Volume 147, October 21 – October 25, 1938

DIARY Book 147 October 21 - October 25, 1938 Regraded Uclassified Book Page ánglo-California National Bank (San Francisco) Fleishhacker, Herbert: Resignation discussed by a) HMJr and Upham - 10/21/38 147 69 b) If If Jones - 10/25/38 343 e) " If Preston Delano - 10/25/38 345 - B - Barter Germen and Japanese practices discussed by HMJr, Taylor, Oliphant, and White - 10/25/38 394 Oliphant memoranda and possible letter to Hull - 10/25/38 418 Budget Public Works Administration Appropriation Act of 1938: Breakdown by departments and agencies 29 Conference at HMJr's home on national income and Federal budget; present: Mr. and Mrs. HMJr, White, Henderson, Currie, Lubin, Means, Eliot, and Ezekiel - 10/23/38 204 Bullitt, William C. See France: Plane Mission Business Conditions Haas resume for week ending 10/22/38 269 - C - China Meeting on possible agreement; present: HMJr, Hanes, Taylor, Oliphant, White, and Lochhead - 10/21/38 70,348 a) Drafts of letter to FDR discussed b) Tung oil contract involving $42 million: HMJr tells Hanes to "make it for three years - more palatable to FDR" - 10/21/38 136 1) Hanes agrees; thinks similar contract for bristles next Silver: State Department feels any United States move to acquire property rights in silver located at Tientsin is inadvisable - 10/21/38 141 Jones (Reconstruction Finance Corporation) letter concerning suggested loan of $20 million by Export- Import Bank to a Chinese-owned American trading company - - 10/24/38 279 HMJr proposed memorandum to FDR concerning various plans under consideration 387 Taylor memorandum disapproving aid to China unless same credit 18 made available to Japan 391 Conference at HMJr's home; present: HMJr, Chinese Ambassador, Chen, Hanes, Lochhead, and White - - 10/25/38 435 a) Fall of Canton and Hankow, possible fall of present government and BO fate of proposed agreement discussed Regraded Uclassified - C - (Continued) Book Page China (Continued) State Department answer to second of two questions concerning Chinese section of Kowloon-Canton Railway - 10/25/38 147 442 - F - Federal Farm Mortgage Corporation 3% bonds of 1944-1952: Bell memorandum to HMJr concerning - 10/24/38 293 Fiscal Committee See National Resources Committee Fleishhacker, Herbert See Anglo-California Bank (San Francisco) France Plane Mission: Bullitt and Monnet to confer with HMJr - 10/21/38 36 a) Dine with HMJr; had just been to Hyde Park; French corporation to build airplanes in Canada discussed - - 10/22/38 185 White memorandum: Copy left with FDR - 10/21/38 39 HMJr asks Peoples to see Monnet - - 10/24/38 252 - G - Germany See Barter Giannini, Amadeo P. McIntyre tells HMJr he is going to ask Giannini to stop writing to him - 10/24/38 259 - H - - Husbands, Sam Application for $12 million loan discussed by HMJr and Upham - - 10/21/38 69 - I - Internal Revenue, Bureau of Reorganization: Speaker Bankhead consults HMJr about regional office in Birmingham rather than in Atlanta - 10/21/38 11 Regraded Uclassified - J - Book Page Japan See Barter Japanese-owned Fishing Boats in Mexican Waters Navy reports to HMJr a) HMJr acknowledges 10/21/38 147 15 - M - Monnet, Jean See France: Plane Mission - N - National Resources Committee Fiscal Committee: First meeting discussed by FDR and HMJr (HMJr reports to Hanes, Gaston, White, and Haas) - 10/25/38 380 a) Haas memorandum on conference with Ruml regarding research investigations of budgetary problems - 10/21/38 384 New York State Farley and HMJr discuss coming election - 10/24/38 265 - P - Peru Colonel Fuchs, special envoy, consults Treasury concerning arrangement similar to one made with China and Mexico for United States purchase of total annual silver production - 10/21/38 139 Portugal HMJr's letter to Jesse Jones concerning extension of credit by Export-Import Bank to Portugal - 10/24/38 295 Procurement Division Memoranda from Peoples to HMJr and from HMJr to FDR concerning "Aviation Procurement Committee" - 10/24/38 288 Public Works Administration See Budget Regraded Uclassified - R - - Book Page Reconstruction Finance Corporation Conference on refinancing Series K notes; present: Taylor, Bell, Broughton, Kilby, Foley, and Tietjens - 10/21/38 147 137 a) Announcement - 10/24/38 280 b) Success discussed with Jones - 10/24/38 261,309 1) Discussed at 9:30 meeting - 10/25/38 323 c) Success discussed with Sproul. 263,306 d) Closing of subscription books - 10/25/38 316-A HMJr tells Bell to close books 307 Refugees FDR tells HMJr he has told British Ambassador he will stand for no nonsense - 10/25/38 375 - S - Silver See China " Peru South America Governmental loans to; present at conference: HMJr, White, Burgess, Stewart, Warren, Goldenweiser, Gardner, Riefler, Viner, Williams, and Oliphant - 10/21/38 146 Stabilization Conference on sterling exchange rate; present: HMJr, Taylor, White, Lochhead, Viner, Riefler, Goldenweiser, Williams, Burgess, Walter Stewart, Robert Warren, and Feis - 10/21/38 74,146 a) White memorandum: "Dollar-Sterling Situation" - 10/21/38 130 Switzerland Burgess asks HMJr to see Straesle, head of Credit Suisse - 10/24/38 254 - T - Taxation Knollenberg article, "The Supreme Court and Tax-exempt Income" (Harper's, October 1938), forwarded to HMJr by Spingarn 202 - V - Van Zeeland, Paul HMJr and Taylor invited to Belgian Legation to meet Van Zeeland 337 - W - Works Progress Administration Lonigan memorandum on total number of workers as of 10/15/38 301 Regraded Uclassified 1 GROUP MEETING October 21, 1938. 9:30 A. M. Present: Mr. Oliphant Mr. Gaston Mr. Haas Mr. Taylor Mr. Hanes Mr. Upham Mr. White Mr. Viner Mr. Lochhead Mr. Gibbons Mr. McReynolds Mrs. Klotz H.M.Jr: Herbert, do you want to change those blinds for me? Gaston: Yes. Is it right that Dr. Benes is coming to Chicago? Viner: Uh huh. H.M.Jr: Fine. I congratulate you. This, I understand, has been written at the request of Guy Helvering. See that gets a copy of it. I have only got that one. Just attach a copy of it. He just asked for it. McReynolds: I'll look at it, and see. H.M.Jr: What? McReynolds: I'll look at it, and see. H.M.Jr: Anything else? McReynolds: Just a minute; the General Motors has been putting on a Parade of Progress in a hundred twenty-seven cities, quite a scientific show; they're going to put it on, starting next week, here. It will be on this open plot back here at the corner. Their men were in yesterday evening to see me, and I called Herbert. They are offering to give to the Regraded Uclassified 2 - 2 - Treasury a free showing, before the show opens - get a chance to go through it - lots of scientific history, scientific development to it - and if you would care to go see it, they would give us a preliminary showing. H.M.Jr: No; no, my price is higher than that. McReynolds: So I'll ..... H.M.Jr: No thanks, not for myself. No. Thanks very much. Anything else? McReynolds: I've got nothing but a couple White House letters here you asked me to talk about; no hurry about it. H.M.Jr: Yeah. Dan? Bell: I have nothing this morning. H.M.Jr: (Nods to Mr. Lochhead.) Lochhead: The exchanges are all quiet. H.M.Jr: Dan, could you give me - let me have it Monday - how much is the United States Government doing in the way of Public Works, for the last of my message, which do not show up in the Budget? Bell: Just the Government - Federal? H.M.Jr: Federal. I mean, use the - as an example, Straus' organization. Huh? Bell: Uh huh. H.M.Jr: How many things like that are we doing; how much does it amount to, in dollars? Huh? Bell: Yes sir. H.M.Jr: Make it part of that other thing I want. And how many of the things are we doing could we throw into that category? And, for instance, why do they, in the case of Pennsylvania, make the toll higher, rather than doing something else? And it isn't - who decides whether there should be a levy to produce this thing, or whether there shouldn't? Regraded Uclassified 3 - 3 - Bell: Well, that Pennsylvania thing came under a corpora- tion up there especially set up by the legislature, and was a Public Works program. Lochhead: Out to get some P. W. A. funds which is outside of the regular state government, because of limita- tions put in the Constitution from that state. H.M.Jr: Well, is that - is that a good model? Bell: About the only way to handle it. I shouldn't think so, no. H.M.Jr: You see what I am thinking about; are there others which are better? Could we throw the thing into things which could be financed, and well - ah - I guess - is Bolder Dam, is that - is that - is that a good example? Bell: Well, Bolder Dam was an excellent project. The contracts were all signed before a spade was ever stuck in the ground, and the revenue was, assured to pay the Government back their hundred and sixty million dollar investment, and it still is a good project, but what I am afraid, before it is over, the rates now applying in the Bolder project will be changed to comply with Bonneville and some of the others that are not so good, and we won't get our money back. H.M.Jr: What about the Southern Water District? Is that the transmission line from Bolder Dam? What was that that the R. F. C. sold sixty - sixty-five million dollars, and they pledged to hold the Southern California ? Bell: That was another thing. H.M.Jr: What was that? It did show the transmission, or something. Bell: That was the power company, I think. H.M.Jr: How much are we doing, of the things that do not appear in the Budget, and how many - what sort of things could we do in the way of Public Work lines which could be thrown in that category, which would not show up in the Budget? Regraded Uclassified 4 + 1 I Bell: It will require a little study. H.M.Jr: As to what we are doing now wouldn't require it. Bell: I think I can have something on it. H.M.Jr: Thanks. (Nods to Mr. White.) White: We've got something here with reference to the sterling rate as applies to the negotiations with the English, but I presume you want to postpone that until later in the day. H.M.Jr: That is right. (Nods to Mr. Gibbons.) Gibbons: (Nods "Nothing.") H.M.Jr: You're very solemn; you're not worried about the New York State election? Gibbons: I don't think there is going to be any election up there, is the way I feel. That was a funny thing I asked about the other day - those two lawyers that's running - are they still taking different sides? Ah - you know, your Oliphant: Eddie? No, you're mistaken about Eddie. Gibbons: The other fellow told me Oliphant: I'll tell you sometime what he told me - if Lehman ran against him. H.H.Jr: You fellows are a little beyond me. Gibbons: Incidentally, Bob Wagner is certainly having a terrible time getting any funds - people that will contribute to the Democratic party. H.M.Jr: On Section two-eleven? Gibbons: I am telling you abou what - personally, it is funny - I mean, people contribute to the party - Labor Relations Act. Regraded Uclassified 5 5 I I H.M.Jr: Be sure. You're on that ...... (speaking low) You (Mr. Viner) want to give us a little pure economics? Viner: It's gotten a little adulterated of late - New Deal stuff. I am not even sure of that now, whether my memory's straight. White: Get it a little adulterated; it will be useful. H.M.Jr: I read your two memoranda last night, Cy; as far as I could read, it seems you are doing everything you can as far as the West Coast situation is concerned. You're sitting tight. Upham: I have a tentative draft of a letter following up to one of the banks, which I'd like to refer to these ..... H.M.Jr: If you get that, it will be fine. (Some words not understood.) Upham: 0. K. Hanes: (Hands H.M.Jr. a letter.) Got that thing on the German situation. H.M.Jr: (Looks at memo after talking low to Mrs. Klotz.) Hanes: The last paragraph will tell you he's just making an exception in this case; it will not have to divulge the names to pay the tax. H.M.Jr: And it's all done? Hanes: All done. H.M.Jr: I'm not used to such service. Thank you very much; that's very nice; thank you very much. What else, John? Hanes: That's all I've got. I've got the first draft of that letter which you want to write, which I'd like to take up with you. H.M.Jr: I'm going into this meeting with the economists at ten, and may be able to come up for air this after- noon; I'll see. Regraded Uclassified 6 8 - 6 - White: We've got in fine shape that contract we have drawn. Hanes: I haven't been over there yet. H.M.Jr: Mac, talking with John Hanes about Phil Young, McReynolds: He dropped in this morning. H.M.Jr: Oh, I'm sorry I told him he could pay him whatever is necessary in order to get him. We thought you'd have to pay him five. McReynolds: Yes. H.M.Jr: You go to Hanes about that. Is that right? Hanes: (Nods "Yes. H.M.Jr: Or am I going too fast? Hanes: No, that's all right with me. H.M.Jr: Isn't that what you want? Hanes: Didn't hear you. H.M.Jr: I told Mac you talked to me about Phil Young, and it's all right with me to pay him enough to get him. Hanes: Good. H.M.Jr: Huh? Hanes: Good. H.M.Jr: You thought that five would do it. Hanes: I don't guarantee that, because I haven't talked to him about it; he said he wouldn't come for the price he's talked to Mac about. He didn't want to change for that price. H.M.Jr: Was Duffield satisfied? McReynolds: Oh yes; he's ready to come, just as soon as .... probably the first of November. 00 H.M.Jr: And you explained the salary to him. Regraded Uclassified 7 - 7 - McReynolds: Yes. H.M.Jr: Anything else? Hanes: No. H.M.Jr: Wayne? Taylor: The Peruvian man is coming in at three o'clock this afternoon for his first conversation. H.M.Jr: Good. Taylor: Have you got any particular idea about it - or just listen? H.M.Jr: No, no idea. What do they call their money? White: Sol. H.M.Jr: Yeah. I haven't got a "sol." Taylor: We're also going to be asked, within the next couple of days H.M.Jr: Yes. Taylor: to name a three-man mission, to go to Cuba. H.M.Jr: Well, now, let's talk about that with these people at ten o'clock; let's talk to them about this whole business; I want to talk to them about South America as well as sterling. Bring that up, see? Taylor: Sumner Welles told me that yesterday, that it was coming, and he wanted particularly for us to send the best we have. H.M.Jr: He told me about it a couple weeks ago, but I don't know - I'd like to get these men's advice, and maybe out of this group we can get somebody to go down there. Jake looks as though he might like a couple of weeks in Havana. Viner: As long as it's in the winter time. Taylor: It might be more than two weeks. Regraded Uclassified 8 - 8 - Gaston: Jake gets too much publicity when he's left alone, and I think he might have to have some help. Viner: With your help, Herbert, fine. Say, I ought to charge the Treasury for a secretary to answer all the letters people write asking me for jobs here. H.M.Jr: Ah - well, that's Viner: Or maybe you will give them all jobs, I don't know which. H.M.Jr: I'm sorry; the W. P. A. rolls are full. Wayne, anything else? Taylor: (Nods "No.") H.M.Jr: George? Haas: I have nothing this morning. H.M.Jr: Herbert? Gaston: Duffield told me that Hogate hoped that this thing could be put on the basis of a loan, and I told him, of course, a loan of his services would not be; I told him, of course that couldn't be done. H.M.Jr: A loan? What do you mean? A loan of his services? Gaston: Yes. H.M.Jr: No. Gaston: I told him that, of course, we couldn't do anything like that. H.M.Jr: No. Gaston: I did something rather unusual yesterday. I asked the Washington Times not to print a story which is perfectly true, and they agreed not to print it. We have been getting shipments of raw opium for storage supply. They had an accident down in the railroad yard; a couple cars were ditched, and one of them was our car of raw opium, and some of the railroad men talked pretty freely about it, and the Times had pictures and were prepared to run a Regraded Uclassified 9 - 9 - story. Harry Anslinger thought it would be very dangerous to print it, and they agreed not to print it. Gibbons: How much opium was in it? How much of a quantity? Gaston: I don't know; it was a pretty large quantity - a carload of opium. H.M.Jr: Do they always ship it that way? Gaston: They seemed to have been shipping it that way for sometime, and nobody learned about it; it's been coming in here very quietly. H.M.Jr: Does it go to our vaults? Gaston: Yes. It's in part for ordinary reserve, and it's in part for military supply. Viner: (Talking to Mr. Upham.) H.M.Jr: What does Jake say? Upham: Getting ready for a new session of Congress. H.M.Jr: Is that what he said? Upham: Yes. H.M.Jr: Why should we? They're "dopes" already. (Laughter) All right. Can I thank you (Mr. Gaston) and Cyril for the follow-up you've done on one Mr. Kiplinger? I hear he's reformed. Gaston: Thank you, Mr. Upham. H.M.Jr: I say "follow-up" because I claim an hour and a quarter with that fellow myself. Believe me, I never talked to anybody the way I talked to him. Gaston: I think that thing that Shelton brought up to us was pretty much of a feeler; I don't think he really intended to print it. H.M.Jr: Anything else? Regraded Uclassified 10 - 10 - Gaston: Nothing else. H.M.Jr: (Nods to Mr. Oliphant.) Oliphant: (Nods "Nothing.") H.M.Jr: Let's see, ten o'clock, we have this meeting. All right. Regraded Uclassified 11 Friday October 21, 1938 12:12 p.m. HMJr: Hello. Operator: Speaker Bankhead. HMJr: Thank you. 0: Go ahead. HMJr: Hello. Speaker Bankhead: Hello. HMJr: Henry Morgenthau, Jr. B: Mr. Secretary, this is W. B. Bankhead. HMJr: How do you do, sir. B: I'm all right. How have you been? HMJr: Oh, I've been better and worse. B: Yeah. I called you up about a matter that our people down here in Birmingham and all over this section have been very much interested in. Ah - It relates to the location of the regional office involved in your decentralization of the Bureau of Internal Revenue. HMJr: Oh yes. B: Now, when this program was first announced, Mr. Secretary, they - Louisiana and Mississippi, Tennessee, Alabama, Georgia and Florida were the states they said were going to be involved. HMJr: Yes. B: And the Chamber of Commerce at Birmingham and a lot of other civic organizations in this area were very anxious to get that ah - headquarters located in Birmingham. HMJr: Yes. B: Now, ah - I've received in- - we've received information that since the original states were layed out that ah - in fact I have a letter from Regraded Uclassified 12 - 2 - Mr. Hanes about it. HMJr: Yes. B: Who is Acting Secretary. - That Louisiana and Mississippi have been cut off of that list and that they were now thinking about putting that office in Atlanta. Well now, very casually, Mr. Secretary, Atlanta has just about got everything - every regional headquarter in this Administration. HMJr: Yes. B: And our people over here in Alabama - and I share in it - have gotten pretty sensitive about it. HMJr: I see. B: We don't think it's fair to us. And I'm asking you to see if you can't re - have that matter reconsidered and let the original geographical division stand and consider Birmingham for that assignment. HMJr: Well, I'll be very glad to look into it and I - and I'll - and find out just where - B: I think it could be done and we ah - we people over here in Alabama feel like we're - and Birmingham - that we're entitled to some of those things. HMJr: Yeah. Well - B: We don't have to be - ah - you know, we go along over here in Alabama. HMJr: I know you do. (Laughingly) B: Atlanta has just practically gotten everything. Of course I don't blame them but ah - it's a fact that practically all of the regional head- quarters of any importance under this Adminis- tration in this area have been put in Atlanta. HMJr: Right. B: And my people, the Senators Hill and Senator Bankhead and all of us can't understand why we don't get a look-in every now and then. Regraded Uclassified 13 - 3 - HMJr: Well, you're willing to leave the Federal Prison there, aren't you? B: Huh? HMJr: You're willing to let them have the Federal Prison? B: Federal Prison? HMJr: Yes. At Atlanta. B: (Laughs) Yes. All right. That's there too you know. HMJr: All right. Well, give - B: But now, Henry, listen - HMJr: Yeah. B: I'm deeply interested in this. HMJr: Well, give me a chance. B: I'm appealing to you - I don't ask for many favors - HMJr: I know. Very few. B: - from this Administration. And I feel like that we ought to have a reconsideration of this. HMJr: Well, I can assure you if it's just a question of flipping a coin you'll get it. B: Well, I - - I'll appreciate that very much. And Louisiana and Mississippi could be retained in there and Birmingham would be right square in the center of that area. HMJr: Well - B: Physically and everything else. just HMJr: If it's/a question of tossing a coin I'm for you. B: What's that? HMJr: If it's just a question of - if it's a tossing a coin - if it's a matter of close decision, you see, - where it should go, I'mfor you. Regraded Uclassified 14 - 4 - B: Well. Well now you - you talk to Mr. Hanes about it, he's been handling the matter. I want you to do that for me. HMJr: I'll do it today. B: Well, I want you to. HMJr: I'll do it today and ah - I'll go right into it. I'll be glad to. B: And will you let me hear from you? HMJr: I certainly will. B: Thanks verymuch. And - and good luck. HMJr: Thank you. Same to you. Regraded Uclassifie 15 October 21, 1938 My dear Mr. Secretary: Thank you for your confi- dential letter of October 5th. I shall appreciate your making available to me any addi- tional information you may receive on the activities of Japanese- owned fishing boats in Mexican waters. Sincerely yours, Nmp. (Signed) H. Morgenthau, Jr. The Honorable The Secretary of the Navy. 16 October 21, 1938 My dear Mr. Secretary: Thank you for your confi- dential letter of October 5th. I shall appreciate your making available to me any addi- tional information you may receive on the activities of Japanese- owned fishing boats in Mexican waters. Sincerely yours, (Signed) E. Morgenthau, Jr. The Nonorable The Secretary of the Navy. Regraded Uclassified 17 Home THE SECRETARY OF THE NAVY WASHINGTON (SC)A8-5(1)/EF37. 5 October 1938 CONFIDENTIAL Sir: The enclosures, which are copies of reports received from a source believed to be reliable, are for- warded for information. In this connection, it has been further reported that the Japanese population on the Pacific Coast of Mexioo was increasing rapidly, that Japanese owned tuna boats from San Pedro and San Diego were leaving these ports with skeleton crews, stopping in Mexico to man their boats with recently arrived Japanese, would bring these men to San Diego as members of their crews and there obtain seamen cards for them to land. These Japanese would then dis- appear and the same boat would again leave with a skeleton crew to pick up more Japanese in Mexico. The American consuls in Guaymas and Ensenada, Mexico, have endeavored to stop this practice by refusing to visa the crew mani- fest, but the situation still exists. Respectfully, The Honorable, The Secretary of Treasury. Enclosures: (3) CONFIDENTIAL to beans, All Regraded Uclassified 18 Los Angeles, California January 11, 1938 I have been at Guaymas, Sonora, Mexico, since about April of 1933, engaging in the fishing industry, together with my associate, an American eitizen. I am also an American oitisen. In our fishing operations, we have used American capital and Ameri- can vessels, and have conducted our fishing operations in the Gulf of California, basing at Guaymas. During the last few years, TO have concentrated upon the catching of shrimp, and - were the first persons to produce and ship shrimp from these waters in commercial quantities. This we were only able to do after the expenditure of large sume of money in the development of nets for deep sea fishing of shrimp. Before We commeneed our shrimp operations, a small quantity of shrimp had been produced by Mexican fishermen, using cances, fishing in the lagoons for only a short period each year. Our success soon attracted the attention of the Japanese. First, I will attempt to give some history as to the operations of the Japanese up to 1936, when their roal invansion of the waters of the Gulf of California begen. In 1931, & large Japanese vessel came into the Gulf, and dropped off six small sampane, each of about 26 feet in length, and using 10 horse power Japanese Bolindo engines. They went into Guaymas, and stated that they wished to work with Mexican labor M fishermen. These fishermen were placed aboard mall boats, but were not used, as the Japaness did any work that was to be done. The boats went up and down both Coasts of the Gulf, doing very little fishing. Had they eaught any shrimp, they would have had no means of getting it to any market, as they had no 100 on board, and even 80, the holds on each of these boats would only hold less than a ton of shrimp with ice. They checked both Coasts as far North as the North end of Tiberon Island, taking special interest in a reef of 15 fathoms that lies midway between the south end of Tiberon Island and the North end of San Pedro Martir Island, 9. place where it is most unusual to find shrimp. It was at about this time that the Mexican Government became suspicious of the actions of the boats, and sent soldiers overland from Guaymas to Kino Bay. & distance of ninety miles, and on the protext of not being immigrated properly, the Japanese were brought back to Guaymas, deported to Japan, and the boats confissated. In 1931 or 1932, the Japanese made another attempt at fishing, basing on Topolobampo, Sinalea, using all old steam schooner called the "Marta Buner", once an American bettom, but at that time under the Mexican Plag. This expedition was headed by a Japanese Regraded Uclassified 19 ÷ by the name of Shin Shibate, who lives in Long Beach, California. Be has conducted many expeditions in Mexico, all of which have failed as far as fishing is concerned, but regardless of the number of failures, he never come to be financially embarrassed. This may be due by reason of his being financed by Japanese or illieit operation. The expedition of the "Marta Buner" THE a failure. In February, 1934, three very well-dressed Japanese came to Guaymas, and stated they wanted to hire a small boat to investi- gate fishing conditions in the Gulf of California. The Mexican that was placed aboard the boat to operate it, was instructed to observe everything that was being done by the Japanese. Two days after this boat left Guaymas, the writer was fishing on an American boat at a place called the "Tasticta" Lagoon, about fifty miles Worth of Guaymas, and about ten o'olock of the third morning, the small boat carrying the Japanese was seen to come out of a mall bay called "San Pedro Bay" about ten miles South of Tastista. San Pedro Bay is one of the very few fresh water holes between Guaymas and Kino Day. Although TO were fishing at the time, and despite the fact that the Japanese stated they wished to investigate fishing conditions they were not interested enough to stop and observe our operations, but proceeded towards the middle of the Gulf and passed on to the North. When this small boat returned, after a two weeks' trip, the Mexican Captain reported that the Japanese did not fish, and made no attempt to determine and locate fishing grounds, but did nothing but check water holes, taking soundings, and take many pictures, both movies and stills. In the Fall of the year 1936, the Mitsui Company, which is the well-known Japanese corporation, whose attention had been attracted to shrimp fishing operations, sent the aforementioned Mr. Shin Shibata to Guaymas, Mexico, as their representative to under- take fishing operations for them. At first, they used American boats, obtained from San Pedro, California, and there was quite an influx of Japanese into Guaymas, but due to the opposition of the Mexican citizens, a. great many of these Japanese left, although a considerable number remained. The Japanese were unable, at the beginning, to catch shrimp, because they were unaware of the fish- ing grounds, and did not have the proper nets. They attempted by bribery to have our employees divulge information to them, and were able to copy our note and boards. The few shrimp that were caught were in very pear con- dition, and when the same reached the United States by rail, were not fit for human consumption. This expedition was a failure. When Mr. Shin Shibata and the Mitsui Company first N° rived at Guaymas, they were accompanied by two Mexicane - one, & General Iturbe, and Mr. Valdes, both being Mexican Government Regraded Uclassified 20 officials representing the Department of Economy of the Mexican Government. These two men, and the Japanese did their utmost to cause us trouble, hoping that WD would leave Mexico. They passed out a great deal of propaganda about how the Japanese would help the Mexican fishermen. During the year 1935, a Mexican citizen named A. Anaya, who was employed by the Japaness, wes given a concession by the Mexican Government to explore the Coasts of Mexico, to gather in- formation concerning depths, currents, temperatures, topegraphic and fishing conditions, spawning grounds of different species, and to educate Mexican fishermen in modern methods of fishing. No. Anaya was really employed by the large Japanese Kyodo Company, and shortly after, the Japanese vessel "Minato Maru", a steel vossel of about 500 tons, appeared at Mazatlan, which was to be the base of their operations. Immediately, Japanese propaganda was commenced by giving neckties and various other gifts to the populase, and making many promises regarding the future welfare of Mexico regarding her fishing. The crew of the Minato Maru appeared to be well dissiplined, leading one to believe that they were probably trained along Naval lines. The Minato Maru made one trip South to Cape Corrientes, and one North to the Colorado River, taking soundings, with both lead line and sonio depth finder. About this time, two Japanese citizens were placed in the Department of Fisheries of the Mexican Government at Mexico City, and are still there. The Kyodo Company apparently has been able to gain the confidence, by one method or another, of some Mexican officials. The propaganda of the Japanese to teach the Mexican fishermen how to fish, was merely a sham, for they did not employ any Mexican fishermen, and were unable to catch shrimp at the begiming themselves. By their agreement with the Mexican Govern- ment of "exploration", they evaded the payment of exportation and exportation taxes. About the same time, another Japanese vessel of the same size as the Minato Maru wes sent to the East Coast of Mexico, The Minato Maru finally confined her operations to & shrimp bed about 15 miles long near Mocapule Island. In thebegin- ning, the Minato Maru was entirely unable to catch shrimp and all that she obtained was purchased from Mexican fishermen. At this same time, the Mitsui Company was operating out of Gaymas, and there appeared to be some friction between the Mtsui and the Kyede Company, neither of whom had been successful at that time. Apparently, - deal had been made in Japan, whereby the waters of the Gulf of California were divided between these two companies. In January of 1936, the Captain of the Minato Mary, named Imasura, and a. Japanese named Fulcuno, the latter of whom I believe Regraded Uclassified 21 resides in San Diego, came to Los Angeles in an attempt to enter into a transaction with us. They admitted that their shrimp fish- 1ng operations had been a failure and very costly. At first, they stated they wished to purchase shrimp from us, leaving the Minate Maru in Mexican waters to be loaded with our shrimp there. However, the price they offered was way below the cost of production, and we could not accept their offer, nor would TO have done 50 if m could. Their next proposition was that they supply us with mall Japanese boats which we would operate for them. Ne, of course, refused such a proposition. In our fishing operations, we have used fishing vessels much smaller than the Minato Maru, and more in number, for this is the logical way to obtain shrimp. The Japanese admitted that our methods were correct, and that theirs were wrong, and their boast that they would teach Mexican fishermen how to fish is laughable, as we taught the Japanese how to fish - that 18, they copied our procedure. At this conference, these two Japanese, - ing that they could not enter into a transaction with us, politely informed us that they felt very sorry for us, indicating that they would drive us out of Mexico. We have been approached many times by different Japanese on the pretext, on heir part, that they desired to buy shrimp from us, but it was evident that all they were seeking was information concerning our methods of fishing. Shortly after the above meeting in January, 1936, the Mitsui Company and the Kyodo Company evidently made some agreement between themselves, and in March, 1936, several small Japanese boats came into Guaymas, flying the Japanese flag, which boats be- long, we believe to the Kyodo Company. An incident occurred in February, 1936, that is worth repeating. One of our vessels, the Theodore Foss, came to ancher in the evening in the fishing grounds South of Guaymas, The Minate Maru came very cless alongside, hailed our Captain, and asked him by what right he had to be there, and demanded that he come aboard the Minato Maru with his ship's papers. of course, our Captain refused to do 10. The Minato Maru left Mexico in the number of 1987 for Japan, taking back with her several Mexicans. In the Fall of 1937, the Minato Maru returned from Japan and 18 now in the Gulf of California, together with two large Japanese ships of about the seme siso AS the Minate Maru, and five maller Japanese ships about 80 feet long. Contrary to their provises to the Mexican Government, the larger vessels had no Mexican fisher- men aboard, and the smaller vessels carried very few. Regraded Uclassified 22 abo Another of their understandings with the Mexican Govern- ment val that they would not ship any shrimp out of Mexico, merely doing exploring work. However, they are now catching hundreds of tons of shrimp, to the knowledge of the Mexican Government, who in no way seem to protest. We have been informed that the Japanese have been compensating Mexican officials. The present method of operation of the Japanese is as follows: The larger vessels stay on the fishing grounds and fish for shrimp. The smaller vessels do the same and the shrimp which they eatch are put aboard the larger vessels. Also, these maller vessels put in at Guaymas for 100, oil and provisions and bring shrimp into Quaymas, which is shipped to Los Angeles by rail. One of the larger vessels, generally the Minato Maru, leaves the Gulf for San Pedro about every two or three months. She last 47⑉ rived in San Pedro about the middle of December, with 300 tons of shrimp on board. For any shrimp sold in the United States, the Mitmui Company nots as the sole agent for the Kyodo Company. The shrimp brought by boat is generally packed in boxes and frozen, which boxes are marked "product of Japan". In her first trip of the season, which was in the Fall of 1937, she unloaded considerable shrimp for the United States market in San Pedro. However, on this last trip, all the shrimp which she had on board was trans-shipped to Japan. Tie have information that another one of the large Japanese vessels is due to arrive shortly in San Pedro with a load of shrimp. The shrimp that is shipped from Guaymas by rail is not frosen, but is packed is 1000. We are not certain how much shrimp the Japanese have sent into our United States markets through Los Angeles since the Fall of 1937, but we believe the same to be several hundred tons. They are now working out their threat to drive us out of Mexico 80 that they say have & total and complete menopoly of the shrimp fishing industry. This they are doing by actually dumping 80 much shrimp in the markets in Los Angeles that they have driven the price down way below our costs and their costs of production. Regardless of any fair price that we may put upon shrimp which we send to Los Angeles, the Japanese immediately out our price, and when TO meet their price, they immediately again lewer their own price, until the sales price is below the cost of production. The Captain of the Minato Maru has & salary of 200 yen per month, which_is approximately $58.00 and the members of the crew have & salary of 40 yen, or $11.00 per month. These miaries are far below eay wages paid on American fishing vessels. This cheap labor, esupled with cheep food, ecnsisting mostly of rice and fish, which is served to the crew, is for below the standards of living which any decent American would desire to maintain. Regraded Uclassified 23 The Japanese are willing to cell below cost, as above stated, in order that they can, in this manner, cause us to leave Mexico. The Japanese companies have huge financial resources, and - believe are backed by the Japanese Government, and they are as ruthless in economic warfare as in their military operations. They are deliberately cheating the Mexican Government, and earrying on insidious propaganda. We pay our labor decent living wages, both in fishing, and in the repair of our vessels. Should the tastics of the Japanese compel us to withdraw from our fishing operations, the American labor which We hire would be unemployed. We have endeavored to build up a sound business, using honest methods, and paying labor well, and it seems unbelievable that the Japanese can come some 8000 miles, and in what is virtually American waters, drive out American industry. Were American fisheries to operate in Japanese waters, everyone known what the result would be. Tie feel that the American Government should support American fisheries and drive out this we seruulous Japanese competition which is now appearing from the Bering Bea, South. While we believe that our Naval authorities oan draw better conclusions as to the Naval and military dangers involved by having these large Japanese vessels operating in such close proximity to our shores, we wish to call particular attention to the fact that while these vessels are probably not large enough to take active part in any Naval engagement or the destruction of commerce, yet they are 80 equipped with high-powered radio that they can disseminate information as to the movement of ships and otherwise, which would be of the utmost value. While it may seem fantastic, yet these vessels could net as mother ships to submerines, andlend them great help. It is rather odd and strange that the Japanese have become ao in- terested in the location of fresh water holes, in the depths of the water, and the location of safe anchorages, if they are only in- terested in fishing. Thile the above dates may not be exact, the facts are car- rect, and we have continually made reports to the American Consul at Guaymas of all of the Japanese activities, as far AS the same have come to our knowledge, and we believe that the American Consul has made official reports concerning the same, While it may be, for diplomatie reasons, that the American Government would hesitate to make representations to the Mexican Government, which would be the enviest, quickest way to remove the Japanese, if so, it is necessary for American labor to take such action as they may deem fit in order to preserve American industry and American fisheries from the invasion of cheap foreign labor operated by unscrupulous foreign corporations. Were we the only American fisheries now being harmed by this Japanese invasion, it might be said that our protest was G. selfish Regraded Uclassified 24 -7- one, but when it is considered that the Japanese have invaded our fisheries in other respects and at other places, it becomes necessary that we be protested. When it can be said that W are in competition with the whole Japanese Government, it becomes self-ovident that each individual American fishery can no longer fight its own battles, and that we must have protestion. If it is the desire of America that American industry and American fisheries perish, such a result will surely happen, and in the not far future. The magnitude of the situation makes it impossible for us alone to solve the problem. If the American Government lends no assistance, there is only one body of people sufficiently large to combat the situation, and that body is organized labor, because no individual group is large enough. We need not quote statistics as to the number of men employed in American fisheries, the value of the products, and the harm which is being done by arrogant, unserupulous Japanese methods. Copy of Copy Regraded Uclassified 25 (TRANSLATION) LFH PROJECTED DECREE OF FISHING IN TERRITORIAL AND EXTRA- TERRITORIAL WATERS Whereas, 1. - The products of the sea constitute a national resource, which by themselves should contribute to the nutrition of the Mexican people for their strength and development, and performing today in ter- ritorial and extraterritorial waters, fishing under primitive methods, the laok of these products makes, if not impossible, it very difficult to acquire them, until now they are regarded as food for the privileged persons, sinoa among the proletarist there are not the elements neces- sary to aequire this food so appreciated by all civilized peoples. Whereas, 2. - It is the obligation of the Government to bring about reduction in price and increase consumption of marine products, and to no- complish this it is necessary to teach the native fishermen the new method in fishing, training them in the handling of same and showing them ob- jectively the procedure and results that up to the present time have been accomplished in modern fishing. Whereas, 3 - It is imporative to eontinue the work of coean investi- gation and studies to determine the production zones and protect the various marine species, at the sens time form with the students of the Institute and school of Forest Conservation and Fish and Game, adequate personnel, including the construction of fishing boats through the establishment of necessary ship-yards, The CONGRESS OF THE UNITED MEXICAN STATES DECREES: ARTICLE 1. - The executive Dept. of the Government will be - powered to create a. stock company in position to fish largely the marine products, prosuring at the same time a price reduction in the country and also the teaching of modern fishing methods, - its handiwork and the construction of fishing boats. ARTISLE 2. The objective of the Corporation will bei (a) Fishing in general in territorial and extraterritorial waters, exeepting that of reserved areas and also of marine species reserved to native fishermen grouped in the cooperatives. (b) To effect explorations and exploitations in territorial and extraterritorial waters. (e) To establish packing and refrigerating plants, fixed and float- ing, M auxiliaries of these. (d) To effect all kinds of operations pertaining to fishing. (+) To foment the inversion of Mexican sapital into the fishing industry. Regraded Uclassified 26 Page 2 (f) To continue works of investigation and scientifie studies to determine sones of propagation and adequate prosedure of the protection of the various marine species, proportioning such studies to the Federal Government. (g) To supply the fishermen's Cooperatives with boats and fishing equipment for their work financing them and buying their products. (h) Industrialisation in general of the edible marine products with- out losing sight of the manufacture of fertilizer for agriculture utilizing species of low market or commercial value, and the offal of same, (1) To teach the native fishermen the different systems of modern fishing as well as to the students of the Institute and School of For- estry Conservation and Fish and "ame. (j) The construction of fishing boats to reduce hunting, establish- ing for this the necessary ship yards. (k) Employ in the crew of the boats one-third Mexican fishermen and as these become schooled in the management of modern systems employed in fishing, thus losing their character of apprentices, to substitute for foreign fishermen 80 they can occupy positions in the fishing Grown on the boats of the Company. (1) To supply markets of the country, at reduced prices, Marine products, fresh, refrigerated, salted and dried at prices within the reach of the working classes - putting out propaganda to open new markets in the Interior. (m) To make use of fishing boats with refrigerating plants equipped for trawling and maller boats to 80 tone each, equipped with note easy to handle; a boat of less tonnage will be used especially for research and to teach Mexican fishermen. (n) Boats to which the previous paragraph has referred will be pro- portioned by the shareholders of Series B, to the Company in the nature of renting and will be held and eonsidered as Mexican, the Company being privileged to buy them and aequire others as required for fishing purposes. ARTICEE 5. - This will be & stock Company through registered shares in Series A and B. Shares in Series A will be subscribed to by the Federal Government, will represent 55% of the Company's capital, will be absolutely un- changeable. Shares of Series B can be subscribed to and aequired by foreigners when they represent B. maximum of 70% and the 30% as a. minimum to be sub- soribed by Mexicans. Regraded Uclassified 27 Page 3 ARTICLE 4. - The capital stock will be $500,000.00 to be sub- seribed to in the following form: The Government presents to the Corporation concessions for Marine fishing granted to the Company and cash in the amount of $125,000.00. Thorest, up to the amount of $500,000.00 will be contributed by the subscribers and holders of shares of Series B. ARTICLE 6. - The majority of the members of the Administrative Consel will be designated for representation to the Government - one being appointed by the Secretary of the Treasury and Public Credit, another by the Secretary of National Economy and two by the Autonomous Department of Forestry and Fish and Game. ARTICLE 6. - The capital stock, if necessities or circumstances of business require, can be increased to another $500,000.00 that will be distributed proportionally by the members, but the Government will continue with 65% representation, this increase in capital stook with only the obligation of contributing a 27. as the other 273% will be considered as increase in value of the authority or concession for fishing. ARTICLE 7. - The Federal Government will represent in the All- semblies the number of votes equivalent to 56% of the Corporation's capital and approval of the Federal Government as stipulated by the shares, will be necessary to determine the following matters: (a) License to contract with individuals or private companies for fishing and exploitation of determined species. (b) Building of ship yards and construction of fishing boats by contractors. (o) Measures designed to regulate the interior market of the products in the fisheries brench or restrictions in exploitations. ARTICLE 8. - The Administrative Counsel will be made up of seven members, of which the Federal Government will appoint four, at any time being privileged to revoke appointments and name other members. The remainder will be designated by majority vote of the share holders present of Series B and unanimous vote of the Government Counsels will be necessary when it has to deal with deciding upon some of the points mentioned in Article 7. ARTICLE 9. - Formal contract of the Corporation will détermine the proportions in which the profits will be distributed, on the basis as follows: Uclassified 28 Page 4 I - In the first place & certain persentage to be set aside for reserve fund. II - In the second place a definite amount will be destined for the acquisition of boats or fishing equipment and refrigerating or pack- ing plants and vehicles of transport. III - Then the necessary quantity will be applied to cover the shares of Series A. Interests as appearing on formal contract. IV - In the third place a certain percentage will be distributed among the directors, employees and workmen of the Company. V - After payment of the above, the interests of Series B will be covered, and VI - If there be a closing of accounts the additional interests will be apportioned to the shares of Series A and B. ARTICLE 10 - The Federal Government will agree to the condition of the Company as established in the formal contract and in accordance with special agreements, subsidies that compensate the Company, if same fulfills each and every one of the obligations imposed by this Decree and those designated in the respective contracts. ARTICLE 11 - The Company agrees and will fulfill all laws in force regarding fishing and those that might be distated in the future includ- ing Decrees and bulletins that might affect it. ARTICLE 12 - The executive Branch of the Government through the Secretary of the Treasury and Public Credit of the National Reonomic and Autonomous Department of Forestry and Fish and Game, is empirored to subscribe to and stipulate in the contract and statues all clauses and stipulations convenient for the best enforement of this Decree, and each one of the Secretaries and Departments mentioned will exercise attributes which, to the State they correspond as share holders of the Company. The Department of Forestry and of Fish and Game, will choose technical heads Founders of the Company. Mexico D. F. December 15, 1937 PRESIDENT OF THE UNITED MEXICAN STATES LAZARO CARDENAS. CHIEF OF THE DEPARTMENT OF FORESTRY AND FISH & GAME MIQUEL A. DE QUEVEDO Regraded Uclassified 29 PUBLIC WORKS ADMINISTRATION APPROPRIATION ACT OF 1938 Breakdown by Departments and Agencies Department and Agency Amount Agriculture Agricultural Economics $ 3,960,400 Agricultural Engineering 15,100 Beltsville Research Center 3,492,671 Entomology and Plant Quarantine 400,000 Total Agriculture $ 7,868,171 Commerce Coast and Geodetic Survey 2,050,500 Fisheries 1,090,350 Lighthouses 3,670,150 Total Commerce 6,811,000 Interior The Bonneville Project 10,750,000 Geological Survey 2,690,000 Indian Affairs 5,313,000 Mines 597,000 National Park Service (Phy. Imp.) 2,212,000 National Park Service (Roads & Trails) 90,500 Reclamation 31,750,000 Total Interior 53,402,500 Justice Prisons 14,085,000 Total Justice 14,085,000 Navy Tards and Docks 36,154,000 Total Havy 36,154,000 Treasury Coast Guard 7,987,433 Public Health Service 3,490,000 Total Treasury 11,477,433 War Corps of Engineers (Rivers & Harbors) 600,000 Corps of Engineers (Flood Control) 3,000,000 Quartermaster Corps 49,283,400 Total War 52,883,400 Independent Offices Veterans Administration 13,268,200 Total Independent Offices 13,268,200 Grand Total - $ 195,949,704 October 11, 1938 C-2 Handed to be m 0 t 21. by Barlan Regraded Uclassified approx 10-21-38 30 Ht EMPLOYMENT BY WAR AND NAVY DEPARTMENTS ON Department W.P.A. AND P.W.A. PROJECTS W.P.A. P.W.A. Total War 23,287 3,326 26,613 Navy 23,416 3,435 26,851 Total 46,703 6,761 53,464 Regraded Uclassified 31 EXPENDITURES FOR PUBLIC WORKS FOR THE FISCAL YEARS 1936 TO 1939 (In Millions of Dollars) Estimated 1936 1937 1938 1939 aid from regular annual appropriations: Public Highways $ 29 $ 90 $ 152 $ 190 Tennessee Valley Authority 21 42 42 41 Reclamation 15 16 40 50 Rivers and harbors, improvement 7 74 89) Flood Control 28 26 39) 170 Public Buildings 15 34 6 61 60 United States Maritime Commission 12 1 50 Rural Electrification Administration - 1 11 50 Other (Army housing, naval shore stations, etc.) 16 38 45 45 Total regular 119 315 480 656 aid from emergency appropriations: Public Highways 215 260 85 45 Tennessee Valley Authority 28 I I I Reclamation 35 36 26 11 Rivers and harbors, improvement 143 75 10) Flood Control 9 20 24) 5 Public Buildings 53 42 16 5 Emergency housing 25 51 43 10 Rural Electrification Administration 1 8 5 I Public Works Administration: Loans to public bodies 36 a/21 38 70 Grants to public bodies, including administration 234 273 190 355 Other (Army housing, naval shore stations, etc.) 59 63 56 54 Total emergency 766 807 417 555 Grand Total 885 1,122 897 1,211 Excess of credits, deduct. Includes Shipping Board. Regraded Uclassified 32 1939 EXPENDITURES - FEDERAL AND LOCAL (In millions) Federal Local Total W. P. A. $2,135 4 $400 $2,535 P. W. A. 500 500 1,000 General public works .... 550 200 X 750 C. C. C. 275 -- - - 275 Emergency public works ... 200 -- 200 Total $3,660 $1,100 $4,760 X Highways, etc. Includes 500 cmillim from March/ of to 1. June 30,1939. Regraded Uclassified 33 CONSTRUCTION, REPAIRS, IMPROVEMENTS, ETC. (Outside Budget) (Continued) Balance of Agency Type of Work Limitation Obligations Incurred Funds Available Remarks se Owners' Loan Corp. Advances for Repairs Indefinite Own Property - 1938 - $21,700,000 Estimated 1939 -$25,000,000 - Borrowers' Property 1938 304,000 250,000 Approximately same amount in each year. eral Saving and oan Association Home Financing Indefinite 1938 - New Construction $95,500,000 Approximately same amount See below. Home Purchasing 83,000,000 expected each year. Refinancing 73,000,000 Reconditioning 17,500,000 Other 23,000,000 Total 292,000,000 E: The Federal Government has about $500,000,000 invested in the Home Loan Banks, The Federal Saving and Loan Insurance Corporation and in stock of Loan Associations (both insured and non-insured). The above figures cover insured institutions only. These represent about 25% in loans and deposits of the total Associations in the System. 34 CONSTRUCTION, REPAIRS, IMPROVEMENTS, ETC. (Outside Budget) SUMMARY Balance of Agency Type of Work Limitation Obligations Incurred 9/30/38 Funds Available Remarks eral Housing Admin. Title I Modernisation $500,000,000 to $669,236,187 $25,000,000 to Loans running Loans 1,000,000,000 50,000,000 $20,000,000 per month Insurance of Modernisation $100,000,000 $ 95,000,000 $ 5,000,000 (Plus Losses to date Loans (ta cover losses) (Reserve releases) $18,000,000 Title II Insurance of Outstanding bal- New construction $ 693,449,116 Appears that Construction ance of insured Existing " 745,038,901 2,000,000,000 au- Loans mortgages limited 1,438,538,017 thorisation will be to Estimated Repay- $664,453,519 exhausted by 6/30/39 $2,000,000,000 or ments 102,991,536 After 6/30/39 only 3,000,000,000 Net 1,335,546,481 new construction and (with approval of renewals are insur- President) able. 1 Electrification Generating $146,340,000 $58,600,000 $87,740,000 $70,000,000 of ministration Plants, Trans- (R.F.C.Funds) $87,774,000 subject mission Lines ($3,660,000 expired to approval of the and Wiring 6/30/37) President. Housing Adminis- Slum clearance $800,000,000 $202,000,000 $598,000,000 Obligating at rate of ation and low cost $1,000,000 per day. housing stimated. As loans are paid off in excess of 90% (80% if insured for 20%) the unused portion of the insurance becomes available to cover new loans. 35 CONSTRUCTION, REPAIRS, IMPROVEMENTS, ETC. (Outside Budget) (Continued) Espaymente Loans Amount and other Unpaid Agency Type of Work Limitation Authorised Disbursed reductions Balance Remarks F.C. - Self-Liquidating Loans New Construction No limitation other $451,105,736 $316,117,507 $123,590,638 $192,526,869 Approximately $400,000,000 author- (Sewers, Bridges, Highways,etc.) Loans than R.F.C.'s gen- (since 1932) ised before P.W.A. began. Now eral limitation as authorizations include Pennsyl= to amount and ex- vania Toll Highway for which piration date. $26,100,000 is P.W.A. and $35,000,000 18 R.F.C. funds. Repair of damage, Earthquake, Loans for repair $20,000,000 expires 8,529,108 6,529,108 7,719,510 809,598 No more loans being mds. Flood, etc. of damage during Dec. 31, 1933 (dur ing 1933) (Known as First Earthquake 1933 Loan) Repair of damage, Earthquake, Loans for repair $30,000,000 expires 3,470,447 3,470,447 1,729,393 1,741,054 No more loans being under Flood, etc. of damage during Jan. 23, 1939 (since 1934) (Known as Second Earthquake 1935-1936 Loan) Disaster Loans - Repair of Loans for repair $20,000,000 expires 8,062,365 7,280,673 1,328,688 5,951,985 Expect 3 or 4a. million will be are- damage, Earthqake, Flood, of damage. Dec. 31, 1938 (since 1937) thorised for hurricane damage. Tornado, etc. Loans to business enterprises Improvement and No limitation other 7,992,241 7,992,241 Information not Information Expect $8,000,000 will be authorised repair loans than R.F.C.'s general (since 1937) readily avail- not readily during remainder of 1939 fiscal limitation as to amount able available year. and expiration date. Construction Loans 15,285,890 15,285,890 Expect $15,000,000 will be authorised (since 1934) during remainder of 1939 fiscal year. Railroad Loans Improvement, repair Included in a section 90,062,651 90,062,651 Difficult to actimate Serve as pres- and construction covering railroad loans (since 1932) ent one conditional authorised loss of $2,483,600. loans, for various purposes limited to $350,000,000 plus, 7, c. Mortgage Co. - Now construction No limitation other than 16,996,066 3,768,000 1,094,702 2,673,298 Expect loans will res along et the 7601 (since 1933) of 5 to 6 million a year. $100,000,000 capital and R.F.C.'s general limits- tion as to amount and 61- piration date. Regraded Iclassified 36 October 21, 1938 The President called me on Friday, October 21, at 12:45. I read the attached statistics to the President and he said, "Things are going up too fast, and I said, "I don't agree with you, Mr. President. They can't go up too fast," and his reply was, "Well, it is nice to have them go up now Just before election." The President then said that Bullitt wanted to talk to me; that he wanted to come to Washington to see me and was bringing Monnet with him. He said that he read the three-page memorandum which I gave him on Tues- day and that we need not worry about the part that has to do with exchange difficulties. The President then put Bullitt on the telephone and I told him that I would be glad to see him and Monnet sometime over the week-end, but that I did not know what arrangements Mrs. Morgenthau had made and after talking to her I would send him a wire. Attached 1s a copy of 38 the telegram which I sent Bullitt later in the day. per H9 37 Copy N.Y. Times Weekly Business Index Weight Oct. 15 Wk. Change Automobile Production .03 65.9 up 14.5 Steel Ingot 11 .10 73.5 up 6.4 Electric Power IT .49 95.2 up 1.9 Lumber 11 .06 74.7 off .4 Miscellaneous Carloadings .19 77.0 up 3.1 All Other 11 .08 88.6 up 1.7 Cotton Mill Production .05 On basis of available data, NYT index of business activity in Oct. 15 wk. rose 2.7. Next wk.: NYT index of auto production in Oct. 22 wk. rose to 85.4 from 65.9, up 19.15. Regraded Uclassified 38 October 21, 1938 TELEGRAM (VIA WHITE HOUSE WIRE) HON. WILLIAM C. BULLITT HYDE PARK NEW YORK I WILL BE VERY GLAD TO HAVE YOU AND YOUR FRIEND COME FOR SUPPER TOMORROW SATURDAY NIGHT AT EIGHT OCLOCK BEST REGARDS HENRY MORGENTHAU JR Regraded Uclassified 39 October 21, 1938 Harry White gave me the attached memorandum with reference to the French Government's establishing airplane factories in Canada and why we should not help finance them, and I gave a copy of it to the President when I saw him at Hyde Park on Tuesday. I did not leave the first sheet of the attached memorandum with the President, because it had Harry White's name on it and I did not want to put Harry on the spot. I did not want Bullitt to go after him. Harry's name did not appear on the other pages of the memorandum. I also gave the President a copy of White's memo "British comments on Sterling." Regraded Uclassified 40 COPY October 18, 1938. To: Secretary Morgenthau From: Mr. White The proposal that France build large plane factories in Canada has merit only under the assumption that France cannot (for technical reasons which I would not know) produce all the planes she needs at home during the next few years. Possibly Mr. Bullitt is in possession of informa- tion indicating that is so. However, on economic grounds the proposal has very little merit. If the only or chief consideration is one of finance, it seems that France would be most unwise to attempt to develop a source of supply for planes in Canada rather than at home. Mrs. this with of at Left copy F.R Hy de Park an Regraded Uclassified 41 Copy PROPOSAL THAT THE FRENCH GOVERNMENT ESTABLISH IN CANADA AIRPLANE PLANTS CAPABLE OF CONSTRUCTING SEVERAL THOUSAND PLANES A YEAR. Conclusion. The plan has some advantages but these appear at first examination to be much outweighed by the disadvantages: hi The possible advantages of the plan are as follows: 1. The French Government would have an important source of supply located three thousand miles away from Germany and Italy. 2. France might be able to increase her supply of planes more rapidly by utilizing trained skilled labor of United States and Canada. Were France dependent on the output of foreign owned plants she might not be able to get as many as she would wish, and/or the cost might be higher. Were she to depend on the United States for supplies, those supplies might be stopped in time of war by the application of our "Neutrality Act". 3. It is possible that France might be able to obtain through borrowing abroad a portion of the foreign exchange necessary to construct the plants. B. The value to France of these advantages is quite uncertain: 1. Insccessibility of the plant to foreign bombing planes would be an advantage only in war time. But that is the very time when speed, ease, and certainty of delivery of planes becomes important. For France to depend on a source of supply in a foreign country three thousand miles away for so large a proportion of a vital war need would seem to be unwise from a military point of view. (a) Ocean transportation of three thousand miles in war time has its hazards; submarines, mines, air attacks, sabotage, spy activities, etc. (b) Planes manufactured in Canada would be subject to assumption control by the Canadian (or British) government. France would be giving another important Regraded Uclassified 42 N , 1 hostage to Britain. Canada might decide, in the event of war, that she prefers not to have within her borders an area which might attract the enemy's bombing planes. Wishing to remain "neutral" Canada might place an embargo on the export of planes to France. Or in the event of a world war she might decide she needs all the airplane plant capacity available to turn out planes needed for her own protection. All possibilities considered it would seem that despite her proximity to Germany and Italy, France would have a more dependable supply of planes in war time were they produced at home. 2. Plants with an output of the magnitude proposed would require a large number of trained workers. Where would they come from? The United States itself will absorb all available skilled workers for a long time to come if it embarks on a large program of its own. In fact, there is probably a scarcity of that type of labor now. Large plants built in Canada would greatly accentuate the scarcity, drive up wages still further and complicate our own plane program. Bottle necks of all kinds would develop which would serve only to accentuate price mal-adjustments here. France would do better, it would seem, to train her own personnel and develop a large scale organization at home. It is possible that France feels she cannot develop a large scale equipment at home quickly enough, and is afraid to contract for future purchases in the United States both because of the Neutrality Act, and because of the possible interference with production schedule and models by Army and Navy authorities. This possible interference with a supply from the United States constitutes the chief advantage for attemp- ting to establish factories in Canada as against dependence upon the United States plants. Were the sole alternatives open to France either United States or Canadian sources of supply, the latter might be a little more certain so long as the Neutrality Act remains in force. The importance of that disadvantage is somewhat reduced by the probability that the Act will be modified, or that it would not be permitted to interfere with shipments to France were France to be attacked. 43 - 3 - 3. France may be able to finance construction of the plants through flotation of foreign loans. Whether Americans could participate directly in such a loan without violating the Johnson Act is not certain, but even if it be assumed that the foreign capital for setting up the plants would be forthcoming from Americans and/or Frenchmen, the chief cost of foreign exchange would remain. The planes produced would have to be paid for with foreign exchange. The gold holdings of France are already deemed low, and her balance of payments is already heavily unfavorable. Were France to purchase from abroad several thousand planes a year, the increased pressure on the franc might easily be enough to cause it to depreciate much further. The suggestion has been made that France would be able to finance the construction with French capital that has already left the country (1.e.-flight capital). This is doubtful and even were it true the advantages accruing therefrom are not important. Frenchmen who now prefer to keep their funds outside of France would probably hesitate to invest in any securities which could in the event of war be very easily identified and taken over by the French Government. In any case, the item of expense that is most important to the French government from the foreign exchange aspect is the pur- chase of the planes and not the cost of the plants. C. Other disadvantages of the proposal are: 1. For the French people the venture might involve a heavy loss. The expenditure of several billion francs a year at home (especially when financed largely through borrowing) would mean a substantial increase in employ- ment and business activity. Were, however, that amount spent abroad unemployment at home would not decrease and might even increase. Much depends on how the money was raised and on the repercussions on the franc. 2. For the United States the construction and utiliza- tion of such a large airplane factory would have some disadvantages difficult to evaluate. 44 - 4 - (a) It would compete with any large program that might be undertaken by this government, and would add to wage and price maladjustments in the airplane and allied fields. (b) Large plants in Canada might in the hands of a victorious enemy (or of a Great Britain realigned with Germany or Japan in a desperate attempt to save the Empire) constitute a threat to our safety. Possibly, too, important French plane factories near our border would slightly increase the danger of our becoming involved in a European war. Regraded Uclassified 45 October 12, 1938 Secretary Morgenthau Mr. White Subject: British press comments in regard to the sterling- dollar exchange rate. Summary 1. Toward the end of June, when the sterling-dollar rate was approximately 84.95, comments appeared in the British press suggesting that sterling THE overvalued, but these comments emphasized that the rate had been stable and was expected to continue to be no. 2. During the latter half of July, mention of sterling over- valuation became more frequent. At the same time the hope was expressed that the sterling-doller rate would be permitted to fall to $4.86 in the event that the two currencies were formally stabilized, as it was widely rumored they eight be. Several weeks later it was frequently stated that this adjustment to $4.56 WRB not enough to correct the overvalua- tion of sterling but it val generally supposed that the United States would not permit A fall in the sterling-doller rate be- 107 $4.86 and it we considered better, in view of the inter- national political situation, to lose gold rather than antagonize the United States. 3. About the middle of August, when the sterling-dollar rate WAS approximately $4.88, several financial writers took the position that sterling was destined to RO below $4.86 and that the United States would roon become reconsiled to this. Press comments were generally to the effect that sterling should be allowed to fall in terms of dollars about an far AB the United States would permit. About this time it came to be accepted that the benefits of e lower sterling-doller rate would outweigh the adverse of- fects of an accelerated short-term empital outflow such as might result if sterling were allowed to go below $4.86. Regraded Uclassified 46 Secretary Morgen thau - 2 b. During September (sterling below 84.86): Approval widely expressed et the breaking through of the traditional parity rate, which had been regarded as an important payche- logical barrier to the needed correction of overvalued ster- ling. Figures from $4.10 to $4.70 were mentioned an possible appropria to equilibrium points for the dollar-sterling rate. (Incidentally for the first time there supeared state- ments that sterling var considerably overvalued in terms of several sterling bloo currencies.) 5. During October, attempt to Juntify fluctuations in ster- ling because of the critionl period but approval of the lower levels. (Press and periodicals for October not yet available except the cable quotations.) Intimation that an adjustment of the dollar-sterling rate will not suffice to correct Britain's weakened economic situation and a new note. The item in the London Times of October 12, 1938, taken together with Keynes' statement of 6. few days earlier, may be the harbinger of an altered commercial policy in recognition of the weakened British economic status as 6. consequence of the Munich episode. The item of October 13 introduces for the first time a note of hopelessness in Britain's monetary position in the near future. HDW:lrs 10/13/38 Regraded Uclassified 47 Secretary Morgenthms - 2 June 24, 1938 (84.961) - The Financial Issue ".....УШ the first time since starling vos w precisted, there is now no najor maladjustment between Present sterling-dellar rate is stable the chief currencies. For the last three years the and ean be maintained in the future - sterling-deller rate has been very stables its flue- although there is an intimation that ster- tustions have had an explitude in the whole period of ling is overvalued. only 2 percent. Thus, although in objective terms the dollar is still undervalued in relation to sterling, the existing rate is CDD which has been effectively stable and which - unlikely to change in the 1987 future. Horeover, the latest frans depresiation has finally removed the overvaluation of the frans. There is thus no distortion in the structure of the sterling- dollar-frane triangle, and that structure could, in all but the nost sensational circumstances, be maintained. In fact, 190 are already in & period of de fasto stabili- sation." June 25, 1938 ($4.962) - The Statist "Immediate outlook suggests that dollar will for 2009 time renain in the vicinity of gold export point Sterling-dollar rate is stable but star- to the United States." - but "in the long fun the ling my prove to be undervalued if prices outleek for the dollar may be unfavorably affected by rise in United States as & result of the the implications of the pump-pering program." pump-priming program. July 5, 1938 ($4.948) - The Financial Name ".....In other words, the dollar, in view of our own adverse belance and that of many sterling area Sterling-dellar rate is stable. Bow- countries, seens once more to be undervalued against over, sterling is overvalued, and a small sterling. That does not sean that my fall below the steady loss of gold will be necessary to present rate is to be expected, but a steady trickle support the prevailing rate. of gold to support sterling." 48 Secretary Margenthms - , July 7, 1938 (84.936) - The Financial Benta ".....If stabilisstion should case about, the old parity of 4.86-2/3 again seens a reasonable level, It If stabilisation wro to be effected, 10 well known that at the time of the Tripartite Agree* rate should be set at $4.866 to correct sent our own authorities had a figure of about 4.00 in overvaluation of sterling which has mind, and, in view of the Anerican trade surplus the appeared in recent months. dollar has been manifestly undervalued in recent months....." July 9, 1938 (84.936) - The Momonist "It 10, however, possible that these novements of international 'hot money' into gold, and the consequent Capital movements sex.be masking & gold operations of the Exchange Equalisation Account real overvaluation of sterling. are masking what would otherwise be a steady drain of gold from our reserves occasioned by our passive bal- and of payments." July 9, 1938 (84-936) - The Statist "If stabilization were enbarked upon, it - net unlikely that the old parity of 4.86-2/3 would sev meet If British and Incriom surrencies with the approval both of the American enthorities and was stabilized - in accordance with our owner This would imply an appreciation not only in remore - $4.866 would likely neet with the dollar but in the sterling price of gold. approval by United States and British "On current account, beverer, the dollar is again authorities. demonstrably undervalued against sterling. the balance of probabilities thus favors - improvement in the dollar....." 49 Secretary Norgethau - 4 July 11, 2938 ($4.928) - The Financial Times ".....the old parity of $4.866 would today imply an overvalued pound. On this basis $4.60 would be A sterling-dollar rate of $4.60 would 'about right'. be justifiable but $4.866 would be a - "This suggests that even the recent recovery is premise between the commie equilibrium and the dollar leaves the peund still overvalued. s rate the political requirements of the United of $4.866 would, in fact, be a compresise rate, N° States. fleeting both the influence of capital novements and also the desire of Washington not to comissance a lower rate for sterling. Quite possibly it - the rate which has formed the basis of this year's trais negotiations, and if. a DEW nonetary agreement is w visaged rumsur is probably correct in forecasting the adoption of that rate. Certainly 10 ought not to accept a higher rate, and Washington would probably not agree to & lower rate. Even if no fresh agreement is in view, sufficient has been said to suggest that if economic forces alone were operative the pound would naturally gravitate downwards, and it looks as if No cent rates had been artificially high. For these reasons the long-term view, as wall as the short-term view, favors 6 firmer tendency of the dellar, but with $4.866 as the botton limit of any further depreciation." July 13, 1938 ($4.932) - The Financial Name "The huge American export surplus for the first five months of this year (amounting to $544,000,000, w Our export surplus proves sterling is cospared with a deficit of $126,000,000 for the curres- overvalued. pending months of 1937) is taken as a clear indication that on current account the dollar is undervalued m any rate approaching 85.00 to the ⑇ July 16, 1938 (04.927) - The Recognist "It is intimated that en purely commando greende sterling at $4.866 may be 6 more natural level then $4.86 may be & "more natural" level $4.90." 50 Secretary Margenthm - 5 July 19, 1930 ($4.918) - The Financial Have "Market quarters suspect that continental quarters with large sterling balances are becoming alive to the Undervaluation of dollar is bringing unifest undervaluation of the dollar in relation to pressure on the pound by indusing capital sterling, and foresseing a prolenged period of pressure flow to United States. on the pound, are already removing funds from London to See York." July 20, 1936 (84.921) - The Financial I'm ".....It is reasonable that the Emhange Account should release gold to offect the novement of capital, Starling-dellar rate should fall con- but only if the dollar is in equilibrium - income w siderably before the Exchange Account under- count. And that can only be when the dollar rate takes to support sterling by selling gold. stands considerably lower them it does today." daly 22, 2938 ($4.919) - The Financial less "That starling is week is terms of dollars is due to the fact that, while the number of those who not- Feakness of sterling is due to general isualy believe in a joint sterling-deller devaluation expectation that sterling-dellar rate will is small, there are nore people who consider 18 possible fall to 14.86, that the rate may eventually be adjusted to 4.66. This accounts for the early covering of seasonal dellar N° quirements by produce merchants from when a difference of one percent is of soue importance. The weaknessoof sterling is thus incediately based on & seasonal factors August 4, 1938 ($4.895) - The Manchester Guardian "With the large adverse balance of payments DOB presumably being insurred by this country, a certain Teakness of sterling, exclusive of cap- quantity of gold withdrawals is fully to be expected ital movements, is directly attributable to as soon as the masking of this by foreign acquisitions rearnament program. of sterling coases. And as long as We accept this adverse balance as part of the order of things, necessitated by the rearnament program, gold withirewals can be viewed in the same way." 51 Secretary Morganthan - 6 August 4, 1938 ($4.895) - The Lendon Times There are reasons for thinking that to part Regraded Uclassified at least the relatively favorable foreign trate exper- Pressure en sterling is temporary and ienos of the United States has been the result of will be relieved as business recovery pro- transient influences. In any case until last year a coods in United States. export surplus vas & normal feature of American commy. Hearwhile the adverse trade balance of this country is tending to decrease, and if one takes the balance of trade of the wider sterling area, as one should to take the real measure of the economic pressure 00 sterling, the principal factor in the deterioration has been the trade alump in the United States itself, which will pass with the progress of recovery in the United States. AS for the influence of rearnament, large though the British expenditure, actual and prospective, may - the expenditure en relief and capital works in the United States is more formidable still, and if it does not immediately reflect itself in an inflation of importe 18 will do so no doubt in doe course M it did from 1935 envards. There is certainly no indice- tien of other than a purely temporary shifting of the balance of economic power as between sterling and the dollar. That there has been any shift at all 10 be cause these days the cyclical novements of trade in different countries DO longer coinside. The United States noved first into 'recession' and is apparently moving first out of 18." August 6, 1938 ($4.895) - The Economics Theee runers For a stabilization of currer cies of Tripartite signatories/ have in their turn dream If sterling and dollar currencies are attention to the overvaluation of sterling. There is stabilized, 1t is likely that the rate will little or no belief in an early devaluation of the be fixed at $4.866. Improvement in world dollar in tens of cold, but in Continental circles conditions will strengthen sterling. there is certainly a belief in the likelihood of a N° turn to the traditional sterling-dollar parity of $4.86-2/3 as a preliminary to any stabilisation agree- 52 Secretary Morgenthau - 7 "It 10 wall-known that there is always a time-lag between the exports and imports of the primary-prodee- inc countries This possibility that the exchange stringency of these countries due to the time-lag is beginning to pass away is of some importance to the outlook for sterling. Most of the countries concerned are nembers of the sterling area, and any change in conditions which helps these currencies will pro tanto help sterling as wall, although the reduction in the primary producers' imports is unfortunately likely to connote a reduction in the United Kingdom's exports." securit 6, 1938 ($4.894) - The Statist ".....An unquestionably more potent influence during the past week has been the growing conviction Overvaluation of sterling, in that starling is overvalued in relation to the United terms of dollars, will be accentuated tates dollar and that this overvaluation will become in oming months, although it should be core and more apparent M the autumn approaches." recognised that "an enormeus short- The weight behind this conviction of the our term bull position in dollars has been valuation of sterling is derived from such concrete built up." evidence as the revolutionary change in the U. s. bal- ance of payments over the past twelve months, and from the belief that this tendency will be accontuated in the immediate future by the bountiful grain harvest in the United States and in the note indeteminate future by the effect of accelerated resement on the balance of payments of the sterling area as a whole." The one important qualification that should be nade to the view that a further appreciation of the dollar is inevitable derives from the fact that a enoreous short-term bull position in dollars has been built up over the past month by foreign exchange dealers. There can be few institutions transacting foreign exchange business on an important scale which are not at the moment running long positions in dollars." Regraded 53 Secretary Morgenthau - 6 August 8, 1938 ($4.883) - The Pinancial Times ".....For long the Continent has been convinced of the overvaluation of sterling in terms of the Regraded Uclassified Sterling destined to return to $4.86 dollar. by mid-September, but if there is stabili- "The several denials and disclaimers by British, setion of currencies, the sterling rate French and American officials have failed to remove may 60 lewer. the impression that the pound 10 destined for its old parity level and that an all-round devaluation is probable. It is now said that mid-Septanber my be the time for this latter event. "To what level the currencies are to be lawred is not mentioned; in fact, 18 is almost impessible to state what 10 the true parity between the dollar, starling and the frans." August 10, 1938 (04.803) - The Evening Standard "Towards 4.50. The view has often been attri- buted to our authorities that the 85.00 to the pound forees probably require rate seriously overvalues our currency, and that a $4.50 rate. rate nearer 4.50 is more in keeping with the true situation. Accordingly, while our authorities are probably anxious to prevent a too sudden depreciation in the pound against the dollar, over the longer period they say well take the view that sconomic forces must cause the dollar rate to move towards 4.50. Their recent actions suggest that this is the case." August 13, 1938 ($4.872) - The Statist ".....Must one, then, suppose that the tradi- tional parity does not possess this backing, and that The view is gaining ground that it 10 the view is spreading that it may will be swept asida inevitable that sterling will fall below by the forces that are pulling down sterling in terms 04.866. of the dollar? It is unquestionable that such & view is gaining ground. The approach of the antuan season and the steady widening of the deficit en the visible balance of British trade lend it same circumstantial support....." Perhaps the retreat from that stabilisation Invel 14-86-2/3 had become insvitable by reason of diustments in the balances of anyments 54 Secretary Mergenthan - 9 August 27, 1938 (24.881) - The Financial "The evidence is not conclusive; for interne- tional financial statistics do not permit emart British authorities face alternative of calculations. But there is at any rate 4 strong losing gold or allowing sterling rate to fall presemption, backed up by the actual pressure on to about $4.50. In order to maintain cordial the pound, that sterling is overvalued. In this relations with United States 10 net be better position, the authorities have three long-torm to sceept a starling rate of $4.86 even though alternatives. They may initiate & deflationary this involves the loss of considerable gold. drive to reduce prices and costs here, haping in the meantine that American industrial recovery will make the necessary adjustment less than would otherwise be necessary. This must evidently be impracticable The authorities are, therefore, left with two alternatives, both unpleasant. They may allow gold to be withdrawn in order to maintain the international advantages of the Tripartite Agreement. Or they may allow starling to fall to, say, 4.50, at the expense of a cartain strain upon Angle-American economic relations and a possible currency war. "The depreciation of sterling would certainly be the line of least resistance - provided it vere possible to persuade the American authorities of its necessity, and to achieve it within the frame- work of the Tripartite Agreement. But if the Americans insisted on the naintenance of the old dollar parity, - should be neet unries to destroy the Agreement and to attempt to alter the rate by force. at present, beyond all question, the attain- nent of the closest pessible relations with the United States must be the corner-stone of our inter- national policy. The naintenance of the 4.87 rate might be costly, but in the long run it would be less expensive than & breach in inglo-Anerican rela- tions. In other words, in order to maintain the Tripartite Agreement, we should be prepared to less gold. As a long-term policy, of course, this plan is hardly practicable. 55 Boxwtery Morgenthan - 10 August 20, 1938 ($4.880) The Statist "is far as the three currencies of the Tripartite Agreement are concerned, it is evident that sterling Starling is said to be overvalued in is palpably overvalued in terms of the French franc terms or both the frame and the dollar. and that any exchange weakness of the latter currency is due not to normal nonetary purchasing pour factors, but to inherent distrust in the currency. As regards the dollar, recent experience in the exchange market strongly supporte the view that sterling is also over- valued in that direction." August 26, 1930 ($4.877) - The Financial the [fripartite] Agreement still prevents the overvaluation of starling against the dellar free The Tripartite Agreement prevents being corrected. In the mer future, this country's correction of sterling's overvaluation but adherence to the agreement is likely to be tested to political solidarity of United Kingdom and the uttermost, for there is little doubt that the United States is more important than correct- defense of sterling at its present dollar value will ing overvaluation. incrican views on proper entail the loss of further large quantities of gold. exchange rates are rigid. lie doubt it is true that currensy depresiation is not the best name of correcting our aiverse balance at a time when large imports of materials are needed for rearnament. The best course may well be to continue financing our inport surplus by druwing 80 our - seas investments and, if necessary, a large part of our gold reserve. Even if that were not so, it wight be worth while to suffer considerable inconvenience rather than to break assay from the agreement, since the latter affords a seens of preserving the political solidarity of the democratic nations. But it may seem regrettable, to some, that American views on exchange rates are relatively rigid, and that the securing of the pelitical benefits of the agreement should, con- sequently, be a matter left so largely to this country." 56 Secretary Margethan - 11 August 29, 1930 ($4.870) - ".....thm view was gaining ground that, despite the heavy decline of the past month or too, the - Regraded Uclassified The fall in sterling rate has not been valuation of sterling against the dollar has not yet enough to correct overvaluation of starling. been remedied and that the authorities will the in the long run be forced to persit & further substantial depreciation." August 31, 1938 ($4.857) - The Pinensial Nown ....Undaubtedly, the number course in the long RS is to allow sterling to dealine in order that - After emmerating the sources of the deficit may be paid for by increased exports. If of current selling avvent, the position is nonetary authorities come to this conclusion (and taken that starling should be allowed to there is reason to suppose that they too consider star- depresiate about as for M United States ling grossly overvalued) the initiative passes to the Treasury will permit. The United States American authorities Should our - Karchange w Treasury 10 criticized for its "rigid views" count casse to support sterling, the incricance could on exchange questions. always counter that policy by themselves buying otor- ling. That starling they would expect to convert, however, into gold withdram from the British fund, and in the last report this country could retaliste by no fusing this facility. Any such currency war would be deplorable in the extress, and yesterday's statement by the U. 8. Treasury helds out a walcome hope that America is at last prepared to modify her rigid views on ex- change questions. One may wall ask, indeed, why 18 should be left to this country alone to shoulder the burden of existaining the tripartite past. That agree- nent is undoubtedly of immes value as an expression of pelitical hareeny between the six democratic Powers which adhere to 12. Dut these pelitical benefits are shared equally with the other participants including the United States, which in the past has profited in addition by a persistent undervaluation of the dollar via a via starling and the franc." 57 Secretary Morgesthan - 12 1, 1936 ($4.854) - The Pinencial Times *May people believed that it [steriing 1 would never be permitted to fall below that level Regraded Uclassified British tradition that $4.86 is proper [4.86-2/2]. Apart from the psychalogical factor, they rate should be destroyed. could produce DO argument in favor of their visa. whose than one previnent benker expressed the spinion yesterday that the sconer 10 tried to forget the level of $4.86-2/3 the better. Sentiment alone, they contended, surrounded that old parity with & hale." September 1, 1938 ($4.854) - The Financial Times "The theoretical position today thus appears to be rou, hly as follows: Economically justifiable rate is about 1. The pound is overvalued by not quite 15 per- $4.10. Prene is undervalued against both cent against the dollar. dellars and starling. 2. The dollar is overvalued by 15 persent against the franc. 3. The pound is overvalued by R percent against the frans. These calculations are based upen price indices alene, and ignore the many imponderablee which affect these calculations and which probably nean that the frans is less undervalued than these figures suggest." September 3, 1938 ($4.842) - The Mcanemist ".....No doubt there is - solid commercial justifi- cation for the recent strength of the dollar. It is Trade balance of sterling area has been evident, for example, in the fact that the visible shifting unfavorably. Lees gold would have trade balance of the United States yielded an expert been lest by pagging rate at old parity. Dat, surplus..... while both the Dritish and, as for as 10 such a policy would have been unwise probably. can be calculated, the sterling area's, trade balance Fall in starling rate below $4.86 is not an has been shifting appreciably in the other direction..." unfair competitive depreciation. ".....This figure 14-86-2/21 case passed, there is no obvious vallying-point, DO obvious rate to limit the riot of imagination that can be resorted to in viewing the possible extent of a further depresiation of sterling. There is probably substance in the opin- 100 generally heard in the foreign exchange market 58 Secretary Kergerthen - 19 this week that it would have cost the Inchange Aqualisation Account less to hold the rate above $4.86-2/3 than it has cost to held it above 84.85. Dut this alene provides no adequate criticism of the policy actually followed by the authorities. They are better able to judge of the character of the selling to which sterling has been subjected, and to decide from this and from its weight whether the occasion calls for pegging a outranse or for the exercise of the more normal function of the Account, namely that of 'irening out' fluctuations." ".....And in any case, this week's fall in the pound sterling has neither been due to novements of British capital DEP has 11 been engineered by the British authoritise. In no sense so 10 - unfairly competitive depresiation...." September ", 2936 ($4.85-1/4) - The Statist The Account has in fact filled its tro- ditional role of moothing flustuations and bee Letting sterling fall below $4.866 wee refused to oppose - trend which, by its recent per- an essablent nove. The benefits of a lower sistence and by the masive operations to which 18 exchange rate outweigh the adverse effects has already led, gives every indication of being of stort-term capital outflow. There is DO fundamental. There have been suggestions in the long-term speculation against sterling. market that the authorities, by allowing the dellar rate to move beyond 4-86-2/3, have let the 'botten fall out of the narket'. There is no great evidence to support the suggestion. Admittedly the passing of this level was & psychological factor of - importance and undoubtedly helped to carell the volume of offerings of sterling on Tuesday. But the opera- tions of the Account must clearly be guided by something nore than day-to-day considerations of this kind or over by regard for psychological influences. Psychology has to be translated into actual exchange operations before it becomes an effective market factor. It sight in this particular instance help a vive nore foreign capital may from Lendon than 59 Secretary Morgenthau - 14 would otherwise have gone but this is a considers- tion en which the decision to hold sterling at what may be a definitely overvalued level should net depend. ".....Sut there is no long-term speculation against sterling such as there has been and such as still persists against the from. From that quarter the Exchange Equalisation Account need fear nothing." Suptember 6, 1938 (84.823) - The Financial Times ".....the peand might be hald to be overvalued by none 20 percent and therefore bond, on, for a Appropriate value of sterling is new paint in the neighborhood of $6.40. If the heped- about 84.40 but since future developments Indi- for trade revival in the United States materialises, cate a strengthending of starling the proper prices there should respend quickly, especially under stabilization rate is $4.70. the inflationary impetus of *pump-primingl.....Britih currency, moreover, will benefit as and when the in- port demands of rearement diminish. Such probabilities lend powerful support to the views of these authorities who limit their expectation of sterling's fall to, say, the neighborhood of 34.70.° September 9, 1938 ($4.820) - The Times "The economic evidence of a recent overvaluation of sterling points to an overvaluation as against the Overvaluation of sterling against currencies of starling-blee members with more certainty sterling-bloc currencies nore apparent than it does to an overvaluation as against the dollar. then overvaluation against dollar. In the circumstances, the present signs of a wider adhesion to the sterling pivot cannot be an entirely welcome compliment." Regraded Oclassmed 60 Decretary Morgesthan - 15 September 200 1936 (84.811) - the Sconomist *It must not be thought that the wakes of Regraded Uclassified sterling is entirely due to capital movements. The Fall of starling below 14.86 is not pound 10 also weak for ordinary commercial remove. competitive; in fact it is necessary to If it is true to say that the immediate result ashieve aquilibrium of international pay- of the Tripartite A, reement and the frans devalus- ments en current account. tion of October, 1936, me to establish a fair degree of equilibrium reand the pound-dellar-frass triangle, than subsequent exchange and price novements in the three countries have overvalued the pound against both the other currencies. It has indeed been - valued against the dollar ever since American prices began to fall in the autumn of 1937. la & long-term view, therefore, and quite spart from the imetiate pressure en the pound 46-86-2/3 has osseed to be an appropriate rate. On this argument, the peand's de- clins below that rate 10 not competitive depreciation, but quite the reverse..... "At a vary rough jusse, - could stand a total loss to the United States of A150 milliams....* September 17, 1938 ($4.81) - The ".....in times of recession, particularly in the opening stages, the prinary producer is bit wrst by Sterling se overvalued but, since it 10 A fall in his prices, whereas the name/acture finds impossible to say what the correct value that he is unable to reduce his prices and se is - should be, stabilization is not desirable. able to sell his goods. The present overvaluation of Authorities should pursue an elastic and sterling against the dollar is, so far as England 10 frankly opportunistic policy. concerned, nothing nore than a particular though strib- ing symptom of this general disease, and DO must be regarded as one of the necessary and automatic conse- quences of the world recession, The extent to which sterling is overvalued is difficult to define. It son pends whather it is thought best to measure British nanufactured goods prices against American primary product prices or against those of American namufac- tured goods) or whether it is thought best to attempt a aprondse between the two categories of American 61 Secretary Morgenthau - 16 prices, which differ fundamentally from each other. ".....No must, therefore, pursus an elastic md, indeed, 4. frankly opportunist exchange policy." September 20, 1938 ($4.823) - The Financial Kenn "For this reason, it would be wise to keep sterling at a level at which 18 is not unduly vale If capital flows back to England, authori- nerable. Having allowed it to decline below 4.86, ties should not permit sterling-dollar rate to the authorities may as well keep it under that return to $4.86. level. To allow it to rise above its old parity would serve little useful purpose) for the figure of 4.86 has by now ceased to possess ear "nystie" quality, and no psychological factor, consequently, would tend to facilitate its defence at its Mater- leal parity." October 1, 1938 (84.623) - The Statist "........ tactics of the Exchange issues in allowing these wide novements in rates have not Recent action of authorities in allowing with no real criticis in quarters best placed to sterling-dollar rate to fluctuate widely is appreciate the task that faced the authorities on justifiable. the critical days of this week. with the outlook an uncertain and threatening there would have been no justification for holding the sterling-dollar rate in the face of the overwhelming volume of sales of sterling which reached the market." Regraded Uclassified C2 Secretary Margarthes - 27 Subsber 12, 1936 (64.75) - The Time "The renewed weakness of starling sines its sharp Regraded Uclassified post crisis recovery has been widely viewed in the The recent decline in starling has city with a complacency not whally distinguisheble been viewed for the most part with approval from veiled pleasure. It has not escaped notice that and the Exchange authorities have cade no no great effort has been made by the authorities to great effort to check the decline. Americant check the movement Those who are convinced by desands of the United Kingdom are likely to the evidence that sterling has been and is overvalued - increase costs and raise Britden export prices. and they are in a majority - ass in this covement a Also, there is the possibility that the possible adjustment of the exchange value of starling United Kingdem say loss sere of its export in accordance with our real comercial 20048..... It trade in Southeastern Europe. However, & certainly 00616 probable enough that the demands of fall in starling against the dollar alone expanded rearnament will tend to increase rather than to not a sure for sterling overvaluation lower the costs and prices of writish goods relatively because experts of the United States and to those of our competitors. And the desirability of other countries with currencies linked to a lower rate for sterling is thus likely to increase the dollar do not compete with United rather than diminish during the next year or two. It Eingdom's exports in several of her most is also necessary to reckon with the possibility of important markets. the loss of scele of our trade with Southeastern Europe in favor of Jernany although simittedly the total vol- - of such trade has in recent years been small. "Unfortunately however it is unduly optimistic to feel that a fall in sterling against the dellar 000⑉ stitutes an easy cure for any existing overvaluation of the peand. The relief provided by a decline in the dollar rate in economically BOYS apparent than real for the United States together with other areas whose currency is based on the dollar is of only limited importance M a market for or empetitor of British exports. Se far as 1% yess the relief provided is welcome and valuable. But it must be reseibered that the great balk of British oversea trade is in relation to competiters and markets whose currencies are either within the starling bloo or can for practical purposes be aligned with 18..... The only currency against which even passive depresiation 10 possible is the dollar and only & very limited and partial corrective for my over valuation can be obtained in that way. The absence of A natural corrective in the sphere of the excha C3 Secretary Morganthm - 18 rates is indeed a very real problem and case which could net find any practical solution if solution proved necessary except by negotiation between nembers of the sterling blee. Whether the problem will become pressing or not at an early date may depend very largely on the domestic effects of the anticipated expansion of the amerent program." October 13, 1938 (84.73-1/2) - The Ximms if the westmard flow of funds proves as persiatent as at present Beena likely the policy The best policy for the Exchange Rund of gradual retreat night naturally prove somewhat to pursue - ⑉ long all the persiatent press- expensive in terms of the loss of gold involved. ure on sterling continues - is that of The market is inclined to feel that it ⑉ take orderly retreat, "especially M at the advantage of the authorities policy of gradual N° present time Washington - inclined to cession - an attitude which bas found its refler- view a fall in starling with equanimity." tion in an appreciable amount of speculative bear The alternative policies of determined selling of sterling during the past few days. It pagging of the rate, or allowing the rate is difficult to ⑉ however, what new policy the to fall rapidly to a much lower level are control could logically pursus. It would appear much my dangerous. on the face of it that the flight into dollars is of a kind which would not be easily cheeked either by a determined effort to peg the rate or by allow- inc sterling to fall rapidly to a materially Love level. The latter policy has certain obvieus attractions, especially as at the present time Washington some inclined to view & fall 1a sterling with equanicity. But there are serious objections to adopting such a line, partly because there is no real guide M to what sort of level if any would check the desand for dollars, and partly because it is very conceivable that a rapid decline might in any circumstances nerely aggravate 4 flight which is based on apprehenadone of an essentially vague kind. In view of the rapidity with which the flight to the dollar was renowed after the Kundch Agreement 16 - well be thought that it is impossible 10 calculate any particular point at which it ean be 64 Summary Marganthau - 19 checked or exhausted without same - furerable devel- opents in the Description political aphose. If that should prove to be m a policy sizing as - orderly - eline in storling - if dealine should be necessary - my for the time being be the meet reasouring and effective." Regraded Idessified 65 Friday October 21, 1938 2:37 p.m. HMJr: Hello. Operator: George Harrison. Go ahead. HMJr: Hello. George Harrison: Hello, Henry HMJr: Hello, George. H: How are you, sir? HMJr: George - hello? H: Yes. HMJr: Have you been following this R.F.C. note issue of Monday? H: Yes. HMJr: How - what interest coupon do you think it ought to have? H: Well, I had a session this morning - about an hour - with ah - Sproul and Matteson,- HMJr: Yeah. H: - both of whom have been talking to banks and dealers and everybody else trying to get their views. HMJr: Yeah. H: Ah - our - our unanimous opinion is - HMJr: Yeah. H: - that is we feared - HMJr: Yeah. R: - that it would be wise to put out a three year note - November to November - HMJr: Yeah. Regraded Uclassified 66 - 2 - H: - at 7/8ths - HMJr: Yeah. H: - without any allowance for interest adjustment. HMJr: Well that's what they seem to think down here. H: I think that's a clean cut thing to do and it gives you about a fair price. HMJr: Ah - H: Now the - the three year June ones are selling at par 16 to 18. HMJr: Yeah. H: We think that the November one would probably sell at - being a little longer maturity - at par 13 to 15. HMJr: Yeah. H: If you made it 3/4ths for three years it would be awfully thin ; it would be just slightly over par on a mathematical basis - not allowing for anything else. HMJr: But at 7/8ths comfortable? H: 7/8ths, we think, is very reasonable. HMJr: Who - H: There is one bank who owns a big block of the - ah - who suggested it ought to be one percent. HMJr: Huh. - What bank was that? H: That was the Chase. HMJr: I see. H: They own forty million of them. Regraded Uclassified 67 - 3 - HMJr: Greedy - greedy - H: But Green is ah - he's a - he's a flippant sort of fellow who likes to trade and I think he sort of was smart;- he said to go up a cent or even 1 and 1/8th. HMJr: Yeah. H: But that doesn't make any sense. HMJr: Well, George - ah - who'll be in the bank tomorrow? H: What's that? HMJr: Who'll be there tomorrow if I want to talk? H: Well, I - I had planned to go on up to New Haven to the ball game but I'd just as soon stay here. HMJr: That's all right. Will ah - what's his name be there? H: What's that? HMJr: Sproul? H: Ah - Matteson will be the best one for you to talk to I think but - ah - I'll stay around my- self, Henry, I'm not particularly anxious to go. HMJr: No, I don't want you to do that. I just want somebody there ah - to give us the final say around eleven o'clock or SO. H: Yes. Well I think - I think Matteson will be the best one for you to talk to. HMJr: You do? H: And I'll have him call you if you'll let me. HMJr: Well, I won't - I may be at home, I don't know - ah - H: Uh huh. HMJr: But I'll be here in town. H: Well, if I'm not here would you talk to Matteson? Regraded Uclassified 08 - 4 - HMJr: Sure. H: All right. If it's a very good day and if every- thing is quiet here I may go up unless you want me to stay. HMJr: No, no. No, I don't think it's important enough. H: No. And I don't either, really. HMJr: No. No, everybody's been telling me - well I haven't checked except around the - H: Well, we - we've - I went over it very thoroughly and - from all its aspects and I think that's your best bet. HMJr: I talked to Burgess - that's the only person I've talked to - outside of the Treasury. H: Well, ah - HMJr: Burgess said 7/8ths. H: He - he thought you could do anything. He said even if you went four or five years. But I think it would be a great mistake to go out beyond the - HMJr: No. H: - the life of the corporation. HMJr: Well. - Oh, I don't want to do that. Well, unless there's something happens tomorrow it'll be three year - 7/8ths. H: First rate. And no interest allowance. HMJr: No interest allowance. H: That's right. HMJr: Right. H: First rate. HMJr: Thank you, George. H: Goodbye. Regraded Uclassified 69 Friday October 21, 1938 4:50 p.m. HMJr: Cy. C. B. Upham: Yes. HMJr: What Mr. Jones was here for was to plead with me that if Mr. Herbert Fleishhacker would hand in his resignation now - that we would let him - accept it but ah - not make him resign until the first of January. U: That is effective January 1? HMJr: Yeah. Now I said nothing. So then he said that Sam Husbands has an application for a twelve million dollar loan. U: Yes. Preferred stock. HMJr: Yeah. And I said, "Have you told Upham about it?" He said, "No." So I said, "Well, tell Upham about it." U: Yeah. Well Husbands is coming tomorrow at nine- thirty. HMJr: So ah - he's coming to see you tomorrow morning. U: Yes, sir. HMJr: O.K. U: Thank you. HMJr: Goodbye. U: Goodbye. Regraded Uclassified 70 RE POSSIBLE CHINESE AGREEMENT October 21, 1938. 4:00 p.m. Present: Mr. Hanes Mr. Taylor Mrs Klotz Mr. Oliphant Mr. White Mr. Lochhead H.M.Jr: You (Hanes) said you wanted 8 meeting on China. Hanes: I only wanted to show you the two versions. One is rather more full than the other one. This is the draft of the letter for you to send to the President. Do you want to go over those two letters? H.M.Jr: No, I'm all in. Hanes: All right. Well, somebody will have to say which one you want, as between the two. They both contain the same facts. Oliphant: I think the shorter one is the better. Hanes: I shortened the letter up by taking out the first part of it, which only goes to say, "As you are fully aware, from an economic standpoint, China's plight at the moment is desperate" - goes on to tell how we can help China, and so forth, which I thought was not getting to the point. So I went straight to the point in the second draft, which says, in effect, "Here's the program we have planned, and ways and means of getting 21 million dollars quickly into the hands of the Chinese Govern- ment." H.M.Jr: If you gentlemen will be patient for one minute, I'll just read it. Let me take home - let me take this thing home. Hanes: Better take both of them, see which one you like better. H.M.Jr: This is the one that you like the better. Hanes: Well, that's mine. I took the - Mr. Oliphant wrote the other one. I just cut out the part that told about - which was superfluous, and which he already is familier with, by the way. Regraded Uclassified 71 -2- H.M.Jr: All right. Hanes: Incidentally, this second copy here is corrected for three years. First copy has not been corrected for three years. H.M.Jr: For three years is how much money? Hanes: Is 21 - is 43 million 600 thousand dollars. H.M.Jr: For three years? Hanes: For three years. Not the entire amount, but half of that for the immediate down payment, or 21 million. The accurate figure is here. White: They only get 21 million loan altogether on that, don't they? Hanes: They get - the total, if the oil is purchased for 12 cents a pound - the cost of three years' supply will be 43 million 200 thousand dollars. H.M.Jr: Yes, so half of that - and a half of that would be 1111 Hanes: And a half of that would be 21 million 600 thousand, which would be the down payment. Oliphant: The total amount of credit extended. Hanes: 21 million. White: Do you feel the five year is out? Five year is out? H.M.Jr: For this purpose, yes. White: Yes. H.M.Jr: I want to, if I can, establish the principle. White: If this works, they have some tin they're ready to talk on. H.M.Jr: Exactly. White: Also pig bristles. Regraded Uclassified 72 -3- H.M.Jr: Well now, as to this Tientsin silver - is that what it is? - Mr. Hull says - I gather he feels we should keep out of it, is that right? Lochhead: He didn't say. They've changed it there so that we wouldn't admit here specifically - I mean we don't state specifically that we haven't got an interest in there, because technically we might have an interest in it. Taylor: The reason - in other words, the reason he wants to word that that way is because they're a little worried about why the British asked them the question, and they would like to be able to answer about like that, which is that it has no specific interest. H.M.Jr: I realize when my brain isn't clicking; it isn't clicking now. I'm just going to call all bets off. Regraded Uclassified 73 É Will be present: Burgess Williams Warren Viner Riefler Hansen Will not be present Stewart Regraded Uclassified 74 RE STERLING EXCHANGE RATE October 21, 1938. 10:00 p.m. Present: Mr. Taylor Mr. White Mr. Lochhead Mr. Viner Mr. Riefler Mr. Goldenweiser Mr. Williams Mr. Burgess Mr. Walter Stewart Mr. Robert Warren Mr. Feis H.M.Jr: The reason I asked you gentlemen to come down was this. We've got - oh, & number of things, I think. When you were here last time, we decided to deposit gold, and I think that was a good move. I haven't had any complaints. Federal Reserve Board nasn't said anything, End it was well accepted. I don't know whether - I'm just going to throw out - anybody wants to bring that up or anything else. I'm bothered considerably about sterling. We always talk nere confidentially. We've got this British trade treaty which is in the works. I'm told the thing was figured at 4.90. Sterling roughly is 4.75. They've got this clause in, which is - you can invoke the thing if develuation takes place. The suggestion has been made that instead of leaving it that way we might put in a floor, say that if sterling should go to X point, why, the trade treaty would be cancelled, the theory being that it would be much easier for me and for the President, I think, if We ned E floor to the thing, in case it went through to a certain point at which point we determined it would be to our disad- vantage; because there are some people unkind enough to say that they're going to hold sterling where it is until the trade treaty is signed, then watch her go through to the floor. Why not put in a floor before? And I want to say that on sterling I haven't said anything publicly, because certainly while the British press doesn't reflect this in any way, the British Treasury has done everything possible (Feis comes in) Regraded Uclassified 75 -2- Hello. Come in, sit down. everything possible to defend the pound. I mean they've spent ¿S much as 60 million dollars in one day. I'll repeat what I said, which I want particularly, Herbert Feis to hear. I say - I'm talking about what we - I'm talking about sterling. Don't you want to come up here, Herbert? Feis: I've never known anyone who gets down to business promptly three minutes after the hour. He's already talking on'the subject which he is supposed to talk about. I've never heard of anything like that before. H.M.Jr: Well, you see, in the Treasury we esk intelligent people over, and we don't like to waste their time. I want to go back. The sterling thing is up; I'd like these people to talk about it. When they were down last time we decided we'd deposit the gold cer- tificates; that decision was made. I think the thing has worked out very well. We're depositing about five percent, ten percent, more every time. I think that's worked out all right for the present. And the other thing - told tnem we always talk here confidentially - I think the trade treaty is worked out on a theoretical basis of 4.90, end sterling is now around 4.75. Isay some people have been unkind enough to suggest that they'll hold it there until the trade treaty is signed, and then they'll let the thing drop. And. therefore, I'm raising the thought of the possibility of suggesting to the President that we put & floor in, a price at which, in case it should drop, why, automatically the thing would be off. It certainly would be much easier for me if there was & floor, a price at which we felt it would be unfair. Then I wouldn't have to have all these arguments to invoke this thing. See? I'm raising that thing at this time. I mean just for argument's sake say that if sterling went through 4.50 that would be the signal at which the trade treaty would be - would have to be reexamined; Regraded Uclassified 76 -3- I don't know now you describe it technically - instead of having that very difficult sentence in on exchange, which would mean that Mr. Hull and I would have 8 head-on collision as to how to inter- pret that clause. The present clause - we can get that clause. Have you (White) got that clause? White: Yes. H.M.Jr: It's very short. Just read it out loud, Harry. White: The clause I was about tn hand you is the one I thought you mignt wish to substitute. The clause that's in there - I'm sorry, I haven't it; I thought I had it. I have the clause which they suggested and which we turned down. H.M.Jr: No, the one .... White: And I've got the one which we're suggesting. But the actual one I haven't got. But I can get it for you in a minute. Oliphant: You can state the substance of it. H.M.Vr: What's the substance? White: Yes, I can state the substance of it: that when there shall occur a wide variation which shall be regarded as inimical to the interests of either party, the clause shall be invoked which permits the reexamination of the trade agreement with a view possibly to reformu- lation or a cessation. H.M.Jr: Well, get the exact wording. We got that, and the other thing I'd like you people to discuss is this: this whole question of possible financial assistance through government loans to Central and South America. Everybody's talking about what we're going to do with this 14 billion dollars worth of gold, and I'd like to know why it wouldn't be a good thing if Congress would authorize the President that if he felt that the Monroe Doctrine was being undermined in any Central or South American country, he could be authorized to make a governmental loan to that country, or to assist them in Regraded Uclassified 77 -4- their finances. We have right now before us the question of State Department sending a mission down to Cuba. Now, you people know what the situation is in Brazil, where they've got all these foreign exchange troubles, haven't got enough foreign exchange, American business men have to wait indefinitely for their money. If the United States Government openly and aboveboard, let's say, should loan Brazil a hundred million dollars for 20 years at three percent, something like that, why, it would put Brazil on her feet. And I personally lean very strongly - I don't know what better use we could make of our money than if we should loan it to coun- tries in Central and South America. I mean I don't want to take these devious ways of doing it through some backdoor method. I'd like to - that's what we did in - what was the country where we did it with J. G. White? Feis: Haiti. H.M.Jr: Haiti. But I'd much rather do it openly and aboveboard. And now I asked White to prepare a little stuff so that you fellows could shoot at it. Then after we get through we'll follow the regular routine. People can bring up anything that's bothering you that's my responsibility. 00 if you don't mind first taking some of my worries, then I'll be glad to take some of yours. Go ahead, Harry. White: Prepared B. hurried memorandum which has four sub-headings. "1. What currencies followed sterling down?" - to indicate that the problem is not merely one of dollar versus sterling, but dollar versus most of the impor- tant currencies. And we have supporting data so they can see at a glance just what currencies have followed sterling, which have exceeded and which haven't. And the second question asked is: "Does the total economic situation justify a lower sterling rate with reference to the dollar than $4.86?" And I've indicated all the possible reasons that might be advanced in justification of that position. Regraded Uclassified 78 -5- The third question gives some information 89 "pertinent to the above claims" that would help you to arrive at an evaluation of those claims briefly. Fourth question is "What can we do about it?" indicating three or four possibilities. The last question is "Should we do anything about it?" I have copies of this memorandum that I can distribute, or would you prefer that I Just read it out? H.M.Jr: I think it would help them if you distribute it. White: I'm sure I haven't got enough. Didn't have time to do it. H.M.Jr: Look over each other's shoulders. I say ne's (Burgess) - I don't know how they let him in. Do you (Feis) think it's all right, letting this banker in here? Feis: Yes, I guess it's all right. White: We didn't have timeto make more; we've only got three carbons. H.M.Jr: Well White: We'll spread them around. H.M.Jr: Spread them around. White: I have the original. Would you like to read it? H.M.Jr: You're going to read it. I'll listen. White: "Appended is a table indicating the percentage change in rates of exchange from August 1, 1938 to October 17, 1938" - to the most recent. I haven't many copies of those tables, but they do indicate that most of the importent countries either went right along with sterling or exceeded the sterling rate. "It will be noted that most of the currencies have depreciated during that period at least as much as or Regraded Uclassified 79 -6- more than sterling. The important exceptions are Belgium, the Netherlands, Canada and Switzerland. Of these only Belgium did not decline at all." The others showed declines varying from El half to & little more than one percent. "In evaluating the effects of the depreciation of sterling it is therefore essential to bear in mind that most currencies drop with sterling and a decline in sterling really involves the appreciation of the dollar in terms of most currencies. This makes a decline in sterling more important for the United States and less important to England. "2. Does the total economic situation justify & lower sterling rate with reference to the dollar than $4.86? "The following ressons might be advanced as justifica- tion for a lower sterling rate." Most of them have been advanced in one form or another by the British press and semi-official statements. "(a) England has been experiencing an adverse balance of payments exclusive of capital movements of substan- tial proportions while we on the other hand have been gaining a large amount of gold exclusive of capital movements. "(b) British exports are dropping while her rearmament program calls for sustained imports" - thereby indicat- ing that the situation might grow worse so far as the balance of payments is concerned. (c) England no longer has a balanced budget and her rearmament program combined with the possibility of a deepening recession will still further unbalance her budget. "(d) England cannot afford to lose much gold through an adverse balance of payments on non-capital account because she is the resting place for 8 large amount of short-term capital. She therefore needs to conserve her gold supply to make her less vulnerable in the event of a flight from sterling. "(e) England must reserve its gold stock as part of her national defense program. Regraded Uclassified CO -6- '(f) In her efforts to prevent sterling from weakening England has already given up, she claims, large sums of gold. " (g) Since the recession in England is concentrated largely In her export industries any improvement in her international competitive position is an important means of checking tne recession" - in England. '(h) England is now faced with more powerful competi- tion from one of her chief competitors - Germany. Britain thus must take strong and, if necessary, unusual measures to protect and even increase her share of the world's export trade." Those are the claims that are advanced. Now the ques- tion of evaluating those claims would be one of the things that I presume you'd want to discuss in some detail today. But here is some of the factual information that might be helpful: " (a) Great Britain's unfavorable balance of payments on non-capital items is large and has been increasing during the past three years. Our estimate for the first six months runs around 650 million and probably somewhat less than that for the second half. For the year as a whole her 'unfavorable' balance may be as much as one- half billion dollars." We've got some more detailed data available here when you want to go into it further. "In contrast, our 'favorable' balance on non-capital items is about 81 billion a year. This balance is due chiefly to E low level of imports accompanying our recession, and El relatively high level of exports sus- tained in part by the foreign armaments consumption and by the return to an export surplus in agricultural products. "(b) United Kingdom exports in the third quarter are 17 percent less than the comparable period of the previous year." This relates to their claim that their exports are declining. They had a 17 percent decline in the third quarter, a 14 percent decline in the second quarter, and & 2 percent decline in the first quarter, as compared to the previous year, which shows that their Regraded Uclassified 81 -7- H.M.Jr: Excuse me, Harry - 2, 14, and 17? White: 17 the last quarter, 14 the second, and H.M.Jr: Start the first quarter. I can't follow you. White: 2 percent, then the second quarter 14 percent, then the next 17 percent, as compared with the comparable quarters of the previous year. In other words, their exports are declining. "Our exports, however, show an even greater decline. The first quarter showed a 16 percent increase compared with 1937, whereas the second quarter showed a 7 percent drop" - that is, we went from a 16 percent increase to a 7 percent drop - "and in the third quarter there has been an 18 percent drop" - compared to last year. If (c) The" - with reference to the claim that their balance - their budget is unbalanced and will become more SQ - "The United States deficit for this fiscal year will be in the neighborhood of $4 billion. The estimated deficit for Great Britain is the amount of the National Defense Loan raised during this fiscal year - less than " - don't know exactly how much, but unquestionably less than a half billion dollars, between probably three hundred and four hundred million. "No matter what basis n - with respect to increased armaments - "no matter what basis of comparison is employed, it seems likely at the moment that our expenditures on armaments during the next couple of years will be greater than those of Great Britain. " - selecting any basis of comparison that you think is significant. If (a) We do not know now much gold the Dritish Equall- zation Fund has lost in the last few months. We estimate that the Fund probably lost no more than 2300 million and possibly much less. I haven't checked tast figure wholly with Archie, and it will be subject to substantial modification in the last couple weeks. Lochhead: I've been trying to check on the last few weeks. Of course this is a guess - you realize we can't get figures - but I think it's nearer five to six hundred Regraded Uclassified 82 -8- million. White: The losses in the last couple weeks have been ery heavy. "It must be remembered that a substantial portion of the outflow of gold from London consisted of gold belonging to other countries and newly-mined gold. England has about $2,700,000,000 in the Bank of England and at least another billion in the Equalization Account." Or that may be a couple hundred million less. The figures of their gold losses we tried to interpret from the point of view of what we have gained and what other countries have lost, and guess on what they lost in the hoards, as E basis of these estimates as to what the Equalization Fund has lost. I think six is high, but three is probably low. "We have no figures indicating the amount of foreign short-term capital left in England but certainly the 'hottest' portion of that capital must have left London during the past few months. "(e) There can be no doubt England must conserve part of her gold stock for a national defense program. The question is - how much is a reasonable amount? As 8 practical question the limiting factor will not be the amount of gold she needs for war purposes, but something in excess of that." These are not attempts to meet their claims - there's more discussion that we have on each one of them - but it's merely certain factual observations. "4. What can we do about it? Possible moves which we may take, listed in order of severity" - beginning with the least severe and increasing: "(a) We can request the British to consult with us on any further proposed variation - downward variation in the sterling rate, in accordance with the terms and spirit of the Tripartite Accord. "(b) If the British fail to agree to the consultations, or if the outcome is unsatisfactory we can announce the termination of the Tripartite Accord.' That is, if the criteria, or criterion, which they supply to us as B Regraded Uclassified 83 -9- basis of their movements of sterling is, after discussion and consultation, unsatisfactory to us, we might say that they're taking a competitive advantage which is in violation of both the spirit and the letter of the Tripartite Accord. "(c) We could use the proposed United States-United Kingdom trade agreement as & lever to prevent further substantial depreciation of sterling by insisting that a general provision be included which would terminate the agreement if the sterling rate declined by more than & stated percentage (possibly 5 percent) from the rate pertaining on April 22, 1938, the date on which active negotiations began." That would mean at about $4.71. There is another suggestion which is all prepared - something like that, but stated in the exact terms, which I can read after this, 1f you like. "(d) We can raise the dollar buying and selling price of gold. Or there's another: you can raise just the selling price and leave the buying price where it is. The effects of that we'd have to discuss as a possi- bility. "(e) Use of the Stabilization Fund to prevent sterling depreciation and, if necessary to carry out this program, ask Congress for an increase in the size of the Stabilization Fund." That "e" is practically out, for various reasons. Now the next question, and the important question, is "Should we do anything about it?" And in an attempt to answer that we will have to consider: "To what extent will our export trade be affected?" We did receive estimates prepared by the Commercial Attache in London in which he went into very considerable detail, indicating "that a decline in sterling to $4.40 would result in a loss in our exports to the United Kingdom and other sterling countries (which is only a part of the loss to our exports) as being $150 million per year based on 1936 trade figures, and 8100 million if sterling drops to $4.60." I'd say offhand that the assumptions on which those conclusions rest are subject to a wide degree of both Regraded Uclassified 84 -10- modification, question and interpretation. Any attempt to estimate the exact amount of trade that you would lose if sterling drops to a certain figure, is almost love's labor lost; you won't get very for without subjecting your conclusion to all sorts of reasonable questioning. "This estimate to be complete should be increased by the loss in trade resulting from depreciation of non-sterling currencies, and the loss in trade in non-sterling markets. Only 40 percent of our exports go to sterling countries." Lven that estimate did not take into consideration the trade effects that would result from the. decline in other currencies that will go with sterling. "(b) Our domestic markets will be subject to intensified competition from imports. "(c) The consequences upon domestic business conditions of adjustments in the export and import trade volume and character." Those briefly are probably some of the things you want to talk sbout. I can only plead that we didn't have much time to throw it together. H.M.Jr: Did all right in a short time. All right, gentlemen, where do you want to start? White: I now have that clause, if you want to read it. H.M.Jr: Fine. White: Did you want that clause? H.M.Jr: Please. White: The clause as it is at present in the general provision in the contemplated trade agreement between the United States of America and the United Kingdom, states as follows: "If a wide variation should occur in the rate of exchange between the currencies of the United States of America and the United Kingdom, and if either nigh contracting party should consider the variation so substantial as to prejudice the industries or commerce of the territories of that high contracting party, such high contracting party shall be free to Regraded Uclassified 85 -11- propose negotiations for the modification of this agreement, end if agreement is not reached within 30 days after the receipt of such proposal, the high contracting party making the proposal shell be free to terminate the agreement In its entirety on giving 30 days' notice in writing to that effect." 00 the key words are "If a wide variation should occur" and "if either party should consider the variation SO substantial ES to prejudice its indus- tries or commerce." Viner: And the 60 days. white: well, the 60 days is for notice. H.4.Jr: What did the British suggest last June or July? They made some suggestion. White: "Without prejudice to the question whether a variation of more than ten percent in the rate of exchange between the currencies of the United Kingdom and the United States obtaining on the day of signature of the agreement would constitute a wide variation for the purposes of Article 13, it is understood that no variation of that amount or less shall be so regarded." In other words, on the date of signature - let's assume today: $4.76 - & variation of ten percent up or down from that, or less, would not be regarded as a wide veriation, without saying that & variation of more than that would be; but at least a variation of ten percent or less would not be. That WBS their proposal submitted H.M.Jr: But if it went 11 percent, it doesn't mean White: That's right. H.M.Jr: It does not mean that all bets are off. White: Merely means you can reconsider it at that point, if you wish to. H.M.Jr: That wouldn't help me any. White: But anything of ten percent or less you would not be in a position to consider a wide variation. Regraded Uclassified 86 -12- Viner: Ten percent from date of signature, not from date the negotiations begin. White: And that makes a substantial difference, because it was four ninety-three or -four, Ithink, when the concessi ns were offered and it's now four seventy-six. There's another clause which has been suggested as a possible basis for discussion nere if you like, to replace that with, if it is felt that some floor 1s called for. "For the purposes of Article 18 (which I read before the last one; that's the article that's now in there) a variation in the dollar-pound sterlin_ rate of three percent or more either way from the rate of $4.36 to the pound sterling snall be deemed to be a wide varia- tion, and if for five consecutive business days the dollar-pound sterling rate of exchange varies by six percent or more from the rate of $4.86 to the pound sterling, the agreement snall be terminated in its entirety 30 days after the expiration of such five-day period.' That's a three percent variation from par; would bring it around $4.72, whichwould be regarded as a wide variation and thereafter pave the way for discussions. A six percent variation would be $4.57. H.M.Jr: Six percent? white: Would be 4.57. It would be automatically terminated at 4.57. At 4.72 would be the area in which you could begin negotiations; those figures are just ten- tative. H.M.Jr: But the six percent would be 4.52? White: 4.57. Gold'r: Would you mind reading that again, this last one? White: This is supposed to be in addition to and would not be made public; this would go as part of the secret minutes or whatever it is. Feis: (Nods no) Regraded Uclassified 87 -13- White: No? You mean that no such thing is possible, you don't have any understandings outside of written agreements in international affairs. Well, in that event it might have to be modified, if the State Department persists in that view. "For the purposes of Article 18, a variation in the dollar-pound sterling rate " - incidentally, the British asked that their ten percent rate should not appear in the agreement; when they offered it, they asked that it be understood and appear in the minutes and not in the agreement; but probably they (American State Department) pursue different tactics. Viner: Listen, Harry, if they operate on the rate - we tie ourselves to gold and they operate through gold, and let's assume that as a result of their operations, or of conditions, the sterling rate goes up to five five; then they can terminate the agreement. White: That's right. H.M.Jr: Even though they have taken the initiative. White: Well, I don't see now you can - you have to have a two-way clause. That isn't a grave danger. But they would be justified if, in wanting to reconsider Viner: Supposing we raise the price of gold. I mean let's take it the other way. Suppose we by Presidential action raise the price of gold. White: You raise an interesting question, important question, which will have to be discussed here. It is clear that at present any alteration in the rate is prac- tically British-determined. They can determine the rate and we can't, except indirectly. Viner: By changing the price of gold. H.M.Jr: That's right. Viner: Therefore, one might take the position that since we're the passive agents, we need some protection of that kind. Regraded Uclassified 88 -14- Let's assume that a clause like that is desirable. You ought to put it in general terms, so it takes care of the direction of the initiative, so it doesn't indicate by its form that we expect tnem to depreciate and there is no question of our doing it. H.M.Jr: Well White: Shall I repeat that? Gold'r: I'd like to hear it, because I missed one or two of the points - if you don't mind, Mr. Secretary. H.M.Jr: Sure. White: "For tne purposes of Article 18, a veriation in the dollar-pound sterling rate of three percent or more either way..' - these figures are just tentative - "from the rate of $4.86 to the pound sterling snall be deemed to be a wide variation" - this is explain- ing and defining wide variation in the exchange - "and if for five consecutive business days the dollar-pound sterling rate of exchange varies by six percent or more from the rate of $4.86 to the pound sterling, the agreement shall be terminated in its entirety 30 days after tne expiration of such five-day period." Unquestionably this will nave to be modified and changed to make Viner: See, my point is this. Supposing sterling rises again because of market conditions to 5.05 or 5.10, or what- ever the precise point is; that would automatically terminate the agreement. Tie certainly don't want that; they mightn't want that. Yet both parties would be bound to it. And the importer who is anxious to know what the rates would be at a certain time, finds us saying, reading that literally, that when sterling goes up - automatically, upon reaching that point tae agreement expires. H.M.Jr: What I said to White, carrying the thing - as far as I'm concerned, all I want to do is put a floor under sterling, and that's all I was interested in; and all that - well, just to make it easy for the President and myself, so that we wouldn't have this terrific job of going through as great discussion of trying to Regraded Uclassified 89 -15- interpret what B wide variation is. Now, if, let's say - first, we haven't agreed that we want to do it, but if we wanted to do it - I mean as far 88 I'm concerned, all I am after is to put a floor under it now, and I wouldn't suggest any more than that. At least that's the way I feel as of today. But I'm taking it that White feels that if we wanted to put a bottom the English would insist on a top. Viner: My point is that this puts a ceiling too for each country. H.M.Jr: Well, I didn't ask for that. White: That can be modified, I think, to meet both objections. I think you've (Viner) got a legitimate point. H.M.Jr: That's White's contribution. white: All of us. H.M.Jr: But anyway .... Gold'r: I should think, Mr. Secretary, it would serve your purposes if you have your clause read that in case a variation of six percent occurs either high con- tracting party will have authority - will have the right to denounce the treaty, rather than to make it abrogated automatically. I don't believe you'd want to bind yourself to having it abrogated auto- matically when a certain point is reached, because you can't tell now what circumstances there might be at the time and you might not want to have it automatically lapse. You ought to have the authority to denounce it if you want to, but certainly not have it occur just of itself. Williams: Couldn't you soften that by suggesting that at that point a discussion should begin? Viner: That was one of the other clauses. White: Well, you could make it that at one point discussion begins, at the next lower point the discussions are terminated. Now you can vary those points to meet - Regraded 30 -16- I think, to meet both your objections, because there would be a time in between in which negotia- tions could take place and in which case this por- tion of it could be modified. So the question would be whetner - (a) what rates those shall be, and (b) whether you want anything of this sort in at all. Williams: The modifications that would come out of discussion might render unnecessary and undesirable the abroga- tion. The thing that bothers me about it is that provision that it contains for dropping the whole business. It seems to me that's going pretty far, unless we're prepared to say now that so much - such a figure as what you gave, 4.57, is undesirable. I don't see now you can know that. White: Well, apparently from the British point of view they regard it - not necessarily that it's proof - but they regard it 88 pretty important, because they all seem to feel that - such arguments as have been made in the press and by quasi-public officials are that a decline in sterling is necessary in order to pre- vent a continued disequilibrium or drain on their gold reserve. Williams: What I'm saying - let's assume they might be right on that - would it be desirable for us to say that "at this point this agreement shall be terminated"? Couldn't we cover it with the provision for discus- sion, leaving the other question quite out of the agreement, covered in some more general way? White: That avoids the very issue which the Secretary wishes to take care of. Viner: I think the first point in this memorandum is important; that we might, on the best study we could make, feel that a slump in the English sterling rate was warranted by English conditions, but we might feel, for instance, that for Sweden, whose position is strong and so on, to go along with that is not warranted. And I don't see why we should hit at England in that case, but the question might arise on & whole range of other coun- tries. White: Except that Angland must bear the responsibility of, or must take into her considerations, as we must take Regraded Uclassified 91 -17- into consideration, that if she goes down a lot of other countries must follow her. H.M.Jr: Excuse me. I don't think Herbert Feis heard me say this. I'd like to say it again: that up to this point - never mind what the British newspapers have said, or all their comments, and everything else - I want to go on record here with you gentlemen that up to this point I am personally entirely satisfied that the British Treasury has done every- thing possible to hold sterling in line. Now, I don't think 1 said that when you were here. Feis: No, sir. H.M.Jr: But up to this point - never mind what they have said - I am personally convinced that the British Treasury has done everything humanly possible to maintain sterling where it is. I just want to say that, see? So - I think it's important - up to this point, I mean, I have no doubts in my mind as to their sincerity. Go shead. I mean that's - you agree with me, don't you, Archie? Lochhead: Yes. We can argue, but in the main they have gone out and supported it. White: I don't agree with that. Viner: I wouldn't be able to accept that proposition quite as stated. I'd say it is quite possible - I'm pre- pared to agree that they've done everything we could reasonably expect them to. White: That's right, because after all they could have Viner: They could have kept it at the original rate. White: They'd have lost more gold. Gold'r: Isn't that all you mean, Mr. Secretary: that they have done everything that could be reasonably expected? Regraded Uclassified 92 -18- Viner: That we're not dissatisfied with the efforts they have made to maintain the rate? H.M.Jr: I mean I have no - I've read the paper - for instance, a number of times the British Treasury has said, "Well, the United States Treasury doesn't say any- thing that they're dissatisfied." Well, I have no reason - if Sir John Simon should walk in here tomorrow and say, "Are you dissatisfied?" I couldn't put my finger on anything to say where they had not done everything within reason to maintain the present rates, and when they spend 60 million dollars in one day I think that they've gone as far ES they could within reason. Now, somebody might say they ought to have spent 120 million dollars that day; but at least they've done everything that they could. And for your information - it's all very confidential - they're drawing on their earmarked gold in France now, and they're even drawing on some of their gold in the Argentine. So somebody could say, "Well, they should have spent twice as much." Well, maybe they should and maybe they shouldn't. But the thing that bothers me is this little birdie that dropped this thought in my ear: that they'll do what they are doing up to the minute the trade treaty is signed, and then the bottom drops out. Taylor: There is - I think there is one point that is his- torically interesting, before we get too far with this discussion of this particular clause. When this other clause with the ten percent limitation on it was proposed, we took tne position that we'd prefer to stick to the standard clause and not mix up the dollar-sterling rate with the trade treaty negotiations; and that as far as we were concerned, why, the principles of the tripartite agreement - in other words, no competitive devaluation - were the ones that should be in our minds; that we had much greater freedom of action if we stuck to the tripartite principles and emphasized that. We also had two conversations with the British here, very serious conversations, and told them to tell their trade delegation to lay off this trying to Regraded Uclassified 93 -19- bring in this sterling-pound relation - I mean sterling-dollar relationship, at that time. Viner: Has the original suggestion come from them on this question? Taylor: Came from them, and they were trying to feel us out on this ten percent. H.M.Jr: But date this. It was June and July. Taylor: It was in June and July. H.M.Jr: But the thing started with them. Viner: what did they want? White: Wanted to smoke us out, find out how low they could go. Taylor: In other words, we thought about it quite carefully and we took the position that we did not wish to introduce what you might call the relationship of the pound and the dollar into the trade treaty. There were various reasons for doing that. White: Yes, our chief motive was - we felt that all they wanted was information as to how far they could go down and we stand it. You see, their opinion has been, as evidenced by numerous statements and by the general attitude of the British press, that we would not stand for a break through 4.86. They said that numerous times out there - I mean the British press commented on that. And we felt that this in part was an attempt to find out whether we really felt that way, and the fact that they used a ten percent variation either way, and the fact that they weren't satisfied with the general tenor of the provision, which in itself is sufficiently liberal, led us to believe that they had an ulterior motive, particularly because the request came apparently from the British Treasury and not from those negotiating the agreement. And as a conse- quence of that, the answer then was as Wayne indi- cated. Regraded Uclassified 94 -20- Taylor: Specifically asked the British Treasury to tell its trade negotiators to lay off this one. We didn't want to talk about it in this connection. Gold'r: That ten percent, Harry, is based on the rate at the time of the signing of the treaty rather than White: That's - the first time it wasn't specified. First was en oral request; they were turned down, as Wayne Taylor indicated. About a month later on, when their drafting expert came from London, he had already written out - on July fifth, that was, almost - more than three weeks later he had a provision written out which embodied in words their oral request, and in this written request it was as of the date of signing. In other words, they felt they would like to try it egain on July fifth. So though it is true that we took the position that the wide variations were adequate, I think the situa- tion nas changed and might warrant, if we felt that it was desirable from the point of view of the exchange rates, legitimately taking the position that the con- cessions were evaluated on the basis of the then pre- vailing rate; and those of you who are familiar with the agreement have in mind that a good many of the concessions granted were not large in terms of per- centage of the total value - though there were a num- ber of concessions which were 50 percent of the existing duty, the existing duty is not large in many cases - so that a variation of ten percent would wipe out most of the concessions that were granted, providing prices didn't move in a contrary direction, and it so happens that prices are moving in a direction which is again more unfavorable to us. So they cen't say, "Well, our prices have risen, therefore these concessions are not wiped out by E ten percent depre- ciation." The opposite has been true. Viner: You mean their prices are moving down relative to ours. White: I mean their index. I wouldn't say the specific commodities; I don't know. Warren: I'd like to raise one other question. Does the treaty run for & stated number of years or indefinitely? That is, is there any other terminal Regraded Uclassified 95 -21- than this clause provided for the treaty? White: I don't know; I think it's indefinite. H.M.Jr: Herbert Fels ought to know. Feis: I don't remember the general phrasing of it. Viner: None of them have an indefinite length, have they? Feis: Oh no, there are provisions for termination. I don't just remember whether this is three months or six months. Taylor: Have dates of termination, don't they? Viner: And have dates, don't they, when they erminate unless renewed? Feis: After a limited perioù of time, tney can all be terminated. It's either three months' notice Taylor: When I made my comments, I wasn't suggesting that we shouldn't review the situation. I W&S merely giving the historical background of what had already been done. Viner: Of course, if there is a three months' notice clause in the agreement already for termination, that does raise the question as to whether you need any more provision than that. White: Well, that depends on the motives for which the pro- vision is written. There is adequate protection against trade difficulties. Oliphant: If you acted under the three months' clause, Jake, you'd have to assign à reason for that. Viner: What? Oliphant: If you acted under the three months' clause, you'd have to assign a reason for so acting, which would bring you back to the embarrassment which the Secretary mentioned. Viner: AS compared to one form of this, but not as compared Regraded Uclassified S6 -22- to the other form. It would still require a reason. There's only one of these which is automatic, you see, White: I think perhaps sight is being lost of the fact that that was included - place for this discussion - as one of the ways for checking a decline. I mean, in other words, it isn't an attempt to protect the trade agreement; that's the trade agreement's business. Williams: It seems to me that the really fundamental question is, now desirable is it to attempt now to put E definite bottom under sterling? It seems to me that we're coming into new conditions that we have had no exper- ience of up to now. We have always faced the question whether England in El new depression wouldn't depreciate the pound, and indeed have to in spite of the best efforts possible to prevent it, and the Question has always been, what will be our interest in that sort of situation? Now, we could fight back and SO protect our trade position for the short interval. Another way to look at it would be to ask ourselves whether WE wouldn't gain more on balance if the English policy were such as to alleviate the depression over there. I can imagine our losing out E. little bit on the terms of trade and yet getting actually much more trade if England were in a healthy condition. Now, I don't know the answer to that; I don't believe anybody does. I can see that the English in some ways would dislike 8 depreciation of the pound in so far as their thinking about the cost of armament, for example, the necessity of imports. They may be very desirous of preventing a drop in the pound. It is somewhat the same problem that arises for them in war. When they have purchases abroad to make, they're interested in supporting the pound. So it's a very mixed question. But it would seem to me unwise to attempt to tate a definite bottom such as would abrogate these whole arrangements. I would prefer to see some other pro- vision which would make possible the modification of the terms of the treaty, or something of that sort, insure full discussion of the problem, but not close it out at some bottom which it seems to me nobody can really determine at this time. White: At what point, either in point of history or in point Regraded Uclassified 37 -23- of exchange rates, would you r egard it as & reasonable point at which tosay, "This has gone 50 far that we want to know what your proposals are in the future," that they are adversely effecting us? And though they're benefiting themselves, we may take the position that we would prefer to have them gain from our health rather than we gain from their health. Williams: Yes, that, of course, is the difficult question. I don't know, but it seems to me that you can afford to be somewhat less certain about that - we could take your figures, for example - because all it means is, we all recognize that the time has come for serious discussion of the problem. H.M.Jr: Pardon me - you say the time has come? Williams: I mean at some such figure H.M.Jr: I thought you meant the time has come now. Williams: No. Upon a further drop of X amount. Viner: I think if you thought that 4.50, let's say arbitrarily, was a time when serious discussion should take place - I'd say it would be all-important to have the discussion beforehand and not have it in the midst of an emergency or crisis; not have it on such a basis that we'd be in a position that we'd feel they have to retreat from de position they've always recommended. Williams: That would suggest you'd want to put the figure 8 little higher. Viner: No, it would suggest, from the point of view of discussion, that discussion ought to be outside of the agreement and ought to be early, if possible. So there ought to be a clarification of views es to what variables each country would take into account in deciding whether the other country's actions were justifiable. Stewart: It occurs to me, Mr. Secretary - the original reaction you had - that it would be desirable to keep these things separate if possible. Regraded Uclassified 98 -24- H.M.Jr: Excuse me - you're asking or telling me? Stewart: No, I'm making an observation that one gets forced into a different point of view because one is concerned at the chance that the agreement is made and then the rate goes lower, and then you have to take some action outside the agreement; apparently even with the British Treasury doing all that can be expected of them, you have already had 8 decline of rate which may be embarrassing with reference to the rates established at the time the trade treaty was entered into as a basis of calculation. I assume that there is nothing in the tripartite agreement which provides any range of variation, nothing which automati- cally brings in discussion. Would it be fessible to have B trade agreement premised upon a continuance of the tripartite agreement and then have modifications in the tripartite agreement of the kind that you (white) have suggested in B and C (4 (b) & (c), pp. 8-9) of your program, in which you make one conditional upon the other; then use the mechanism of the triper- tite agreement for bringing in the whole matter of discussion and laying down there the range of varia- tion, separating the monetary from the trade. White: It's an interesting suggestion, particularly Viner: Particularly as the question of consultation has arisen in connection with the tripartite agreement, but our precedent Taylor: You have a mechanism for consultation at any time on any subject, and you have 24-hour protection under the tripartite agreement. White: Let's see if I understand that clearly. H.M.Jr: May I interrupt just for a moment. I want to let you people know, so you have all the background - sometimes human frailty brings you to & position which subse- quently seems important, but at the time very unim- portant - this suggestion of the British was brought to my a ttention, oh, just a few days before I was sailing for surope, and I WES completely all in. And I said, "I just cannot take this up; this is too importent to take up a couple days before." And I simply said, "Let's stall on this thing." So the thing Regraded Uclassified 99 -25- was not that we didn't want to have this thing one way or the other, but the fact W8S that I was - my brain was just all in and I couldn't take the matter up three or four days before. And I also felt at the time - and I think that I was correct - that the British were bringing it up not so much because they were serious about it, but because at that time, for some reason we didn't know, they wanted to stall the trade treaty, postpone discus- sions. At least that was the impression that I had, and that impression gained strength after I saw Kennedy abroad. So I just wanted to tell you this wasn't a policy that we sat around and delayed, said, "Well now, this is something - it was arrived at because it came up a few days before I was sailing and I wasn't physically or mentally in any condition to take up as serious 8 thing as that. I said, "Well, the only answer is we've got a whole lot of other trade treaties; we'll follow the same thing." And I told Taylor, "Well, let's just stall them on that thing." But I wanted you to know how it was arrived at. Stewart: I can see that, and furthermore, certainly circum- stances now are very different from the ones existing in July. And I think quite reasonably a trade treaty calculated upon one rate of exchange, and with E three percent provision - you would be now on that basis of entering into discussion, at 4.57 - or rather, 4.72. As to whether or not there ought to be a discussion, assuming narrow limits, assuming the unforeseen, also assuming the State Department can't enter into side agreements, it did seem to me that the tripartite agreement might give one an opportunity for discussion between those parts of government which now have that problem before them, more easily than the elaborate trade agreement, which nas to go through different channels. H.M.Jr: In other words, we already have E. side agreement. Stewart: You modify the side agreement. White: There is 8 definite responsibility which the Secretary Regraded Uclassified 100 -26- of the Treasury has which I think might be mentioned, although it is doubtless clear to all of us. I think it is worth while repeating. The trade negotiations are entered upon, are consummeted; trade agreements are made. They are based on the assumption that certain exchange rates prevail; that is implicit in them. Otherwise, the trade negotiations have no significance whatsoever, and all the discussion, months and months and months of discussion, on concessions become absurd. And the responsibility for maintaining stable equitable exchange rates is the Secretary of the Treasury's responsibility. So that he cannot be subject to the criticism of saying, "Here we worked for two years to make a trade agreement, and you ruin the whole business - to say nothing of ruining other things, or spoiling other things, by not adequately protecting our interests so far 85 exchange is concerned. Now, your (Stewart) thought is that that protection already exists in the tripartite. However, in order possibly to tie it up, your thought might be very good; In other words, you might interpret "wide" in this agreement as relating to competitive advantage in this other agreement, and then under the terms of the tri- partite accord we can say, "Look here, these variations are such as to give rise in our opinion to the belief that they may be for competitive reasons; we therefore want some consultations to indicate what other criteria you are employing to lead you to that conclusion, to see whether or not we agree, whether we shall not consider the tripartite violated." However, it would make it a little easier if it were again tied back to the agreement so as to interpret "wide" from the dis- cussions which are entered upon by the two Treasuries; that is, they should be the agencies to consider whether or not tast depreciation is competitive or not, because all other agencies depend upon the Treasury - Secretary of the Treasury to maintain equitable, reasonable rates. Stewart: I think it would be easier, if you could foresee the circumstances and be confident you could foresee the circumstances under which discussions would arise, if you could specify 8 rate. But if you have a rate specified and you can't foresee, I'd rather trust to consultation. Iclassified 101 -27- H.M.Jr: You'd rather what? Stewart: I'd rather trust consultation under the tripartite, I think. White: Except that they haven't been very - they haven't been sufficiently helpful to give us an indication of the facts upon which they are going, up to now. Stewart: I think your B and C here H.M.Jr: Well now, just to give you - excuse me - give you some more facts - Herbert Feis will have to refresh my memory. Some time, Herbert, since I've been back, September or October, I did give Mr. Hull a memorandum which I understand he did give to the British Ambassador. Did he? Feis: Not the memorandum, but the substance of it. H.M.Jr: Would you mind telling these gentlemen while they're here - what did we say, do you remember? White: I H.M.Jr: Have you got it? White: I have it here. H.M.Jr: Will you read it? White: Shall I read it? I mean just that H.M.Jr: These things come back to me, see? White: I assume it was given as you gave it to them. This is what you gave. H.M.Jr: Herbert Feis says the substance was given to the British Ambassador here. White: This was September 8. H.M.Jr: September 8. White: September 8. Regraded Uclassified 102 -28- H.M.Jr: All right now, what does it say? White: "There is one aspect of the fall of sterling which is disturbing me and which doubtless is giving you cause for concern; namely, the effect of the fall of sterling on the trade agreement now being negotiated between the United States and the United Kingdom. On April 26, 1938, when I understand the United States made a major part of its offers to the British Government, the sterling- dollar rate was $4.987. Today the rate is around $4.833, a drop of over three percent. This decline nas, of course, already raised the value of the con- cessions offered to the United Kingdom and lowered the value of the concessions offered by the United Kingdom to us. "What disturbs me particularly is not the fall which nas already taken place so much as the possibility of B1 furtner decline. The British financial press con- tains frequent comment to the effect that sterling even now is overvalued with respect to the dollar. Officially we have received no indication that a lower sterling rate is contemplated, nor have we yet decided what action the Treasury Department would take in the event of a further drop in sterling. However, it 1s clear that in view of the relatively small r eductions in the duties offered us on numerous American exports to Great Britain, any further decline might completely neutralize many of the benefits we had hoped to obtain from our export concessions, as well as increase the value of the concessions granted to the British." I think the next sentence was left off. H.M.Jr: Yes, I think SO. Feis: That's far enough. White: The next paragraph was left out. H.M.Jr: From whom to whom was that? White: This was from the Secretary of Treasury to the Secretary of State. Whether it was formal or informal, I don't know. H.M.Jr: Informal. And the date of that? Regraded Uclassified 103 -29- White: Well, the date of that is September 8, 1938. Oliphant: About what was sterling at that time? White: That date it was 4.833. H.M.Jr: And that was repeated informally to the British Ambassador. So I mean - do yousee? - I mean gradually we'll give you the whole story. Viner: Was there any reaction to that memorandum of any sort? Feis: No marked reaction, but recognition of the fect that it was E matter of substance. We hadn't asked for any specific pledge or response. H.M.Jr: Now, Riefler's having trouble with blood-pressure, and I want it relieved, so will you please go shead, Riefler? Riefler: Well, it seemed to me that we were - at least coming in rather cold to it, I was being confused between what seemed to me two issues. One is the immediate issue of the sterling exchange, in which you have a great many considerations that would indicate that they might want a lower value and that there might be reasons for advocating it; and there are other reasons - the sterling bloc and that sort of thing - which indi- cate the opposite. And that's the type of issue we've been dealing with in the tripartite. The second issue is the issue of a trade agreement, which is a treaty to establish B. basis of doing certain kinds of dealings for a long time. Now, at the present time there are a great many reasons way a drop in sterling bothers us. It is easily conceivable to me tast during the life of this trade agreement sterling may go quite low; I mean the sterling bloc may break up. They've had E bad blow to their prestige. We may have a situation like we have had with France, in which all the effort in the world couldn't hold sterling to any agreed level. And we might not want at all to dis- turb a trade agreement during that period, although we would want different rates. And I think that you ought to look forward to Regraded Uclassified 104 -30- protecting yourself against the kind of contingencies tnst would orise under varying circumstances in the future. You don't want to be embarrassed. If sterling should drop drastically ecause of serious disorganiza- tion in British finance, and that is possible under the circumstances they face, you would have great pressure from exporters to change your rates; you'd have pressure from domestic interests to stop British imports coming in. And you would want to have a chance to look at those in a rather detached spirit and not under the pressure of heavy political pressure from the Hill. So tast - I go back to Walter Stewart's suggestion of distinguishing these two things, the tripartite end the trade agreement. And on the trade agreement i wondereu whether it wouldn't be possible to have some sort of an escalator clause tast automatically - vita the change of a certain amount in the sterling rate the percentage of concessions varies a certain smount. I mean that would give you a protection against pressure outside. They would know beforehand that this did bring certain penalties. And then a further provision like the one you now have, that under those circumstances negotiations could begin - would be under way to rearrange the rates. I mean have on automatic penalty with & change in therate, and then have negotiations to either modify or accen- tuate that automatic penalty. It would give you time and take pressure off of you. Because this may be very embarressing as it comes, and I think some sort of automatic change in the rates J.M.Jr: You mean ilefler: would give you a much better mechanism with which to deal with it. decide: You mean automatic as far as the trade treaty goes. linfler: Yes, the trade treaty would have in it that with the change of a certain amount in the rate, automatically the concessions are then changed, but that those changes are then subject to negotistion. I mean you wouldn't then be in the problem of a completely new negotiation that you would have to initiate, Regraded Uclassified 185 -31- H.h.Jr: Well, may I - just one second, Jake. Can you hold your thought a second, Jake? Viner: Sure. H.M.Jr: I mean my thinking is clear to this extent so far - I mean I just want to take a pause a minute - and that is that, after all, our first responsibility on the external dollar is in connection with the tripartite treaty, and that affects sterling and the whole sterling area. And I think the thing that we ougnt to - that I want help on - is to examine that picture and see whether this fall in sterling is one which is a natural fall from trade balances or whether it is one which is being stimulated for trade advan- tage. And is the fall already serious enough that we should do something about it? And then I think after we take that look at it, then this other thing, which e verybody can recognize - that the wey the trade treaty is now, for me to buck that after it is signed and invoke the monetary clause - it will DE a very, very difficult thing, because we'll see it first before business feels it, and we'll have to be out in the forefront, in the front trenches, before they realize there is a war that's on. And thirdly, I don't want to have us find ourselves in the position we were in in 131 and 132 - to take two years to get out of it. Now, I mean on - I mean I'd like to be smart enough to foresee this thing and not have this collar around my neck and then maybe take 12 months or two years to wiggle out of that damn thing. And just to go back to one little thing that somebody raised, if there WES anything in it - I know the President wouldn't sign any agreement or let me sign any agreement which would tie his hands as to what he would do with the dollar. But - I mean you brought that out in the beginning. So I just wanted to - I'm just thinking out loud. But go shead, Jake. Viner: Well, in connection with dissociating the trade agreement from the exchange rate problem, I'd say that Regraded Uclassified 108 -32- our trade agreements thinking has generally been in the past in terms of stable exchanges. When you have fluctuating exchanges, you can't separate trade negotiations from exchange rates; you've got to think of them together for expedient purposes. But - you may separate them in agreements, but you've got to do your thinking together. And I want to point out three alternatives from the trade agreement side with respect to exchange rates when they're fluctuating. If your tariff has specific rates and the other countries depreciate, the ad valorem e quiyalent of your rates rises automatically. If you/ad valorem rates, as we have, the specific equivalent falls automatically. Now, your (Riefler) suggestion is really an exchange depreciation duty - you're tying it to a regular duty - but an exchange depreciation duty which keeps the ad valorem constant. Now, which one of those things three do we want to attain? Stewart: Two of those I get; what's the third one? Viner: The third one is the equivalent to his (Riefler) suggestion of having a flexible rate; that is the equivalent of an exchange depreciation rate, which is 8 supplement to the other duties, and when the other exchange falls and presumably cuts the duties, we White: What would that do to the most-favored-nation clause? Viner: Well, the British had an exchange depreciation duty which was discretionary after 1919, and they never applied or were attacked in Parliament for not apply- ing it; and they explained then that they didn't apply it because their law officers told them it would violate the most-favored-nation agreement. I think that was one of the reasons given here in 120, '21, and '22 for not applying it. Now, you have that problem there. Regraded Uclassified 107 -33- You see, if you stick in a supplement of that sort - well, no, you wouldn't, because you wouldn't be applying it against a particular country; it would spread at once to all the other countries entitled to most-favored-nation treat- ment. White: And moreover, if you took that position, you would raise the question as to whether or not a change in the prices of the specific commodities in the various countries might not have to be reckoned against. Consistency would demand that kind of an approach and would raise all sorts of problems for the negotiators - specific ad valorem combinations Viner: I think part of the background we ought to have here is a calculation of the percentage of our exports which is to sterling area countries which follow sterling, not England; and the percentage of England's exports which is to sterling area countries; because that indicates the additional elements of movement in our trade position when sterling moves. Riefler: assuming it's maintained. Viner: Assuming it's maintained, yes. Here is one little element at the present time from the Canadien position. The Canadians back in 1929, '30, '31, and '32 followed the dollar more than they followed sterling, and the Canadian Government is now being attacked by the western provinces for having done that and being charged with it as having been a mistake, and their Royal Commission is answering that it was 8. mistake but you can't blame them, because they didn't have E central bank or machinery to adjust it. Now they in the same position again of having to decide which they're going to follow, and the pressure is strong there, I know, on them to follow sterling now. White: Well Viner: Now, that's another point. White: They went down 1.1 during the period in which U.K. went down 3.3. Regraded Uclassified 108 -34- Viner: Yes, I know, they're down 2 now. White: Well, this is October 19. Viner: They're cutting in between, but there is great pressure on them to follow the lowest one of those two currencies and not do what they did before and slide in nearer to us than them. Now, I just say the Canadian exchange is of some importance for us. White: Which merely accentuates the importance of doing what we can to check the sterling decline. Viner: Or bringing to their attention, at least bringing into the picture, the fact that we are Interested in the sterling rate not only for its own direct sake, but for all the rates that it drags with it. diefler: May I add one thing more to my suggestion? I was suggesting that something that would be very roughly equivalent to E constant ad valorem rate be used, but I don't tains it would be possible mechanically to work one out that would adjust automatically, because you nave too many problems involved. What I was suggesting was that you have in the treaty automati- cally a rough compensating penalty for changes in the rates, and that those go into effect sutomstically as of El given period: at the end of 30 days; then the negotiations take place, it seems to me, in E much more fevorable stmosphere. We were saying before that really those things could only be handled by negotiations at the time. I think that's true. But the negotiations should go forward in terms of an stmosphere of trying through the negotiation to restore what was a status quo, rather than disturbing a status quo which has become favorable to one party against the other. I mean if sterling should depreciate and we simply have a clause in there which says that on 30 days' notice we may negotiate, we're going to be negotiating in an unfavorable atmosphere, because the depreciation of sterling automatically improves their position and makes ours worse, and it means an atmosphere of pressure and difficulty, tenseness - few days, 30 days, 60 days - atmosphere of pressure and high feeling that they're gaining the competitive advantage and therefore we won't let them do 1t, and so forth. Now if instead Regraded Uclassified 109 -35- the depreciation of sterling automatically penalizes them, throws the weight the other way, it means that sutomatically the concessions are roughly equivalent or even tip the scale in our favor. Then when you enter into the negotiation, I think you have a better chance of adjusting the new concessions to the actual situation. White: I think that proposal overlooks the most important aspect we are concerned with. It may help to restore any losses or any alterations in the concessions as between the United States and England. But we must constantly bear in mind that an alteration in the sterling rate affects our trade almost the whole world over, end any neutralizing effect that you may be able to introduce by altering the duties on British trade alone, aside from the objections of the most-fevored- nation treatment, would leave untouched the losses sustained by this country in their trade with all other countries. Viner: It would touch only those commodities which have concessions on them in the trade agreement. White: You could raise 8 rate already incorporated in another trade agreement. Viner: How about that, Herbert? Aren't there retes in the British trade agreement which are already provided for at minima in other agreements? Feis: I don't understand that, Jake. Viner: Supposing there was some escalator provision of some sort which provides that when the English exchange goes down 5 percent, one third of our concession is taken away. Would that involve us in difficulties with other countries with which we have made conces- sions on the same items? Feis: (Nods yes) We'd be involved in numberless difficulties of many varieties, practical and commercial. Viner: So that's that. Lochhead: If the rate went down 5 percent on teel, the Swedish rate would go down 5 percent automatically. Well, that wouldn't Regraded Uclassified 110 -36- Viner: Yes, supposing we have & duty on steel from which we nave made & 5 - 15 percent concession to Sweden, and now we make 8. 15 percent - or, 20 percent concession to England; Sweden gets the 20 percent rate. Now, we cut tast concession to England because of sterling depreciation to 10 percent. Can WE do that? You see, we have no right to cut it to Sweden. Lochhead: I was going to say that. White: It depends. If the lower rate was 8 result of the British agreement, sue WES being merely extended most-favored-nation treatment, in which case you could take it back. Viner: The case I NES taking was where you went beyond the Swedish agreement in the British agreement. Warren: All this discussion seems to me to have been resting on a premise that a declining currency is an advantage to the country whose currency is declining, B competi- tive advantage; and some of it has rested 30 heavily on that premise that it nas been assumed that the country might seek A depreciated currency in order to gain that competitive - hypothetical competitive sdvantage. I think that we ought to et least consider the possibility that the decline in sterling should be merely a reflection of economic forces beyond control, in no way either sought us a competitive advantage or even conferring E competitive advantage, and one in which the decline might be presumed to be no more then a sort of blind effort to reach E new equilibrium. And where a telk of 6 penalty presumes that the party. who is suffering is doing something wicked for which he should be punished, in case it is something beyond control and mere groping for a new equilibrium, then tae idea of penalty, it seems to ше, snould be exchanged for one of recognition that that might - that may be a way or compensation. Oliphant: And in that event your tripartite mechanism wouldn't do you any good. Riefler: What? Oliphant: Your tripartite mechanism wouldn't do any good. Regraded Uclassified 111 -37- Vinor: It would be an exchange depreciation but no competitive advantage; that's his point. Ollphant: No, no, He says, suppose there 1s an exchange depre- ciation with 10 competitive advantage, but the competi- tive advantage was not sought. Viner: No, ne says if it reflects 8 basic change - if the fall in sterling reflects E change in the economic situation of England, you might Warren: say that the United Kingdom with which these negotiations were initiated was E different United Kingdom from the one with which they were being concluded, and the latter is much veaker. White: There are some phrases there that are the key phrases and must be examined, because they give 8 connotation which I think alters your conclusions very, very much. when you say "groping for an equilibrium" and use the assumption that there is an equilibrium which is good for england which she is groping for, and that she may - it Isn't the competitive advantage which concerns her, It's the fact that she is In E disequilibrium and is searching for equilibrium - those are phrases which I think we all agree, because I think we've all examined them at some length, look good only when you don't get below the surface. What we mean by disequilibrium as far as England is concerned, in this situation - those who claimed that Angland is in disequilibrium have always said that the proof lies in her international trade and her inter- national balance of payments, or the evidence is there - proof - and that her attempts to alter that international balance of payments situation must rest on chiefly an attempt to alter her trade balance in an effort to restore that equilibrium in the balance of payments, not this general equilibrium that you (Warren) are speaking of. And I think we're apt to find, if we examine that carefully, that that is largely - not wholly and not always, but very largely & competitive, à bargaining matter; it's a question of one country's gain as against another country's loss, speaking in the short-run, not in the long-run episode. And England's attempt to alter her rate, in so Br as Regraded Uclassified 112 -38- sae is attempting to alter that rate, lies in the hope that - in the expectation that that alteration of rate will alter ner balance of trade; in other words, that she will export much more relative to ner imports. and they will export more relative to her imports because she has E more favorable price with which to capture markets. If you want to call that groping for an equilibrium, that's all right, but I might want to call that sttempting to seek an a dvantage in third markets - which we might want to grant for various reasons. Williams: That needs to lot of elaboration. White: I grant that. Williams: It may not amount to disagreement, but may - but put a different light on it. It seems to me that back in the great depression a lot of things we thought we knew were proved to be untrue or to need modification. The depreciations of currency didn't work out in changes of trade in the way that you would think. White: It did in many countries, John. Williams: And not in many others. It's E very curious thing that countries that depreciated their currency and had no advantages against each other nevertheless found their trade growing - that the effect WES really internal rather than external. Viner: Yes, but, John, there was also this difference. They started out on the gold standard and reserve require- ments, and part of our troubles - the English trouble was impairment of their reserves for their banking structure. Williams: Gave them monetary release, tnat's true. Viner: I think that was the recovery element rather than the exchange depreciation. But I'm not sure that that same element is in the situation now. Williams: That's right, I mention that as an illustration only. Now perhaps today we may be faced with some internal conditions which, of course, have external reflections; they always do have. But if you think of the capital Regraded Uclassified 113 -39- items rather than the trade items and of the reasons why there may be flight from the pound and the effect of that on the exchange, it might very well be that, as Warren is saying - that there is some adjustment of rates tast would have a good internal effect and a good effect on capital movements, and not be aimed primarily st the trade balance. Nhite: That's quite true, but if the examination is made on that basis, they' got the weakest case, because capital movements per se occur either when you expect E recession in the country you are in ES compared with some other, or when you expect on alteration in exchange rates, and I would say that the cnief motive of much of the capital which has left England in the last couple of weeks has been the enticipation of further altera- tion in the exchange rates. And therefore to say that capital is moving out because it is afraid of exchange rates chenging, and therefore we ought to change exchange rates in order to stop that capital from moving - that nas some point. But one might Elso SEY that maybe you'll stop that capital movement by giving some evidence to the public that they're not going to lower the rate. Williams: I can't argue against that. White: That's the whole difficulty which is created by the breaking through of 4.86. Williams: I've argued for it for years. But still it does seen to me that the British might come to rest some- what lower than here, possibly 4.50, and in the interval when there was an increasing presumption infavor of that you might even hasten the capital Govement, but after you've reached a level which they felt was sustainable, then the capital movement would be lessened ano would possibly even be reversed. White: That's quite true, and might justify our acceptance of a lower rate. Viner: That depends, too, on now their budget policy reacts to the falling exchange, or how it is tied up with budget policy. I can cite the French case, where they let the exchange drop in order to improve their Regraded Uclassified 114 -40- position. That creates a stimulus to increased budgetary deficit; they create the deficit, the exchange falls again, and you have B vicious circle. Williams: Question is, though, whether you could transfer that to England. White: Doubtful. Williams: I doubt that you'd have tast sort of fear withregard to the budget erising in England. Viner: I don't think we have my cause for it under conditions at all normal. If a serious armament rivalry gets on, I don't think we can forecest what may happen. Williams: The real point I'm trying to make is that we may be making a mistake in thinking about this thing as much as we have been accustomed to do in the past in terms of competitive trade advantage, because it is very difficult to say where our advantage lies there. Sup- pose there is an alteration of rates in our favor and we temporarily gain certain trade advantages. But suppose that uas a harmful effect on the country to which we sell; then at the end we may be selling less then before and have lost our advantage. That's the nature of our difficulty. And it might well be that we should allow angland D certain amount of advantage in our own interests. white: That's quite possible. In other words, the larger situation has to be examined, and that's what I take it we were going to do here. But to revert to Mr. Warren's point, which I think is important because the implication is that an alteration in exchange rate may not be E serious factor or a signifi- cant factor in trade. And yet look at the lengths we go to in attempting to secure trade agreements, which after all merely alter the prices of certain commod- - ities En little bit to the advantage of one country to another. I say that if one could say with validity that an alteration in exchange rates within reasonable, moderate amounts of 5 or 10 or 15 percent is of no significance in the long run - then I say an altera- tion in tariffs and duties is, in the main, with the Regraded Uclassified 115 -41- exception of certain cases, equally unimportant, and our trade agreement program looks rether unimportent. Viner: Except this: supposing you assume there is a tariff reduction nere which is simultaneous with an increase in costs there and a fall nere. Then I'd say that tariff reduction leaves the situation as it was before. White: Yes. You can get all sorts or hypothetical cases. Viner: The same way with exchange rate depreciation. If it takes place while the price level here - sterling depreciates while the price level here is rising and there is falling, or while both are staying constant, then I'd ssy that's competitive savantage, but if their costs are rising or ours are felling The point I'd make 68 to all of this is the old point that tariffs are a matter of international concern and SQ are exchange rates, there are many factors entering into it, and that what we ougnt to try to work for, at least, is that substantial shifts in exchange rates shall not occur unilaterslly without consultation and without taking into account a general picture. And I'd say sterling is the pivotal rate for us and by any means we can we ought to bring consultation into the picture, so we can express ourselves at least. White: Let!s examine the basis for their hopes, because I think you might find that when they put all their cards on the table, if they do put Bll their cards on the table, they believe, rightly or wrongly - they believe they'll get E competitive advantage or some advantage which will alter their balance of trade, which will turn their balance of payments to Ex less unfavorable degree. Now if they believe it and are acting in that way - and I think consultation might be in order - then we might point out to them that "you're mistsken." If on the other hand they're saying, "We feel we must go down to 4.50 because cepital believes we're going to 4.50 and it's flowing out of the country, then we might well ask them, "Way did you ever start that business?" or we might agree with them in its being & good thing. But certainly we ought to know the basis Regraded Uclassified 116 -42- for their conclusion and be able to give the other side of it, which we haven't. Williams: Doesn't it mean that what we're trying - really trying to do is find a basis for consultation that will come into play more or less promptly and effectively, rather than to set arbitrary lines that we really can't Viner: Or rather than insert any rigid formula which cannot possibly meet the variety of situations that may arise. Warren: That's what I wanted to express; didn't make it so clear. I think nobody could defend the position that fluctuations of exchange rates are inconsequential; I think they're extremely important. But I think that the imposing of certain automatic penalties, like prescribed compensatory provisions of duties and so on, might undo the very thing that we were eiming at doing; that was securing a continuing satisfactory trade relation between the two countries over en extended period of time. Riefler: But that was just what I thought that I was advocating with automatic adjustments. It seems to me - I mean I was advocating - I mean a shift in exchange, whatever the cause, raises the question of competitive advantage or disadvantage, because it goes against existing trade concessions, existing teriffs. Viner: Unless prices are moving the opposite way to the exchanges, you see. Riefler: But it's a relative one at the time - ES of the time of discussion, because the prices have moved, I mean, as of the time of discussion. Viner: But in order to maintain the status quo if the prices nave moved, you may have to keep the same rates, you see? Riefler: Exactly. That's why I say have provision for discussion - have provision for discussion, but have provision that if the discussion does not eventuate, that then there has been an automatic Viner: In other words, the purpose of the automatic device is to force discussion. Regraded Uclassified 117 -43- Riefler: To force it on È more realistic basis. White: Well, that can be schieved by some part of the provision as suggested here. Viner: kell, I'd say you can agree on discussion without having a penalty clause in It with which to enforce it. They'd keep the agreement in any case. Hiefler: But it changes something, outs E certain emphasis on it. Dliphant: Jake, now does the tripartite mechanism protect the Secretary? I mean isn't that clause - wasn't it this sort of a background. that "you shan't use your exchange rates for the purpose of obtaining z competitive advantage"? Now, take the Secretary's embarrassment if England finds nerself in this position, which is quite likely: tast the two considerations dominating her policies are, first, the desire to purchase materials abroad at - cheap price - wbr is imminent; and second, the desire to preserve her war chest, her gold chest, for war. Now, if under those circumstances flight of capital or what not sends these rates way down, there is no protection for the Secretary in the tri- partite agreement. White: -nose are contrary Viner: Those are contrary; those would work in opposite directions. Supposing she wants to preserve her gold stocks for war emergency purposes and will not give it up; then if there is pressure at all on the exchanges, they will 60 down, you see. Olipnant: I understand. Viner: Now, now does that protect the Secretary? I'd say the Secretary could then say, "You're getting 5 com- petitive savantage because of a war or military ob jective.' Ollphant: Well, as I understand it, the tripartite agreement - it was addressed to the seeking of competitive advan- tage. Viner: Yes, but Oliphant: The what? Regraded Uclassified 118 -44- Oliphant: The seeking. H.M.Jr: Yes, seeking. Viner: Yes, but Herman, if you fell back on that and interpret that strictly and try to search for it, you're going to leave out most of the phenomena that occur. What GO they permit? - not merely: what ao they incite or induce? Because if they let any pressure on the exchange push sterling down, then that encourages the speculative elements to operate for a decline, push it down further. In other words, I'd interpret that to mean: induce - or, permit en exchange depreciation which creates a competitive advantage; otherwise, it's meaningless. You could never prove that they've induced it, you know. H.M.Jr: Let's stop here a minute again, and somebody - let's just summarize how far we've gone. Where are we right now? I mean what's being recommended? White: Well, the discussion catch H.M.Jr: Well, let's just/our breath B minute, see where we're at now. White: The discussion the last half hour or so has been around two points, I take it. One is whether there is any possibility of determining at this time whether the larger interests are in fvor or opposed to putting a floor so close to the present one. And the second one is, might we not receive adequate protection and might we not achieve the principal objective, which is con- sultation to determine just what criteria are being applied by England, through the operation of the tri- partite accord? H.1.Jr: Through the tripartite rather than through the trade? White: Yes, because the tripartite accord indicates that each country has agreed not to seek El competitive advantage in the movements of exchange rates, and therefore I take the implication is, if you feel they are seeking E) competitive advantage it would be appropriate at that time for you to ask consultation, or if you were convinced that they were so doing, you might wish to Regraded Uclassified 119 -45- say they are violating the tripartite accord, and therefore nothing of that sort is necessary in the trade agreement. H.M.Jr: Now, I'd like to ask Feis a question, if he doesn't mind. He may not be ready to answer. Purely from the State Department standpoint, see, which channel do you think that they would rather see ne pursue? Using the clause - I mean let's say that sterling goes down, and - let's say sterling goes down considerably more, to E figure at which I would become disturbed and the people in this room advise me to become disturbed, see? I mean that situation. We have a meeting, let's say, in two weeks or two months from now, with the treaty already signed - call a meeting because we're all bothered. And you're sitting over there with Mr. Hull and his edvisers. Which channel do you think that they would rather see me pursue: the channel through the trade treaty clause, or to use the vehicle of the tripartite? If you don't mind my asking. Feis: No, no, I - may I talk a little bit? H.M.Jr: You can talk. I mean you people are sitting over, you have a meeting. Which would Feis: The most important question, as far as I can appraise it - first, that this whole negotiation is taking place against 8 background in which our chief difficulty in making of our commercial relations an effective weight in our general international relations, is our very marked excess of exports, relatively perhaps the greatest in American history, and that as a practical matter the anxieties and troubles that are upon us now are connected with that excess of exports and not with the question of insupportable loss of general position. Second, that this negotiation with Great Britain is connected with the one with Canada - if they are effected, both are large-scale negotiations. They bring the economies of the three countries into much- - would bring the economies of the three countries into much closer relationship with each other, and you simply have to anticipate from the economic standpoint that there are going to be necessary points of difficulty Regraded Uclassified 120 -46- and adjustment; the thing is not going to be without dislocating influence from time to time here and there. And you must really make your decision on very general ground of mutual slowly-developing benefit for all par- ties concerned, through making some such trade relation- ships. If that's your background, why, tuen your prospective problem arises in a somewhat different fashion than I think has been indicated in the discussion. It arises when as a consequence of trade, of an exchange varia- tion, or some other cause, it turns out that the import movement of E. commodity dealt with in the trade agreement becomes unexpectedly large and disturbing. H.M.Jr: What, Herbert? Feis: Unexpectedly large and disturbing. H.M.Jr: What becomes Feis: The import of some competitive commodity that's been dealt with in a trade agreement. That's the way the actual problem presents itself. For years we've had to try to keep the public streight on the fact that most of the branches of increased exportation were not due at all to any action we took under the Trade Agreements Act - namely, to drought, etc. - but cases arise Viner: You mean increased importation. Feis: That's right - imports. If, having signed this British agreement, an exchange variation takes place and you begin to get - and where we fear it, frankly, most is in the textile schedules - you begin to get an unanticipated movement of competi- tion, much more thoroughly disturbing than had been anticipated, then we're up against something that we can't avoid, no matter what clauses in the treaty or clauses not in the treaty. The industry begins to come at us, the representatives down at Congress begin to come at us, prospective legislation is formulated to do something about it, and we've got to take our hat in our hand and go around to the other country and Regraded Uclassified 121 -47- say, "See here, we're in a nole, we've got to try to work out some way of dealing with this situation." The number of such instances have been remarkably few. They will be more likely to arise under the British agreement than any other, if there were this substantial exchange variation. But I do think that the general clause that we've got in there is quite sufficient to enable us to act in the face of such actual situations 25 will present themselves from the import side. and therefore my own predisposition is to say, let it be at that, that will give you the instru- ment you need to protect yourselves against too serious unanticipated competition. And I'd leave that problem to be handled through the trade agreement and by such B general formula. Now, turning from what is therefore the State Department problem to what is more completely the Treasury problem, the decline in sterling would have effects of another type, effecting perhaps our competitive relationships in third markets and in the rest. I don't see that you can deal with that effectively under any trade agreement formula anyway; that you'd have to deal with under your tripartite formula on broader ground. So, to summarize, I am led to the conclusion that you're going to findit difficult to do anything prac- tical that is much of an improvement over that general formula; that, on the other hand, you must foresee the possibility that a type of situation might arise that you can't deal with satisfactorily either under that formula or any alternative trade agreement formula, and you would be thrown back on to the tripartite agreement. And that's about the way it looks to me. White: I'd like to make some possible factual corrections, if I may, that I think are significant. First place, we have had larger excesses of exports. In 1920 alone it was E billion - elways ran eight, nine hundred billion, so on - but it's high. Feis: Wait o minute. If you're going to correct the facts, correct the facts I give and not the facts you think I give. I said higher proportionate excess of White: Proportionate to what? Feis: To imports. Regraded Uclassified 122 -48- White: Oh. But the more significant fact I think you'd have to take in consideration is the fact that in the first Quarter of 1938 our excess of exports was 320 million; second quarter was 310; the third quarter, 214. In other words, our excess export is showing & decidedly downward trend. Viner: Not only that, Feis: How long do you think you can keep that up? Viner: It will keep up, because the favorable balance last year was largely due to the fact that we were leaders in a depression and therefore cut down drastically on imports of raw materials, and as and if business re- covers, we'll increase our imports of raw materials. Feis: Precisely the point I was trying to make was that that was the existing background, which, unless saved by an increase in imports, would inevitably bring around a decline in our exports. Viner: That's right. Williams: It seems to me we ought not to try to prevent that kind of change in trade. It's partly cyclical, and it's got to nappen. We'd be in of most unreasonable position in this country if we were insisting on always having 10 very large surplus of exports. White: John, that coming from you - I'm E little bit surprised. After all, why look at the excess exports? Don't we have B continual excess of imports on our tourist expenditures that amount to eight or nine hundred million? Isn't it, after all, the movement rather than particular levels? Williams: exactly. But what I am referring to is cyclical varia- tions within movements. They've got to be permitted to happen. White: The significant thing is, why is it down? It's down in part because our exports are declining. Therefore, it is a little more important to us than it would be if it were due to an increase in imports, which would reflect recovery here. It may well be that recovery would con- tinue here, but I think we always have to recognize Regraded Uclassified 123 -49- that it may become more difficult if the sterling rate drops to & point which gives them B competitive advantage, which needs to be examined. Williams: Let me put my thought this way. Suppose we got now an increase in imports because we are in the recovery phase of the cycle; supposing we get some of those Imports from England. Doesn't that serve to sustain our trade later, and is there any other way to do it, essentially? White: That's right. Viner: I think Feis's point was that for the time being, at least, England nas the problem of 8 big import surplus which is pulling them down. My point is that within snother year the picture may be substantially differ- ent. Williams: It seems to ne the point essentially is whether we want to do anything to attempt to protect that export surplus. Eventually oughtn't we to recognize that it is unusual and perhaps unreasonably in our favor, that it has got to be modified? Isn't that an element of our problem? White: Depends entirely on how the surplus is arrived at, John. Your preliminary assumption that your imports were increasing by virtue of continuing recovery nere - why, yes, I taink that's an excellent thing, particu- larly since the repercussions are desirable all sround. If, on the other hand, the export surplus is declining by virtue of a sustained downward trend in our exports, then the conclusions we might come to might be 2 little different. We might be willing to see that continue, but I don't know whether we would be willing to see that accentuated by changes in the exchange rate. That is, we might be willing to let sterling remain around 4.76 and say, "wet's see what happens in the next few months; we're going down In our exports, but we're willing to take that rap, we can afford it." But should we introduce a new element in the situation at this particular juncture by letting sterling go down to 4.50 in the expectation that that will measurably stimulate the flow of trade? Accentuation in that trend might have domestic repercussions which a sensitive plan such ES our present recovery might not stand easily. Those are the problems. Regraded Uclassified 124 -50- H.L.Jr: Herbert, how do you suppose the State Department would feel 1f I - I'm just throwing this out, the suggestion - that I should invite E representative of the British Treasury to come over at once to discuss with them the trend of the sterling-dollar rate? Feis: Without making any reference to the trade agreement negotiations? H.M.Jr: I'll put it this way: discuss the tripartite agreement with them, not discuss the treaty at all. "This trend aas been going on; I'm bothered about it. I want somebody to talk to about 1t." Feis: I think we'd have no views about it whatsoever. Just a continuation ... H.M.Jr: I mean I am bothered, this thing is going on this way, and I'd like somebody to come over and talk to me about it. White: Before the treaty is signed or after? H.M.Jr: What I'm talking about is now. White: In other words, before the treaty is signed. H.M.Jr: I'm not thinking of the treaty. I'm thinking of my responsibility under the tripartite. Fels: We'd regard it as 8 most natural action. H.M.Jr: Most natural action. And 11' I don't do it, they'll wonder why I don't do it, huh? Feis: That I can't answer. If you do do it, it will seem a most natural action. H.M.Jr: Most natural action. Well, nere - I mean to again give you Just a little side remark which I think is rather interesting. We fought tooth and nail when we were creating the tri- partite to have & clause that sterling - we should keep sterling within ten points up or down of 4.90. The British refused - just throwing out a little history - Regraded Uclassified 125 -51- and they said they wouldn't tie themselves to any- thing. So when they came along with this thing, it interested me very much. But we fought tooth end nail to have - to try to have a ten point - have 4.90 the mean. Stewert: Does it follow from that, Mr. Secretary, that it would be difficult to get modifications in the tripartite agreement at the time which would sutomatically bring discussion in In the event that the range of variation, quite apart from any seeking, should become wide? Would it be difficult to get that kind of modification? Viner: Consultations are supposed to take place whenever any party wishes them, you know. d.6.Jr: Now, when the European wer - it was E matter of hours whetner they would or wouldn't - Idion't want to bring it up, lecause during that period they did everything they could in the way of - I mean they had even - Bank of England even work on Saturdays to pack gold. You know what that means. Did they work on Sundays? Lochhead: No, no. H.M.Jr: But they worked on Saturdays. I mean they did every- thing that anybody could do during that whole thing to keep the thing open and keep them moving. I mean they slapped gold on their boats without insurance and the Treasury attitude was, "Well, we'll answer who will stand the loss afterwards." But I mean they did every- thing possible while that crisis W&S on to keep channels open so that people could buy dollars. So for me to bring it up at that point would both have been ungen- erous and would have been unreasonable, because they did everything. Now that's over. And certainly I didn't foresee as B reaction to this thing, and particularly to what I call Hitler's "governess" speech, the tremen- dous sinking feeling which would take place as a result of that. Now that thing has happened. Now I don't think it would be unprecipitous for me to invite them over to discuss the situation as it is. And I'm just throwing that Into the ring, see? Stewart: what nas been the experience with consultation? Regraded Uclassified 126 -52- H.M.Jr: Pordon me? Stewart: Has there been consultation apart from the sort of thing that nappens over the telephone? H.M.Jr: In tne tripartite agreement? Stewart: I mean under the tripartite agreement, over 8 period of time, has there been consultation of the kind that you are anticipating the possibility of having now? Viner: In connection with France it's been large. H.N.Jr: well, in connection with France, yes. The occasion hasn't arisen in connection with sterling, see? But in connection with France, yes. And then when we had the French - the quarterly French crisis, why, we would consult with England, yes. But here's B movement which, if you look at it on the monthly basis and not on B. daily basis, is down, down, down; and I would have every reason to say I'm worried. The British press keeps wondering why I'm not worried. We've had an analysis made of the press since June - all references of the British press to this thing, and I don't think that they could say - well, that this is a bolt from the heavens, unexpected, you see? I mean I think Herbert Feis's resction - it would be the way ne says, would be a very natural thing. I mean I'm just - what you people do for me is to give me a chance to think with you, and I'm just throwing that out, and - but I think - I mean entirely aside from the trade treaty - I mean our responsibilities under - not only with England. But certainly they aust feel embittered that during their troubles people like Sweden couldn't get out of London fast enough. I mean there's no sense of loyalty or anything else; Sweden couldn't get the gold out fast enough. And then for B while it looked as - there was talk of Holland tying to the dollar; but as far as we are con- cerned the only thing that happened during that whole period was France asked us one day whether we'd cooperate with them in asking our banks not to deal in frencs except on strictly commercial transactions. -hen we sent back word in an hour that we would; they were delighted. That was the only thing ever asked Regraded Uclassified 127 -53- as during that whole period - plus, I mean, the cooperation that we got to get the gold out of england after W6 bought it; and they broke all kinds of Laws to cooperate with us. I mean they - I don't know how many laws they broke in order to cooperate with ua to get the gold out. So I mean I'm just tainking kind of - I don't know whether possibly that mightn't be a move. or course, there's the question, when taey come over nere, what you going to say to them? "I'm worried." white: I taink we might well ask them what they propose to GO and what's the criterion upon which they base their actions, and let's examine them mutually; might be a little more extended analysis of the various proposals. But I think that's exactly wast the tripartite accord plans for. Viner: What would you do if they denied in the lignt of previous statements - denied they were doing anything except Just straightening out sharp fluctustions? Mite: They cousen't sustain it. The discussions between technical sen would show that's baloney. Viner: I taink that their capacity for sticking to that Josition is greater than you Judge, White: They could keep repeating it. Viner: what would you do? White: That would be a Question to be decided. If the dis- cussions were unsatisfactory, 1f in other words tuey stuck to B point which We felt - which the Secretary relt was not sustained by any competent analysis, then he would be confronted with the choice as to whether or not he wanted to regard their action as being - as seeking competitive advantage; what de would do then depends on the circumstances. Jr: Well now, let me say this. You people have been so refined; I think you've been a little bit hempered in these conversations by my presence. Some of you always are, but others need to get S little more vociferous. I think they've been cramped this morning. Regraded Uclassified 128 -54- I don't know what your plans are, but if you could go - take off your coats and go at each other the way I know you like to, then come back at three o'clock and see me again. White: Is there disagreement, Mr. Secretary? I thought most of the people here expressed the opinion that consultation was in order. H.M.Jr: Well, I don't know the way - I felt this way: I have certain little things I have to do as far as I'm concerned on the external picture, strictly Treasury, not thinking of the trade treaty at all; and that it's a problem and I don't know whether - I don't think these people have cleared their own thinking yet. I mean I don't think it's jelled, has it? I think if they nad from now to three o'clock to exchange views - Mr. Burgess has been very quiet; I suppose he's embar- rassed sitting down with so many economists. Burgess: Not the slightest. H.M.Jr: His silence, his dignity Burgess: I'm trying to think, Henry. It's always a strain. H.M.Jr: Well, anyway, you've been very silent. So I mean if you could - I have nothing from three o'clock on for the rest of the afternoon; I would like to talk a little bit about South America. Burgess: I think we have & lot of very difficult questions and we can very well think about them before we give you a judgment on them. Feis: We've got & South American meeting on over there at three. Taylor: I've got that Peruvian coming in at three. H.M.Jr: All you've got to do is say "Hello." Couldn't you get him in a little earlier? Taylor: I could try. I've already said, "How do you do" to him; he wants to talk business. H.M.Jr: Well, see what you can do. Regraded Uclassified 129 -55- Fels: The trouble is that not only - I mean I'll be at the three o'clock meeting, but everyone else that you'd like to have over at the Department will be at the same meeting, because it's on South American affairs. H.M.Jr: Financial? Feis: The whole Lima Conference. Burgess: Make it two. H.M.Jr: I cen't do it at two. Well, we'll go along - I'd like to see what these people have to think about South America, and we're not going to sell out South America this afternoon. Feis: It may be that that will be shifted over there. H.M.Jr: And enything - if I'm correct, there is no finance on the agenda, is there? Usually isn't. Feis: Well, there will be proposals; there always are. But nothing H.M.Jr: Well, see what you can do. Feis: Nothing serious. H.M.Jr: See what you can do. And have you people got a little more time this afternoon? Feis: Mr. Secretary, may I raise this? If - I see nothing on the possible agenda even worth troubling anybody with, they're such impracticable suggestions, except one which we were going to bring over to the Treasury, and it's a possible proposal for periodical meetings of representatives of Treasuries or central banks among the American republics. H.M.Jr: Well, you gentlemen .... Feis: Don't know whether you want to give any thought to it or not. Of course, it's clear that if we go in for such periodic meetings that whoever you send there is going to have to deal with a new group of loan proposals at every meeting. H.M.Jr: I think before we decide that we should decide whether the United States Government is going to make loans. Then, if it is, the meetings will be pleasant. I'll see you all at three. Regraded Uclassified 130 October 21, 1938 Secretary Morgenthau Mr. White Subject: The Dollar-Sterling Situation (Sumnary) 1. What currencies followed sterling down? Appended is a table indiesting the persentage change in rates of exchange from August 1, 1938 to October 17. 1938. It will be noted that most of the currencies have depre- clated during that period at least as much 86 or more than has sterling. The important exce tions are Belgium, the Netherlands, Canada and Switzerland. or these only Belgium did not decline at all. The special Germen marks show parti- cularly sharp declines. In evaluating the effects of the depreciation of sterling it 16 therefore essential to bear in mind that most currencies drop with sterling and a decline in sterling really involves the appreciation of the dollar in terms of most currencies. This make - & decline in sterling more important for the United States and less important to England. 2 Does the total economic situation justify a lower sterling rate with reference to the dollar than $4.86? The following reasons might be advanced as justification for a lover sterling rate: (a) England her been experiencing an adverse balance of payments exclusive of capital movements of substan- tial proportions while " on the other hand have been gaining 8. large amount of gold exclusive of capital movements. (b) British exports are dropping while her reareasent program calls for sustained imports. Regraded Uclassified 131 Secretary Morgenthau - 2 (o) England no longer has et balanced budget and her re- armament program combined with the possibility of 5 deep- ening recession will still further unbalance her budget. (a) England cannot afford to lose much pold through an adverse belance of payments on non-eanital account because she 10 the reating place for a. large amount of short-term capital. She therefore needa to conserve her gold supply to make her less vulnerable in the event of a flight from sterling. (e) England must reserve 1tn gold stock nn Dart of her national defense program. (f) In her afforts to prevent sterling from weakening Ingland her already viven us, the claims, large nums of gold. (z) Since the recession in England 1 # concentrated largely in her export industrice any improvement in her interna- tional competitive comition 10 an important means of check- Inc the recession. (h) England in now faced with more noverful competition from one of her chief connetitors -- Germany. Britain thue must take strong and, if necessary, unusuel measures to protect and even increase her share of the world's 120 port trade. 3. Some information pertinent to the above claims. (a) Great Gritain's unfavorable balance of payments on non- capital itemm is large and has been increasing during the past three years. Our estimate for the first six months runs around 650 million and probably somewhat less than that for the second half. For the year DE 0 whole her "un- favorable" balance may be ns such as one-half billion dollars. In contrast, our "favorable" balance on non-capital items is about 11 billion 8 year. This balance 10 due chiefly to A low level of imports accompanying our recession, and A relatively high lovel of exports sustained in part by the foreign argaments consumption and by the return to AB export surplus in agricultural products. (b) United Kingdom exports in the third quarter are 17 per- cent less than the comparable period of the previous year. Last quarter the dealine was only 14 percent from the pre- vious year, and the first quarter of the year 2 percent. Regraded Uclassified 132 Secretary Morgenthau - 3 Our exports, however, show an even greater decline. The first quarter showed a 16 persent increase compared with 1937, whereas the second quarter showed a 7 percent drop, and in the third quarter there has been an 18 per- cent drop (compared with previous year). (o) The United States deficit for this fiscal year will be in the neighborhood of 84 billion. The estimated deficit for Great Britain 10 the amount of the National Defense Loan raised during this fiscal year -- less than one-half billion dollars. No matter what basis of comparison is employed, it ceems likely at the moment that our expenditures on area- ments during the next couple of years will be greater than those of Great Britain. (a) Te do not know how much gold the British Equalization Fund has lost in the last few months. We estimate that the Fund probably lost no more than $300 million and pose- ibly much less. It must be remembered that B. substantial portion of the outflow of gold from London consisted of gold belonging to other countries and newly-mined gold. England has about $2,600,000,000 in the Bank of England and at least another billion in the Equalization Account. The have no figures indicating the amount of foreign short-term capital left in England but certainly the "hottest" portion of that capital must have left London during the past few months. (e) There can be no doubt England must conserve part of her gold stock for 8 national defense program. The question 18 - how much 1s a reasonable amount? As a practical ques- tion the limiting factor will not be the amount of gold she needs for war purposes but something in excess of that. 4. That can " do about it? Possible moves which ve my take, listed in order of severity: (a) we can request the Pritish to e nsult with us on any further proposed variation in the sterling rate, in accord- anoe with the terms and spirit of the Tripartite Accord. (b) If the British fail to agree to the consultations, or if the out cone in uneatisfnetory ve om announce the terml- nation of the Triportite Accord. Regraded Uclassified 133 Secretary Morgen thau - a (o) Use the proposed United States-United Kingdom trade agreement an 8. lever to prevent further substantial depresintion of sterling by insisting that 1 general pro- vision be included which would terminate the agreement if the sterling rate declined by more than a stated percentage (possibly 5 percent) from the rate pertaining on April 22, 1938, the date on which active negotistions began. (a) We can riase the dollar buying and selling price of gold. (e) Use of the Stabilization Fund to prevent sterling de- preciation and, If necessary to carry out this program, ask Congress for an increase in the size of the Stabilization Fund. 5. Should ve do anything sbout it? (a) To what extent will our export trade be affected? Estimated prepared by the Commercial Attache in London in- dicate that a dealine in sterling of $4.40 muld result in a loss in our exports to the United Kingdom and other ster- ling countries (which 10 only a part of the loss to our exports) as being $150 million per year based on 1936 trade figures, and $100 million if sterling drops to 04.60. This estimate to be complete should be increased by the loss in trade resulting from depreision of non-sterling ourrencies, and the loss in trade in non-sterling markets. Only 40 percent of our exports go to sterling countries. (b) Our domestic markets will be subject to intensified competition from imports. (e) Consequences upon domestic business conditions of ad- justments in the export and import trade volume and character. HDW:HG:lrs 10/21/38 Regraded Uclassified 3 10-21-20 134 Foreign Tuchange Rates - I Country Date # 1 Amail 1938 October 19. 1011 Pereant change Reliviano 5.00 3.50 - 30.0 livia in Pesta 5.7500 5.2000 - 11.3 The 22.87 21.30 - 6.5 E aguay (Free) Peso 42.90 40.90 - 4.7 uguay (Official) Pass 64.7016 62.4975 - 3.4 X Kong Dollar 30.7287 29.4687 - 4.2 gentine (Free) Peas 26.10 25.20 - 3.8 getina (Official) Paso 32.7670 31.6805 - 3.3 Trans 2.7588 2.6591 - 3.6 raits Settlements Rellar 57.3625 55.3290 - 3.6 itish India legas 36.7362 35.4936 - 3.4 ins (Shanghei) Tun 16.3281 15.7687 - 3.4 mader Juny 7.25 7.00 - 3.4 alond Marida 2.1681 2.0935 - 3.4 beco Drashma .9010 .5707 - 3.4 Lealent Permit 394,7687 381.9250 - 3.4 miss Irons 25.3403 24.4762 - 3.4 istralis Pound 391.6000 378.5468 - 3.3 seart Krone 21.9389 21.2072 - 3.3 = Ten 28.6485 27.6993 - 3.3 I Issue 24.6962 23.8725 - 3.3 later of South Africa Pend 486,6666 470.4975 - 3.3 mited Kingdon Pound 491.5000 475.2013 - 3.1 Naguslavia Dinar 2.3179 2.2000 - 1.6 lemada Dollar 99.6895 98.5385 - 1.1 lefteerland Trans 22.9069 22.6894 - -9 latherlands Floria 94.8533 54.4194 - .8 fuschoslovakia Kerma 3.4500 3.4372 - N formary w Free mit 40.1728 40.0494 - .3 Ama Taignat mark 4.13 4.93 + 19.4 Securities mark 4.13 4.93 + 19.4 Jarnary Registered mark 10.45 17.63 . 4.6 the 19.18 16.45 - 3.6 I Keavara mark 19.18 15.45 - 3.6 Travel misk 21.49 20.89 - 2.5 Regraded Uclassified 135 Foreign Archange Rates (Continued - 2) I E.A I Country Unit I I # Credit mark 5.00 4.97 - .6 Milrois 5.8540 5.840 - .2 LOV 1.2390 1.2325 - .2 Taken tomala esuela Paso 19.8333 19.7980 - .2 Slow 18,8300 18.7975 - .2 I 19.6690 19.6900 - .1 Live 5.2606 5.2603 - .005 (Free) Paso 49.00 49.00 - embia (Official) Pase 56.28 57.15 + 1.7 Quotaal 100.00 100.00 - Belivar 31.50 31.50 - le (Export) Paso 4,0000 4,0000 - le (Official) Paso 5.1716 5.1766 + .1 due Belge 16.9025 16.9052 + .02 Ya in .7292 .7300 + .1 German rates - free mark from Federal Reserve Beard. Blocked mark rates from The Financial Times, Lenion, for August 3 and October 7. 1938, converted from marks per pound. 1 HEHiab 10/21/38 Regraded Uclassified 136 October 21, 1938 Coming down with Hanes to the Treasury this morning, I told him to change the memorandum that they were preparing in connection with the five-year contract to buy tung oil from China, which involves some $42,000,000. I said, 'Make it for three years because if the amount in dollars is smaller, or roughly about $20,000,000, it would be more palatable to the President and what I wanted to do was to estab- lish the principle.' Hanes said, 'That is fine, be- cause if we get this thing through, the Chinese suggested that we give them a similar contract on bristles, an item which is most important to American business. Regraded Uclassified 137 TREASURY DEPARTMENT m INTER OFFICE COMMUNICATION DATE OCT 2 1938 TO Secretary Morgenthau FROM Mr. Taylor A conference was held in my office at 2:30 this afternoon to discuss the set-up for refinancing the Series K notes of the Recon- struction Finance Corporation. The conference was attended by Messrs. Bell, Broughton, Kilby, Foley, Tietjens and myself. It was pointed out that the usual exchange transaction which we have been accustomed to use in our own financing under the Second Liberty Loan Act could not be employed in this case because the Reconstruction Finance Corporation Act confers no authority on the Corporation to exchange its notes. To meet the problem raised by this lack of authority, the suggestion was made that the transaction be handled by inviting subscriptions at par for the new notes and at the same time offering to purchase on November 1, 1938, at per and accrued interest, the outstanding Series K notes of the Corpora- tion which mature on December 15, 1938, to the extent to which the holders thereof subscribed to the issue of Series P notes. The amount of the offering of Series P notes under this plan would be limited to the amount of Series K notes tendered for purchase. This transaction would in legal effect be a purchase and sale transaction but the net result would be to effect an exchange of the new notes for the old in a manner which would be in compliance with the Recon- struction Finance Corporation Act. Regraded Uclassified 138 -2- The fear was expressed that the changes which this trans- action would necessitate in the set-up would be harmful to the market. To meet this fear the suggestion was made that a short wire be sent to the Federal Reserve Banks informing them in ad- vance of the changed set-up and the reasons for it. The proposed changes in the set-up and the explanatory wire were checked with Mr. Allen Sproul of the New York Federal Reserve Bank and he gave it his approval. It was then decided by the conference that the transaction would be handled in the following manner: (1) The secretary of the Treasury would invite sub- scriptions for the Series P notes of the Recon- struction Finance Corporation. (2) The Secretary of the Treasury would offer to pur- chase on November 1, 1938 the Series K notes of the Corporation to the extent to which the holders thereof subscribed to the Series P notes, the amount of the offering of the Series P notes to be limited to the amount of Series K notes tendered for purchase. (3) Payment would be made for the Series K notes tendered for purchase at par, the principal proceeds being applied in payment of Series P notes and the balance, which is accrued interest from June 15, 1938 to Novem- ber 1, 1938, to be paid to the subscriber. well. Regraded Uclassified NA39 239 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE October 21, 1938 Secretary Morgenthau TO Mr. Taylor FROM Colonel Fuchs, the special envoy sent to this country by the President of Peru, called this afternoon and discussed the subject of his mission with Mr. Lochhead and myself. He reviewed his understanding of major developments in the silver market and the silver policy of the United States from 1932 to date. He then stated that his government wished to make an arrangement similar to the one made with China and Mexico for the sale of what amounted to the total annual silver production of Peru. It was apparent that about this point the President of Peru had been misinformed, as to both the nature and the extent of the Mexican and Chinese arrangements, and also did not know of the Canadian agreement. We clarified this point for him and obtained considerable general information about the ownership of silver mines in Peru, which are approximately as follows: sixty-two per cent of the production is owned by Cerro de Pasco; eighteen per cent,of which seven per cent 1s contracted for by Cerro de Pasco, is owned by Peru nationals, end the remaining twenty per cent is owned by other foreign interests, including the American Mining and Metels Company, 8. French group and an English group. We informed Colonel Fuchs that this country was not particularly interested in purchasing silver as such, but that it desired to develop closer monetary cooperation with countries of this hemisphere, and in the case of Peru, which happened to be also a leading silver-producing country, there were additional reasons why conversations leading to cooperation Regraded Uclassified 140 - a - building up Peru's reserves of silver and other exchange resources could be productive; that we would welcome the opportunity of dis- cussions along broad lines, and that it was the desire of all branches of this Government to further friendly trade relations. We emphasized our feeling that it was preferable to treat monetary matters AB being separate from trade agreements proper, and in general delivered the type of speech that we have given to the Cubans, Brazilians, etcetera. I suggested that he transmit to his President his impressions of the preliminary conversation and also any further information which the President might need about our silver purchase agreements, etcetera, which might give the President the necessary background. In general, it was a pretty satisfactory preliminary discussion end Colonel Fuchs, who is former Minister of Finance, as well as the leading mining engineer of his country, understood pretty thoroughly what we were talking about. He also appeared enthusisatic about the possibility of doing something for silver, 88 he confessed that he is a bi-metalist. We backed away from any questions directed to what we would expect his country to do, the amounts of silver which we might purchase under proper conditions etceters. This situation is 8. particularly touchy one, as most of the silver production 1s controlled by foreigners and especially by Cerro de Passo, but I believe that there are possibilities of cooperation which should be fully explored. w. Regraded Uclassified 141 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE October 21, 1938 TO Secretary Morgenthau FROM Mr. Taylor Hamilton of the State Department called me before lunch and stated that he had taken up the two Chinese questions with the Secretary of State, and that on the question of the State Department's recommendation regarding the silver located at Tientsin, the Secretary preferred to handle the matter orally as hitherto. Hamilton stated that the State Department's position was that any move by this Government to acquire property rights in the silver in question under the circumstances surrounding this particular lot of silver would be inadvisable; that subject to our agree- ment they wish to send 8 message to our Consul-General instructing him to communicate orally and informally with the British Consul-General to the effect that they were informed that the silver in question was not specifically included in any arrangement between the United States Treasury and the Chinese Treasury. The State Department is attempting to get information on the question of any possible understanding which the Japanese and British may have on the subject of the railroads and other British property. They are making inquiries in London 63 well as in the Far East on this and will report as soon as possible. Regraded Uclassified 142 FEDERAL RESERVE BANK OF New YORK October 21, 1938. Dear Mr. Secretary: If any further demonstration were necessary, the performance of the new issues market, during the past week, would seem to prove that there is a strong demand for high grade bonds. Two utility company first mortgage bond issues totaling $135,000,000, both rated Aa and both for refunding, were over- subscribed on the day of offering and bid up to premiums of e. point or slightly more. $80,000,000 of 3 1/2a of 1968 of the Public Pervice Company of Northern Illinois were priced to yield about 3.34 per cent, and $55,000,000 of Ohio Power Company 3 1/48 of 1968 were priced to yield about 3.17 per cent. Next week, the scheduled offerings of $50,000,000 Firestone debentures and $55,000,000 Wisconsin Electric Power Company bonds, will add another $105,000,000 to the month's total of new Issues. Following that there are at least two weeks in which no large public issues are to be expected (with the possible exception of the $25,000,000 issue of Argentine 4 1/2s of 1948, origin- ally Intended for the market in August, and which has been "kept alive" in registration since that time), as none has been placed in registration since the two issues just mentioned were registered on October 5. On the basis of present figures, therefore, corporate financing in October will come to about $370,000,000 unless additional private sales are announced between now eni the end of the month. Of this total, the only sizable emounts of new capital are $24,000,000 for general corporate purposes of the Union Carbide and Carbon Corporation, announced last week but actually sold some time ago, and $37,000,000 to repay bank loans of the Firestone Tire and Rubber Company, the proceeds of which have already been used for expansion of plant and working capital. The total of refunding issues, however, will be the largest since Decem- ber 1936. It is true, of course, that offerings have been concentrated in this month, the totala for last month (when war fears helped to restrict the market) and in prospect for November being much lower than the October total. Both the corporate and minicipal bond markets remain eager for additional high grade offerings. Yours faithfully, Manyme Allent Sproul, First Vice President. Hon. Henry Morgenthau, Jr., Secretary of the Treasury, Treasury Department, Washington, D.C. Regraded Uclassified AM 143 REB PLAIN London Dated October 21, 1938 Rec'd 4:48 P. m. Secretary of State, Washington. 1231, October 21, 6 P. m. FOR TREASURY FROM BUTTERWORTH. OnE, The market opened with the dollar bid at 4.74- 7/8. The British authorities offered dollars at 4.75 and subsequently sales of dollars by those wanting to buy gold took the rate to 4.75-1/2 just before fixing. 225 bars WETE sold at 146S 2-1/2D mostly supplied by the British fund. The rate was steady this afternoon at around 4.75, with some profit-taking sales of dollars by Swedish institutions. When NEW York came in a seller of dollars and the rate went to 4.76-3/8 where it now stands, The market was narrow throughout the day. The franc remained steady at 178-3/4 and relatively idlE. Two. It is reported in the British Financial press that the foreign transactions advisory committee has been asked to sanction a deal whereby 8. further £6,000,000 of stock in the English Woolworth Company will bE acquired by British Regraded Uclassified 144 REB 2-#1231, From London,Oct.21,6p.m. British from American interests and consequently the sum passed across the Exchanges. Three. Only about 619 million of the crisis 127 million note Efflux has returned to the Bank of England, this WEEK'S return showing the second decrease in the note circulation of about 10 million. Government securities in the banking department were reduced by about 69.5 million and now stand at 5104.9 million. Public deposits which increased from 612 million on October 5th to 128 million on October 12th were up again this WEEK to L33.8 million, reflecting in part the Exchange Equalization account's operations. The Effects of the heavy reduction in short term balances in London resulting from the Exodus of capital to NEW York continue and are reflected in reduced bankers' deposits which now stand at the low figure of 691 million as compared with 6113 million in July and 100 million before the onset of the acute stage of the European crisis. The capital Efflux has also curtailed the volume of outside money available for loans to the discount market, and credit has been tight for the past two weeks. The Bank of of England has been, Especially since Monday, making heavy purchases Regraded Uclassified 145 REB 3-#1231, From London,Oct.21,6p.m. purchases of Treasury bills in the market and rates have slightly eased. Today's Treasury bill rate of 13S 9D per cent compared with 15S 5D last week, though wEll bElow the 25S 8D rate of the crisis WEEK, is still above the pre-crisis rate of just over 10S per cent around which level it has stood for the most part since early 1935. KENNEDY EMB Regraded Uclassified State. 146 RL STERLING EXCHANGE RATE AND October 21, 1938. GOVERNMENTAL LOANS TO SOUTH AMERICA 3:00 p.m. Present: Mr. White Mr. Burgess Mr. Stewart Mr. Warren dr. Goldenweiser Mr. Gardner Mr. Riefler Mr. Viner Mr. Williams Mr. Ollpnant H.M.Jr: Well, gentlemen, I suppose you've got everything solved, sterling is up ten cents, the world looks rosy? Who's going to report? Stewart: I think Mr. White. H.M.Jr: White, you sum it up. White: I'm not sure that I have the report, but I'll give what my impression is of the story; others will check up. It was generally agreed that no such floor or ceiling as was suggested or might be contemplated should be included in the British trade agreement as such. That's in answer to one of the questions. Two .... H.M.Jr: Am I going to be given the reasons? Give me the reasons why. White: I'll let those who felt strongly about it give them, if you don't mind. H.M.Jr: I'd like to take one thing at a time. Let's put Burgess on the spot. Burgess: Well, I think we all felt that it was extremely diffi- cult to set any limits within that agreement that wouldn't lead to difficulty. One point is that any limit put in tends to operate as a maximum rather than a minimum. You put in 4.50 and you give a free ride down to 4.50. Another thing is that it confuses administration to put in monetary limitations within this arrangement, because it mixes up the State Depart- ment and other elements of the administration, and tends Regraded 147 -2- to make less effective the direct operation between the Treasury and the other Treasuries. Our feeling was that the same result might be better achieved by trying to implement the tripartite a little further by seeking to get better consultative arrangements. H.M.Jr: Say that again. Burgess: Well, I think probably I would clarify that best by making the second part of that proposal, which really ties into this. H.M.Jr: Well, go ahead. Burgess: Our thought was that in answer to your second or third question, as to whether there should now be consultation, that there was a desirable need for consultation at the present time, and that one might utilize this opportun- ity by sending a message by Butterworth, say, to the British Treasury that our considerations of this clause in the trade agreement have led us to raise the question whether there shouldn't be in the tripartite agreement a better mechanism for consultation, and say that we'll prepare a memorandum H.M.Jr: Pardon? Burgess: Say that we're working on that plan and hope to prepare a memorandum and wish they'd be thinking about it. It seemed to us that raising that question right now, before this is signed, might give it more weight and might perhaps lead at least to some better consultation under the tripartite. H.M.Jr: Now let me just get this thing. Who differs - I mean leaving out the Treasury people for the moment, who takes an opposite view from this expressed by Dr. Burgess? Stewart: Mr. Riefler has about the most specific suggestion as an alternative. is d.M.Jr: I mean WILD thinks that this/not the move? Riefler? Riefler: Well, I became convinced in the end that it was much too late in this trade negotiation business with England to Regraded Uclassified 148 -3- raise the sort of question I was raising; thet it would mix up more things than it solved. I do feel very strongly that just saying "We'll consult when situations arise, isn't enough; that when we come to these times we'd like to consult, the onus is against - a little against the passive party, or the party likely to be injured by a change in exchanges. And it seems to me we ought to seriously a ttack the problem of insuring that consultation does take place and does take place on an equal basis between the two parties. And I'd like to see this group work on that problem and meet on it again and see what we can do about it. I mean I - I was convinced in the end by the discussion that I was raising the thing a little too late. H.L.Jr: Late in the discussion, or late in the agreement or trade negotiations? Riefler: Yes, it isn't thought through and it would take time to work it out. H.M.Jr: well, I don't quite see where you differ from what Burgess says. White: I think, Mr. Secretary, it might be a little better, before you attempt to get the reaction on that point, if you heard what the positive recommendation was, which I think would take care of some of the things which you have in mind and some of the things that Riefler has in mind. The thought was that if consultations could be initiated with a view to establishing a range of variations within the exchange rates that would call for automatic consul- tation in the tripartite accord - that was John Williams' suggestion: that we mignt tie that kind of automatic con- sultation not with the trade agreement but with the tripartite accord, where it more appropriately belongs. And as a move toward attaining that objective, the first step would be an exchange of messages based on the state- ment that we, as the Treasury, had been asked to inter- pret the phrase "wide variations" which appears in the trade agreement. H.M.Jr: Asked by whom? 149 -4- White: Well, we could say asked by individuals or State Department. That wasn't indicated. Riefler: President. White: And that in our attempt to come to some definitive conclusion as it applied to the trade agreement, we saw that there were several things which hadn't been synthesized or agreed upon, and that you wished to initiate some consultations with a view toward filling in that link In the chain. And that preliminary might take the form of an exchange of memoranda setting forth the criterion of wide variations. H.M.Jr: Well now - are you through? White: One more step beyond that. H.M.Jr: Go shead. White: And then upon that exchange of memoranda you might wish to proceed with further consultations, or you might come to some agreement which would serve the very purpose you had in mind in wishing or thinking of including 8 floor to this agreement. H.M.Jr: Well now, let me get this thing straight, if I under- stand what you gentlemen are saying: that you don't think, for one reason or another, that we should use the trade agreement as & mechanism to try to talk about the price of sterling. Huh? Burgess: That's right. White: That's not wholly Viner: No, no - we shan't use it at this moment, but, you see, we may use that provision in there as it is now proposed later on. White: But an interpretation of the word "wide" variation. H.W.Jr: But at this time ... Gardner: ...we put no figure in the trade agreement. Viner: We put no figure in the trade agreement. Uclassifi 150 -5- H.M.Jr: Yes, you don't put any figure in, but Gardner: We use it as a point of departure for discussion. Viner: For discussion now. White: Under the tripartite accord. But it would really apply to the phrase in here. H.M.Jr: Let's see if I understand it. I mean supposing Just for argument's sake I sent for Mr. Bewley, who happens to be here - the British Financial Attache - and said, "Well, Bewley, I'm bothered about the If - from what I understand you to say - " about the clause in the trade agreement which covers exchange, and therefore, under the tripartite agreement, which calls for consults- tion, I would like to sit down with your people and talk this thing over." And then he says, "Well, what bothers you?" "Well, what bothers me is what kind of conditions may exist which would necessitate us to invoke that clause." is that the idea? White: That's putting it very boldly. H.M.Jr: What's that? White: That would be putting it very baldly and very boldly. H...Jr: Well, I'm not going to beat around the bush. I never have with the British. I tell them what I have on my mind. White: I think you want to dress that up & bit. Viner: But not to use that provision in the clause which calls for a conference. H.M.Jr: I'm trying to get - I don't quite get what you people have - it seems to me... Let's say we have no trade agreement and just under the tripartite - let's just forget the trade agreement - I think it calls for a conference. Regraded Uclassified 151 -6- Nolte: we 011 agree. Viner: lie all agree. Williams: That's the point. H.M.Jr: I tainx it cells for a conference. Viner: Ana WE say, approve of this clause in the trade agreement, but use this clause as the occasion for calling the conference, say that that clause and the discussion arising in the course of its drafting nas Led us to believe that we're not 2S clear with the English on certain points that are certainly involved in the tripartite agreement 88 we should be, and we'd like to get our relations further clarified by conference or exchange of memorands. H.H.Jr. well now, where I don't Quite go with you people is this. You SEY - everybody nods his head when you say the way sterling nas been acting calls for E conference with england on the trend of sterling. And let's say that they seno somebody over here. Then out of that conference do I understand that you people are suggesting that I'll say, "Now we'd like to understand each other better ES to under what conditions WE would have to invoke that clause, rather than to wait until the conditions are so 080 we'd have to do it on the spur of the moment"? Is that the idea? White: I'm afraid 8.V.Jr: Is that the idea? White: I'm afraid that they haven't faced that problem, and if they were to face that problem there might be some doubts in this group. But as Igather - let them speak for themselves - there nas been no attempt to say that if in the opinion of the Treasury after these conferences 4.60 was the type of wide veriation which was regarded 68 prejudicial to our industries, that we should say that we should invoke this; that that decision whether or not to invoke this clause is something I think implicit in the discussion - is something to be left wholly with the State Department and not with the Treasury Department. H.m.Jr: You mean as to when to invoke the clause? Regraded Uclassified 152 -7- White: That's right. Maybe I'm wrong there, but that's what I would gather from the discussion. Viner: But the situation which would justify the State Depart- ment in appealing to that clause would, in terms of the tripartite agreement, justify the Treasury in open- ing up discussion. 011phant: Well, wasn't the suggestion to have this Anglishman come over here and say to him, "I want to discuss with you an amendment to the tripartite agreement setting up machinery for discussing the effect of exchange variations on trade agreements"? White: On everything else. H.M.Jr: I wouldn't want to use that. Oliphant: I WES going to say, this pretty near brings trade agreements over into the Treasury. H.M.Jr: I don't want to do that. That's what I don't want to ao. Oliphant: That's what I wanted to bring out. Burgess: I don't think you ... H.m.dr: I don't want to do that. Burgess: That isn't what he had in mind at all. Viner: I think what we were aiming at was that the discussion of this provision in the trade agreement has made it clear to us that there are things unsettled and uncer- tain in the tripartite agreement that should be clari- fied. H.M.Jr: Well, there we are in accord. Now on this monetery - not monetary - foreign exchange clause in the trade agreement, the British have tried their best to get me to interpret that for them and I have refused to. I mean they have tried to get me to interpret that and I have refused to, for 8 very good reason: I didn't know what the answer was. 153 -8- But I have no hesitancy in sending for Bewley on Monday and simply saying, "I'm bothered about the trend and I'd like the best Treasury man to come over here and talk things over." And then if out of that discussion - and then say, "I don't want to wait until the thing is so serious - that I'd like to discuss this thing before it gets serious. and then if ne says, "Well, what about the - what about that clause in the State Department, I'd like you people to advise me; I think it's very - that's very important: whether the Treasury should set the red - the danger signal, or whether the State Department should. Now I think that you people could overcome my dif- ficulties if you declded after consultation: let the State Department interpret this; it's their treaty. Why should I interpret B State Department treaty for them? We can give them the facts. The thing that I don't want to 00, gentlemen - I always try to be as frank with you as I know how - I don't want to be in the position, after we get this trade treaty through, which is the apple of the eye of Mr. Hull - that I should be placed in the posi- tion that I have to say, "Call that treaty off," see? Now they have taken years to build up a publicity machine to get this country ready for this thing, I mean, and to put this thing across; then it goes through. Then I've got to be in the position - that's why I was looking for something automatic. To say - now, I - I don't have to ask anybody in the State Department to call over the English or the French or anybody else to consult with them about the tripar- tite, and Mr. Hull always leaves - keeps out of it and doesn't want anything to do with it. Now, that demarcation between the two departments is clean-cut and it's worked beautifully for four years. Williams: Mr. Secretary, it seems ... H.M.Jr: Just a minute - excuse me, just a second - and if I can find some way of keeping out of their bailiwick, so that I don't have to take a clause in there and tell them that "your trade treaty is through" - now, that's what I don't want to do. 154 -9- Williams: It seems to me that that was what was running in our minds and that's way we thought that it would be B. good idea to try to make the tripertite agreement more workable, try to introduce into it some more definite provisions for consultation without tying that into the trade treaty really in any way. I mean it doesn't involve & judgment on your part, for example, that the trade treaty should be abrogated. It only tries to take care of 8 situation like the present, for example. H.M.Jr: Well, I don't need anything more than I've got. All I've got to do is send for Bewley and say, "Mr. Bewley, I want to consult." That's all that's necessary. Williams: But wouldn't it be on advantage to you to have the British come to you occasionally, when it's their currency that's fluctuating, if you could put upon them the responsibility for explaining their position to you without having to ask them? Wouldn't that relieve you in some situation of a certain amount of embarrassment? H.E.Jr: I don't embarrass that easily. It doesn't - it wouldn't embarrass me B bit to call him in this afternoon and simply say, "Gentlemen, I want a con- sultation." Wouldn't bother me the slightest. White: The additional thought that I had H.M.Jr: I mean I don't think - I mean I doubt whether we could be smart enough to work out & set of signals so that as we begin to pass those block signals, on such and such E. point we'd consult; because if we had had signals like that I would have had to kick France out. Oliphant: That's the point. H.M.Jr: If you had worked out B set of signals for me, France would be out. Williams: Yes, that's right. E.M.Jr: Now, whatever the signals were, I just had to take them, go like this and this (stretching hands apart) and then g et a new rubber band. So you give me a Regraded Uclassified 155 -10- new set of signals and the thing breaks. But + have no hesitancy at all, if you people think that the situation calls for it, to call for to consultation tomorrow. But the thing that does bother me - I mean besides the big question of the whole trend - the whole movement and what it means to recovery in this country. After all, that's the fundamental thing - what It means; and that we don't wait too long, until we have lost our position of adventage. But the other thing which bothers me, trying to be practical, is being in & position to interpret a clause of the trade treaty which might lead to call- ing the trade treaty off. Stewart: Mr. Secretary, I think that in these conversations we nad we had exactly that same objective in mind. We didn't intend ever that you should be in 8 position of having to pass on whether or not that clause was affected. We intended to try to keep the relation between the State Department and the Treasury just as nearly separate as possible. But we thought the reference to this clause would put the British in a better frame of mind to come to the conference than just an invitation to consult about the tripartite agreement, and that they would come with a more serious intent if they had reference to that phrase than they would if you said, "We want to talk." We also had considerable doubt in our minds as to how much value & consultation would now be, with no prepara- tions on either side; that 1f tomorrow you were to ask a representative of the British Treasury to come in, it would be very doubtful how much would be gained. It would depend largely on the personnel on the two sides. But probably it would be wiser to have some exchange of views and definition of problem before an Invitation WES extended. H.M.Jr: Now, Professor Stewart. Stewart: Yes, Mr. Secretary. H.M.Jr: Is that right? Again let me be very frank. If my advice is correct, and if Mr. Kennedy is correct, the Uclassifi 156 -11- tripartite agreement means a great deal more to the British Government than the trade treaty does. Now, I'm just reporting what he says. He says - he told me when I WES over there - he says, "Nobody in the British Government wants a trade treaty." I don't know whether that's correct, but that's what Mr. Kennedy told me; I'm only quoting Mr. Kennedy, who is our Ambassador to the Court of St. James. Maybe he's all wrong, but that's word for word what ne told me. So if he's correct, then using the trade treaty as an excuse wouldn't bring them here any quicker. Frankly, it might keep them away. As to your second suggestion, I wouldn't dream of making this move until I had at least one, two, or three weeks' time to sit down with you people and work out a very careful agenda scross the table, back and forth, each taking the side of the British, and the others going back - "Where do we want to land after this consultation?" See? I mean I'd want, oh, two - from one week to a month of careful work on just where we're going to land, before I even suggested it. So I mean I'm entirely in sympathy with you on that. And I think the thing that - if you people say to me, "Morgenthau, we think the situation is serious enough that you should consult," then what I'd like to do is to immediately put the Treasury to work, with the help of you gentlemen, and begin to work on an agenda, and to see where we'd end, where we'd arrive st, what are our objectives. I don't know enough about it - I mean that's why Stewart: even that doesn't meet what I had in mind, because it wesn't an agenda here or the assurance of preparation here; it WBS that there be some preparation there, that they would have some advance notice AS to the kind of question you would raise with them. And it may be that this reference to the treaty is not the proper occasion for it, but I think the experience that apparently you have had before - if these Britishers retire behind a vague phrase, furnish very little information, and more or less considering motives on two sides Regraded Uclassified 157 -12- Williams: That's my feeling too. Stewart: What you need, I think, is that whoever comes here goes through & process of preparation and ne knows in advance some of the questions ne's going to have to face. H.2.Jr: Let me put this to you this way. Do you think - would you advise me, 28 of today, that I should suggest a meeting witnout further preparation? Stewart: No. B. . Jr: What? Hun? Stewart: Advise : meeting without preparation? H.M.Jr: That I should ask for consultation without doing any nome work. Stewart: I would not. H.S.Jr: Whet? I need more home work even before I ... Stewart: You need nome work and you need assurance that there is some home work going on on the other side. H.l.Jr: Hould you hint that I'm calling such B meeting? Stewart: I'd 60 beyond that. I would hint it and I'd have enough preparation so that you gave them something which you said on your side - that you're getting prepared to discuss this kind of question. Gold'r: It seems to me, Mr. Secretary, what you need is B letter to them, or E conversation based on & memor- andum, in which you would say that "We would like to have a consultation, but at this consultation we'd like to take up these questions, and we'd like to have you come prepared with thoughts on these ques- tions, and we're prepering for them also. Then we can meet Blue discuss it." So they would have to have some concrete stuff - you could say, "Well now, what level of sterling would be satisfactory to you from your point of view in relation to your foreign trade and your 158 -13- need for raw materials on the one hand, and your need for exports on the other? On the other hand, we'll have material to show what levels of sterling are likely to be damaging to our economic develop- ment and our recovery." And say that those are the terms in which we want to discuss it and that there is no use discussing it unless we've got some concrete terms before us. Isn't that what - wouldn't that be what you (Stewart) have in mind? Stewart: I think some outline of questions, yes. Williams: Wast bothers me now - it may be just repetition, but there is nothing in the tripartite agreement that requires the country whose currency is being depre- clated to make any explanation of any kind. Sure, you cen 6sk for it whenever you want it, and they may hide behind & form of words and really not tell you very much; and that's very different from an undertaking to 60 into conference on the matter, and it seems to me that's what the tripartite really needs. This may be the opportunity to get it. White: I think your interpretation of the rubber bands was que to El slight misunderstaniing, Mr. Secretary. There wasn't the thought that there would be DE range at which action would take place other than the con- sultation - El range at which consultation would have taken place, just ES occurred with the French: you could have consultation if certain things happened. And there was Dr thought suggested - I don't know whether anybody opposed it; some agreed with it - that while this was goin_ forward, in the beginning at any rete, the signing of the trade agreement might be postponed, to give it more force. But I don't think everybody commented on that or passed on that. Merely E thought that was raised. I felt that you'd get more effect, if this were withheld in the interim, when you asked for consultation, without indicating definitely that you were withholding it because of that. Oliphant: Discuss the likelihood of the British postponing the signing of the trade agreement if this question were raised at this time. 159 -14- White: I had assumed - and apparently my version of the case is diametrically opposed to the Secretary's source of information - my impression is that the British Government, Chamberlain particularly, is extremely eager toget this signed. H.d.Jr: Well White: That's at variance with our Ambassador. He's probably better H.M.Jr: Ee's most emphatic about it. And I only heard again the other day, indirectly, that he still says the same thing. Now, I'm - I have no other information other than what Mr. Kennedy says. Gold'r: Does Butterworth say it? H.M.Jr: Well, he sticks to his knitting, which is just to represent the Treasury. But I've never asked, I wouldn't ask him, I couldn't. It would embarrass him; I mean ne never sends any cables or any letters on that. Gold'r: Well, he told me he thought they were pretty anxious to have that. Gardner: They're not anxious for the economic consequences, but are extremely desirous of the political good will that it would create. H.N.Jr: I don't - I'm not trying to interpret Mr. Kennedy, but I know he told that to me, and I've heard it within the last week. A man saw him and quoted him; he repeated exactly the same thing. Well now, what I'd like to do is to let this thing sink In, and then what we might do, you people - to prepare some questions here in the Treasury that we might put to the British, and take the liberty of asking you people to come down again and take a look at the things that we might want to ask them. How would that be? What? I mean I think I've got what you people have In mind: in other words, that we do this thing through the tripartite and not try to do it through the trade treaty. Isn't that right? Stewart: That's right. Regraded 180 -15- Viner: First, we're agreed it should be done, and secondly, it should be done through the tripartite. H.M.Jr: All right. There's no - I can go along on that. Now, let's talk for & few minutes about South America. All I have to offer you people is this. I know the situation of many of the countries is bad financially. I know that in some of these countries United States business men are losing ground. I know they have difficulty in getting cash. Now, are we just going to sit here and take it, or are we going to do something about it? I'd be glad to hear anybody that would like to talk about it. You've (Burgess) got a couple offices down there? Burgess: We have some offices down there. And I may say that the organization, before I joined it, made considerable loans in those parts. It was easy to make the loans; the great problem is to get them paid back. I haven't ned a chance to give it the study with our organization that I'd like to. I might be able to get some more light on it. I think it's E very tough problem to make loans down there that haven't any reasonable chance of being paid, but I think that it's possible that something could be done. Our people are keen about continuing the Export-Import Bank, not that it's done very much, but it is an organization that does ferret out a few situations. But I'd like to study it further before making any definite recommendations. H.M.Jr: You're not ready. Well, we'll go around the room. Mr. Warren? Warren: Well, never having been in Latin America, I don't nave any acquaintance with the opportunities there. I think that the general history of inter-governmental loans is not very satisfactory, including those that we now have outstanding. On the other hand, all other nations seem to be doing it, and it is possible that the only way that we can maintain our position in the contemporary world is to do the same sort of thing. Uclassifi 181 -16- H.M.Jr: But you don't want to go beyond that. Warren: I couldn't go beyond that. H.M.Jr: Dr. Goldenweiser? Gold'r: I'm afraid I haven't anything at this moment. I'll think about it. If I have any thoughts, I'll let you have them. H.M.Jr: Gardner? Gardner: Very doubtful about it. I don't see that it could be done on a business basis, and I doubt whether it would create political good will; that is, among debtors in default. Those nations that have been able to work out credit arrangements with Latin America have occu- pied EL trading position which gave them at strategic advantage to enforce collection. We haven't that trading position. H.M.Jr: You want to say anything, Harry? White: No, I naven't anything. H.M.Jr: Riefler? Riefler: Well, my feeling is also one of hesitancy at embarking on this new line. Inter-governmental loans have a bad reputation. On the other hand, I an quite clear that the United States, as 8 creditor nation, as a repository of 14 billions of gold, and as 8 potential leader of the Pan-American bloc - all require that there should be credit facilities between New York or Washington - between the United States and Latin America, and there should be loan facilities of some kind. And we're going to have trouble until normal relationships are there; I would much prefer it if there were private credit arrangements, because you would avoid the difficulties of inter-governmental connections when it comes to the collection phase. But I see no chance of that. So I'd at least consider It quite seriously. Williams: I have nothing to add to that. Burgess: de lived there several years. Stewart: On, did he? Regraded Uclassified 162 -17- H.M.Jr: We loaned Williams once. Williams: I don't know; I think it's a pretty dubious business. I agree that we ought to offer them all facilities possible. We ought to for our own position. But I think you can get into an awful mess. The South Americans get to disliking their creditors about ever so often, and I should think that it would be pretty dubious. I thought that Herbert Feis's suggestion that we arrange some machinery for meeting with them - central banks and governments - a rather good one. I should think that that might be done. White; that ought to go a long way to help them out (sarcas- ticelly). Williams: And I see what might come out of it. You might say, "That's nothing, that's just another round of talk. And it might well be that. Riefler: Ine idea of it would be loans. Williams: It might be it would eventuate in some sort of loans. 1 would rather approach them that way. H.M.Jr: What are you going to approach? Williams: There are lots of things you can talk about with them. Burgess: About meeting some of their obligations up here. Riefler: And we're up against the proposition where other countries will be offering taem .... Oliphant: Sure. Standard technique. Happened in the last two weeks in eastern Europe. Going on all the time. Gardner: Collecting on a barter basis or a clearing arrangement. 8.2.Jr: I mean here we are on the one hand, tied up with a favored-nation clause and against barter; and on the other hand every day, let's call them these nations that do business through barter are getting E wider and wider fleld. Oliphant: Through barter and outrigntgovernment loans. Regraded Uclassified 183 -18- E.S.Jr: -nrough what? Ollphant: Outright government loans: Turkey, Poland - what's the list in the last two weeks? H.M.Jr: Turkey and Poland. Oliphant: That all? Other credits. Viner: Czechoslovakia. Oliphant: Czechoslovakia. Williams: There goes along with that & development of a sphere of interest which I think would be pretty unwelcome; in Latin America they talk about "the great Colossus of the North" and if we were to start out to make loans through all South America, they'd say, "We see through that." They wight 011phant: There mignt be some such thing as B New Deal in "the great Colossus of the North." I think a real descrip- tion of what tast Colossus of the North has done under the "Oid Deal" is enough to turn enybody's hair white, but there's such a thing as a New Deal in the great Colossus. H.n.Jr: You don't think - you think they'd turn us down on our money? Williams: Oh no, they'd take the money, but they'd blame you for giving it to them later on. Riefler: It would be an excuse for & revolution to get rid of the government that contracted the loans. H...Jr: Well, I - I'm just going around. I don't - right now the State Department's asking me to appoint 8 commission of three to go to Cuba - to do what? what will they do when they get down there? Talk about sugar growing? Jake? Viner: I don't know. I think we've had an experiment with the Export-Import Bank; I'd like to know what their exper- lence is, what they think about it, why they haven't been able to make the loans, and why that isn't the best Regraded Uclassified 184 -19- agency for doing it. What's wrong with that set-up? I don't know anything about it. And I wouldn't express any opinion; I would say that the fact that other countries are making such loans is something that ought to lead us to give serious consideration to whether we have to do it for both political and economic reasons. They won't like us if We make them loans, but they'll like us still less if we refuse to make them loans. White: We might like them still less, Viner: That doesn't matter. White: Oh yes, it does. Depends on the reason we dislike them. H.M.Jr: Mr. Stewart? Stewart: I'm perfectly clear about it myself. H.M.Jr: You are? Stewart: Yes. I wouldn't think of it myself. I think the long record H.M.Jr: You wouldn't what? Stewart: I wouldn't think of making & loan on governmental account. You've got a long record of rescue parties organized by central banks and by governments which is Just a record of disappointment and misadventure behind it. It buys you short-time good will and long-time ill will. The people that do it, I think, are wrong. I think they're suffering for it now. I think the government will suffer exactly as 8 private banker suffers when it comes to buying it off. I think it's a first-rate mistake. I wouldn't contemplate it myself. The only possible basis that I think could be consid- ered would be in the contrast between the two types of loans that have been made to Turkey. The British make them a loan and they expect that money to be spent in England, but they don't really ever expect to Regraded Uclassified 105 -20- buy anything from Turkey to help the repayment of the loan. If the government of this country is prepared to make advances to certain South American countries and specify the goods which they will receive in payment of that loan over 1 period of time, it's E fessible thing to consider. But unless you've got something which is like the German thing - the German thing is really built that way. There's a real difference between the British loan to Turkey and the German loan to Turkey. B.d.Jr: There is E difference? Stewart: Yes, DE basic difference, I think. One is that the Germans are prepared to give an advance credit in which Turkey buys goods from Germany, but at the same time they expect over a period of years presumably to have the loan peid off in the goods that they want from Turkey. Now, if you've got B list of goods, then you've got E. trade relationship; the loan is only incidental to that. But the foreign lending that's been done out of the London market, out of the New York market, which has been done with the accumulation of debt, with no prospect of ever repaying it, is ill-will. If along with it you can carry & trade basis upon which you really stimulate the trade between two countries, that's a conceivable thing to do. But you'd have to specify your list, say, "This is the sort of thing - whetner it's tariff or whatever it is - " these are the goods we want that you have." You might do something if you have H.C.Jr: Would you when you get back mind sitting down and writing me - developing me E little - writing me B memo on that, just along the lines you've been talking? Stewart: I taink everybody here will testify that I never write a memorandum, Mr. President - Mr. Secretary. H.M.Jr: Don't you? Stewart: I never do. H.M.Jr: Well then, let's get you to say a little more right now. Regraded Uclassified 186 -21- Stewart: That's about all I've got, really. H.1.Jr: I don't quite follow you. Stewart: The only idea I nad in mind was the difference between the German loan to Turkey and the Britisn loan to Turkey. But I assume that the German loan to Turkey is intended to give them a credit which they can spend pretty promptly in Germany. H.M.Jr: To Germany. And you'd follow that. Stewart: Yes. And they expect then to receive goods over E period of time from Turkey, which is the old-fashioned notion that the banker had about why loans were made, and how they were paid off, in contrest to most of these intern tional inter-governmental loans, where it's El rescue party and it's intended to support the exchange, improve the government finances, and never has any method of getting it repaid. H.M.Jr: What you're suggesting is, if we do anything, we take & look at the German method. Stewart: Yes, I think that's a genuine reciprocel trade agree- ment on the grand scale and it will build an economy in the long run; may have other difficulties .... Viner: You need import controls to do that. You can't do it on a free import basis. The Germans know they can decide just what shipments of tobacco to Germany shall be made against that credit. Stewart: I don't see now an inter-governmental loan can have meaning aside from the practice of an authoritarian government. H.M.Jr: You and Keynes are not for apart. Stewart: We always have been. H.2.Jr: If I'm correct - and you (White) check me - he suggested just this to England last week. Stewart: Uh-huh. H.I.Jr: AS you - did you (White) see 1t? 187 -22- White: Yes, H.2.Jr: Am I right? Naite: That's right, BS en approach to bilateral H.M.Jr: But as I understand, Maynard Keynes' suggestion to England that in their dealings with Germany - his suggestion 13 practically what you're saying now. I3 that right, Harry? White: Well ... H.2.Jr: WELL, I mean the same pattern. White: Same direction, same objective. H.M.Jr: If you haven't seen tast, you ought to take a look at that. Viner: Was it E loan proposal or E barter proposal? white: No mention of & loan, but there may have been E loan implicit - may well have been B loan implicit in it, because he suggested following in the direction of the German pattern but chiefly in the way of bilateral balancing; but they wouldn't hesitate, as they haven't hesitated, to make loans along with that sort of arrangement. H.M.Jr: If I may just - well, I can hold my thought; go ahead. Siefler: One thought I wanted to put in, and that is that there is a great misconception prevalent almost all through the United States: that under certain proper conditions Latin America would be able to absorb productively fairly large amounts of capital. I don't think that's true, and I think you ought to realize, in going into this, that they can't possibly use and pay for very much money; the loans should never be very large. White: Depends on the interest rate which they pay. H.M.Jr: Well, I'm - all I'm going to say is, you fellows have not discouraged De. I think there's enough brains in this room that we can - the fact that it hasn't been done successfully doesn't mean that we can't do it. And I at least haven't been able to think it through, Regraded Uclassified 168 -23- and I'd like to take another - have you all take another look at it, because I can see the thing slipping through our fingers, because other coun- tries are doing it and we're just going to - we're just going to lose ground, because we have nothing to offer them. Stewart: Is it - in South America is it chiefly Germany? H.M.Jr: Pardon me? Stewart: Is it chiefly Germany in South America? In South America. H.M.Jr: Yes, yes. Yes. Stewart: I think it's awful hard to beat that system on their scheme. Viner: Is it possible to get the record of the Export-Import Bank as to their experience and why they haven't been successful in making more loans? White: Well, one partial answer to that is that the President has just taken a trip - the President of the Export- Import Bank has just taken a trip all around and apparently has stimulated a lot of questions on small amounts, not large amounts. But I mean the mere fact that Pierson went around might indicate that their previous experience was not adequate for them to come to a conclusion, that they wanted more information. Viner: I should think Pierson would have something to contri- bute on this. H.M.Jr: I should think so. Viner: Why isn't that set-up - I haven't heard why that set-up isn't satisfactory. White: I think the approach has got to be very different: much broader gauge, much reorientation of your whole proposal. And I think that any attempt to come to 8 conclusion on the basis of the type of past loans which have been given, in which the interest rates have been preposterous - I mean the real rate, not the nominal rate, and in which the uses to which they were put were doubtful Regraded Uclassified 189 -24- Viner: The nominal rates were preposterous, real rates very low. Unite: Only because of defsults. liefler: Tremendous amounts loaned at perfectly normal rates. These cases that are preposterous are awful cases, but they're not the general one. White: 6, 10, 12 percent - real rates of interest. If loans were made and tiea to exports, possibly even of certain commodities or for certain purposes, and if some mutual negotiations went on LS to the purpose for which those loans would be made then tnd possibly some reasonable reduction in rates for the particular commodity which - the teriff rates for the particular commonity which they engage in, nd if the interest rates were made extremely low, because we may be lending them in & large part in dead asset and commercial considerations gren't the only ones, there may be possibilities. I don't think WE can go on past record as decisive. H.M.Jp: Well, wast I'm going to do is this. I'll get for you gentlemen just what the Export-Import Pank has or has not done. I'll try und fina out what their problems are in Souta America, now they feel about it. e'll also prepare a memorandum on the things that we think we ought to put up to the British, :nd when we have that I'd like to invite you to come down a gain, if you'll be willing to see - take a look at it. Regraded Uclassified 170 PARAPHRASE OF TELEGRAM RECEIVED M FROM: American Embasey, Paris DATE: October 21, 5 p.m. NO.: 1794 FROM COCHRAN Today the Paris exchange market was very slow, with French stabilization fund giving a little sterling this morning around 178.75. Until after Sunday's elections and any resultant political developments are known, everyone is delaying new commitments. In spite of con- tinuing gossip of a possible capital levy, subscriptions to Government paper still satisfactory. I received a call today from Beyen of B.I.S., Jay of Morgan's and Grant of Guaranty, all of whom are attend- ing the meeting here this week of the monetary and credit policy committee of the International Chamber of Commerce. These gentlemen said that efforts were being made to reach & compromise this afternoon on some rather innocuous reso- lutions about return to the gold standard, utility of stabilization funds, international credits and BO forth. A report will be given of the final texts. END SECTION ONE SECTION TWO. With regard to the French situation Beyen insisted that & real French financial recovery will necessi- tate a conversion of the present state debt forced or otherwise. Regraded Uclassified 171 -2- otherwise. The delay in issuance of financial decrees is & sub- ject for complaint among French business circles. Because of the increased cost of living, French civil servants are renewing their demands for higher pay. A criticism of "dumping" of French wheat is beginning to be made by the British press. Purchase of dollars and sales of sterling by Scandanavian banks and particularly Stockholm are also drawing adverse comment in the financial circles of London. END SECTION TWO. WILSON EA:DJW Regraded Uclassified 172 REB GRAY Paris Dated October 21, 1938 Rec'd 3:40 P. me Secretary of State, Washington. 1794, October 21, 5 p. m. (SECTION THREE) Swiss press reproduces a memorandum addressed to the Committee for National DEfense and Combating of Unemploy- ment by the Swiss Federal Council dealing with the question of utilizing part of the book profits from revaluation of the Swiss National Bank's gold stock to cover unemployment relief Expenditure to the Extent of 150,000,000 Swiss francs. The Swiss National Bank had again and again been invited to consider this plan and in a report to the Federal Council the bank maintained its opinion that those profits should remain untouched in the interests of the Swiss currency and in view of the increased uncertainty with regard to a postponsment international currency situation. The bank repeated its readiness to grant to the cantons and the Federal Government Extensive discount credits on most favorable terms. WILSON WWC EMB 173 REB GRAY Paris Dated October 21, 1938 Rec'd 4:10 P. m, Secretary of State, Washington. 1794, October 21, 5 P. m. (SECTION FOUR) Dutch press publishes EXCERPTS from B. statement by President Bachmann of the Swiss National Bank on Swiss currency policy. The continued depreciation of sterling in relation to the dollar and gold hE declared had raised the question for Switzerland whether the Swiss franc should bE allowed to follow the downward movement of sterling or whether the gold price Expressed in Swiss francs must bE kept stable. In this connection commercial considera- tions were of primary importance. During the first SEVEN months of this year the sterling bloc absorbed 27% of total Swiss exports while the share of the dollar bloc was only 7%. This would suggest that Switzerland should keep step with any further depreciation of sterling; but that would mean a rise in the Exchange rates of not only the 80- called free currencies but -- and this was of particular importance -- of the blocked currencies also for instance the Reichanark and currencies of other countries with which Regraded Uclassified 174 REB 2-#1794, From Paris,Oct.21,5p.m. (Sec. Four) which Switzerland had clearing agreements. A higher REichamark rate in relation to the Swiss franc would lead to a reduction in imports from Germany the proceeds of which were not only financing German tourist traffic to Switzerland but also payments to Swiss creditors holding German bonds. Professor Bachmann stressed the fact that the Swiss franc was linked neither to sterling nor to the dollar. WILSON EMB KLP Regraded Uclassified 175 REB GRAY Paris Dated October 21, 1938 Rec'd 4:02 P. m. SECRETARY of State, Washington. 1794, October 21, 5 P. m. (SECTION FIVE) Switzerland maintained her complete freedom of action in respect of all possible future decisions in the currency sphere. The interests of Swiss Economy were always the deciding factor. Non-Economic motives could never prompt Switzerland to follow other countries in their currency policy. In conclusion Bachmann Expressed himself in favor of maintaining the gold standard as the best currency system. The increasing collaboration between central banks and foreign Exchange funds for the maintenance of certain Elastic currency relations afforded proof of the world-vide tendency towards the re-introduction of the gold standard. In view, however, of the present world political situation and its economic repercussions a return to the 'gold standard in the near future could hardly bE Expected. (END OF MESSAGE) WILSON KLP Regraded Uclassified 176 MY GRAY Paris Dated October 22, 1938 Rec'd 8:50 a.m. Secretary of State Washington 1799, October 22, 11 0.m. FROM COCHRAN. Council of International Chamber or Commerce yesterday unanimously adopted, on the proposal of Aldrich of Ohase Bank, Chairman of the Chomber's Committee on Monetary Policy and Credit, the following resolution: "The removal or modification of barriers to international trade, the beloncine of -overnmental budgets, the stabiliza- tion 00 currencies, the removal of Exchange controls and the growth of proceful relations among the nations are all inter- dependent. Progress in the accomplishment of any one of these objectives facilitates progress in all the rest. There is no fixed order of priority amon] them. In different countries, special circumstances may suggest that Efforts may bE con- centrated at a iven time upon one rather than the others. With respect to the currency problem the Chamber maintained: (End section one). WILSON CW CSB Regraded Uclassified 177 MJD GRAY Paris Dated October 22, 1938. Rec'd. 9:13 a. m. Secretary cf State, Washington. 1799, October 22, 11 a. m. (SECTION TWO) One. Gold standard: notwithstanding the increase in gold production and the accumulation of large gold TE- SErVES in certain countries, the International Chamber of Commerce reeffirms its faith in the ultimate restoration of gold as the international measure of value, and in the fundamental Economic function of a gold standard. Two. The tripartite agreement: The International Chamber of Commerce recognizes the importance of the tri- partite agreement and suggests that consideration should bE given by the powers adhering to this agreement to the establishment of appropriate means of reenforcing their present collaboration, and more especially to determine the proper relative values of the three principal curren- OTES, with a ViEW to maintaining a stable relation between them and ultimately restoring gold parities. Three. Cheap money policy: The International Chamber of Commerce rejects the fullncy that artificially cheap money Regraded 178 MJD -2- No. 1799, October 22, 11 a. m. (SECTION TWO) from Paris money is necessary for business activity and that money markets must never again bE called upon to stand the discipline of firm or tight money rates. WILSON GW WWC 8: THE Regraded Uclassified 179 McC GRAY Paris Dated October 22, 1938 Rec'd. 9:15 n.m. Secretary of State Washington. 1799, October 22, 11 n.m. (SECTION THREE) Monty rates should tell the truth regarding the actual situation AS to the supply and demand of capital. By an adequate supply of capital is meant an abundant volume of true investor's savings and corporate savings". Paris editor of the NEW YORK HERALD TRIBUNE todny carries three column head line "Morgenthau Calls in Experts for Mystery Monetory Talks, Gold WElcome, Says Secretary". AGENCE ECONOMIQUE gives one column to the meeting, suggesting Vashington uneasiness over depreciation of starling. Wilson GW:WWC Regraded Uclassified 180 rr GRAY London Dated October 22, 1938 Rec'd. 9:30 n.m. Secretary of State, Washington. 1235, October 22, 1 o.m. FOR TREASURY FROM BUTTERWORTH. Toley confirms the report in today's financial press that the Foreign Exchange Advisory Committee has given its sanction to the pounds 6 million Woolworth deal reported in paragraph two of my 1231, October 21, 6 p.m. Incidentially the basic policy upon which this decision was founded is outlined in my 81, February 1, 8 p.m., but it is noteworthy that the condition of the dollar ster- ling exchange ct the time it was enunciated was quite dissimilar from that it is today. The dollar opened at 4.762 bid and moved rani'ly to 4.76 at which point the British authori- ties intervened. But as soon as they went out of the market the rate went up 4.75 3/4. 197 bars were dealt in at gold fixing at 146 shillings 1 ² pence of which the British fund supplied all but 15. After the resultant dollars had been obsorbed the British Regraded Uclassified 181 2 - 1235, October 22, 1 p.m. from London the Br tish authorities again came into the market and held the rate at 4.75 3/4. After they went out at noon the rate moved to 5/8. The volume has not been large. KENNEDY TOP WWC Regraded Uclassified 182 MY GRAY Berlin Doved October 22, 1938 Rec'd 11 s.m. Secretary of State Washington 568, October 22, 2 p.m. No. 26 FOR TREASURY FROM heath. The composite statement for all German banks Excepting savings banks shows that in September their total liabilities were 18,205 million marks a decrease of 707 million marks from August 31. The decrease was mainly in deposits of other credit institutions which fell from 6,700 to 6,090 million marks. On the assets side there W28 e heavy decrease in bill holdings; from 6,012 million marks on August 31, to 4,997 million marks on September 30. THE percentage of liquid assets of all Cerman banks decreased from 54.8 on August 31 to 52.5 September 30, or to about the BATE percentage as a yesr ago. Cash reserves, however, increased from 2.1% to 3.1% during September. It is asserted in the press that there are no more Government "special bills" left in German bank portfolios. Bank holdings of Treasury bills increased only 242 million marks during September to n. figure of 3,489 million marks as compared with an increase of 425 million marks in August. VILSON KLP GW Regraded Iclassified 183 PARAPHRASE OF TELEGRAM RECEIVED FROM: American Embassy, Rio de Janeiro, Brazil DATE: October 22, 1938, 1 p.m. NO.: 249 I am told by the Director of Exchange that during the week of October 24 the Bank of Brazil will close exchange for maturities and daily quotas for the whole period September 8-15. You are requested to inform Commerce of the foregoing. CAFFERY. 03V1303R EA:LWW BEG is 700 reserved VANDATES - - - - - Regraded Iclassified 184 Federal Surplus Commodities Corporation Sunnary of Commodities Procured - Fiscal Year 1938 and Fiscal Year 1939 to date (Figures in thousands) : : Total : : fiscal 17/1/38:7/7/38 7/14/38:7/21/38:7/28/38:6/4/36 Commodity : Unit : year to to to to to to Total I : : ending 17/6/3817/13/3817/20/38:7/27/3816/3/36 to to to to 7/1/38 # : 16/30/38* to I 1 10/19/38 I h) Apples (Dried) Pounds 14,557 - - - - - - - - Bushels 5,625 . E) Apples (Fresh) - - - - - - - - - - - - - - (1) - - 3) Apricote (Dried) Pounds 2,990 - - - - - - . - - - - . 3 110 198 ju (2) - Beans (Dried) Founds 56,800 - - - - - . - - - - - - - - - (3) - 5) Beans (Enap) Bushele 4 - 33 5 5 - - - 9 3 4 - 1 , - - - - (6) 1 1 - - 1 1 - - - 36 (5) 6) Beate (Fresh) Bushels 11 6 7 18 13 9 5 6 5 n Blackberries (Canned) Casse 5 2 2 * - ! - - 39 65 11 46 241 (6) - . - - - - 6) Butter Pounde - 15,035 80 - - - . - 50 (7) - - - - - - . . - 9. Cubbage Bushels 990 26 40 130 31 45 338 62 36 2,143 30 3,377 5,109 3,783 3,804 16,884 (8) 66 81 01 Onne syrup Gallons 237 107 56 134 163 - - 357 370 234 216 1,947 (9) - - - - - - - - a - - - - 107 (10) 1) Carrote Bushele - 1 2 11 7 7 6 7 10 12 5 2) Couliflower Crates 15 8 7 6 1 16 124 (11) - - - - - - - - - - 19 1,174 2. - - - 21 (12) 1) Celery Bunches - - - - 17 65 39 15 13 4 Cercal (Whole wheat) 8 Backs 408 6 9 in - - 163 (13) - - - - - - - - - - - - - - - - - (14) 42 Chesse Pounde 3,446 - - - - - - - - . - - - - - - - - (15) b) Corn Backe - - - - - - 1 M 3 - - - - - - , - 5 (16) ) Coston Bales - - - - - - - - - - - 4 1 5 - - - 10 (17) E) Cotton fabrio Yards 1,133 - - - - - - 10 49 1 29 44 14 - 3 22 1 173 (18) (9) Cottonsed oil Pounds 9,780 - - - - - - - . . - I - - . - - (19) (D) Eggs (Shell) Casse 270 - - - - - - - - - - - - - # - (20) , - n) Fish Pounds 3,677 - - - - - - - I - - (21) - - - - - - - 2) Flour Barrele 2,699 - - 1 - - 279 # - - - - - - - . - 279 (22) 3) Grapefruit Boxes 401 - - - - - , - - - - - - - - (23) - - - (4) Grapefruit Juice Cases 552 - I - - - - - - - 464 - 7 - - - 64 555 (24) 5) Grapee Tons 8 - - - - - - I - - - - - - - (25) - I - 26) Labele - - I - - - - 15,560 - - - 15,560 (26) Labels - , - , - - 2,550 - 2,550 (27) E7) Mattrese Ticking Yards - - - - - - - - - - - - - - - RS) Milk (Dry skim) Pounds - - 320 - - - - 8,961 (28) 21,520 - - - - - - 2,651 5,960 - 29) Milk (Fluid) Quarte 12,497 497 515 523 528 525 538 530 531 522 509 515 524 415 534 551 580 8.337 (29) 39 181 78 153 74 979 (30) (30) Ontone Founds 3,000 - - 300 25 OV 11 22 16 12 7 53 31) Oranges Boxes 1,932 e 48 59 57 38 46 5 55 50 50 66 55 64 54 47 - 76% (31) - 1 9,075 - 9,075 (32) 32) Paper baga - - - - Bage 21,825 - - - - - - , I 33) Peaches (Dried) Pounds 2,534 1,223 2,300 - 4,791 1,873 10,167 (33) - - - - - - - - - - - - - b (34) - B43 Peaches (Freeh) Bushels 8 - - - 2 4 - - - - - - - Bozee 318 - - - 73 17 12 , - 229 (35) Pears (Fresh) 31 96 - - - I - - - - (36) - - - Casse - - . - 36) Peán (Canned) 862 - (37) - - - - 1 - - - - - - - - - - 371 Pean (Dried) Founds 6,000 - - - - - 3 TAX . - . - - - - - - - (38) Pess (Freeb) Bushela - - - - - - - - 3 - - in - 8 204 122 334 $9 - - - DEL Polatoes (Dweet) Duabela 440 - - 42 232 45 19 2,365 (40) - - - - - - 40) Potatoes (White) Bushels 4,325 - 466 483 120 44 167 266 142 219 108 12 - - - (51) - - - - - - (41) Potato starch & flour Pounds - - - - - (42) 2,562 - 1 1 - - - - - - - - - - Tona 5 - - 13 (43) 42 Prunee (Dried) - 55 - - # - - - - # 5 5 - 11 (ab) LA Prunee (Fresh) - - - € Bushela - - - - - 1 - - - - - - 45 Raisine Tons - 11 - - - - - - (45) 15 - # - - - - . - , - (45) Rice (Milled) - - Pounds 73,190 - - - - - - - , - (46) - . - - - - - - - 145 (47) (46) Tobacco - - - Pounds 3,500 - - - - - - - - - - - - - 1 114 (48) (47) Tomatoes (Canned) 50 - - 130 15 Cases - - - - Bushels 18 22 16 20 4 1 (48) Tomatoes (Fresh) 282 3 - - 1 - 7 22 October 22, 1935 Treasury Department, Division of Research and Statistics. Weekly figures reported by Federal Burplue Commodities Corporation are based on telegraphio reports and are unrevised. Fienal year totals have been revised to include all contract cancellations and other adjustments. Regraded Uclassified 185 mmany Dictated October 24, 1938 Ambassador X22 Bullitt and Mr. Monnet had supper with me Saturday night and stayed after supper until twenty minutes past twelve. They had Just come from Hyde Park. Monnet was sent over here by Daladier and the Kinister for Air of France with the idea that he could organize a corporation to build aeroplanes in Canada for France. While in Hyde Park, last Tuesday, I had talked to the President about this and left with him a memor- andum prepared by White and told him that I was opposed to this for many reasons. Friday the President called me, about five minutes of one, and told me that he had this talk with Monnet and Bullitt and that my particular worry that the French could not supply the foreign exchange was nothing and that that had been taken care of and that he would like me to see these people. After supper Bullitt told me that the President nad been most frank with Monnet; that he had drawn B. map and shown him Just where outside of Montreal this plant should be located; had even told Monnet how many planes the English had built and how many the French had built in their respective countries, and that they should build a plant in Canada which would produce 1700 planes on an 8-hour shift and 5,000 planes on a 3-hour shift. I tried a number of times to stop the conversa- tion and get on to how they were going to finance this, but Bullitt did not want me to do it. Finally, after they had let me know that everything was lovely and that the President had given the plan his blessing, I said to Mr. Monnet, 'Let's take It for granted that you could overcome all technical difficulties.' I said, 'How much do you think the plant will cost? $25,000,000 to build?' He said, 'No; $50,000,000 to $100,000,000. I said, 'How are you going to pay for that?' He said, 'Frenohmen who have their money over here will subscribe to the stock. I said, 'I don't believe it, but lets, for Regraded Uclassified 206 -2- argument's sake, say they will, because any Frenchman who has nis money in America, before he subscribes to stock of a new company will want to know to whom the product 1s going to be sold, and the answer 18 the French Government, and the first question he 18 going to ask 1s how 1a the French Government going to pay for these.' Mr. Monnet said, 'The Frenchman has con- fidence in his country, but not in its money and if he could buy a bond or stock which was payable in United States or Canadian dollars, he would do so.' I said, 'Well, -don't let argue. I wan't argue. Let's take it all for granted that your plant is built.' I said, 'How much do you people figure it will cost to pay for 1700 planes?' He said, 'About $85,000,000 a year. 'Well,' I, said, 'to my knowledge, I say it's impossible for the French Treasuryto find $85,000,000 a year of foreign exchange.' I said, 'I have grave doubts as to how they are going to pay for their own budgetary expenses during the next three months, let alone find $85,000,000 to send over to Canada.' I felt my way gradually in order not to offend his feelings, but he encouraged me to go on. I made up my mind I wasn't going to argue as to the theory which they had sold the President, but would stick to the subject which I knew, viz: Government finance. Bullitt again tried to side-track the meeting by saying that before you can get stability in France, the international political situation has to be straight- ened out. Monnet, to my surprise, pushed this aside. He said, 'That is not so.' He said, 'We have been hearing that for a long time and we have been hearing for four years that if we continue to give the French- man his freedom, eventually his confidence in theGov= ernment will return and he will bring his money back.' He said, 'That has proven not to be so.' (I am not giving this quite in its sequence, but I am giving the salient point of the argument.0 About this time, I decided I might just as well be frank and get everything off my chest and I said, 'Mr. Monnet, we figure that during the last four years there must be at least $4,000,000,000 gold that has Regraded Uclassified 187 left France. Just as long as that 1s abroad, and what little money is left continues to leave France, there isn't any use talking about building aeroplanes or anything else.' And I said, 'You people have to devise means and methods whereby you get this money back. I said, 'If the French Government had the courage to put through decrees whereby they would make their citizens bring back their money or put them in Jail, I Bay that overnight you have such & change in your domes- tic situation it would be hard to even realize it.' So he said, 'How do we do it?' I said, "I am sure that the American Government would assist you to locate this money. I am sure the British would do the same. Then you have to discharge about two-thirds of your Cabinet, because most of them would be involved. You might have to put a thousand people in Jail.' He said, 'That's too many. Two or three would be enough.' I said, 'For example, after the return of capital, instead of the Government paying 7% ffor its money on its debt, it might get it at 3%. He again said, 'But how could you do it?' And then I got what Bullitt said was an absolute stroke of genius. I said, 'If Leon Blum could get elected on a platform of no devaluation and then de- value under the cloak of the Tripartite Agreement, I said, 'Mr. Daladier, if he has the courage, can do the same and under the cloak of the Tripartite Agreement he can announce supervision of foreign exchanges and issue decrees which would make it a Jail offense not to bring your money back.' Both Mr. Monnet and Mr. Bullitt were simply beside themselves with Joy- I further pointed out, I said, 'I am correct, am I not, that your very Left party members are for exchange controll' He said, 'They are.' I said, 'Your whole situation overnight would change, and Monnet said, 'If we made this move to bring foreign capital back, we would please the Left very much and, in return, Daladier could demand of the Left that they ease up and let the people go to work in the munitions factories, etc.' Regraded Uclassified 188 The last thing I said, Saturday night, I said, 'Mr. Monnet, if you don't do something like this, your country 18 through.' And I repeated it twice. I said, You might Just as well make up your mind, It's through!' I said, 'It's impossible for you to con- tinue with the bulk of your capital abroad. The French Treasury is busted and, I said, you Just can't con- tinue. Bullitt and Monnet returned on Sunday, after having slept over the matter, and Monnet could not say enough to thank me. I said, 'Do you think Mr. Daladier will have the courage to do this?' 'Well,' Bullitt said, 'the way you painted this picture, it will give Daladier the opportunity to be the saviour of France, and that would give anybody courage.' I said, 'Does he realize that he will have to start with Mr. Bonnet and from then on down either fire them or put them in Jail?' He said, Monnet realizes all of that. So I said, 'Well, the quicker Monnet can get on a boat and go back, the better.' Monnet had already looked up the boats and saw that he could get back by November 4th and that the decrees are still possible until the 15th of November. Up to date, Daladier has issued no deorees. He said the reason for that is that he just does not know in what direction to turn. I have never seen Bullitt so enthusiastic about anything. He sald he had thought it over whether he should go back to France and help or go down to Bermuda and he decided that inasmuch as 80 many of his friends were involved, that it would be better for him to be in Bermuda. Monnet wants to go through the motions of seeing Peoples, because there are only two people that know he's over here -- Daladier and the Minister of Air. He is not reporting to the French Embassy and he 18 sending no cables. I then said I would arrange for him to see Mr. Oliphant who, before he left on Thursday, would give him a memorandum or would explain to him verbally what we could do in the United States to assist the French Government to locate French capital. They again asked me whether they thought the British Regraded Uclassified 189 ⑉5⑉ would cooperate and I said I was sure they would. He said, 'Well, they can work through Monnick.' I said not if they wanted my cooperation. So he said, well, how would they approach the British? We have always offered to approach the English for them. We could either do it through the British Embassy here or they could do it themselves, but they should decide. I then said to Bullitt, 'How about if we do this for the French -- help them locate the capital -- might we also have to do it for the Germans and the Italians?' He said, 'Don't worry about that. I can give you 16 reasons why you would not have to do it for them.' 30 Monnet asked me how would they draw up these decrees and I said we didn't have the French law, but I was sure that give Jacques Rueff 48 hours and he could draw it up, but that we would explore our own facilities for helping them locate the French capital. From our own domestic standpoint, this whole question of having 14 billions of gold would also be greatly assisted if 2 or 3 billions should go back to France and would ease the pressure on me what to do with all this gold. Another thing I said to Bullitt, with this money back it gives them a chance to loan cash to the Balkans B.B against the Germans offering them credit against barter and it gives France a chance to hold up its head with Turkey and with Poland and Roumania and again be in the position of being the banker for what they call the "Little Entente' instead of this cock-eyed scheme of Bullitt's to build an aeroplane factory in Canada. In the telephone conversation I had with Cochran from my house, I pointed out that we ought to do some- thing to assist South America. so Bullitt said to me, 'I had a talk, last week, with Cochran and he is the craziest blankety-blank fool you ever saw! He's Just crazy! What do you suppose he suggested? He suggested that we go down and conquer South America!' I said, What for?' And Bullitt said, 'Well, he said Europe 19 through and we have to look into South America as a future sphere, 80 let's go down and conquer it.' This is Cochran putting my ideas to work. And Bullitt said, 'I said to Cochran, you are nothing but a God-damn Regraded Uclassified 190 Fascist!' I was 60 afraid that Cochran would say, 'That's Morgenthau's idea.' And he said, 'After all, they are a half-educated people. Let's go down and conquer them.' And he said Coohran also said, 'The strong have to dominate nowadays.' I said to Bullitt, 'But will he have the courage?' and he sald, 'Put it on a platter that he can be the saviour of France.' And he said, 'Daladier six days a week he is magnificent and on the seventh day he goes completely to pieces; the seventh day he is all blah. The only hope 18 you don't get him on the seventh day. Bullitt has the audacity to say to me, 'This has been my idea for two years' when he fought me, toothand nail, on exchange control. I said, 'Can't you find some peasant, somebody who 18 BO honest and has his feet right on the soil and nobody can shake the man?'s I said, 'It means a French revolution.' He said that the Communist party In France, they want this and if you give them this they will go along on the other stuff because they say why should we work 48 to 60 hours when those crooks on the top are making all that money? And they are right. And I said, 'In America we have only one policy: pay your taxes or go to Jail. So he said, 'Don't let's bring up the tax question right now. o0o-o0o Regraded Uclassified 181 Saturday October 22, 1938 11:27 a.m. HMJr: I mean I'm making a record? Wayne Taylor: Yeah. HMJr: What's the market? T: What do you want first? HMJr: Bonds - Government bonds. T: Quiet and steady - ah - practically no change. HMJr: How are stocks? T: Industrials up a .28. HMJr: Yeah. T: Rails - half a point; - Utilities 22/100ths. And volume in the first hour 510,000 shares. HMJr: And commodities? T: Commodities - wheat - ah - practically unchanged. Corn up pretty nearly a - oh, not quite a cent - three quarters of a cent. Cotton unchanged. Averages up .02. HMJr: How - how is sterling and francs? T: Sterling - last sales 75 and 7/8ths. HMJr: Is that up or down from yesterday? T: Ah - that's ah -- off from close - closed at 76 and 3/8ths. Francs - 66 and 1/4 - off a quarter. HMJr: Now, if we sell a 3 year and 7/8ths R.F.C. note how many thirty-seconds do they figure there is in it? Is Harris there? T: Twelve or thirteen. BMJr: Is that what he figures? T: Yeah. Regraded Uclassified - 2 - 192 HMJr: What was it last time? T: Well, we figured pretty nearly a half a point last time. HMJr: Not quite as good, is it? T: No. And this isn't exchange, you see, and no - no cash and so on. HMJr: Now, if you could arrange that you could listen on the loud speaker and let me talk to Matteson why we'll finish up. T: 0. K. HMJr: See? (Short pause.) Operator: Operator. HMJr: Hello. 0: Yes, sir. HMJr: I want them to listen and I want to talk to Mr. Matteson in New York, please. 0: All right. 11:29 a.m. Operator: Go ahead. HMJr: Hello, Matteson? Walter Matteson: Yes. Yes, Mr. Secretary. HMJr: Ah - Matteson, I'm talking to you from the house but the men are listening at my office so I'd like to know what it looks like to you on a three year R.F.C. note. M: Ah - - 7/8ths 3 years - interest only up to November first. HMJr: Yeah. Ah - how many thirty-seconds ah - Regraded Uclassified 193 3 I I M: I don't quite hear you. HMJr: How many thirty-seconds premium do you think there'll be in it? What do you think it'll sell at? M: Ah - it - - it figures mathematically about 13, based on the price of the outstanding issue. HMJr: Yeah. And practically what do you think it'll do? M: And ah - as a practical matter the ah - the ah - the Street - I've talked to them this morning again and they think that they will command a premium of about a half. HMJr: About a half? M: Yes. HMJr: Well that's comfortable isn't it? M: That - that's comfortable. Three quarters would be a little tight. HMJr: Uh huh. M: Three quarters figures out mathematically ah - a premium of only about four thirty-seconds. HMJr: That's too close. M: That's too close. Ah - Mr. Secretary, Mr. Harrison is here and he wants to talk to you. HMJr: All right. M: If you'll hold the wire I'll have you transferred. HMJr: Thank you. M: Is there anything else you'd like to ask me in the meantime? HMJr: That's all. M: Will you hold the wire? HMJr: Surely. (Pause) Regraded Uclassified 194 - 4 - M: (Speaking to his operator: Secretary Morgenthau is on my wire. Will you transfer him to Mr. Harrison, please.) George Harrison: Hello. HMJr: Hello, George. H: Hello, Henry. HMJr: My heavens! You didn't give up the football game on this beautiful day? H: I know. But I just had so much to do here before going down to my meetings that I thought I'd stay at the bank. HMJr: Well that's a shame. H: But I'll get out this afternoon. Ah - Henry, as far as the market is concerned we still feel exactly as we did yesterday. HMJr: Good. H: And I see no reason why you shouldn't go ahead unless all these lawyers are messing it up - I don't know. I don't know what is going to be the conclusion of their eliberat ions right now. HMJr: What lawyers? H: Well, they've found out, as you probably know, that the R.F.C. can't make an exchange. HMJr: Yes. H: And that you've got to offer to buy - ah - to sell to somebody who is willing to buy some from you. HMJr: Yes. H: And Matty says he thinks it's all right and that it won't make any difference but he hopes that the Treasury fellows will be liberal in letting - in the way they word their heading, so as not to confuse people too much, Regraded Uclassified 195 - 5 - HMJr: The heading where? H: Heading on the offering slip. HMJr: I see. H: On the circular. HMJr: Uh huh. H: Because it - instead of being an exchange offer- ing it - apparently it will have to be a state- ment that the Treasury is going to be willing to sell to somebody who will sell something to the Treasury. HMJr: Yes. R: But we can probably explain that all right. It's too bad it had to come up. HMJr: Well, ah - do you think the lawyers are right? H: I don't know a thing about it. I don't know what the R.F.C. can do and apparently - they say the R.F.C. can't make an exchange offering. HMJr: Yeah. H: But I think we've got to accept the lawyers' judgment about it. HMJr: Oh yes, I don't think there's any question about that. H: Ah - and I'm raising the question not at all - ah - to dissuade the lawyers, because I don't know enough about it. HMJr: Well, does Matteson think there's any question? H: Did he speak to who? HMJr: Does Matteson have any doubts about it? H: No. Ah - he was 8 little perturbed that they might confuse people by the form of the heading on the circular. HMJr: Well I'll tell Bell to be extra careful. Regraded Uclassified 1S6 - 6 - H: Yes. And I've got him now, and Logan - they're all downstairs study ing it and waiting to hear from the Treasury. HMJr: All right. Well as soon as I hang up you'll hear. H: All right. HMJr: And ah - do you think if they leave that open Monday and Tuesday that'll be enough? H: Well, I don't know, Henry. They're are only about 45 holders. HMJr: Yeah. H: We estimate. HMJr: Well, I mean two days ought to be enough, oughtn't it? E: I should think it ought to be enough because they're the type of people who get information quickly. HMJr: Well, we - if there's any - for instance - con- fusion on Monday you can let me know; I won't say anything until Monday afternoon - when I'll close it. H: Yes. I think that's best. I'll be in Washington Monday for a President's conference. But, what I'll do is - if it doesn't look as though it's going right during the day Monday - HMJr: Yeah. H: - I'll have Matty let you know so that you won't make a statement about closing it Tuesday. HMJr: All right. R: First rate. HMJr: Now, one other question - did you see those stories about sterling? H: I did. HMJr: How did you like that? Regraded Uclassified 197 - 7 - 61 Well, I don't know - I couldn't get very much out of the stories other than the fact that you're all studying it. Now the net effect of that would be merely that it would show the British that you're interested in it - HMJr: Yeah. H: - and ah - that you are studying it. RMJr: Well, that's just - that's all I wanted to do was to let the - let the World know we were interested. H: Yes. BMJr: And studying it. Well, shouldn't we be? H: What's that? HMJr: Shouldn't we be studying it? H: Well, I think you should be. (Laughingly) HMJr: Yes. Exactly. H: Very much. I'll be interested to know what develops - when I get down there I'd like to talk to you about it. HMJr: I'll be glad to see you. 8: All right. HMJr: Thank you, George. R: First rate. FMJr: Goodbye. HMJr: Hello. Wayne Taylor: Hello. HMJr: Well, you heard. T: Yeah. Regraded Uclassified 198 - 8 - HMJr: Ah - so - I don't know how the circular is worded but ah - ah - T: We're going to ah - as I - I sent you a memorandum about that last night - HMJr: I read it. T: And we're going to send a special wire to each of the Federal Reserve Banks calling attention to that wording and explaining why it is necessary. HMJr: Yes. T: Ah - Matteson, Sproul and the rest of us down here feel that on account of the small size of the offering and the fact that it will only be of interest to forty or fifty people - HMJr: Yes. T: - all of whom will understand the circumstances, that we haven't got anything to worry about. HMJr: Good. Well then I won't worry. T: Yeah. HMJr: And - now, Wayne, we'll let it - we'll do it just the way we're talking - 7/8ths. T: Right. HMJr: Will you notify Jesse Jones? T: Yeah. HMJr: So that he can have a Board meeting and legitimatize it? T: Yeah. HMJr: Now, what else am I to do? T: Well, ah - papers will come right up if you're ready for them. HMJr: Now, is Gaston around? Regraded Uclassified 199 - 9 - T: Yeah. HMJr: Is he in the room? T: Yeah. HMJr: Well then, he heard the discussion. T: He did? HMJr: Yeah. Anybody want to talk to me? T: (Short pause) No. Apparently they want to go out and play golf or something. HMJr: Well, let me talk to Gaston. (Laughingly) T: Yeah. HMJr: Hello. Herbert Gaston: Hello. HMJr: Herbert. G: Yes. HMJr: Did Davenport say when he wanted that article back? G: Ah - not in any correspondence does he say definitely. HMJr: Have you called him up? G: I haven't called him. I - I can do that. HMJr: I wish you'd call him. G: Yes. HMJr: And I wish you'd tell him that I've read it - G: Yes. HMJr: And I like it. G: Yes. All right. HMJr: See? G: Yes. Regraded Uclassified 200 - 10 - HMJr: And then I wish you'd ask him what the deadline is for us. G: Yes, I'll do that. HMJr: See? G: Yeah. HMJr: Ah - is Bell reading it? G: Yes. Bell read it rather hastily and made some notes and then he passed it over to one of his people to check some figures and transactions that he gives there. (No more of this conversation was recorded.) Regraded Uclassified HADIOGRAM 4A 201 U S S Canopus (Hongkong) October 22 1958 NICHOLSON Spagent Washa DO Zugene Chen telephoned United Press tonight Generalissime and Madame Chieng Kai Shok and Wang Ching Wei arrived Hongkong to negotiate peace terms with British Anbassador to China. IV Boong denies this report. In view latter's lack of vital information past week we cannot furnish definite data in regard to this subject. CAMPBELL U 8 8 Canopus (Hongkong) October 22 1938 NICHOLSON Spagent Washa DC Canton formally occupied by Japanese today. The suddemess of Japanese victory has desed British and Chinese leaders at Hongkong who believed latter would make strong resistance. The British view is that there must have been wholesale selling-out by Centon group to Japanese. Can- ton industrial plants including electric power cement paper plants destroyed by Chimese before Japanese approach. The bridge over the Pearl River was also blown up. TV Soong and others are shooked at the leek of resistance and have been totally uninformed in regard to events of last two weeks. British military and other authorities are disgusted with Canton give-away and expect definite reaction Central Government set-up. Testerday United Press at Hongkong had informative report from United Press at Shanghai stating that British and German embassadors to Japan had approached Japanese Government with mediation proposals which included Japanese recognition of status quo foreign interests and invest- ments in China based on resignation of Chiang Kai Shek. United Press showed copy of this meseage to Ambassador Clark Kerr who is now is Bong- kong on his way to Hankow. Kerr said confidentially and not for publi- cation that such rumore were picked and permisious that British ashesse- dor to Japan bad not approached Japanese Government on such plan and that sumors were probably instigated by Japanese who wish to undernine Anglo- American relations. Kerr further stated that be did not want such denial stated in press but that repeated undercurrent runers along this line Я were continually instigated to influence American opinion against the British. 8838 DS T99 CAMPENEL ТИЗМТНА930 YAUSA3RT provided with to scillD pind - 9 because - Regraded Uclassified 202 TROUTBECK uctober 22, 1938 AMENIA NEW YORK Bar Henry 9 suppose you have been my friend Knollenberg's article on tax-8x5m/ptincome, but a am Enclosing it in case you have not. W. White and & are must Cratiful /u your Kindness in the Helvering matter. He has promited sympathshic Condideration the case. Ever yours, I.E. Spingarn, arper's magazini, betober, 1938 203 THE SUPREME COURT AND TAX-EXEMPT INCOME BY BERNHARD KNOLLENBERG (now head Librarian of yale University) I" 1925 I had a hearing in London be- that many of our well-to-do business men (ore one of the British Commissioners avoided a large part of the individual sur- of Inland Revenue. After the matter in taxes, which nominally they were sup- hand was threshed out he asked me if 1 posed to pay, by investing their capital in minded answering a few questions about operating companies like the Ford Com- the United States income tax law and ad- pany which accumulate most of their ministration. Most of his queries dealt earnings to acquire new sources of raw with our tax on capital gains, a feature of material or expand their plants and in- our law which Englishmen find raiher ventories. Others organized individual puzzling. But the point that really holding companies the income of which baffled him was how we could make our was accumulated and invested by the cor- tax system work at all if it was true, as he poration in various ways free, except in had repeatedly heard, that our State and extreme cases, from individual surtax. municipal governments could issue an un- 1 conceded that a Iew thousand out- limited supply of bonds, the interest from standingly successful corporate execu- which was entirely exempted from tax by tives, stock brokers, lawyers, and the central government. accountants were badly pinched by the He said that at one time during the surtaxes from which they had no means World War, when the British Treasury of escape. But since the income of these was particularly hard pressed, Parliament men consisted mainly of salary or fees had authorized an issue of bonds the in- from corporations or wealthy stockhold- (erest from which was exempt from ers, they were not in a position to raise a supertax in the hands of British as well as serious outcry against a system which was foreign holders. But everyone regarded acceptable to their benefactors. The this as so unfair to British citizens whose Commissioner saw the point and agreed funds were invested in taxable securities with me that, despite its lack of logic, the that the tax-exempt bonds were retired American system of tax-exempt bonds as soon as possible and no similar bonds would probably survive until Congress were ever thereafter issued. made the surtax on corporate stockhold- I was of course compelled to admit to ers fully effective by forcing corporations the Commissioner that his information to distribute their profits as to tax-exempt bonds in the United Such action came, eleven years later, by States was correct. But I went on to say the adoption of the corporation undis- that the system was not as unfair in Qpera- tributed profits tax of 1936. Finding his tion as it might appear to be on the statute ox gored, the American business man now books, and that we were very British in became keenly alive to the inequity of the not bothering about the logic of a thing tax-exempt bond. Complaints poured in if it worked tolerably well. I explained to Washington over the unfairness of (ax- Regraded Uclassified WINE PARTY It was so spontaneous It was frightening. They looked at each other frightened. fear staring in urgently up at him. Then THE SUPREME COURT AND TAX-EXEMPT INCOME 539 It was as If they had wanted to spring into flexh. as if he were plunging through her, her face. He looked deep each other's arms and bad been restrained pg. at devastating rates of surtax, the cases unhappily made some superfluous by the thought of how much, actually, He did not see anything with be his clive business man who risked his capital statements-lawyers call them dieta- tion. eyes. His brain was fainting with productive enterprise while the in- tending to imply that the taxes in ques- separated them. soon now. They were going to be cogete - estor who salted away his hoard in tax- tion would have been invalid even "You're cold," she said at last, She put exempt bonds escaped tax entirely. The though non-discriminatory. his hand under her arm and hugged it recession" was attributed in part to the In 1842, after death had removed Mar- into her warmth. Ti made it seem as if Her eyes jerked past him to the emply. "Where is Tom>" she cried, Thesever leg. novement of capital from highly taxed shall from the bench, the Supreme Court she were snuggling up to him. "Maybe," productive business enterprises into decided Dobbins D. Commissioners of the said, "if you throw this jacket of mine who?" "Whor" asked Dick dully. "When ion-productive tax-exempt government Erie County, involving a non-discrimina- round you You must be very cold." bonds. Industrial leaders and the Ad- tory tax imposed by Pennsylvania on all smile and the dropped his hand. She was He looked down at her with an uneasy ministration agreed that the tax-exempt property including the value of any office begin to run toward the bare sea, He heard her whimper. He saw to bond must be eliminated. held by any resident of the State. Dob- The only question was whether the bins, captain of a United States revenue ponderous method of a constitutional cutter stationed at Erie, Pa., contended mendment must be invoked or whether that the tax was unconstitutional as ap- WINE PARTY in ordinary act of Congress would plied to the value of his office even though niffice. the tax was not discriminatory. Relying BY BADETTE DEUTSCH The President decided to try the latter, on Marshall's dicta in the Maryland and and, on April 25th, sent a special message Charleston cases, the United States Su- A COINS because they shine lo Congress recommending that the ex- preme Court sustained Dobbins' conten- Remain unspent, sting federal income tax law be amended tion, and thus established the doctrine The golden-bodied wine to include in taxable income the interest that no tax could be imposed by a State Will first content from State and municipal bonds. Con- based on income received from the Fed- The pure lust of the eye, gress will probably act favorably on this eral Government. Enough, if such rich luster pay the sight recommendation, at its next session, and This unfortunate decision could per- (Vilh interest upon long vanished light. thus precipitate one of the most impor- haps be theoretically justified on the tant and exciting legal battles that our ground that it the Court sustained the This pleasure as it pales generation has witnessed. For the tax- tax, Pennsylvania or some other State Seems not 10 fine exempt bond has a longer and more acri- might go communistic, impose 2 99 per As what the glass exhaler- monious history than any other constitu- cent tax on all salaries in excess of some Breath of the vine. tional question that the Supreme Court insignificant amount, and, if federal offi- Rare gust, be stow to diet has had to face in the past five turbulent cíals were subject to the tax, deprive the The We'll take " on the tongue, mixed with our breath years of constitutional development. Federal Government of the necessary per- ghostly grape laughs jollily AI death, sonnel for carrying out its operations within the State. But, however theoreti- II Being drunk, is fire. The wine, though cool as snow, cally impressive this supposed danger During the regime of Chief Justice might be, it was and is too remote to just The Inste transmutes the glow Marshall, the United States Supreme tify the Court's giving it controlling Unit desire Court handed down decisions in two weight. Puls Or its long grieving by, cases (McCulloch U. Maryland and Wes- In a subsequent case, Collector U. Day, Though finds some service of sweetness in ton v. Charleston) holding that taxes im- the Supreme Court carried its unsound wrung, the heart exulis, the what's shuddering lart. heart. posed by the State of Maryland and the decision in the Dobbins case to its logical city of Charleston, South Carolina, were conclusion by holding that the federal in- That makes is rage, The failure of delight unconstitutional because they discrimi- come tax, adopted temporarily as an nated against agencies of the federal gov- emergency measure during the Civil War, The treachery, the spile ernment. Since a discriminatory tax by could not be imposed on the salary of Day, of this fouled age, one government, State or (ederal, against a Judge of Probate for the County of The Wine's power inn defy. the other would strike at the very roots of Barmstable, Mass: thus establishing that Forgets blood bounds in the orin. unsubdued the dual system of government provided State officers engaged in a governmental its pain, the soul forgets flesh its solitude. for in the Constitution, these decisions function are completely immune from were unimpeachably sound. Marshall, federal tax on their compensation from however, in writing his opinions in these the States. But the question whether Regraded Ucla HARPER'S MONTHLY MAGAZINE THE SUPREME COURT AND TAX-EXEMPT INCOME 541 540 primte investors are exempt from (ederal city were "direct" taxes which miss be supreme and inferior courts of the United sion of a federal judge's salary in income tax on the Income from bonds issued by apportioned among the several States M. States now in office, and the compensation of on the same footing with all other income the States was not raised until 1894, when curding to population. Is provided all officers and employees of a State or any does not "diminish" it, within the mean- simply that: political subdivision thereof except when ruch ing of Article III, Section I. The second Congress enacted the first peace-time ted- compensation is paid by the United States is that even if the inclusion of a federal eral income tax. which included a use on The Congress shall have power to levy and Government judge's salary in taxable income does income from State and municipal bonds collect direct taxes on incomes without $ The constitutionality of the new law "diminish" it and hence would have been held by private investors. portionment among the several Males RECORDS The entire tax, as far as it applied to ing to population. was sustained by the Supreme Court in unconstitutional prior to the adoption of the case of Brushaber v. Union Pacific Ry. the Sixteenth Amendment, the provision income from property, was binerly as- But the Bill was amended in the Senate miled as unconstitutional on the ground Co. But in its opinions in that and two in that Amendment explicitly empower- Judiciary Committee to read as follows later cases, Stanion v. Baltic Mining Co. ing Congress to impose a tax on incomes that tases on inclume from property were and Perk v. Lowe, the Court gratuitously "from whatever source derived" meant "direct" taxes, within the meaning of At- The Congress shall have power to lay and asserted that the only function of the what it said, and was intended to give ticle 1 of the Constitution, and that the collect tases on incomes, from whatever Constitution provides that "direct" taxes derived, without apportionment among the Sixteenth Amendment was to relieve Con- Congress power to impose taxes on in- several states, and without regard to any gress from the requirement of apportion- come from all sources including those can be imposed by the Federal Govern- census (If enumeration. ing federal income taxes among the States previously immune. ment only And this is the form in which the pro- according to population, and that the The first point was ably developed by If apportioned among the several States which words "from whatever source derived" Attorney General Palmer in his argument posed Amendment was adopted by Cm may be included in this Union according to did not give Congress power to tax before the Supreme Court, but the Court gress and eventually ratified by the their respective numbers. sources of income previously immune. (Justices Holmes and Brandeis dissenting) necessary number of the States. It will be seen that there was a striking Such gratnitous statements are, however, rejected the Attorney General's argument The tax was concededly not so appor- change in language between the first and so frequently ignored by the Court itself on grounds that are not pertinent to this tioned (in fact the very purpose of the (ax second drafts of the Bill, namely, the 1> that Congress was plainly justified in dis- discussion. The second point, however, was admittedly to extract much heavier atitution of the words "from whatever regarding these dicta, as it did, in enact- was completely abandoned by the Auor- taxes from the wealthy States than from ing the Revenue Act of 1918. ney General, who expressly conceded in the poorer ones without reference to their smille derived" for the word "dired" his brief that: populations) and. therefore, if held to be il There was no statement in Congress - "direct" car, was clearly unconstitutional. to the reason for this change, but the III li is not, in view of recent decisions, con- tended that this Amendment rendered any- The opponents of the tax also contended natural implication from the words them- In the 1918 Act Congress, in its dire thing taxable as income that was not so tax- that. even if the tax was constitutional as selves is that some member of member need for increased revenue for the War, able before. applied to income from property gener- of the Senate Judiciary Committee it. provided specifically for the inclusion in There were in fact no such "decisions." ally it was clearly invalid in so far as it sisted that the proposed Amendment be taxable income of the salaries of federal In the Brushaber, Baltie Mining Co. and applied to income from State and munici- enlarged to give Congress power not only judges. Walter Evans, a United States Peck cases, previously referred to in this pal bonds because of the decision of the to levy an unapportioned income tax by District Judge in Kentucky, sued to re- article, the Supreme Court had gratui- Supreme Court in Collector V. Day. also to levy taxes on income from suance cover the federal income tax imposed tously asserted that the words "from what- These questions were brought before the which, but for this enlargement, would under the new Act on his salary, and the ever source derived" in the Sixteenth Supreme Court in Pollock V. Farmers' be held exempt from tax. case reached the Supreme Court in 1920, Amendment did not enlarge the power Loan & Trust Co., which eventually held la February, 1913. the Sixternsh in Evans V. Core. of Congress to tax sources of income pre- the tax unconstitutional on both counts. Amendment was ratified by the last of the Judge Evans contended that a federal viously immune: that the Amendment There the matter rested for come time required three-fourths of the States, and statute requiring the inclusion of the only relieved Congress of the necessity of -until in 1909 the pressure for an unap- in August of that year Congress enacted salary of a federal judge in his taxable in- apportioning such income taxes as it had portioned federal income tax became to a federal income tax law. Congres come "diminished" his compensation con- always had power to levy. But the strong that an amendment to the Consti- limited the possible grounds for bolding trary to the provision in Article 111, Sec- veriest tyro of a lawyer knows that such tution, which would permit Congress to the new act unconstitutional by spott tion 1. of the Constitution that the com- dicta-not "decisions" as the Attorney impose such a tax, was pushed through cally providing in the law: pensation of federal judges "shall not be General described them-carry little Congress with almost no debate, being That in computing net income under di diminished during their continuance in weight and are frequently disregarded adopted by a unanimous vote in the section there shall be excluded the intered office"; and that the Sixteenth Amend- by the Court when it is called upon Senate and with only fourteen "Nays" in upon the obligations of a State or any polition ment, in empowering Congress to impose to decide (not merely talk about) a moot the Home subdivision thereof, and upon the obligation taxes on incomes "from whatever source point. Às initially draited, the proposed of the United States or its possessions: sho or de derived," did not modify this Section. The Justices, realizing that in passing Amendment clearly dealt only with that compensation of the present President of y There were two possible answers to this on the exemption of Judge Evans salary part of the decision in the Pollock case United States during the term for which of contention. The first is that the inclu- they were in effect deciding whether their holding that taxes on income from prop- has been elected, and of the judges of Regraded Uclassified 542 HARPER'S MONTHLY MAGAZINE THE SUPREME COURT AND TAX-EXEMPT INCOME 543 own salaries would be exempt, felt im- to be equal in its terms, and it engli la If this income tax be constitutional it mg pelled to deal with the abandoned point the leasi to society and the least to the governo- ment seriously considered by one of its on their own account. But this self-ini- operate upon all securities alike. If ment than any other man on earth? committees strikes me as a proceeding of tisted consideration did not change the should do now what we are asked to de, No " would be the inevitable result All the Kin But to get back to the text of the Court's extraordinary levity." Court's decision. The Court held As to the "public appeals" to which the (Hulmes and Brandeis again dissenting) and municipal securities would immediate opinion in the Evans case, the next mate- Court referred, the situation was as fol- that the Sixteenth Amendment did not go to an immense premium and all the up ment in support of its opinion on the give Congress power to tax sources of in- talists of the country would invest in them be meaning of the words "from whatever lows: When. in January, 1910, the ques- came we should make them by ad of Congres lion of the ratification of the proposed source derived" was as follows: come previously exempt from tax. but more valuable than any other investment. Sixteenth Amendment came up for con- merely made il no longer necessary for Congress to apportion amongst the States When Senator Hill offered a new amend The message of the President recommend- sideration by the New York legislature. ing the adoption by Congress of a joint resolu- Governor Hughes of New York sent a such income taxes as it had always been ment to exempt from tax the interest a tion proposing the Amendment, the debates special message to the legislature point- entitled to impose by apportionment. the bonds of any "State" (omitting en the resolution by which it was proposed, ing out that the words "from whatever The májority opinion on this point be- "county, municipality or (own"), Senate and the public appeals-corresponding to source derived" in the proposed Amend- gim by saying: Vest successfully opposed this, also; N)- those in the Federalist-made to secure its rati- ment, "if taken in their natural sense," ing: fication leave no doubt on this point. Cov. would empower Congress to tax incomes Let us turn to the círcumstances in which ernor Hughes, of New York, in a message this Amendment V3) proposed and ratified If I wanted to murder the bill with the pm laying the Amendment before the legislature derived from State and municipalities. and to the controvery it was intended to ple of the United States I should pus la of that State for ratificacion or rejection, ex- He questioned the advisability of giving sente, mine.) amendment upon it. Who make inver pressed some apprehension lest it might be Congress this power, and recommended ments in these bonds? Is it the - de construed as extending the taxing power to that the proposed Amendment be re- and follows with the statement that the pendent separe This every day later for nib- income not taxable before: but his message jected unless and until this provision was only controversy in the Pullock case was sistence? Is iL the men living upon 4 caling promptly brought forth from statesinen who eliminated. whether Congress had power to impose an even of live or sis thousand dollars? It de participated in proposing the Amendment This WM a bombshell to the members unapportioned income tax, Capitalist. such convincing expositions of in purpose, as of Congress who were trying to rush This statement is not true. As we Consequently the 1894 Act, as Goally here stated. that the apprehension was effec- tively dispelled and ratification followed. through the speedy ratification of the have accn. there was not one controversy- passed, imposed an income tax on "In- Amendment, lest Congress be tempted to "the controversy"-in the Pollock case. There were two, The second was terest" generally, without any exception The facts referred to in the foregoing thumb its nose at the Supreme Court by in favor of that derived from State or whether or PLOE income derived from a statement are as follows: In June, 1909, enacting a federal income tax law with particular source, namely, interest on municipal bonds. President Talt recommended the adop- out waiting for a constitutional amend- State and municipal bonds. could be The same conflict appeared in the rela- tion of an Amendment giving Congress ment expressly authorizing it to do so. taxed by Congres at all-even by a prop- lively limited debates on the Bailey-Came power to impose an income tax without A number of them, including Senator enjy apportioned tax This accond con- mins income tax bill of 1909 (which was apportionment among the States. His Root of New York, issued statements troversy was THAT a mere lawyers' fight. It dropped to make way for the Sixteenth message said nothing one way or the other pooh-poohing Governor Hughes' sugges- refested a deep-seated issue between the Amendment). Possibly because the So about giving Congress power to tax in- tion and Mating that, in voting for the redicals in Congress, who were deter- preme Court's decision on the State and come from sources which might be en- proposed Amendment, they had thought mined (o eliminate any Temphole through municipal bond interest point in (he tirely exempt from tax, and, as first in- the words "Grom whatever source de- which the well-to-do might be able to Pollock case made it clear that there war troduced, the Amendment was directed rived" were intended merely to emphasize escape federal income tax, and those who TTO hope of securing a reversal of the solely to the point referred to in the that Congress should be permitted to Im- regarded this consideration as of lexs im- Court's position on that point, the 1909 President's message. But, as previously pose income taxes on the sources previ- printance dian the refention of the exist- will provided for the exemption from BE pointed out, the proposed Amendment ously subject to tax, free from the require- ing limitation on the power of Congress of interest from State and municipal triving later redrafted la include the words ment of apportionment. The New York to burden the States. bonds. That this strategic consideration "from whatever source derived," and was legislature, without giving its resson or This difference in point of view was did not deter radical Seriator Burken of adopted by Congress in this revised form. reasons, refrained from ratifying the pro- Nebraska, who favored the bill of a while As to the Court's reference to "the de- posed Amendment at this session. clearly brought in the debates in Com from questioning this particular fearure bates" on the resolution for the Amend- However, in the fall of 1910 John A. poss over the income tax law of 1891. While the 1891 tax bill was pending in ment, they were, in fact, so meager as to Dix, candidate for Governor of New York of it on the ground that how are you ever gring lo got over the within throw no light on the meaning of the on the Democratic ticket, ran on 28. plat- Congres, Seriator Hill of New York tiese in the case of a man who has his million Amendment and justified the complaint form pledging his support of the proposed moved that interest on "the honds of 40y State, county, municipality or town" be may, invested in county, state, municipal die of Congressman McCall of Massachusetts Sixteenth Amendment, without revision. expressly exempted from the lax. But trict. and United States bonds? The Sensift that "for the House to perform its part He was elected, and carried out his pre- specifically exempts them. How are you ever in such a solemn transaction as amend- election pledge by writing a public letter Senator Vesi of Missouri successfully op- posed this exemption on the ground that: going to make the law fair in the or el that ing the Constitution of the United States to Mayor Gaynor of New York City in kind of man who, in my opinion, contribute without having the form of the amend- April, 1911. in which he said: Regraded Uclassified 544 HARPER'S MONTHLY MAGAZINE I cannot agree with those who maintain that (a) the State legislatures were 4 that the proposed constitutional amendment should be defeated, because of the possibility turbed by Governor Hugher warning that it empowers (he National government to that the Amendment might be held by tax the income of state and municipal bonds. the Supreme Court to mean what il mid This interpretation is doubted by many au- and (b) were reassured by the declare thorities: but even if it were valid, the amend- tions of certain "statesmen" that it 4d ment. in my opinion, should still be approved. not? Considering the history of the Assuming that the amendment will be Amendment herein set forth, is it for ratified by the necessary three-fourths of the equally reasonable, or more so, to believe states and thereby become an integral part of that the Hughes message was reassuring the United States Constitution, the income not disturbing, to most of the State legis- tax it authorizes can be imposed only by the vote of Congrem. The states are fully repre- latures which were considering the pro- posed Amendment: reassuring because sented in both houses of Congress, and in the Senate equal representation and vote is given it convinced them that the Amendment each Mate. if adopted as it stood, would empower How. then, can If Federal income tax be im- Congress to tax incomes from whatever posed which could be oppressive in its effect source derived. and not leave a Toophole on state and municipal bonds, without the of tax-exempt bonds through which "Ue consent of a majority of the states? Is it possi- Capitalists"-to recall Senator Vesis ble that the states through their representa- speech-could escape the tax? tives in Congress would vote an unjust and It is a firmly established and reasonable destructive tax upon their own credit and securities? rule of construction that if the language even of an ordinary statute is gran Governor Gilchrist of Florida had matically unambiguous and provides le inned an even more emphatic challenge something that Congress might conceive to Governor Hughes' view that it was un- big have been seeking to accomplish, the wire to give Congress power to tax State statements of individual legislators that securities. In an open letter to the New it means something else are to be disre York Times, he said: garded. In the case of a federal consu- The proposed Constitutional amendment tutional amendment, this rule must ap provides "that Congress shall have power to ply with special force, because Congress lay and collect taxes on incomes from what- in submitting the amendment, acts n 1 ever source derived". Congrem could, there- fore, tax incomes derived from Mate and proposing rather than a legislating body. so that even if it could be assumed that municipal bonds, and could exempt incomes derived, Senators and Congressmen, being Congress as a whole had used the be necessarily residents of state and generally of guage of the proposed Amendment in municipalities, would not pass a law which some Pickwickian sense, it would not be would destroy through tuxation the credit of fair to assume that the State legislatures their own state and of their own municipal- had adopted this eccentric meaning. itles. Senstors and Congressmen understand It scems evident that the majority the law of selt-preservation as applied to them- selves, They wish to be re-elected I favor opinion and decision in the Issuans as the income tax amendment. Gov. Hugher' oh- was erroneous in holding that the words jection to the contrary notwithstanding. "from whatever source derived" dié not Shortly after Governor Dix's pro- mean what they say, nouncement the New York legislature ratified the Sixteenth Amendment, and IV in February. 1913, ratification was com- pleted by a favorable vote of the neces- It was eight years more before the 100 wary three-fourths of the States. tion of whether Congress had power M In the light of these facts, what justifica- impose a tax on income from State and tion had the Court for its assumptions municipal bonds arove. But unless the Supreme Court was prepared to overruk Regraded Uclassified THE SUPREME COURT AND TAX-EXEMPT INCOME 545 its decision in the Evans care, it was a fore- justices of the Supreme Court,-and how gone conclusion that the Court would de- galling, considering that they are in 1 cide against the power of Congress, and sense its sponsors! this it did in the case of National Life In- The willingness of the majority of the surance Company D. United States, de- Supreme Court as now constituted to cided in 1928. Still later the principle of overrule indefensible decisions on consti- the Evans case was stretched to its ulti- tutional questions, no matter how long mate conclusion in Brush 1). Commis- established, is strikingly illustrated by the sioner, in which the Supreme Court held recent decision and majority opinion of that Congress could not impose a tax on the Court in Erie Railroad Co. v. Tomp- the pay of an employee of the New York kins. For over ninety-five years, the Su- City Water Department, because this in- preme Court had adhered to the rule, come was derived from a source immune which it had established in 1842, that the from federal taxation. federal courts are not required to follow Thus, federal judges, the owners of the decisions of the State courts in matters State and municipal bonds, and most of non-statutory local law. But in April State and municipal employees are now of this year the majority of the Court dis- held to be a privileged class, immune, carded this long-established rule, saying: wholly or in part, from one of the major If only a question of statutory construction burdens to which their fellow-citizens are, were involved we should not be prepared or can be, subjected. This situation, to abandon a doctrine so: widely applied especially the tax-exempt bond aspect of throughout nearly a century. But the uncon- it, in intolerable. It prevents the formu- stitutionality of the course purnied (i.e. pur- lation of a sound and equitable federal sued by the Court itself] has now been made tax program in ordinary times. II con- clear and compels us to do so. stitutes a serious menace to our national As shown by the quotation, the Court, well-being in time of way or other fiscal in considering whether to overrule an emergency. And finally it is a breeder of earlier decision which it now thinks was financial difficulties for many of the States erroneous, will distinguish between de- and municipalities that it is supposed to cisions construing the meaning of an protect. by tempting them to borrow ex- ordinary act of Congress and those con- travaganily because of the relatively struing the meaning of the federal Con- "cheap" money to which the tax-exempt stitution. This distinction, which has feature of their bonds gives them access, long been advocated by Justice Bran- As to the cure, the President was on deis, is eminently reasonable. If the Su- solid ground in declaring in his message preme Court makes a mistake in constru- of April 25th that the most practical solu- ing an ordinary statute, Congress and the tion of the problem is for Congress to President can, at the next session of Con- (ax income from supposedly immune gress, amend the statute, stating in more sources and give the Supreme Court an- explicit terms what was intended in the other opportunity to pass on the question first place. Such being the case, it may whether or not the words "from whatever well be preferable to let Congress rectify source derived," in the Sixteenth Amend- the Court's error rather than for the ment, mean what they say, The Supreme Court itself to overrule its earlier de- Court as now constituted would probably cision. But the same is not true of an welcome, not disapprove, a statute pre- error in construing the meaning of the senting the question to it anew, In view Constitution. In such a case Congress of the fact that even the ordinary layman has no power to correct the Court's mis- can perceive the unsoundness of the ma- take, and, unless rectified by the Court jority opinion in the Evans case, it may itself, the error must persist until COT- easily be imagined how glaringly appar- rected by the cumbersome process of con- ent this must be to most of the present atitutional amendment. Regraded Uclassified 546 HARPER'S MONTHLY MAGAZINE But in providing for a tax on income give up their law practice to accept their now exempted, Congress must, in fair- appointments. In the case of future ap ness, take into account the fact that bil- pointments, the increase will be necessary lions of dollars' worth of outstanding to induce men of high ability to leave bonds have been sold by States and mu- private practice for the bench. For nicipalities at an abnormally low rate of reasons which will be apparent to there interest on the assurance that the interest familiar with the operation of the surtax, would be exempt from (ederal income the proposed increase will not fully office tax. I estimate that the interest on tax the existing tax exemption in the Case of exempt bonds is about filteen per cent federal judges with substantial incomes less than would have been demanded from other taxable sources, but it would if the interest had been taxable. If this be inexpedient to make any special pro- estimate is correct, the owners of State vision for such special cases. and municipal bonds should be allowed As a corollary to its taxation of the in- to deduct from their income taxes other- come of State officials and from State wise payable an amount not exceeding bonds, Congress should give the States fifteen per cent of the interest received by the right to impose income taxes on the them from such bonds. If, after investi- salaries of federal officers and on the in gation, the Treasury Department should terest from future issues of federal bonds. find that the differential has been more No constitutional amendment is required than fifteen per cent, the maximum tax for this purpose. The rule of immunity credit should be correspondingly in- of federal instrumentalities from State creased. taxes was developed by the Supreme Secondly, to guard against the unfair- Court to protect the federal government, ness of retroactive taxes, Congress should and if the federal government sees fit to provide that if the Supreme Court sus- waive this immunity the Court will pre- tains the new tax on income previously sumably give effect to the waiver. held to be exempt, the Treasury De- Finally, Congress should put 2 stop to partment shall not attempt to impose future issues of federal securities contain- taxes on similar income received in prior ing a clause for exemption from federal years. income tax. The interest on outstand. In the third place, the salaries of our ing federal securities containing such a federal judges should be increased by an clause, must, of course, continue to be ex. amount roughly offsetting the federal in- empted from federal tax. A federal tax come tax that will be payable on their on this interest would be a breach of the salaries under the proposed new tax law. public faith. But if Congress will stop Fairness requires this in the case of federal issuing such bonds, this one remaining judges now on the bench, most of whom loophole of tax-exemption will gradu- must have taken into account the prevail- ally close itself by the redemption of the ing exemption of their salaries from fed- existing bonds, most of which fortunately eral income tax in considering whether to have an early maturity. Regraded 204 RE FEDERAL BUDGET AND NATIONAL INCOME October 23, 1938. (2211 30TH STREET) 8:30 p.m. Present: Mrs. Morgenthau Mr. White Mr. Leon Henderson Mr. Lauchlin B. Currie Mr! Isador Lubin Mr. Gardiner C. Means Mr. Charles W. Eliot, 2nd Mr. Mordecai Ezekiel H.M.Jr: Well, gentlemen, I took the liberty of asking you to come nere tonight for this reason. We've got a lot of problems in the Treasury, as you know, and particu- larly at this time of year when we're working on the budget - question of revenue, question of taxes. And the more I look at this thing, the clearer it seems to me that maybe - you people may have seen it all the time, but it hasn't been - that certainly, talking for ourselves - we give a little piece, some other department does a little piece, then somebody suggests, say, to the President, "Won't you make a talk of peace to business, and he gets very grouchy and he says, "Why put on that old record again?" and that puts it off. And what it looks like, I mean, is that from my stand- point - and that's what I want to - if you'll talk about - when we begin to talk about taxes and Government expendi- tures, the thing that we - I think we've got to have is a much, much bigger national income than we have ever had before. And if we could get a sufficiently big national income, why, then a lot of these things like taxes and prices for agricultural commodities, lot of these other things, fall into their Henderson: "Peace for the business man." H.M.Jr: "Peace for the business man." lots of things will become easier. Ezekiel: Even C.I.O. H.M.Jr: Well, from the figures we developed, the thing that stuck in my mind was this: a hundred billion dollars national income meant 149 percent Federal Reserve Regraded Uclassified 205 -2- index for production. And the most interesting figure of all, I thought, was that 100 for the Buresu of Labor Statistics prices. And people talking about price inflation - well, you've got to get up to 149 percent, from the calculations we made for a hundred billion dollar income, in order to get your figure, which is around 78 now, up to 100, Henderson: That must have been a straight assumption. white: Yes, it WES, Leon. Currie: You have to make an assumption. Lubin: You could turn it the other way around. H.M.Jr: We turned these figures over to the Committee the other day. Guess Haas has given them to you to check. Means: They conform to our figures also. H.M.Jr: They do? Means: Yes. H.M.Jr: Well, I'm not - I just want to throw out what I have. denderson: I mean right at that point I don't agree for one minute that on & hundred billion dollar income the price level will only be 100, unless there is 8 tremendous amount of intervention on the part of government in factors of supply and control of credit, and things like that. Lubin: Maybe I didn't understand the Secretary the way you did. I understood him to mean that with an index of production of 149 and a price index of 100 you get 100 billion dollars worth of income. White: That's right. It's not the other way around. Henderson: That's all right. H.M.Jr: And 85 I say, we have turned these over to be checked and we'll be more than pleased to have anybody else check them. I mean I can't defend them, I didn't work Regraded Uclassified 206 -3- them up. I mean they!re there, and I Henderson: Put it this way, Mr. Secretary. One of your big problems is what you do to prevent a blowing up of prices with any kind of an increase in production that falls short of the full use of capacity. The difficulty we had in 136 and '37 was that in a number of the segments of industry where the utilization of capacity was only 60 to 70 percent, there was an increase in prices that ran beyond the 1929 level, and that was the cause of the dislocation and dis- turbance, in many cases. H.M.Jr: Well, may I denderson: And one of the prime problems is how you exert the governmental participations in economic activity to the extent that you do not get those runaways. H.M.Jr: Well, I just want to give you Means: what we're shooting for. Henderson: It's all right to assume it. H.M.Jr: I just want to give you one other figure, if I may. If - as I say, I'm not - I'm not saying that we want a hundred billion, but I just use that as a figure and I want to - what I want you fellows to do is, how can we get there and do we want to get there? I mean is that 8 mark we want to shoot at? The other theoretical figure is this: that if we should reach a hundred billion on the present tax basis, if taxes weren't changed one iots, our revenue would be over nine billion dollars, see? And that's - I mean those are the figures I carried. Now, the thought I had was this: can the country produce a hundred billion? What will become dislocated, and all the rest of that? Is that a thing we want to work at? And instead of always going to the President and having people say, "Well now, let's all get together with brotherly love,"and all that sort of thing - is it some- thing we want to do, to have all the various departments working toward a goal, trying to get the activity - I mean can we ever get this wealth down to the lower Regraded Uclassified 207 -4- third? Can we ever cut our deficits? And I mean unless something like this - there never - it's very depressing, from the Treasury standpoint, because I can't, I mean, see that within E - we can cut expenses very much, I can't see that we're going to change the unemployment very much, I don't see that we're going to be very much better off. Agri- culture is going to ask for constantly more money. I mean we're just going around and around, and I just wondered if we couldn't take a fresh look at this thing, and the possibility really of building up this productivity. What would the people working for the Government have to do to build this up to reach it, and what's the goal we want to shoot for? That is very briefly what I want. Azekiel: Probably the most important single problem the New Deal has. H.M.Jr: And we've never attacked it all together, Ezekiel, not all working for one. And so often we're all tripping over each other; we may be doing something that hurts you, and vice versa. And there's never been a group which has all worked Henderson's afraid of price inflation, somebody else is afraid of something else. But if we said, "Well, this is the goal we want to shoot for. Now Morgenthau, don't worry about increased taxes; we'll get them for you, because we get them for you through additional income and things like that." See what I mean? Henderson: You say that only through increased national income are you going to get a reduction in the deficit and a repayment of any of the debt. H.M.Jr: Well, that, gentlemen, is what I asked you to come for, and I'd like you to - if you would just talk about it, and you can - if you would talk as freely as you feel. White: Why might we not start in with some examination of the picture of anticipated incomes at the various levels, the distribution of that income, and the yield of those taxes? I know that Gardiner Means Regraded Uclassified 208 -5- has made some studies and has some brief picture that might start the ball rolling in that direction. Then we can Jeans: I think most of all - I think the thing is that the very act of getting some measure of agreement as to what the level of national income, if we had full use of resources what that level would be, would be a coordinating influence of tremendous importance. We have done some studying very similar, I think, to that done in the Treasury, in which we have tried to arrive at the figure at which we'd have full employment. This is the chart that corresponds probably with the material you have. On the left there, the actual employment in 129 and in 135, converted, taking the part-time employees and making them the equivalent of full-time. Then two lines, almost on top of each other, which represent the amount of manpower that would be absorbed - could be expected to be absorbed at different levels of national income, using 1935-36 prices. Most of the members of the Industrial Committee are familier with this chart, so I don't think you need to pass it around. +hen at the left of the chart is the available manpower, and we come out with the figure of about 90 billion at 1935-36 prices. If prices went up back to 1929 levels, it would be 105 billion. So that 100 billion is prob- ably within the range. H.N.Jr: Within the range. Means: With further work by your (Currie) board and our board, we could probably narrow the margin down to the point that the figure was a hundred billion, or somewhat over or somewhat under, under this, that or the other condi- tion. H.M.Jr: Already I've heard some people murmuring about this thing going too fast: prices. I mean I'm just going to slaughter the first person that says so publicly - I mean that the thing is going too fast. Means: Yes, the distance that still remains to be gone is great. H.M.Jr: It's tremendous. Regraded Uclassified 209 -6- Means: Tremendous. And the implications are that in terms of easing up the increase in profits in industry, the increase in profits in wages, in taxes - tax receipts Erekiel: of course, the things that are in danger of going too fast are the things like the increase in the price of copper as the demand increases, when as a matter of fact their costs are falling. If industries like that continue to jack up their prices, to get a larger and larger margin of profit, they can soak it off long before it reaches present levels. H.M.Jr: Have you people made any calculations of present factory capacity of this country? I mean can it produce or will they begin to have to add to plant? Means: We went at it a little differently, and we said, "What's the consumption and what's the manpower in different industries that would be absorbed?" H.M.Jr: Would you explain that, because I haven't thought of it along those lines, and nobody's explained it to me that way. Means: what we're trying to do is say, if we had E national income of a hundred billion, such as you suggested, how many people would be employed in this, that or the other industry; what would each industry be called on to produce: how many pairs of shoes, how many million yards of cloth, how many tons of coal? And in those terms we worked out as B very preliminary undertaking a set of conclusions that point to a building up for the whole economy the amount of activity in different industries. What we have not yet done and what we have in mind to do is to try to build up a picture of the amount of new capital equipment that would be called for. We have made one study in the iron and steel industry, where we have tried to figure out at a 90 billion national income just what - a hundred billion national income - what would be the amount of steel that would be called for in each major type of steel production: steel rails, sheet steel, steel wire, what have you. And then we've carried that back through the industry to find out just how much steel production, ingot produc- tion, pig iron production, iron ore production, coal Regraded Uclassified 210 -7- production for the purposes of making coke, would be required. And then at each stage we have calculated approxima tely the amount of new plant that would be called for in addition to the existing plant. Now, on the basis of data that are available, we can't do that sccurately enough to say that for this indus- try thus and thus is so, but we can have a basis for building up a national figure of the expansion in equipment that would be required. Henderson: Let's put it this way, Mr. Secretary, that what you might ask in this group - the first question to be asked is whether or not B productive capacity at the present time is higher, lower, or about the same as 129. My own feeling is that it is not any higher than Currie? 1929; it's just slightly less. What would you think, Currie: That's about right. But in the meantime your working population has increased. Henderson: Your working population - but I'm talking about physical capacity. White: That's exactly the question that the Secretary has asked, as to whether Henderson: I'm trying - I'm not trying to get into opinions on that, because it definitely relates to his question of how - whether we canget there and how we can get there, and what are the difficulties that are to be encountered before We get there? H.M.Jr: And what would the dislocations be, if any? Henderson: The dislocations - when do they start? H.M.Jr: Pardon me. Henderson: We're at about a 65 billion dollar rate of national income right now. Given another - given 72 billion dollars, that rate, you begin to run into difficulties. White: Leon, supposing we proceed this way. Let Gardiner Regraded Uclassified 211 -8- present some of the material he probably has on income briefly - distribution of that income, which will indicate the amount of savings that we may anticipate at the various levels. Then we can let Currie pick up the ball to take up what will be the demand for capital equipment at the various levels and in the various industries. And then there will emerge from that the beginning of the answers to the questions BS to where the dislocations will appear. And then you'll carry on the ball from that. Huh? Means: A major problem in connection with that size of income is whether we're going to get a saving which has an opportunity to express itself in investment and in the creation of new capital goods which provide buying power and which build up the national income. It is a circle of - a problem of providing a buying power. We have made some studies derived from the data partly collected by Dr. Lubin's organization and partly by the Bureau of Home Economics on the savings by the various income groups. AS you go from the lower income groups at the left up to about $1,200 to $1,500 income, family income, you have an actual negative saving; they're using up their bank accounts or their cash on hand, or they're borrowing or buying on time. Beyond that point you have the savings by the various groups that are represented in that chart; represents the aggregate savings by the different groups. When you get an increase in national income, you get an expansion of the saving as different groups move up to a higher level of income. And on the basis of that type of analysis we have made some very crude first approximations - they're almost guesses - as to the savings that you might expect at a hundred billion na- tional income. They run up into the figures of 15 to 17 billion of savings. You have e second form of saving by corporations, as they make profits which aren't distributed 88 dividends, adding another perhaps two to three billion. And then you have their fund which they credit to depreciation, various funds which in order to insure buying power on the part of the public have to be expended in cepital formation, in building new plants - plant and equipment. Regraded Uclassified 212 -9- White: What does that total? Means: That total - I'm hesitant to give any total, because this type of analysis only progresses to a point where it begins to suggest answers rather than give them. Henderson: You mean what's the Means: 24 to 30 billion. White: Yes, I just wanted some rough idea. Means: Somewhere in, that range - 24 to 30 billion. White: 30 billion. Ezekiel: That's net saving, above maintenance and depreciation? Means: No, it includes about five billion of maintenance and depreciation. Ezekiel: That's really the amount available for capital expendi- ture, not capital formation. Capital goods expenditure. Means: Capital goods expenditure. Gross expenditure in business. That doesn't take account of your durable goods purchased by consumers, like automobiles, but it takes care of housing, residential housing. And one of the problems of insuring that full national income is making sure that that 24 to 30 billion dollars has an outlet in the way of capital investment. Either that sum must be invested in plant and equipment or it's going to constantly - the effort to make that saving on the part of individuals is going to impede, is going to diminish buying power as effectively as if the individ- uals simply received money and buried it. So the problem there is to clarify those figures. The second one is to find out how that saving is likely to express itself as an opportunity to invest. H.M.Jp: I was going to say: going back over history, have we had cases where excess savings has so to speak bogged down the economy? Means: We haven't really had data enough in the past to answer Regraded Uclassified 213 -10- tust question. enderson: Well, that NUS tue conclusion of the Brookings study, certainly. That was their conclusion, certainly. Ellot: 129 was E bogging down. memerson: That 129 was distinctly a problem of investment of excess savings. Anite: Up to now they've explained the series of depressions on tnose grounds, but they've never had the data which has enabled them to give proof that would satisfy pretty cereful observers, so they have had to fall back on reasoning rather than supporting it with evidence. but in the last recession there's É good deal more evidence available which points to that. 1 think you've got some figures, haven't you, Currie, on the last five years? denuerson: Welt a minute before we pass on from that, Harry. You say that - it depends on whom you say that it didn't satisfy - the Brookings analysis. I think the thing that could be said about the Brookings analysis is not that it didn't satisfy, but that their estimates were entirely too generous ES to what W&S the volume of savings, volume of over-savings. And since it was too generous, they were called upon to explain how that amount of saving got dissipated and they got into some ludicrous explanations on that. But most people did not reject the Brookings snalysis as to the idea of an excess of savings seeking investment at that time, particularly in terms of the physical expression of it, in terms of Carysler buildings and Empire buildings, the mad demend of insurance companies, the expression in the stock market, biäding up of stocks and things like that. I mean I went to put - I wanted to put that point in, because I think it is germane to - when you come to the last period, to see what Currie has done. Jeans: Look, Leon, I think it's very important, the point you're making there; namely, that the Brookings statistically have not established it; they have theoretically established it. There are a lot of people have established it could happen, and I don't think anybody had B Regraded Uclassified 214 -11- Henderson: They've established 8 statistical pattern which wasn't a good one; Harry's right in that. Idea of 15 billion dollars or something like that was just a hocus-pocus that wouldn't stani up. Means: I think it is very possible that their conclusion is right. I don't think it is statistically established. Answering that that it hadn't been established. H.M.Jr: May I ask you, at this stage of 65 billion, have you any estimate what the national savings are? Aeans: Probably make them. I haven't sat down and tried to make them. Henderson: It's probably around eight billion dollars, exclusive of depreciation account. Eight billion dollars of real savings, exclusive of depreciation account, which would run to four to five billion dollars. H.M.Jr: Well now, I'm asking - I don't know. Lubin: Over 20 percent - that's too high. White: You've got from 135 Ezekiel: Six billion in 135, 136, and the national income 10 to 20 percent higher. Seven to eight billion would sound reasonable. Henderson: I would say it's not more than that. Murrie: I have some indirect evidence here that the volume of savings is pretty - was pretty large in 1937. I don't know if I've shown any of you people yet - just work I've been doing this last - short time, just very recently, in my section. Henderson: Before you go on to that - I mean, for the Secretary's purposes, on the over-savings question, there was no - there is no doubt, is there, Lauch - it may be six, it may be eight, but there was an excess of savings over real investment. Currie: Logically you can't get away from this: any time the income is falling, there must be an excess of savings over investment; when income is rising, it is the Regraded Uclassified 215 -12- opposite. But logically all through from 1929 right to '33 there was an excess, and this last year there's been. Means: Logically it's established. In statistical fact and substance I don't think too much weight H.L.Jr: I'd want to - I mean may I just raise my finger and say, "I'll pass, but White: "With reservations." n.M.Jr: TI that doesn't mean I accept it." Currie: There's : lot has to be explained. senderson: You'll come in if anybody bets. I'd like - just like to pass. Means: What we need is 8 lot more work on this. currie: On this '37 situation there's en evidence of probable over-saving. Then I think this chart bears on it. I don't think I have enough to go around; If you people can share that. (The chart referred to was entitled "Consumer Expenditures and Total Income Payments Other Than Interest and Dividends") Consumer expenditures of wage-earners - I've correlated this with consumer income, exclusive of interest and dividends, and it runs very closely all right from 129 right on. But, you see, what happened in '37 - we know from other sources there that despite the fact that install- ment credit was built up to levels in excess of 129 in '37 - an increase - and despite the fact there was some three billion addition to inventories, nevertheless your consumption did not keep up with your income there in '37; in fact it slumped off and leveled off. And then, of course, the slump came. In other words, I'd say that you'd have to have about two billion or three billion or four billion more investment to increase income sufficiently to sustain that rate of increase in Regraded Uclassified 216 -13- consumption that was going on from '33 up to 137. Lubin: May I ask a question there, Lauch? Currie: Yes. Lubin: In 137, juaging by these figures, your income was exceeding expenditures by approximately, oh, a hundred million a month roughly? A little over two hundred million a month? Currie: Yes. Lubin: which is two and a half billion a year. Then the difference between that and total savings was what was paid out in dividends and interest? Currie: If I put the dividends and interest in here end retained earnings, you see, which is also part of the national income, there would have been a marked divergence between your dotted line and your con- sumption. The dot ed line, your national income, including the amount retained by corporations, would have gone up steadily here, but consumption would not have kept pace with it. Lubin: I see. currie: So even In 1937 there was evidence of the trouble that's going to be ahead of us. H.M.Jr: Do you mind if I kind of come back again to - I mean just for a minute sort of bring it back? Currie: This is your meeting, Go shead. H. .Jr: It's all of our meeting, but I want to get as much nelp BS I can. In getting back to this thing that Mr. Means was talking about, the question of savings and the rest, have you correlated this to Government expenditures - if you want a pump-priming or snything else? I mean have you the relationship to pump-priming that the savings and national income bear? Have you done that? Because that's where I come in. Regraded Uclassified 217 -14- Zeans: we discussed that et our last meeting, and Dr. Currie H.M.Jr: That's the meat. Means: is having his people work on that. Bliot: Currie's got it. Currie: This chart (another chart) is - I tried to measure H.M.Jr: I'm not trying White: The significance of that first chart that he just showed - it really should follow the other. That should come first, the one you have in your hand now. H.M.Jr: I just feel - little bit too detailed for the moment. Currie: You probably have seen this chart before, Mr. Secretary. It is an attempt we have made - Dr. Viner initiated it at the Treasury, then I continued it after I went to the Federal Reserve - to get a smooth measure of the current contribution to buying power made by the fiscal policy of the Government. And as you notice that very snarp slump in '37, which helped explain Means: Will you explain your curves first, Lauch? Eliot: What are these lines? Currie: The lower lines are the difference between the top two lines, you see. H.M.Jr: Now, receipts - this is Government receipts? Currie: Yes. H.N.Jr: And the top is Currie: Adjusted expenditures. H.M.Jr: Meaning you take off what? Currie: I take off refinancing. Regraded Uclassified 218 -15- H.M.Jp: Do you take out Social Security? Currie: No, the appropriation to Social Security H.M.Jr: But the contribution. Currie: but not out-payments on Social Security. That's included. H.M.Jr: That's the difference? Currie: Difference, that's right. Then I've tried to smooth out the income tax payments and interest payments - see, they're smoothed over a three-months period. Then I tried to take the agencies' actual expendi- tures and collection of Social Security taxes in the field rather than when the Treasury collects them every quarter, you see. H.M.Jp: I see. Currie: It's plainly the cash deficit, adjusted smoothly. Means: It's really a net contribution; comes either from Government borrowing or from a reduction in the Treasury balance. Currie: Yes, that's right. Now, I think that sharp fall from '36 to '37 had something to do with the flattening of income shown in the other chart. H.M.Jr: I see. Currie: But I'd like to draw your attention to the fact of how well income has kept up in 138. Production went completely to hell, just slumped right off - one of the sharpest falls we've ever had. Despite that, income kept up and consumption kept up. I think that's attributable to your rise in adjusted expenditures in the Government. Henderson: Production for consumer goods didn't have the tremen- dous drop that you had in all production H.M.Jr: And the other thing, Regraded Uclassified 219 -16- Henderson: which is a fortifying statement to the net contribution to activity. Currle: In other words, if you keep up buying power of wage- earners, people like that, you keep up consumption. Henderson: Yes. Means: And opportunities for investment. Currie: This chart illustrates the difference in this last recession from 1929. I've charted there - I'm sorry, I haven't got any copies - the compensation of employees from mining, manufacturing, construction, on the one hand, and from public service on the other. And in 1929 the mining, manufacturing, and construction is very high in relation to public service. In this last recession we have been coming up teadily: public service, relief, Social Security payments; and we have actually increased, end if you include farm benefit payments and some of the construction in there, the governmental - state, municipal, local and Federal - is now more important at the current moment than all of mining, manufacturing, construction, as a source of income to wage-earners. Eliot: Every time we get into one of these things, it makes me wonder now far the human brain can go. Currie: Is it as bad as that, Charles? Eliot: No, I mean, as to how far - everything that you gentlemen say at all these sessions shows more and more problems of administrative judgment, and how in the dickens we're going to have enough brains in any group such as this, or any other combination in years to come, that can make these decisions, I just don't see, Lubin: Charles, let me ask you a question. Who did it last year, ten years before that - ten years ago, twenty years ago? White: They Just did it a little worse. Lubin: It was just done pell-mell. You let a million judgments operate in industry and look what you got out of it. Regraded Uclassified 220 -17- White: I think the significance of that first chart needs to be brought out a little more clearly now in relation to the other chart. Currie: I think the significance of the thing - well, there are various things you can draw from it, but the really important thing is that it's the first time that I've seen a statistical demonstration of the fact we have all believed up to now, that consumption follows buy- ing power. Jeans: Buying power - not from your dividends. Currie: Wage-earners' and farmers' income. That's what it really represents. Ezekiel: I wonder, Lauch, if you could also make another interpretation of it, that despite the ability of private business or despite the lack of ability of private business to reinvest the current savings, the fact that government WES stepping into the gap and making these expenditures made it possible to have a continuous expansion in activity, even though private business was not itself making the necessary expenditure, necessary investments, to balance savings. Currie: ies. Yes, I think that one chart leads logically to the other: your contribution by your government to buying power and the increase in incomes and increase in consumption. Then I have other charts, if you care to see them, showing the follow-up of private investment behind consumption. white: You mean private investment follows consumption. Currie: Up to 1937 there was far more follow-up than generally appreciated. azekiel: It's a result, not & cause, in other words. Jeans: Showing the same relation between industrial activity and new investment in plant and equipment on the part of industry that existed in prior years. Regraded Uclassified 221 -18- Currier These are our estimates of capital expenditures - on the dotted line - of mining, manufacturing, and construction; this is the index of production; and it followed with a lag of one year, you see, right through here. And when the index of production got up to the 1928 level, which is here, capital expendi- tures on the part of mining end manufacturing got up to the 1928 level. Amazing thing, though, is that, contrary to what we are always told - that when there is a demand for private investment Government bonds go down - if you put your Government bond chart right here, your Government bonu chart goes right along, so it proves that isn't true. Currie: That's right. And England went through E relative boom, for England, with no increase in interest rate. H.s.Jri You're always told that when there is a demand for private capital Government bonds go down. Well, the low was right there, when I went into the Treasury. Cerrier Inat's right. And tney were going up, with that dip in '37, of course. E.M.Jr: You know, if I could just throw out one other thing at you, then you've got what I've got in my mind. It's this: this thing which you are talking about here, what these Government expenditures do, I suppose is why some people would like to see this continued - continue to spend 8 lot of money, and without Increas- ing the taxes. And that sleight-of-hand is getting more and more difficult. And I just thought I'd throw out some figures, which you people may be entirely familiar with, but I had them done for this thing; and that is this: in 1939 the Federal Government - this is what we cell, for a better name, pump-priming - NPA, PWA, general public works, CCC, emergency public works, this year, on a budgetary basis would total three billion 660 million collars. And the local contribution - also these are rather rough - a billion one. Or we get a total figure of four billion 760 million dollars. Now, that includes an estimate of 500 million dollars additional for WPA after Merch 1. So we arrive at B figure of four billion 760 - I mean local and Federal. I don't know whether Regraded Uclassified 222 -19- these figures are new or not. Currie: Well, I've attempted to do something like that from your side, Mr. Secretary. You see those pencil lines, very timid? These are available; I had these done. But I mean three billion 660; local, one billion one: we arrive at four billion 700 million. Now, in asking myself - trying to either cut down expenditures or get the deficit smaller, there's just two things you can do: either cut down expenditures or raise taxes. Or a thiro thing, and I don't tnink that the thica proposition has been explored sufficiently and I went to throw that into your mind, and that's the public works expenditures which do not appear in the budget. Ana I've got some figures here. Expendi- tures for public works. Well, under the Housing - the total construction under Housing, which does not appear - we get Title One, obligations incurred, roughly, 670 million. And the insurance and modernization loans, 95 million - insurance and construction loans. New construction and existing: new construction 1s 693 million, existing is 745. Rural Electrification, 58 million. United States Housing Authority - these are ell obligations incurred - 202 million. Now when you get down to the new things, you have modernization loans, 670 million; Rurel Electrifi- cation, and United States Housing. You get Home Owners Loan m new construction, 95 million. And then when you look at the R.F.C. on this, it's just very, very little. denderson: I'll be sure that that one is right. H.M.Jr: what I'm getting at is mite: What does that total? 4.M.Jr: He didn't total it. Means: Sounded lixe four and a helf billion. Vuite: Sounded like two. Regraded Uclassified 223 -20- H...Jr: It's all on pieces of paper. I just got It last night. Henderson: AS you used to say in the Army - "skip." N.M.Jr: The point 1s, It's very little. These alternative figures are open to you gentlemen. But if the only - ES I sty, there are three - we have three alternatives, ES I see it - four alternatives - well, three, really, for next year, in the sense that you could either cut expenditures, raise taxes, or you could look to these non-budgetary expenditures - I mean which do not appear in the budget, but would be a substitute. And then in the meentime, what I think is the over-all thing is this increase of the income. wanted to let you men know how I was thinking; take It, tell me what's wrong with it, and then come back and see if you can't do something with it. Because it seems to me - now, I'll give you an example. You take, for instance, this so-called all-westher highway they did in Pennsy lvanis, which is 8 toll highway. You could duplicate that twenty times over. And it doesn't appear in the budget - 135 million dollar toll highway. Now, there's SO many things which could have been done, but the brains of the Administration either - if they've been working, they haven't been effective. And I should think you could develop two or three or four or five billion dollars worth of that sort of work to take the place of the things that we have to raise taxes for, and ease the budget picture, but - I'm being very frank about it, not beating around the bush - as an alternative. But each one of these things - I mean somebody is interested in housing, and they get a whole group down, una HOW they raise the money - it's very inci- dentsl. I mean they take It perfectly for granted. But if Mr. Straus should do 800 million dollars, it's very, very importent, and from the budget picture it's very important. And of course, BS far as this budget is concerned, he's in the budget for 27 million and that's all. But if there are other things like that which could be built up and things which start much quicker than anything which is started, and which you can also stop Regraded Uclassified 224 -A1- Azekiel: Would you consluer a fifta alternative there? H.M.Jr: I'm just throwing the thing - all I'm trying to do is let you people take e look in my mind. Being as honest 65 I know how. I'm groping, I'm trying to think of something else, instead of just sitting back and putting 8 wet bandage around my head, going to bed with a budget headache, which I've had for four years. I mean I'm trying to be just 88 frank 6S I can be. I hope there are fifth and sixth alter- natives. And I say you fellows are very Hungry over there in Agriculture. And I'm afraid a billion three won't do it; it may take two billion three, I don't know. zekiel: I was wondering if, in addition to your public - the expenditures that don't appear in the budget, you would be at all interested in considering the kind of budget separation that they have made in Sweden, where you separate the investment expenditure from the current account expenditure and handle it just like N corporation dues: cover your investment expenditure by an annual charge. White: The Secretary has been through that quite a lot; ne's femiliar with that expenditure classification. M.S.J.: If you don't mind, I think that's what Dewey accused Lehman of yesterday - the bookkeeping operation. Szeciel: every corporation in the country runs its accounts that way. Lubin: That isn't going to prevent people who went to show you up running E deficit from saying, "Under the old system, here's what the deficit is." I mean they could transfer the books back to the old system. But if you could come in through your good roads bureau, the thing we talked about and I worked like "8" on three years ago: a trans-continental highway, when Mr. Roosevelt had the idea he was going to build villages along and cities and the whole thing - and then something just happened, it was scrapped. But I mean 8 trans-continental highway could very easily take two billion dollars. And - I mean those Regraded Uclassified 225 -22- kinds of I mean I don't say I'm - I'm not going to throw It aside, but I don't think the Swedish method is going to get us what we want, and I don't think it would keep people from .... Henderson: You really haven't got five, six, and seven alterna- tives. You've only got three. These other things are bookkeeping expedients. H.1.Jr: That's what I - that's what I thought. Henderson: That's what this one is. -llot: Haven't you got enother: this philosophy ... H.C.Jp: I don't know whether you a gree with me, but I think the Swedish thing is merely bookkeeping. Henderson: You've got to either increase taxes, cut down expendi- tures, or increase the national income. Currie: There's a fourth. Henderson: I went to be shown before you get into any quaternion areas. Lliot: I think there's a philosophy of choosing the type of expenditures that has E fast turnover and thereby reflect tuemselves Henderson: Tney reflect themselves in national income. Any increase or decrease is bound to reflect itself in national income. aliot: It is whether you're thinking primarily of increasing national Income or primarily of increasing velocity. 8.2.Jr: I'm trying to think of some way to get enough wealth SO it really can be distributed and get down to the lower third, so we can get rid of these 12 or 13 million people, give them a decent living, so they can be healthy End get some of the good things out of life that we've been talking about for five years and haven't given them. Eliot: I think, Mr. Secretary, you'll find this group unanimously agreed that the goal of 8 higher national Regraded Uclassified 228 -23- income is the right approach. we've been telking about the lower one-third for five years. We sald we'd give everybody a job; we've never ¿iven everybody a job. We've got, Dr. Parran says, at least three million people now underfed, undernourished; we're not doing anything about it: at least three million people. And I don't know how many millions of people don't get any medical care. Now, all of these things, when you get through and done, I can't see any other way: we've just got to get more money distributed. But I don't think you can do it through the Treasury. Now, I mean that's - I mean we've gone, I think, about as far as we can through the Treasury; and soon, I think, if we go much further, we'll just have trouble. What I'm trying to do is to find some any before this trouble comes, that's all. And I don't know any other way than to create more wealth. White: To support your thesis, Mr. Secretary, that it may be necessary to resort to the type of things that you're speaking of, I think Currie has got some figures, some estimates of the amount of capital that has been required in the past and now much is likely to be required in the future, which seems to indicate that there's going to be quite a discrepancy between the amount of capital which will be seeking investment and the amount of capital which will be demanded. But I think the figures he has - you might spend a minute or two merely indicating them, which will throw greater emphasis on the search for methods such as you have just suggested. Currie: Well, I wouldn't say much more for this than that it is illustrative of the type of problem we have to face in the next three or four years. What I have done here is to find out how much capital investment - money spent in the production of durable goods, consumers' housing, in the 20's was necessary to generate the national income that took place in the 20's. And I came out there with a proportion of about 22 percent of gross capital formation, public, private, in housing and in durable producers' goods. That is, business capital of around 18 billion corres- ponded with the national income of around 78 billion in the 20's; that came to about 22 percent. Now, if that same relationship should prevail in the 227 -24- future as it has in the past - and incidentally that's the precise proportion that also prevailed in 1937, that 22 percent - for a hundred billion national income we need 22 billion capital formation. H.M.Jr: New? Currie: New. H.M.Jr: Each year. Currie: Yes. Ezekiel: Net capital. Not net - gross. Six billion of that would be the account for depreciation. Means: That checks with my figures very closely. Currie: Now, that indicates to me - what we might do there is just in the realm of research, of studies to be insti- tuted - is to try to estimate our expectation of how much probability is there when you survey the field of public housing, public expenditures on housing and business expenditures - how much prospect there is of getting up to 22 billion, and if not, what are the alternatives? Now, the alternatives are, as you just mentioned, either that the Government spend more directly through the budget, or do it - or you've conceded a bit by having Government corporations issue Government debentures, which I think is an excellent suggestion; or change this relationship that prevailed in the 20's, increase consumption relative to the national income. White: By giving larger incomes to the lower third. Currie: That's right. White: Taking more away from the top group through taxes. Currie: Now, unfortunately, we have regressed, I should say, in that direction this last year. We have taken off the tax on undistributed profits and tax on capital gains - the larger part. We have instituted payroll taxes for Social Security account, and pretty heavy tobacco and liquor taxes. H.M.Jr: About 60 percent on consumers. About 60 percent on Regraded Uclassified 228 -25- consumers, isn't it? Currie: Yes. So apparently from my figures here in '37 we haven't really changed this proportion - apparently a gross capital formation of about 22 percent of the national income. Henderson: What you're suggesting, Lauch, is - you've got two things in consideration in that alternative. One is the question of leaving more at home to be spent by consumers, which is a change in your qualitative tax. Currie: You can increase consumption relative to your national income without running an unbalanced budget. Henderson: That's right; we're on a long-term regression on the amount of savings anyway. Lubin: In that surplus of income over expenditure, how much is for Social Security so far, first nine months? Currie: I haven't got the figures at hand. Lubin: Is it very great? With the unemployment compensation, there won't be much margin, will there? Currie: Actually this year there's been an increase in the unemployment insurance list. But some 8 tates I didn't get aren't paid yet. Lubin: That's true, there has been an increase, but the net is relatively small as compared to last year. Ezeklel: The old-age is the big thing. Currie: The old-age is the big thing. Lubin: Last year all income, no outgo, but this year Currie: This year, if we're accumulating a fund on unemployment insurance, what are we going to do in a very good year? Lubin: The reason for that is, some states weren't in. Regraded Uclassified 229 -26- Currie: But most of the important ones are. Lubin: And you want to remember, too, that the period in which you can earn your benefit had not been completed by & great number of workers. The system is still new. Means: In March it was at the annual rate of a net saving of approximately 800 million. I think that's low compared Lubin: Is that all Social Security or Means: That's for all Social Security. Lubin: That includes old-age, which is the big factor. Means: Yes. Bzekiel: I had the figure in mind approaching just barely under a billion dollars. Means: I think that with a hundred billion it would go up to a billion and a half each year. Currie: I may say, in connection with this 22 billion figure, which I think will probably be necessary if we're going to have a national income of a hundred billion, that one of the people on my staff has been working for the last two years examining the prospects in the durable goods field one by one, right through utili- ties, railroads, housing - what you could really expect on the basis of full employment there, and it leaves a deficiency, we can't - we don't get up to that. Means: So what is involved is making people save less or find- ing some way to get those savings converted into useful equipment for the country, through the Government or through corporate development. Henderson: Does anybody ever mention the propensity to consume, or is that too matter-of-fact? H.M.Jr: I think most of the people in the room helped on that price statement which we helped the President to get out, which is still good, I think, isn't it? Henderson: Yes, still good; and somebody's going to be looking at it one of these days when the national income starts to going up. Regraded Uclassified 230 -27- H.M.Jr: Well, what I was thinking about is this, Once we get our facts and are pretty sure of ourselves - I mean I think this needs a selling job. I mean if we could - the possibility of getting the President to sound out, getting people thinking in terms of a hundred billion. And if we could be awful sure of our facts and prepare the thing, it wouldn't be out of the realm of possibility to get him to maybe make a talk about it, if we could get him convinced that this is the thing, you see, get everybody. What I want - if we're right: that's the first thing I want to make just as sure as I can, that we're right, that this is the way to think, rather than just to increase taxes or cutting down expenses. Henderson: Well, I don't think you'd find a bit of doubt on that in this group. Do you, Harry? White: Well, I think what the Secretary has in mind you'd agree with, Leon, and that is that this statistical data, or this factual information, must be pushed to the point where it is convincing to any reasonable man. And then once that is so denivrson: What I meant Is that that's the enigme which he nas got for himself. White: On yes. lienderson: I mean such studies DS we have made would indicate it. 4,M,Jr: What I'm getting at is this. Supposing the President or somebody should make & speech along these lines. We'd want to be awfully sure that the economics of it is absolutely sound, and that Somebody says, "Well, it's impossible, they can't get a hundred billion. You can't get it in the United States. Not enough people, not enough national resources" - or this or that or the other - "just can't be done." You know? And that's what I'm asking you fellows, whether you'd put your brains to work, see, can it be done? I mean is it a healthy thing to look for- ward to? White: There are a lot of bottlenecks that crop up. H.A.Jr: Is it a healthy thing for the country? I mean consid- ering all the component parts that go into the fabric Regraded Uclassifie 231 -28- of this country, is it a healthy thing? Means: A very nice problem of timing in there. In studying the iron and steel industry, we concluded that next year they couldn't finish the iron and steel that would be called for by a hundred billion national income. It would take them about two to three years to increase their equipment to the point where they could carry that load. On the other hand, ES a goal two years, three years hence, that hundred billion would be a perfectly feasible goal. White: Well, since there's no danger of reaching it this year or next year, Gardiner, there wouldn't be any problem. Means: But that would be one of the things that's got to be kept in mind. You can't jump from 65 to 100 overnight. Someone has got to work out a program which involves, let us say, an 80 billion income next year, and a 90 billion the year after, and 100 billion the year after; some progression, whatever Aliot: And what the bottlenecks are, and where you'd have to put pressure on to solve it. Means: Is your progress going to be held up by lack of electric power or by lack of steel? White: Means has been working about two years, Mr. Secretary, on just that problem. There's a lot of work been done, but still in & rather preliminary stage. But it's just that very problem. well, there are two things, Harry. There is that, which you might say Is a longer-time study. But the other thing, which is a matter of almost days: can we produce one, two, three, or four billion dollars worth of pro- jects which could be financed outside of the budget? Currie: I've been thinking of what you just said. See? That's a matter of days. The other thing is a matter of maybe months. But of days - I mean can I take out of my hat several billion dollars worth of projects like - as good projects as slum clearance and that sort of thing? Regraded Uclassified 232 -29- Currie: I was Just thinking, as you were speaking, one possi- bility you haven't exploited there is the Farm Security loans, which are mostly recoverable and which could be financed in that way. H.M.Jr: Farm Security? Currle: The renabilitation loans. That comes right in there. H.M.Jr: well, turn them over to Farm Credit. azexiel: Or give them Farm Credit refinancing. H.M.Jr: Yes, I mean we'd - if you just turn them over to Farm Credit, then it takes it out of the budget, huh? White: Mr. Secretary, have you got somebody working on the various things - is there somebody working now on the various things that might be handled that way? H.M.Jr: No, except that I spoke the other day on this to Ruml. White: That's right. That's in the - that's about to be examined, that's right. d.M.Jr: No, no - definitely to them. But I'm just going all around the lot, from my standpoint, tonight, and I'm saying we got two things. One is the immediate thing, and Mr. Ruml - I don't know who ne gave that to. White: He gave it to me, and Means and I were talking it over this morning. H.M.Jr: Then he's got that. Then the other thing is, we get back to this longer-time thing: what national income is healthy for the country? Is that a good way - what? Means: That's the way to say it. Azekiel: You would be interested in projects which would involve new legislation as well as those which could be done under existing authority. 8.3.Jr: Oh sure. White: Well, he did some of that work ... H.M.Jr: You (Dzekiel) 233 -30- Ezekiel: Last year we got a little groundwork done on that. we dropped it, but I think we could pick it up. Henderson: I'll give you a memorandum any time you want it. Lubin: Are you thinking of something that would take 50 or 100 million dollars if through such an expendi- ture you could get, sey, two billion dollars worth of credit expansion? H.M.Jr: Sure. Lubin: I'm thinking of some sort of private housing - I mean a project, say, of 500 thousand units, on a $3,000-per- unit basis, gives you a billion and a half dollar expenditure. If we could get that going by spending 50 million dollars worth of Government money, it would bring that much private construction in the picture. H.M.Jr: well, we're spending - bext example is the United States Housing - 800 million dollars; in the budget, 27 million. Backiel: You have a continuing expenditure, of course, there. d.M.Jr: True, but I meant Ezekiel: Immediate effect is very great. H...Jr: Certainly it would be a good investment if we could spend 50 million to get two billion. Ezekiel: Yes. H.M.Jr: That's what Lubin asked me. Currie: Let me draw to your attention, Mr. Secretary, that proposal last spring to accomplish this very thing you're talking about, to set up a Federal Railway Equipment Corporation. H.M.Jr: I read about it in Kintner and Alsop. (Hearty laughter) I mean that's the only time I ever heard about it. Regraded Uclassified 234 -31- White: That's not fair. You heard about it before then. H.M.Jr: All right. Harry's .... Currie: Maybe I can cover my blushes. That was designed to accomplish exactly what you're speaking of now. H.M.Jr: Got to have & little fun, Harry. Currie: Outside of the budget, the main interest .... H.M.Jr: Everything that happened last year - as far as I'm concerned, I'm more than willing to start fresh. Henderson: (Laughs) H.M.Jr; But the great trouble, ES far as I was concerned last year, was that - well, as for BS I'm concerned, I just never had a chance, so - and I mean .... White: The problem is still before us. H.M.Jr: What? White: The problem is still before us. H.M.Jr: Yes. The problem is still here and nothing is solved. Nothing is solved. Lzekiel: But an awful lot of hard work ... H.M.Jr: Nothing is solved. Just having a four billion dollar deficit solves nothing. Currie: That's right. H.M.Jr: And there isn't anything new that we're doing except that. Nothing. Currie: Just putting more money .... H.M.Jr: There's nothing new and nothing's solved. We're right back where we were. White: Yes. It's worse. It's worse in the sense that it's snother year. 235 -32- H.M.Jr: I mean nothing is solved, and as I say, I never had a chance. Henderson: I don't know, Harry, whether you'd say worse or not. White: It's worse in the sense that another year has passed. Henderson: You're thinking in terms of the amounts. I'm thinking in terms of experience White: Oh, that's different. Henderson: ...and understanding. White: No. H.M.Jr: That's right. White: We've learned a good deal. H.s.Jr: And if you get the various economic staffs in Washington all thinking about this, and if we can get, instead of, say, the people always going to the President and saying, "Now give this talk about cooperation between government and business " - instead of having all these people come down .... Henderson: We'll get O'Mahoney and my committee to make those speeches. H.V.Jr: Pardon? Henderson: O'Manoney and members of my committee will make those speeches. They're more afraid of us than they are of the President right now. H.M.Jr: Well, you compliment yourself. Henderson: No, they are; no question about that. H.M.Jr: Well, anyway, I do think that - as I said the other day to Mr. Ruml, the reason that this interests me is, at least it hasn't been tried - I mean so that every- body's thinking about it, all the efforts directed that way. And I think from my standpoint it's definitely worth trying. Regraded Uclassified 236 -33- Means: Until one has gone through the process of trying it, one doesn't know whetner it will work or not. But it nolas to me very great promise. Currie: I think we'd all agree here - I think so - that while economically there is no particular reason way you shouldn't increase the national debt year after year after year, actually, politically, feasibly, it's not - we can't go or expecting to just run a deficit year after year; the community is not going to stand for it. Eventually we're just going to have to work out some other WAY of handling this thing. H...Jr: The thing from a political standpoint - I think the legislation calls now for 40 or 45 - what is it? Ruite: 15 and 25, or maybe - 45 is the total. 8.1.Jr: Now there's always the danger that we're going to go to Congress and, although Congress votes the thing, in order to make the grandstand play they'll say, "We won't increase it; we just won't give it to you." And look what the committee - every "purgee" that wasn't purged is on that committee. (Hearty laughter) AS 8 metter of fact they are. Every Senator that they & ttempted to purge is on the Finance Committee, as far ES I know, with the exception of Smith. I mean we've got them all. Wnite: They're just waiting for it H.d.Jr: I mean - and the people - all the press, everybody keeps playing up the fact the public debt is a barometer. Currie: That's right. H.d.Jr: And it's not a barometer at all. I mean I don't consider it a barometer of anything. Ezekiel: Mr. Secretary, in addition to this one proposal that was hammered out last year, the railroad one, which Mr. Currie has mentioned 237 -34- 8.8.Jrs Which I teased nim about. there were a couple of other proposals, 8 lot of work done. One was a general proposal for E road authority to actually go shesd on lower prices, select- ing the projects that seemed promising; and B somewhat similar undertaking was at least looked into with respect to housing - large-scale corporation which would set nousing costs down to where they would have a very large volume. From your view And those were thrown into the discussion lest year through that committee of which both you and Secretary Wallace are members, but apparently got no attention at the White House. I wonder whether, in view of the hearing those sut last year - whether it would be possible to use the same material over again - or it would have to be reworked to hide the fact it was done before. "nIte: well, Ezekiel, it would first have to be presented and re-examined to see whether it fits the present situa- tion, and ii it does, irres ective of so much water over the dam - 11 it's good now or if it can be made good, it will receive E hearing. denderson: Well, why it was rejected last year - why not just walk up to the counter and face the fact the thing was done in B. hurry and everything that was new was rejected? The question N&S of doing something that had a familiarity and had EL reasonable chance of getting through fast, which W8S accepted, and that's the basis on which the cutting was made. You might as well face that. d.V.Jr: It wasn't a matter of whether it HUS good, bad, or indifferent. I just wented to get the Secretary's view on that. G.S.Jr: Well, what I would answer would be this. Instead of Laving one or two, I'd hope to have a list of 15 or 20 or 25 different projects. Leans: That would include things that are now done that could be converted to the other basis, as well as new under- takings. 238 -35- H.D.Jr: And then what I would do - if they were given to me, I would do it in the regular Way: that they would go up through the budget and give them 8 chance to emasculate them, everything else; then have them go up to the President in a book, just the way he gets a list of Mr. Ickes' projects. Then the President nas them and everybody's familiar with them and everything else. And I - to answer your question, I think the thing would get Dr. very warm reception if they went through the regular channels, and I for one would do every- thing that I could to facilitate it. But as I say, I never had a chance last year. I mean I had Mr. Wallace's report, everything else, but I don't think Mr. Wallace's report ever got any consideration. At least, I don't think so. azegiel: It never was read, apparently. H.M.Jr: I'm quite sure it wasn't read. Henderson: Depends on who you mean read it. B.M.Jr: What? Henderson: I've got it. H.M.Jr: So have I. Henderson: I've got it. It wasn't read. I've got it. When the actual thing was put together, I was given that as well as several other things. And there weren't any marks on it. I don't know whether it was read or not, but the basis on which the thing was done was a question of more of the same thing that had been tried before. Lubin: Of course, you knew you could sell that to Congress. denderson: And it had to be sold quick, I mean. And if you 80 and if you start now - there's a difference between starting in April of a year in which the legislature is sitting and starting in November, coming up to a presentation to Congress. Now, that's the difference that you're in. H.M.Jr: That's why I'm doing it tonight. Regraded Uclassified 239 -36- Henderson: That's the reason why you've got that Ezekiel: I just wanted to clarify H.M.Jr: I think the fact that the thing that was done last year was or was not read - I would say it makes no difference. (lenderson: That's right, that's the point I'm making. When you got to that consideration, no matter now good it was, it couldn't have got in if it were new, and that was the only basis on which it was cut. Most of the stuff was either put in or cut in 15 or 20 minutes, when it really got down to the real decision. Means: You going to write a history of the New Deal? Henderson: What? Means: You going to write a history of the New Deal? denderson: No, and I've got an understanding Just about like this. I had an understanding with General Johnson (Mr. Henderson's following remarks were left off the record at his request). Currie: On this confidential information, what happened there - I was told that Kintner also had that very same thing you had, the whole list of all the projects submitted to the President that time, and that on the back of this railway thing was written in the President's hand: "This has been watered down." H.M.Jr: "This has been watered down." Well, I'm very interested to see what Kintner and Alsop are writing in three articles for the Saturday Evening Post on what happened during that time, because they did - you see, they'd been around to see everybody, and they couldn't quite make out on a lot of these things what the President's reaction was to them. I'm sure they saw B lot of you people in the room on this stuff, And so, foolishly, I was told - talked to Alsop. He gets on the phone. Every single question was asked very cerefully. But each one was like, for instance: "Did the President see Mr. Wallace's report?" That's what was asked the President, see? Each one after the other. He'd gotten Regraded Uclassified 240 -37- information which he had heard - there had been a meeting at Wayne Taylor's house - Adolph Berle, Wayne Taylor, and Eccles. He didn't know whether there was & memorandum or not. Well, had the President seen that memorandum? "Well," I said, "why don't you ask Wayne Taylor? I wasn't there." But I mean he was checking So I'm very curious. Henderson: I'm curious to see - ne was checking with Lube (Lubin) and me. He'd get me on the phone and ask me about something, and hang up, and before I could get over to Lube, right next door, ne'd have Lube on the phone and Lube would be H.M.Jr: Those boys are good, though. Currie: Yes, they're very clever. B.M.Jr: They're very good. So I'm very curious. And somebody had told them that I had changed and I was for public works. I said, "No. "hoever told you that?" I don't know if they were checking up on me; but they wanted to know whether I had changed my position. Currie: When are they coming out, Mr. Secretary? H.V.Jr: I don't know, but there's a series of three. They checked with you fellows too. They had a lot of that stuff. Eliot: I think most of this group would say, Mr. Secretary, that this goal of increasing national income - it's not only a healthy operation, but is essential for the health of the patient. White: That's a good wind-up. H.M.Jr: Well, if you people would be willing to help me on it, I'd more than appreciate it, because I need all the help I can get. And I've got a very difficult job; it isn't getting any easier.