Tenancy B111, find the money for him, and then Wallace during the day, I give this 8.6 an example, knowing we found the money but it has to come out of some existing appropriation, has a press conference and says, 'Too bad, Economy 18 the order 80 we will Just give yp all the programs,' and then today comes a long statement from Ed O'Neal attacking the thing. It clicks Just like that (gestures). Mr. Bell: There is going to be 8. conference here in ten days, I understand. HM,Jr: I think it's terrible, but, 8.8 I say, I think Boll and I will come in for this kind of thing within the Administration. It has been bad enough up to now, but I don't think anything we have had will equal what we are going to get in the next two or three months, and anything you people pick up or hear -- but it will come from within the Administration. Wallace will attack and sit back and say, "We want to do everything" and then put various pressure groups to work on us. I think it's terrible. Money is available for Farm Tenancy, for ever-normal granary, for Housing -- it's all there, but they have to give up something. So if you hear anything that 1a helpful to Bell and me, I wish you would get it. Bell, I think you and I are going to have the worst time because it's going to come from within. Herbert, you might get O'Neal's release for no. Just how 8 -8- much of it the President is going to stand, I don't know. But I just thought I would let you know. But I think it's worth taking -- quite worth while. Mr. Bell: By the way, Walter Lippmann sensed that. He noticed a story in the paper on Wallace and he said, 'I think unless the President stands behind the Treasury that you won't be able to go through with this program. I think it's unfair to put the Treasury on the spot that way and alone.' He said, 'I can see it coming.' 000-000 9 April 23, 1937 After Cabinet the President asked to see Wallace, Bell and me. At the end of & half hour discussing the Farm Tenant Bill Wallace suggested that we cut his road appropriation from 150 million dollars to 120 million dollars - the 30 million dollars to go towards starting the Farm Tenancy Bill. This is, of course, what I hoped and prayed for, namely, that they would cut appropriations to find the necessary money to start anything new with. On Crop Insurance they decided that they would limit it to wheat and that they would only need about three million dollars for administrative purposes until August, 1938, and Wallace said that he would consult with his people to see whether he could find the three million. The meeting started very tense but ended on a very amicable basis. I am tremendously encouraged. Regraded Uclassified 10 CONFERENCE AT THE WHITE HOUSE, APRIL 23rd. The President discussed with Secretary Morgenthau, Secretary Wallace, and myself, the question of funds to finance, during the fiscal year 1937, the provisions of the Farm Tenancy Bill and the Crop Insurance Bill. He asked Secretary Wallace as to whether or not he had been able to find any funds in the Agriculture Department to finance the Farm Tenancy program. The Secretary replied that they had discussed the matter at some length with the heads of the various bureaus of the Department of Agriculture concerned and they had come to the conclusion that the most that would be needed for the fiscal year 1938 to start this program on an experimental basis and maintain only a micleus of an organization would be about $25,000,000. He said he did not think they should spend more than $15,000,000 on Farm Tenancy and he hoped that the Department might get by with as much 88 $5,000,000 for the fiscal year. Under the land-buying program he thought that $5,000,000 would be sufficient but officials in charge of that program would prefer to have $10,000,000. As to the source of the funds, he thought that the best place would be good roads. He asked me to explain the situation with respect to good roads. I stated that the Secretary of Agriculture, prior to January 1, 1937, apportioned for the fiscal year 1938 about $200,000,000 among the several States for Federal aid highways and grade crossings, and that there will be a similar amount available for apportionment on January 1, 1938. The Budget for 1938 contains an item of appropriation of $150,000,000 to pay the States for Federal share of this program for the fiscal year 1938. 11 - 2 - I explained that when the Secretary of Agriculture apportioned these funds to the various states it becomes under the law an obligation of the Federal Government and does not require a contract to construct the roads in order to incur that obligation. I said that I felt some money could be saved out of good roads by two methods (1) for the Appropriations Commit- tee to reduce the $150,000,000 to $130,000,000 after which the Secretary should instruct Mr. MacDonald to advise the States that while the author- ization for roads had been apportioned among the several States there was only available for expenditure during that fiscal year the sum of $130,000,000 and therefore projects would not be approved in excess of that sum, or (2) for the Secretary to instruct Mr. MacDonald to delay the approving of projects 80 that some part of the program, to the extent of $20,000,000 or $30,000,000 will be thrown over into the fiscal year 1939. Of the two, I prefer number (1) because Congress would be a party to the changed program. In either case, I think there will be some repercussions from the road organizations. The President instructed me to confer with Mr. Jump and Mr. MacDonald of the Agriculture Department to work out the necessary steps and then confer with the Chairman of the Appropriations Committee so that the reduction might be made in the estimate pending in Congress. Secretary Morgenthau then brought up the question of the participation in this program of Governor Myers' organization. He said that he felt that Gover- nor Myers already had the Federal Farm Mortgage Corporation a set up which Regraded Uclassified 12 - 3 - is prepared to assist in this land-buying program, particularly in the appraisal end. He thought it advisable that the Secretary of Agriculture not set up a duplicate organization but be required to use the organization already in existence with, of course, full authority in the Secretary of Agriculture to determine the type of projects and the places where they should be located. Secretary Wallace agreed that this had a great deal of merit and he would be glad to look into that phase of the matter. Secretary Wallace then brought up the Crop Insurance Bill which has passed the Senate. He said that he thought the President ought to get behind it or it would not get through as a great deal of objection has developed in the House. The President asked the Secretary how much money was involved and he replied that there was $10,000,000 for administrative expenses and $100,000,000 for capital stock but that he did not feel the full amount indicated would be needed for the fiscal year 1938. I asked the Secretary if he did not feel that the incurring of obligations under the Crop Insurance program could be confined for the fiscal year to wheat and the liquidation of any obligation so incurred could be confined to the fiscal year 1939 and that the administrative expenses might very well be kept within & limit of not more than $3,000,000. He said that it was his thought that the bill now pending in the House should eliminate every grain except wheat and that the experiment should be confined to that grain, and that the matter of the liquidation of the obligations under this program would not be presented until about August 1938, which would be Regraded Uclassified 13 - 4 - in the fiscal year 1939, and that certainly it was his thought that $3,000,000 for administrative expenses would be ample and he hoped that they might turn out to be a great deal less than this sum. He also said that he saw no reason why the funds required in 1938 for this purpose should not also be taken out of roads. DWB Regraded Uclassified 14 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 23,1937 TO Secretary Morgenthau FROM Mr. Magill Subject: Conference regarding the case of E. M. Smith, in Attorney General Cummings' office, attended by the Attorney General, Assistant Attorney General Morris, Mr. Oliphant, and myself. The Attorney General asked for our views regarding the case, Mr. Oliphant told him that in our opinion it was a particularly flagrant case, since there had not only been gross fraud by the tax- payer, but the taxpayer had induced twenty-five or thirty clerks, cashiers and the like to participate in his attempts to defraud the Government. Mr. Oliphant gave the Attorney General the names of several of these individuals with salaries ranging from $1,800. to $2,500. a year, who were dependent in some way upon Mr. Smith and who, at his request, reported dividends of around $15,000. to $25,000. each, which did not belong to them. Mr. Oliphant said that WO re- garded the case as one of the worst which we had ever seen and that it was extremely important to the morale of the taxpayers on the Pacific Coast that the criminal prosecution be actively carried through. The Attorney General then made B. long statement to the effect that the difference between the Treasury Department and the Department of Justice was that his men had had greater experience with Judges and juries and that in many cases in which his attorneys would agree with the Treasury that the fraud was flagrant, nevertheless a conviction had not been secured. He mentioned particularly the Mitchell case and the "Dutch" Schultz case. Mr. Morris stated that there were a number of legal questions regarding some aspects of the tax liability 80 that WG might not be able to recover the full tax. Further, Mr. Smith would explain the fraud on the grounds that his wife, from whom he was separated, was causing him a great deal of difficulty, and he did not want her to know the actual extent of his fortune. Mr. Oliphant reminded the Attorney General that Justice's success in fraud cases ran about 70 percent and that this case WRB of 8. sort where success is likely, owing to the fact that there would be many witnesses who would testify to Smith's fraudulent schemes. He said that this 08.86 offered the same opportunity to the Attorney General as the Mellon case to instill new standards of uprightness in taxpayers. Regraded Uclassified 15 The Secretary - 4/23/37 - 2 The Attorney General said that so far as the civil liability was concerned, the taxpayer is now offering $1 million in cash, $500,000. payable at the end of the year, with the understanding that he will waive the statute of limitations and permit the case to be tried before the Board of Tax Appeals to determine his exact liability. The understanding will be, further, that no part of the $11 millions is to be returned even if the Board finds his liability is loss than that amount. The Attorney General said that he thought this offer VALS about all that could be expected, since the tax- payer's total assets were around $4 millions. Be could hardly be expected to offer the full amount of the tax, penalties and interest, since to do so would undoubtedly ruin him and cause him to lose con- trol of his business. The Attorney General felt that the taxpayer would agree to enter a plea of "guilty" to one of the counts of the indictment, and that it would then be up to the Judge to de- termine the sentence. The Attorney General did not seen disposed to undertake that his attorneys would make a vigorous attempt to seoure a substantial jail sentence. I pointed out to the Attorney General that although WG had lost the Mitchell case, the not effect has been to put a stop to husband and wife transactions for tax purposes, hence our loss W&S really a great victory. Furthermore, whether we win or lose the Mellon case, no one is apt again to create an educational trust out of pictures hanging on the walls of his own house, Both Mr. Oliphant and I com- plimented the Attorney General upon his persistence in prosecuting the Mellon case, and told him that the case had been extremely help- ful to the Treasury. The Attorney General finally suggested at the end of a con- ference of 11 hours, that we take a little more time to think over the offer. Mr. Morris stated that the oriminal case was now set for trial in the June term. The Attorney General thought that WB ought to make up our minds regarding the offer in compromise at an early date. He suggested in conclusion that the very fact that the offer had been made would make it difficult for us to succeed in the criminal case. After this conference I saw Robert H. Jackson. He told me in confidence that while he was head of the Tax Division he hAd strongly recommended to the Attorney General that the criminal case be actively prosecuted. He said he had told the Attorney General that the $13 millions offer was ridiculous since it involved us in the neces- sity of trying out the fraud case. So far as the entry of the plea of guilty was concerned, he said he felt no doubt that & suspended sentence would be given. He added that Mr. Bruce Kramer had been very angry at him and at you for refusing to accept the offers in Regraded Uclassified 16 The Secretary - 4/23/37 - 3 compromise and that he (Jackson) had been told that his transfer to the Anti-trust Division might be connected with his attitude in this matter. Rm Regraded Uclassified 17: TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE April 23, 1937 TO Secretary Morgenthau FROM Herman Oliphant There are attached your letter to the President, which he referred to the Federal Trade Commission, the Federal Trade Commission's reply to him, his proposed letter transmitting this reply to the Speaker and to Senator Robinson, and the letter from the Federal Trade Commission approving this use of its letter. This, briefly, is the situation: It now violates Federal law for a manufacturer to bind retailers to keep up the price of his product. This Tydings-Miller Bill would make this law- ful in interstate commerce involving States which have legal- ized contracts for resale price maintenance. This change in the Federal law would facilitate a rise in the price of many commodities and thus raise the cost of living. If they say this Bill is aimed to prevent a retailer from selling something below cost to get customers into his store, the answer is that that is a different unfair method of compe- tition, namely, predatory price study. We should prohibit it, but not legalize resale price maintenance. The five cases in the Federal Trade Commission against the liquor interests charged them with violating Federal law by binding retailers with contracts to maintain their monopoly prices. If the Tydings-Miller Bill passes, these cases fall, and you can expect a rise in the price of liquor which will accentuate the "bootlegging" problem. Attachments Uus Kerly: 4-27-27 Brought this subject at Cabinet President agreed to sign 4 two attached letters HmL Regraded Uclassified 18 FEDERAL TRADE COMMISSION WASHINGTON AYRES April 23, 1937. Honorable Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D. C. Dear Mr. Secretary: In response to your inquiry about the letter of April 14 addressed to the President by myself as Chairman of the Federal Trade Commission, and discussing the probable effect of the Tydings-Miller bill, you are advised that the letter was for the use of the President in any way he may wish. Very truly yours, W. 6 apes W. A. Ayres, Chairman. Regraded Iclassified 19 Sirt My attention was called to S. 100, which would render legal certain contracts for the maintenance of resale prices now illegal under Federal law. I requested the Chairmen of the Federal Trade Commission to give ne a recommendation on this Bill, and I attach his reply on behalf of the Commission. The present haserd of undue advances in prices, with a resultant rise in the cost of living, makes it most untimely to legalise any competitive or marketing practice calculated to facilitate increases in the cost of numerous and importent articles which American householders, and consumers generally, buy. You will note that the Federal Trade Commission has made no study of the effect of resale price maintenance on consumers since 1929, but the Commission does mention a reputable body of informed opinion to the effect that such control of resale prices would be hermful to the consuming public. Indeed, the Commission says: "There is great probability that manufacturers and dealers may abuse the power to arbitrarily fix resale prices by unduly increasing prices, resulting in bitter resentment on the part of the consuming public, especially in this period of rising prices." Since we are in a period of rising prices, this 8111 should not, in ay judgment, receive the consideration of the Congress until the whole matter can be more fully explored. Conceivably, the Con- gress might approve having the Commission bring down to date the study which it made eight years ngo by examining the economic effects of resale price maintenance under the novel and rapidly changing conditions now attending business in this country. Faithfully yours, 7AR Honorable Joe T. Robinson United States Senate Enclosure HOrboie Typed 4/22/37 Regraded Uclassified 20 Sira My attention was called to H.R. 1611, which would render legal certain contracts for the asintenance of resale prices now illegal under Federal lav. I requested the Chairman of the Federal Trade Commission to give no a recommendation on this Bill, and I attach his reply ou behalf of the Commission. The present hazard of undue advanced in prices, with a resultant rise in the cost of living, makes it most untimely to logalize any competitive or marketing practice calculated to fecilitate increases in the cost of numerous end important articles which American householders, and consumers generally, buy. You will note that the Federal Trade Commission has made no study of the effect of resale price maintenance on consumers since 1929, but the Commission does mention a reputable body of informed opinion to the effect that such control of resale prices would be hermful to the consuring public. Indeed, the Commission sayss "There is great probability that munufacturers and dealers may abuse the power to arbitrarily fix resale prices by unduly increasing prices, result- 108 in bitter resentment on the part of the consuming public, espe- cially in this period of rising prices." Since we are in 6 period of rising prices, this Bill should not, in my judgment, receive the consideration of the Congress until the whole matter oan be more fully explored. Conceivably, the Con- gress might approve having the Commission bring down to date the study which it made eight years age by examining the economic effects of resale price maintenance under the novel and rapidly changing conditions now attending business in this country. Faithfully yours, 7LR The Speaker, House of Representatives. Enclosure. Regraded Uclassified FEDERAL TRADE COMMISSION WASHINGTON April 14, 1937 The President, The White House, Washington, D. C. Dear Mr. President: Receipt 1s hereby acknowledred of your memorandum of April 7, 1937, transmitting Secretary Morgenthau's letter of April 6, 1937, and requesting a recommendation on the Tydings-Miller Bill. The Commission has not heretofore expressed an opinion as to the merits of this bill for the reason that it deemed it to be a matter of legislative policy for determination by yourself and the Congress. The Tydings-Miller B111 would amend the anti- trust laws so as to legalize contracts and agreements fixing minimum resale prices for goods sold in interstate commerce and resold within the jurisdiction of any state where such contracts or agreements as to intrastate commerce have been legalized. / number of states now have such statutes. Many of these state laws and the Tydings-Miller Bill are directly and irreconcilably in conflict with the present Federal law on resale price maintenance. Public policy since the passage of the Sherman Anti- Trust Act in 1890 has been opposed to resale price maintenance. Numerous court decrees have been entered under the Sherman Act and numerous orders to cease and desist have been issued by this Commission and affirmed by the courts in conformity with the public policy expressed in the Sherman Act end in the Federal Trade Commission Act. Enactment of the Tydings-Miller Bill would in its practical effect void such decrees and orders and constitute a reversal of what has been public policy for many years. The President - 2 - April 14, 1937 Since state laws, legalizing resale price maintenance, differ in the various states, and since, under the proposed Federal legislation, Federal exemption from the anti-trust laws would be conditioned upon the legality of similar contracts in intrastate transactions, the Tydings-Miller Bill would modify the anti-trust laws in differing degrees in different states. Thus, not only would it leave the Federal anti-trust laws in full force and effect as to those states which do not legalize resale price maintenance, but there would be divergent policies as to those states which legalize resale price maintenance, because of the differing terms of the different statutes in the respective states. Thus, the Federal Government would be under the necessity of attempting to enforce divergent regulatory policies toward shipments made by the same manufacturer to dealers located in different states, because of the differ- ences in the respective state statutes. A peculiar feature of many of the state laws which would, under EL recent decision of the Supreme Court, speaking through Mr. Justice Sutherland (57 S. Ct. 147), thus be made binding upon interstate commerce 1a that they require wholesalers and retailers to conform to the provisions of private resale price maintenance contracts to which they are not parties. Thus, a private contract, the provisions of which are determined without public hearing and apart from any public supervision 8.3 to reasonableness, is made binding upon all dealers and the consuming public. With respect to the economic phase of this matter, the Commission has not made a recent study of resale price maintenance. However, in 1929, the Commission did undertake such a study, reporting to the Congress thereon in 1931 (H.R. 546, 70th Congress, 2nd Session). In that report the Commission said: "The position taken by both proponents and opponents of resale price maintenance are based on the belief that such maintenance Uclassified The President April 14, 1937 of prices will limit retail competition ... The real crux of the question, therefore, is whether injury done to the consumers' interests through the elimination of dealer competition with respect to price-maintained articles would be greater then the damage now alleged to be done to the interests of manufacturers and distributors of trade- marked, nationally advertised brands when they are used 88 leaders. Neither injury is capable of exact measurement, but, in the opinion of the Commission, the potential damage to consumers through price fixing would be much greater than any existing damage to producers through this form of price cutting." The general opposition of economists and consumers to this type of legislation is noteworthy. A question- naire sent to members of the American Economic Association some years ago, by Carroll W. Doten, Professor at the wassachusetts Institute of Technology, resulted in a vote of 401 to 87 that the manufacturer should not have the legal right to control the retail prices of his products. There is great probability that manufacturers and dealers may abuse the power to arbitrarily fix resale prices by unduly increasing prices, resulting in bitter resentment on the part of the consuming public, especially in this period of rising prices. Replying to your inquiry as to the five complaints issued against certain distillers by this Commission, referred to by Secretary Morgenthau, there are enclosed herewith, for your information, copies of those complaints. In substance, these dealers are charged with mainteining uniform minimum resale prices in interstate commerce and with enforcing agreements with respect thereto by unlawful methods, such as The President - 4 - April 14, 1937 the use of blacklists, boycott, threats of boycott, and other coercive methods incidental to the enforce- ment of their resale price policies. With great respect, I am Very truly yours, W.a.ayer W. A. Ayres, agree Chairman. Regraded I Iclassified THE WHITE HOUSE 277 WASHINGTON April 7, 1937. MEMORANDUM FOR HON. W. A. AYRES 6106 Would you give me a recommendation on this Tydings- Miller Bill to which the Secretary of the Treasury refers? F.D.R. 761 Letter from the Secretary of the Treasury, 4/6/37 to the President. States the live FARES Gending w/Pore the Federal Trade Com- mission against DONE of the largeat distilling compenter which he muntioned to President In- 1377 volve Lidr monopolistle practice of fixing retail prinos in violation of Federal Inw " winst rosels price maintenance. States If Tydinga-Miller Bill, reported out in both Houses, to to be unacted, the liquor Industry should Do excepted. 26 SECRETARY OF THE TREASURY C Washington o ? I April e, 1957. By dear Mr. Presidents The five cases pending before the Federal Trade Commission against some of the largest distilling companies which I sentioned to you invoive their monopolistic practice of fixing retail prices in violation of Federal law against resale price maintenance. The Tydings-Miller Bill has been reported out in both Houses. It would legalise the monopolistic practices on which these Federal Trade Commission cases rest. This Bill applies to all commodities and would tend to raise prices generally, particularly in the lines of business where monopolistic conditions prevail. It should not pass at all, but, if it is to be enacted, the liquor industry should be excepted because a rise in prices in that industry would have the additional social disadvantage of accentuating the problem of "bottlegging." Faithfully yours, (Signed) H. Morgenthau, Jr. The President The White House. Regraded Uclassified 27 April 23, 1937. 11:34 a.m. H.M.Jr: Hello. Operator: Vice-President. H.M.Jr: Hello Garner: Hello Henry. H.M.Jr: This is your old friend, "Money-Bags". G: Yes, that's all right - I'm for you; I'm doing my damnest to protect you. H.M.Jr: Well I just wanted before I went to Cabinet I wanted to kind of - how things - how are they feeling up there. G: Well by God there all for this reduction now I'll tell you that. H.M.Jr: They are. G: Bet your damn life they're all for Secretary of the Treasury' H.M.Jr: Well that's - ah G: That's - that's fine ain't it? H.M.Jr: Couldn't be better. G: Well now I'm just going to tell you. You've been up there about three years haven't you? H.M.Jr: Yes. G: And by God this is the first time that you've ever said you wanted anything done. H.M.Jr: That's right. G: Well now - ah - nobody's to blame but you fellows if the thing's overloaded but we're ready to help now and help like hell unless you down and say no - no - no - no - no Regraded Uclassified 28 - 2 - H.M.Jr: Well we'll go the limit. Of course, the way - the trouble right this week is that the newspapers don't believe we mean what we're saying. G: I know they don't and that's all right they may not - we may not be able to do it. I don't know what the boss is going to say; I believe he's going to balk on this 10 percent. H.M.Jr: On the what? G: Is he going to balk? H.M.Jr: No. G: When he finds out what it is by God he's going to say, "Well wait a minute". H.M.Jr: Well you know this reminds me of the way - when the world war and they wouldn't believe that the American soldiers were coming because they kept telling them each month they were coming next month, G: Yes, I know - well we've been doing that you know the last two years. H.M.Jr: And if there was some little bill that he could veto. G: Yes by God with a ringing message. H.M.Jr: I mean some little bill for a million dollars or something G: Yes. H.M.Jr: and say at least G: I just hope to God he can; I'll do everything I can to persuade him to do it and fix it on the hill. H.M.Jr: If you could think of some little bill that didn't mean much and we could get him to veto it and then G: Well you find out one of them and by God I'll do it. H.M.Jr: All right. Regraded Uclassified 29 - 3 - G: All right, I'll see you there at 2 o'clock. H.M.Jr: Thank you. G: All right. Regraded Uclassified 30 April 23, 1937. 11:35 a.m. Bell: Hello H.M.Jr: Dan B: Yes. H.M.Jr: If we could only find some bill that comes down for 500 thousand or a million dollars that - and get the President to veto it soon, see? B: Yes. H.M.Jr: And then give a good stiff message and let it - it would need something like that for these people to believe that he's going to do it, see? B: Ah-ha. H.M.Jr: Now these bills that come down have to go across your desk, don't they? B: Oh yes - oh yes. H.M.Jr: Well now see if you can't find some bill that we can get them to veto that carries an appropriation B: Well I've been looking for some but there's been - hasn't been any bills going through that amount to anything. There's a lot of private claims and things like that - about all. H.M.Jr: No but something that he could sound off on, you see? B: Yes. H.M.Jr: Make a B: Ah - H.M.Jr: - a noble speech about, see? B: What I'd like to see him veto is some appropriation bill. H.M.Jr: That's what I mean. Regraded Uclassified 31 - 2 - B: That's never been done - I mean big one H.M.Jr: Oh. B: take the Interior Department bill which aT they are now talking about increasing that Vocation Education from three to fourteen which is eleven million dollars increase and if they do it - just hop right on it and veto the thing; he's opposed to it; he said he was at the time and that - ah - and then call attention to the fact that it's a shame that he has to veto a whole appropriation bill with 500 items in it to get at one and then ask for a Constitutional Amendment bfore he can veto individual items. One at a time, see? H.M.Jr: Yes, well let's get something like that, see? B: Yes. Well I think that if he could take a whole appropriation bill which is something - ah - well I don't know - remember when one was ever vetoed. H.M.Jr: Well we've got to do something to make these people believe. B: That's right. I know they don't believe it. H.M.Jr: Yes. B: And I talked about doing a little work here on some letters H.M.Jr: Yes. B: to go out to - about this next June and impress upon these people that the President did mean to save money in the next three months. H.M.Jr: Yes but we need - what we need is a very very strong veto message. B: That's right - that's right. Well I've been looking for something but there hasn't anything come along that's worth much. H.M.Jr: Well - ah - when you get it give me - come running in. B: Allright, fine, I will. H.M.Jr: Thank you. B: Goodbye. 32 LMS GRAY London Dated April 23, 1937 Rec'd 2:45 p. m. Secretary of State, Washington, 241, April 23, 6 P. m. STRICTLY CONFIDENTIAL. for TREASURY FROM BUTTERWORTH. At the weekly meeting at the British Treasury today, I conveyed the information which was given me in the tele- phone conversation of April 19th on Japanese financial approaches in Washington, and Phillips stated in reply that he had seen Arakawa since the latter's conversation with Waley and that he had found him very vague. Arakawa had made no mention of the tripartite monetary agreement and asked a number of questions and had given no information in return. Philipps said he could only conclude that Arakawa had no instructions to do anything specific and "728 merely "nosing around for information on the price of gold". I also mentioned that I had heard that the views which he had been good to make known in last Friday's meeting had been read with interest in Washington, particularly his offer to exchange at any time views on the general situation 33 LMS 2-No. 241, April 23, 6 P. m., from London. situation created by the increase in the quantity and value of gold. The American Treasury was, of course, also willing to exchange views at any time; however, the important ques- tion of ways and means immediately arose since the related problems were so complicated that they did not lend them- selves to cabled instructions. Philipps said that he under- stood that point of view; that it was desirable to keep the matter in the back of one's mind for it was not pressing - there was no need of precipitate action. He then changed the conversation by saying that the French situation seemed to have become more complicated since our last talk and was perhaps approaching a crisis point. This time it was not due to a treasury deficiency for the French Treasury had enough money with which to carry on for the time being but it WD.S a currency matter, which WC.8 to say a political matter. His feeling for which he emphasized he had no factual basis was that "once again we will be approached by the French for advice". Asked, whether there was anything in the monetary realm which Blum could do Phillips said that he did not believe there was any definitive action he could take and therefore he had no advice to offer them should they come for advice. At bottom the trouble seemed to be one of political and social in discipline; 34 LMS 3-No. 241, April 23, 6 P. m., from London discipline; for example in some extraordinary way it has become C. highly important political question involving whether the Blum Government WS.S to reverse its policy and provide a public works program merely to please the 30,000 workmen who were now reluctantly and intermittently putting up the exhibition buildings. BINGHAM TTC Page 3 35 PARTIAL PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Paris DATE: April 23, 4 p.m. NO. 523 FROM COOHRAN Paris exchange market much quieter today. French control had up to 3.30 p.m. intervened only slightly selling sterling between 111.29 and 15. Lazard is sell- ing dollars importantly against sterling or francs (then converting francs into sterling). Dollars were fairly well bid until New York opened seller. Rentes up; 4 1/2 1937 bonds unchanged; shares about even. I made a call this forenoon at the Bank of France. The French control had not intervened in the market up until 11:30 but it was still too early to make any fore- casts as to market trends. I was told most confidentially by Cariguel that since I last called on April 16th (refer to my telegram No. 491 of April 17, 9 a.m.) the control had been steadily losing gold and had difficulty between two credit days. Cariguel let me know that the net balance of gold and foreign exchange in the control fund had declined from approximately (end Section one) 36 PARAPHASE OF SECTION TWO. No. 523 from Paris April 23. 4,500,000,000 francs to 3,650,000,000 francs. I questioned Cariguel as to whether during the past few days any other means had been discussed of raising money for the Government to supplement the Treasury's funds which still remain from the new loan. The balance of the Treasury, incidentally, (as I mentioned in my telegram of yesterday) with the Bank of France has declined as of the last statement. This confirms the prediction that this account would not be increased through the receipt of late payments on subscriptions to the loan, but the fund was rather drawn upon. Reference was made by Cariguel to the City of Paris loan - see my telegram No. 482 of April 14, 6 p.m. - the proceeds of which will undoubtedly be used by the Treasury. Government or semiofficial loans which are issued on the local market usually result in a flood of applications being received by the Bank of France. How- ever during the first few days that the City of Paris issue was open, at the Bank of France not a single bond was sold. I was informed by Cariguel that there 18 now some dis- cussion of the possibility of issuing 2,000,000,000 france of bonds of the Caissides Pensions, offering the same terms as the last loan. Taking into consideration the present (omission) market, he doubts whether such an issue would be feasible. Cariguel could not confirm the rumor that recently an attempt to borrow in the Netherlands had been made by the Treasury. END SECTION TWO. BULLITT. 37 PARAPHRASE OF SECTION 3. No. 523 from Paris April 23 The recent weakness of the franc Cariguel attributes to fears over the political and social structure in France. This consisted of a flight from the franc, he said, and not a filling of commercial demands for currencies of other countries. During the last speculative attack on the frano, he said, the situation was not favorable as long and short term money rates are high on the French market, with prac- tically no foreign funds here and bank deposits are low. He said that nevertheless, if big holders of capital see fit to leave the franc irrespective of money rates, this currency can be put under such pressure that the foreign exchange resources and gold of the French control might not last long. Presumably the control had already started drawing out gold from the Bank of France. Cariguel said that, with reference to the situation in the Netherlands, President Trip of the Netherlands Bank had recently released from the Dutch stabilization fund a considerable amount of gold. END SECTION THREE. BULLITT. EA:LWW 38 PARAPHRASE OF SECTIONS FOUR AND FIVE, No. 523, April 23 from Paris. He had given this gold to the Netherlands Bank of the Indies against florine, to reconstitute the gold resources of that Bank. At noon today I had a visit from Maurice Frere, the representative of Prime Minister Van Zeeland, charged with preliminary international economic investigations. I have known Frere several years, and he talked rather frankly about his mission. The job keenly interests Frere, although he realizes that nothing could be accomplished very quickly and that there are many obstacles to be overcome and much groundwork to do. Frere said he saw no early opportunity to hold a world conference on these matters. He has no preconceived plans about it, but is obtaining the views of the appropriate officials in the various countries and he then hopes to see if they can develop some common form- ula. Frere had seen Spinasse, the French Minister of National Economy, before he called on me this morning. He found that Spinasse, as well as Auriol and other officials of the Blum Government, were interested in the undertaking of Van Zee- land, and anxious to do what they could to assist it. How- ever, he understands that the French Government 18 not in a position to take the initiative but will await the results of the explorations which Frere is making to see whether then can fit into a general plan. If some broad interna- tional program 1s achieved, Frere thought there would be Regraded Uclassified 39 - 2 - an especial opportunity for replacing quotas by customs tariffs in France. The German situation, he knows, would present difficulties in the achievement of such a plan. Any big program, he believes, must envisage a devaluation and stabilization of the Reichsmark, for which outside financial assistance would have to be given to Germany. France, he believed, would be unwilling to extend such assistance to Germany without some political guarantee from her. When Spinasse and other French officials urgently requested Frere's views as to the French situation, he said he expressed them frankly. The Blum Government, he told them, should at once take definite and forceful action to quiet the labor situation, and demand the Extreme Left's full cooperation. Frere asked them why they were letting such a situation develop for some other government to take in hand. If a strong policy of public order and relaxation of the forty-hour week, etc., would be followed by the Blum Government, Frere said he thought it could win suffic- ient confidence on the part of the capitalist classes to bring about a repatriation of funds and a business paikup If pickup which might END SECTIONS FOUR AND FIVE. BULLITT. EA:LWW 40 SECTION SIX save the situation. Nevertheless, he realizes that the time for such action is near to passing and that 1f a crisis is to be avoided, something must be done soon. He would regret seeing a government which in most matters meets the current policical thought in France fall on a financial difficulty. He is convinced that his banking friends in Paris, although skeptical of the present Gov- ernment, would help the Government through a crisis rather than see it fall in circumstances where the banks might conceivably be blamed therefor. Frere is returning to Brussels tonight and will proceed to Berlin on Monday where he has been urged to stay a week by Schacht. A favorable impression was made by Schacht in Brussels where Frere attended the meetings between Van Zeeland and Schacht. After leaving Berlin Frere will go to Rome but will not stop off in Basel where he has attended regularly the B.I.S. annual meetings heretofore as a representative of the Austrian National Bank. He considers that it is highly important that he obtain the support of the Government of Italy to the present under- taking and that the dictators find no reason to take offense at Van Zeeland's procedure and no basis for 41 PARAPHRASE OF SECTION SEVEN. No. 523 of April 23 from Paris. terming this plan a "democratic" maneuver. It is Frere's plan to see the appropriate officials as soon as he can. He does not want to expose himself to the general question- ing which he might experience if he stopped over at Basel, where at the annual meeting 80 many central banks will be represented. I questioned Frere as to whether on Van Zeeland's trip to the United States he would be with him. His reply was that van Zeeland's trip to Washington is still considered as a purely personal call, and that 28 long as this is the situation, he does not want to give evidence of actual investigation or negotiation through taking his technical assistant with him. I gave to Frere a document on the American Government 1938 budget, and two publications of the Treasury Depart- ment on capital movements. As yet Frere has not got together any sort of a staff, but he said he might call upon me later for further documentation with respect to our country. Material on France had been given him by Rist. END MESSAGE. BULLITT. EA:LWW Regraded Uclassified 42 MM GRAY BOMBAY Dated April 24, 1937 Rec'd. 6am. Secretary of State Washington, D.C. April 24, llam. FOR THE SECRETARY OF THE TREASURY. Silver market continued quiet durint the WEEK; ready opened at rupees 53-5 per hundred tolas and after touching 53-10 closed at 52-12. Stocks on hand continued heavy at about 34,000 bars and daily offtake improved to about 85 bars. A shipment valued at 20,000 pounds reported from London. Gold declined; ready opened at rupees 34-14-3 per tola, touched 34-11-6, closed at 34-13-6. There was some nervousness early in the WEEK concerning American Treasury policy but confidence returned. WATERMAN WC KLP DECEIVED TRUZANT 43 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Paris DATE: April 24, noon NO.: 527 FROM COCHRAN There is no exchange news as Paris banks are closed for the day. This morning I talked by telephone with Jacobsson at Basel. From Jacobsson's conversations with Van Zeeland, Marcel and other officials of the B.I.S. and contacts, he thinks Paul Van Zeeland is principally playing for time, through Freres investigational trips to European capitals, until he can come to Washington. I talked yesterday with the senior partner in a Paris-American banking concern. He told me that franc deposits in his bank were not increasing and that the deposits in foreign currencies, namely, sterling, dollars and Swiss francs, amounted to twenty-four percent of his total deposits. The firm of Sulzer Freres, one of his clients which has manufacturing plants for engines, et cetera, in France and Switzerland, informs hii that due to inefficiency of French labor and to social legislation, their cost of production in France is at present thirty percent higher than that in the Swiss plant despite the fact that higher per capita wages are paid Swiss laborers. He Regraded 44 -2- He said that another American client of the bank requiring large quantities of manufactured material finds that it can get goods it had ordered cheaper in Switzerland than in France and can get a guarantee as to fulfillment of the contract and delivery for a specified date from the Swiss while no guarantee will be given by the French factories. These two examples were offered by my contact to show the unfavorable financial situation which has developed under the present political and social regime in France and the unsound business. 03V13338 TS21 08 89A EA:DJW 3 6330 - - - - Regraded Uclassified Fin AH 45 The Government Security Market Week ended April 24,1937 Treasury bonds recorded a net decrease of about 1/2 of a point in the average during the past week, thereby cancelling practically all of the advance in the preceding week. Prices turned upward on Monday and Saturday but in the other four days the movement was toward lower levels. Trading continued at a moderate rate, principally in small lots, but as there was little buying interest shown in the market a small amount of selling at times resulted in sizeable losses. The long issues were the most active and suffered the largest losses. The five longest maturities lost about 3/4 of a point, the three shortest issues were about unchanged, while declines by the other issues ranged from about 1/4 to 1/2 of a point. Guar- anteed issues declined about 5/8ths of a point in the average. The trend to the Treasury note market for the week as a whole was toward slightly lower levels but at no time was there any real weakness in the market as individual changes on any one day were confined to small fractions. Losses ranged from 1 to 6/32nds compared to gains that ranged up to 23/32nds in the previous week, MHHarro 46 MEMORANDUM April 23, 1937 To: Secretary Morgenthau From: Dr. Burgess Treasury bond market opened moderately lower today and prices sagged steadily in quiet trading up to the close. The long Treasury bonds finished 10/32 to 16/32 down from yester- day, the intermediate maturities were down 4/32 to 12/32, and the three shortest bonds were down 2/32 to 6/32. Losses in the guaranteed bonds ranged from 1/4 up to about 1/2 point. Volume was $1,572,000, most of which consisted of small lot transactions. The note market was easier and closing quota- tions were at the lows of the day, 1/32 to 4/32 off from yesterday. Domestic bonds were dull but there was a little activity toward the latter part of the day when some selling appeared. Second grade bonds showed losses of up to 1/2 point and high grades were off, on the average, about 1/4 point. Foreigns were generally quiet with prices unchanged. German bonds showed gains of fractions to about a point and a number of Latin-American issues were fractionally off. No purchases for Treasury today. Regraded Uclassified Please TREASURY GENERAL DEPARTMENT COUNSEL speak to me WASHINGTON APR 26 1937 My dear Mr. Secretary: Reference is made to the letter, under date of March 5, 1937, to the Secretary of the Treasury from G. Mallet Prevost, administrator of the estate of Teresa de Prevost, in which ap- plication and demand is made for payment under the provisions of Bill S. 1360, 74th Congress, 2d Session, entitled "AN ACT For the relief of the estate of Teresa de Prevost". The letter states that the Bill "became a law by reason of the failure of the Presi- dent to return the same with his objections thereto to the House of Congress in which it originated in the time and manner pre- scribed and required by the Constitution and Law of the United States". The amount involved is $25,000. It appears from an investigation by members of my staff that no record was kept either at the White House or at the Senate of the exact time or even the day upon which the Bill was returned to the Senate with the Veto Meesage of the President. Article 1, Section 7, Clause 2 of the Constitution pro- vides, in part, as follows: "Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve 48 - 2 - he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Ob- jections at large on their Journal, and proceed to reconsider it. ... If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been pre- sented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Con- gress by their Adjournment prevent its Return, in which Case it shall not be a Law." (Under- scoring supplied.) The nature of the return and record thereof contemplated by the Constitution was indicated by the Supreme Court in The Pocket Veto Case, (1929) 279 U.S. 655 (at pages 684-685) "In short, it was plainly the object of the con- stitutional provision that there should be a timely return of the bill, which should not only be B. matter of official record definitely shown by the journal of the House itself, giving pub- lic, certain and prompt knowledge as to the status of the bill, but should enable Congress to proceed immediately with its reconsideration: and that the return of the bill should be an ac- tual and public return to the House itself, and not 8. fictitious return by & delivery of the bill to some individual which could be given a retroactive effect at a later date when the time for the return of the bill to the House had ex- pired." It 1a obvious that the lack of records in the instant case illustrates an undesirable situation which should be remedied. You may wish to call the matter to the attention of those concerned or to present it in Cabinet meeting. Very truly yours, General Counsel. The Honorable The Secretary of the Treasury. Regraded Uclassified 49 "pril 26, 1937. 9:25 a.m. H.M.Jr: Hello Operator: Chairman Eccles. H.M.Jr: Hello. Eccles: Hello. H.M.Jr: Marriner. Eccles: Yes sir. H.M.Jr: I think I better go away every Saturday. E: Why? H.M.Jr: Well look what happened to the bond market. What did you fellows do to it? E: Well we put a few orders in. H.M.Jr: I see. Do you want to tell me? We've heard one side of it; we haven't heard yours. E: Well this is what happened - ah - on Friday, of course, the market went off pretty badly H.M.Jr: Yes. E: and - ah - so I had a meeting Friday a fternoon in the office and we got ahold of George and decided what to do on Saturday morning. H.M.Jr: Yes. E: Told them that they ought to change their tactics and put some orders in H.M.Jr: Yes. E: and that's what they did. Regraded Uclassified 50 - 2 - H.M.Jr: Well they must have changed their tactics about putting in orders of five bonds under the market and then when he hits it why withdraw the orders of five bonds. E Well they got a - they got quite a lot of them on Saturday. H.M.Jr: But they must have followed the market up, didn't they? E: Well I wouldn't say that they put orders in - not under the market - they put orders in with the dealers for two million each. H.M.Jr: Two million each? E: Yes. H.M.Jr: Of what? E: Well two million - two million to each dealer. H.M.Jr: Oh I see. E: Two million dollars. H.M.Jr: Yes, to use at his discretion? E: What is it? H.M.Jr: To use at his discretion? E: No - no - to - to use them to buy any bonds that were on the market - being offered at the market. H.M.Jr: I see. E: You know they weren't to follow it up but they weren't necessarily to follow it down but if there were bonds hanging over the market H.M.Jr: I see. E: You see? To pick them up H.M.Jr: Yes. E: and on the board they put orders in for - ah - well I think they picked up close to five million. Regraded Uclassified 51 - 3 - H.M.Jr: Well - E: At least they - we got - we got Saturday morning fifteen million H.M.Jr: Yes. E: and - ah - I - I argued that that market ought to show some strength over the week-end. H.M.Jr: Yes. E: That they had bill financing to do to-day H.M.Jr: Yes. E: and that the job to-day - would be just that much more if we didn't change that trend of the end of the week. H.M. Jr: Yes. Of course, I'm simply delighted. Taylor and Lochhead and I walked home Friday night and we talked it all over and - because we felt terribly blue at the way they were handling it but I kept saying it's the Federal reserve's money - it's not mine and then you fellows did Saturday what we were praying that you'd do. E: (Laughs) Well - H.M.Jf: I mean you did what we'd have done if it was our money. E: Well I felt that - that the - ah - Open Market Committee had authorized - we fought that thing through as you know H.M.Jr: Yes. B: and I said, "Well what the devil do they mean now?" I said, "We've got this money to be spent and it's true we can't take the market and there may be more offerings than we can take but certainly we can get in there and do a darned sight more than we did do." H.M.Jr: Yes. E: I said, "We've proven by putting a statement - see George is always arguing and some of the others on the Committee Regraded Uclassified 52 - 4 - were arguing very strongly that if we could show a statement where we hadn't bought any bonds for a week H.M.Jr: That would be bullish. E: that that would be bullish because it wouldn't be E supported market. H.M.Jr: Well they got A: And I said, "Well I - I'm not sure that's the case at all. If I was sitting out in the country and saw that condition I'd say that the Federal Reserve's got cold feet and they're withdrawing." H.M.Jr: Well, of course, George Harrison has been saying all the time the best news - they did nothing - well your statement came out and showed that they'd done nothing E: That's right. H.M.Jr: and the country's reacted - "Well if the Federal Reserve System hasn't got confidence in the bonds why should we?" E: Well it - an - I don't know what - I don't know what reason George will give for that now, He'll have some other reason I guess; something else will have happened. H.M.Jr: Oh, I - I haven't talked to him but Taylor has and from the way he was sputtering I gathered that you fellows must have done something and naturally we were curious. E: Well we bought - ah - we bought fifteen million on Saturday. H.M.Jr: Yes, well All I can say is more power to you. E: And we're going to meet in about a half hour - George is down - I had him come down and Sinclair is down H.M.Jr: Yes. E: so that we can watch the market this morning and - ah - SO as to make that bill offering successful, AS I understand it though the bill market has acted pretty good and the market is entirely cleaned of bills H.M.Jr: Yes. Regraded Uclassified 53 - 5 - E: which is a good thing. H.M.Jr: Yes. E: And - ah - as you know, we took some of the bills last week H.M.Jr: I know. E: but the dealers then during the rest of the week, in spite of the bond market being weak, had a strong - a pretty strong demand for the bills and they even got rid of all the nine months bills. H.M.Jr: Good. E: So the bill market looks better. H.M.Jr: Well I think that having a strong market Saturday - you're absolutely right - it makes it much easier to-day. E: Well I figured it would cost less to-day if we did that than if we let that market continue to go down. H.M.Jr: Even the New York Times had a kind word to say for the bond market E: Did they? (Laughs) H.M.Jr: which is something. E: Well I hope - I hope it will get off all right. H.M.Jr: Well I'm simply tickled to death but we made up our mind that it wasn't our money and we were going to grit our teeth and go through this week and take it on the chin. E: Well I - an - I told you I was going to do what I could and I've been fighting like hell to keep the thing going and H.M.Jr: Well - E: we've got another week to get through and Regraded Uclassified 54 - 6 - H.M.Jr: Well I'm - I'm more pleased to-day than I've been any time since the 15th of March. E: Well that's fine. I'm - I'm glad you are. H.M.Jr: Yes. Well let me know later on, will you? E: I will. I'll call you. H.M.Jr: Now that it - I - you see with Burgess away I don't get as good information as when Burgess is there. E: You know that's a terrible loss to us. Now if we - an - an - those fellows don't run that market like Burgess. H.M.Jr: Oh no. E: And - and - and H.M.Jr: And they've insisted that Harrison - ah - what the hell does he know about the bond market? E: He doesn't know anything. H.M.Jr: And when you call up Harrison he insists on referring to this man - what's his name? E: Ah - Allan Sproul. H.M.Jr: And not only that but he's the boy that sees the newspapermen every a fternoon. E: Well it's just unfortunate. It's just one of those damn breaks because I'm - I'm sure that if we'd had Burgess - ah - the situation would have been handled far much better than it has; the results would have been better. H.M.Jr: Oh sure. E: Burgess was in favor of - of this action you know - when this crowd was down here although he didn't say much about it - I knew he was pretty much in sympathy with what I wanted to do. Regraded Uclassified 55 - 7 - H.M.Jr: Well even if he wasn't he'd do what you want him to do. E: He'd not only do that but he knows what to do. H.M.Jr: Yes. Oh I've felt his loss tremendously. E: Yes, well it's been a fright for us. H.M.Jr: Well let - talk to me a little later will you Marriner? E: All right. H.M.Jr: Thank you. E: Goodbye. Regraded Uclassified 56 April 26, 1937 9:30 Group Meeting. Present: Mrs. Klotz Mr. Oliphant Mr. Magill Mr. Upham Mr. Gibbons Mr. Taylor Mr. McReynolds Mr. Bell HM,Jr: Steve, what about this J. L. Matthews, related to the Vice President, who came in to see you? Mr. Gibbons: He came in and said you had talked to the Vice President, Just a young chap. HM.Jr: I don't know who he 18. Mr. Gibbons: He said the Vice President had spoken to you about it. HM,Jr: No. Well, I have to see the Vice President myself. I will go up the first thing tomorrow morning. The Vice President 1a more temperamental than at any time over the spending thing. All this stuff that the Vice President is working against Roosevelt 18 not true, because I have seen him in action and he always said, 'Now, Chief, what do you want? Is it all right for me to do 1t?' Don't for B. moent, want anybody in this room to think he is working against Roosevelt. Mr. Gibbons: I think he would come right out in the open and tell you what he 18 doing. HM,Jr: Herbert? Mr. Gaston: (Gave the Secretary Kiplinger's 'Washington Letter'.) HM,Jr: I got this over to Kiplinger anyway. I had Regraded Uclassified 57 -2- better luck than with Lippmann. (Reading) "How sincere 1E the President? We have reason to believe that he is sincere NOW despite fact that in past he has TALKED economy and then proceeded to spend more than ever. He may change his mind, as he has in the past, but Just now he has reason to be very earnest in working toward budget balance." Herbert, I am inclined to sand for Arthur Krock. I haven't done it for B. long time. And talk to him about the editorial on gold in the Times. They ran that rumor the other day and in order to justify themselves, instead of being good sports and coming out and saying we are a bunch of old wash-women, I kind of thought I might send for Arthur Krock and in view also -- if you would get yesterday's Editorial Section of the Times -- make a note -- a story by Turner Catledge. In the body of his story 18 a straight factual story, but the head- ings are 'Due to Treasury's Blunders we are Having Budget Troubles'. Then you read the Turner Catledge story and there is nothing in it, but the heading -- something about 'Treasury Blunders Makes Budget Balance Difficult -- but the story does not say anything about it and there 18 no use calling up -- I would much rather have it out with Krock. What do you think? Mr. Gaston: of course, Krock would not have anything to do with the heading of that story. HM,Jr: No. No. But I have nothing to 108 e and 8. little to gain. Shall I call him up and see if I can get him? Mr. Gaston: Yes. HM,Jr: (To Operator) See if Mr. Krock could come in to sea me between 11 and 11:30. Let me know which. Mr. McReynolds: Nothing. Mr. Bell: Nothing. HM,Jr: Danny, on this thing now did you keep your word with me? Mr. Bell: on, yes! Mr. McReynolds; Yes, he did. I went around to his office about eleven o'clock and the girl said, 'He isn't here. The Secretary made him promise to stay nome.' Regraded Uclassified 58 -3- HM,Jr: Could you get hold of Clarence Opper and this fellow Ihlder and sort of sit down and see if they can sketch something along the line the President told us. What he said 18, we take part of Ickes' revolving fund and then we set up housing on a basis of, first, the community would have to buy the land. Isn't that what he said? Mr. Bell: He said he would insist on it. HM,Jr: Then he said, two, we will give & 45% grant, and three, all the unemployed labor that they could use. Mr. Bell: Did he say 45% grant? HM,Jr: Yes. Mr. Bell: And in addition ..... HM,Jr: all the unemployed labor that they could use, What they are doing now 18 they are giving them Mr. Bell: ... relief labor. HM.Jr: Well, aren't they giving them -- we are buying the land, We Just give them a 45% grant. Mr. Bell: Ickes is constructing some himself. Mr. McReynolds: All that he 1e doing is he's doing 16 all, but he 18 giving them 45%. HM,Jr: Mac is in on this and we are not getting anywhere. Mr. McReynolds: Ihlder has B. draft, but everytime it comes back, something new is thrown into it. HM,Jr: You have been thinking about it and if I get & breathing spell in the next two or three days, I would like to sit in on it, but I am afraid the President will send for us. For ty-five percent grant, he limited it to materials, (I had better get him to give it to me at noon) and then give them all the relief labor they could use. But I thought he said 45% on materials. Mr. Bell: I thought he said a 45% grant including all the labor. Regraded Uclassified 59 -4- HM,Jr: Anything for me on the overhead of the various agencies? Remember? Mr. Bell: I have forgotten it if you did. HM,Jr: I will tell you again. You were going to take B. sheet and go back to July 1 ..... Mr. Bell: Oh, yes! HM,Jr: ... and have the various number of people employed in the several emergency agencies and as the money goos down, 18 personnel coming down. Mr. Bell: We had to send to the field for some of that. HM,Jr: What else? Mr. Bell: That's all. There is a little concern on the Hill about this economy program. HM,Jr: Which way? Mr. Bell: Cannon called me up last night and said -- Cannon is pinch-hitting for Taylor. HM,Jr; What State does he come from? Mr. Bell: Missouri. He says the Tabor stuff is going out all over the country and all of these Democrate are getting letters from their constituents criticising them for not cooperating with the Republicans in this economy drive. HM,Jr: Swell! Mr. Bell: To show the absurdity of the situation: one of his men -- one of the letters he got was from & man who said he was on WPA and he wanted more money from WPA -- wanted higher wages and at the same time insisted that he cooperate with the Republicans on the economy drive. HM,Jr: In other words, the heat 1s being turned on them. Mr. Bell: Yes. But he says the thing that is worrying him -- two points in the President's message, as to how he Regraded Uclassified 60 -5- 18 going to meet the deficit in 1938 has not gotten across at all and I told him you and I talked about it and said if we could get some bill which he could veto we might bring this home. He said, 'That's a good idea'. And he said, 'I hope you can get one', but he wants to attach to the present deficiency bill the 10% cut. I am to ask the Pres- ident this morning if he 16 agreeable to having that go through. HM,Jr: Dan and I have been watching for & nice juicy bill for the President to veto and then with a big speech give them a veto message 80 it will let them know he means what ne says. How about Gibbons' request for an appropri- ation for the New York Fair? Mr. Bell: That Fair and Exposition thing is just & plain racket. Every city in the country is trying toout- do the other. We are paying all the administrative IX- penses for these Fairs. HM,Jr: Anything on your desk? Mr. Bell: No. HM,Jr: You know, they Just won't believe it. I use the same example -- the Alliee kept saying, 'You keep telling us the American troops are coming. We don't believe it. Each month is going to be next month.' And tney wouldn't believe it until they actually saw the list of killed. It's the same way with this. They are not going to know until the President publishes the first casualty list and then they are going to believe it. It's true. They won't believe it. Mr. Bell: I would like to see it happen to an appropria- tion bill. HM,JR: I bet I know which one. You are out for blood in a big way! Mr. Bell: I want to shoot a whole battalion all at once. Mr. McReynolds: You want one of these large Department bills. HM,Jr: He has his eyes on & departmental bill and if he kills that -- Mac, where is our Treasury bill? Regraded Uclassified 61 -6- Mr. McReynolds: That was ruined before it ever got to the Committee? HM,Jr: How far along 1e it? Mr. McReynolds: Conference. HM,Jr: You nad better watch it. This fellow Bell is on the warpath. Mr. McReynolds: I am watching 1t, but Danny ruined that before it ever went up. Mr. Lochhead: I haven't those other figures yet. Mr. Taylor: Nothing. Mr. Gibbons: I would like to tell you something I heard Saturday night. HM,Jr: Stay right behind. Mr. Upham: You said you might want to see me before HM,Jr: I think you had better start out just like I said. I would not only see the banker fellows. I would see the Farm Credit, the HOLC and the Federal Housing, Bo you get all around the thing. I suggested to Cy that he start and swing down through Richmond, Atlanta, Texas, New Orleans, San Francisco and Seattle and take a plane back, and send in a letter and let us know what's going on. Mr. Upham: Mr. Gaston has already asked if he can go in my place. HM,Jr: Better get a little dope on the farm stuff. The President got a letter from an orange grower in Florida send- ing a check for $101.00 and he said he thought the President could use it better than he because he's getting paid for something he had done all his life. Said, Why should he take money for that? I thought I would take my check -- I can't say 'disabled' -- but Iwant to use a very carefully chosen word -- the children at Warm Spring could 12 use it a great deal better than I could and send it to the Warm Springs Founda- tion for the children down there. Mr. Gibbons: Physically underprivileged. Regraded Uclassified 62 -7- HM,Jr: Something -- not underprivileged. Mr. Gaston: You spoke about the Wagner Housing Bill. The only thing the President has said in his press confer- ences 16 that this would be pretty much of a blue-print plan and also he said that he is firmly convinced that the whole cost should be the grant and then he also said this other thing about using the Public Works revolving fund. Mr. Bell: The decision for the locality to buy the land is the most important decision he has made. Mr. McReynolds: All the housing people tell me when it goes in that way you don't have to worry about financing, because there won't be any program. Mr. Gaston: I fixed up something for Mackellar, but the man on the air tonight 1s Cummings. HM,Jr: That's your worry. Mr. Oliphant: I would like to tell you, before lunch, about my talk with Wallace Saturday. It will take four or five minutes. Mr. Bell: (To Mr. Oliphant) Herman, may I ask what is the condition of the refund to the Philippines? Mr. Oliphant: There has been sent to Quezon & draft of a letter which he 18 going to reply to us, asking us not to pay it for the present. For the time being, not to pay to the Philippines the $46,000,000. HM,Jr: I think it's B. "gyp". I swear it 1s. I know the Army does not want it, but I still think .... Mr. Oliphant: The Army would like to have it for an arsenal. HM.Jr: But not for the Philippines. Mr. Oliphant: An arsenal in the Philippines. They did not want the political government to have it, but they would like to have it for an arsenal. HM,Jr: I listened to it last year and if ever a Government Regraded Uclassified 63 -8- was entitled to it, they are. I mean, a moral obligation that they are entitled to it. Mr. Oliphant: Absolutely. Mr. Gaston: It's their gold reserve. Mr. Oliphant: No. This is the other thing -- this is the cocoanut 011. Mr. McReynolds: Processing tax collected. HM,Jr: On, I thought you were talking about the other matter. Mr. Magill: The Railroad Retirement 18 taking ite normal course before the Ways and Means and I notice that this Doughton bill for repealing that provision for reporting corporate officers' salaries 18 going to be taken up under B. rule, I suppose to be passed. HM,Jr: I haven't read your letter yet on your talk with the Attorney General, but when he sat down ne said, 'I had 8. fine conference' Mr. Magill: When did he say this to you? HM,Jr: At Cabinet. 'And I don't think there is any real difference between us. (Mr. Magill laughed aloud at this remark.) I said, 'I am sorry, Homer, I haven't talked to either of the men. So he said, 'Well, we are practically together.' I had better see both of you this morning. Mr. Oliphant: Did the Federal Trade Commission thing clear at Cabinet? HM,Jr: It cleared. Wallace raised one objection. He said something about rice in prices and he changed it to put in the word the "seeming" rise of retail prices. Put in the word "seeming" and the word "retail". Mr. Oliphant: And the White House will send it? HM,Jr: Will send it. The thing that surprises ne on prices -- food prices are 10 points lower today than they Regraded Uclassified 64 -9- they were a year ago, which is surprising. It is All cleared. Mr. Oliphant: That's a good piece of work. HM,Jr: The Attorney General handed it to me and wanted me to present it. He did not want to present it. (Mr. Oliphant laughed aloud at this remark.) But you certainly would have gotten a big kick to hear him talking about 'his brief' against the Aluminum Company. (General laughter from the group.) 'You can't imagine the work it takes to go into & thing like this.' I was feeling devilish and I said, By the way, do the people's names who work on this ever appear on the brief? 'Oh, yes, and he showed me Homer Cummings and switched over to the other list and it mentioned Robert Jackson last. Mr, Oliphant: I Just happen to know how much time he put on it! HM,Jr: 'God! The time it takes!' And he did say one thing and I gave him a pat on the back. He turned and said, 'Mr. President, another thing against Mr. Mellon -- Aluminum - and you might get another art gallery out of it.' So I gave him 8 pat on the back and I said, 'Homer, that's pretty good coming from you.' I got the idea that a certain fellow by the name of Robert Jackson, who spent about nine months work- ing on the Mellon income tax case, somehow or other got the idea that the Board of Tax Appeals thought the Administration had lost interest and, purely by accident, before the Board of Tax Appeals hand down the decision, he wants to show that the Administration has not lost interest and, therefore, he files another claim against Mr. Mellon and the Aluminum Com- pany to show that the Administration 18 interested. The fact that it came down before the Board of Tax Appeals de- cision 1s pure accident or coincidence. Just an accident on the part of Robert Jackson! Am I right? He's a smart boy. He's got his whole reputation in that thing. So he files this other thing and everything 18 fine and shows Mr. Mellon 18 still Mr. Mellon and the Board of Tax Appeala read it and now I say that Mr. Jackson's chances of winning it are increased about 1,000 percent. Never occurred to Bob! Mr. Oliphant: No: Mr. Magill: Hell, no! 000-000 Regraded Uclassified Noted Divident 65 FEDERAL RESERVE BANK OF NEW York April 26, 1937. ATTENTION: Mr. Lochhead Sir: There is enclosed herewith copy of the summary of a speech delivered by the Japanese Minister of Finance at the Conference of Clearing Houses held in Tokyo on April 20, 1937. Respectfully When L. W. Knoke, Vice President. The Honorable, The Secretary of the Treasury, Washington, D. C. Enc. ISWEOJA BECEIAED 1881 RSA TSG: TS RSA VIDART não service - - --- - Regraded Uclassified The Summary of the Speech 66 of the Minister of Finance Delivered at the Conference of Clearing Houses Held in Tokyo on April 20, 1937. 1. The purpose of our financial and economic policy is to promote the welfare of the country. In view of our poor natural resources and increasing population, the expansion of our foreign trade must be the guiding principle. Accordingly it is necessary to promote trade with other countries, to develop shipping and fishing indus- tries and to encourage emigration. To attain these purposes it is advisable to make reciprocal arrangements with foreign countries by peaceful and gradual means. Economic nationalism is still prevailing in the world and is impairing foreign trade and jeopardizing the peace of the world. Therefore if an international economic conference is held in the future, we will gladly participate in the conference with B view to clarifying the situation and to making foreign countries better understand our country. of The urgent necessity for the present is to improve the producing power of industry, to develop industries as a whole and to promote foreign trade so as to enable the Government to meet the increased expenditures. The increase of national expenditures ought to be limited within the producing power of industry. 3. The Government is prepared to carry out taxation reform in the near future. The increase of taxes, however, should not retard the development of industries. In revising custom duties, the Government intends to protect industries which require protection from the view point of national policy and to give careful consideration to the balance of payment. Regraded Uclassified 67 C ? 68 2. 4. It is important not to make drastic changes in financial matters and not to take radical measures which affect financial institutions. However, in view of the great responsibility of financial institutions with respect to the development of the pro- ducing power of industry, the consumption of national loans, the encouragement of savings and investment within Manchuria and China, it is desirable that they collaborate and cooperate among them- selves, and also discourage speculative employment of funds. As to monetary policy, neither the expansion of currencies to the ex- tent of exceeding the economic need of the country nor the strin- gency of money inimical to the smooth operation of the financial world is advisable. The amount of currencies should be appropriate to the situation. 5. The balance of payment is reflecting all aspects of finance and economics and should be taken into consideration by the entire nation. The Government has decided to send gold abroad and increase funds for the purpose of maintaining the present rate of yen ex- change. However, we can not rehy simply on gold shipments. The urgent necessity of today is fundamentally tò improve the balance of paymentso as not to impair the foundation of the currency system. When the producing power of the industry develops favorably, the maintenance of the yen exchange rate at the present level will not be a difficult task. 03V13038 Test TS ASA TMJMTHA93G YRUZA39T all to - will - - - Regraded Uclassified 69 LNS GRAY London Dated April 26, 1937 Rec'd 2:50 p. m. Secretary of State, Washington. 247, April 26, 7 P. m. FOR TREASURY FROM butterworth. Replying to a question (*) House of Commons this after- noon Charcellor of the Exchequer announced that he had decided in the general interest of local authorities and other borrowers to acquaint the market with his intention to "advertise on Vednesday morning details of an issue to be made on Thursday of two and a half per cent national defense bonds to the amount of 100,000,000 pounds at 99 and one- half. This will be a short to medium term security redeem- before able / the end of 1948 by annual drawings at par of not less than 20% of the amount of the loan, the first drawing being in the autuar of 1944; subscriptions will be payable by installments over three months and the first dividend will be 13 shillings per cent on the 15th September 1937. In order that small investors may have an opportunity of participating I have arranged for a separate issue of reg- istered bonds in amounts of five pounds and multiples of five Regraded Uclassified 70 LMS 2-Jo. 247, April 26, 7 P. m., from London. five pounds up to a maximum of one thousand pounds to be made through the Post Office Savings Bank and Trustee Sav- ings Bank". Mr. Chamberlain also indicated that "the proceeds of the issue until required for financing the defense program will be available for reducing the floating debt and will in any case cover the estimated expenditure of eighty million pounds to be made this year from borrowed monies". The London Stock Exchange was decidedly weak again today but the amount of business transacted bore no relation to the price declines; inasmuch as no brokerage firm can advise its clients how any particular stock is to be taxed under the new. national defense contribution there are no buyers, while at the same time there are both nervous sellers and forced sellers. Thus far there is no reflection in the House of Commons, aside from a numerically small die-hard Tory group, of the somewhat bitterly critical reaction now current in the City. The foreign exchange market was also active today as well-informed dealers report that the Bank of France will have lost as much as two million pounds today. BINGHAM HPD: WYC (*) Apparent omission. Regraded Uclassified 71 April 26, 1937 3:15 p.m. Present: Mrs. Klotz Mr. Magill Mr. Oliphant Mr. Taylor Mr. Seltzer Mr. McReynolde Mr. Bell Mr. White HM,Jr: Bell, I don't like to bring up these unpleasant things, but I thought after having lunched with the President you might B.B. well have the worst. This is on the Housing bill. The President said on a million dollar project that the city should buy, out of its own budget, $200,000. That leaves $800,000. The Federal Government will give a grant of 45%, which 18 $360,000. Then, he said, we will give 10% of relief labor, which 18 $80,000 -- 10% of the $800,000 -- leaving a contribution of $440,000. Now on re-cap, the city puts up $200,000; the United States Government puts up $440,000; the balance of $360,000 should be raised on first mortgage, and I said, 'What else do we contribute?" and he said, 'Nothing.' And he said, 'Why?' and I said, 'They won't like it.' He said, 'If they don't like it, they're crazy!' I said, 'Is that really all you are going to give them?' So he said, 'WHAT! Henry, you and I could build on that basis and if they can't, they're crazy.' Mr. Bell: You didn't have a Senator present. HM,Jr: No, but I have it in his own handwriting. Mr. Bell: I don't Bee any initials! HM,Jr: That's the President's last. And when I said, 'Mr. President, this won't do;they won't like 1t,' he said, 'Anybody that don't like that 18 crazy.' Well, they are asking for 100%. And he said, "Well, if they don't like that, they don't get anything. They can take it and like it.' Regraded Uclassified 72 -8- Mr. Bell: This ie 56 - 44. HM,Jr: It's 44% grant by the Government and 50% by the local community. Now, I want volunteers. Who 18 going to break it to Senator Wagner? I'll tell you what we'll do. If Vac does not come through with that memo that I am wait- ing for in 24 hours, he's the candidate to see Senator Wagner. Well, anyway, there it 10. I'll move on. Isn't that good news? Mr. Bell: 0. K. That's fine. HM,Jr: Now, the other thing 1s this, and you can carry the ball on this, Magill. The President wants, when he comes back, to send either a message to Congress or a letter to Pat Harrison and Doughton in which he 18 going to go into detail as to what the $600,000,000 is that we are short of revenue -- possibly use Professor Crum's letter -- but anyway, he wants to say flatly that our estimates and our method of estimating were correct, but the citizens -- that's the word he used -- found 8. trick way of finding loopholes. And then he wants us to 80 into considerable detail as to what those loopholes are, particularly elaborating on his friend Colonel Schick. He's got that fellow on his mind. (Shick razor.) And here's what 18 new. He wants to make B. recom- mendation to Congress, now, the 12th of May, that these loopholes be closed and that they be retroactive. And he said he does not want to wait until next fall and he wants to particularly, where it 18 true, to show the items which are held up by Court action and go into B. description of Just what the Court has done. And this thing -- some- body he read -- Ray Tucker or somebody said that the Pres- ident and the Secretary of the Treasury did not know how to estimate taxes and it's gotten terribly under his skin. So I told him about the one in the Times on Turner Catledge, who wrote a perfectly straight story, but the headings were 'Treasury's Blunders Make Budget Balance Difficult. That's in the Times editorial section. But he wants to hit this and he said, "Don't wait until I come back. If you get any good stories on how people evade taxes, send them down to me by radio." He said, "I have been telling the Colonel Regraded Uclassified 73 Schick story to everybody who comes to the house. People get awfully angry about it and incensed to think that & United States army officer would become a Canadian citizen and move his fortune to the Bahama Islands. Now I did not argue with him that his meesage wasn't dry yet that he would make recommendations in November 8.8 to loopholes, but he 18 very much excited about it and he wants to have those loopholes closed now and retroactive. He thinks it's too late. I didn't argue with him because ne was all steamed up. He had Just seen some congressman about flood relief. He's turning him down on 8. flood re- lief bill. So I thought, Ros, if you would carry it and work with Herman Oliphant and with Haas -- joint cooperation, but somebody has to carry the ball. But I wanted to do the two things and BO I thought it was a pretty good meeting. Mr. Bell: Fine! Mr. Magill: of course, it's mostly 8. matter of getting information from these field investigations. HM,Jr: Then he asked me something which I could not answer and did not attempt to answer, and that was that he saw some ruling about Internal Revenue on foreign corpora- tions and ne said, "Are you sure that will stick?". I said, "I don't know." Something he saw. But I don't know whether everybody has seen Crum's report or not, but I am giving you the stuff. This means no housing bill - at least no money. Mr. Bell: You don't have to go below the second line. No housing. HM,Jr: I said to him, "I didn't get all of this kidding when I came into the room the other day." I said, "What was it all about." I said, "I didn't get 1t." He said, "Didn't you understand?" and I said, "No." So he said, "I was getting back at Wallace at the statement he had made that he wasn't going to get any money and I thought the way to do it was to take it out on you and Bell, and Wallace would get it." I said, "I wish you would give me a signal next time." But did you get it, Bell? Mr. Bell: No. Regraded Uclassified 74 -4- HM,Jr: I couldn't get it. Mr. Bell: I thought he wanted to let us know we were licked before we started. HM,Jr: He turned to Wallace and said, "I don't want to do anything to hurt Wallace." I just saw Wallace and he's going along with us on everything. Even now he's talking about taking some out of his $500,000,000, 80 I have nothing to complain of and I thought you fellows would like to know. Mr. Bell: I intended to call them over this afternoon, and go over it, but I have not had a chance. o0o-o0o Regraded Uclassified you 2x # 1,000 , ano Land 200 11120 BALANCE 810 We gand 45% 360, AND and pay major of inter Form 10% 11 80, 11.0 Fur Cuntrib = H 440, was. Imming : City pays in tach fortand A 200, 100. 11.5 pays in tash 440, ano. Balmer AG finand 360, was 1, was pas Regraded Uclassified 76 April 26, 1937. 3:35 p.m. H.d.Jr: Hello Operator: Chairman Eccles. Go shead. H.M.Jr: Hello Marriner? Eccles: Yes sir. H.M.Jr: How are you to-day? E: Well I'm all right. (Laughs) How are you by now? H.M.Jr: Oh I'm all right. What did you spend? E: Well now - sh - I guess you got the report on the bill market. H.M.Jr: No I haven't. E: The - an - well the - I got a preliminary report. H.M.Jr: Yes I've got it before me - I didn't realize it. E: Well it was - the preliminary in New York was 72 on the nine months and 63 on the short bills - it was a little less than last week on the short and slightly over on the long H.M.Jr: Yes. E: .....SO that the average would be just about the same or maybe slightly less than last week H.M.Jr: Yes. E: .....SO that we're over that hump. H.M.Jr: Yes. B: Ah - the - ah - we - we told the dealers this morning - indicated to them that if they found that they were long on long bills and were having - have any difficulty in disposing of them - marketing them during the week that we would be prepared to help out. H.M.Jr: Yes. Regraded Uclassified 77 - 2 - E: "n - we don't know how many bills they bought but we assume, of course, they did - they were in the market and did subscribe to some extent. H.M.Jr: Yes. E: Now - ah - what we would do then tomorrow and Wednesday and Thursday during the week would be to, if they found that they were having difficulty distributing their long bills, we would either take some off their hands for cash or on an exchange for short bills. In other words, if they found that they could readily sell short bills H.M.Jr: Yes. E: and they - they - in that case they would, of course, sooner have short bills than cash. H.M.Jr: Yes. E: We would then switch give them some short bills and - in exchange for the long bills. H.M.Jr: Yes. E: And - and that - that apparently was helpful, of course, in the situation. H.M.Jr: Well you fellows got your teeth into this thing Saturday. How much weight has George Harrison lost the last 48 hours. E: (Laughs) Oh he looked all right this morning. H.M.Jr: Is he sitting next to you now? E: No he's gone back. H.M.Jr: Could he hear me this morning? E: No. H.M.Jr: Oh. E: No. H.M.Jr: All right. E: No he didn't hear you. Nobody heard you. Regraded Uclassified 78 - 3 - H.M.Jr: All right. E: The - ah - the - ah - the bonds to-day were - they were just selling all over the lot. H.M.Jr: Yes. E: An - we bought 17 million. H.M.Jr: Good. E: Of bonds. H.M.Jr: Swell. E: And the - the - an - market was off - ah - in the short bonds from two and - up to as high as, I think, 7 or 8/32d's in the longest ones. H.M.Jr: Boy you're watching this bond market these days, aren't you? E: (Laughs) H.M.Jr: Remember when I used to call you up and you'd E: Well hell I know but H.M.Jr: give me a three day old quotation. E: we had no occasion to do anything about it. We were so far removed from it that there was nothing else to do. H.M.Jr: Yes, that was my money in those days. E: It wasn't anybody's money. H.M.Jr: Sure. E: Wasn't any money going in. H.M.Jr: Yeah. E: What? H.M.Jr: The days I used to put in 40-50 million in a day and I'd call you up and you say "Huh." Regraded Uclassified 79 - 4 - E: Well I know but you - ah - you didn't want us in at that time. We went in on B partnership basis feeling you got interested in it. H.M.Jr: I love to hear you talk quotations. E: Well anyway H.4.Jr: It warms the coccles of my heart. E: Now - an - you'll be interested in this - I - I think that the bond market will possibly continue to go down. H.M.Jr: Yes. E: An - maybe I'm wrong but it's - it's just my hunch that it will be put down and - because they've - everybody's talked this 3% H.M.Jr: Yes. E: The - there's a sit-down strike. (Laughs) That's what it amounts to on the part of the insurance companies and the big investors and they've put out - and I talked to - Walter Cummings called me from Chicago this morning H.M.Jr: Yes. E: and Walter said - ah - ah - the banks throughout the middle west and customers were talk - talked to him during the last week and again this morning and it was their general feeling - because of the propaganda that had been put out from New York, he said - that the bond market is going to 3% and he said there wasn't any of the banks that he knew of that were required to sell at all to meet any reserves. He said they all had ample reserves and practically all of them had excess reserves. H.M.Jr: Yes. E: So that the only reason they would sell the bonds would not be because they had any other place in the world to put their money but would be merely because they thought they could buy them cheaper. H.M.Jr: Yes. : Because they could sell them on a - on a 2-3/4 yield and buy them later on & 35 yield - of course that - 80 - 5 - in other words they were speculating to that extent. E: Now he said the insurance companies - ah - and, of course, we know that - and the big institutional investors who had wanted 3% right along are just sitting back and are anxious to have the country in general help them get that rate. H.M.Jr: Yes. E: Now - an - so I sald they may go to 3%. H.M.Jr: Yes. is However, the minute they start their buying they can't any more keep them at 3% than they can fly because there just isn't enough places to put the money they've got - an - and, of course, they'll go back up again. H.M.Jr: Yes. E: Now - ah - I - we decided this morning here - the Committee - that during the balance of the week we would just continue to operate like we did to-day. H.M.Jr: Swell. in We wouldn't - we couldn't take the market and, of course, we wouldn't try but that we would be in the market and - ah - buy securities and undertake to keep it orderly. 4.M.Jr: Good. E: Ah - so I say if it should go down there H.M.Jr: Yes. E: it's my hunch that we'll - we'll see a darned good - a - a much better bond market a little later on. H.M.Jr: Yes. E: That it's just one of those periods that - ah - the propaganda has caused everybody to feel that they're going to make profit by selling now and buying later. Somebody is going to get fooled. H.M.Jr: Yes. 81 - 6 - E: Now - ah - the - this was an interesting phase - and I've heard it before and possibly you have - that - ah - the Treasury was going to have to do some long-term financing in June. H.M.Jr: Yes. E: And - ah - therefore that they - and they'd likely have to pay 3% H.M.Jr: Yes. E: because the investors that know wouldn't come in for less than three now - that no one would take less than 3% H.M.Jr: Yes. E: and - ah - the tendency, therefore, would be to wait with the expectation that they could get a higher rate when the Treasury's financing had to be done in June. H.M.Jr: Yes. E: Now - ah - of course, I think that to do any long-term financing at all in June - at least unless the situation was - was entirely different - ah - would be a mistake and let the bill market - after the first of June there will be a lot of excess reserves. H.M.Jr: Marriner, listen, old man, let's wait till the first of May and then we'll begin worrying. E: Oh yes. H.M.Jr: Then we'll begin worrying. Let's get through this week. I think this is going to be your hardest week and if you keep plugging the way you did to-day - Saturday, see E: Yes. H.M.Jr: ah - let's see where we are next Monday on the first but don't let's worry about our 15th of June because - don't let anybody tell you I've made up my mind about anything. Regraded Uclassified 82 - 7 - E: oh well I knew that. I was - I was merely telling you the - of some of the propaganda that they're putting out with an effort to knock down the bond market. H.M.Jr: And don't forget that Walter Cummings was the first banker to sell a big block of bonds that we knew of. E: Yes. H.M.Jr: That he sold 25 million along - between the first and seventh of March and it's the fact that he'd sold it and I'd heard about it is the r eason that I stiffened my price on the exchanges for the 15th of March. Burgess told me that Walter Cummings had dumped 25 million and he was the first fellow to do it. E: Ah-ha. Ah-ha. H.M.Jr: And when he went down to Warm Springs to see the President complaining about the bond market I said, "You ask Walter Cummings why he sold before anybody else did." E: Ah-ha. H.M.Jr: Don't forget it either. E: Well I knew that he'd done that. H.M.Jr: Yes. E: And I'm not - Walter Cummings' report was merely - and I don't know whether it was New York or not - maybe H.M.Jr: You're coming over for lunch tomorrow. E: Well I'd like to. H.M.Jr: O.K. E: All right - one o'clock. H.M.Jr: Righto. E: All right. Goodbye. Regraded Uclassif 83 LAZARD FRERES 120 BROADWAY NEW YORK LAZARD FRÈRES & Cre PARIS LAXARD BROTHERS & Co.I.ro. LONDON NEW YORK April 26, 1957. TELEORAPHIC ADDRESS LAZARD. NEW YORK Hon. Henry Morgenthau, Jr., Secretary of the Treasury, Washington, D.C. Dear Henry, In view of the friendly and open-minded mamer in which you received me on the occasion of my last visit to Washington, I feel warranted in writing to you at some length on the subject that we discussed. I do this the more readily in that I was much impressed with your approach to the problem, which seemed to me entirely without pre-conceptions and purely based upon a desire to find a sound solution of present difficulties. My impression was that, among your other concerns, you were extremely interested in the subject of "hot money". I think that the great flow of gold to this country is in measure due to a movement of capital in our direction which is the re- sult of political and economic uncertainties in other parts of the world. Because of the removal for the time being of the imminent danger of a European war, I would expect this cause to gradually assume diminishing importance. Beyond this, however, there is another factor difficult to appraise but which I consider of great moment. that is the fact that the American price level has never anything like fully adjusted itself to the revaluation of the dollar that has already taken place. In my opinion, a gradual rise in the commodity price level to accomplish such a readjustment should not only be welcomed, but should be facilitated. Until this re- adjustment takes place, there will be no stopping the flow of gold, barring a new gold policy. Regraded Uclassified 84 E For the reasons stated when I was with you, I consider & change in the price of gold as a brake on gold imports an unsound conception and one which you will be extremely reluctant to adopt. Now that we, for a long time, have had de facto stabiliza- tion on the basis of $35. per fine ounce, I feel that any tampering with the gold price would introduce an element of the greatest con- fusion and uncertainty into the world and the domestic economy; and such a step would be fraught with the greatest danger. I can see the pressure under which the constant influx of gold must be placing you, and yet I am satisfied in my own mind that to yield to this pressure, either through refusing to buy gold, through attempting to place an import tax on its importation, or through excessive handling charges, would be in fact jumping from the frying pan in'to an extremely hot fire. I would hesitate to predict how much of our recovery would be jeopardized by such & fire once it was lit. I know how much considerations of this sort weigh with you, and I em hopeful that your thinking will not take you in this direction. Since I last spoke to you, there has been a further and material drop in commodity prices. This has now reached a point where, as you know, it is creating a considerable nervoumess and hesitancy in the business world. Furthermore, the Government bond market has become as much & matter of concern to outside observers like myself as it must be to the Treasury Department. I am told by banking friends in New York that they have many orders to sell Govern- ments and that there are few bona fide bids other than from the Federal. This, taken in connection with your new program of selling Treasury Notes weekly, creates 8 situation of some tension and one that I think is getting near the point of requiring drastic action on your part, It is so much easier to revive confidence when it has had merely a little setback than after it has turned into pessimism and despondency, the face of 8 declining business activity and a tendency towards growing unemployment. I would consider neither of these latter possibilities as extremely remote, barring action by Washington. My feeling is that this situation could be readily turned ebout if you would abandon the policy of gold sterilization and deposit in gold certificates with the Federal the equivalent of the gold now sterilized. This would have an immediate and an electric effect on the bond market, both for Government and corporate issues, and would go a long way towards throwing into reverse the feeling of apprehension that has been growing all too rapidly in the last few weeks. It would be reflected in the commodity market by substantial advances. Washington bas been critical of advances in the commodity market until quite re- cently; yet I cannot avoid the feeling that they should now be concerned rather about further declines than about a new recovery. While I quite sympathize with their desire to react from to time against speculative excesses wherever they may appear, I feel that in the long run we will only reach B. sound position if gradually the price level is allowed to re- adjust itself to the present price of gold. Such a readjustment in itself would correct many of the disequilibrie in our system. Regraded Uclassified 85 - 3 - There will always be a lag between a rising cost of living and the rate of wages and salaries. Somethimes one will out-run the other and at other times vice versa. But having in mind the extent to which there is a tendency to re- distribute through wages, salaries and dividends to en ever- increasing number of individuals a constantly larger share of the annual productivity, I would expect this to gradually take care ot itself in the general upsurge of an economy which is turned towards increasing activity based upon an enormous amount of necessary work throughout the country waiting still to be done. Such an upsurge will do more than anything else to solve the problem of "bot money, and at the same time it will do more than any other thing to bring about budgetary equilibrium. It is obvious that anything which causes a material setback in this tendency will have immediate and unpleasant implications for the budget. This letter, as you see, is addressed to other phases of the problem than those which I went into with you in some detail when I was in Washington. I have not changed my view about the question of the free coinage of gold, but I agree with you that the phases of the problem touched upon in this letter are of more 1m- mediate importance. In the end, they all have some pointsof inder- dependence. I am at your disposal at any time to discuss this or any other questions with you, should you so desire. With kindest regards, I am, Yours sincerely, Just Julan le FA/B. Regraded Uclassified 86 JS Gray PARIS Dated April 26, 1937 Rec'd 4:09 p.m. Secretary of State, Washington, D.C. 530, April 26, 6 p.m. FROM COCHRAN. French control sold fair amount of sterling at 111.15. Dollar has become a little more offered. The control sold a few at 22.55. Rentes dealined about 1.70 francs and the new 1937 four and one half national defense bonds sank to 94.31. stock market bad. is Today's market nervousness/due in part to week-end political developments and most particularly to insistent and recurring demand of Jouhaux and his laborers that ten billion france be borrowed by the Government to finance public works and especially to take care of the twenty odd thousand employed in finishing the Paris Exposition structures. The idea of "work billà" after the German example which could be discounted by contractors with the bank and later rediscounted at the Bank of France is being pushed while earlier ideas of capital levies and nationalization of insurance and other business are reviving. "ith French Parliament assembling tomorrow, Govern- ment may soon face a bitter debate on general policies. The Minister Regraded 87 - 2 - From Paris #530 The Minister of Finance will undoubtedly be required to advertise the Finance Committee's detailed information with respect to the state of the Treasury, disposition made of funds recently borrowed, etc. BULLITT SMS:RGC Regraded Uclassified 88 April 27, 1937. H. M. Jr. called to see the Vice-President this morning. The Vice-President told H. M. Jr., that as Secretary of the Treasury he has the responsibility of the budget and the time may come when he may have to resign if he does not get the co-operation of the President on "spending". H. M. Jr. told him that he does not threaten but if the President does not carry out his promise to stop spending, he will resign. The V.P. told H. M. Jr., that for two months he has laid the ground work for the curtailing of spending but that the President would not listen. He also said, "Henry, frankly, I am talking to the President through you". H. M. Jr. replied that he understood. H. M. Jr. asked the V.P. whether he had confidence in him and the Vice-President answered, "Henry, I am your friend and I am proud of you. You can always count on me". Regraded Uclassified 89 April 27, 1937. 9:58 a.m. H.M.Jr: Hello Operator: Governor Harrison - go ahead. H.M.Jr: Hello Harrison: Hello Henry? H.M.Jr: Good morning George. H: I was disappointed not to see you yesterday. On account of this daylight saving thing I had to rush off as soon as my meeting was over. H.M.Jr: I see. What were you - afraid to get caught in the dark. H: Well I'll tell you. It gets me home so late. I didn't get home as it was till pretty near 11. H.M.Jr: I see. H: And I - it cuts an hour off on the night train so I have to skip that if I can. H.M.Jr: Yes. H: Ah - I - everything is about the same as last night's closing. H.M.Jr: well I haven't. I haven't - I don't watch the bond market as closely as I used to. H: I see. H.M.Jr: I let Marriner and you do that. H: And - H.M.Jrt Seriously. H: What's that? H.M.Jr: I'm serious. H: Well I think that's right. H.M.Jr: Yes. Regraded Uclassified 90 & 1 1 H: The - an - and I'm glad you don't bother about it. H.M.Jr: Yes. H: Ah - the - an - ah - - - the difficulty is there's a there - that I wanted to mention to you there - judging by the evidence of the last three or four days H.M.Jr: Yes. d: there's a good deal of liquidation coming from the middle west and far west H.M.Jr: I see. H: for the first time. H.M.Jr: Ah-ha. H: Ah - that's the reason that - usually quiet in the mornings - it's been quiet in the mornings for three days now and then there's - ah - the west wakes up - ah - we get soaked and it's been quiet again to-day but we're fearful that we will get soaked again this afternoon the same as we did yesterday. Of course, yesterday was a bad day in everything. H.M.Jr: Ah-ha. H: And a good deal of rumor or talk has been around town about collapse of prices and securities in London. H.M.Jr: Ah-ha. H: Ah - which some people rumored I guess we've had no evidence of any justification to the rumor. H.M.Jr: Yes. H: That somebody's commission in - ah - houses - were in trouble over there. H.M.Jr: A h-ha. H: Now whether that's had anything to do with added pressure I don't know. Regraded Uclassified 91 - 3 - H.M.Jr: Well I wanted to ask you just what the various worries were in New York - if you could - tell me what are some of the financial people worrying about in New York? ": Well I don't know but I'll tell you what I've done - I've just started to-day having a series of - well I began as a matter of fact on Friday before I went down there and they had only one then but I'm having now a series of talks with the principal banks just to find out - because I can get a collection of that. H.M.Jr: I'd like to know H: And I'm having two or three of them come in to-day again and after I get 8. better cross-section of it I'll sum it up for you but I just wanted to know myself. H.M.Jr: Because I - I - all I keep. hearing is they're worried but I don't know what they re worrying about. H: Well I'll tell you - one man - and I think it's better from your standpoint than mine not to ask me who it is - some day I'll tell you came - came on Friday and I spent an hour with him and, frankly, his only worry was the general one - fundamental one - of what the world and - and the U. S. too but the world was a whole was going to do about gold because he thinks we're getting into an awful Jam on it. H.M.Jr: Ah-ha. d: And he says that with America and England being forced to buy gold at prices that are not justified in relation to other world prices - gold that we don't want - and the way he figured it out - that it will either continue to come here and increase excess re- serves or increase government debt and he just thinks and expresses damnfoolishness for the world - for England and this country to have to go on at that rate buying gold that they don't want and all the rest of the world is dumping on these two countries. Now he says funda- mentally he thinks that's the most dangerous thing in the situation and that thoughtful people are getting more cautious about it and getting more at the President. H.M.Jr: Well that - would that mean there would be more or less gold come this way? Regraded Uclassified 92 - 4 - H: You mean his feeling that way? H.M.Jr: Well I mean if they're are enough people feel that way. H: Well I'll - I'll try to puzzle that out. I don't think so because you see most of it is coming not because people here are attracting it but rather because people in the other parts of the world that don't want it are selling it to us because they think they're getting a very good price. H.M.Jr: Well I'd be very much interested after you talk to the people - ah - ah - if you - if there's any general ideas as to what's the matter I'd like to have them. H: Yes, well I'll - I'll - well I thought I'd just make this survey just to see what's itching them all. H.M.Jr: Of course, from the standpoint of the United States Treasury - ah - I'm not worried H: Yes. H.M.Jr: because the things that are happening don't affect us. H: Yes. H.M.Jr: So there's nothing - ah - for me to worry about unless the worries get sufficient that it slows up business. H: Yes. H.M.Jr: And, of course; that hasn't happened. H: No I don't think it's happened and to the extent we've had any slowing up I think it's been H.M.Jr: So - ah - ah H: But I do think from - ah - evidence that you get everywhere that there is a trend of firmer interest rates all over the world. H.M.Jr: Well - ah - that - that may be so although I see the British are selling B 1948 - 2-1/2% bond so that don't look as though interest rates were so firm. Regraded Uclassified S3 - 5 - H: 1948. H.M.Jr: That's what they - that's what they offered yesterday - 1948 - 2-1/2%. H: Yes, that's 11 years. H.M.Jr: At 99-1/2. H: Yes. H.M.Jr: Well let's see what happens beginning next Monday when - when - after we've passed the famous May 1st date. H: Yes, well I think that we're seeing that now. I think that we're closer to that. H.M.Jr: All right George if you get anything give me a ring, will you? H: Yes, I will. H.M.Jr: Thank you. H: Goodbye. Regraded Uclassified MEMORANDUM S4 April 27, 1937 To: Secretary Morgenthau From: Dr. Burgess Treasury bonds were quiet today with little change in prices. Volume of trading on the board was emall and there was not a great deal of activity in the over-the-counter market. Opening bids on the board were 1/32 under yesterday's close and there was little variation from this level through- out the session. The long bonds closed unchanged to 2/32 off and the rest of the list was unchanged to 1/32 off. The guaranteed group W&B also quiet but showed fairly large price changes; the F.F.M.C. bonds were mixed and the H.O.L.C. bonds were down 5/32 to 7/32 on sales. Government bond turnover on the board was $691,000 compared with $3,643,000 yesterday. The note market was quiet and steady with few changes in quota- tions. Several middle maturities closed 1/32 down on the day, the two longest issues 1/32 better and the rest of the list was unchanged. Domestic bonds were dull apart from a little activity in the second grade rails, and price changes were generally small. In the second grade group rails were emall fractions better on the day, industrials were firm to last night's closing level, and utilities were small fractions off. High grades were rather mixed with a firmer tendency. There was moderate and general activity in the foreigns with few price changes of consequence. Argentine 4ge were off 1/2 point; Canadian bonds were unchanged to & shade lower, while Australian and Japanese issues firmed slightly. No purchases for Treasurv today. Regraded Uclassified 95 ADDRESS OFFICIAL COMMUNICATIONS TO THE SECRETARY OF STATE WASHINGTON, o.e. to 1804 DEPARTMENT OF STATE WASHINGTON In reply refer to FE - 694.006/8. April 27, 1937 CONFIDENTIAL. The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and encloses for his confidential information a paraphrase of a tele- gram (No. 119) of April 23, 1937, from the American Ambas- sador at Tokyo in regard to trade policies of Japan. Enclosure: Paraphrase. 03V13038 1 is VRITENINT \ 1 \ \ Noted A. Lochhead (nox Regraded Uclassifie I 96 DEPARTMENT OF STATE DIVISION { ( FE BUREAU ( ENCLOSURE TO LETTER DRAFTED ADDRESSED TO Secretary of the Treasury S6 (CONFIDENTIAL) PARAPHRASE A telegram (No. 119) of April 23, 1937, from the American Ambassador at Tokyo reads substantially as follows: On April 21 the Minister for Foreign Affairs remarked at a farewell dinner given in honor of the Kadono Economic Mission that, although it may not be possible to restore com- pletely international free trade as it existed in the past, a check should be put on the trend toward extreme trade protec- tion. The Foreign Minister said also that Japan should take part in the movement in Europe and America for freer trade between the nations. According to reports in the press of April 22 the Ministry of Finance has decided to retain in force after July 1 the measures adopted on January 8 for import exchange control and to expand the scope of the measures in order to restrict gradually imports into Japan of luxury goods and non-essential materials. The attention of the Department is invited to the inconsistency between the two policies above mentioned in case the Department should have occasion to have con- versations with the mission while it is in the United States. 694.006/8 Noted = A. Lochhead Regraded Uclassified 97 April 27, 1937. 10:25 a.m. H.M.Jr: Hello. Operator: Mr. Knoke. H.M.Jr: Hello. L. W. Knoke: Good morning, Mr. Secretary. H.M.Jr: Hello Knoke. How are you? K: Quite well, thanks. H.M.Jr: Ah - Knoke, have you talked recently to England or to Holland. K: Well I'm expecting a call from Holland now. H.M.Jr: Good. K: They put it in for ten minutes after eleven. H.M.Jr: Are they calling you? K: Yes, they're calling me. H.M.Jr: Good and are you going to talk to England today? K: Ah - well if you think I ought to. H.M.Jr: Well I - I'd like to know what they're all worrying about. If you can find out, you know. K: Yes. H.M.Jr: If there's anything particular that's gone wrong or is there - ah - what's all the shooting for, you know? K: Yes, well I'll - surely I'll ask that question. I'm afraid that (laughs) this situation will last for a while, Mr. Secretary. H.M.Jr: Why? K: Well because - ah - ah - you see the - it will - probably the rumors will come up and the rumors will call for a denial and the more rumors and the more denials probably gradually the more hard-boiled the market will get. S8 2 I I H.M.Jr: Yes. K: And that, after all, is the experience that has - that anybody always has had. The first denial is the most effective; the second is - is not quite as effective and so it will - and so it continues. H.M.Jr: Well do you think these rumors that they're going to drop the price of gold are coming from abroad? K: From where? H.M.Jr: From abroad. K: Oh I'm sure they are not coming from here. H.M.Jr: Yes. K: Well that I'm sure of because - ah - at least I have no reason to assume that anybody here is spreading those. H.M.Jr: Well that's what I think. K' Well at least ..... H.M.Jr: Some of the people here in the Treasury don't agree with me. I think that they're being manufactured abroad. K: They what? H.M.Jr: I think the rumors are coming mostly from abroad. K: Well that's what I think. H.M.Jr: Yes. K: That's what I said. I don't think they come from here. H.M.Jr: No. K: They at least - ah - let me put it this way. I have no reason whatever to assume that they come from here. I have no indication of any kind. H.M.Jr: Well this is the way I feel and I told this to Governor Harrison a little while ago. While these rumors are bothersome and they upset the markets and so forth and so on - but as far as the United States Treasury is concerned they really don't affect us. Regraded Uclassifie 99 - 3 - K: Yes. H.M.Jr: And while - what I'm trying to do as Secretary is to be - to help keep the market stable see, and orderly. In the final analysis all of this - what's going on here for the last couple of weeks really doesn't touch us. I mean there's nothing really to worry us. K: Well no - I guess. H.M.Jr: I mean the stock market falls four or five points; it doesn't affect us and always - because it hasn't slowed up business, you see? K: Yes, well, of course, the one thing - ah - one respect in which it seems to me it does affect us is the - the - ah - continued increasing amount of gold coming over. H.M.Jr: Well why worry about it, Knoke? K: Well - ah ..... H.M.Jr: Supposing we get a billion dollars of gold - what of it? K: Well - (Laughs) H.M.Jr: No I want to get that over to you. What of it? Now look - K: Yes. H.M.Jr: We're spending seven billion dollars next year - seven billion three hundred million dollars. K: Yes. H.M.Jr: Supposing I have to spend seven million dollars on interest to sterilize a billion dollars worth of gold. What of it? Why should I worry? K: Quite so, Mr. Secretary, but I'm not H.M.Jr: No but I want to get that over to you. I mean I want to get it over to you ...... K: Yes. H.M.Jr: ..... so that you can get it over. Regraded Uclassified 100 - 4 - K: Yes. H.M.Jr: There's nothing in this situation which gives me any cause for worry. If I get a billion dollars worth of gold and sterilize and it costs me seven million dol- lars in order to insure the financial structure that this gold doesn't go into our blood-stream, see? K: Yes. H.M.Jr: Keep it out of our blood-stream. K: Yes. H.M.Jr: What is there to worry about? K: Well - ah - may I - ah - say how I think the market is H.M.Jr: Please, always tell me and then tell me what you think. K: Ah - the way the market argues is that as the sterilized gold mounts up someday there will be a kick from up in the Capitol and the same old argument. They say, "Well this is nothing but a bonus to the banker" and - ah - in Patman's language and in Coughlin's language - a bonus to the banker. H.M.Jr: Well all right - let me take care of that. I took care of it in 133, 134, and 135. K: (Laughs) H.M.Jr: No, but I'm telling you. K: Yes. H.M.Jr: I mean I want to get this over to you that neither the President nor I are worried about the present situation because there's nothing in the fundamental economic structure of this country which it harms. We're going ahead; we have our strikes, yes; we have our labor troubles, yes; but the business moves forward. Ah - the New York Times business index constantly goes up. I mean what is there fundamentally for me to worry about? That's what I'd like to have some New York financier tell me, because I can't see anything. K: That isn't I think H.M.Jr: Pardon me? Regraded Uclassified 101 - 5 - K: That isn't what you want to worry about - it's - ah ***** H.M.Jr: Well I can't worry because they worry. K: Well that is just it - the - quite so you can't but the effect of the - the accumulated effect of their worrying is what worries me. H.M.Jr: True but what you want to know is - there's only two people in the United States that can change the price of gold, and I'm one of them. K: Mr. Secretary, I said to the Chase yesterday I was willing to bet there would be no change this year and I was willing to bet there would be no change next year, and I said, "Politically I can't think any further than that." H.M.Jr: Well what I'm getting at is - ah - I want you to know that I'm not worried about five hundred million; I'm not worried about a billion dollars worth d' gold coming over here, see? K: Yes. H.M.Jr: And I - but I can't worry because some fellow down there worries. K: Yes. H.M.Jr: Now the only thing that Archie brought up is whether we ought to step in and buy some gold in London ourselves. K: Yes. H.M.Jr: I don't know whether that would help or not. K: Well I - I think it - ah - yes, I think it would help because it seems to me the continued discount of the London price indicates that supply - that although demands has picked up considerably yet it is not up to supply. H.M.Jr: Well, think that over. K: Well we - he and I discussed it yesterday afternoon and I thought it would be - expressed the feeling then 102 - 6 - H.M.Jr: Well you talk to London; you talk to Holland, will you? K: Yes. H.M.Jr: And - and talk to Cariguel too. K: Yes. H.M.Jr: And after you've talked to them give me a ring. K: Am I at liberty to indicate what you told me? H.M.Jr: Are you at liberty? K: Yes. H.M.Jr: Absolutely. K: All right, sir. H.M.Jr: I mean absolutely. K: All right. H.M.Jr: I mean I - I wouldn't give that to very many people but I give it to you. You mean abroad and at home? K: Abroad. H.M.Jr: Yes, you can use it - you can use it anywhere where you think it's necessary. K: All right, sir, and I'll call you later on. H.M.Jr: Yes, because that's the way I feel. I mean - the point is I can't worry because some other fellows are worrying and there's - there's nothing that I can see that I should worry about. K: Well I shall do my darndest to get that across. H.M.Jr: 0. K. K: All right, sir. H.M.Jr: All right, thank you. Regraded Uclassified 103 April 27, 1937. 10:57 a.m. Hello H.M.Jr: Henry Morgenthau, Jr. Yes. H.M.Jr: You tell Major Berry, when he comes back, that I have approved his request for the 15% differential for the men in the Bureau of Engraving. Approved his request - I beg your pardon? H.M.Jr: On the 15% differential - he knows what I mean. Yes. H.M.Jr: In the Bureau of Engraving - night workers. Question of unions. All right I surely will. Allright I surely will. H.M."r: I have approved it. You've approved it. H.M.Jr: Yes. All right I'll tell him when he comes in. Regraded Uclassified 104 April 27, 1937. 10:58 a.m. Hello Operator: Just a minute please. H.M.Jr: Put him on. 0: He's on. H.M.Jr: (Aside to Miss Roche: "Thanks Miss Roche") Hello H.M.Jr: Hello Butterworth. B: Good afternoon Mr. Secretary. H.M.Jr: Can you hear me. B: Absolutely. H.M.Jr: All right. Butterworth - what I want you to do if you have the contacts - I wish you could talk to either to some of the American B: I can't hear you sir. H.M."r: Can you hear me now? B: A little bit better, yes. H.M.Jr: If you know any of the American brokers in London - brokerage offices - do you know any of them? B: Yes - yes I do. H.M.Jr: I wondered if you could sort of talk to them B: Yes. H.M.Jr: ....and find out why they think the people are selling American stocks, see? B: Why they're selling American stocks? H.M.Jr: Yes, if they have any reason. Regraded Uclassified 105 - 2 - B: Yes, well I - I know that there's been a spilling over of the liquidation here. H.M.Jr: Yes. B: I'll tell you what I mean - brokers took the position which occurred here in the last week. H.M.Jr: Yes. B: And then from speculators and investors found themselves in a position where they had to undertake some forced liquidation. H.M.Jr: I see. B: Now they - if they liquidated their English stock which had declined considerably in value - H.M.Jr: Yes. B: Those were several reasons that I reported you know. H.M.Jr: Yes. B: They would have to do so at a great sacrifice H.M.Jr: Yes. B: ....and so they were inclined to liquidate some of their American holdings H.M.Jr: I see. B: particularly the sort of well known market leaders such as U. S. Steel and New York Central and International Nickel. H.M.Jr: Yes. those B: The- particularly / national stocks which are quoted in large amounts both here and in New York H.M.Jr: I see. B: which is an active market in both places. H.M.Jr: I see. Regraded Uclassified 106 - 3 - B: And that I know has been going on. H.M.Jr: "h-ha. B: I don't think they've been liquidating their American stocks from - in the last few days on the basis of H.M.Jr: Ah-ha. in I think it was temporary rather than a permanent thing I.M.Jr: Well the thing that I wanted was: What was their particular worry - not only American stocks but what are they worrying about, see? B: Oh I see. 1.1,3r: I mean - what are the people in the markets - what are they worrying about abroad and in the United States, see? I mean if - if you could find out - I mean - ah - I know they are worrying about a lot of things but I - I can't find out what their particular worries are. B: I don't think they're particularly worred about the American scene. I think their worry has been internal matters here. S.V.Jr: Well could you find out more about it and send me a cable on it? B: I could indeed. Would you like - like me to tell you a little bit about the atmosphere at the present moment? H.V."r: Yes. B: Ah - in brief the English market has improved to-day. B.M.Jr: Good. E: And people are feeling better in anticipation of the statement which Mr. Chamberlain is making to the House of Commons to-day H.M.Jr: I see. Regraded Uclassified 107 - 4 - B: regarding the national contribution pact. Of arrangements of this pact has - ah - hit the market so hard is because it's connected in the peoples minds with the wartime financing. H.M.Jr: Yes. B: This pact. E.M.Jr: Ah-ha. B: And it's going to hit people H.M.Jr: Yes. B: For instance, if they come here on 1933, 134 and 135. H.M.Jr: Yes. B: A good many of the heavy incomes have been - and so on were very depressed during those - so that if that is true it would carry the they will have to pay a rather large tax. H.M.Jr: I see. B: A very good is that the - the whole position is somewhat clearing up on the basis of the assessment which was on the three million pounds that twenty - twenty-five million pounds but the particulars as to how it is going to be worked out has not been made clear. H.M.Jr: I see. B: If those were cleared up I think that they will be likewise clearing up the H.M.Jr: Ah-ha. Well if you don't mind - I don't quite get it very well over the telephone. I wish you'd sit down and write me a cable on it. B: I certainly will. Regraded Uclassified 108 - 5 - H.M.Jr: Now we here, as far as the Treasury goes, we have no particular worries but there are an awful lot of other people who are worrying and I'm trying, by calling up you, calling up Cochran and New York, I'm trying to find out what are people worrying about in the various financial centers 3 B: Yes. H.M.Jr: and see if any of it makes any sense and - so if you just talk and see - I mean if you can pin them down, see? B: Yes. H.M.Jr: And if you can and never mind how foolish it sounds - why just send it along. B: Yes I will. H.M.Jr: And we're trying to pick it up from the different centers. B: Allright. Well I'll see if I can 't get you off a cablegram tonight. H.M.Jr: Thank you very much. B: On this - Mr. Secretary. H.M.Jr: Yes. B: You got my report of the conversation on Friday? H.M.Jr: On what? B: On Friday. H.M.Jr: Yes. B: Was that satisfactory the way it was put? H.M.Jr: Yes quite. B: It was. H.M.Jr: Yes. B: Well thank you so much. Regraded Uclassified 109 - 6 - H.M.Jr: Yes, it was all right. B: Thank you very much. H.M.Jr: Goodbye. B: Goodbye. Regraded Uclassified FEDERAL RESERVE BANK OF NEW YORK 2) 110 FICE CORRESPONDENCE DATE April B, 1937. CONFIDENTIAL VILES SUBJECT: TELEPHONE CONVERSATION WITH Facks 1. -3 DE WEDERLANOSCHE BANK. Mr. de Jong called me at 11:51 and referred to his cable- gram of today, by which he had canceled his previous instructions to sall guilders at 5476 or better, and gave us a new order to sell for their account further guilders 25,000,000 at 5484 less charges, that is 54831 in cases where w sall through agents. If we made sales without paying brokerage or commission to agents, he would be satis- fied to receive 54851 also. de Jong was at great pains to point out that changing the price did not nom & fundemental change in their policy. All they intended to do was to follow the market rather than stick to one rate irrespective of demand or supply. That being so, they were quite likely to change their rate again in the near future or, for that matter, to change it a number of times. In that case, they would send us a telegram quoting us the new rate. I asked how the dollar was behaving and de Jong said it was very much offered. I asked how he explained the weakness of the dollar and he ascribed it to the same old runers. I took this opportunity to refer to our telephone converse- tion of April 9, when I had repeated to his what the Secretary of the Treasury had told no over the telephone, namely that neither the President not he contemplated 8 change in the gold price. I nentioned that I had had a similar call from the Secretary this merning, repeating the same statement and I added that, personally, I was very consid- erably impressed with what the Secretary had told no. de Jong thanked me. Be the sentiened that he unsted no to know that in all Regraded Uclassified 111 FEDERAL RESERVE BANK OF NEW YORK FICE CORRESPONDENCE DATE April 27, 1987. CONFIDENTIAL FILES SUBJECT: TELEPHONE CONVERSATION L. V. Knoke WITH DE HEDERLANDSCHE BANK. - 2 - probability we would receive substantial amounts of dollars for their account, which they were not going to ask us to convert into gold. This, however, did not apply to dollars with which we might credit them against our sales of guilders in this market. The latter, we were to continue to convert into gold as heretofore. I pointed out that if he accumulated dollars without at once converting them into gold, conversion under the present arrangement could not take place at 8 future date. de Jong assured no that he fully understood the situation. LEK:KMC BECEINED Tax / I - 1 2 - / / Regraded Uclassified 112 April 27, 1937. 10:58 a. n. Hello. Operator: Just 8. minute please. H.M.Jr: Put him on. Operator: He's on. H.M.Jr: (Aside to Miss Roche: "Thanks Miss Roche.") Hello. H.M.Jr: Hello Butterworth. B: Good afternoon, Mr. Secretary. H.M.Jr: Can you hear me? B: Absolutely. H.M.Jr: All right. Butterworth - what I want you to do if you have the contacts - I wish you could talk to either to some of the American ..... B: I can't hear you sir. H.M.Jr: Can you hear me now? B: A little bit better, yes. H.M.Jr: If you know any of the American brokers in London - brokerage offices - do you know any of them? B: Yes - yes I do. H.M.Jr: I wondered if you could sort of talk to them B: Yes. H.M.Jr: ..... and find out why they think the people are sell- ing American stocks, see? B: Why they're selling American stocks? H.M.Jr: Yes, if they have any reason. 113 22 I I B: Yes, well I - - I know that there's been a spilling over of the liquidation here. H.M.Jr: Yes. B: I'll tell you what I mean - - brokers took the position which occurred here in the last week. H.M.Jr: Yes. B: And then from speculators and investors found themselves in a position where they had to undertake some forced liquidation. H.M.Jr: I see. B: Now they - if they liquidated their English stock which had declined considerably in value - H.M.Jr: Yes. B: Those were several reasons that I reported you know. H.M.Jr: Yes. B: They would have to do so at a great sacrifice H.M.Jr: Yes. B: .... and so they were inclined to liquidate some of their American holdings H.M.Jr: I see. B: ..... particularly the sort of well known market leaders such as U. S. Steel and New York Central and International Nickel. H.M.Jr: Yes. B: The - particularly those national stocks which are quoted in large amounts both here and in New York H.M.Jr: I see. B: ..... which is an active market in both places. H.M.Jr: I see. 114 - 3 - B: And that I know has been going on. H.M.Jr: Ah-ha. B: I don't think they've been liquidating their American stocks from in the last few days on the basis of H.M.Jr: Ah-ha. B: I think it was temporary rather than a permanent thing. H.M.Jr: Well the thing that I wanted was: What was their particular worry - not only American stocks but what are they worrying about, see? B: Oh, I see. H.M.Jr: I mean - - what are the people in the markets - what are they worrying about abroad and in the United States, see? I mean if - if you could find out - I mean - ah - I know they are worrying about a lot of things but I - I can't find out what their particular worries are. B: I don't think they're particularly worried about the Americar scene. I think their worry has been internal matters here. H.M.Jr: Well could you find out more about it and send me a cable on it? B: I could indeed. Would you like - like me to tell you a little bit about the atmosphere at the present moment? H.M.Jr: Yes. B: Ah - in brief the English market has improved today. H.M.Jr: Good. B: And people are feeling better in anticipation of the statement which Mr. Chamberlain is making to the House of Commons today ..... H.M.Jr: I see. B: ..... regarding the national contribution pact. Of arrangements of this pact has - ah - hit the market so hard is because it's connected in the people's minds with the wartime financing. H.M.Jr: Yes B: This pact. 115 - 4 - H.M.Jr: Ah-ha. B: And it's going to hit people H.M.Jr: Yes. B: For instance, if they come here on 1933, 134 and 135. H.M.Jr: Yes. B: A good many of the heavy incomes have been - and so on were very depressed during those - so that if that is true it would carry the they will have to pay a rather large tax. H.M.Jr: I see. B: A very good is that the - the whole position is somewhat clearing up on the basis of the assessment which was on the three million pounds that twenty - twenty-five million pounds but the particulars as to how it is going to be worked out has not been made clear. H.M.Jr: I see. B: If those were cleared up I think that they will be likewise clearing up the H.M.Jr: Ah-ha. Well if you don't mind - I don't quite get it very well over the telephone. I wish you'd sit down and write me a cable on it. B: I certainly will. H.M.Jr: Now we here, as far as the Treasury goes, we have no particular worries but there are an awful lot of other people who are worrying and I'm trying, by calling up you, calling up Cochran and New York, I'm trying to find out what are people worrying about in the various financial centers ..... B: Yes. H.M.Jr: and see if any of it makes any sense and - so if ..... you just talk and see - I mean if you can pin them down, see? B: Yes. Regraded Uclassified 116 - 5 - H.M.Jr: And if you can and never mind how foolish it sounds - why just send it along. B: Yes I will. H.M.Jr: And we're trying to pick it up from the different centers. B: All right. Well I'll see if I can't get you off a cablegram tonight. H.M.Jr: Thank you very much. B: On this Mr. Secretary. H.M.Jr: Yes. B: You got my report of the conversation on Friday? H.M.Jr: On what? B: On Friday. H.M.Jr: Yes. B: Was that satisfactory the way it was put? H.M.Jr: Yes quite. B: It was. H.M.Jr: Yes. B: Well thank you so much. H.M.Jr: Yes, it was all right. B: Thank you very much. H.M.Jr: Goodbye. B: Goodbye. 117 April 27, 1937. 11:54 a. m. H.M.Jr: Hello. H.Merle Cochran: Hello Mr. Morgenthau. H.M.Jr: Hello Cochran. How are you? C: All right, thank you, how are you? H.M.Jr: Oh pretty well. C: Haven't heard your voice for some time. H.M.Jr: No. Cochran why I'm calling up is I wonder if you could make a few inquiries as to what people are worrying about as far as the finances of the world are concerned, see? C: Yes. H.M.Jr: We're getting all kinds of rumors; some of them credited; some of them London - I mean I wondered, for instance - I mean what are the New York banking, representatives of the New York Stock Exchange people in Paris - what are they worrying about, see? C: Yes, H.M.Jr: What are the French people worrying about? C: Yes. H.M.Jr: In other words, I'm trying to collect the various worries and then see if they make a picture, see? C: Yes - yes. H.M.Jr: Now, of course, I know about the gold and all that and every day we deny it .... C: Yes. H.M.Jr: ..... and we'll keep on denying it. C: Yes. - 2 - 118 H.M.Jr: But I wondered if you could visit around in the next day or two and then send me a cable and give me what the people are worrying about. C: Surely, I can do that. H.M.Jr: Even though they may sound foolish. C: Surely. H.M.Jr: Have you got any ideas of your own what . - or have - you got any worries. C: Well I haven't any particularly, no. But when I was in Basle, for instance, on the gold proposition - H.M.Jr: Yes. C: At that time your H.M.Jr: Yes. C: They were afraid that it left the door open to some- thing and they thought that it might necessarily H.M.Jr: Yes. C: And since then it's been the market collapse more than anything to the effect of the President's statement on commodities. H.M.Jr: I see. C: And, of course, London had such a bad day yesterday and they've had this proposition put on to them and budget. H.M.Jr: Yes. C: It's just given them the worst move they've had in a long while. H.M.Jr: Yes. C: Then the loans coming out yesterday at a fairly low rate - this - it's all upset them. Regraded Uclassified 119 - 3 - H.M.Jr: Yes. C: And then - then they fear that the American operators might in their own market. H.M.Jr: Yes. C: They think that if they had a little more - a little more confidence that it would spread over here. H.M.Jr: You mean the stock market? Are you talking about the stock market? C: That's it. H.M.Jr: Yes. C: That if the American operators had more faith in their own market H.M.Jr: Yes. C: ...... that the confidence would be reflected on this side. H.M.Jr: I see. C: I'll - I'll get in touch with some of the Treasurers here tonight or certainly in the morning. H.M.Jr: Yes. C: And, of course, after this week-end I could give you quite a lot when I'm down at Basle. H.M.Jr: Ah-ha. Well - C: You remember I go there on Saturday night. H.M.Jr: That's right. C: That ought to leave Monday and Thursday - then I have - - no - Sunday and Monday. Then I had your wire yesterday - Sunday rather H.M.Jr: Yes. Regraded Uclassified 120 - 4 - C: ..... saying that you approve for me. H.M.Jr: That's right. C: I have no inkling of that at all but there's a good man on that Committee. H.M.Jr: Yes. C: by him so I'd only be there two or three days. H.M.Jr: Yes. C: And I expect to get the Annual Report out by before I go down. H.M.Jr: Good. C: And they're going to have a very expansive chapter on gold. H.M.Jr: Yes. C: On that I think there's probably some recommendations. I can cable a summary of that before I go then I'll get a cable off by airmail from Basle to Paris before I leave there for H.M.Jr: All right, well send anything along - along those lines. C: I'll send you one from Paris before I go ++++++ H.M.Jr: Right. C: ..... along this line. H.M.Jr: And you'll be interested to know that we've practically made up our minds to go to Hawaii this summer. C: Oh is that so. H.M.Jr: Yes. C: I just sent you another bunch of booklets this time on Regraded Uclassified 121 - 5 - H.M.Jr: Well I C: H.M.Jr: Hawaii has no troubles just now and we think it looks pretty good. C: Fine. H.M.Jr: Yes. C: Well I mean this summer is not going to be pleasant over here. H.M.Jr: No we think that Hawaii looks very nice. C: I think personally you're headed in the right direction but I'm sorry you're not going to be here in person. H.M.Jr: Yes. C: But for a holiday this is not going to be the place. H.M.Jr: No that's what we thought. C: When would you go then - - July or August? H.M.Jr: We'd be there the month of August. C: There the month of August. H.M.Jr: Yes. I thought you'd like to know it on account of your own plans. C: Then what I should do - I should stay here for the summer, I think, then later get the holiday ..... H.M.Jr: Good. C: at H.M.Jr: Good. C: for some rest probably. .... H.M.Jr: All right. Regraded Iclassified 122 - 6 - C: But I'll get off this cable in the next day or two. H.M.Jr: Fine. C: And one thing - I can speak with the French. H.M.Jr: I wouldn't take very much - I mean if - - if any govern- ment could hear it all right. C: Oh well that doesn't matter. I meant personally. H.M.Jr: What's that? C: My friend here is giving a dinner on Thursday night. H.M.Jr: Giving a dinner Thursday night. C: And which I hope by this time because and he's invited him and Auriol and, I think, all the members of this Control Committee. H.M.Jr: Yes. C: And he's been good enough to invite me along too. H.M.Jr: Yes. C: So I may hear some interesting things: H.M.Jr: Well you might drop me a letter. C: H.M.Jr: What's that? C: it might be for some specula- tion. H.M.Jr: Well you might drop me a letter. C: this Thursday night. H.M.Jr: I say after it you might just write me a personal letter. C: Yes. Regraded Uclassified 123 - 7 - H.M.Jr: Did you hear what I say? C: Yes. H.M.Jr: You might write me a letter. C: Surely. H.M.Jr: Yes. C: All right I'll H.M.Jr: O.K. C: There's nothing else here. Everything is going all right. H.M.Jr: Thank you. C: Goodbye. H.M.Jr: Goodbye. 124 April 27, 1937. 12:57 p. m. H.M.Jr: Knoke? L.W. Knoke: I had all three on the 'phone. H.M.Jr: Yes. K: And in each case I referred to our telephone con- versation the 9th of April when I'd spoken to them about what you had told me at that time and I - I mentioned that I had again this morning discussed - that you had discussed the situation with me H.M.Jr: Yes. K: .... and that you - ah - that I heard very strongly that there was nothing - ah - there's no change contemplated anywhere. H.M.Jr: Yes. K: Ah - I then asked - ah - I suggested to Bolton that he let me know just - along what lines people argue in Europe H.M.Jr: Yes. K: ..... and I asked the same question of Cariguel and they both promised they'd let me know if they heard any new arguments. Meanwhile, this is what Bolton said. It was a kind of a whispering campaign H.M.Jr: Yes. K: mostly among academic circles H.M.Jr: Yes. K: (Laughs) What he called the "Semi-intelligentsia," H.M.Jr: Yes. K3 .... economists ..... H.M.Jr: Yes. Regraded l 125 - 2 - M .... ah - who - ah - based their argument primarily on rising tendency of commodity prices. H.M.Jr: Yes. K: Ah - Cariguel said while there was very little in - in - ah - Paris - the hotbed for all this talk was London H.M.Jr: Yes. K: ..... and - ah - ah - as far as the Bank of France was concerned, of course, they had never and were not taking it serious now - that's the way he put it. H.M.Jr: I - you talked to Amsterdam? K: I talked to Amsterdam also and repeated the same thing. H.M.Jr: Yes. And they - what did they say? K: Ah - well they didn't - ah - I didn't go into full length H.M.Jr: Yes. K: because Amsterdam would probably give me what London was giving. H.M.Jr: Well everything that I've heard this morning; I talked to Butterworth in London and to - ah - Cochran - and it all heads up in London as near as I can make out. K: Yes, that's what Cariguel said too. H.M.Jr: Yes. Well if they give you anything - let you know .... K: Well they both promised that they'd let me know and I explained to them of how much value it was to us to understand the psychology of the fellows abroad and to know how they were arguing - would they please bear me in mind and they both promised it. H.M.Jr: Of course, I feel that the shoe is pinching in England and - ah - all these arguments about changing the price of gold would help their situation and I've thought so now for some time. 126 - 3 - K: Well I just wonder which, of course, would mean a lower sterling rate, wouldn't it? H?M.Jr: Yes. K: I just wonder whether, with the present expenditure for armaments, H.M.Jr: Yes. K: ah - sterling rate at this level isn't really one that fits into the whole picture. H.M.Jr: I don't know. Well evidently it doesn't - otherwise all this rumor wouldn't be coming out. I don't K: Well of course, there is - that rumor I think - there's always the speculative element - H.M.Jr: Well there's more than K: He spoke of private banks - I'm sure he had in mind Lazard Freres - ah - Cariguel denied that he thought what happened of Lazard Freres business it was not at the moment at least of a particularly speculative nature. H.M.Jr: Ah-ha. Well - ah - what did they think - Lazard Freres was doing something? K: Well that is a - ah - what's his name - Bolton didn't mention him by name. H.M.Jr: Yes. K: He spoke of private banks in Paris and in London. H.M.Jr: I see. K: And Cariguel furnished the name H.M.Jr: Yes. K: and said that he didn't think it was Lazard - .... Lazard was doing that business just now. H.M.Jr: No - - ah ..... 127 - 4 - K: He rather protected Lazard on that. H.M.Jr: I see. - ah - well thank you very much. X: I'm dictating a brief report on the talk. H.M.Jr: Yes. Well I don't think it's - I don't think it's Lazard because as a matter of fact Mr. Altshcul was down here the other day for the first time since I've been here - asked to see me. K: Yes. H.M.Jr: And - ah - he - ah I gather very strongly that he thinks it would be a mistake to change the price of gold. K: Yes, I see. H.M.Jr: And - ah - ah I - ah - I didn't get anywhere the idea that - that - that he thought we ought to change it. I mean I listened to him. I didn't talk - I just listened. X: Yes, well I had the impression that of the two Cariguel probably knew more about Cari - about Lazard business than Bolton. H.M.Jr: Yes, well I got the very distinct impression from Mr. Altschul that - that - ah - I was just reading - I've got a letter here from him. I'll just read you what he says. K: Yes. H.M.Jr: "Now that we for a long time have had defacto stabiliza- tion on the basis of $35 per fine ounce I feel that any tampering with the gold price will introduce element of the greatest confusion and uncertainty to the world and the domestic economy and any such step will be fraught with the greatest danger." K: Yes. H.M.Jr: And that's in writing. K: Yes, I see. 128 - 5 - H.M.Jr: So that's how they feel. K: Yes. H.M.Jr: Couldn't put it any stronger than that. K: No. H.M.Jr: What? K: No - - no. H.M.Jr: I mean this is a summary of what he told me. K: Yes. H.M.Jr: I don't think ...... K: I have: the highest respect for Mr. Altschul's opinion. I think he's extremely intelligent and ..... H.M.Jr: Well - so he put it all in writing and - ah - so - ah - he - ah - whatever the rumor is I don't think it's coming from that source. K: Yes - yes. H.M.Jr: All right. K: Right, sir. H.M.Jr: Thank you. K: Goodbye. FEDERAL RESERVE BANK 129 OF NEW YORK FICE CORRESPONDENCE DATE April 27, 1937. CONFIDENTIAL FILES SUBJECT: TELEPHONE CONVERSATION L. 1. Encke DM WITH BANK or ENGLAND. I called Mr. Bolton at 12:24 to ask how things looked over there nov. Be expressed the opinion that in London and on the continent stock and commodity markets were beginning to look a little bit steadier and that the principal liquidation seased to be over. A lot, however, depended upon statements by the Chanceller in the budget situation, which were expected some time during this week. Business in dollars had been tremendous this morning, stock brokers and Japanese banks being the principal sellers. The supply of gold resulted from dishoarding and from the sale of newly-mined gold. Sellers continued to believe that we would lower our gold price. I asked Bolton whether he could explain to no along what line these arguments ran. If we had a better understanding on this point, maybe something could be done about it. Bolton then explained that it looked to him like 1 kind of a whispering campaign carried on by intellectual and seademic circles, with a good deal of talk about commodity prices on the part of some economists who insisted that secure or later commodity prices would have to be lowered and that this could be best accomplished by means of a oubt in the gold price. I referred to our telephone conversation of April 9, when I had spoken to his about a telephone call I had just received from the Secretary of the Treasury, in which the latter had repeated to no most emphatically that neither the President nor he contemplated a change in the gold price. I continued to say that I had this morning had a similar - versation with the Secretary of the Treasury and that the Secretary had repeated his previous statements, which had personally impressed Regraded Uclassified 130 FEDERAL RESERVE BANK OF NEW YORK FFICE CORRESPONDENCE DATE April 27, 1937. CONFIDENTIAL FILES SUBJECT TELEPHONE CONVERSATION L. I, Knoke WITHBARK OF ERGLAND. - 2 - me very considerably, with the result that I felt very strongly that the Secretary was not worrying about the gold inflow nor about the present or future sise of the amount sterilized, nor about the inter- est charge thus incurred, which was certainly of no consequence com- pared with the fact that he had to find $7,000,000,000 next year. The Secretary had added that the President was equally as determined as he was, that there should be no change in the price. Bolton thought that the difficulty was that a great many people (and notiody knew #- actly who they were nor from where they got their information , were sure that something was going to happen, feeling that where there was so much moke there must be some fire. It was a very difficult kind of argument to fight, he thought, but be would do his best to keep ne posted and particularly to let me know if any new arguments made their appearence. LWK:KMC DIVIDEN Regraded Uclassified 131 FEDERAL RESERVE BANK OF NEW YORK FFICE CORRESPONDENCE DATE April 27, 1937. CONFIDENTIAL FILES SUBJECT TELEPHONE CONVERSATION L. 1. Knoke WITH BANK OF FRANCE. I called Mr. Cariguel at 12:50. They had had a busy morning, he said, with the frame sround 444 1/2 and further fluetus- tions depended on what would happen here and what official statements might be made. In Europe, and particularly in London, rumors were circulating that we would interfere with the gold contents of the dollar; so far Paris had not joined in this talk. I referred his to our telephone conversation of April 9, when I had discussed with him a telephone call received from the Secretary of the Treasury in Washington, in which the latter had repeated to no most emphatically that neither the President nor he contemplated a change in our gold price. I continued that I had this morning had a similar conversation with Mr. Morgenthau and that Mr. Morgenthau had repeated his previous statements, which had personally impressed no considerably, with the result that I felt very strongly that he vas not worrying about the gold inflow nor about the present or future sise or amount of the gold sterilised, nor about the interest charge thus incurred, which, he said, was certainly of no consequence compared with the lat fact that he had to find 7 billion dollars next year. The Secretary added that the President was equally determined that there should be no change in the price of gold. Cariguel said that he had originally thought that these various runers had come from America but now he began to wonder whether they did not originate in London. The public was very credulous and prone to pay a good deal of attention to this talk about lower prices. I suggested to Cariguel that, if ⑉ had a better understanding Regraded Uclassified 132 NISC 12 60M 8-36 FEDERAL RESERVE BANK OF NEW YORK OFFICE CORRESPONDENCE DATE April 27, 1937. CONFIDENTIAL FILES SUBJECT: TELEPHONE CONVERSATION TO L. W. Knoke WITH BANK OF FRANCE. FROM - 2 - of just what these arguments in favor of price changes were, we might be able to do something about it. Would he, therefore, help no and give me a ring next time he came across a new argument or rumor - wind there was - new. He promised that he would do so but warned se that it was a hard job to trace these rumors. At the Bank of France they had never taken them seriously. LWK:KMC BECEIAED Tear e YAM THUNTRA930 YRU2A397 150 12 sty - - as al Name house Regraded Uclassified 133 KLP PLAIN London Dated April 27, 1937. Rec'd. 2:42 p.m. Secretary of State, Washington. RUSH 248, April 27, 8 p.m. FOR THE SECRETARY OF TREASURY FROM BUTTERWORTH Your telephone call came during my daily market inquiries here which I have since completed but there is little to add to what I then said, Briefly the present position must be regarded in the light of its antecedents, viz, the initial nervousness engendered by the "commodity price scare" which was further augmented by the "gold price scare" brought to B. head by Professor Sprague's speech in Paris. As reported in my 224, April 17, 2 p.m., gold mining shares were seriously affected and since then two small failures have occurred in Johannesburg, the only market where there has been no attempt to control speculation, and there have been rumors of further difficulties. As also reported in that telegram the downward movement in commodities aroused in its course a number of other bear factors such as the effects of stock loss Regraded Uclassified 134 - 2 - #248 from London - April 27, B p.m. loss orders and hedge selling which caused much forced liquidation. On top of this and just after the difficult Stock Exchange settlement account terminating on April 15 had been arranged came the impact of Chamberlain's budget speech with its national defense contribution tax, the exact incidence of which the City was not then able and is not yet able fully to asses. Its imprecision, its resemblance to the hated war time excess profit tax, its apparent inequalities (the severity with which it would fall on recently recovered industries such as shipping, steel and engineering) and the fact that it hits primarily common stocks caused an immediate decline on the London Stock Exchange. In the given circumstances each decline in turn brought about further forced liquidation culminating yesterday in a "buyers strike". Therefore those who had to raise cash were forced to turn to the active New York market. As I mentioned on the telephone London's repatriation of funds by the sale of New York stocks has no connection with the American soene as such but is entirely due to technical causes arising out of the recent declines in commodities and stocks in London. None of the American brokers consulted here reports sales of American stocks by British insurance companies or invest- ment trusts and on the contrary several have received buying orders today at certain price limits. However it is to be Regraded Uclassified 135 - 3 - #248 from London - April 27, 8 p.m. be expected that in view of the recent past and the growing nervousness about the French situation London brokers may take occasion to improve their clients' & marginal positions which in some cases will doubtless necessitate further sales in New York. Conditions in the London Stock Exchange were better today and prices advanced and there is a general feeling that the "worst is passed." The demand for dollars in the late afternoon was due (1) to buying by Holland as a result of purchases of American common stocks (2) recurrence of the rumors in the gold market that something might be done in the United States to affect the price of gold. BINGHAM HPD Regraded Uclassified 136 RB GRAY Paris Dated April 27, 1937 Rec'd 3 P. m. Secretary of State Washington. 540, April 27, 5 p. m. FROM CO CHRAN. French control yielded some sterling today. Dollars were a little casier due to their being offered against sterling. French rentes up 35 to 70 centimes without much business being done. Rest of market quiet. Today witnessed a lull permitting some recovery from yesterday's unsatisfactory situation. Last evening following a Cabinet meeting Minister of Finance stated that the Government is maintaining its position of rejecting the idea of a new long term loan. He also denied rumors that there were to be resignations from his stabilization fund committee (Rist, Rueff and Baudoin had each been reported as resigning). The press says that Auriol also said that the French financial situation was witnessing some improvement rather than deteriorating as some alleged. Auriol will be heard tomorrow by the Finance Committee of the Chamber, on Thursday by the Finance Committee of the Senate Regraded Uclassified : 137 RB -2-#540, April 27, 5p. m. from Paris Senate and on Friday there will be general parliamentary debate on Government's policies. BULLITT CSB 03VIT038 Now is SSA 1878762930 Y2UBA111 " 6% W issue NO - - Regraded Uclassified 138 April 27, 1937 tty dear Mr. Attorney General: Mr. Magill and Mr. 011phant have reported to - fully on the extended conference which you had with them last Friday concerning the possibility of the settlement of the tax cases against 8. M. Smith, E. M. Smith Company, and Malter a. L. Smith of Los Angeles. They outlined to as fully the suggestions as to a settlement, which are now being mde to you on behalf of the taxpayers. In view of the - usual character of these cases, it seems to IN that, as in former tax cases of like seriousness, any consideration of the settlement of civil liabilities at present is untimely and that these oriminal cases should be pressed to trial OF plea and sentence. Thereafter the collection or settlement of the tax liability can be taken up. I hope that you will consur in this view, in the light of the additional information which Mr. Magill and Mr. Oliphant gave you, but if you do not, I should like for us to discuss these 06000 with the President, as indicated in my letter of April 15, 1957. Sincerely yours, The Honorable The Attorney General of the United States RM/egh % m FILE COPY Regraded Uclassified 139 April 27, 1937 The Honorable, The Attorney General, Washington, D. C. My dear Mr. Attorney General: I am returning herewith a number of letters ad- dressed to Mr. Keenan by Mr. M.L. Igoe, United States Attorney for the Northern Judicial District of Illinois, containing criticisms directed at certain officers of the Treasury Department. with these I enclose a memo- randum given my by the responsible officers of this De- partment commenting upon Mr. Igoe's charges. I believe that you will agree with me, after examining this nemo- randum, that there is no basis for Mr. Igoe's suggestions of improper conduct on the part of officers of this De- partment. Sincerely, (Signed) H. Morgenthau, Jr. Secretary of the Treasury HNG/mff Initiated: Graves, McReynolds, Helvering and Oliphant Regraded Uclassified 140 April 26, 1937. MENORANDOM FOR THE The Department has received from the Department of Justice a number of letters addressed to Non. Joseph 2. Keenan, Assistant to the Attorney General, by Michael L. Igoo. United States Attorney for the Northern District of Illinois, containing complaints against the Treasury Department, more especially against certain of the Department's officials headquartered at Chicago. These letters have been sent here informally pursuant to an understanding reached noss time ago between Mr. Xeenan and Mooors. Cliphant And Helvering. to the effect that Rr. 1800 would rebalt in writing whatever grounds he might have for complaining of the activities of Treasury agencies at Chicago. In accordance with your request, & synopsis of the complaints contained in Mr. Igos's letters, with the Department's comment with respect to each specific criticiem, is submitted below. Allered Unfriendly Attitude on the Part of Treasury Officials at Washington. Mr. Igoe begins his first letter. which is dated March 25, by indicating that it is his distinct inpression that the officials of the Treasury Department in Vashington feel that at all hazards they must uphold their subordinates In the field regardless of the serite of any controversy which may arise. Be bases this, he anys, upon his experience is two specific instances: namely. the case of Halph Charges N. Oyler and the so-called Barney Franklin case. After discussing these two cases at 6000 length, he has the following to any Dept's. Reply to Igoe's "From the statements above made, I believe you will agree with - that all of the difficulties between the Treasury Department and myself could have been ended long ago If there had been A disposition on the part of the officials of the Treasury Department to deal ex- paciently and fairly with such difficulties when they arose. It is because they did not do so that - find ourselves in the situation which now confronts us. Regraded Uclassified 141 - 2 - Insuranch as Its. Igon evidently feels that the attitude of the officials of the Treasury Department toward the two cases nantional have had math to do with the strained relations between his office and this Department, they will be doolt with here in SOME detail. the Dylor Crea. Ralph II. Oyler, now District Supervisor, of Marcetics. at Detroit, Mich. was formarly on duty in the same expecity at Chioago. Mr. Igne states that he comminicated to Mr. Whoms or tain information pointing to improper contuct on Cylor's part. Re says further that If the facts which he submitted to Mr. Gibbons were proven, as he understands they ware, Cylor should have soon membrily coparated from the Service. As calls attention to the fact that Oylar still retains his position. to his (Igoo's) and resement. 1tr. Iges obviously feels this the officials of the Treasury Department in Washington ware not interented in retaining Cylor in the face of his (Igne's) representations. COMMIT on Div St, 1933, the Purmer of Sarootics at Chicago submitted forge reports to the United States Attorney for the Northern Juli- etal District of Illinois, charging the following persons with violations of the Federal Inrootic Drag Lawst (1) Denjamin Creach, Ivan He Partos, and Villiam Paymel (2) India Howard and Charles Porter Nitcholl; (3) Hal Price Rentley and Marvin Hardins and (4) A. to Barroni and Junes The reports were Sevend upon in- vestigations mile during June and July, 1933, at the Arlington Park race truck, Chicago, w agents of the Pursons of Marcotics TUP der the direction of Mr. Cylar. then District Supervisor at Chiengo, and the violations charged aross onst of the alleged "doping" of rade horses. Mr. Cylor yes trunsferred from Chicago to Betroit on November 1. 1933, but before his transfer, on Augment 18. 1933, all the Date nons namel above wore indicted in the Foderal District Court at Chicago. The indictments were secured my Itr. Lealio R. Salter, Special Assistant so the Attorney General, who had charge of these cason for the Government from their Inception and no. as will be coan, finally secured convictions against Howard and witchell. Regraded Uclassified 142 the defendants in the Howard case ward Indic Howard, owner and trainer. m/. Charles 2. Mitchell, his stable foreman. In the smires of their Investigations, Federal Marantic agents observed on reserve Instances that Jane before meing horses of the Homest stable ware civen an injection from a notal agrings. They finally notral the syrings on one socasion Just as its sentants ware should to be atministered, and at the and time they nelsed erven bottles from beness In the Howard stuble. The agrings and the bottles was all found to contain heroin. On the prossedings in court, 4 me ston to the was filed and overraled. On the trial, both defendants wire found cullty on June 30, 1934, and on July 3. 1934, Howard - find $300 and conteneed so ton 40ys in Jall, and Mitchell the fined $100 and nontened to five Ange In Jail. The jatl contances ware responded and the defendants placed on prohation for one your. Noth defendants appealed, and the direuit Court of Appeals for the Soventh Circuit affirmed the judgment of conviction January 39, 1930. They petitioned the United States Suprese Court for on tiorari, which was denied April 20, 1935. An has been eath, this case was tried X Mr. Salter, Special Assistant to the Attorney Gan- oral, the liberine argued the Government's and before the Circuit Court of Appeals. on Jane 20, 1934, the cosss against the other persons above named were continued for trial until the September, 1934, term of court, the United States Attorney's office advising that nation would be deferred In those cases until the Howard date and been finally adjudicated. As has been seen, shie was disposed of an April 2, 1935. Mr. Igos successed so the office of District Attorney in June, 1935, and these three anams TOTO panding at that itm, with no obstaole now in the way of their prosention. The defendants In the so-called treach case word Ronjarda Creoch, whome wife visa the owner of 3 stable of horses. Ivan F. Parker, Creech's non-in-law and trainer of the stable. and William Pagme, a colored stable boy. During their Investigations, Federal Sureette agents on fourteen occasions observed the administration so horeos of the Creed: stable, gast prior to racing. of the com tente of a motal ayringe. This me usually w Paster. with Page assistance, but on at least one occasion Creech also - observed to participate. A search of the stables use made on July 28, 1932, and 120 crains of heroin and 16 grains of cocaine found thereon. After the fimil disposition of the Howard ass, this case EM not for trial on January o, 1936. However, on November 36. 1935, Parts and Pagma withdrew their previous pleas of not cullty. and entered pleas of cullty. Parks VV fined $500 and Payme $250. on the sand car. on mation of the United States Attorney, the case VM disnissed as to defendant Creech. this disposition was nide with- out consultation with the Date or the District Super- visor at Chicago, and the latter officer did not learn of the termin- ation of the case until January 3, 1934, when she was informally ase visal by Accistant United states Attorney Batley. Regraded Uclassified 143 - 4 In the Barroni and Berhes case, it had been observed on too 00- casions that a stableman entered & horee's stall with a syringe and Inter Came out and rinsed the syrings with vater. The officers did not actually see anyone use the syrings and there is no avidence to show what was contained therein. The officers 414, hovever, seise from the tack room of the Barroni stable, a number of bottles of 4 liquid which proved, upon analysis, to contain heroin. In the Headley and Bardia case, the officers observed the con- tests of a metal syrings administered to horses in some five in- stances and a number of bottles were seized in the tack room of Headley's stable of a liquid which proved, upon analysis, to contain heroin. The Barroni and Hezhas once and the Headley and Hardin case wore set for trial on November 30, 1938, the Barroni-Hexhen care to be tried first. Barroni and flexhen filed motions to suppress as evidence certain property seized in the tack room, on the ground that the search and seisure vore unlawful. Upon hearing arguments, Judge Woodward rendered a memorandum opinion granting the motions of Barroni and Hexhom and when the case vas actually called for trial, it was dismissed in December 2, 1936, for want of prosecution. 30- cause of the ruling on the admission of the evidence as to Barroni and liexhes, the CASE of Headley and Hardin was also dismissed on the was date for want of prosecution. The Creech case was undoubtedly the strongest of the three cases remaining after the disposition of the Howard case, and it vsa the opinion of the Commissioner of Marcotics that a vigorous prose- oution of this case by the Government would have resulted in the conviction of all three of the defendante named therein. Early in January, 1935, the Commissioner called the disposition of this case, as above described, specially to the attention of Assistant Secretary Gibbons, stating, assong other things, that there had been rumore that a great deal of money had been reported ready to secure the closing of the 05.00 without prosecution. Mr. Igon happened to be in Tashington about this time, and the dissatisfaction of the Commis- sioner of Narcotice with regard to this miter was communionted personally to him by Mr. Gibbons in n conference at the Intter's office in the Treasury Department. which was attended also by the Assistant Commissioner of Narestics in the Commissioner's absence. Regraded Uclassified 144 - 0 - There is no record of what transpired at this conference. " is apparent, however, although Mr. Gibbons now has no such recollection, that Mr. Igee on this occasion must have conveyed to Mr. Gibbons certain information pointing to misconduct on the part of District Impervisor Cyler in connection with one of the heree-doping asses here referred to. It 1s apparent also that some agreement was reached by Mr. Iges and Mr. 01bbons to the of- feet that Oyler's supposed nisconduct would be made the subject of an investigation by the Intelligence Unit. On January 31, 1936, Mr. Gibbons made a formal recommendation to this effect, to the Secretary. from which the following is quoted: "District Attorney Igon advised m that he had heard that the Narcotic District Supervisor at Detroit, Mr. Oyler. had advised the Chief of Police of Lexington or Louisville, Contudity, over the telephone that he 414 not think that one of the defendante In question could be convicted, notwithstanding, be protested the final sollon taken by the District Attorney." Pursuant to Mr. Gibbons' recommendation, the Intelligence Unit of the Bureau of Internal Revenue was directed to male an investige- tion of Mr. Cyler's alleged miscondust, and a final report of the investigation was delivered to the Department on May 14, 1936. This report, which was signed by Special Agent J. 4. Jordan, contains the following: "In compliance with request of Assistant Secretary Gibbons, the closing of the Benjamin Greech 'horee doping' rase track case at Chicago, Ill., and alleged questionable notivities of Mr. Cyler with reference to the Barroni and Headley race track cases, were taken up with United States Attorney Michael L. Igoo at Chicago, n. ........ "U. a. District Attorney Michael 7. Igoo informed - that Attorney T. 3. McGrath. who represented Donjanin Creech, Ivan H. Parke, and William Payme to the Cresch 7604 track case, had salled at his office on January 6, 1936, and inquired as to whether Mr. Oyler, the Marcotte Agent in Charge of the FAGE track investigation, had been to Mr. Igoe's office that day to advise his that Mr. Oyler did not think there vas sufficient evidence to secure a conviction in either the Barroni or Headley - that Mr. McGrath did not represent either of the parties, but was down in behalf of 6 mutual friend of theirs and his, Regraded Uclassified 145 - s namely, William 11. Schnidt, - Inisiness nan of Chicago, undertalor, and also angaged in the maine who had boon very friendly with both Mr. Headley and Mr. Burront for 5 partod of yours, and who had been a aliont of At- torney for twenty years. The U. n. Attorney advised Attorney that in ass not know Mr. cylor and that the Latter had never called on him. "Attorney T. 3. McCrath informed me that on Junuary 17, 1935, 117. filliam X. Schnd &t and into his office, undorpanied Y Hal Price Handley, defendant in one of the mon track dasse, and introduced the latter. During the corrersation, 117. Modrath inquired how they wase Informed that Mr. Girr was contag to Chiengo and day he was coine to success dismisial of the Handley use Barront daten to the 11. 5. Attorney. Therepon, Mr. Ha2 Price Handley told Mr. Mc0rath the following story: "IOn daturiay, Junuary 4. 1036, Dylar called the Chief of Police at Lexington and mini the Chief to are mays a moeting between Cylar and Headley. The Chief sur Hondley and Headley advised him that in was not intervated in mosting Ovier at any I'm or any place. insisting that Cyler had done his & creat injustice in involving him in the marcotic picture because has had navor permitted the 11.90 of narcotics on any of his horees except as nicht have boon prescribed in a medicine w a Licensed voterinarian. the Chief of Police called Oyler at Detroit and so advised hime Gylar then minted to know if the Chief would not and to Detroit AS he wanted to tell him monthing. The Chief then tell Oylar he could not (in book to Mondley because Monthay would not talk about the case and that If the Chief wanted to talk about the Drugo the would have to see Vallace Huir, attorney for Handley. Mr. thir told the Chief he sould no to Detroit and são what Oyler had to any. the Chief arrived in Detroit Junuary 3th. not Oylor and it va at that time that Oylan said 3ve 414 not think there 123 mufficient evidence to try the Barroni nnd Howlley cases and that he VAS cotae to Chicago to so viving the United States District Attorney in this District and he wanted Mr. Handley to know that be W doing this ao that Handley would appreciate his friendliness in the natter. Chief of Police left for Laminaton on have January 3th and after left for chicago on Funday. Junuary oth. Regraded Uclassified 146 Regraded Uclassified - 7 - "Cylor, nome time during the work of January oth, advised the Chief that just before he est on the truin to & to Chicago, be received a tolegram so done to Vashington which accounted for the reason of not doing what he had advised them he was going to do." "This statement of Attorney Modrath's Was correhorated w Villiam 2. Schmidt. Attorney went on to any this he know there WAS no fix in the Greech case: that Mr. Behmidt is on Headlay's and Barroni's bond, and West noither he nor Mr. Schmidt here over heard about any attenge on the part of Mondley or Barroni to fix their case; that the above statement of facts Le accurate and can be rolled upon 1005: and that he received $1,200 as his fee in the Creech amo." It is assund that the foregoing etatements mão to Special Agent Jordan by Mr. Igon and Attorney substantially compriss the information conveyed to Mr. 01bbons w Mr. Igoo at their earlier interviews. At any rate, the investigation mile by Special Agent Jordan along the line of developing whether Hondley's statement, as reported w Attorney Medreth, appearing to Implionte Gyler in AN attempt to effect a settlement of the original case at the time pending against Headley, could be substantially corro- borated. Corroboration for this statement could not be hade Chief of Police Thompson of Laxington, Kentucty, interviewed w Special Agent Jordan on Harch 17, 1935, at Lexington, and in the course of the Interview made the following statements "I have known Halph Cylor for years and Harry Analinger, the Commissions, is an eld-tine friend of nine. I never tallord with Oyler over the phone About the Hondley anso, and Cylor never called m on the telephone from Detroit. I don't know where you not this story, but shoever told it is a cools-eyed liar." Upon being informed that his statement VM at variance with statements attributed to his w Mr. Hoadley, and in the course of the SAM any. Chief Therpeon the following signed statement to Special Agant Jordans 147 Regraded Uclassified - 8 - "About theme years ago when Mr. Handley was indicted for have anrootion in his stable, he asked - to halp him to investigate to find out the facts in the also, M to his knowledge he nover had my nurcotion around his racing stables and all his employees accured him there MM nono found around his barns. "I have known Mr. Headley all my life and he and I have boon personal friends all our lives, ml knowing his standing in this community, I Visa what he was maying was the truth. "I mãe several trips to Chicago. balload to several city desoctives and & les of other people I loss, to não If I could find out what they found agrount Xr. Mendley's stables, as Mr. Headley was contions to find out whother his exployees were telling the truth or not. "Ab different times when Shie case was not in Chicago, I we there and realy to testify as a character witness for Mr. Nandley. but every time It was not. it was always done timed: and (F) also Intended to todas several of the best citizens of this city to also testify as character vitnasses for him "Alone about the Christmas holldays of last year, I más a trip to look over the traffic conditions in other cities: I went to Cincinnati, Toledo, Detroit, Chicago, Indianapolis, and Louisville. Just before I started this trip, I called Mr. Headley and Mr. Mair and told than I was going your Detroit and Chicago both. and I would by and fint out hother the case WAS going to be tried 07 continued, 90 that - world know whether to take the character witnesses or not. So I put in & call for Mr. Cylar and asked his is he me going so be in Chicago or Detroit about that time, and I think he said in Detroit: und when I arrived in Detroit, I - him and asked his whother the 00.00 was going to be tried or con- timed again, M I wanted to notify Mr. Mair no we could ent our character witnesses up there. He told - that he and not know and wouldn't know until he got to Chicago nn/L consulted the District Attorney's office whether is IRMS coine to so trint 07 continued. "I don't know anything nore about It now than I and three years age, as to what they found in Itr. Houllay's stable, as Mr. Cylor and no om also has given no any information on the subject." 148 - 9 - It will X noted that Mr. Readley was mith to have teld Her Modrath that Cylar Ind called Chief Thompson from Detroit on Jan- MARY 4. Dut in his stoned statement, Chief Thorgison says that it VILA her the called Oyler, and not after the called him Appearantly luving this discrepancy in mind, Apecial Agent Jordan said to Thorpson when the latter (The him his alemed statements "Tora state here that you 414 talk with Mr. Cylor over the phone from Detroit." To this Thropson replinds "Yon, I called hts W to mix A date to now him there, but he nover called - from Detroit my time." On March 34, Special Agent Jordan also secured signed state- nonta with regard to this matter from Healley and Mr. Neudley's attorney, Mr. Vallace Mutr. Mr. Healthy's statement rends M 502- lovel "About the first of the year 1936, Emast Thompson, Chief of Police of Laxington, RT.. called and told BD he me going to several cities, including Detroit, on nome police business, and wanted to know If I mented him to nee Mr. Oyler while he was in Detroit, and I referred him to my attorney, Mr. Matr. I am advised that he 4th sall Mr. Mair and Mr. Hair told his that it would be all right for him to see Mr. Oylar, and to fint out whether my cruse was going to be disposed of on Jamery 9 or not. wity recollection is that Chief Thorpens returned to Lexington the following Monday and comminicated with Mr. Mair, and that I called Mr. Huir and Mr. their tald no that the case would not be tried on the 9th, and that he understood Mr. Cyler was going to Chicago and that everything was all right. I took from this statement of Mr. Mair to mann that my case would be disposed. of in the sure my as the Creach case. as short time after that I want to Chicago on some other business. and while there I called Hr. William S. Schmidt, whom I have Imount for a lane Mm. and who is RV personal friend and the voluntarily signed my bont at the time I who intiated. I atd not call with reference to the came, but Just to talk with him. Schmidt not - down town about noon for lunch and augusted that before bunch I 5 with his to are Attorney 7. B. who TEMB his larger and friend, and who had represented Creach. Regraded Uclassified 149 - 20 - "I want with Scholds to 190 Mr. Heleath and 416 not talk to him AS v attorney and have novez employed Its Motruth to represent M in NY my. In the course of the conversation, Mr. McCrath tell no that In law 1150 Kiskland and Mr. Regves. 17 Chicago attorneys, ant also love 112. That, who represented Marroni, and that the othins of profession provented him from saying anything concerning another Immyor's case, but he would be very glad to advise with olthor of those contlemen, If they called wor him. "I told 1/5 McGrath that 1 VM not guilty in this case, had nover at rarge time permitted the use of - cotics on my horses, and had never permitted nurcotics in any form to be in a stable. I sold his that Chief Thompson was & 11fe-long friend, and had tried to find out what the Government was claiming AS against 30, int had arror been able to get any information. I also told him about Thompson's trip to Detroit, and that Thompson before Leaving had been in comminication with Mr. Muir, and wanted to know about his seeing Cylar while in Detroit, and when Thorpson date book be sald Oylar was going to be in Chicago in a Any or two. I 414 tall Mr. Modrath that Thompson not said that Cylor would 300 the District no torney and reconnent the dismissal of RV case, but after wards I talked with Hr. their and I found out that I had evidently misunderstood the maning of It. This non- vermation All the whan no told - over the phone that 'the case would not be trind, and overything would be all right', taking from this that case von coing to be having in nint the dismissal of the Greach case, but I mimmidersted ltr. Nutr, and litre Shir mays what he mont to tall me the that avalythine would to all right, so that I work not vorry about RV Grea at that time." Mr. Miris statement is INS follows: "M the time Chief Thompson TME going to Detrols, he called me q and told na he - gotac to advoral cities on nomo business, Including Datroit, and wanted to know If I thought It would be well for his to - Mr. Cylor while In Datroit. I told him It would be entirely all right for his to seo Mr. Cylor and to Mr certain, If 1so could, whether the case the coing to be tried on Junuary 9 or not. Regraded Uclassified - 11 - 150 "In A day 07 two Thompson ruturned to Loxington, called 99 and told me to had asso Oylar, best that he ase not find out from him whether the Case would be tried on the 9th, but that Cylar the going to Chicago and would be at the Metrict Attorney's office. "mooiving this information, I telephoned to our attorneys in Chicago and told then that Mr. Oyler as coing to be at the District Attorney's office and for them so got in touch with the District Attorney and - if our area could not so Alsposed of along the lines of the Grooch case. "I told Mr. Headley, over the telephone, that the case would not be tried on the 9th, but that everything would so all right. After talling hts this, be the in chicago on nome business and he tells ISS that be had a talk with Mr. Schmidt and Mr. McGrath, in which he told Mr. MoOmth and Mr. Schmidt to the affect that Cylor was reposed to come to Chicago, and that Two wis going to request the District Attorney to diamise the CASO, Mr. Healthy was to have motten this information from m, best Mr. Readley was missnism about this and staintor- proted R anying to his that the dase would not be triad, but everything would be all right." Attention is particularly invited to the fast that while Mr. Sendley states he are initiate to Mr. MoOrath that Oylar planned to have the case against his dismissed, has not says that this vis a misstatament. Doth Mr. Meadley and Mr. Mair now state in write Inc that the former signaterstood the latter, who had not Intented to convey any main impression M that received w Mr. Headley and passed on to Mr. There Le clearly TV) avidence to support the statement that Mr. Cylor pronised to tain action locking to the dismissal of this case, or that he had oxpressed himself M feeling that the CASH VISA a wast on. In considering the statements which have been mde with respect to the Handley once, it 19 vall to rocall that this case ma mile in July, 1933, and that during the acures of the investi- cation n. Special Assistant to the Attorney Genoral - assigned to handle it. The obtained the Inlictment and aftermats tried and convicted Inste Howard, one of the defendants in another case made at the time as the Headley case. The latter case remained pending in the office of the United States Attorney at Chicago from August, 1033 to December 2, 1938, when It was called and dienlesed. During this entire period the once was called for trial several times, end on no coonsion was postponsent requested or suggested w Mr. cyler. Regraded Uclassified 151 12 + 4 There 1m. moreover, considerable room for doubt whether the statements originally attributed so Mr. Readley by Altorney McGrath would have afforded grounds for the dismissal of Cyler even if they could have been corroborated by substantial evidence, eince they osen to imply only that Oyler had become convinced that there TM not sufficient ovidence to try the case pending against Headley. and that it vas his Intention so to advise the United States At- torney who had the case in charge. Had these statements been nb stantiated, there, of course, would have been a question whether Mr. Oyler's alleged action was judicious and discrest, but over if true, on their face they certainly de not imply corrupt misconduct. Novever, the stories finally told w Thompson, Readley, and Muir, as represented by their written statements now in the Department's files, as the result of questioning by Special Agent Jordan, are in as entirely different version from the account given by Attorney Moornth, and they do not corroborate in any particular the state- sente alleged by Attorney McGrath to have been made to him by Headley in 60 far at those statements may be said to reflect on Mr. Cyler. In these circumstances, and upon the recommendation of Special Agent Jordan and the Chief of the Intelligence Unit of the Bureau of Internal Revenue, the Department reached the conclusion that It had no basis for taking notion of any kind against Mr. Cyler. The Barney Franklin Case. Mr. Igoo repeats the complaint which he has previously made with respect to this case, based on the fact alleged by him that Mr. followley deliberately and knowingly transmitted to the Chicago DAILY HE#3 a letter which he (I@00) had written to Tellowley recommending the acceptance of an offer in compromise submitted w the defendant in the case of United States vs. Barney Franklin. Again Mr. Igoo oriticises the officials of the Treasury Department at Washington for their failure to discipline Yellowley for making this letter public. COMMENT Although the facts in this notorious case are well known, 11 is believed that they should be reviewed briefly here. On June 19. 1934, the defendant. Darney Franklin, the propristor of n rathskeller in the Loop district in Chicago, was arrested in possession of an illicit rectifying plant La the basement of his barroom premises. At the time of his arrest, certain quantities of untaxpaid spirits, counterfeit strip stamps, fraudulent labels, etc., ways found on the promises. It was evident that Franklin was not only defrauting the Government of 11s revenue, but was also cheating his patrons by selling them spurious liquor. Regraded Uclassified 152 - 13 - Detween June 19 and September no, 1934, eight adjurnments UTTO obtained from the United States Commissioner before the defentant was held for the Grand Jury. On November 2, 1934, the defendant YAS initeted. On December 10, 1934, A demirrer vas filed to the indiot- ment. The decurrer was overruled on Jamuary 16. 1935, at which time n plan of not milty was entered and a motion mile to suppress the evidence. This notion use dented on April 26, 1935. Natween April 25, 1935, and September 30, 1935, the trial of this case was as- journed five time. On October 15, 1935, the United States Attorney recommended to the There and Penalties Unit 05 the Department of Justice the acceptance of an offer in compromise in the STATE of $2,600 rede w the defendant, Pronidin, in mathsfrotion of All civil and original liability. This offer vas rejected by the Texter and Fonalties Unit on the recommendation of the Alcohol Tax Unit of the Treasury Department. The case me wijourned from time to time from February 15, 1236, to November 30, 1936, at the request of Amaistant United States Attorney Classer, who assigned MS the reason for his request the fact that nn offer in compromise submitted by the as fondant was under consideration. the asses the finally onlled for trial before Sullivan in the District Court on November 30, 1936. AS this time the defendant withdrew his plan of not guilty and pleaded guilty to one count in the indictment upon the understanding that N enepended sentence should be given on all other counts and that there should be a fine of $1,600 on this one count. This arrangment was recomented in open court w Assistant United States Attorney Glasser. It 10 a conspion- ous faot that the amount of the fine 50 recommended vas the same as the nument offered in compromise of the miter, which had been - Jested by the Department of Justice. Than this recomendation was mis w Assistant United States At- torney Flasser, the Court, of its own notion, took the matter under advisement and adjourned the Mr of sentence until December 10, 1936. On December 9, 1936, the Secretary of the Treasury protested personally to the Attorney General against Olasser's recommentation for the disposition of this date w 5 fine, and it is understood that the Secretary's protest was promptly conveyed to United States Attorney Igos. Notwithstmnding the fact, when the care can w for sentence on December 10. Assistant United States Attorney Glasser TO- noved his earlier recommendation, and the Court imposed a Cine of $1,650 against the defendant in accordance therewith. Regraded Uclassified 153 - 14 - As will be seen from the foregoing. the Barney Franklin 0000 WAS pending in Chicago from June, 1934, until December, 1936. In connection with the offer in compresise above reforred so, Mr. Igoo, on Catcher 15, 1935, addressed the following letter to Mr. Tollowleys "Please fint enclosed cashier's check in the amount of $1,650, which has been submitted to If by the above-nased defendent (Frunklin) as m offer in comprondes of the above entitled 000190. "I have accepted this check from the defendant with the distinct understanding that it is his liability only and not no to his codefendant. "I recommend the neceptance of this offer for the reason that I think it 10 substantial and In view of the past record of the defendant 16 is probably & better settlement than 100 could receive through the courts. "Hespectfully, (Stgned) and Tre Igoe." In response to this letter. Hr. Tellowley advised Mr. Igoo, on November 13, 1935, that he could not concur in the acceptance of this offer, and recommended that Franklin be prosecuted. In an article which sppeared in the Chicago DAILY of May 15, 1935, the above letter was quoted. rent. 18 was Mr. Ipe's name tion that & dogy of the letter had been furnished the HENS w Mr. Yollowley. Acting on this assumption, Mr. Inco addressed the follow- inc letter to Mr. Yellowley under date of May 16, 1936: "I will thank you to advise - at your carliest convenience, your authority for giving to the prees my letter to you of October 15, 1935, which appeared in the Chiongo Daily Hows of May 15th, 1936. "Haspectfully, (Signed) "Michasl L. Igoe United States Attorney." 154 - 15 Regraded Uclassified To this, Mr. Yellowley replied as follows, on Your 20: "In reply to your inquiry w letter of May 16th, I desire to advise that no part of the article referred to, which appeared in the Chicago Daily Have of October 15, 1936, vas siven out w m or by any namber of 7 force. "Very truly yours, (Signed) us. 0. Tellowley "Mstrict Supervisor." On May 19, Mr. Ige responded to Mr. Tellowley's letter ad follows: "A further examination of the article appearing in the Chicago Daily News of May 15, 1936, together with investigntions más by this office, cause no to concluis that the statements in your comminication of May 19, 1936, are not truthful. I shall govern myself accordingly. "Respectfully, (Signed) #Wichuel L. Igoo United States Attorney." Mr. Igoo promptly reported this incident to the Attornay General, and a conference Wills arranged for Mr. Igoa with officials of the Treasury Department at Mashington, in the course of which Mr. Igon instated won Yellowley's removal for his supposed nation in midne lis. Igen's letter public. Mr. Igoo's present complaint 1s, of course, a 23926 reiteration of his former charge. but it is to be noted that although he indicated in his second letter to Mr. Tellowley that he had mdo certain investign- tions in the promises, he has furnished m information or evidence whatsoever tending to show that the lotter published by the DAILY YOUR was in fact mão public to 115. Tollowley or by anyone in Mr. Tellowley's organisation. In his present letter AS in his previous complaint, Mr. Igoo plainly states that his belief that Mr. Tollowley made his lotter public reste solely upon the fact that the HTM article in which the letter was quoted was uncomplinentary to hin (Ime), coupled with the further fact that at the time of the incident a former reporter of the MRSS. Mr. Charles Johners, was on duty in Chicago as the 155 - 16 - Treasury Department's "publicity Agent." Mr. Yellowley entegorically denied having given the letter to the XEVS, and such Investigation as this Department was able to name at the time afforded no basis for the conclusion that he had any part in the traisaction complained of. A representative of the Department who called on the City Editor of the Chicago DAILY yours for information M so the source of the letter in question, was not with 5 declination to give out the acures from which the letter cans but THE positively told that it 41d not smanste from angone in the Treasury Department. Under the foregoing circunstances, the Department are not foal at the time of Mr. Igoe's original complaint and does not now feel that it had any bests for action against Mr. Yellowley in connection vith the matter. Allowed Insfficiency of the Alachol Tax Unit AL Chicago Mr. Loss maises sertain complaints of inefficiency on the part of the Alcohol Tax Unit at Chicago. These complaints are somewher informatio. but they my fairly be classified M follows: Operators of large stills are seldom If over appro- handed: only ninor defendants are arrosted. Investigations are see long delayed. Cases are frequently spoiled w illegal entry won the premises of the violators. Cocupational-tax stamps are sold to vendors of we taxpaid spirits. Character of defendants in limor cases. Mr. Igoo enyst The record indicates that operators of lazys stills in this district are selden If ever approhonded. In practi- only every CASO in which a large still is involved. only minor do- fendants are arrested. This situation has been commented upon w all of the Indges in this district." No says also that this situation was commated upon w both the February and March, 1937, Grand Juries, and refers to letters which he received from the foremen of those Grand Juries containing such comment. In then goes on to support this complaint w citing three particular cases called for trial in March, 1937, in which he ene. or implies, that there visa adverse comment by the Court won the chaos as presented w the Alcohol the Unit. 156 - 17 - COMMUNITY. MT. Igoe's reference to the oriticisms of the February and March Grand Juries need scarcely be taken seriously. It is known to the Department that the letter signed by the foreman of the February Orand Jury was written by Assistant United States Attorney Glasser, and signed by the foreman at his (Glasser's) solicitation, and 11 is reasonable to premise that the March letter originated in this - way. is is of course obvious that the members of a Orand Jury sitting for a one-month's term, and dealing only with such few selected cases as the District Attorney chooses to bring before it. would hardly be in & position to say of their own knowl- edge that the Alcohol Tax Unit apprehends only the smaller violators and overlooks the principal defendants. As to Mr. Igoe's statement to the effect that all of the judges in the Chicago district have commented on the failure of the Alcohol Tax Unit to apprehend important violators, the Depart- ment knows of three Cases only in connection with which the Court made comment which might be construed as in may way reflecting upon that Unit. These are the three cases referred to in Mr. Igoe's letter, which vors called for trial, respectively. on March 1, March 2, and March 3, 1937, as follows: U. 1. 71. Frank Schaaffer, " al.; U. 3. vs. Frank Sidote, at al.; and U. 3. vs. Klasr 1. Soltwodel. These cases will be discussed below, with particular reference to such comments M wore made from the bench at the time of trial. V. 8. 74. Trank Schweffer. at al.--Tois 0889 originated with the seisure, on January 1, 1936, of an illicit distillery on the farm of George Subin, near Hinedale, Illinois. As the result of s subsequent open investigation, the Alcohol Tax Unit was able to connect eight defendants with the violation, all of whom, including the defendant Schaeffer, were indicted on December 10, 1936. On the trial of this case on March 1, 1937, two Government witnesses, namely, Falter and stave Subin, some of the owner of the farm on which the still was seised, failed to identify the defendant Schaeffer when called to the stand for this purpose. Upon this development, which CAMP as a surprise to the Government, Judge Wilkerson unde the remark, as Mr. Igoe says. that there vas ovidently something wrong with the Government's case. It is not seen how this consent from the bench can be construed either as reflecting upon the Aloohol Tax Unit, or as bearing particularly upon Mr. Igoa's contention that the Alcohol fax Unit apprehends only minor do- fendants. This was no more than the not uncomes occurrence of Regraded Uclassified 157 - 16 - Government witnesses changing their testimony. Following the seisure of the atill in this case, the witnesses Valter and Steve Subin had unde sworn statements to revenue officers connecting the defendant Schaeffer with its operation, and they had identified two different pictures of this defendant. It is not supposed that Judge Filkerson's remark was intended to impute neglect to anybody for the witnesses' repudiation of their testimony at the trial, but it might well be observed that it was no less the duty of the United States Attorney than of the Alcohol Tax Unit to anticipate this event. Had Mr. Igon called these witnesses and made their statements of record before the Grand Jury at the time of the in- dictment. they would undoubtedly, under fear of prosecution for perjury, have adhered to their original testicony when the case went to trial. U. 3. 11. Prank Sidote, of al.--This case had ite inception in the seisure of B. large alcohol distillary on December 17, 1936, and the arrest, at the time of the seisure, of four defendants, namely. Frank Sidote, Joe Cieero, Wike Ponicki, and Jundo Rose. One addi- tional defendant, John Tenuti, was connected by subsequent investi- ention. All five defendants were indicted on December 10, 1936. On March 2, 1937, the defendants Sidote, Cicero, and Ponicki on- tered pleas of guilty before Federal Judge Sullivan. Mr. Igoe states that the Court at this time expressed doubt, in view of the youthfulness of the defendants, that they had any real responsibility for the operation of the distillery, and that he postponed contence until March 19, 1937, with instructions to the defendants that they should assist the Government in identifying the actual owners of the still. A subsequent investigation promoted by the Court's remarks developed the fact that the actual owner of the still was one Francesco Buggeri, now in Italy. and that the defendant Ponicki was likewise financially interested. These facts were given to Judge Sullivan when the case 0489 up for sentence on March 19, at which time he again continued the case with a rearrk to the effect that the people he was after were the ones who profited from the illioit operations. U. 8. 75. Elmer y. Solinedel.-This 10 one of several substan- tive cases that grew out of the supervision by officers of the Alcohol Tax Unit of the telephone of one Pete Modorowies, a well- known alcohol distributor in the Chicago area. The Case jacketed against Modorowies was not successfully concluded due to the fact that the wire supervision was discovered by the telephone company and had to be abandoned before sufficient evidence could be obtained Regraded Uclassified 158 - 19 to incriminate his. The defendant Soltwadel, however, was arrested on January 24, 1936, while transporting 75 callons of alsohol, as the result of information secured from supervising Moderovier's telephone. This case was called for trial on March 3, 1937. at which time, after n motion to supprees the evidence had been denied, the defendant entered & plea of guilty. After the plea of guilty had been entered, it appears that counsel for the defendant advised Assistant United States Attorney Glasser that his elient, the do- fendant Soltwodel, was of the opinion that the Hodorovies ones had been "fixed," supposedly by an Alcohol Tax investigator by the name of Coleman. This information was conveyed by Mr. Classer to Federal Judge Barnes, who after a conference in chambers called the Alcohol Tax officers to the stand and asked them why Hodorowies had not been brought in as a defendant. As these officers were not familiar with the Hoderowies matter, and were therefore not able to answer the Judge's Tuestions to his satisfaction, A conference was arranged in chambers by Judge Barnes with the head of the enforcement branch of the Alcohol Tax Unit in Chicago, who advised the Court that 11 had 60 far been found impossible to develop sufficient evidence to justi- ty the submission of a conspiracy case involving Modorowies and his associates. Be also advised the Court that the case against Hodorowies had originally been handled by Investigator Coleman, who, prior to the conclusion of the investigation, had been dropped from the service as the result of a routine character examination unde by the Civil Service Commission, and that the statement of the defendant Soltwedel was the first intimation which officers of the Alcohol Tax Unit had had of any alleged attempt to "fix" the case. After this conference, Judge Barnes expressed himself Ad fully antiefied with the explanation made. It than appears that in the three instances cited by Mr. Igos in support of his statement to the effect that the Federal Judges have all commented adversely upon the alleged failure of the Alcohol fax Unit to bring in important defendants, the supposed adverse comment had to de only with the danes instantly before the Court and had no reference to the general situation which, according so Mr. Igos, exists in the Chicago district. The personnel of the Alcohol fax Unit assigned to duty in the Northern Judicial District of Illinois comprises 42 investigators or enforcement agents. In addition to this personnel, special investi- cators, to the average musber of about 12, are assigned to duty in this judicial district, charged specially with the investigation of important ayndicated operations in violation of the revenue laws relating to distilled spirite, wine and beer. A fair indication of the volume of the work done by this force of nen one be gleaned from the following statistics showing results of their operations against persons involved in the illioit manufacture, transportation, and sale of distilled spirits during the calendar years 1935 and 19351 Regraded Uclassified 159 Still Beigures, etc., in the Northern Articial District of Illinois : Calandar year Item : 1935 # 1936 I I # I Hurber of still soired : 3301 174 Number of persons arrested - name 417 Average still commoity. callons I 3001 354 Gallons of mach moised I 1,020,6241 678,304 Gallons of distilled spirits soland I 35,348: 30,840 Number of automobiles selsed I 50Γ 36 Value of property soised I $354,8131 $335,017 I : These statistics are given hare not A8 having any direct banz- Ing won Mr. Isea's charge that the Alcohol Pax Unit luss m/a no handway against important operators, but stoply to give some fair idea of the extent of the problem which has confronted the Alcohol the Unit Ln the Chicago urua. In the Chicago district, as in all other districts, the operations of the Alcohol Tax Unit met largely be based upon complaints and information from public-spirited citi- sone, and from police and other local peace officers. It is satnly by Investigating such complaints and w following w much information that the revenue officers Are snabled to loaste and mairo illicit stills And to apprehend these attanting the plants, at well as those encaged ta the complumentary operations of unlawful transportation not salo. It is well lovern that, particularly in matropolitan areas 11:00 Chicago, the persons approhended while directly involved in these operations as often paid employees of the real proprietors and managers of the illicit enterprises) and n. proper ultimate or jective of the Thurams of Internal Revenue is to determine by Invoice tigation who these propriators and nanagers are and to obtain legal evidence of their complicity. This is not easy to do, and the Do- partment mins DO clain that In the Chienge ATEA or any other area it is completely authorsful in reaching this ultimate objective. There will always be Instances, As fairly illustrated by the three cases which have been cited by Mr. 1gos, In which Use Department will fail to reach the principal defendants. It night of course be said that moh dames should be nore thoroughly investigated and never procented for presecution until the real persons in interest have boen implicated. 34:1 to follow such & course would be to tio w the relatively small force which is available on a limited mmber of cases, and this would be to allow other violators to run respont while the investigation of this limited member of CASSE - nation- loualy pursued. The Department's deliberate policy in this respect Regraded Uclassified 160 H 19 to selse all illicit distilleries and to apprehend all violators of which 18 has knowledge, regardless of their rank and status, with the greatest possible dispatchi and to employ its limited force of special investigators upon investigations calculated to develop ori- dance against the malers of these rings and andicates whose facturing and selling operations now the mont widespread and, there- fore, the most damaging to the Inderni revomo. This policy Le followed in all districts, and with the result that in most metropolitan centers 11km Chicago, the illicit traffic Is lapt at a minimum by the sheer physical process of destroying 12- logal plants as they are found and promossing those who operate thes, and by the constant pressure which is through compirany casse note scatnst important muminotures and distributors of the syndl- cated type. In the nature of things, however, a large proportion of those apprehanded by the Purona of Internal Deveme in purcuing this policy will be in the chtegory referred to by 1tr. Igoa AS minor defendants- not only parsons who are the employees of large violators trut persons who operate on their own account in n small way. whother as INITI- factures, transporters, or vandors. Considering the country an a whole, It is probably correct to any that minor defendants of this type involved in alcohol-tax chass probably outmumber the so-called major defendants in the ratio of at lesst ton to one. It is of course not intended Your the foregoing to leave the 1>- pression that the Department has any choice in the matter of approve handing minor defendants and reporting thees to district attorneys with a view to their prosecution. The applicable statute requires every fraudulent violation of the revenue laws, regardless of its importance, to be 60 reported. the Innguage of the statute to as follows: Title 25, the 1645(b). U.S.C.-It shall be the duty of every collector of internal reverate having knowledge of any willful violation of any Law of the United States relating to the revenue, within thirty days after coming Into presession of mush knowledge. to file with the dis- trict attorney of the district in which any panalty, or forfeiture may be insurred, a statement of =11 the facts and circumstances of the 0329 within his knowledge, together with the news of the witnesses, forth the provi- sions of law believed to be no violated on which reliance my be had for condemation or conviction. (R.S. 100. 3164: Pob. 34, 1919, c. 18, moo. 1317, 40 Stat. 1146; Fob. 36, 1936; C. 27, 900. 1115, 44 Stat. 117.) -Now district supervisor, Aloohol The Unit, Burosu of Internal Revenue in once of violations of liquor-tazing laws. (10t of March 3, 1927, n Stat. 1382, and regulations issued therounder.) Regraded Uclassified 161 $1 Before loaving this phase of the mitor, it should be said that one of the most valuable instruments which the Government has at its command In dealing with major violators of the Federal liquor laws, in the vigorous prosecution. convistion, and inprisonment of minor defendants who are connected with those major violators, whether as employers or as customers. If the attitude of the prosecuting offi- cars and the courts toward these ninor figures to one of under Immienay, the Government has no pressure which It our bring to hear upon those persons with a view to foreing a disclosure of their principals or their sources of supply. This point is well illustrated by the Schaeffer and Sidote Chees referred to above. where It is evident that & thront of severe punishment against the ninor defendants who had been approhended, olther w the District Attorney or by the Court. would have brought to 11/300 the identity of the real principals. It should be obvious that in any district where ainor defendante can normally expect to be discharged without prosecution, or if prone- outed or pleading cuilty lot off with a surpended sentence on the ground that they are not principals, the Government to deliberately abandoning the meet effective neass which it has at Its disposal to identify novil locate the important violators. The best results ugainst major violators AT6 naturally obtained in those julicial districts where these facts AFC understood by the prosscuting officers, and DOB- versely the pearect results are ashieved to districts where the pross- outing officers are AVOIRE to hardling asses against so-called minor defendants. The remults of unjer investigations in the Chicago district have not been added by any effort on the part of the District Attorney to put preseure upon ninor defendants In the namer here suggested. The moord shown that a much larger member of violators are released with out trial in the Northern Indicial District of Illinois than In any other metropolitan 1296 in the United States. The record shows also, however, that dospite this handless there have been many instances in the Chicago district where in commotion with large still soirures these financing and directing the illicit operations, and those supply- the the your anterial for purposes of illicit manufacture, have been involved by the investigations of the Alcohol Tax Unit, and reported to the United States Attorney for prosecution. A for of these CASSS will be described below. Casa Ho, 3611-K. William J. Joriman, at al.-2his case originated with the seizure of a clandostine alcohol distillary on Pobruary 19, 1935, in A warehouse building operated by the Continental Warehouse Company. Chiengo. The distillary had a daily producing capacity K Regraded Uclassified 162 - 00 - approximately 4,000 gallons not Will other of the largest illicit plants over noined In the entire country. Subsequent investigation developed that the must notorious liquor ring in the Chicago area VGS behind its operations. The corn VPO which TM utilized as the basis of the useh was murchased in ten's-ear lots through an slaborate coverturane arrangement. 21 finished alcohol not only fount its way Into the Chiengo mrint, but vas shipped In druna to distributing are In other midmatern cities. As the result of an extensive open investigation, & case report VIS midital to the United States Attorney in Chinago on May 16, 1935. naming 25 individuals and 7 corporations M defendants, and including along with the persons who were responsible for the namifacturing and distributing operations, those who MM furnished the hollors, Lanks, and other equipment used in the construction of the distillery. and these the supplied the row materials from which the illicit product VAS anministured. The met important defendent was one William J. Torizon, the nonacine director of the warehouse convery. and long A well-known flows In the illicit alcohol meket in the City of Chicago. Care No. 30-4-11 Pront Salam, at al.-This case had its incoption or March 31, 1935, with the seisure of a Large illioit alcohol distillory constating of one 1,500-gmllon still, and one 1,000-cmllon still. One arrest WILE mde at the time of matsure. As the result of subsequent Investigation, A 0020 report was submitted to the United States Attorney on August 5, 1935. recommending the prosecution of nine defendants, in- cluding four important principals, as follows: David Stern, Frank Salam, Fred Hlusenthal, and San Rieff. Defendant Storm maintained an office In n., from which he was in telephone communication with the premises on which to distillary vas located and from which he supervised the hamling of rew materials to the plant and the disposition of the finished product. Defendant Salam rented the premises on which the distillary vas located and supervised its construction. Defendants Bluenthal and Moff furnished the zur mtorials from which the illicit product - manufactured. The remaining five defendants ware employees. Gase No. 3803-M. Anthour Hicali, at al.-This and involves & Large combination headed X the four !ffcelt brothers, with headquartors at Galmot City, Ill., n. minute of Chicago. An the result of an union- cover investigation began in April. 1935, four large distillaries Do- Longing to this combination ware unised in the northwrn part of Indians, angaged in the annufacture of alcohol, shiefly for male in the City of Chicago. Imploye worrdh merate eiro cocured from the United States in Chiengo, based upon the telephone conversations Intor- costed, and calling for domunitary instrumentalities of the crime. Overt note in pursuance of the vara found to have been nitted both in the Northern District of Indiana and in the Northern District of Illinois. At the conclusion of the investigation, a defandants were reported to the United States Attorney in the Northern Regraded Uclassified 163 - 36 District of Indiana under date of December 6, 1935, for prosecution. The more important defendants word the Viceli brothers, who from their headquarters at Calumot City curried on a wholesale liquor business on an axtensive scale, namifacturing and selling untaxpaid spirtte in large quantities, purchasing and nains automobiles and truce for health the alcohol, and consrally directing and mon- violag the illicit operations. Case No. 3849-K. Jong h Vani. of al-mis case involves the Vani conbine, a notorious of alcohol distillors in the Chicago area Two distilleries WOTE meised in connection with this GILSO, one on November 22, 1934, and another on June 26. 1930, and those two operations word connected by subsequent Gyen Investigation. Fourteen defendants yoro reported to the United States Attorney at Chicago on February 26, 1930, including Joneph Vani, James 7uni, Torg Corno, and Palmer A. Melone, se principals. There persons ware the owners of the distilleries, supervised their construction ml operation, paid the employees working in the plants, brought THE materials to the stills, and disposed of the finished alcohol. All four of thene to- fendants had original records. Three other invortant defendants were involved In this 0810 as l'ontenante of the principals, who assisted in renting the distillery premiums, in purchasing oquipment and M- >lion, and in otherwise facilitating the conspiracy. The remining seven defendants ware still operators, trust drivers, not other ninor employees. Code No. 4517-N. Pater Dowine, at Al---This case involved the seizure of two large alcohol distilleries operated on different premises, one on December 37, 1935, and the other on May 5, 1935, the two selmures being commented by subsequent investigation. A report me submitted to the United States Attorney at Chicago in this onse on November 3, 1936, recommending the prosecution of eight defendants, including the following principals: Peter Domino, Frank Theodore, Theodora Ingresta, Frank Increasia, and Anthony Donino. These five individuals were all financially interested in the distillaries, word responsible for renting the prenises on which they wire loanted, annual the distilleries to be set w and operated, hired and paid the distillery myloyes, and disposed of the alcohol mondactured. All these individuals have criminal records, having been convicted and cent to the penitentiary on a complracy charge In 1931. The remaining three defendants in this case were persons employed as still operators and truck drivors. Regraded Uclassified 164 Case No. 320-M. Rainar. 11 al.-This case involves a conspiracy to violate the Interval-revemue Thing on the part of a Ingree alcohol manufacturing and distributing syndicate, commonly referred to AS the Brurerman-Tainer combine, and known to be the second largest - which has operated in Chicago and visinity since repeal. The Introductory phases of the case vor. handled through the medium of telephone supervision. More than 1,600 telephone calls relating to the illicit business of the organisation were intercepted during the undercover Investigation. A 4,000-gallon alcohol plant ville solued in the nourse of the investigation, and other overt note were astabltshed. Corn migar was utilized AS the basis of the mash for the distilling operations in this plant. which was purchased through the usual nover- house aystem Over 537,000 pounds of corn sugar were purchased from the Corn Products Sales Company from about July 1, 1935, to August 15, 1935, by this syndicate. After the open investigation the instituted, 195 withouses wore interviewed, and 50 statements reduced to writing. Five special investigators were engaged over a period of months in developing this case, beginning in Amount of 1935. Evidance was nib- nitted to the United States Attorney under date of May 18, 1936, against B1 individuals and corporations including the following important do- fentants: HARRY Allen %. Mainer, Mayage Suche, Ben yoid. Sam Ininer, Arnold Invorman, and Charles Vins. These ware the princi- pale and their chief lieutenants. Harry Brancrman and Allen M. Mainer 1702°F the financial backers. directors of all operations, and the - ployers of the authordinates. In addition to these persons, thirtoon individuals ware reported to the District Attorney in this case for having furnished mterials to the unitists or having connired with the syndicate to the and that the materials might be received and properly covered. Thirteen other persons were named in the case report as comprising the (Troup which natually operated the distillary. owned or leased the premises houstng the operation. purchased vehicles for the syndicate, and supplied needed aquipment. A member of other defendants were included, se truck drivers. convoys of the trucks used in transportation, and minor employees. Case yes 41.50-M. Dooxee at Al--This case involved the operation of a Inrge alcohol distillary on two different promiss, - claiming in March, 1935, up to the date of its soirure on Catober 20, 1935, by a well-lawn Italian combination. Under date of March 26, 1937, & case report was mubmitted to the United States Attorney in the Northern District of Illinois naming 17 defendants. including the following principals: George Saladine, 3am Surage, Charles Fanno, and Joa Messinn. These four defendants financed and owned the distillery and directed the ontire illioit enterprise. The defendants Savage, Panno, and Messina had long criminal records, including may violations of the liquor 1ws. The other defendants ware largely still operators, truck drivers, and compants of the prodess on which the distillary was located. Thile those latter individuals are regarded as ninor co- fendants, 11 should be said that motically all of then have long records ME liquor violaters. Regraded Uclassified 185 - 20 It should not be understood that the foregoing represents all the cases which have been made in the Chicago district in recent months which have involved important violators. As will appear in & later connection, 38 conspiracy 04868 rere referred to the District Attorney at Chicago for presecution during the 34-months period from January 1. 1935, to December 31, 1936. Among these GATER will be found a considerable mumber, in addition to those above described, which contain evidence against the larger figures in the illicit alcohol traffic in the Chiengo area. A total of three hundred and fifty-three defendants were named in these casse, and AB examination of the situation justifies the conclusion that the Alcohol fax Unit at Chicago, while of course not uniformly wuo- cessful in the investigations which it has ands with a view to reaching the major illicit operators. has during the last two years reported to the District Attorney evidence which involves the most important of the individuals and groups engaged in the illicit liquor racket In the Chioago district. Attention in invited parkie- ularly in this connection to the Torkman, Braversan-Vainar, and Miceli cases, implioating what undoubtedly are the three most noterious alcohol syndicates which have operated in the Chicago area since the repeal of Prohibition. Alloced Delar in Completing Investigation. Mr. Igon the complaint that "investigations are long do- layed." He says that, In many cases, in submitting reports to him the Alcohol Tax Unit requests that the cases be not presented to the Grand Jury because an investigation 10 under may, and he implies that in frequent instances cases Are lost by renson of the disappearance of the necessary witnesses due to the long lapse of time. He supports this charge by citing one case only. that of HATY Solla. with respect to this case, he says that this woman operated a still from which alcohol was supplied to one Harlan Crouch, who on May 14, 1936, 100 saulted and killed an investigator of the Alcohol Tax Unit in the State of Indians. Re enys that the Solla worman was apprehended by the Alcohol Tax Unit in the Chicago District almost a year before this killing occurred, and he implies that despite pressure from his office. the investigation of the Solla case has not yet been concluded by the Alcohol Tax Unit. COMMITTEE with respect to this complaint. the Department has unde an examina- tion of the cases reported to the United States Attorney at Chicago W the Aloohol Tax Unit, and the record discloses the following: or a total of 402 unjacketed (substantive) cases submitted to the United States Attorney in the 14-months period from January 1935 to February 1937, inclusive, 365 were filed within 30 days from the discovery of the violation, and of this number the great majority vere submitted Regraded Uclassified 106 F within a pariod of from two to ton Angress: 21 05305 TUTO eximited within as days from the date of the violation: B ward submitted within 20 tays from the discovery of the violations one in only 22 mass are & period longer then 90 Ange after the viola- tion visa discovered before submission of the final dage report. In the Momenths period from January 1, 1935, to December n, 1036, the Alcohol 2nz Unit at Chicago reported 38 Instated (oan- extray) arees to the United States Attorney. It will be resembered that this to the class of cases in which the Department by special investigative affort undertakes to involve the "higher ups," or syndicated operators. In violations of the revenue laws. As is well known, conspiracy cares require a great donl of patience and time for their miscossful completion. They necessitate the use of A vide variety of Investigative methods, and time are frequently based upon the supervision of telephones and the observation of suspects over extended periods. It in maifest that investigations of this char- actor can not be completed with anything 11:00 the same dispatch that applies to the substantive chass nbove reforred to. Mary such casse require months for their completion, and 11 not infrequently happens that after prolonged investigation chass of this kint have to be abandoned without securing 10aml oridonce of the complety of the individuals valor emploion. The following record should de 002- videred in the of the foragoing comunts or the 38 consyimey 00391 prosented to the United States Altorney in the M-months period homtioned, 5 ware relatived within 30 lave from the date of the via- Inston: 4 von submitted within 60 9 0029 submitted within 90 6 ward admitted within in days: 1 was submitted within 100 7 TOTO mismittind vithin 100 days; and 8 were submitted within 210 tays. Neven much cases 621 207 under investigation In the Chicago District. Considering all the CASOS referred to the United States Attorney at Chicago by the Alcohol Tax Unit, 11 account that approximately 04 have boon completed not submitted with a view to prosecution within 30 days of the violation, 6% within 60 days. and 35 within 90 days) and that in only 7 of the dises has the investigation boon prolonged boyond 20 days. This record afforts little Justification for Mr. Inca's charge that investigations are 20mg delayed. The facts in the dolla case, which to the only case offed by Mr. Icoo to substantiate his complaint, are M follows: This wonan was reported to the than District Attorney at Chicago in October, 1934, for I substantive violation which was discovered July 17, 1934; she VIVE later reported to the District Attorney, now Mr. Iroo, for a out- stantive violation which occurred on June 19, 1935; and also WAS The ported for a third substantive violation in May, 1935. The violation Regraded Uclassified 167 30 in ench case visa the operation of an illicit distillery. The plant involved in the second case was vary large, having 5. expacity of 500 gallons. not when the report of this violation was submitted, the District Attorney was requested to dolay proceedings with respect to this violation pending further investigation by the Alcohol That Unit, with A view to the implication of other defendants If possible. This second case renained domant until Justs, 1936, at which time the attempt to emlos & conspiracy case involving other defendants was abamioned, and the District Attorney was requested to proceed on the mibetantive charge against the Solla vone. An indictment This obtained in this case on December 18, 1936, and the work was tried and convicted on April 16, 1937, receiving & Jall sentence of six nonths and a fine of $300. It does not appear, therefore. that the dolay in this case occasioned w the unsurseasful afforts of the Alcohol True Unit to involve other defendents, had any advorse affect upon its ultimate proscoution. Before leaving this point. attention should be called to the fact that Mr. Ime's charge that the investigations undertakes by the Alochol Tax Unit are unduly protracted 1m utterly inconsistent with his other darge, above reforred to, that the Unit does not suffi- siently concentrate upon the problem of bringing important violators before him. It in of course obvious that If syndicated violators, material mon, and those who have financial investments in illicit operations, are to be prosecuted for the important part which they play in the illicit liquor traffic, this can be done only through the expedient of involving then na principal defendants in conspiracy which In the very nature of things on missessfully be made only w long and todious investigative offort on the part of the revenue officers. Alloced illawal narchas and soinures. In the text of his various letters, Mr. 1000 entres no direct reference to this subject, but in the letters referred so by him from the forem of the February and March, 1937, Grand Juries, a statement is m/s to the effect that may aloohol-tax cases have to be no-billed by the Grand Jury for the renson that they are based upon the entry by Aleckol Tax Unit agents into homes and premises of private individuals without the aid of proper search mercate. COMMISSIONER Although Mr. Iges repented this charge verbally in his converse tion with Housrs. Cliphant and Holvering, he has at to time submitted any specific tratances in which onses presented to hin by the Alcohol the Unit have falled of presecution w reason of illogal entry or illegal search. the Department has before it, however, the record of the Grand Jury sitting at Chicago during the month of February, comment with respect to which will. it in believed, suffice to show the mb- stantial facts recurding this particular complaint. Regraded Uclassified 168 - 20 - Seventeen alcohol-tax cases were taken by Assistant United States Attorney Classer before the February Grand Jury. or this misser, 10 wore indicted and 7 were no-billed, and the ovidance is clear that 6 of these latter 7 cames wore no-billed w the Grand Jury on repre- sentations for Mr. Classer the 1 they VOTO based upon illegal search or illegal entry by agents of the Alcohol Tax Unit and that proseou- tion could therefore not be sustained. The Department has made a cereful examination of there aix cases, and mish facts in each case no are believed partinent to the issue here under consideration will so briefly stated. Case No. IN-2019-on September 20. 1936, officers of the Chicago Police Department neised a 350-gallon St. Louis-type still, together with 7,000 gallons of mah and about 400 callons of alcohol. in a one-story from residence on South Volumb Avenue. After this seirure, the case was turnel over to the Alcohol Tax Unit for pressention under the internal-revenue laws. The Government and not in any mg dooper- ated In the seinire. It Is a well-established rule that the prohibitions of the Pourth Americant relating to search and solmure apply only to Federal officers, not that evidence obtained w State officers working integeniently of Foderal officers own so admitted without question in Federal Court. There ware no grounds for no-billing this chao by rasson of a illagal march nal solmers. Case No. IN-1922-This case was made during the investigation of the miniar of as investigator of the Alcohol the Unit in the State of Indiana in May. 1936, by one Harlan Grouch, which has been previously referred to. The investigation in that GIVEN disclosed that shortly after the mander, Grouch returned to Chiengo in company with one James Jacobe and vas arrested by the Chicago police for the possession of 45 callons of bootles alsohol. The investigation disclosed that the alcohol had been sold to Grouch and Jacobs w one Herman David. This licensise will an adopted case. Regardless of the circumstances no rounding this seisure. 18 was ande by State and not Federal officers and the evidence would unquestionably have been admitted in Federal Court had the case boan allowed to 8 to trial. Case No. December 1. 1936, investigators of the Alcohol Tax Unit who had been informed that the defendant was munufacturing liquor, unde an investigation near his premises. Thile in the alley they detacted an unmistakable oder of msh, which was traded to the pronises where the selmure WAS mde. After detecting this odor, the investigators proceeded to the house and knocked on the door. The defendant's wife answered the door, and, being informed by the officers of their identity and purpose. she was noncommistal, stating that her husband was not at home, and inviting the investigniors inside the house Regraded Uclassified 169 - 30 - to avait his return. Then Inside the house, the investigators because cortain that n still WILL in operation in the assessent. Than the name's husband arrived, to wis placed under arrest and a soarch VMS más of the breasent, where a 300-gallon still, together with a quantity of mah, was selved. It to believed that the search in this sase was illegal and could not have been used as A basts for prosecution. Case No. IN-3039-0n November 18, 1936, investigators who had been informed that a still THE in operation in n. care on the north aldo of Chicago, vent to the premises for the purpose of midne an investigation. Than appronching the care they detected an - mistalmble odor of alcohol. the investigators rapped on the carage door, stated that they TOTO Federal officers, and nalsed that the door be opened. The defendant in this case opened the door and was invediately placed unter arrest. The curre was than overshed and B. 300-gallon still, together with lb quantity of mah and alcohol, was seized. The facts In this case indicate a Instful search as M inst- dont so an arrest for a crins conditted in the arresting officer's presence. It 1s believed that Ath proper attention on the part of the United States Attorney this case word have been mistained had it been permited to 6° to trial. Organ yes IN-3000-on December 3, 1936, investigators rate NR in- vestigation of & reported violation on the defendant's premises. On approaching the promises from the alley. the investigators anticed a very promounded otor of formanting mark, which appeared to comate from a two-stall carace located on the roar of the 10t. After determining certainly that the odor we in fact contry from the care they entered the NAME and found an unforground vat filled with mah, with pipes leading to the hours. the of the officers went to the house and rapped on the door. The defendent opened the door and will nated by the officers the 933 in control of the carage. The defendant stated that he was. He TOD thon astred where the still was located, and he stated that It was in the Incoment. the defendent vas placed unter arrost, and lad the officers to the otill, which WIVE found to be a 200-gallon plant of the St. Louis type. No seimure me mis witil after the arrost. It will be noted that in this case the officers are not enter the premises until after they had first adcertained that & felony visa being committed there. It is believed that the search in this case vos good, it having been nade as an incident to a lawful arrest for A orine consitted in the arresting officer's presence. Case no. III-1042-On April 10, 1936, investigniors of the Alcohol Tax Unit want to a garace known M the "North There Garage." in Chienge to investigate a complaint that untaxpaid liquor was being manufactured there. they entered the and found a boy in charge. After revealing thair identity. they asked the boy to show Regraded Uclassified 170 - 31 - them around the carage. As they proceeded toward the rear, they detected an unmistakable odor of formenting mish and heard the noine of a stens boiler. They proceeded to the second floor, where they found a BAR sitting alongaide n steam boiler, receiving tenk, and etill. The still, which vas a 300-gellen copper plant of the St. Louis type, was seised, together with all the paraphernalia, mash, and alcohol. This is A close case. It appears that this search sight be called "exploratory" and perhaps could not have been sustained. On the other hand, it is to be noted that the netrure occurred in a public garage and there were therefore grounds for a contention by the Government that the search did not fall in the category of "exploratory" searches and was good. Rowever this may ba, it is falt that the question whether the search was legal or illegal in this particular case should unquestionably have been left to be raised by defense counsel and passed upon by the Court. The Department's judgment therefore is that of the six cases no- billed by the February Grand Jury on representations by Assistant United States Attorney Classer that they were based upon illegal search and seizure, there was only one in which the circumstances warranted a decision by the Government not to undertake prosecution. In at least four of the remaining five cases the available evidence 10 considered to have been entirely legal and would have afforded un adequate basis for prosecution had the cases been properly presented by competent counsel. In this connection, it will be recognized by anyone having a familiarity with police work that is is inevitable that entries, searches, soisures, and arrosts made in good faith by enforcement officers will in same instances be judicially determined AS illegal on questions ruised by defense counsel, and no protense is mde that there have not been instances of this kind in the Chicago district as in all other districts. But the Department knows of no other Instance in which Government counsel have themselves deliberately undertaken to raise such questions before a Federal Grand Jury as an obstacle to indictment. There to considerable svidence which points to the fact that Mr. Glasser's conduct of the Alcohol-Tax CASSE taken before the February and March Grand Juries was not in good faith. It 10 a matter of common knowledge that grand juries must and de rely wes the prosecuting officers for instructions regarding the law in any case presented to them. Moreover. it is known that the action of the February and March Grand Juries at Chicago is no-billing certain CASSE was taken upon the affirmative recomendation of Mr. Classer and upon his positive statements, usually contrary to fact, that these cases were based upon illegal search and seisure. It is known also that the letter to Mr. Igoo signed by the foreman of the February Grand Jury, condemning the Alcohel Tax Unit and extelling Mr. Classer, orig- insted with Mr. Glasser himself, and there is no reason to suppose that the letter signed by the foreman of the March Orand Jury had any different origin. It will be pertinent to consider these circus- stances in the light of the following statutory provision: Regraded Uclassified 171 - Title 20. use. 406, U.N.C.-I\ shall be the daty of every district attorney to whom any collector of customs, or of internal revenue.¹ shall report. according to law. any case in which any fine, penalty, or forfeiture has been insurred in the district of such attorney for the violation of any law of the United States relating to the revenue, to cause the proper proceedings to be commond and prosecuted without delay. for the fines, penalties. and forfeitures in such CLUB provided, unloss. wen 100 miler and ampiration. he shall decide that such process- Inca cannot probably be matained. or that the unde of public Justice do not require that mah proceedings should be instituted; in which date he shall report the facts in mistors cases to the Secretary of the Transury, and in internal revenue 03,200 to the Commissioner of Internal Reveres for their direction. (R.S. 300, B38; Feb. 37, 1077, c. GO, 000, 1, 19 Stat. 241.) The Ins defining the datins of district attorneys thus Imposes was those officers the daty of proceeding In chees reforred to then w the Buranu of Internal Revenue with & view to prosecution, only in the event ther whall decide that Wra prograding an 270b- ably be mistained on the extéange submitted to than, In view of Dise provision of law, It would be fair to inquire dy 11 RUS that Mr. Classer, If is value in good faith convinced that the six 00265 above refurred to were based upon illegal search 07 seisure, took these CLOSS before the Drand Juny at all. He certainly was under no date to do this. Cm the contrary. compliance with the statute would have required his to comminate his adagivings with regard to these cases, not to the Grant Jury, but to the Commissioner e Internal Revenue, or, M is the practice in such mitors, to the Commissioner's representative at Chicago, the District Supervisor of the Alcohol Tax Unit. It must be presuned that Mr. Igoo and his assistant, Mr. Glasser, are familiar with the law which defines the duties of the offices which they hold. In the face of this 1nt and contrary to its obvious Intent if not its supress provisions, Mr. Olasser presented a musber of casss to the trand Jury in which, as he represented to the grand purers, the evidence will not sufficient to mistain prosecution. Following the no-billing of these cases, Mr. Classer propared & letter assailing the Alcohol The Unit for supposed delinquancies is their proparation and praising himself, and he induced the signature of this letter by the forumn of the Grand Jury. Mr. Igos promptly gare this letter to the newspapers, where it was published along with fantastic statements attributed to Mr. Glasser to the general effect Now district supervisor, Alcohol Tax Unit, of Internal Revenue in case of violations of liquor taxing laws. (sot of Hardh 3, 1937. 44 Stat. 1382. and regulations Lasued thereunder.) Underscoring supplied. Regraded Uclassified 172 - 33 that note bootleg liquor 10 being sold in Chiengo at the present time than in the heyday of the Prohibition pariod. There AFC present here all the alements of is deliberate plot to discredit the endowere of the Purom of Internal Novement at Chicago to enforce the reverns Inwo: there 10 nothing of a bona fide character that is worthy of serious notice by the administrative offloors of this Department. Collection of las from aliand illicit vantara. Mr. Icee complains of the fact stat, as he enve, the Alcohol Tax Unit collects the retail liquor dealer's compational tax from ensies and similar unlicansed planes which traffic in untarpaid spirite. If constutes his critician with this statements "This would soon to be a violation in Itself by reason of the fast that it in effect 11- canses the illicit operator." CONSUMER Mr. Iges's criticism of the practice of the Eurom of Internal Revenue in collecting occupational taxes from parsons selling inter- paid distilled spirite without a license in not ensy to comprehand, since it in no wise impinges upon or conflicts with his jurisdiction and duties M United States Attorney, but falls within the posuliar administrative provines of the Consissioner of Internal Invenue. If his comment is not to be regarded at being thelly gratuitions and intrasive, it is necessary to conclude that, no is perhaps suggested by the statement above quoted. Mr. Iges is of the opinion that this practice not only in unwarranted In law, but constitutes each A via- lation of law as to require his to give the matter his attention in his official capatity as Government prosecutor. To bagin with, it may be and that the practice to which Mr. Igoo refore Is not peruliar to the Chicago district, Incl under long-stant- 100 departmental regulations is the withorm procedure in all the is termal-roveme districts into which the country is divided. It is obvious. therefore, that the Alcohol Tax Unit at Chicago mut be ammented from any blans which my attach to the practice complained of. With reference to Mr. Igoo's opinion that the practice is ille- me. it my be said that the Federal statutes imposing agestal or compational taxe upon sortain classes of persons have been in of- feet for more than sixty years. Among other things they provide that all persons who sell distilled spirits or offer such spirite for sale, mibject to the occupational tax as retail or wholesale liquor dealars no the case my >0, and in this respect they min no distine- $1on between licensed and unlicensed persons, not between persons the Regraded Uclassified 173 - 34 - sell taxpaid spirite and thome who sell unterpaid spirite. The at- ministrative construction base followed the law, M will be evident from the fact that the uniform practice of the Bureau of Internal Revenue has always been to undertake to collect the scoupational tax from all liquor dealers operating in "dry" States: from unlicensed M well as licensed persons selling liquor in "vol" States: and from per- sons selling untaxpaid liquor as well AS those selling texpaid spirite only. whether the State of sale is conta or "dry". In instances where collection can not be nade otherwise, the rule has been to assert the occupational-tax liability of any person apprehended in the sale of spirite in violation of the Federal laws, by the assessment of the tax, with ad valores penalties, for the period covered by his known illegal operations, and this is regardless of whether the spirite sold have or have not been texpaid under the Federal laws. It would appear that Mr. Igos has fallen into the arror common among uninformed people of characterising as a license the tax stamp which is furnished to any person paying the occupational tax in COD- nection with his current business. In this connection, the provisions of Section 3243, R.S., are quoted below: "The payment of any tax imposed by the internal- revenue laws for carrying on any trade or business shall not be hald to exempt any person from any penalty or punishment provided by the laws of any State for carrying on the 8430 within such State, or in any nan- not to authorise the commensement or continuance of such trade or business contrary to the laws of such State or in places prohibited by municipal law; nor shall the payment of any such tax be held to prohibit any State from placing a duty or tax on the 1400 trade or business, for State or other purposes." The occupational-tax stamp Issued to dealers in liquor by the Bureau of Internal Revenue carries the substance of these provisions prominently on its face and, in addition, the following words: Tale 10.0 tax A license. It appears to be well settled that Congress may tax even that which It forbids. It is believed that a consideration of the applicable statutes and decisions should dis- poss of Mr. Igoe's opinion that the issuance of occupational-iax stamps has the effect of licensing illicit operations. Mr. Tgpe 10 substantially correct in his understanding "that the reason for the Alcohol Tax Unit's insisting upon the purchase of & tax stamp from (by) individuals selling untaxpaid distilled spirite, to so that the investigatore one sake a search of the premises after Regraded Uclassified 174 8 the stamp has been termed in asseriance with loo." In Chiongo, as in other large office, there Are may houses of prostitution, spasite and/or, and dives where spirite are sold by the performed or disponsed on the promises In violation of State and local 1/w. Not only do them places every on the sale of spirits without State or municipal License, but, as experted w Mr. Isoo, their liquor stocks not - commonly consist wholly or partly of unterpaid or booting spirits. The difficulty of reaching violators of this class - the usual me forcement nethods in very creat. Y reason of No fast that their Illiois operations are unually carried on in spartment houses and other residential buildings not readily accessible to revenue offi- 0673. It :- often possible, however, to induca the propristor of a -Ince of this kind to pay the Pederal occupational tax, which 1150 valved, ADDITE other things. nationalisment of tax Hability on the propriator's parts and in any once dare this 18 done. the INFORMATION nonth obviously clairs the which for a mussequent periodical inspection of the promises by revenue officers under Section 3177 of the Mevised Statutes. This practice, misch AS 1tr. Inco supports to commonly fol- lowed in the Chicago district, has resulted in considerable progress toward the alimination of the unlo of unterpada spirite at Chicago through discrderly houses art other statter places which are illegal under State and local law - an objective which 1s obvieusly dectrable from the standpoint of protecting time Federal revenues. the mothod Assoribed in legal in story respect, nov? 10 the noot effective nothod which the Department can command to restrain the sale of bootleg spirite through illicit and clunientine retail outlets. Re valid ranson approved the It should be objected to by any United States Attorney. Criticism of Mr. Arthur P. Modden Inecial Account in Chance, Intelligence Unit. Chicago. Mr. Igoo males two specific complaints against Mr. Maddon, the first having to do with IS investigation which he requested Mr. Madden to min of the expressed improper withdrawnl of a large amount of liquor from a certain bonded warehouse in Chicago, and the second with an 1m vastiontion which be likerism requested Mr. Madden to make of the my pound miscon/mot of two inspectors of the Alcohol 2nt Unit in endonver- Las to collect an amount of noney from 5 certain tax The two cases are well movn to the Department. Hornand Brothers. General Bonded Maryhouse no. 3. Chinago, Mr. Igon says that from the beginning of his term of office, & story had Soon in circulation which reached him sometimes over the telephone and constines through non, to the effect that a 100% mount of liquer and been Exproparly vithtrum from N certain Regraded Uclassified 175 - 30 - bonded Be says that he requested Mr. Hadden to investigate this mtter: that Ad a result of this request Mr. Mindden striced Ity. schere. the Department's "publicity mn" at Chicago, that he (Iers) sent Mr. rellowley under investigation; that hn (Igon) throught it strange that Madden should in this my notify one of Tollowley's agents of the fact that Yollowley WILL being investigated; that Itr. Madden has failed to comply with his (Igne's) request for a report of life investigation; and that he (Xgon) lears that If = artin has Seen conditted in connection with the withdrawal of the liquor in question, presemition might be barred by the reving of the statute of limitations. COMMIT The bonded warehouse in question, although not named in Mr. Igen's letter, YOUR General Bonded Warehouse No. 3, the proprietor of which was Worand Bros., Inc. On December 4. 1935, Assistant United States Attorney Classor brought to Mr. Maddon's attention certain claimed irrogularities in connection with this warehouse. Mr. Madden no- signed Special Agent D. I. Clean to Investigate this natter and on December 7. Mr. Cluan called on Mr. Glasser, who advised him that he (Cleaser) had come into the perseasion of certain information to the offect that in the month of January, 1935, 5,000 cases and 150 barrols of whisloy had been removed from this to the merchouse of Valores and McLaughlin. Mr. Classer stated that his information wis to the effect that this had been stored in the Normal Pron.mere- house for a great many years, ml. that storage charges mounting to $10,500 had accrued on 1t, which ware DatA to Morand Pros. at the time of renoval. Mr. Glasser further stated that It was his impression that the Government might have been defraulad of a large amount of money through the unanthorized removal of this Mo stated that Us source of his information was one Don Vacarelli, than an employee of the Standard 011 Company in New York City. and formarly a storekesper CRADE in the of Internal Nevanus. He stated further that Vecarolli in turn had received his information from one Kooniz, At employee of Morand Bron. Mr. Classer indicated that in his opinion A thereach Investigation should be miss by the Intelligence Unit to determine whether the Government had not been defrauded in conne- tion with this transaction. Following his interview with Mr. Olasser, Special Agent Olsen dis- covered that the mtter referred to by Mr. Classer had already been made the subject of an investigation w Mr. linidam's office. Vacarelli had been interviswed at New York City by Special Agent c. L. Converse of the Intelligence Unit on October 33, 1936. In the course of this Interview, Vacarelli stated that he had boon employed as storekesper in the Incroam of Internal Revenue unter Mr. Yollowley until Regraded Uclassified 176 - 37 - some time in 1934, and that in this capacity his last nasignment was in the Morrant Bros. varatiouse; that William Reenic. whom he described as owner of this a had told him that Mr. Yellowley and informed his (Zoonic) by letter that his warehouse would have to be closed and the whinkey stored therein disposed of: that Mr. Koonie had advised Mr. Yellowley that there wild storage Gree on the whichey amounting to $10,000; that after hearing this story from Mr. Loanis he (Vacarelli) looked W the regulations and found a section that provided that when whinkey had been in bonded storage for ten years. the Government could seise 14 and well it in order to collect its tax: that he (Vacurelli) had called this regulation to the attention of certain officeru in Mr. Telloolay's office and had been told to mind his own business: that in conno- tion with the transfer of the whichey from the Morani Bros. VAN- house to the Walcom and HeLaughlin warehouse Mr. Koenis stated to his (Vacurelli) that Walom and McLaughlin were getting a half a million dollars worth of whistory for $10,000, nad that in his (Koanig's) opinion the Government should have selood the liquor and sold It as it had all been In storage for more than ten years) Was in his (Vacarelli's) opinion someone not & lot of noney to allow this transfer to be nate) that in his (Vacarolli's) opinion, Mr. Keenig should be interviewed in connection with this transaction; that Assistant United States Attorney Warren Carridy had sont him A tologran during the provious real: asking his when he would be available to appear before the Federal Grand Jury at Chicago: that reporters of the Chicago American had speken to his about this miter the last time he was in Chicago: and that Alexander Jania and former United States Attorney George 1. & Johnson know about the matter and were considering having it-presented to the Grand Jury, Special Agent Converse stated in his report of this interview that Vacarelli had proviously related this SVIII story to him in the early part of 1935, and that he (Converse) had at that time inter- viewed Keenig as suggested by Vacarelli. In the course of his in terriew with Konnic. the latter stated that in his opinion every- thing was regular in every way regarding the transfer of the liquor from the Morand warehouse to the warehouse of Wakes and Walmighlin. It is believed that the foregoing substantially comprises the information which had reached Mr. Iges regarding the supposed - authorized removal of spirits from the Morand Bros. varahouse at the time when Mr. Madden's office me requested to investigate this mitter. The natual facts regarding the transaction vill now be stated. Regraded Uclassified 177. - 38 - The Mornal Bros. warshouse, known as General Bonded Narchouse No. 3, 10 located at 823-827 Norton Street, Chicago, Ill. This is in a district frequented by cangators and hoodlums, and reported attempts to rob the warshouse were made during the years when it vas used for the storage of spirits, one of which, sono time bo- twoon Fobruary 25 and March 5. 1037, was monoreful. Al though only this one robbery untually occurred, the Morand warshouse, w reason of its undestrable location, had to be closely guarded by revenue officers at all times, and wish a constant 201200 of verry and annoy- nnes to the officers of the of Internal who were No sponsible for its reservision. On October 8, 1934, after informal discussion of the matter with Departmental and Durou officers at Washington, Mr. Yollowley, District Supervisor of the Alcohol Tax Unit at Chicago, mubmitted the following recommendation to the Comissioner of Internal Revonues: "I an writing you recerding General Bonded Warehouse No. 3, operated by Morand Bros., 073-827 Norton Street, Chicago, Illinois. "I have been recomending for the past siz years that the spirite In this warehouse be noved to a don- centration warehouse. The Incrome on several occasions ordered the spirite concentrated but each the the pro- pristor of the warehouse land the reseval postigned 100 definitely. "Thero Are now only 33,345.3 tax gallons In this warehouse. There is very little activity. Stornkeeper- (migers are needed very badly at plants where there is A great doal of activity. It is for this reason and the fast that this warchouse is located in M undestrable part of the city that I an again recommending that those spirite be removed to a communiration warehouse. The namigned there could then be Given nore productive duties. I sincerely hope that you ONA anin issue the concentration order and tint this work can be accomplished as an early date. "I shall amit your realy with interest. "Yery truly yours, (Stened) - c. "Asting District Supervisor." Regraded Uclassified 178 Regraded Uclassified - 39 - on October 31, 1934, an the result of Mr. Yollowley's recom- mendation, the Commissioner of Internal Revenue directed the removal of the spirits from the Morand marchouse. The following are peril- nont extracts from the Commissioner's order: my virtue of the authority vested by Law in the Secretary of the Treasury and by his conferred and 100 posed upon the Commissioner of Internal Reverns. you are instructed to direct the Morand Brose, Incorporated, to effect 22. removal of all distilled spirite stored in Its General Bonded Unrehouse No. 3, 023-837 Norton Street, Chicago, Illinois, to nome concentration warshouse or wire- houses, designated as mah, pursuant to the Act of Pobra- ATT 17. 1923, as reanacted in the Treasury Appropriation Act for each fisanl year up to the present time. Preferably such warahouse or merchouses should be located in Chicago no as to effect the most reasonable transportation costs. Purther instruct the proprietor of General Bonded Warehouse No. 3 that this removal must be accomplished within thirty Engre from the date of this order unless an extension of time is granted X the Depart- ment. ........ "Upen removal of the spirite purmant to this order. payment of accrunt charges against such spirite and trans- portation costs to the concentration wurshouse my be rade (1) by the owner of the spirite (2) w the proprietor of the warehouse from which the spirite are resoved or (3) Y the proprietor of the murchouse to which the spirits are reserved. In the avent the said charges and transporto- tion costs are not remund by the propristors of ofther of the warchouses, the Department will look to the owner of the spirite for mottlement of much conto. "In the event of failure or refusal of Morand Bros., Incorporated, to renove the spirite within the time - scribed in this order, or within my extension of time which my be granted, you AFG directed to report mall failure or refusal to the Department with much rocom- mendation as you my doom approprinte." 179 - 00 - The statutory authority for the transfer of spirite in this is found in Section 3272. h. 3., mailing At follows: "Misser in the opinion of the Commissioner of Internal Revenue any distillery or other warehouse 10 unsafe 02 will for use, or the narchandise therein 19 for my reason liable to loss or great waster. he my discontimes main medical and require the mr chandies therein to be transferred to mah other - house M be my destgnate and within euch time na he may prescribe. such transfer shall be nute under the exporvision of $200 collector, or of such other officer M my be designated by the Consissioner, novil the acquence thereof shall be paid by the cumar of the morthantise. Whenever the owner of mail nor- chandise fails to much transfer within the time prescribed. or to M the gust and proper asspense of much transfer, as amoortained and determined by the Commissioner, stich marchandise by be seized and sold by the collector in the num numar as goods 1279 nold won distruint for tipos, and the proceeds of such mis shall be andior to the payment of the taxe the thereon and the cost and expenses of much male and removal. and the balance paid over to the owner of mach nerchantise." Horand Bros., Ino., cortain difficultion In complying with the order of the Commissioner for the renoval of the spirite, and on December 30, 1934, Mr. Tollowing wired the Commissioner as follows: "Morand Bros. failed tales stops renoval spirits to another warehmise accordance your order October thirty-first. Suggest you dasignate Waloun MoLanghlin or Lawrance warshouse, or both, ISS receiving concer- tration worehouse for these spirite. Shall than magotiate with proprietor designated receiving mre- house with view having him assume storage charges and cost renoval and file necessary papers for yes noval." And he wired the Commissioner again on January 2,1935, A8 follows: "Please designate by wire warshouse to remove spirite Morand warehouse. 300 my telegram December twenty-ninth." Regraded Uclassified 180 - 41 - On January 3, 1935, the Commissioner nent the following tolagram so Mr. Yellowley: "Rotols December twenty-nine and January two inno order October shirty-one for removal spirts from Morand Brothers warehouse to another mirshouse, Durom 1a acreadble to designation of either and Halmyhlin or Lawrance warehouse, or both, as reseiving concentro- tion varahouse and you are authorised to nogotiate with propristor of mar warehouses with view to having them ADDITION storage charges and cost of removal. If such armagements made specific order for concentration will so issued." Acting under the authority to be found In the correspondence here referred to, Mr. Yellowley canned the transfer of the spirite in question from the Morand warehouse to General Bonded Warehouse No. 3, operated by Walam nn/ Malaughlin, at 200 East Illinois Street, Chicago, the transfer being completed February 4. 1935. The transfer was under the direct supervision of inspectors R. ?. HeGrath, 0. L. Studenberg, and n. J. Rusine. Aft will appear from the foregoing. the supposed unauthorized transfer of spirite in this instance will in fact a transfer which had been expressly authorized and directed by the Commissioner of Internal Revenue. It was in accordance with the law and the rega- Intions of the Department, resulted In no loss to the Government but on the contrary diminished the risk of such loss, was supervised by officers of Internal Revenue, and was regular in every respect. In view of the insimuations by It. Igos's informant, perhaps it should be apecially added that in connection with the transfer of tamble norehnalism from one bonded warshouse to another, the Gov- armont preserves all its security and 11ons for the ultimate - nent of taxes. In view of these facts it is consent difficult to uniorstand the basis of Mr. Iges's criticism, bet his complaint apparently Cross out of the fast that in the course of his investigmtion, Mr. Madden, or agents working under his supervision, male certain con- tasts with Mr. rellowley's office, the intended inference svidently boing that these contacts word designed so defent the objects of the investigation. The record clearly shows that the investigation me in fact conducted in a manner wall calculated to bring to light all the facts with referrace to the miter under trquiry. Regraded Uclassified 181 - 42 - Allowed attented artertion by Algohol 25 Unit arents. ltr. Iges writes that on one cooasion two Agents of the Alochol Tax Unit attompted to collect notary from 8 defendant In & case which has been referred to his office for prosecution. No questioned the subject of the attempted collection and accordingly brought the este for to Mr. Madden's attention with a view to having AR appropriate Investigation nate. No any's further that, much to his assoniahment, he later loarned that Mr. Madden had talom the mitor 8 with the local office of the Alcohol Tax: Unit, which last advised him (Maddon) that the action of the two agents was regular. No concludes w maying that Wis the "a rather strange must in which to contract An investigation." COMPUTER The defendent whom lbs. Igon has in wind, although he doos not Monthly him in his letter, to 0730 Thoodors Men. the with one Margaret Born TR&E the proprietor of & Atsorderly house at see Morth Lolant Avame, Chiango, when theme premises ware visited by revenue officers last September. Ries novt linran ware ventors of unterpall alcohol at various locations in Chicago, Including 282 North Loland Avenue, 4451 Bazel Avenue, and 855 Insurance Avenue. A criminal case was name ant against these persons growing out of sales of unterpad pirits at the Leland Avenue address In September, 1936, and out of similar sales mêe at the Lewrence Avenue address in Devember, 1936. and this was referred to Mr. Igno's office for disposition. On March 5, 1930, Mr. Igee addressed the following letter to Mr. Madden # "In ros Theodore Rios and Margaret Horan "I have boon informed by the above named people. that when they voro arrested on November 340 1936, certain suggestions were made so then w nen of the Alcohol Tax Unit, annely Paul Tamillo and 0. Davis, with reference to & mettlement which they sight notes in lieu of tasse. "They further informed 255 that they received tale- phone calle from one of the men of the Alcohol Tax Unit every day for three consecutive days. requesting than to brine $200 down to his, and that If they 414 not he would como w and got them. "It Is w suggestion, in viaw of the above, that on investigation be mão to determine the foots in this case. "Respectfully, (signed) M. 1. IGOH V. 3. Attorney." Regraded Uclassified 182 - 43 - On March 9, at Mr. Maddon's direction, Special Acont Somera, of Mr. Mndden's staff, called on Assistant United States Attorney Glasser with reference to this matter and WM furnished by Mr. Classer with a copy of the following affidaviti 07 RISS "I reside at 937 LaPayette St. I an the anno Theodore Miss who was arrested on Hovember M. 1936, with Margaret Horan for A violation at 985 Lawrence Avenue, where the agents seised one gallon of alcohol. Then we arrived at the New Post Office Duilding as the office of the Alcohol Tax Unit, Presl Famillo not 0. Davis wire sitting alons with us, and Tamillo told us that our taxes would be in the neighborhood of 2000. and that (9) would be acquested to pay that. When I told him I had no much amount of money, he naimal m how moth I had. Than I informed his that I had $000 worth of bornis bonds left, he registed that I anah the Somus bonds M soon M possible, and doliver the $200 to Mr. No also told no that if I burried and cant in the bonds intediately I should receive the money within 5 four days. Mter this conversation 18 was talen orsr to the United States Court Nome and arraigned bafore Don- niscioner Walker. Our dhao was continued before Comie- sioner Walloar and hearing WELL not for December 0. 1036. On the Monday, Tuesday, and telnesday following our appoarance before Commissioner Valler on November 34th, Mr. Tamillo called at Y home every day for three days. and told me that If I d14 not bring the $200.00 down to him be would como w and cot m. After Mr. Twilllo's call of the Vednesday following our before Judge Valker, IF) 414 not 000 him again until he testi- flod in the Commissioner's Court room on December 8, 1938. (signed) "Theodore Rice "I, Margaret Horan, having read the above statement, consur in 11 and my that it is the truth. (31 ma4) Margaret Horea "Subscribed and evorn to before - this 12th drg of January. 1937. (Signed) Deniel D. Glasser "Hotary Public." Regraded Uclassified 183 - 44 It - apparantly the beltef of Mr. 1,000 and his novistant, Nr. Olasser, that the demands nate of the defendante Riom and Norma for Alcohol Tax Agents Tamille and Davis. AS described in the above affidavit, were actortiomic and froutulent in dharao- tor. Under these circumstances, Special Agent Sommers in And 001279 visited the offices of the Alcohol Tax Unit for the pur 2038 of inspecting the files relating to the case, Invusation of the files disclosed that the Investi entions nañe by the Al- cohol the Unit had brought to 11ght the fact that these defendants had insurred a liability for compational and ad valoren penaltive amounting to $442.92, as the result of their liquor sales at the addresses above Given during the period from December 1, 1933, to June 30, 1937: that the propor forms had been filled up by these persons in November, 1936, notmowledging their tax 11s- bility In this ment that the defendant Rios advised Agents Tamillo and Davis at the time, however, that he ase not have this amount of money, but thought he could realise at lenet $200 by cashing his borns policy, and would pay as lasst that amount: that Agente Tanille and Davis thereafter sought on c. minder of occasions to sequre the tender of this maller mant and that the file of the contains an official report of Agents Fundlle and Davis which includes the following statements "Inspector Twilllo phoned Mr. Rios, the wholessler, on November n, and he promised to be in December 1, to pay $200 on his liability of $447.93 AS wholesaler. "On December 1. Inspectors Taxillo and Davis waited, but Xins did not show w.' Special Agent Somere interviewed Us. I. J. Baker, Senior Inspector, Alcohol 2nx Unit. and the superior officer of agents Tamillo and Davis, the advised that he (Baker) had born in close touch with the handling of the Mes-Horan case and was familiar with the afforts rade w the agents to collect the the Since It me this developed that the donands name upon Ries NS described In the above affiderit dated January 12, 1937. had been vale R. matter of official record in the files of the case and ware known to and approved by the expervisory officials of the Alcohol The Unit at the time when the transaction occurred in November, 1936, third ware clearly no prom/s for the muposition that they were axtortionate and fraudulent in character, and Mr. Madden's investigation was closed when there facts were brought to light. Regraded Uclassified 184 - 40 Thile it this - that there is not the allghtest ground for the Icee's criticism of the methods purmied by Mr. Madden in haviling this investigation, there is one further neport of the nutter which armed be commented mon. Mr. Igoo says In reference to the Rice- Homa Incidents "It is V understanding that once a chae 1s referred to the Department of Justice. the disposition of that case romins sectusively with this department." No mans to any that 1000 the Rice-Horan matter had been referred to his office for prosecution, his office, as a antter of law, than because exalusively responsible for It, and any attampt mês thereafter by revome offi- core to collect money from the defendants vas AR improper Intrusion 2 won his jurisliction. The Department disagrees with M-, Ispa's understanding of the law on this point. The reference to a United States Attorney, with % view to criminal prosecution, of n. willing and frandulent violation of the internal-reveme Lum relating to diatilled mirits, has not harotofore been construed as relieving the Commissioner of Internal Revenue of his rusponsibility for the collection of the intornal-revemue taxes found to be tue from the >oraon or persons involved in the violation, oven though the liability for much taxes arises out of the identical circumstances which cive rigo to the original liability: and it has long been the sulform practice in all districts for the Comissioner, by his officer^ and agents, to ADDRESS the occupational taxes and ad valoren penalties prescribed w Inc. together with comodity taxes than applicable, all persons found engured in the illegal unmissiture or sale of distilled apirite, and to purmises the renedies prescribed in the statutes for the recevery of much taxes, independantly of my orininal recording which my be Instituted w the United States attorney. The Department is not but that Mr. Igoo's of the 1.00 La at the bottom of his complaint in this onso, since, if the law 100ml been M he supposed, he nicht have had crounds for the bollef that the notion of revenue officers Tandllo not Davis anounted to not unmarranted interforence with his functions. Under the natual circumstances of the case, however, it is clear, first, that the Aloohol The Unit at Chicago who regularly performing n routine duty in its afforts to effect the collection of tame due from Rice and Moran; and, record, that the nots of agents Tanillo and David were their proper official note in their capacity M inspectors and deputy collectors of Internal reverne. Regraded Uclassified 185 8 Oriticious of Mr. A. Mar Gymball Office of the General Counsel In a separate letter, dated March 20, 1937. Mr. Igoo miss date plaints against Mr. H. Riley Compbell, M attorney of the General Counsel's office, Duram of Internal Revenue, the vas formarly Mr signed to Nr. Igosts office ne Special Assistant United States AB- torney. for the of masteting in front cases. Mr. Igno says that Campbell "1s instating that be must supervies and con- trol all civil matters which ATO new pending In this (Iges's) office. and which are now handled in conjumetion with this office by Carl The Peridas of the office of the Revorue Counsel." Mo says further that for nore than a year past he (Igco) has been forced to spend more than half his time in an effort to protect hinself from unharrasing situations which he to satiafied WIN brought Into extetance through the joint activities of Yellowley, Maddon, and Compbell. No mys further that because of Campbell's willful and permistent refusal to cooperate with him, he advised Garybell (this was some months no, probably December, 1936, M the result of the events in the so-colled Malone case) that he (Igee) could no Longer work with him. It is someshat difficult to comment upon sweeping observations of this character. At Mr. Igoo's instance. the Conoral Counsel of the Duran of Internal Bevenue relieved Campbell from duty in Itr. Igoo's effice in January, 1937. and so far as can be assertained Campbell has since had no contact with that office. The alloged joint activities of Tollowly, Madden, and Gamphell are considered to be entirely Imaginary. Campbell has had as occasion to controt Tellowlay officially. and be anys that even now he has only the alightest acquaintance with him. Since he vas toin out of Iges's office in January, Campbell has been writing with the revenue and special agents on certain important income-bax froud onses which ATO now in the investigative stage. It is believed that Mr. Icco's state- nent that Compbell willfully and persiatently refused to cooporate with him during the time Oneybell VM mealgned to his office, ann be diamissed with the connont that It MM not until after certain user culties arona between Mr. Igne and Carpbell in December, 1936, in connection with the Valone choo, that If Igea raleed any question requeding the character of Gampbell's services. Regraded Uclassified 186 - 47 - Action of Nr. 5, C. Yellowley in Connection With Service Laboratories. st AL. By letter dated April 3, 1037, Mr. Igon formarded to the Terma A. dog of of comminication dated January 9. 1930, directed w Alexander Junio, them Special Agant in Charge in the Buronu of Prohibition, to Goorge 1. & Johnson, then United States Attorney In Chicago, relative to an investigation in 1929 and 1930 of the activities of certain availably donstured alcohol permittees and cover-house in Chinago and other netropolitan cities buring the period from 1922 to 1030. Mr. Irom migrate that this retter should now be inquired Into by the Truesury Department. The informace apparantly intended to that Mr. followley, ad Pruhibition Mainistentor in the 05 Prohibition, and later na District Supervisor in the Incrones of In/tistrial Alcohol. was cullty of - milfessance or nonfessance in connection with the Immence of parmite and the supervision of comittees. COMPUT According to the Dopartment's records, the enso referred to 190 vulted in the indictment of 5029 than one hundred corporations and 130 dividuals, mostly permittees novil cover-houses in Chicago, Nov York, Clovoland, Detroit, and Baltinors, on & charge of conspiracy to violate the National Prohibition Act. Done idea of the thoroughness and the extent of the investigation m/le at the time will be gained from the feet that the case report now in the Department's files consists of more than 2,000 typewritten payment, exclusive of exhibits. It is believed that no purpose would be served X reopening this case. The matter our be disposed of by stating that at the time the case was investigated in 1939 and 1930, the facts in connection there- with were fully known to the Director of Prohibition and later to the Commissioner of Industrial Alcohol: and that these officials found nothing in connection with the investigation that night be regarded as reflecting in the alightent degree on the cluinistration of his office by Mr. Yollowley. In fast, the record shows that may of the penditions who ware finally indicted had previously had their permite revolced as the result of investigations made by inspectors writing wier Mr. Tellowier's direction. Regraded Uclassified 187 - 46 - Genelusion It is our conclusion that the charges and complaints mão by District Attorney Igee reflecting upon certain Treasury offi- cials headquartered at Chicago, as contained in his letters of March 25, March 29, and April 8, 1935, addressed to Honorable Joseph 3. Keenan, Assistant to the Attorney General, are without any foundation, and require no administrative action by this Department. (Signed) GUY T. HELVERING Commissioner of Internal Revenue. (Signed) WM. H. McREYNOLDS Administrative Assistant HNG- (mff to the Secretary. (fh Regraded Uclassified 108 April 27, 1937. MEMORANDUM FOR THE SECRETARY: In re: Collector of Internal Revenue C. E. Moore, Assistant Collector of Customs C. W. Pollock, Secret Service Operative in Charge 1, G. Harper. An investigation of the alleged participation of Treasury officials at Cleveland, Ohio, in a liquor sales agency, developed that the above named persons became associated in the Ohio Sales Syndicate during April 1934, each acquiring & twenty percent interest in the profits without any investment therefor. This syndicate was created as the result of negotiations commenced by Secret Service Operative in Charge Bert C. Brown, Detroit, Michigan, since removed from the service, who was in- strumental in organizing Famous Brands Ohio, Inc., of Detroit, Michigan, during August 1933, the sales agency for the American Distilling Company in Michigan. The Ohio Sales Syndicate was created to act as a sales agency for this company in Ohio. From April to December, 1934, inclu- sive, Mesors. Moore, Pollock and Harper each received an income of $8,293.14, Collector Moore being paid $1,503.98 in addition for sales promotion services. On January 1, 1935, the syndicate was incorporated as the Famous Brands Ohio, Inc., and stock issued according to the interest of each syndicate member. Mesers. Pollock and Harver received 18 shares each, 13 shares were issued to Collector Moore's wife and a nominal price of $5.00 per share was paid. After the agency was incorporated additional dividends totaling $1,620.00 were paid to each up to the time the investiga- tion was commenced, July 2, 1935. A hearing was held at the office of the Secretary of the Treasury, July 24, 1935, to afford Messrs. Moore, Pollock and Harper an oppor- tunity to explain their connection with this agency. As a result the Secretary directed that Messrs. Moore, Pollock and Harger should either diapose of their interests in the agency and forfeit to the United States Treasury all profits realized by them from that business, or sever their connection with the Treasury Department. Collector Moore was noncommittal in his replies but finally, Decem- ber 16, 1935, he wrote to the Secretary stating that he proposed "to return to the company such profits as I realized from this transaction when and as I am able to do so". Prior to the date of Collector Moore's Regraded Uclassified 189 - 2 - letter, Senator Bulkley had, on December 6, 1935, written to Secretary "orgentheu indicating that the return of such profits would be made to the Famous Brands Ohio, Inc., and that the company would then pay them over to public charity. Mr. Pollock wrote a letter to the Commissioner of Customs, December 26, 1935, stating "I agree to contribute to charity, as I am able, the profits I have received, under the same arrangement made by Collector Moore". Mr. Harper wrote 8. letter to the Chief, Secret Service, under date of January 2, 1936, stating: "I will undertake to return the profits I have made ⑉", There were no further developments until September 24, 1936 when a letter was written to the Famous Brands Chio, Inc., to obtain information as to whether profits had been relinquished by Messrs. Moore, Pollock and Harper but no reply was received. It subsequently developed that this company liquidated shortly thereafter, certificate of dissolution having been filed December 21, 1936. A further investigation was then made during January 1937 to deter- mine whether Messre. Moore, Pollock and Harper had complied with the Secretary's instructions. This inquiry developed that subsequent to the hearing on charges at the Secretary's office, July 24, 1935, Messrs. Pollock and Harper, and Collector Moore's wife, each received $3,060 additional in dividends on the Famous Brands Ohio, Inc., stock. The stock of Collector Moore's wife was held by her until January 10, 1936 when her father, who resides with Collector and Mrs. Moore, acquired the stock and thereafter endorsed over to her checks for divi- dends issued to him in the total amount of 2,070 which were deposited in her bank account. Mr. Pollock's stock was transferred to his wife December 20, 1935, and on April 21, 1936 this stock was acquired by a next door neighbor, Mr. Charles Michel, Jr., who states he paid Mrs. Pollock $720 for it. A dividend check in the amount of 1720 was issued to Mr. Michel but his check for $720 to Mrs. Pollock, purporting to be the cost of the stock, WSE not charged to his bank account until the dividend check was received and deposited, thus in effect resulting in no cost to Mr. Vichel. Mr. Harper's stock was acquired by his wife January 10, 1936 and on April 17, 1936 it was transferred to Mare J. Wolpaw, B former Asistent United States Attorney, Cleveland, Ohio. Mr. Harper states he sold his stock for 15.00 per share, or $90. It will be observed that not only did Messrs. Moore, Pollock and Harper fail to relinquish to Famous Brands Ohio, Inc., profits realized by them from this venture, but on the contrary received substantial eddi- tional income from the liquor agency after official notice that their association was considered reprehensible and instructions given to them that they should forfeit the profits already received. Regraded Uclassified 190 - 3 - Mr. Gardner Abbott, President of Famous Brands Ohio, Inc., now in liquidation, stated on January 29, 1937, that no repayments of profits were made by Messrs. Moore, Pollock and Harper. On the same date Messrs. Pollock and Harper admitted that they had not returned any profits to the liquor agency to date and both indicated that they did not contemplate making any immediate payments. It was also indicated that Messrs. Pollock and Harper have been guided by Collector Moore's action in this matter. Collector Moore was not interviewed as he was ill at the time of the recent investigation. When the evidence of the association of Messrs. Moore, Pollock and Harper was first brought to the Secretary's attention, it was and still is considered to be a grievous offense and removal from the service was deemed to be the proper disposition. It was only after a further con- sideration of the case that it was decided to be lenient and permit them to remain in the service by relinquishing all interest in the liquor business and divesting themselves of all profits received. This they agreed to do, but the evidence established as a result of the recent investigation definitely shows that neither of them made any honest effort to comply with the Secretary's instructions, but on the other hand continued to flaunt the Secretary. mcPepulds Regraded Uclassified