Volume 508, March 15 – March 18, 1942

DIARY Book 508 March 15 - 18, 1942 - A - Book Page Airplanes Glenn Martin Company manufacturing program - 3/17/42.. 508 314 Republic Aviation plant - HMJr's visit to - 3/18/42 349 a) General Smith-HMJr conversation - 3/19/42: See Book 509, page 22 American Federation of Labor See Revenue Revision - B - Brown, Prentise M. (Senator, Michigan) See Financing, Government: Defense Savings Bonds (Overtime Wages) Re-election discussed by Brown and HMJr: Brown suggests certain ways in which Treasury could help - 3/17/42 209 Business Conditions Haas memorandum on situation, week ending March 14, 1942 - 3/14/42 116 - C - Canada See Silver Coast Guard Equipment to be used in anti-submarine patrol - Gaston memorandum - 3/18/42 368 Colombia See Latin America - D - Dallas, Helen See Financing, Government: Defense Savings Bonds (Hinckley, Mr.) Defense Savings Bonds See Financing, Government Doughton, Robert L. See Revenue Revision - E - Excess Reserves See Financing, Government Exchange Market Resumes - 3/16/42. etc. 165,343,410 Exports To Russia, Free China, Burma, and other blocked countries, during 10-day period ending March 10, 1942 - 3/17/42. 328 Freight Situation - Haas memorandum - 3/18/42. 385 Regraded Unclassified - 7 - Book Page Federal Reserve System See Financing, Government Financing, Government Excess Reserves: HMJr tells Treasury group he wants greater reserves in New York "to do my financing at a lower rate"; also wante competition - 3/16/42 508 45,63 a) $500 million on April 2 and $500 million on April 23: HKJr's suggestion 48 b) Burgess offers tentative suggestions for Treasury financing 71 Federal Reserve System: Proposed agreement with - Hase memorandum - 3/16/42. 74 Burgess-Stonier-Haas discussion - 3/16/42 78 Demand Obligations - increased supply of: White memorandum as to whether this might prove to be embarrassing to Government - 3/16/42 81 Sproul memorandum: "General Treasury program incompatible with primary objective of obtaining largest possible amount of funds outside of banking system" - 3/18/42 370 Federal Reserve prepared to follow Treasury request - "even to support & bill rate of & quarter or of twenty-six" - Bell tells Treasury group - 3/19/42: See Book 509, page 34 Proposed press statements by Federal Open Market Committee and Treasury - 3/19/42: Book 509, page 47 Posted bill rate and excess reserves - 3/19/42: Book 509, page 48 Conference of Treasury group - 3/20/42: Book 509, page 164 Conference; present: HMJr, McKee, Eccles, Viner, Haas, Buffington, Bell, and Sproul - 3/20/42: Book 509, page 192 a) Amounts for which each bank can subscribe: Book 509, pages 236 and 253 b) Comparison of par and book values of United States obligations AS represented by State bank members: Book 509, page 254 Federal Reserve asked for reaction to proposed April issues of Treasury Certificates of Indebtedness - 3/23/42: Book 510, page 148 Defense Savings Bonds: Overtime Wages: Brown (Senator, Michigan) suggeste payment be made in non-redeemable bonds cashable monthly after the war - 3/16/42 43 a) Graves memorandum. 58 Hinckley, Mr.: Ineligibility as a result of presidency of Youth Congress and recommendation by Helen Dallas discussed at 9:30 meeting - 3/17/42 168-A Toscanini, Arturo: HMJr's letter of thanks - 3/17/42 320 Agents: Number qualified, etc., May 17, 1941-- March 17, 1942. 321,324 Comparative statement of sales during first 13 business days of January, February, and March - 3/17/42 325 Daily changes in stock of Series E Savings Bonds - 3/17/42 327 Regraded Unclassified - 1- - (Continued) Book Page Forced Savings See Inflation Freight, Export See Exports - G - Gold See Latin America: Colombia N U.S.S.R. - H - Harbor and Port Protection Waesche, Durning, Gaston, and Parker discuss in New York - 3/18/42 508 367 Hinckley, Mr. See Financing, Government: Defense Savings Bonds - I - Inflation Rationing (of Consuming Power), General: Tie-up with forced and voluntary savings expounded by White at 9:30 meeting - 3/17/42 168-M a) White memorandum 168-S - L - Latin America Colombia: Central Bank asks that the gold sold to Federal Reserve Bank of New York be left in Colombia owing to transportation difficulties; White disapproves - 3/16/42 135 Mexico: See Silver Lend-Lease "Lend-Lease in reverse" discussed by representatives of Treasury, Agriculture, War Department, State Department, and Lend-Lease - 3/17/42. 225 - M - Martin Company, Glenn L. See Airplanes Mexico See Silver Regraded Unclassified - M - (Continued) Book Page Military Reports Coordinator of Information reports: British Home Intelligence, week ending March 9, 1942 - 3/16/42 168 Oil and German Strategy - 3/17/42 345 German Home Propaganda - 3/17/42 346 Kamarck summaries, March 16-18, 1942 162,415 - N - National Youth Administration HMJr's attitude toward abolishing discussed by Aubrey Williams and HMJr - 3/16/42 40 a) HMJr's letter to Byrd Committee - 3/21/42: See Book 510, page 72 1) Copies to FDR, Mrs. FDR, and Williams: Book 509, page 89 a) Williams thanks HMJr: Book 509, page 126 FDR's disapproval of abolishment voiced in letter to McNutt - 3/19/42: Book 509, page 117 Thomas, Elbert (Senator, Utah): FDR's letter to McNutt concerning appearance before: Book 511, page 326 NORMANDIE, SS Salvage operations and improbability of use as transport ship - Gaston memorandum - 3/18/42 369 - o - Overtime Wages See Financing, Government: Defense Savings Bonde - P - Port and Harbor Protection Waesche, Durning, Gaston, and Parker discuss in New York - 3/18/42 367 - R - Rationing (of Consuming Power), General See Inflation Republic Aviation Corporation See Airplanes Revenue Revision Doughton, Robert L.: Tells Sullivan he is going to tell FDR he cannot handle tax legislation so long as Treasury, Army, and Navy are not in accord - 3/17/42 211 "War Taxation": Report of American Federation of Labor Tax Committee - 3/18/42 378 Regraded Unclassified - S - Book Page Savings, Forced See Inflation Savings, Voluntary See Inflation Scandinavia American films: German pressure to prohibit importation of - American Legation, Stockholm, cable - 3/18/42 508 392 Services of Supply See War Department Silver Purchase agreements - Canada and Mexico compared - 3/18/42. 383 - T - Taxation See Revenue Revision Tolan, John H. (Congressman, California) Third Interim Report of Committee Investigating National Defense Migration sent to HMJr - 3/17/42 309 Toscanini, Arturo See Financing, Government: Defnese Savings Bonds Transportation Coordination of domestic and ocean - tentative draft - 3/17/42 197 Turkey United States currency selling at steadily increasing discount throughout Near and Middle East - American Embassy, Ankara, report - 3/17/42 338 - U - U.S.S.R. Shipment of gold to United States - arrangements for discussed - 3/18/42 395 - V - Voluntary Savings Inflation - W - War Department Services of Supply: Organization of - 3/17/42 180 Regraded Unclassified 1 Copy No. 13 BRITISH MOST SECRET (U.S. SECRET) OPTEL No. 87 Information received up to 7 A.M., 15th March, 1942, 1. NAVAL The enemy ship which was attacked in the Channel yesterday was pro- bably hit by 43. tarpedo and 16 now in LE HAVRE. Two E-hoate were probably sunk and an enemy destroyer hit by gunfirs, Dur destroyers received superficial damage. One of H.M. destroyers and a merchant ship were eunk during an attack on a coastal convoy off CROMER early this morning, One E-boat was damaged, An -boat was also damaged in an ineffective attack on & convoy off SUFFOIX on the light 14/15th. & Junkers 88 was destroyed while attacking a coastal convey last hight. *. MILITARY LIBYA. 13th, Resistance by enemy patrols tended to increase during last few days. Free French troops have now returned to CHAD territory from Southern FEZZAN. Five station posts were captured during the operations with negligible losses. HURMA. 12th, All quiet PROME Road Sector. An attack by our troops in SHWEGYIN area reported progressing favourably. RUSSIA. Russian attacks are continuing in REHEV area. Heavy righting 10 taking place in the YUKHNOV area, 3. AIR OPERATIONS 13/14. COLOGNE. 112 bombers dropped 98 tone of high explosive and 24,300 incendiaries, including 186 of 250 lbo. representing about another seventy tons, Many large fires seen in the centre of the city, near a railway Junction and just mest of the main station, Eighteen R.C.A.F., twelve R.A.A.F. and four New Zoaland aircraft took part. One R.A.A.F. bomber 18 missing. 14th. During three offensive operations over the Channel, in two of which aircraft of Coastal and Bember Comanda were given escort, Spitfires destroyed ten enemy fighters and probably two more without loss, 14/15th. Enemy activity consisted mainly of anti-shipping and sea- mining operations in the BRISTOL CHANNEL and THAMES ESTUARY. LIBYA. 13th, Fifteen dive bombers, escarted by nine Italian fighters, attacked TOBRUK, Kittyhawks destroyed two fightors and anti-aircraft shot down one bumber and damaged another. MALTA. 14th, HAL FAR aerodrome raided by fifty-eight aircraft, Numerous craters made and one Hurricane destroyed on the ground. Spitfires and anti-aircraft accounted for one fighter, probably dectroyed two and damaged two, Regraded Unclassified 58 TREASURY DEPARTMENT WASHINGTON March 16, 1942 MEMORANDUM FOR THE SECRETARY: You asked me this morning for comment on a proposal by Senator Brown to require the payment of overtime wages in the form of a special non-interest-bearing, non-transferable, non-redeemable security, to be cash- able by the holder after the war, in installments. I would comment as follows: 1. The proposal is for forced savings, which you have consistently opposed. On March 6, in testifying before the Ways and Means Committee, you said, "At this time I hope the committee will not force on me forced savings in any form, because we are getting under way nicely the voluntary pay-roll deauction plan. That should be given a thorough trial." 2. The proposal is discriminatory. It would reach only one class of people, the wage-earners, and only some of those, and would leave all other classes untouched-- investors, self-employed, farmers, white-collar workers, etc. 3. As to those affected, the plan would be confisce- tory. It would confiscate some fraction of wages, large or small according to the length of the war. 4. It is questionable whether a valia statute could be drawn to effectuate the plan on a compulsory basis. In view of its Miscriminatory and confiscatory aspects, the proposal might very well be found unconstitutional. Regraded Unclassified 59 - 2 - Larry Bernard, with whom I have consulted informally, concurs with me in this view. 5. A voluntary plan for the investment of over- time wages in a security such as is described above could undoubtedly be worked out, although it would probably require legislation. I would, however, question the wisdom of our attempting to promote the sale of a non-redeemable, non-interest-bearing security at this time, in competition with interest-bearing, redeemable savings bonds. Conclusion I believe that the Department should not rive its indorsement to Senator Brown's proposal, but that we should continue the effort to induce workers generally, along with all other citizens, to invest a fraction of income regularly in the present Defense Savings secur- ities, on a voluntary basis. GRAVES Regraded Unclassified 2 RESTRICTED MID 319.1 Situation No. 659 M.I.D., W.D. 11:00 A.M., March 15, 1942. 8-11-41 SITUATION REPORT There is nothing to report. A situation map will not be issued this date. RESTRICTED 3 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 16, 1942 TO Mrs. McHugh FROM Mr. Kuhn We tried to make an appointment, but the Secretary had to postpone it until Mr. Disney's next visit. F.K. 4 March 9, 1942 Ferdinand Kuhn, Jr. Secretary Morgenthau I want to see Disney when he is here. Please take it up with me Monday morning 80 that we can make an appointment. Dismissed at 9.30 - 3/9- F allow up 3/12- spoke to Day 3/9 3 Hyr will have 3111 left - by not in work 3/11 Hap evening could not see - finaled Disney of Regraded Unclassified 5 March 16, 1941. Mr. Ferdinand Kuhn Secretary Morgenthau I am very disappointed that we have got no where on our tax publicity program. John Sullivan was suppose to do something to back up my Cleveland speech. Nothing has happened. Did I not appoint & Committee to handle this? I suggest we use some of these favorable tax letters.* Please speak to me. *See Pages 15 and 18 of Mrs. Forbush's Mail Report for 3/13/42. Followed of with Kubu 3/19 - fundshed Per Kahn- Regraded Unclassified 6 March 16, 1942 9:15 a.m. GROUP MEETING Present: Mr. Paul Mr. Sullivan Mr. Haas Mr. Buffington Mr. Gaston Mr. Graves Mr. Thompson Mr. Blough Mr. Viner Mr. Bell Mr. Foley Mr. White Mrs. Klotz H.M.JR: Where is Sullivan? I wanted Sullivan and Paul. MR. BLOUGH: I didn't check. H.M.JR: Did you go on the Hill with him, Roy? MR. BLOUGH: Yes. H.M.JR: I don't think you are this morning. Norman, while we are waiting, I can't remember, it is a week or ten days ago, I asked some of you to get together on this question of coordinating. You were away that one day. MR. THOMPSON: Yes. 7 - 2 - (Mr. Haas entered the conference.) H.M.JR: Where does that thing stand now? I referred it to your office. MR. THOMPSON: I gave you a report on it the day following. H.M.JR: Did you? MR. THOMPSON: Yes. H.M.JR: Could you dig it up and walk it in? MR. THOMPSON: Yes. H.M.JR: Is that where it stands? MR. THOMPSON: I assume SO. I made a recommendation there, but I think it is all taken care of by Mr. Gaston. MR. GASTON: I spoke to you about it that same day. I gave orders immediately to have Maloney in New York put in charge of that-- H.M.JR: That isn't what I mean. Should Irey stay on exclusively as coordinator or should he go back to Revenue Intelligence? MR. GASTON: That is not what Norman is referring to. We are ready to make our recommendation on that. H.M.JR: That is what I meant. You people are ready on that? MR. GASTON: We are ready, yes. H.M.JR: Well, sometime this morning. Who else is in on that? MR. GASTON: John Sullivan. (Mr. Paul entered the conference.) 8 - 3 - H.M.JR: Good morning, Randolph. I won't keep you any longer than necessary. MR. PAUL: O.K. I was just studying my lesson. H.M.JR: Well, as soon as Sullivan comes, I want to bring up something that affects both of you. Thompson? MR. THOMPSON: Senator Tydings has sent a question- naireto practically all of the sections and the bureaus and divisions chiefs in the Department on personnel and space. It is a very disorderly and abusing way to send a questionnairearoun H.M.JR: Why do we have to do that? Why? MR. THOMPSON: Well, there is a Senate Resolution-- (Mr. Sullivan entered the conference.) H.M.JR: Come up here, John, where I can see you. Let's just wait a minute. John, and Paul, on the twenty- eighth of January I had B. meeting in my room at which Kuhn was sick, Sullivan, Foley, and Paul were present. I brought up the question about who was going to follow up on my Cleveland speech and the machine says this. We were discussing the thing. I say, "Well, who wants to say 'I will take the responsibility in consultation with other people in the Treasury to see this thing through'?" And the answer was, Mr. Sullivan, "I will do it." MR. SULLIVAN: That is right. H.M.JR: Now, what is the situation on that? MR. SULLIVAN: Well, we are waiting until the out- come of the Rules Committee today. After that meeting Mr. Buffington and Mr. Morris and Mr. Kuhn and Paul, Mr. Gaston and I met and discussed different people. There was the Knollenberg interlude. After that, Mr. Gaston got Mr. Clevenger down from New York. We talked with 8 - 3 - H.M.JR: Good morning, Randolph. I won't keep you any longer than necessary. MR. PAUL: O.K. I was just studying my lesson. H.M.JR: Well, as soon as Sullivan comes, I want to bring up something that affects both of you. Thompson? MR. THOMPSON: Senator Tydings has sent a question- naireto practically all of the sections and the bureaus and divisions chiefs in the Department on personnel and space. It is a very disorderly and abusing way to send & questionnairearound. H.M.JR: Why do we have to do that? Why? MR. THOMPSON: Well, there is a Senate Resolution-- (Mr. Sullivan entered the conference.) H.M.JR: Come up here, John, where I can see you. Let's just wait a minute. John, and Paul, on the twenty- eighth of January I had 8 meeting in my room at which Kuhn was sick, Sullivan, Foley, and Paul were present. I brought up the question about who was going to follow up on my Cleveland speech and the machine says this. We were discussing the thing. I say, "Well, who wants to say 'I will take the responsibility in consultation with other people in the Treasury to see this thing through'?" And the answer was, Mr. Sullivan, "I will do it." MR. SULLIVAN: That is right. H.M.JR: Now, what is the situation on that? MR. SULLIVAN: Well, we are waiting until the out- come of the Rules Committee today. After that meeting Mr. Buffington and Mr. Morris and Mr. Kuhn and Paul, Mr. Gaston and I met and discussed different people. There was the Knollenberg interlude. After that, Mr. Gaston got Mr. Clevenger down from New York. We talked with 9 - 4 - him, and I think about two days after that was the hear- ing on the Cochran bill before the House Ways and Means and that is hanging fire, and this morning it is coming up before the Rules Committee. Mr. Paul and I are agreed if that bill passes that definitely ends any chance of effectuating the Cleveland speech. H.M.JR: Yes, but we talked about Epstein, and we were going to have somebody follow through, get people to speak. MR. SULLIVAN: That is right. H.M.JR: But nothing has happened? MR. SULLIVAN: That is right. H.M.JR: You haven't got anybody doing it? MR. SULLIVAN: No. MR. GASTON: Clevenger seemed to be quite anxious to undertake it. H.M.JR: Let's call 8. spade - nothing is being done right now? MR. SULLIVAN: Not a thing, sir. H.M.JR: It is kind of tough on me. I mean, I went out - I forget when I spoke in Cleveland - and made this speech. This meeting is the twenty-eighth. I don't know when I spoke in Cleveland. From this day on - I mean, nobody has just gone out from the Treasury to back me up. What are we going to do about it? MR. SULLIVAN: I think it depends entirely on what happens today on this bill. H.M.JR: But let me put it - let me raise another question. I mean, this wasn't - it was the question of 10 - 5 - getting backing on the fight on states and municipals. MR. SULLIVAN: That is right. H.M.JR: And outside of my speech, nothing has happened. Now, let me get the thing. There is this Mrs. Catt, a-woman of over eighty, 8. very influential woman, comes out, most prominent among women's writers, and makes a statement attacking us on our joint returns. There is something that should be handled automatically. Two, yesterday in the New York Times, three or four columns by Stolper, and today, 8. very tricky answer, editorial in the New York Times, in which it said - well, they take my figures, part of my figures, but the other part are no good because they are based on the TNEC which is all wet, see. At four o'clock this afternoon undoubtedly they will ask me about the Stolper letter or the answer, because he says we are fallacious, and he is intellectually dishonest and the drive is on for the sales tax and lower- ing the exemptions. Now, who in the Treasury, because the days aren't long enough, is going to watch the papers, somebody in taxes on - like Stolper, state and municipal taxes, a woman like Mrs. Catt, who in the Treasury can I turn to and who will say, "We are watching the papers and we are backing you up, and if you make a speech in Cleveland, don't worry, Boss, we will back you up." Who is really going to do that? MR. PAUL: Mr. Secretary, I think there are two aspects of that. There is the backing you up from the point of view of giving you answers, and there is another completely different aspect which is backing you up from the standpoint of organizing publicity. Now, I would like to have that responsibility fixed. I will come in any time and back you up from the stand- point of whether you are right or wrong and what you should say to the press. I am willing to do the other if you want me to, but I think there isn't any centrali- zation of responsibility there. 11 - 8 - H.M.JR: Well, frankly, I thought that - there has been 8. shift since that - but on the twenty-eighth of January the responsibility for getting people to speak and go out would be Sullivan's. MR. SULLIVAN: There wasn't any question about that at all. H.M.JR: And I don't see that - despite the cleavage that you (Paul) make - now anybody get in on this that wants to - I mean, we have got a program, and then there is the question of getting people to back us up. There is this thing that they are doing, trying to get Green and what's-his-name to come in here and make a joint thing, and there is a question of what you people would - I certainly am not going to do it. It is silly for me to have to watch it. But at four o' clock today somebody ought to say, "We will have an answer for you on the New York Times editorial, and we will have an answer on Stolper's letter of yesterday, so if you are asked at press, and so forth, and somebody constantly stirring up people to back up the Treasury. I don't see that - I think it is all one. MR. SULLIVAN: Mr. Gaston and I wanted to talk to you this morning on Clevenger. H.M.JR: What do you think, Herbert? How should this be fixed? MR. GASTON: Well, I think, as Randolph says, there are two different things, but at the same time one person can handle those two different things. I think we ought to have somebody in here to handle it. I don't think anybody here now has time to give attention to all of it, or is equipped to. I think we should have somebody in as soon as possible if we decide to go ahead and fight on that. H.M.JR: Well, that was the purpose on the twenty- eighth. That is what we said on the twenty-eighth of January. You were in on that. Regraded Unclassified 12 - 7 - MR. GASTON: Yes. H.M.JR: That is a long while. MR. GASTON: I did give a lot of material to some people who held a meeting up in Mrs. Pinchot's home, but that was a small matter. MR. PAUL: Well, I am certainly giving material to people. H.M.JR: Yes, but I want to talk to somebody. I want somebody to make suggestions. I want somebody to get speakers. I want somebody, as I say, that I don't have to be needling. I want somebody to be thinking about this thing. Let's just take these two people and this question of - now, there was this executive meeting of the governors. Who is contacting the Committee of Governors? Who is contacting the mayors? There is all this stuff to be done. MR. PAUL: Well, if you will just say who you want to do it definitely and put the responsibility in one centralized place, then it is a question of getting men - no one person here can do it all. It is 8 question of organizing and getting people to go out here and there and perhaps having B. man versed in publicity and all that sort of thing. MR. GASTON: I think this man we spoke of could do a good job on it. He did this B.M.I. fight against the Ascap. He did a very good job on it. H.M.JR: What is his name? MR. GASTON: Russell Clevenger. He is an ex-New York Times financial writer. MR. PAUL: I thought he was an able chap, didn't you, John? MR. SULLIVAN: Very. MR. GASTON: He is willing to come. Regraded Unclassified 13 - 8 - H.M.JR: Why don't we take him on? MR. GASTON: Well, we had him down here two weeks ago, and he indicated he was willing to come, but we have been waiting on this-- MR. SULLIVAN: We have been waiting on the Cochran bill, Mr. Secretary. MR. PAUL: Yes, but I think we need something anyway, irrespective of this particular point. H.M.JR: I don't see why you have got to sit back and wait on the Cochran bill. Take joint returns, for instance. Take the slew of stuff that is in every paper on sales tax. I finally got that sales tax story over myself and they have got the figures; and, incidentally, I want - I have got to borrow Blough this morning to have that answer on the Stolper article, and unless there is somebody else - and the editorial in the Times today. MR. PAUL: Shere can go up with me. That is all right. H.M.JR: Because he is involved. Have you read the two things? MR. BLOUGH: No. H.M.JR: Well, get them and after you read them, brief them for me. The whole thing, it all gets back, they say that we based our stuff on TNEC, you see. MR. BLOUGH: It is not true. H.M.JR: And that is full of holes. And that TNEC stuff is the thing that this Hildegarde Kneeland did, isn't it? MR. BLOUGH: It depends on what they are talking about. H.M.JR: It is such an easy thing to go back at the New York Times, and other papers will pick it up and pick it up. MR. BLOUGH: There is nothing we have done that has any tie-up with the TNEC that I know of. H.M.JR: Well, if it isn't answered today, all the other papers will run it; and, as I say, the Stolper article yesterday and the Times editorial based on it. MR. BLOUGH: Right. H.M.JR: Now what about this man? MR. SULLIVAN: He is a good man. Regraded Unclassified 14 - 9 - MR. GASTON: And this broadening out of the whole tax job, we were considering it solely from the standpoint of the tax-exempt proposition but covering the whole field is certainly, regardless of the outcome of this-- H.M.JR: Where is this fellow Merillat? He was good. Where is he? You don't think he is any good? MR. BLOUGH: I say he is in Honolulu, isn't he? MR. GASTON: He is with Foreign Funds somewhere. H.M.JR: Was he good, Roy? MR. BLOUGH: I don't know if he would be any good on this job. lie did a very nice job in writing up the tax sentiment. H.M.JR: What is he doing in Honolulu? MR. FOLEY: I don't know. H.M.JR: Let's bring him back to Washington, Norman. He worked in Roy's shop. MR. BLOUGH: He worked with Mr. Tarleau, but he is not a trained publicity man. He wrote & very nice sum- mary of news. H.M.JR: No, but take a trained publicity man, could he prepare the stuff for him? MR. BLOUGH: That I think he could do. MR. GASTON: Covering the whole field, the man will need help. MR. SULLIVAN: I think Merillat would make 8. very good man for him, Mr. Secretary, especially if we decide on Clevenger who comes in from the outside and who is not familiar with all of these things that Merillat knows so thoroughly. MR. BLOUGH: I would agree with that statement. H.M.JR: All right, let's get him back. Well, then, it gets down, where should this go? I mean, who should 15 - 10 - he be responsible to, this fellow Clevenger? I mean, whose group, who is going to follow all the things and to? is going to back up the Treasury, where does he go MR. PAUL: Well, that is up to you. He can go to John, or he can go to me. He ought to go to somebody that is right in touch with the program all the time. MR. SULLIVAN: I think he would have to be very closely in touch with Randolph at all times regardless of whom he goes to, Mr. Secretary. H.M.JR: You do? All right, will you take it, Randolph? MR. PAUL: Sure, I will take it if I can get the help, which I assume I can. I will get after Mr. Clevenger today, and we will get the other man back to help him, and we will head it up that way, if you say so. H.M.JR: Then the idea is to work this thing up. MR. PAUL: That is right. We will work it out right away. H.K.JR: What? MR. PAUL: We will work it out right away. H.M.JR: All right. You are excused. (Mr. Paul left the conference.) H.M.JR: Did I get you (Sullivan) out of bed? MR. SULLIVAN: No. H.M.JR: You mean yes. I mean not the sick bed? MR. SULLIVAN: No. Two no's. 16 - 11 - H.M.JR: After hearing all this coughing, I think we will get rid of these people. The President said - told the story, it took half an hour to tell it at Cabinet, about how this man and wife who went down somewhere in Mexico to visit this lost tribe for & year, ninety people were living there, the Indians. They said, "Well, aren't they imbred and sick?" He said, "No, they have just got one rule there. If anybody in the tribe gets & common cold, which they get, they just point a finger at him and he has to leave the tribe for one week." MR. HAAS: I am ready to go. (Laughter.) H.M.JR: That is very good, George. MR. BELL: That was kind of a forced cough, I think. H.M.JR: Herbert? MRS. KLOTZ: Harry looks sick. H.M.JR: I didn't hear him cough. MR. GASTON: I expect to have that letter in to you today about foreign representatives. H.M.JR: All right. MR. GASTON: I have got a very nice letter from the Coast Guard in Honolulu praising the work of the Narcotics man there who attached himself to the Coast Guard during the emergency. The War Department raised some objection to - out in Seattle to giving these these Lend-Lease figures going on Army transports, and I called up Patterson's office, and I think that got things straightened out 30 they will let us have the stuff. H.M.JR: Who objected to it? MR. GASTON: The Transport Service of the War Depart- ment. Some of those shipments are going on transports, Regraded Unclassified 17 - 12 - and they wouldn't give the Customs Agent the figures until they got orders from the War Department, 80 I think we have got that thing straightened out. You might be interested to know that the Saturday Evening Post has fired Stout because of his isolationist atti- tude. They are cleaning house on the editorial staff. Fuller is behind it, the general manager. I think they will get rid of Garet Garrett, who has been doing the isolationist stab-in-the-back editorials. I suppose you looked at that material that Grant gave you. H.M.JR: I turned it over to Sullivan. MR. GASTON: We don't find anything wrong with Hennigan other than the fact that he is making about forty-five or fifty thousand dollars a year, and I don't know why such a man who is making that in the law practice wants to be connected with the Internal Revenue. H.M.JR: I know a man who is making a hundred thou- sand dollars & year and wants to be Alien Property Custodian. (Laughter.) MR. GASTON: Well, that is a little more attractive proposition, I would say. I would like to go to New York to spend the day tomorrow if you don't mind. H.M.JR: That is all right. MR. GASTON: It is on Harvard protection matters. Waesche is going up. H.M.JR: What is the banquet? MR. SULLIVAN: Friendly Sons of St. Patrick. H.M.JR: O.K. MR. GASTON: That is all. H.M.JR: Have you got an inspection up there too, Ed? 18 - 13 - MR. FOLEY: I could. H.M.JR: What is on your mind? MR. FOLEY: Have we decided who is going to appear before the Rules Committee on the Cochran bill? MR. SULLIVAN: That is what - both Randolph and I are going, and we are going to take Chuck with us. H.M.JR: What else do you have? MR. FOLEY: Nothing. H.M.JR: Stay behind. MR. BUFFINGTON: Mr. Disney saw Mr. Cole of the Reader's Digest. H.M.JR: Mr. who? MR. BUFFINGTON: Mr. Cole of the Reader's Digest. They are very favorable to that idea, and Roy Disney is coming down Tuesday or Wednesday to discuss some further things. Our Donald Duck picture ends today. H.M.JR: What do you mean? MR. BUFFINGTON: They are going to stop showing it. They have shown it in close to twelve thousand theaters. H.M.JR: And they are going to stop showing it in-- MR. BUFFINGTON: Yes. They feel they have covered practically the entire field. H.M.JR: Supposing the theater wants it. MR. BUFFINGTON: They will let them have it. They are keeping fifty reels in reserve for any requests they may have. H.M.JR: Are there any letters you could write to that one man in particular who has done such a good job? 19 - 14 - MR. BUFFINGTON: Do you mean Miss Spitzer. H.M.JR: On the distribution. MR. BUFFINGTON: Oh, Herman Robbins. I think it would be & nice thing to write a letter. H.M.JR: You write & letter and I will sign it. MR. BUFFINGTON: That is all. MR. BLOUGH: Mr. Sullivan may want to bring this up, but Mr. Tugwell has been trying to get us to send somebody to help him as 8. fiscal adviser. He wants us to pay the bill, and we have been trying to figure out what to say about it. I think he talked to you some time ago, perhaps. H.M.JR: We can't do it. They will have to pay the bill. Harold, afterward, if you would take care of this, for me, and put in some words. She has dis- covered Taxes To Beat The Axis, and she has written words to the song, Deep In The Heart of Texas. Look her over and see if I ought to meet her. The words aren't bad. MR. GASTON: Bob Burns is the fellow that started that Deep In The Heart of Taxes. H.M.JR: Is it? It is a good song. Anything else, Roy? MR. BLOUGH: Deep In The Hurt of Taxes, Mr. Tarleau said the other day, and I thought it was very good. No, I have nothing. H.M.JR: George? Deep In The Hurt. You can sing that song to Sam Rayburn. MR. HAAS: Here is that report. I will have another one at four o'clock today. H.M.JR: Look, as I remember, they got me kind of confused on this thing. 20 - 15 - MR. HAAS: I wonder if it would. That first sheet is the one you saw the first day of Philadelphia alone. Now, the second sheet is all Russians at any port. H.M.JR: Oh. MR. HAAS: This is all Russian, including the Gulf and other places, Boston and New York. This is Philadelphia beginning back at that Monday and crosses out those that sailed since March nine. It is just for Philadelphia and that is all Russian. H.M.JR: But these are the ones which have sailed? MR. HAAS: Yes, these are for Philadelphia. You asked for them specifically. H.M.JR: Well, We will run it that way. There are only two that have sailed? MR. HAAS: That is right. H.M.JR: Would you, Norman, call up the Under- Secretary of War's office and ask him if he would give me the set-up which General Somervell now heads in regard to transportation. There is General Somervell, the Maritime Commission and Joe Eastman, the Railroads. Now, they met Friday and had some kind of B. set-up under General Somervell, and I would like to know what it is, and there must be some order on it, you see, and I would like a copy of it. Now, this is the Federal Reserve System program? MR. HAAS: Yes, sir, and the notes on that meeting. H.M.JR: Right. Now, aren't you (Bell) testifying today? MR. BELL: Yes, ten thirty. H.M.JR: If I want to go to school with George this morning, that is all right, isn't it? 21 - 18 - MR. BELL: Yes. H.M.JR: And then why don't we have B. - I can meet with you at three fifteen, Bell, on this thing. MR. BELL: All right. H.M.JR: George doesn't have to go up with you on the Hill, does he? MR. BELL: I don't think so. It is just that amendment. I hope not to be there more than a half hour. H.M.JR: I will be ready for you a little while later, George. John? MR. SULLIVAN: We have had some figures in that aren't too definite, but indicate the collections and at least in these two offices, they are running about three times what they were at the same period last year. H.M.JR: In dollars? MR. SULLIVAN: In dollars. In one instance, eighteen million against six, and in another instance twenty-one against seven. In the Indianapolis office last year up to, I think it was the seventh of March, they had fifty- five thousand taxable returns. This year they have a hundred and fifty-three and of the hundred and fifty- three, a hundred and sixteen thousand paid in full. H.M.JR: Could I have a little note of that for my four o'clock press? MR. SULLIVAN: I will get you all the figures that are available, but I doubt if it is wise to give them out, sir. H.M.JR: Well, 8. few spot checks wouldn't hurt. MR. SULLIVAN: All right. H.M.JR: The boys will want something. I would like to have them. Regraded Unclassified 22 - 17 - MR. SULLIVAN: I will get you what I can. H.M.JR: I would like to have something on it. MR. SULLIVAN: All right. H.M.JR: What else? MR. SULLIVAN: We thought it might be nice if we drew up some kind of an honor scroll to give to these fellows who have been so helpful in giving us billboard advertising space, and radio stations, and the editors and what not. I would like to draw one up and show it to you and see what you think. They have really been very responsive. H.M.JR: I have heard practically nothing on the radio about paying your taxes. Over the week-end on the farm I listened a lot. There is just as much Defense Bonds, but I don't think I heard a single announcement about paying your taxes. MR. SULLIVAN: Well, I made three five-minute tran- scriptions which were sent to eight hundred seventy-two different stations, and I have heard a great deal from that. I mean, people who knew me heard it. MR. GASTON: I heard several during the week on the local radio, about paying your taxes before the sixteenth. H.M.JR: I just didn't hear 8 word. MR. BLOUGH: These morning programs that are supposed to get you up and off in a cheerful mood have been talk- ing taxes lately. (Laughter.) - 18 - 23 H.M.JR: Well, I was surprised at the attitude toward me. Mrs. Morgenthau and 1 went to the theater last night. It showed a glorified vaudeville. They first called on Douglas Fairbanks Jr. who was there. He got just a little hand, and then they announced that I was in the audience. He didn't say anything about taxes, but after all they know it, and I was amazed how friendly the audience was. They couldn't find me. This man said, "My God! Don't tell me he is up in the balcony." (Laughter) But I was amazed. MR. GASTON: Was that here or in New York? H.M.JR: In New York. MRS. KLOTZ: What was it? H.M.JR: Priorities of '42. It is terrible. Harry? Mk. WHITE: Nothing sir. H.M.JR: Wonderful. How much pressing is this thing that you have written me about with the English and Dean Acheson? MR. WHITE: Nobody is pressing me. H.M.JR: Wonderful. MR. BELL: On this ammendment apparently there is quite 8. bit of oposition to Byrd, more because Byrd offered it I think than anything else. I thought I would take the position that we have no objection to it unless it is going to delay the bill and we wouldn't want it to do that. H.M.JR: Oh, I would kind of throw my weightalittle bit against it. MR. BELL: I think the committee will do that. H.M.JR: Well, I will tell you, I don't know what Larry Bernard found but the thing that worries me is, 24 - 19 - this is a sort of an over-all control of all of these independent agencies, and 1 don't think that is the way to do it. That is what George told me. MR. BELL: I don't think 80. I think all you do is just put in the hundred and twenty-five billion dollar limit the authority to issue guaranteed obligations. Eventually it will be there anyhow when we take them over. That is all I can read into it, and what we did do is put on another paragraph which tied up the guaranteed debt with the gross public debt. He wanted them in the same statement. I think we can do that without legislation, and I would rather do it without legislation. H.M.JR: But don't try to - try to stay as neutral as you can. Put your heels against it and haul back, will you? MR. BELL: All right. H.M.JR: Haul back. MR. BELL: I will try. MR. THOMPSON: I think on this Tydings resolution, I will get up an answer for the whole Treasury Department. H.M.JR: Look, supposing every other Senator is going to send us something. He isn't chairman of anything. MR. THOMPSON: Well, this is Senate Resolutions. MR. BELL: He is Chairman of the Subcommittee. MR. THOMPSON: The purpose is to see if there is sur- plus personnel and space that can be used for the war effort. I think as far 8.8 Treasury is concerned, it is a waste of effort to go through it. MR. WHITE: Have you taken a glance at it, Mr. Secre- tary? It is terrific. I have never seen anything like that questionnaire. MR. THOMPSON: He sent two hundred thirty-five of them. 25 - 20 - H.M.JR: Well, why don't you go up and call on who- ever did that for Mr. Tydings and say it is-- MR. THOMPSON: Yes. We checked with them up there, and the Senator's idea is that if he can get direct informa- tion from the officials, he will have 8. definite picture. Most of the questions could be skipped by the majority of the people. H.M.JR: You mean he doesn't want it from me? MR. THOMPSON: Well, he does want it. He wants to see if what they give him checks with what you give him. H.M.JR: Well, I will leave it with you. MR. THOMPSON: I will get up a report for the whole Department. MR. BELL: There are three or four committees up there doing the same thing. H.M.JR: I know. MR. FOLEY: Mr. Secretary, may I bring up one thing? There is an oil tanker down in Port Arthur that has been immobilized down there for some time, and Dean Acheson called up Friday afternoon and said that they were terribly anxious not to have her seized but to turn her over to the Spanish to take some oil to Lisbon. She was owned by a Greek refugee who went to Madrid and was jailed there. He is supposed to be out now, and Foreign Funds has taken the position that we don't know whether or-not he is acting under duress and have refused to license the transfer of the tanker to Spanish registry. Now, I told him that I would speak to Foreign Funds about it and ask them who would handle the matter with the State Department in case our boys wanted to argue. Well, our boys did want to argue, and Feis called me on Saturday and the upshot of it was that I said we wouldn't release her until we had a letter from the State Department saying 26 - 21 - as a matter of high politics, international politics, it was essential that she be turned over to Spain, because ordinarly we wouldn't do it, and if it is a political matter we would want it in writing, 80 that is the position. They went back and called me back about five o'clock Saturday and said, "No letter," and I thought maybe you might hear about it. H.M.JR: Very good. 27 March 16, 1942 MEMORANDUM FOR THE SECRETARY From: Mr. Blough Subject: Editorial in New York Times, March 16, 1942. The point featured in this editorial is that on the basis of National Resources Planning Board figures, one-third of all the consumer units of the country (families and single individuals) have incomes of less than $780 & year, while two-thirds have incomes of lees than $1,450 B. year; and also that families and single individuals having income of less than $2,000 comprise 82 percent of the consumer unite and account for 60 percent of consumer purchases. The main point of the editorial 18 summed up in the following sentences: "If these figures are correct, it appears that a substantiel majority of all consumer units accounting for a very large part of all consumer expenditures must be exempt from income tax." The question is: "Whether it is not necessary in one way or another to dip still further into the current purchasing power of those units which, despite their low incomes, con- stitute the majority of consumer units, in order to prevent the still greater hardship of inflation." Comments: (a) The National Resources Planning Board figures cited by the editorial are for 1935-1936. Incomes have risen substantially since then. According to more recent estimates made by the Office of Price Administra- tion on the same basis a.e the National Resources Planning Board estimates, in 1942 only one-sixth (instead of one-third) of all consumer unite will receive incomes below $780, and slightly less than one-half (instead of two-thirds) will receive incomes below $1,450 a year; Regraded Unclassified 28 - 2 - end families and single individuals having incomes of less than $2,000 will comprise two-thirds (instead of 82 percent) of the consumer units, We estimate that femilies and single individuale with incomes less than $2,000 account for about 50 percent (instead of 60 percent) of consumer purchases. (b) Some families with incomes over $2,000 will not be subject to tax because of the credit for dependents; on the other hand, some families and many single individuals with incomes below $2,000 will be subject to tax. In all, it is estimated that in 1942, under present exemptions, about one-third of all persons receiving incomes will be subject to the income tax. These persons will account for more than 55 percent of the total income received by all persons and for about half of all consumer purchases, (c) The revision in figures does not change sub- stantially the policy question posed by the editorial. Although the problem 18 somewhat less serious than the editorial suggests, it 18 true that about half of the consumers' purchasing power 18 not reached at all by the income tax and substantially half of the balance is largely,,Felieved by the exemptions to people paying some tax. Regraded Unclassified 29 The New York Times. MAR- 1G 1942 TAXES AND CONSUMPTION come taxes, The same source LA DI- Secretary Morgenthau believes sponeible for figures showing that tam- - theil and single individuals naving m- the new tax bill must withdraw pur- chaning power, but he opposes any come of less than $2,000 comprise 82 per cent of all the consumer units DE further broadening of the tax base or the country and account for 80 per cent any suggestion of & sales tas. In sup- of all consumer purchases. If these port. of this position be has advanced figures are correct, it appears that . two arguments: First, that the burden substantial majority of all consumer of taxes upon the income groups now units, accounting for a very large part exempt from income TAXES is already of all consumer expenditures, must be very heavy: second. that those with in- exempt from income tax. corona below the exemption levels do If there were no war and no arma- not have purchasing power sufficient ment program, there would be no oca- to cause inflation. The first of these sion to consider the need for reducing argumento will be readily conceded. It purchasing power in these lower in- has, in fact, been used repeatedly by come groups. Rather, as in the recoy- opponente of this Administration in arguing that the burden of high Gov- ery period, we should be considering arnment spending fell heavily in hidden ways of increasing their purchasing taxes on the poor. The figures cited power. If it Were possible to wage the by Mr. Morgenthau showing that a ein- war to victory without reducing the na- gie person with $750 income pays $130 tional living standard, the problem in tases or 17.3 per cent of his income would not arise. But the facts, as ad- and . married person with $2,500 pays mitted by every one, Including Mr. #250 or 16.7 per cent, correspond fairly Morgenthau. are that civilian consump- tion must be curtailed. Price Adminis- closely with the findings of Dr. Get- hard Colm and Mina Helen Tarasuv in trator Henderson says that the volume their monograph for the Temporary of goods for civilian consumption National Economic Committee, called, "within & few short months will De not "Who Pays Taxes But it should be much above 1932. In 1943, he saya, remembered that this burden to not the shall survly fall below 1932." The result of defense taxes, It andsted be- Department of Commerce says that sa- fore the defense program began. tional income this year will be Ultre The second argument made by Mr. times the level of 1932. Morgenthau, that the income groups In one way or another this discrep- below the exemption levels do not have any between income and the supply of sufficient purchasing power to cause goods will be reconciled. If it in not INC- inflation. requires more examination onclled by Issing and borrowing sway and some proof. The Treasury calou- from all income groups . largo emount lates that, giving effect to personal EX- of their purchasing power. It will be emptions and normal deductions, no in- reconciled by an inflation of prices nome tax is paid by single persons with The question at issue is not to be solved $832 a year, married persons with by pointing to the burden of hidden $1,664 - year and narried persons hav- taxes now resting on the poor. It is ing one dependent with $2,106 - year. & question of whether H. is not naces- But the National Resources Planning sary in one way or another to dip still Board has calculated that one-third of further into the current purchasing all the consumer units of the country power of those units, which despite (families and single individuals) has their low incomes, constitute the me- incomes of loas than STAD a year, while jorily of consumer units, in order to two-thirds have incomes of leas than prevent the still greater hardship of $1,450 On the Desta of these figures. inflation Let is have come sound sis- which the Administration has widely Untical evidence on this score from the publicised recent years, & Treasury and other interested depart- part of the consumer units of the coun- ments of the Government in order that try must be excluded from direct in- the decision may be based on facts and pot upon recrimination. Regraded Unclassified 30 March 16, 1942 MEMORANDUM FOR THE SECRETARY From: Mr. Blough Subject: Comments on the letter of Mr. Gustav Stolper, published in the New York Times, Sunday, March 15, 1942. The principal pointe made by Mr. Stolper against the Treesury position, together with comments on them, ere as follows: 1. Statement: Salaries and wages in the three years 1939 through 1942 will have risen $20 billion. A great bulk of this increase goes to income groups below $3,000. "Of these 820 billion, the Treasury actually proposes to draw 8300 million in income taxes." Comments: a. The statement appears to be substantially correct with respect to the $20 billion increase in salaries and wages. There appear to be no studies showing the distribution of this increase but it is probable that 8 large part has gone to income groups below $3,000. b. On 1939 incomes, persons with incomes below $3,000 paid only $42 million in individual income taxes, or less than 5 percent of total individual income texes. On 1942 incomes, it 1s estimated that at existing rates of tax, persons with incomes below $3,000 will pay $750 million, or over 14 percent of all individual income taxes. The increase in rates proposed by the Treasury will almost double the taxes paid by persons with in- comes below $3,000, 80 that under these higher rates they would pay about $1,450 million, or more than 17 per- cent of ell individual income taxes. Regraded Unclassified 31 - 2 - 2. Statement: The figures which the Secretary presented relating to percentages of income taken in Federal, State and local taxes were probably predicated on Monograph #3 of the T.N.E.C. "Who Pays Taxes?" Apart from serious statistical mistskes, this study makes two important misquslifications. It qualifies social security Day- ments as taxes and it qualifies real estate taxes 8.8 being borne by the tenants. Comments: A. The Treasury study was made independently of the T.M.E.C. study. While similar techniques were used, the treatment of certain taxes was materially different. The Treasury percentages of tax are substantially lower than those shown in the T.N.E.C. study. b. The social security taxes are properly grouped with all other taxes for purposes of messuring the com- nulsory payments imposed by Government end determining how much of the income at these levels 18 already being appropriated by the Government. C. In the Treasury etudy, regl estate taxes were pounted in part as taxes on tenante (end owner occupants) end in part 88 taxes on business, shifted to consumers. This was Judged to be the most realistic treatment of these taxes in the light of available data. 3. Statement: The proposed corporation taxes will not curtail consumption by one dollar. They cut entirely into the savinge fund of the Nation and may create ghastly con- sequences by destroying working capital to operate business in the post-war period. High corporate taxes destroy the incentive to efficient oneration. Comments: 8. We cannot expect other groups to make heavy secrifices and not to demand increased incomes unless co morate profits are taxed heavily. Public morale can be maintained only if cornorations are required to Regraded Unclassified 32 - 3 - pay 8. large share of the cost of the war. b. The high coroorate taxes will prevent in- cresses in dividends which would be inflationary. C. The expectation that the proposed Treasury rates will destroy efficiency of operation is a matter of oninion. We do not agree that it will have any serious effect on production or efficiency during the war emergency, particularly since where the tax on any doller of income exceeds 80 percent such excess shall be placed in a reserve for repayment to finance employ- ment after the war. d. Since texes are levied on income they do not reduce working capital unless there has been 8 mistake in determining income. The Treasury has suggested that provision be made for correcting mistakes of this kind. Regraded Unclassified The New York Times. MAR IS 1942 Basis of Treasury Tax Plan Regarded as Fallacious N.Y. Time Economist Finds Three Dangerous Beliefs in American War Finance Policy Which He Believes Must Be Discarded Immediately to Avoid Disaster MAR 15 1942 There la good reason to believe that the receipts are underestimated and that How does the Treasury propose to The writer of the following letter is actually they may exceed estimaise by cope with Unle ovoblem The an economiat of international reputa- considerable margin. However that may proposels provide Cor additional Fyyenite /loh and was formerly aditor of Der be, no one familiar with the problem of from the following sources: Deutache Volkavirt. During the World war financing can take leaue with the Millions War he 1008 head of the Research De- government that good to the Itmite in Individual Income bukes $3,200 partment of the Imperial Austrian Gen- raising taxes to reduce the war-created Corporation Income 2.000 deficit. But considering the magnitude Estate and gift taxes 330 eral Commissariat for War Economy. Later he was a Liberal member for of the inevitable deficit, it le in Itemit Removal of special privi- rather insignificant whether a. few bil- legal was Humburg of the post-war Beichatag lions more or less are covered by taxes Excise taxes 7,340 and correspondent of The Economist of by borrowing from banks or by borrow- Condon. He left Germany voluntarily Ing from private sources. $8,610 refrien the Name came into potor and is What matters shove all are two QUAR From this Intal the Treasury deducte now di citizen of the United States. tions: (1) How to avoid in uncontrol- one billion dellare "because of the in- lable inflation, and (2) how not to dia- Terrelated effects'': the expected total To THE EDITOS of Time New York TIMES: able Industry to cope with the stagger- net Increase thus being $7,610 million May the author of "This Age of ing poat-war problema it win be called Last use first describe how these les (II- Fable" be permitted to write . annt of upon to solve. creases are supposed to be achieved. postacript about the American tax pol- Price Administrator Leon Henderson Brithsh Pay More ley. n centers around three extremely estimated the other day, in . speech at dangerous fallacies The first is the Des Moines, that in JW1 the output of As for Individual income lians, Bie bellef that nothing but the absolute consumer goods and services amounted lax-free exemptions of $7.0 for single amount of taxation matters In the fight to 874 billion, against A. pational income persons and $1,500 for married people against the specter of inflation. The of $92 billion, and that in 1942 the out- and additional $400 for each dependent second is the belief that capacity to pay put of consumer goods will be cut to remain unchanged. The Treasury does in the social eriterion for the distribu- zen billion while the national Income not propose to reach into the lower tion of the burden. The third 38 the may rine to $102 billion. Of these. he brackets. Thus, the American income belief that the cruelty of the war justi- figures. $22 billion will be absorbed by tax for the small and lower middle in- Time, or calls for, highly questionshie taxes and normal savings, which would come will appeare 9.9 a very mild attain economics. These three beliefs have leave $80 billion available for consump- .. compared WITH the British Even created the sentimental fable of Ameri- tion, or $10 billion in excess of supply. with the propused raths it will he just cán war Finance It will seriously en- one-third of the British for a. matried Adjusting Estimates danger our war effort unless we discard man will two children in like income it now. before it is fon lafe. These figures may be arguable in BOY- group of 43,000 We heanthe removitably On March a the Secretary of the eral respects. DUE they certainly setlect successful with the instation of the Treasury submitted to the House Ways correctly the order of magnitude of BUT Brilish in the high and highest las and Means Committee his proposals for problem It we try to adjust the caf- brackets, But we stop (mitating to the the higgest tax bill of all times. Mr. endão year figures of Mr. Henderson to taxation of capital pine which go Morgenthau has made for himself the flocal year 1942-43 in order to make practically true free in England. strong place in the fiscal history of the them comparable to the budget figures. Percentagewise, the increases inj the United States by his forceful honesty the results might be about as follows. lower and medium brackets look VALE and integrity. He has not yet succeeded in billions of dollars: big: actually, the texation of the lower 18 ploneer to break new ground in an 1942-43 Income groups remains negligible, The 1/2 when the continuation of old hou- National income 8318 married taxpayer with two dependents tine polley be hound la and in dismal War expenditures 56 at an income of $8,000 even after the failure. Taxes 30 recent proposals-without various per- Arbitrary Presumptions Consumer goods available 60 missible deductions-will pay only $118, Income available for con- or less than 4 per cent. It happens that The fiscal picture of the United States sumption and savings as the Income groups up to this level rep- projected in the next budget year (July resent 85 per cent of the American pao- In other wants, in the nest Tiscal year 1942, to June 30, 1943) le admittedly pie. In other words, even after this the BAP between potentier demand and arbitrary in lis presumptions as that ascond drastic reform of the income Retual supply of civilisn goods will be of any other belligerent nation. The iss, It remains the tax of . very small classer to $25 Ibso In the $10 Hillion enti- endget provides for expenditures of and minority, No official relimates are mated by Leon Henderson milion and wishes to reise revenues to, available M to the total additional - Houghly, 820 billion. This will still leave to be reined from incomes up to $8,000. nices than $30 billion to be covered by My own astimate is that H will hardly horrowing. In order to reach that gost, exceed 2500 million. - billion additional revenues are to be of which 87 billion are to be de- rised from LARGE and 12 Willien from de, increase in Rocial Security payments Regraded Unclassified 34 The New York Times. salary Increases taxes on Giass consumption at mD. Taxes tortion of The results of this statistical What dom that mean? The public we telegraph, telephone, and lubricating study originates la two misqualifica- will informed the other day that the (oll. or on pipeline transportation. are tions. It first qualifies Social Security business taxes, pure and simple. The total national Income paid out (set year payments as texas. There can be no doubling of the gasoline tax, we have amounted to $80.4 billion, an Increase serious dispute that they are actually of $10.7 billion over 1940. Of the total reason to fear. will remain on paper. forced savings, the accumulated live- Certainly gamoline consumption for the meme payments no lass than $59.7 bill- file of which must in due time accrus to im were salaries and wages, en to- duration of Afre war will be limited by the payer. It would pierce the clouds CIDRAE of $10.6 billion. On the basis of more powerful Facture than the DUT- If we, to the amusement of the public, chasing power of the consumer. In The January. 1042, figures already avail- would quality J. P. Morgan's life to- while we may estimate that salaries and other words. here too we stop at the surance or accident Insurance premiums in the current year will rise et first approaches le nur problem. as part of Mr. Morgen's tax bill: Yet Mr. Morgenthau maintains un- HIMEL snother 35 hillion. TC this can- The acond, equally serious arror of servative estimate comes through. mail compromisingly his opposition against e the monograph la the qualification of experal enter tax. His arguments are bisee and wages in the three years of real estate lans M being "paid" by the dill the old trito ones-that a general YES will have risen in 1942 by I20 billion tenants. Any one who has the remoinet against 1939. the last peace year. There anles tax falle on scarce and plantiful Idea of the resultive of the American 18 no deubt that the great bulk of this commodities alike. that it strikes et real estate situation ever since 1929 INCTORES goes to the Income groupe be- necessaries and unnecessários alike. should know that real estate (Ame- The Secretary would be at a loss to law 23,000. Balaries of executives, which high or low, justified or nol-are actu- point out which commidities are still play A very minor part in the total pay- ally taxes on capital, whatever the orig- available to planty. We know how un- roll, have hardly been raised in 1941. Inal Intention of the Ingisiators may successful the government has been Whatever additional purchasing power have been, If Mr. Morgenthau would in preventing R. sharp price visa in the may have secrued to the upper theome instruct his office la use the figures of necessaries, particularly food and cloth. ATOUPR has been well taken care of by that monograph more critically, he ing Since August. 1909, the wholesale would probably De surprised el the The the Treasury. prices of fondstulfs have risen 30 La 180 sulta. The principal problem of our tay per enni; of industrial new materials- molley is not how much total taxes will Rut, peradaxical as It may sound, the spart from some metale, where prices flow Info the Treasury. The problem in argument ja much leas relevent than the have marly been fixed-81 to 232 per cont haw to Heal with the #20 billion addi- public discussion Memo to assime, Even in a period in which we experience such If the tax loss heaped on the masses nonal income created by the war, the resolutionary price changes we are still miging Lide of money that threatens to were actually as heavy as spurious aquesmish about . general entes tax of name all dams erected for the protec- statistics searn to indicate, the logical 2 or 8. per cent. which. universally ap- MOB of our social life, dama which Al- conclusion would lead into the opposite plied without exceptions, would easily midg show uneanny leakage M Indi- direction of where n led the Secretary, yield #2 to as billion- cared by the sharp and continuous rise Burden on the Wesk will commodity prices. Of these $20 Ability to Pay Allion the Treasury actually proposes The Secretary Instais that even now It is the protection of just these poor- fraw PMO million in income lian the guiding copsideration for the tax est and weakest members of our enclety Nothing can demonstrate the dangerous policy must be ability to pay. To 1 which we have in mind when " try inadeguacy of the American war tax to devise methods to combat the press conference Mr. Morgenthau read policy more drastically than this ein- the other day from a Treasury study monaler of Inflation, It le these under- tragnosition. which, he sald, "Indicated that A single privileged who will carry the terrifio Againel reising the income tax by person with an Income of $750 a year burden of a fiscal policy which le guided an hilling there can be little objection paid 17.3 need rent of his Income in by sentiment In default of hard realism. That a has no bearing on the open and nidden Federal, State and We cannot and must not base our war Fundamental problem of was finance. loss) TAXOR of all kinds, and a married tax policy on the ability to pay. What Der if the $2.5 billion which are ad- man with on dependents, esining $1.500, matters in war finance In-to use the diffirmative imposed on the income paid 10.7 per cent. After aeeing these Keynesian term-the "propensity to shave $3,000 were not levind et figures 1 came to the conclusión that consume"; and we know-in this respect All this would hardly make much we would net be justified in lowering same of the official statistics are relie- difference in consumer demand. though consumption or imposing a general sales ble-that in America the propensity to If yould make # great deal of difference lax." consume is greatest just in three in- The amount or savings, because it le The newepapers did not report more come groups which the recent Treasury these moome groups who contribute the particulare about the Treasury study to proposals atfll want to axamps from hulk of the revings. It in a. question of which One Secretary referred. It la I additional farm motal not of fiscal, policy whether we sofe bet that " was predicated on the The great bulk of the savings. how- was to aquense the middle classes by widely quoted Monograph No. I of the ever, le accumulated by the income teration as to bolster them by strength- TNEC "Who Paya Taxes?" This 43. groups above $3,000, (In Great Britain, ming their power to SEVE, document, which was pub- incidentally, it 10 June the opposite.) If New Exclas Taxes Tiched over a year ago, seema to be treat- this laz bill goes through in anything ent in Washington as a mort of Minie, I like the present form. this propensity to The Treasury elso proposes . Dew That WIND to hope much to the embarrass- consume not only will not be discour- ***ise This is suppowed to meal of like able author. aged but will he encrmously anhanced. Tell E1 343 millions M for as tobacco, Actually this TNEC monograph le ane It will be trresistibly propelled by at - and ml) drinks are concerned, of the outstanding examples of now far least $18 Dillion out of (be $20 billion breimworthy proposal which tape even well trained economists can go by which this year's payrolls will be spriuding Where II may justly he tapped Tobacco and drinks will contribute Al- entrey. misled either by en emotional larger than in 1939, blan or by Inck of practical experience In a letter to THE Naw TIME Times," times $400 11 Billion In loses This more than milion or buth. Apart from several other - published on May 4. 1041, I valled for " revenues are included in THOUR eratiation) mistakes the basic dis- premium on saymen. a penalty on the Das which cannot lie qualified M spending as the guiling principle of the Regraded Unclassified 35 The New York Times. American fox policy." This recent tax program sete the penalty on savings and the premium on epending. This becomes shockingly apparent in the account mainstay of the Treasury's program. the $3 billion derived from corporation taxes. Here the ability to DAY in beyond question. Dut by straining corporation taxes WY shall not curtail consumption by coe dollar. These taxes cut entirely Into the mgs fund of the nation. By thus oilling the reserves of American industry - may create ghartly consequences for the day when we shall have to face the port-war problems By that time Ame:- ICA will have a huge Industry with vantly expanded capacity, and ne work- Ing capital to run It. Is that what the Administration and Congress want? Effect on Corporations It is 8. transparent fallacy to believe that huge corporation laxes contilbute anything to the fight against Inflation. No Industrial corporation loday is cape- ble or expanding for any but war pun- posse. If an executive would be registers enough to think of other expaction. be would be faced with the insuperable burdin of lack of needed materials and lahor. But If. as has often been pointed out, the profis melive in wartime may have no particular effect on the define of expansion. 11 has a very definite effect on the efficiency of operation. The daily struggle to resist the continuous pressure of inflationist forces in every business la enervating enough. trut if the government taken up to 95 per cent away In corporation and Individual m- come only saints and heroes will may in the gratuitous strugate against riving costa. Seinte and heroes are not numerous enough to wage . victorious war on the battlefield and on the #CD+ nomie front To justify an ineffective Lax policy by the fact that American moldiers and enflors are giving their Ilves la - mis guided appeal to sentimentalism and wholly Irrelevant la the real fasue. 11 in apparently a late echo from the lirpes when rich people could my themselves free from military service. To the blood anerifice for our country the rich and the poor are ealled on en equal footing. Enemy hombs and bui- Into are socially indiscriminate, and the rich and the poor alike have only nhe mother to weep for them. 11 will he little comfort If our mentiments add to her worries the intolesable staain or a social revolution wanted by DU one, but inevilable If we persevero on our path. Graffay STOLPER New York, March 14, 1042. Regraded Unclassified 36 March 16, 1942. Dear Mr. Robbins: I an very mush pleased with the extraordinary job you have done in distributing "The New Spirit* to notion picture theatres. With limited time available to accomplish nation-wide distribution, your cooperation has contributed largely to the success of the project. Please convey to your branch managers and other members of your organisation By appreciation of their outstanding service. Sincerely, (Signed) 1. Morgenthama seil Mr. Harman Robbins, National Screen Service, 630 Ninth Avenue, New York, New York. r we.ce GB:amo 3/16/42 Capies to shompson Regraded Unclassified 37 March 16, 1942 9:53 a.m. HMJr: Hello. Operator: All right. Go ahead. HMJr: Go ahead. Dean Acheson: Hello. HMJr: Hello. A: Good morning, Henry. This is Dean Acheson. HMJr: Good morning. A: How are you, sir? HMJr: Fine. A: I wanted to ask you in regard to your note about my memorandum on the Lend-Lease in reverse. HMJr: Yes. A: You said that you were going to call a meeting HMJr: Yes. A: shortly when you got through with your tax bill. HMJr: Yeah. A: Is that on your calendar? HMJr: Well, we were talking about it this morning. Is there something you'd like us to take up now? A: No, I just - I did not want to go ahead and see whether the general method was one that was acceptable to the British until I knew whether it was acceptable to you and the Army and Navy. Regraded Unclassified 37 March 16, 1942 9:53 a.m. HMJr: Hello. Operator: All right. Go ahead. HMJr: Go ahead. Dean Acheson: Hello. HMJr: Hello. A: Good morning, Henry. This is Dean Acheson. HMJr: Good morning. A: How are you, sir? HMJr: Fine. A: I wanted to ask you in regard to your note about my memorandum on the Lend-Lease in reverse. HMJr: Yes. A: You said that you were going to call a meeting..... HMJr: Yes. A: shortly when you got through with your tax bill. HMJr: Yeah. A: Is that on your calendar? HMJr: Well, we were talking about it this morning. Is there something you'd like us to take up now? A: No, I just - I did not want to go ahead and see whether the general method was one that was acceptable to the British until I knew whether it was acceptable to you and the Army and Navy. Regraded Unclassified 38 - 2 - HMJr: Yeah. Well, supposing we have a preliminary talk with you tomorrow morning or tomorrow afternoon. How would that be? A: That would be fine. HMJr: About three o'clock? A: Three o'clock tomorrow. HMJr: Yeah. We won't ask everybody - - just you and anybody you want to bring with you. A: All right. HMJr: I mean, I won't ask any outsiders. A: First rate. I shall be very glad to be there. HMJr: I mean, if you want to bring anybody with you, okay; but I'm not going to ask War and Navy, until you and I have a talk. A: All right. Do you want me to bring Gene Rostow from the Lease-Lend, or shall I come myself. HMJr: Who? Bring who? A: You remember that fellow from Lease-Lend, Gene Rostow? HMJr: I don't know who he 1s. I think you'd better - Just let's do it State and Treasury first. A: All right, fine. I'll be there at three. HMJr: Thank you. A: Thank you, Henry. Regraded Unclassified 00 - Dr. White 39 March 16, 1942 10:46 a.m. HMJr: Hello. Operator: Aubrey Williams. HMJr: Hello. Aubrey Williams: Good morning. HMJr: How are you? W: Well, pretty good. Say, I called you - a group of our people up in Michigan have gotten to- gether about twenty-two hundred dollars up there toward a bomber. HMJr: To do what? W: Our people up in Michigan - our employees up there - have made their day's contribution of their wages toward a bomber. HMJr: Yeah. W: And I - they sent it down here and wanted to present it to you, but they've gone home now and they're going to be back on Wednesday. HMJr: I see. W: What would you think - just have them send it in, or what? HMJr: Well, unfortunately, I won't be here, Aubrey; but if they would send it in to Dan Bell, I know he'd be delighted to receive it. W: Uh huh. HMJr: And I think it's fine. W: Yeah. HMJr: I'm very much pleased myself. Regraded Unclassified 40 - 2 - W: Now, one thing - the main thing I wanted to talk about was that we're coming up for a hearing next Monday or Tuesday. HMJr: Yeah. W: And the impression obtained up there on the Hill that you are among those that have been advocating that we be abolished HMJr: Yeah. W: and I have never felt that you really meant to give that impression. HMJr: Well, what I said I said in writing. I don't know whether you have ever seen my statement. Have you ever seen my statement? W: Only what I read in the papers. HMJr: Well, let me send you around just what I did say about NYA. I mean - I think it WR.6 November fourteenth. Let me get the formal statement, and I'll get it around to you. W: Well, I think they're laying great stress on that statement they say you made that they haven't gone far enough, and it's the clari- fication of that sort of thing..... HMJr: What I said was that I thought that CCC and NYA and Education should be organized into one program to train our young people to do defense work. There should be one agency. W: Uh huh. HMJr: That's what I said, and I still think 80. W: Yeah. Well, of course, the opponents of us HMJr: What? W: I mean, the people like McKellar would say that's right and that should be the school. HMJr: Yeah. And Regraded Unclassified 41 - 3 - W: of course, we think there should be HMJr: I think that - you made something along that sort of thing yourself once. W: Well, what I said was this, that they ought - that these agencies should be coordinated, that the line should be definitely established as to what each was supposed to do, and that NYA and CCC ought to be put together. HMJr: Yeah. That's what I read. W: But what I would like if I could get you to do 18 to recognize the valuable defense end of this thing we're doing. I've cut out everything else. HMJr: Yeah. W: And it would help me no end if I could have something from you before next Monday along that line. HMJr: Well, I tell you what I'll do. I'll talk it over with some of the people here and see what we can do. I don't know. W: Harry White has worked on this. HMJr: What's that? W: Harry White - you know, you had Harry on this. HMJr: That's right. W: And if it would be agreeable to you to let Harry work on it with me, I think I could get something put together that you would agree to. HMJr: That's all right. I'll tell Harry of this con- versation and ask him to look into it. W: Yeah. Well, thanks. HMJr: I'll do that right away. W: Thank you 80 much. Regraded Unclassified 42 - 4 - HMJr: Thank you. W: Good-bye. 43 March 16, 1942 11:04 a.m. HMJr: Harold. Harold Graves: Yes, sir. HMJr: Will you, yourself, and whoever else 1s necessary put your mind on today, this question which I was asked by Senator Brown, who's coming in to see me at ten o'clock tomorrow morning. G: Yes. HMJr: The overtime wages to be paid in a non- negotiable security. G: Uh huh. HMJr: Not a Defense Bond, but non-negotiable. G: I wonder if he means non-redeemable, too. HMJr: Non-redeemable. G: You see, our Defense Bonds are non-negotiable, but they are redeemable. HMJr: I mean non-redeemable. G: Yes. HMJr: The thing that I had in mind was that something along these lines - if we did it - that the thing would only be cashable after G: After the war. HMJr: after the war, and then in monthly pay- ments. G: Yes. HMJr: So they won't all come due at one time. G: I suppose his intention was that it would be interest-bearing. Regraded Unclassified 44 - 2 - HMJr: No, I don't think so, G: No interest. HMJr: I don't think 80, G: Yes, sir. HMJr: But he's coming in tomorrow - sometime after nine o'clock tomorrow morning - and I'd like you to talk with whoever's in the office; be- cause he's very serious; and I understand - somebody said that Mrs. Roosevelt talked to somebody - oh, yeah, over at CIO, what's that secretary's name? G: Carey. HMJr: Yes, and that he was sort of favorable to the thing. G: Yes. HMJr: So give it enough time 80 that you can - it all gets down to how the labor would feel about it. G: Yes, of course. I think I'll talk with Mr. Haas about that. HMJr: Well, he's in here with me now; but anyway, I want some kind of an answer tomorrow morning, if you please. G: Yes, sir. HMJr: Thank you. G: I'll have it. Regraded Unclassified 45 March 16, 1942 11:25 am FINANCING Present: Mr. Bell Mr. Haas Mr. Lindow Mr. Hadley Mr. Buffington Mr. Murphy H.M.JR: I am reading Goldsmith's letter. You read it. I am not going to read it. MR. HADLEY: Most of it is pretty general. H.M.JR: Well, at least somebody - this is what I have been thinking about here amongst ourselves. Bell is on the Hill. God, I don't want the Fed to know any- thing about this thing. I am looking around the room. This is the Treasury crowd. MR. LINDOW: We just ran into Mr. Bell, so he is back. MR. MURPHY: That is what I was going to say. H.M.JR: Now, as far as I am concerned-- (Mr. Bell entered the conference.) H.M.JR: Hello, Dan. How did you make out? MR. BELL O.K. H.M.JR: What happened? Regraded Unclassified 46 - 2 - MR. BELL: They adopted the amendment in the revised form we suggested. There were only about six or seven of them there. I told them that it wasn't something that we would recommend, and while we had no objection to it, we certainly didn't want to delay the bill, and finally they voted it in. H.M.JR: Was George there? MR. BELL: Yes, George was there, and the other part about combining the guaranteed and the gross public debt, I am asking them to eliminate that, because we didn't need legislation to do that, and we decided to do it. They said, "All right." H.M.JR: Well, Dan, this is the way I feel this morning, and I want to tell you fellows. I am convinced, and I don't need any - I don't know what you call it anyway, expert advice on this - that I want more excess reserves in New York to do my financing and to give me 8 lower rate. Now, I don't care how we arrive at it, see, just as long as I get what I want, but I had this feeling - you know, I blew up here one day with Bob Rouse on the phone, and they had me here by the throat. The big difference is, I want & little competition. I want 8. big enough pool there 80 if some fellow doesn't want to come in, it doesn't hurt me, and of course, I would like to keep the interest rates down, and that is where - short rates, I am talking of - where Eccles and Burgess and that whole crowd would join up against me. Now, what I am thinking of doing, and I want you fellows to think about it, and you can shoot at me now, suppos- ing we went ahead with & program that we were going to have two billion, six hundred million of bills, see, this week, with the understanding-- MR. BELL: Next week. H.M.JR: Well, yes, but I mean announce it. With the understanding that we want the Fed to keep the rate at a quarter. Now, in going over this thing with George, he was in here alone, he tells me, one, if they do that, Regraded Unclassified 47 - 3 - if I insist on that, that they will have to buy some and that will be from the reserves. Then, as program two, that we sell five hundred million dollars worth of certificates somewhere between six months and & year, depending on different things. Hadley now says six months would be at a half. Question one, again telling the Fed, if we had the bills and a half & billion - and before you came in, I cautioned the boys that this is B. Treasury conference. I don't want - until you or I say so, I don't want anything to get out to the Fed, because just as soon as it is out to the Fed, we might just as well call the press in. This is Treasury business today. If I agree to two billion two hundred million of bills, and 8. half a. billion as soon as we can do it of the certificates, would that take care of you? MR. BELL: Well, I am just in the process of revising my figures. I think our balance will probably run pretty low at the end of April on that basis. Now, I have upped my Savings Bond figures a little. We will get probably five hundred fifty million this month, and I am going to put it down five hundred million a month from there on. I don't know whether we will meet it or not. If we don't, I will fall short. You see, what we had in April was a billion and a half dollars. Now, the eight hundred fifty million dollars in bills won't get in until you complete the cycle, which will be June. We have got time to think about it. I was thinking more in the neighborhood of a billion dollars for this short certificate, a six months and a nine months or a six months and 8 twelve months, two issues. H.M.JR: Or I might make a deal with you. I am doing this thing so we can have 8. little - I have got to make progress, and I want you to know. Unless some- thing happens, I am going to leave here on the twenty- first for a week in Arizona. MR. BELL: And I take it you will be back by the sixth or seventh of April? Regraded Unclassified 48 - 4 - H.M.JR: Oh, I will be back the thirtieth or thirty-first. MR. BELL: That is when we ought to do any financing that we have got. H.M.JR: I will be back the thirtieth or thirty- first. MR. SELL: All you need to do now is make & decision on the bills. The other is tentative. H.M.JR: Well, I would like to - Dan, you said a billion. I don't like a billion, but why couldn't you maybe do five hundred million, let's say, on the second of April, and then maybe another five hundred million around the twenty-third, do it in two bites. MR. BELL: It is all right. H.M.JR: The reason for that, if it is 8 half - he (Hadley) says today we can do a half. My feeling would be to do five hundred million for a half and feel our way, and then let's say we did that on the second, and then come along-- MR. BELL: You don't have to do it on the second. You could do it on Monday, the sixth or seventh, and then on the twenty-third or the twentieth or something like that. H.M.JR: Then you could do it again. But having an agreement with the Fed that they will keep our rate at a quarter, and the other rate at a half - I mean, there is no use kidding them, saying that we want them to put some reserves in. Now, we watch the thing and see that - I an not prepared to do any more until I get more elbow room in New York, see. MR. BELL: I think that will work out. H.M.JR: I mean, I want more elbow room. Now, I don't know whether the General Motors and these other people will buy these certificates or not. Incidentally, 49 - 5 - the certificates are all going to fall due on the tax date. MR. BELL: I wonder if they should. That is what we want to do, is roll them over through cash operations, and they might fall on a tax payment period, because you are taking a lot of cash out of the market. H.M.JR: You mean you would rather stick to your tax certificate? MR. BELL: Yes, I would rather stick to other maturities on the tax dates. H.M.JR: Now mind you, I an not laying down any law. I am just saying how I feel and I am starting with two principles. I want more reserves, and I want to keep the short interest rates where they are. Now, the way that - to keep the interest rates as they are is to get the Fed to buy some, see. What? Now, I know that this wouldn't - the part that won't please Eccles or Burgess is the fact I want to keep the interest rates down. MR. BELL: I am not sure that is right, but I don't think it makes much difference. H.M.JR: But the thing that you can't convince me of is that you can have the short interest rates rise and keep the longer rates down. MR. BELL: I think they can rise, but I don't know how far. I think they have risen. I wouldn't mind if they went in to the low thirties, but I think putting out this six months maturity with 8. half percent sort of puts a ceiling on your bills. They have got to be some place below that unless this goes to the discount. I think this is & good move, putting out this half percent security. H.M.JR: Yes, I think it is a good move. I think it will put & ceiling on your bills. MR. LINDOW: Well, if Fed bought it, it wouldn't go to discount. 50 - 6 - H.M.JR: I don't hear you. MR. LINDOW: If there was any weakness in the cer- tificate you could keep it from going to a discount. MR. BELL: I think they would buy it. I an not 80 sure they are right. I think we ought to have - what we want really is a better distribution of reserves in New York, and I think maybe this shorter security will help us get that better distribution, because I think this is the type of security that people like, the Guarenty would want, but I don't think it makes really 8. lot of difference, Mr. Secretary, because I think they are going to put in a lot of reserves before this year is over. They have got to. H.M.JR: Well, the way I feel, I would like to play this thing out with Reserve playing the game my way, and try it out. MR. BELL: I think they will play it your way. H.M.JR: And see what happens. And the other thing that I pointed out, nobody, for instance, has gone to General Motors or these big corporations, if they have surplus cash - I don't know - and have said that - "Well, gentlemen, what kind of securities do you want? Are you interested in a sixty, five years, or twenty years? What do you want?" MR. BELL: There was some indication in 8. memorandum from the Federal Reserve of Philadelphia that they had talked to corporations in that district, and had got some indication that they would be interested. Is that right? H.M.JR: Is that the only place they have talked? MR. BELL: That is the only place that has written & memorandum. Williams did that. H.M.JR: Well, it is very nice to sit back in your chair and have Burgess say "It is our responsibility, this 51 - 7 - money is with us, and we will tell the manufacturers what to do," but the Treasurer or the Comptroller of these big corporations, they will decide what they are going to do. They are not going to let the banks decide. MR. BELL: Well, I wonder if before we issue this Mr. Buffington couldn't get busy writing up something, a description of this security, and maybe talking with a few large concerns, and then when we do put it out, we will see that they get the memorandum describing it. MR. BUFFINGTON: Dan, what is wrong with my earlier suggestion, if you picked five corporations and just went to them and talked to them? It seems to me you might get it. MR. BELL: Nothing at all. You might even get ten of the largest. MR. BUFFINGTON: To talk with them and see what they want H.M.JR: Well, I will come back to you in & minute. Hold your thought a minute. What do you think about what I have been saying for the last ten or fifteen min- utes? MR. BUFFINGTON: Sounds all right to me. H.M.JR: Does that sound all right? MR. BUFFINGTON: Yes. H.M.JR: George, I know how you feel. Henry? MR. MURPHY: I think it sounds fine. MR. LINDOW: I am in full agreement. MR. HADLEY: It sounds all right to me. 52 - 8 - H.M.JR: Well, then I will tell you what let's do. The thing is important. I want to let everybody think about it and come back here at three fifteen, see, because this is too important. This is terribly impor- tant. And then I think that if George could go to New York-- - MR. BELL: And possibly Chicago. H.M.JR: And possibly Chicago, and get in whoever the comptrollers are of these corporations. Take & con- cern, for instance, like Armour. I don't know which of these concerns are heavy, you see, with money, and which aren't. Now, Armour or Swift or Cudahy may be in to the banks. International House, somebody like that, "God, we are just sitting back here and just about ready to borrow. Who gave you this cock-and-bull story that we were interested in a twenty year bond?" they may say. MR. BELL: Not a twenty year bond. MR. BUFFINGTON: Five year. H.M.JR: No, no, twenty. I thought you had B. twenty year two and a half. MR. BELL: Yes, but those are not the type of people that we want to invest in twenty year bonds. H.M.JR: Oh, the five year? MR. BELL The five year or the certificate. MR. HAAS: A sixty day one. H.M.JR: Well, anyway, now if he was going to do that he ought to do that this week. MR. BELL: Yes, I should think SO. H.M.JR: This week and let me know before I leave. MR. BELL: You are leaving when? H.M.JR: I hope to leave next Saturday afternoon. MR. BELL: This coming Saturday? Regraded Unclassified - 9 - 53 H.M.JR: Yes, 80 I think what we will do is have another meeting this afternoon and try to get this straight- end out with the Fed tomorrow, see, and then George can spend Wednesday and Thursday - well, the rest of the week up until Friday night going to New York and Chicago. I don't think he will have to go beyond New York. I don't think he will have to go beyond New York because there are 80 many - I think what - I don't think you will have to go to Chicago, George, do you? MR. BUFFINGTON: Well, I thought you would get two different points of view. Certainly the Chicago point of view is different than New York. H.M.JR: Well, I would like you back here Saturday morning so we can settle this thing before I leave. MR. BUPFINGTON: All right sir. H.M.JR: Then would you want to do the bill thing until we heard about the certificates? MR. BELL: Well, we don't have to do the bill thing, but Wednesday we are going to have some new money on bills. H.M.JR: Can't you just do one? MR. BELL: We can do the hundred and fifty roll over on Wednesday. Now, you do the first bill on April one if you would like to. H.M.JR: I would like to have & statement prepared, you see, and I would like to - when you announce the thing, we will do the bills and certificates together if we are going to do them. MR. BELL: Well, you would be announcing it on April 1, and you would have a certificate issued the following week. H.M.JR: But if we are going to do the bills and cer- tificates, I think we ought to have a statement explaining why and all that. MR. BELL: All right, we can have that. H.M.JR: And if George could be back here Friday morning rather than Saturday morning it wouldn't crowd us 80 terribly, you see. Regraded Unclassified - 10 - 54 MR. BUFFINGTON: I see. If you would rather I would go to New York and then come back here-- H.M.JR: Well, think about it. But the thing is, I don't want to rush you people. You can come back here this afternoon and then if you gentlemen agree with me then we will have another meeting with Mr. Eccles. What? MR. BELL: That is all right. H.M.JR: And I don't want George to start out until he sees Eccles. Well, let's see, that is Tuesday. One day in New York, and one day in Chicago, will that be enough? MR. BUFFINGTON: I think that is sufficient. It will give you a short day in Chicago because the train leaves at 3:20. H.M.JR: Yes, that is impossible. You can be back Saturday. You can phone in and simply say this looks all right and I think somebody ought to be working on the statement. This isn't the kind of statement we will need. MR. BELL: Oh,no. H.M.JR: I think if you get back by Saturday then we can clear this thing. It will give you one day in New York and two days out in Chicago. But you see the banks think that - I think I am right, that the banks like to kid themselves with the thing, but the comptroller of the company, treasurer of the company, he is going to decide what he is going to do, and his board of directors, aren't they? MR. BUFFINGTON: I would think 80. H.M.JR: And I think that-- MR. BELL: They can tell you whether or not they are interested in short securities and the rate up to a half. Regraded Unclassified - 11 - 55 They can tell you that. And then there is some indication that after the Treasury bill rates go to a quarter the corporations are coming back into the market. H.M.JR: I think the easiest way to do it would be to ask Governor Young of Chicago to arrange for you to see these people. He could do it in advance and have the people ready and they could do the same thing in New York. You wouldn' be around ringing door bells then. You can see them at the Fed, and I think you could let the Governors sit in with you, see. What? MR. BELL: Sure. H.M.JR: 1 mean, you take Governor Young out in Chicago, you can say, Look, I am coming out here and I want to see the comptrollers of half B. dozen corporations who will decide how their money is to be invested. We have got a suggestion we would like to talk to them about. Would you arrange so I can see three in the morning and three in the afternoon?" MR. BELL: Do you want Bob Rouse with him in New York? H.M.JR: Somebody. MR. BELL: Maybe they can get them to come to the bank in which case it would save a lot of time running around. H.M.JR: Oh, I would invite them to the bank. It is the kind of thing I used to do when I was young. I remember I stopped once in Chicago and they brought in & lot of people all day long and I learned 8 lot. What do you think? MR. BELL: Fine. H.M.JR: You had an easy week last week, and this week you work. Regraded Unclassified - 12 - 56 MR. BUFFINGTON: Very easy. that is fine. I was complaining about it. MR. BELL: Don't ever complain. It always corrects itself. H.M.JR: It was easy as far as I was concerned. Well, what do you think, Dan? I think we have made a little progress don't you? MR. BELL: It is O.K. May I mention one thing? We had about a twenty million dollar balance Saturday night in the Federal Reserve bank and we might have an overdraft tonight, over and above what I have used. H.M.JR: What is your working balance? MR. BELL: Two billion five, four or five. H.M.JR: But you are just short at the Fed? MR. BELL: We are short at the Fed, yes. we let that run down. Now tonight we may have an overdraft, in which case I will sell one day certificates to the street. Is 8 quarter of one percent all right? H.M.JR: 1 don't know. MR. BELL: It will cost us about six dollars eighty cents & million. Well, it is about as low as we thought we ought to go and George said he thought it was-- H.M.JR: You can clear it with George's crowd. If you and George and Hadley and Buffington - here, take this group. Let them settle it. MR. BELL: All right. I think we are all right. I hate to go down-- H.M.JR: You have got them fixed, have you? MR. BELL: No, I just talked to George and Murphy. Regraded Unclassified 57 - 13 - H.M.JR: They çan go into your room right now and settle it. MR. BELL: We thought about going down to an eighth and then taking thirty-one percent of it in taxes would be pretty bad. H.M.JR: Why not let them go into your room night now? Regraded Unclassified 60 March 16, 1942 2:14 p.m. HMJr: Hello. Clifton Mack: Yes, sir. HMJr: Clif. M: Yes. HMJr: On this business of spending four and a quarter million dollars up in Elmira, it sounds like a lot of money to me. M: Indeed it does. They got those figures from the War Department. I talked with Reynolde Saturday noontime, and he told me that - I sald, "That seeme to me like a lot of money," and I thought sure that you would feel like that about it, too; and he said that he felt that he could do a lot better Job than that - than the Army is doing. He feels they're building - putting too much expense into their warehouses. HMJr: Well, let me just interrupt you a minute. M: Yes. HMJr: Because you sent it over - four and a quarter - for me to okay. Now, this 16 a suggestion. Inasmuch 88 they've evidently appointed this General Somervell, has he approved this plan? M: We're having a meeting with Defense Transportation and Somervell - I mean representatives of Somer- vell's office - as soon 88 we have approval to go ahead. HMJr: Well, why shouldn't he provide us the space. Where'd you get the four and & quarter million from? M: That's from the War Department. That's from the War Department. HMJr: Well, why do I have to approve 1t? Regraded Unclassified 61 - 2 - M: Well, this is the story. The Lend-Lease organization had an appropriation of about a hundred millions of dollars for building stores and warehouses and assembly plants for Lend-Lease, and they estimated that about forty millions of that - I think it was forty millions, in that neighborhood - would be re- quired for storing supplies purchased by Treasury Procurement, 80 that we went to them awhile ago and told them that we needed a place to store materials and they said, "Well, we've got the money for you and we've earmarked this for Treasury Procurement; and, as a matter of fact, they made an allotment of twenty millions of dollars to Treasury Procurement for building warehouses. HMJr: Well, I still say, and before I want to okay it M: Yes. HMJr: In the first place, I don't 800 why I have to okay it; but if I do, I'd want General Somer- vell M: Yes. HMJr: I'd want something in writing from him that this 18 what he wants. M: Well, very good. HMJr: I don't like to hold you up, but he's just been appointed to this, and I think we ought to give him & chance. M: Yes. Well, all right, we'll do that. HMJr: I think he ought - now, would you want me to send this back to you? M: If you will, and we'll take it up with him and then get you the story after we talk with him. HMJr: Yeah. I think he ought to write us something and say that this is what he wants. Now, he Regraded Unclassified 62 - 3 - might - you know, he heen't had a chance to get going. He may approve this; on the other hand, he may say, "No, I want to do it some other way.' M: Well, very good. Very good, that's 80, And by all means - the purpose of the meeting that we were lining up was to make sure that we weren't conflicting with anything that they were doing. HMJr: Well, then, before I sign I want General Somer- vell to sign first. M: Yes, all right. Now, on the Russian program, Loeb and the Russian representative and the War Production Board people are having & meeting right now over at War Production Board on each of those items that are tight HMJr: Good. M: to find out one, whether or not there are any of those particular items anywhere in the country that could be applied to those orders. HMJr: Yeah. M: I told them that's what you wanted, and then this question of precedence can be easily settled if we know. HMJr: Well, that's the result of my calling you Friday night. M: Yes. HMJr: Calling you Friday night. M: Yes, that's it. HMJr: Good. Well, now, fine; and let me know, and I'll send this back to you right away. M: Very good. Thank you, sir. HMJr: Thank you. Regraded Unclassified 63 March 16, 1942 3:25 p.m. FINANCING Present: Mr. Haas Mr. Murphy Mr. Lindow Mr. Hadley Mr. Buffington Mr. Viner Mr. Bell H.M.JR: Sorry to keep you all waiting, but that was Ambassador Admiral Standley on his way to Russia. He is quite an old boy. MR. BELL: It was a lucky break. H.M.JR: Yes. He has got a lot of the old salt. MR. BELL: He has been working almost continuously since he retired, just doing things like this. H.M.JR: He said everybody should make an all out effort. MR. BELL: The Treasury had him on something ever since he was there. H.M.JR: Well, gentlemen, I take it - should I read this now? MR. BELL: It isn't very long. It is just what he suggested the other day. Regraded Unclassified 64 - 2 - H.M.JR: All right. Well, Jake, I didn't see you this morning. Have the boys told you what we were talk- ing about this morning? MR. BELL: No, I haven't. H.M.JR: Well, what did you do while you were waiting for me, tell stories? (Facetiously) He doesn't know? MR. BELL: Not unless somebody told him. I just thought just before lunch if you wanted Jake in and I asked Fitzgerald to check on that, and I never thought of it until one o'clock. I could have told him since, but I didn't. MR. VINER: You mean about this? H.M.JR: No. It is too bad to take up Jake's time and mine, but I am going to do it because it is worth doing. I was feeling around this morning, and the way I feel - and I asked everybody to think it over and come back - is that the thing that I am interested in, and I said that this that I was saying today was to stay within the Treasury, I told the other people. As soon as we tell the Fed it gets right out on the street. I am interested in increasing the reserves in New York. I am interested in keeping short interest rates down. I amy be wrong, but I would like to try it. With that in mind to feel my way, I asked them this morning to think about - I thought they would tell it to you - around the first of April starting to sell two hundred million dollars worth of bills a week and then selling five hundred million dollars' worth of certificates, most likely six months at B. half & percent, and then to wait and see what happened. But tomor- row we will send Buffington out to New York and Chicago and talk at the Federal Reserve banks to a number of leading business men, or rather their comptrollers, and ask them what they would be interested in, and are they interested in, and have they any surpluses. Nobody has done that with the exception of sort of hit or miss in Philadelphia. So we sit around here and say this in designed for what businesses want, but no one has talked Regraded Unclassified 65 - 3 - to businesses to see have they idle funds and if they have them, do they want to invest them in the United States Government, 80 that we don't sit here and day-dream and draw pictures like Walt Disney. Buffington is going to go out and see the people. And then I asked the people to come back and think about it and if they thought all right, take it up with the Fed and see if we could get them to agree, the idea being that if we said for bills to hold them at a quarter of one percent and the certificates at a half of one percent, that the Fed would have to hold them at that rate and in doing that they most likely would have to pump some new money into New York. Isn't that about what I said this morning? MR. BELL: Yes. H.M.JR: And that is what we are talking about, and everybody seemed to think it was all right as a step. Now, I don't expect you to answer that now, having heard about it for the first time. MR. VINER: I would like to see-- H.M.JR: What? MR. VINER: I would like to see those two steps taken, but I am not enthusiastic about the quarter-of-a-percent thing. I would have to think about it more. H.M.JR: Well, it is not my fault that you weren't informed. MR. VINER: No, that is all right. H.M.JR: I do the best I can. Well, where are you, Dan? Let's go around the room. MR. BELL: I am 8 little worried about the quarter. Regraded Unclassified 66 4 I think if you would say hold it to a quarter and you don't get any of these business funds, the Federal is going to say to you, "Well, it is your fault because you held it at a quarter." I would rather see 8. range down there, even if you want to put it below a quarter, be- tween one-fifth and three tenths or thirty-five hundredths, something like that, say between that range that the bill rate shall remain and they shall support it, and the nearer it gets to the thirty-five, the more vigorously they will support it. One of the purposes of this is to get in the business funds, and I don't believe they will come in at less than B. quarter. They might come in at et quarter, between a quarter and three tenths. MR. HAAS: Of course you have got the half. H.M.JR: Excuse me, you can find that out, George (Buffington), and also don't forget to try them out on that five-year thing. MR. BUFFINGTON: I raised that question. There seemed to be some difference of opinion as to whether we should go that far with them at this time. H.M.JR: Oh, yes. There is no use going out and just taking it - I am not going to send you out unless you show them the five-year and talk to them about the bills and the certificates. After all, all you have got to do is read Goldsmith's letter and you have the plan anyway. It is no secret. I sent for the letter this morning. There is no secret about it. He was very careful to say the Treasury hadn't agreed to it, but then he goes ahead in the greatest detail telling what the Open Market Committee's plan is so if anybody isn't posted on what the Open Market Committee wants, just tell them to subscribe to Ted Goldsmith's letter. MR. BELL: He came in and told me about it. I told him we had no comment whatever, one way or the other. We didn't deny or confirm. H.M.JR: You are getting cagey, are you? Regraded Unclassified 67 - 5 - MR. BELL: Yes. MR. HADLEY: I an a little bit leery about trying to support the bills at any given rate on the first attempt at a certificate. I think the support should be placed, if you are getting down to that detail, on the certificate and let the bills fall where they will. I think it is mechanically hard to support an issue that you bid for. H.M.JR: Anything else? MR. HADLEY: That is all. MR. LINDOW: I am in favor of the program as you outlined it. I think if we set a range for the bills, the tendency for the Fed would be to support just at the top and all you have done is changed the twenty-five to thirty or thirty-five. If I thought the range would be flexibly followed, I think it would have merit, but I am very doubtful that it would be. H.M.JR: Henry? MR. MURPHY: I am for the program as you outlined it. I don't see any difficulty at all in the mechanical aspect of supporting the bills. All the Federal has to do is to put in a bid at twenty-five or twenty-six and buy them with 8 smile. H.M.JR: But it with 8 what? MR. MURPHY: Buy it with B. smile. MR. VINER: You have the authority now. MR. MURPHY: They won't take them all. I would say for every hundred million we increased the bills if they had a billion at twenty-five or twenty-six, they won't take more than half of them at the most; and 1 would be very much surprised if they took that much. Of course not from us, from the market, but all they have to do is put their bid in the open market. H.M.JR: Buffington? Regraded Unclassified 68 - 6 - MR. BUFFINGTON: I can't believe that these corpora- tions are going to be particularly interested in bills unless you get them up somewhat above a quarter. I wouldn't think that would be enough of & return to attract them, although I think they would be interested in the certifi- cates. H.M.JR: Well, you will know more after you talk to them. MR. BUFFINGTON: Yes, sir. H.M.JR: George? MR. HAAS: I like the program as you outlined it. I think you have to keep in mind that you are not making a public announcement on any rate. It is just between yourself and the Federal Reserve, so that it - I don't see any danger in that at all. H.M.JR: Well, Dan, this is what I - have you got a little time now? MR. BELL: Yes. H.M.JR: Could the boys go into your room? MR. BELL: Yes, sir. H.M.JR: This is what I would like. Just keep this in mind. I want to get more excess reserves into New York, see. I would like to keep short money rates within the approximate range that they are now. MR. BELL: That is all right. H.M.JR: Now, with those two objectives in mind, work the thing out the best you can and arrange to see the Fed tomorrow morning, will you? MR. BELL: Do you want us to see the Fed? You don't want to see them? Regraded Unclassified 69 - 7 - H.M.JR: I don't want to see them. MR. BELL: O.K. H.M.JR: Keeping those two objectives. That is fair isn't it, Jack, as long as I feel that way? That doesn't tie their hands too much. MR. VINER: They won't agree. H.M.JR: Well, I don't care. VR. VINER: Because they will say that the chief merit in adding to the bills will be to draw funds into New York from country banks and businessmen, and that that - they won't buy it at 8. quarter. They might buy it at point three, and I would like to know what is the rate at which there is 8. big pile of funds. There is some rate and it is not very high at which these country funds would start piling in to New York, and what I would like to do is to experiment until you have found that rate at which they will carry a big load, which will do the two things you want. It will add to the New York reserves and it will increase the amount of bills out in the country. Now, it may be that point twenty-five will do it. I think point thirty-five would do it. I feel pretty confident of that. H.M.JR: Well, with the instructions I am giving you, I am not giving you a rate. MR. BELL: He said approximately. MR. VINER: Is point thirty-five approximate? You might have to go that high. MR. BELL: Well, I don't know that that much of 8 range, but the Secretary said approximately the present rates which is twenty-two for the present bills up to whatever you say is an approximate range of that. MR. VINER: I wouldn't go above point thirty-five now. Regraded Unclassified 70 - 8 - H.M.JR: Well, I am saying approximate. I am not going to write the ticket. If it would carry out my philosophy, it would be all ri ght; and as to the details and whether it is point three or - I mean, argue it out. These fellows may be able to convince you on point three or - I don't know. MR. VINER: I don't pretend to know, but I feel confident it is somewhere higher than pointitwenty-five. H.M.JR: You may be right. MR. VINER: I feel, however, there is a big bunch of money that would buy bills. H.M.JR: I think after Buffington has seen a half dozen corporations in New York and Chicago, we will know better. MR. VINER: Particularly if you try to sell the bills, if you don't merely stand there ready to accept them, but if you tell them you would like them to buy. H.M.JR: Well, Dan, do you want any more in the way of-- MR. BELL: No, that is enough. I think we can work out something. H.M.JR: You can do it right now? Can you take this gang into your room? MR. BELL: Yes, sir. And tomorrow we will arrange the meeting with Eccles. H.M.JR: All right. Regraded Unclassified 71 The Bank National City New ESTABLISHED IBIE New York March 14, 1942. OFFICE OF THE VICE CHAIRMAN or THE BOARD Dear Dan: In accordance with the Secretary's suggestion I am enclosing some ideas for the next step in Treasury financing. These are of necessity personal, though I think they are on lines which would meet the approval of my associates. If I have some more ideas I will send them along. Please thank the secretary for taking his time on a busy morning to talk with us. We are on call at any time. Sincerely yours, Randogle Honorable Daniel W. Bell, Undersecretary of the Treasury, Washington, D. C. WRB.H Regraded Unclassified 72 TENTATIVE SUGGESTIONS FOR TREASURY FINANCING with respect to the short market: (1) Increase the bill issues immediately to $200,000,000 B week. (2) In April sell $750,000,000 to $1,000,000,000 of one year cartlileates of indebtedness without rights. These two steps will help distribute excess reserves more evenly among banks as they will provide B means of employing large excesses in some banks. They will elso provide a security suitable for corporations, and in making the offering a definite sales effort should NA undertaken to reach these buyers, by sending them subscription blanks, working through the banks, leaving books open two or three days, etc. With respect to the long markets (1) The next step is to start the Federal Reserve System and the banks in a more active campaign for the sale of F. and G. bonds. Up to this time the emphasis has properly been on the sale of E bonds through the payroll deduction plan; that has been more important because it draws funds from current income. That campaign is now sufficiently under way so that 5. second campaign through the banks to put idle funds into F. and G. bonds can now be started without interfering with or con- fusing the first campaign. While substantial sales of these bonds have been made they have been largely to trust accounts and investors ready to take the initiative. Additional amounts can be sold through & more aggressive campaign. The Federal reserve and banks can do this more effectively than any other agency. (2) In addition there should be a regular market issue of from Regraded Unclassified 73 - 2 - 15 to 18 years, 2 1/2 per cent, to keepthat market supplied with the bonds of this sort wanted by institutions. In selling this issue there might be a further extension of the plan of full allotment to those who will take delivery of registered bonds 90 days after date of sale. These might be allotted 100 per cent up to $25,000, and for these buyers the issue might well be held open for three days or a weak. These proposals are a move in the direction of the objectives suggested by the Federal reserve but without committing the Treasury to launching on a large scale a series of innovations concerning which the banks and market have a good deal of question. These moves should, however, accumulate experience which will be useful in deciding the next step, and they will further the sales campaign in which the Treasury, the Federal reserve, and the banks work together. Regraded Unclassified TREASURY DEPARTMENT 74 INTER OFFICE COMMUNICATION DATE March 16, 1942 TO FROM Mr. Hase Secretary WA Morgenthau Subject: Proposed Agreement with the Federal Reserve System At the meeting in your office with the Federal Reserve people on Thursday afternoon, it was suggested, as an imme- diate program, that: (1) The outstanding amount of Treasury bills should be increased to $2.6 billions, or more: (2) A substantial amount of coupon certificates of indebtedness of 6 months' or one year's maturity (without "rights" values) should be issued in the near future; and (3) The Federal Reserve System should agree to hold the prices and yields of long-term Treasury bonds within some (as yet un- specified) limits. Mr. Sproul said in the subsequent discussion that, if the pro- gram were adopted, he believed that the Federal Open Market Committee would commence to accumulate a portfolio of Treas- ary bills at about 0.30 percent end would press its purchases more vigorously thereafter as the rate advanced. No formal commitment in this connection was proposed, however. No action WE.8 contemplated in the immediate program just out- lined in connection with the proposed new non-market securi- ties, it being suggested that this matter be postponed for more mature consideration. I. Short-term Securities and Excess Reserves The courses of action outlined in the above proposal, if taken alone, would be very bearish in their effect on the market. The increase in bills and in certificates would tend to increase the short-term rate of interest fairly promptly; Regraded Unclassified 75 Secretary Morgenthau - 2 while the auggested agreement with respect to holding the long-term issues within 8. given range would not result in any support for the long-term rate, either directly or through the oreation of new exoess reserves, until the rate had risen considerably above its present level -- that 18, until pricee had fallen considerably. (The support levels auggested for the long-term issues are considerably below present market prices.) The Treasury and the Federal Reserve System, if they should embark upon a program such as that suggested, would be trying a bold experiment -- that of reising short-term rates without effecting long-term rates. Such an experiment right be successful, or it might fail. In 1937, it failed. If it failed this time, it might be possible to reverse it successfully, or it might not be. None of these thinge can be known without trying the experiment. Under these circum- stances - with BO little to gain and 80 much to lose - it 16 submitted that the experiment 1s not worth trying. With this in view, it 18 suggested that the program be amended by providing that the outstanding volume of excess reserves should be increased 80 as to stabilize the bill rate at around 1/4 percent. The necessary increase in excess re- serves could be furnished by open-market operations conducted through the medium of the increased supply of certificates and bills which would be provided by the program itself, which supply should be made adequate for the operations. (It 18 Bug- gested, however, that the initial 1ssue of certificates be confined to $500 millions of nine-months or one-year 1/2's. Such an initial issue could be followed by an inorease in the outstanding amount of bills and, perhaps, thereafter by fur- ther issues of certificates in such a manner as to stabilize the 90-day rate at about 1/4 percent and the one-year rate at about 1/2 percent.) The program, a.e 80 amended, would differ from that pre- viously described only in that it would not provide for sub- stantial increases in short rates -- 8. step which we do not believe can be undertaken without endangering the position of long rates also. Regraded Unclassified 76 Secretary Morgenthau - 3 II. Proposed Range of Support for Long-term Issues No definite conclusion W&B reached at the Thursday meet- ing with respect to the exact range of support to be agreed upon for the long-term issues. There are two schools of thought on this matter, divided primarily by the question of whether it would be advisable to allow the securities to fall below par. The range of support most commonly advocated by those who would not mind seeing the securities fall below par 18 2.44-2.54 percent (99-5/32 to 101-4/32) for the 2-1/2's of 1967-72.* We disagree with this point of view and believe that if any long securities should be allowed to go below par it might unsettle the whole market. The question of "pegging" ie really not involved, as 8. peg 18 Just as much of B. peg at 99-5/32 as at 100 -- and may be harder to hold. In order to evoid the appearance of pegging, however -- which is probably greater at per than at any other price - we should prefer that the bottom side of the peg be a little above par. We suggest, therefore, a range of 2.40-2.48 percent (100-12/32 to 101-29/32) for the 2-1/2's of 1967-72. It was generally agreed at the meeting on Thursday with the Federal Reserve representatives that the 2-1/2's of 1956-58 should also be included in the agreement, in order to provide a broader base. We should suggest in the case of this issue a range of from 2.20-2.30 percent (102-12/32 to 103-19/32). III. Role of Excess Reserves in the Present Situation From a. broad point of view, the problem of excess re- serves boils down to the question of whether the Treasury or the banking system shall govern the terms on which war * The 2-1/2's of 1967-72 are now quoted at 100-17/32 to yield 2.47 percent. The 2-1/2's of 1956-58 are now quoted at 102-27/32 to yield 2.26 percent. Regraded Unclassified 77 Secretary Morgenthau - 4 financing will be conducted. This 1s more than a mere matter of rates. If excess reserves are abundant, the tone of the market will be good and the banking system will willingly fall in line with Treasury policy. If excess reserves are scarce, the tone of the market will be poor, the success or failure of new lssues will always be a matter of doubt, and the Treasury will be constantly subject to the censorship of the banking system -- on matters of general policy as well B.B of rates. The question may broadly be compared with that of whether the price and priorities of, say, copper should be determined by the Government or by B. trade association. The matter of inflation 16 not involved. The degree of inflation will be determined entirely upon other grounds. Regraded Unclassified 78 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 16, 1942 TO Secretary Morgenthau FROM Mr. Hage Subject: Notes on Meeting with Mr. Burgess and Mr. Stonier Mr. Burgess begen his discussion by saying that Chairman Ecoles had discussed Treasury financing proposals with the American Bankers Association people in New York few days ago and the present visit to the Treasury was oconsioned by the desire to explain the banking reactions 16 some of Chairman Eccles' ideas. A summary of the aints made by Mr. Burgess and Mr. Stonier follows: 1. The two new tap securities are undesirable at this time, for the following reasons: a. The announcement of their issuance might have bad effects. Banks are incurring heavy expenses in handling the savings bond program and they are willing and happy to be making this contribution, but it would look like discrimination if banks were asked to sell attractive nonmarketable securities which they themselves could not buy. Why should all investors other than banks be provided with non-risk obligations while banks are invited to participate only in those securities involving market risks? Worse than that, the natural psychology of a banker is to went his deposits to increase; and it would be fighting this psychology to ask banks to persuade their customers to withdraw deposits in order to purchase the new tap securities. b. It 18 unnecessary to offer demand obligations in order to tap the particular funds involved. This is true of both short-term funds and long-term funds. An increase in the supply of short-term securities, accompanied by some increase in rate, would make short-term marketable securities attractive again to corporations, more than half of which would Regraded Unclassified 79 Secretary Morgenthau - 2 definitely prefer negotiable securities anyway. This preference would be based on the instant liquidity provided by marketable securities and on a feeling that Treasury pressure might pre- vent the cashing in of demand nonmarketable obli- gations. For long-term funds most investors do not worry about market fluctuations. Insurance companies and endowments generally buy long-term securities for permanent holdings and for income and are not concerned with fluctuations in the value of principal. In short, marketable securities are attractive enough to tap these long-term funds. Moreover, there will be no serious banking prob- lems raised by bank subscriptions to long-term issues, inasmuch as bank willingness to accept such issues has declined strongly in recent weeks. N. No harm will have been done if it should turn out later that marketable securities have not fully succeeded in attracting the funds for which the new nonmarketable securities were proposed; and such issues may then be offered with the conviction that they are necessary in spite of certain arvu- ments against them. ?. It 1s desirable to increase the supply of bills and to offer 2 coupon certificate of indebtedness without "rights" yelue. An increase in the supply of short-term issues, willah would probably be accompanied by an increase in the short-term rate, would not only serve to attract the funds of corporations, as suggested above, but would be helpful In providing greater fluidity in the banking system. It would probably not hurt the long-term rate if the bill rate rose to as high as 1/2 of 1 percent. 3. There would probably be no serious market repercussions If the 2-1/2's of 1967-72 were to drop to 98 or 99. The basic rate of 2-1/2 percent for long-term money can probably be held for a long time. Bankers generally are not looking for higher rates on long-term money, Regraded Unclassified 80 Secretary Morgenthau - 3 Comments The general outline of the program suggested by Mr. Burgess and Mr. Stonier is not inconsistent with the immediate program described in the memorandum we prepared for you in accordance with your request at the time of the meeting with the Federal Reserve people in your office last Thursday afternoon. There 13 agreement on the desirability of providing an increase in the supply of short-term securities, although there is et serious question raised about whether short-term rates should be increased, and certainly 8.8 to whether the bill rate should rise to 8,5 much 2.8 1/2 of 1 percent. The suggestion to post- pone the issuance of the proposed new nonmarketable securities appears to have some merit especially since it would certainly be to the Treasury's advantage 1f marketable securities could be used to tap the funds involved rather than increase the amount of demand obligations outstanding. The question of whether the 2-1/2's of 1967-72 should be vermitted to drop be- low par is one on which there is considerable disagreement, and we should prefer that the long-run problem of excess reserves be handled in such manner that this issue does not go below par. Regraded Unclassified TREASURY DEPARTMENT 81 INTER OFFICE COMMUNICATION DATE March 16, 1942 TO Secretary Morgenthau FROM H. D. White HDW one of the The question was asked of you by/the Ways and Means Com- mittee as to whether the increased supply of demand obli gations by the Government might not some day prove embarrassing to you because of the possibility that a large portion of them might be suddenly presented for redemption. Any such concerted demand for repayment would be the result of an emergency situation -- such as possibly an unforeseen series of serious military reverses, or an attempt on the part of bank- Ing and other conservative interests to discredit the Administra- tionx despite the immediate effects on their portfolios, or frighten away contemplated legislation, or discourage continua- tion of war effort. Such developments are special emergencies and protective or correction measures are to be regarded as special emergency messures, You will remember that you and the President have emergency powers. If no change in our monetary legislation is made with reference to the matters below, you could, with the approval of the President, muster at very short notice nearly $7 billion of cosh in addition to the working balance in the General Fund with which to meet any such demand. This could be done as follows: 1. Issue $1.8 billion of silver certificates on the basis of the silver bullion in the General Fund. 2. Issue $3 billion of United States notes -- so-called Thomas Amendment currency. 3. Use the more than $1.8 billion of unallocated funds in the Stabilization Fund. This total of nearly 7 billion does not exhaust the possi- bilities. Again bearing in mind that if very large sums are needed the situation would be an emergency and would justify the use of every resource of the Treasury, there would still be open to you the following additional possibilities: 1. A reduction in the gold content of the dollar by direc- tion of the President which would add more than $4.1 billion to the General Fund. Regraded Unclassified 82 - 2 - 2. A reduction in the silver content of the silver dollar in proportion to the revaluation of the gold dollar which would permit the issue of an additional $3.7 billion in silver certifi- cates, It is in the light of such an emergency necessitating the use of very large sums in cash by the Treasury that the above monetary powers must be evaluated, and it is precisely because of their usefulness in an emergency that I strongly urge that no attempt be made to modify or repeal the legislation granting these powers to you and to the President, In addition to this total of nearly $15 billion that could be secured by the Treasury under the monetary powers of the Act of May 12, 1933 and the Act of January 31, 1934, the Second War Fowers Bill would permit the direct purchase of Government obli- Sations by the Federal Reserve Banks. As amended by the House, the aggregate amount of such securities the Federal Reserve Banks could hold is limited to $5 billion. This would still enable the Treasury to sell $2.5 billion of securities directly to the Federal Reserve Banks (provided they agreed to buy them.) Without the House limitation, the Federal Reserve Banks now have sufficient reserve to acquire 8. minimum of $33 billion more in Government obligations. However, the purchase of Government obligations by the Federal Reserve Banks can take place only through the Open Market Committee. (Another source of funds that it might be possible to tap without legislation in an emergency are the deposits and earmarked gold of the @overnments and central banks of blocked countries -- about $2.6 billion. Our Legal Division believes that under the First War Powers Act it could probably be argued that there is legal basis for compelling the investment of such funds in govern- ment securities. This 18 not their definitive decision.) Regraded Unclassified 11y changes in the stock of Serieo E Bevin a Lonue on hand 1/ (In thousange of vieces) : Number of : Number of ieces : Stock on hand : IBIT : pieces solà : manufactured : at close of : deliveries : this day : this day : day : this day Mar. 1 none-closed none-closed 24,386 - 2 304 500 24,582 - 3 160 500 24,922 525 4 171 500 25,251 - 5 200 500 25,551 625 6 210 500 25,841 - 7 211 none-closed 25,630 6PE 8 none-closed none-closed 25,630 - 9 344 500 25,786 - 10 123 500 26,163 - 11 192 300 26,271 - 12 157 300 26,414 800 13 193 300 26,521 - 14 137 none-closed 26,384 I Office of the Secretary of the Tressury, March 16, 1942 Division of Research end Statistics. Includes stock in hands of (1) Federal Reserve Banks end branches, (2) Post offices, (3) Federal Reserve Bank issuing agents, and (4) Treasury veulte in Washington. Regraded Unclassified UNITED STATES SAVINGS BONDS Comparative Statement of Sales During First Twelve Business Days of March, February and January 1942 (March 1-14, February 1-14, January 1-14) Oa Basis of Issue Price (Amounts la thousands of dollars) : : Amount of Increase Sales : Percentage of Increase : : or Decrease (-) : or Decrease (-) Item : : : : March : February : March : February : March : February : January : over : over : over : over : : : 2 February : January : February I January Series 1- Post Offices $ 42,500 $ 48,572 $ 76,833 -$ 6,072 -$ 27,961 + 12.4% - 36.4% Series 1- - Banks 125,572 184,639 208,339 - 59,067 - 23,700 - 32.0 - 11.4 Series 1- Total 168,372 233,511 285,171 - 65,139 - 51,660 - 27.9 - 18.1 Series 1- Banks 21,496 29,546 31,088 - 8,050 - 1,542 - 27.2 - 5.0 Series G - Banks 94,277 147,160 124,732 . 52,883 - 22,428 - 35+9 18.0 Total $284,144 $410,218 $440,991 -$126,074 30,773 - 30.7% - 7.06 Office of the Secretary of the Treasury, Division of Research and Statistics. March 16, 1942. Source: All figures are deposita with the Treasurer of the United States on account of proceeds of sales of United States savings bonds. Note: Figures have been rounded to nearest thousand and vill not necessarily add to totals. Regraded Unclassified UNITED STATES SAVINGS BONDS Daily Sales - March, 1942 On Basis of Issue Price (In thousands of dollars) Post Office Bank Bond Bales All Bond Sales Date Bond Sales Series I Series 1 Series 7 Series G Total Series E Series I Series 0 Total March 1942 2 # 5,811 $ 15,868 $ 2,043 $ 8,726 $ 26,636 $ 21,678 $ 2,043 8 5,726 $ 32.447 3 2,975 8,459 1,629 8,780 18,868 11,434 1,629 8,780 21,843 4 3,395 8,833 2,658 12,558 24,048 12,228 2,658 12,558 27,443 5 3,869 10,448 1,680 11,870 23,998 14,317 1,680 11,870 27,867 6 4,179 10,696 1,759 10,825 23,279 14,875 1,759 10,825 27,458 7 3,480 11,586 1,586 6,328 19,499 15,066 1,586 6,328 22,979 9 4,967 18,636 3,944 8,488 31,068 23,604 3,944 5,488 36,035 10 2,804 5,719 1,365 4,162 11,246 8,523 1,365 4,162 14,050 11 3,156 10,002 1.533 7,287 18,823 13,158 1,533 7,257 21,979 12 2,686 8,114 1,133 5,504 14,750 10,800 1,133 5.504 17,436 13 2,682 10,594 1,065 5.007 16,666 13,276 1,065 5,007 19,348 14 2,797 6,616 1,102 4,745 12,463 9.413 1,102 4,745 15,260 Total $ 42,800 $125,572 $ 21,496 $ 94,277 $241,344 $168,372 $ 21,496 $ 94,277 $284,144 Office of the Secretary of the Treasury, Division of Research and Statistics. March 16, 1942. Source: All figures are deposits with the Treasurer of the United States on account of proceeds of sales of United States savings bonds, Note: Figures have been rounded to nearest thousand and vill not necessarily add to totals. Regraded Unclassified 86 March 16, 1942 FOLLOW-UP FOR THE SECRETARY: You have asked that Mr. Paul speak to you about the President's suggestion that the proposed tax on gasoline be increased still higher. Regraded Unclassified 87 March 7, 1942 Randolph Paul Secretary Morgenthau The President raised the question at Cabinet as to whether we could increase the proposed tax on gasoline still higher. Please speak to me. Follow up 3/10 Paul sand he on 3/10 m spake to The sery 3/13- Pauli office phoned to say that to had not spoken to Hujs- Follow up next 9:30. Regraded Unclassified 88 March 16, 1942 3:45 p.m. TAXES Present: Mr. Paul Mr. Blough Mr. Tarleau H.M.JR: I hear it only took four people to do this little inquiry of mine. MR. BLOUGH: You won't think the results are com- parable to the labor expended. MR. PAUL: Were you intending to discuss this with the press this afternoon? H.M.JR: Well, I felt confident they would ask me. MR. PAUL: Well, I think you shouldn't dignify this particular editorial or this particular letter from the man named Stolper by a press statement. There is some- thing in the paper nearly every day criticizing our tax program. If you consider this worthy of attention, then it should not be attended by you as Secretary, but you should have your staff consider it and perhaps a letter by me to the New York Times replying to it or something like that. The net result of these is that there is 8 little something in it but it is half cock- eyed. H.M.JR: Could I read it? MR. PAUL: Sure. Excuse me, I just want to - I thought you were limited in time. H.M.JR: No, let me just read the thing B. minute. Regraded Unclassified 89 - 2 - MR. PAUL: One deals with the editorial and the other deals with the Stolper letter. H.M.JR: Let me read this. This is good. He is learning. ne has a page and a half. MR. PAUL: Well, I want to say for Roy that he has done a masterpiece there in compressing it to that. MR. BLOUGH: A little more time and we would have done a little better. H.M.JR: Let me just read this. Well, the thing that - this thing here, if they say - on this income it is estimated at the existing rates persons with incomes below will pay - no. I will go to statement one. Salaries, wages for three years. The great bulk of this increase would go to incomes below three thousand. Well, when the increase goes to people below three thousand then their income rises above three thousand. MR. PAUL: In some cases and in other cases it puts it above. In some cases of this great increase people will receive low incomes or it won t put them over three thousand. MR. BLOUGH: This is a low figure because some people, as you say, will have been pushed above three thousand. H.M.JR: Well, here is the thing. I am just think- ing. I think this - rather than arguing, how about giving this stuff to Jere Cooper and let Jere Cooper do it. MR. TARLEAU: 1 think he might like to do that. H.M.JR: He was wonderful with the NAM. MR. PAUL: I was up there and I heard him. MR. TARLEAU: What do you think, Roy? - 3 - 90 MR. BLOUGH: You might inquire and ask if he cared to. MR. TARLEAU: it puts the thing on the record and it doesn't dignify it by having the Secretary answer every editorial that comes up. MR. PAUL: Anything that you can do to keep from selecting one particular letter-- H.M.JR: I would like to thank Jere Cooper for what he did on NAM. MR. PAUL: I will run up and see him if you want. H.M.JR: And say we have got this thing and how would you like to handle it. MR. PAUL: That is quite right. They are doing that every day in the Record. They are putting in things of that sort. My feeling is merely to keep you, as Secretary of the Treasury, from advertising the New York Times. 91 March 16, 1942 MEMORANDUM FOR THE SECRETARY From: Mr. Blough Subject: Editorial in New York Times, March 16, 1942. The point featured in this editorial is that on the basis of Mational Resources Planning Board figures, one-third of all the consumer units of the country (femilies and single individuals) have incomes of 1000 than $780 a. year, while two-thirds have incomes of less than $1,450 a year; and also that families and single individuals having income of less than $2,000 comprise 82 percent of the consumer units and account for 60 percent of consumer purchases. The main point of the editorial 10 summed up in the following sentences: "If these figures are correct, it appears that a substantial majority of all consumer units accounting for & very large part of all consumer expenditures must be exempt from income tax." The question 1s: "Whether it is not necessary in one way or another to dip still further into the current purchasing power of those units which, despite their low incomes, con- stitute the majority of consumer units, in order to prevent the still greater hardship of inflation." Comments: (a) The National Resources Planning Board figures cited by the editorial are for 1935-1936. Incomes have risen substantially since then. According to more recent satimates made by the Office of Price Administre- tion on the same basis as the National Resources Planning Board estimates, in 1942 only one-sixth (instend of one-third) of all consumer units will receive incomes below $780, and alightly less than one-half (instead of two-thirds) will receive incomes below $1,450 a year; Regraded Unclassified 92 - 2 - and families and single individuals having incomes of 1088 than $2,000 will compriss two-thirds (instead of 82 percent) of the consumer units. We entimate that families and single individuals with incomes Issa than $2,000 account for about 50 percent (instead of 60 percent) of consumer purchases. (b) Some families with incomes over $2,000 will not be subject to tax because of the credit for dependents; on the other hand, some families and many single individuals with incomes below $2,000 will be subject to tax. In all, it is estimated that in 1942, under present exemptions, about one-third of all persons receiving incomes will be subject to the income tax, These persons will account for more than 55 percent of the total income received by all persons and for about half of all consumer purchases. (o) The revision in figures does not change sub- stantially the policy question posed by the editorial. Although the problem 10 somewhat less serious than the editorial suggests, it is true that about half of the consumere' purchasing power is not reached at all by the Income tax and substantially half of the balance 10 largely, relieved by the exemptions to people paying some tax, RE:ded 3/16/42 Regraded Unclassified 93 March 16, 1942 MEMORANDUM FOR THE BECRETARY From: Mr. Blough Subject: Comments on the letter of Mr. Gustav Stolper, published in the New York Times, Bunday, March 15, 1942. The principal points made by Mr. Stolper against the Treasury position, together with comments on them, are AS follows: 1. Statement: Balaries and wages in the three years 1939 through 1942 will have risen $20 billion. A great bulk of this increase goes to income groups below $3,000. "Of these 820 billion, the Treasury actually proposes to draw $300 million in income taxes." Comments: A. The statement appears to be substantially correct with respect to the $20 billion increase in salaries and wages. There appear to be no studies showing the distribution of this increase but it is probable that a large part has gone to income groups below $3,000. b. On 1939 incomes, persons with incomes below $3,000 peid only 842 million in individual income taxes, or less then 5 percent of total individual income taxes. On 1942 incomes, it 1s estimated that at existing rates of tax, persone with incomes below $3,000 will pay #750 =illion, or over 14 percent of all individual income taxes. The increase in rates proposed by the Treasury will almost double the taxes paid by persona with in- 00000 below $3,000, go that under these higher rates they would pay about $1,450 million, or more than 17 Der- cent of all individual income taxes. Regraded Unclassified 94 - 2 - 2. Statement: The figures which the Secretary presented relating to percentages of income taken in Federal, State and 10081 taxes were probably predioated on Monograph #3 of the T.N.K.C. "Who Pays Taxes?" Apart from serious statistical mistakes, this study makes two important misqualifications. It nuelifies mooial security pay- mente AB taxes and it qualifies real estate taxes as being borne by the tenants. Comments: 8. The Treasury study was made independently of the T.N.E.O. study. While similar techniques were used, the treatment of certain taxes was materially different. The Treasury percentages of tax are substantially lower than those shown in the T.N.E.C. study. b. The mooial security taxes are properly grouped with all other taxes for purposes of messuring the com- nulsory payments imposed by Government and determining how much of the income at these levels is already being appropriated by the Government. c. In the Treasury study, rael estate taxes were counted in part AA taxes on tenants (and owner occupants) and in part NO texes on business, shifted to consumers. T.18 was judged to be the most realistic treatment of these taxes in the light of available data. 3. Statement: The proposed corporation taxes will not ourtail consumption by one dollar. They out entirely into the savings fund of the Nation and any create ghastly con- sequences by destroying working capital to operate business in the post-war period. High corporate taxes destroy the incentive to efficient operation. Comments: B. We cannot expect other groups to unke heavy necrifices and not to demand increased incomes unless 80 roorate profits are taxed heavily. Public morals oon be maintained only if corporations are required to Regraded Unclassified 95 - 3 - pay n. large share of the cost of the war. b. The high corporate taxes will prevent in- creases in dividends which would be inflationary. 0. The expectation that the proposed Treasury rates will destroy efficiency of operation 1n A matter of oninion. We do not agree that it will have any serious effect on production or efficiency during the war emergency, porticularly since where the tax on any dollar of income exceeds 80 percent such excess shall be -laced in n. reserve for repayment to finance employ- ment after the war. d. Since texes are lovied on income they do not reduce working capital unless there has been a mistake in determining income. The Treasury has suggested that provision be made for correcting mistakes of this kind. Using 3/16/42 Regraded Unclassified 96 Mr. Crawford substituted for Mr. Baukhage on the radio last evening. 97 > MIMORANDUM To: Secretary Morgenthau From: Mr. Paul March 16, 1942 Attached is the transcript of the Crawford talk. He gets to taxes on page 3. I suppose you had reference to his discussion of the National Association of Manufacturers in next to the last paragraph and sales taxes in the last paragraph. REP Attachment Regraded Unclassified 98 Kenneth Crawford, P. M., National Broadcasting Company, March 13, 1942 News of the total war ranges the whole broad expanse of the globe today, some good. some very bad. Here it is in quick summary, starting at the other side of the earth and working home: The Navy announces that one of our submarines has bagged three freighters and a cargo ship in Japanese waters. It appears that the United States Havy is beginning to play the game in the Pacific against the Japanese as well as the German Navy plays it against us in the Atlantic. The Navy further reveals that United States fighter planes have shot down a Japanese bomber west of the Midway Islands. The Midways are the closest of the Pacific stepping stone bases leading out toward the Philippines and we still hold them. The biggest of the current Pacific battles, of course, 10 the sea and air fight for New Chines. The Japanese have made landings on this island down under the squator and 480 miles north of the Australian port of Darvin in spite of heavy losses. The Royal Atr force claims to have littered the beaches of Yes Guinee with the wrecks of bombed transports and warships. Tokio acknowledges the loss of three fighting ships there. Whether the Japanese consider New Guines necessary for the defense of Java, which it has recently won from the Dutah, or whether they want the islande as 8. base for the invasion of Australia ie not yet clear. Most military experts are gusssing that the Japanese will try to establish themselves in northern Australia. Regraded Unclassified 99 - a - It 18 unlikely that they will try to stretch their communi- cation lines another 2000 miles southward to Sydney or Melbourns. A strong position in the north as a backstop to their scattered holdings in the Indies would serve their purpose. There is no doubt that within recent veeks the defenses of Darwin have been strengthened. There is reason to believe that the high command foressw the fall of Java and concentrated the bulk of American and British aid on the Australian continent. If so, the Japanese will be met by powerful resistance on the sea, in the air, and on land. There is the possibility 100, that the invaders may attempt to gain a. foothold on the continent by clambering ashore on rocky Gape York, which projects within 47 miles of New Guinea, rather than brave the guns of Darwin's twin islands, Melville and Bathhurst. These two islands, which guard the entrance to Darwin's harbor, are 120 miles long. On the east the Cobourg Peninsula forms & natural barrier to entry into the port. However, such a nove would meet with continual harrassing from the Darwin base and the Japanese may consider it sound strategy to aim straight at the Darwin objective. In the Atlantic, meanwhile, the British Havy is presumably trying to continue its attack on the 50,000 ton German superdrend- naught. Tirpits, which was spotted at ma early this week and attacked by torpedo planes. The big ship escaped under a smoke screen and is thought to have taken refuge in a Norweigian port. Regraded Unclassified 100 $ On the continent of Europe the Russians are pounding away at the Nasia north of Smolensk, trying to prevent Hitler's armies from reorganizing for the anticipated spring offensive. Closer to home, in the Carribean, U-boate accounted for 4 British tanker and 6. Swedish freighter, according to an announce- ment from the Havy. Here in the United States there were two interesting and per- hape important announcements growing out of Japan's seisure of the Kalayan Peninsula and the Dutch East Indies---the sources of our all- important tin and rubber supplies. Officials of the University of Nevada said they had found tin deposits in Sevada and Dr. Paul Kolacher told a House Committee the Russians had developed & dandelion that, if transplanted and cultivated in this country, might yield a sub- stitute for rubber. All of this brings me to the unpleasant subject of taxes. This global warfare, the necessity of finding new sources of vital supply, all cost money. Next Monday is the last day for filing income tax returns. Take what satisfaction you can from the knowledge that what you are paying this time is at 6. bargain rate. Next year you vill really pay--just how much is now being decided by Congressional Committees. The National Association of Manufacturers brought in its long heralded program today and asked that Congress adopt it in preference to the Treasury's plan. The NAM, which represents the nation's largest manufacturers, has been making the startling statement that it wants to tax these same corporations to the limit of safety. Regraded Unclassified 101 But what the NAM proposed when it got down to cases was that the Treasury's corporation taxes be materially reduced, Instead of taking $3,400,000,000 out of the corporations, as the Treasury suggests, the NAM wants to take $1,400,000,000 out of then in cor- poration taxes. To make up the difference and raise & large part of the money needed to finance the war, the HAM wants to levy an 8 per cent sales tax--four per cent as a tax on manufacturers sales and four per cent on retailer's sales. Another Congressional committee learned today that the Todd Shipyards Corporation made 8. profit last year of $5,000,000 on its $25,000,000 investment. It is clear that the NAM tax program would spare the Todd Company's var profits to an extent that the Treasury would not. It is also clear that B sales tax would hit the average citizen harder than the Treasury's plan, since it would hit all of us alike, making no distinction between those of us who make war profits and those of us who don't. The Administration has opposed such a general sales tax on the ground that war taxes should be levied on & basis of ability to pay. And we shall all pay, whether more or less depending upon the nature of the plan Congress adopts. Thank you! Regraded Unclassified 102 March 16, 1942 3:55 p.m. Jere Cooper: Hello. HMJr: Jere? C: All right, Henry. HMJr: How are you? C: Fine, thank you. How are you? HMJr: I'm fine. Say, that was a masterly thing you did on that NAM thing. C: Well, thank you. HMJr: I just - I thought that was one of the finest Jobs I've seen done in a long time. C: Well, thank you. That's very. kind, and I appreciate it, Henry. HMJr: I gather you got that fellow's goat. C: Well, I think I shook him down considerably. HMJr: Well, I know him. He just thinks he's a little bit better than anybody else in this world. C: Yeah. HMJr: He's an awful conceited ass. C: That was my impression of him. HMJr: Yeah. And he made his money very easily and too quickly. C: Uh huh. HMJr: Yeah. And I remember I met him down - oh, six or seven years ago in Warm Springs, and he was flying around the country with his own private pilot. C: Oh. Regraded Unclassified 103 - 2 - HMJr: Yeah. He's that kind of a fellow. C: Yeah. Big guy. HMJr: Big guy, oh, yeah. is Yeah. HMJr: Now, seeing that you've got on the armor and the horse and so forth, how would you like to take on today's editorial in the New York Times, where they go after us on our figures on income and lowering exemptions and all that? We've got all the answers; the boys have done the work. C; I haven't seen it yet, Henry. HMJr: Well, would you like Randolph to walk it up? C: Yes, I'll be glad. Let him bring it up, and I'll be glad to go over it with him. HMJr: When would you like to see 1t? C: Oh, I guess in the morning would be all right. HMJr: All right, I'll tell him. C: All right. HMJr: And - but I sure enjoyed reading about you the other day. C: Well, thank you. That's very kind, Henry. I appreciate it. HMJr: Thank you. C: Appreciate your calling. HMJr: Good-bye. C : Good-bye. Regraded Unclassified 104 TREASURY DEPARTMENT WASHINGTON OFFICER REVENUE March 16, 1942 AMERICANE of INTERNAL - noe DUL for Vr. Sullivan: Turence 1a made to your request for a memorandum containing Vermation wd might have from collection districts, indicating revive collections on returns for the filing period 1942 B.S with the filing period 1941. As explained to you, we do information from all districts and it will not be until Collectors have listed their returns that accurate figures às the number of returns filed by classes can be obtained. Au on indication of the difficulties which will be encountered Colloctore this filing period in submitting reports, 8 converse- and just had with the Collector of the Maryland District. The Dellector indicated that after working all day yesterday in prepar- twir receipts for deposit, there remained 25 unopened mail bags, 514 heavy day before them and with additional receipts coming comm. there is no doubt that any report submitted by the Col- NS to the estimated amount on hand undeposited will be e - difficult guess. As you probably know, at the close of business Collectors will send to us a telegram indioating the total mount Meposited up to date, es well 8.8 an estimate of the amount we undegosited. When those telegrams are received tomorrow been tabulated, a copy of the tabulation will be sent to following information concerning specific collection districts some value in connection with your request for a memorandum: Ist Illinois District: (January 1 to March 12, inclusive) Filing Feriod Filing Period 1941 1942 able (individual returns) 256,900 532,900 (individual returns) 197,500 127,600 Crand total 000'29' 660,500 scoipts from January 1 to March 12, inclusive $44,331,885.67 $84,989,255.12 PHYSICTORY BES *Scolned Treasury Notes (January 1 to March 12, 1042) $7,646,058.15 US Room Regraded Unclassified 105 - & - Indiana District: (January 1 to March 7, inclusive) Filing Period Filing Feriod 1941 1942 State (individual returns) 51,300 155,000 contrable (individual returns) 71,467 106,900 Crand total 122,767 261,000 wairints- Jan. 1 to March 7, ino. $5,441,120.63 $22,089,180.74 as issouri District: (January 1 to March 7, inclusive) Filing Period Filing Period 1941 1942 vanide (individual returns) 22,030 49,692 ,ontexable \indívidual returns) 32,159 29,873 Grand total 54,189 79,565 udsipts - Jan. 1 to March 7, inc. $1,139,307.70 $3,412,798.01 lit lissouri District: (January 1 to March 7. inclusive) Filing Period Filing Poriod 1941 1942 exable (individual returns) 36,900 90,100 `ontexable (individual returns) 61,400 62,196 Grand total 98,300 152,296 - Jun. 1 to Parch 7, inc. $5,242,294.20 *913,074,638.09 *Includes (reasury Tax Notes in the amount of $1,421,708.32 7th Illinois District: (Jumiary 1 to March 7, inclusive) Filing Period Filing Period 1941 1942 (individual returns) 35,600 97,900 ontexable individual returns) No record 84,965 Grand total 182,865 Weigts - Jun. 1 to March 7, ino. $3,523,369.27 *810,334,258.23 *Includes Treasury Tax Totes in the amount of 167,339.36 Regraded Unclassified 106 - 3 - 1st l/ow York District: (January 1 to March 4, inclusive) Filing Period Filing Period 1941 1942 (individual returns) 24,966 47,238 nationale (individual returns) 47,000 50,100 Prend total 71,966 97,338 - Jon. I to March 4. inc. $2,096,309.23 $4,200,646.57 with York District: (January 1 to March 7, includivo) Filing Feriod Filing Period 1941 1942 (individual returns) 16,942 30,509 antexnole (individual returns) 27,083 28,500 Grand total 44,026 50,009 ecoious - Jan. 1 to larch 7. inc. $11,006,762.02 $18,515,369.15 354 jiew York District, (January 1 to March 4, inclusive) Filing Period Filing Period 1941 1942 (individual returns) 2,057 33,118 contaxable (individual returns) 21,679 17,146 Trand total 30,736 50,254 Receipto - Jan. 1 to March 6, inc. $1,933,727.31 88,782,082.74 Taryland District: (January 1 to March 14, inclusive) Filing Period 1941 Filing Period 1942 Total receipts $11,337,515 $35,521,040.02 Acting Commissioner Regraded Unclassified 107 March 16, 1942 4:45 p.m. General Smith: Hello, Mr. Secretary. HMJr: General. S: Yes, sir. HMJr: Two things that I'm interested in - any headway on keeping sirplanes from flying around on this Atlantic Coast who have no business here? S: I don't know, sir. I made 8. memorandum of what you said and sent it to Mr. Lovett, the Assistant Secretary for Air and I haven't checked up on it to see what he'e done or if he's been able to do anything. HMJr: Well, I tell you, I'm expecting General Marehall for lunch tomorrow. Hello. S: Yes. HMJr: And I'd kind of like to know if anything's happened before I see him. B: I'll call Mr. Lovett and find out if he's there, sir. HMJr: And then the other thing waB..... S: A separate landing field. HMJr: Yeah. S: Yes, sir. I'll see what they propose, if they propose anything. I don't know, sir. HMJr: Yeah. S: You see, I'm almost out of touch with those people over here. I don't Bee them very often. HMJr: Well S: It's rather difficult for me to Regraded Unclassified 107 March 16, 1942 4:45 p.m. General Smith: Hello, Mr. Secretary. HMJr: General. 8: Yes, sir. HMJr: Two things that I'm interested in - any headway on keeping sirplanes from flying around on this Atlantic Coast who have no business here? S: I don't know, sir. I made a memorandum of what you said and sent it to Mr. Lovett, the Assistant Secretary for Air and I haven't checked up on it to see what he's done or if he's been able to do anything. HMJr: Well, I tell you, I'm expecting General Marshall for lunch tomorrow. Hello. S: Yes. HMJr: And I'd kind of like to know if anything's happened before I see him. 8: I'll call Mr. Lovett and find out if he's there, sir. HMJr: And then the other thing was..... S: A separate landing field. HMJr: Yeah. S: Yes, sir. I'll see what they propose, if they propose anything. I don't know, sir. HMJr: Yeah. S: You see, I'm almost out of touch with those people over here. I don't see them very often. HMJr: Well..... S: It's rather difficult for me to Regraded Unclassified 108 - 2 - HMJr: Would you rather not S: Oh, no. I mean, when I was at the other place, you know, I could just - well, just walking from one office to another. HMJr: I see. 8: And contact isn't quite as close 88 it used to be. HMJr: Look, don't hesitate any time I ask for some- thing that's out of your line to tell me. 3: Oh, no, this is quite all right; but I'm not able to give you - to get quite the same close contact where I can see them just in a minute, you see. HMJr: I see. S: I'll get word to you, sir. HMJr: Well, I just didn't want to start - you know, raise hell about it S: Yes. HMJr: But that thing about getting those airplanes out of this zone, that ought to be done. 8: Yes, sir. I'll get a report back before you have General Marshall - before you see General Marshall. HMJr: Yeah. S: Now, then, did Saville call you about the trip? HMJr: Everything's fine. S: I thought he had a very good program. HMJr: Very good. S: Yes, sir. HMJr: I hope you'll be able to go. Regraded Unclassified 109 - 3 - 8: I'm going to try to go, sir. HMJr: Don't feel you have to. S: No, I want to go, very much. The only thing that would keep me from it 18 if something happens at this conference tomorrow which keeps us busy all night and the following day. HMJr: Well, it comes under the - it ought to come under the heading of a "refresher". S: (Laughs) All right, sir. HMJr: (Laughs) S: You'll have a nice trip, though, and I'll get word about this other. HMJr: Thank you. S: Yes, sir. Regraded Unclassified 110 March 16, 1942 6:30 p.m. To: Secretary Morgenthau From: Brig. General Walter B. Smith SEPARATE FIELD FOR PURSUIT SQUADRON NOW AT BOLLING The War Department has written the President, aeking for authority to establish B. field at Camp Springs (this 18 the high ground back of Bolling Field). This would put the pursuit squadron on its own field, and would avoid the fog and mist which 18 80 prevalent at Bolling. CIVILIAN PLANES ALONG THE ATLANTIC COAST Control of civilian planes is under the Director of Aviation, Office of Civilian Defense. The Director 18 General Connolly. The War Department has no direct authority and has not considered grounding or moving civilian planes from the Coast area, because they are being used now in the Civilian Air Patrol, which is a function of the Office of Civilian Defense. W. B. S. Regraded Unclassified 111 March 16, 1942 4:55 p.m. Edward Foley: We've got you on the loudspeaker here, and I was wondering how things were going. Can you talk? Joseph O'Connell: I'm sitting alongside of Judge Mack, and they're in the middle of holding the meeting. They have read a number of resolutions relating to the business of the concern. They haven't reached the point of the program that 1s primarily of concern to you. The program involved, if I may - Judge Mack can correct me if I'm wrong on this - the acceptance of the resignations of the three gentlemen who are absent, that 18 Mr. Schmitz, Mr. Hutz, and Mr. Baragwanath, all of whom have sent in their resignations. That would leave F: Yeah. Hello. O: Yes. F: That will - what? O: That will leave - they also have a communication from Mr. Bullitt, clarifying his status and indicating that he had intended to resign when he wrote that letter several weeks ago. That resolution has already been adopted accepting his resignation. F: I see. And he resigned not only as Chairman, but also 8.8 0: Also as a member of the Board. F: Right. 0: Now, then, when the resignatione of Mr. Schmitz, Mr. Hutz, and Mr. Baragwanath have been adopted, that will leave seven members of the Board, all of whom are present, still members of the Board. F: Yeah. Regraded Unclassified 112 - 2 - 0: Now, then, it is my understanding that they at that point will elect Mr. McConnell, Mr. Wilson, Mr. Marshall, and Mr. Moffett, and that then the by-laws will be amended to reduce the directorate to five in number, at which point after that amendment has been made by the full Board, the remaining members of the Board of Directors - that 18, the directors who are here now - will tender their resignation, at which point they will be left with an existing Board of four out of five. F: That would be our nominees. 0: That's right. F: With one vacancy. 0: With one vacancy. F: And Bob McConnell would be made president? 0: Then this meeting would adjourn. You see, they have to call a special meeting of the new Board for the purpose of electing Bob McConnell as president, because that can only be done under the by-laws at a meeting called only for that purpose. F: I see. Bo the old - you will adjourn this meeting and then call immediately a special meeting of the new Board 0: That's right. F: and Bob McConnell will be made president. 0: That's right. President and Chairman of the Board. F: And that'll all be done today. O: That will all be done, I should say, within the next half or three quarters of an hour. Mr. McConnell and the other members came over about three o'clock and had 8. very pleasant talk with Judge Mack, and he was very helpful. Judge Mack 88y8 to tell you that he welcomes them with open arms. Regraded Unclassified 113 - 3 - F: Well, that's fine. 0: And they had a number of other matters to take up at the early part of the meeting. That ex- plains why we haven't probably gotten further. F: Right. Well, I was just anxious to find out how the thing was going. Now, is that statement that you read to me from McConnell going to be given out as you read it? 0: It's going to be given out as I read it, with one slight revision which Bob made. I don't have 8 copy of it in front of me, but the sentence - he will give that out at the close of the meeting - and the sentence which refers to the - do you have it in front of you? F: No, I don't. I'm not in my office. 0: I think it 18 fair to say that there 18 no sub- stantial change. There's one elight change in verbiage which all of the new directors wanted to make. It doesn't change the substance. F: Well, I'll tell you what you do, Joe. As soon as the meeting is over, would you step to 8 telephone and give me the wording of that change because the newspaper fellows down here want to get a copy of that statement. 0: I can have them on the other phone. Bob won't be - I can have someone outside F: All right. O: read that to you in a very few moments. F: All right. If you could have that done 0: I can have that done F: All right. I'll have somebody in my office have that statement that you gave me in front of them, and then it can be corrected and we'll have it mimeographed here; and then when it's released Regraded Unclassified 114 - 4 - up there, you let me know by phone and we'll let it out down here. 0: Yeah. Now, do you have a copy of Mr. Crowley's telegram? F: Not in front of me. Yes, I have it. 0: If you have it - Mr. Mack has a copy in front of him and additional copies. I thought maybe = you'd want that read over the phone, too. So far as I know, the only thing that 1s to be given out to the newspapers are Crowley's telegram, plus the short statement by McConnell. F: Yeah. 0: That's all that I know of. F: All right. And you're not going to make any statement? O: No, not at all. No need for it. F : And you don't think there'll be need for it. 0: No. F: All right, Joe. Well, when it's all over, step to the phone, will you, and call me? 0: I will. But right away I'll have someone call you and read you McConnell's statement. F: Good. Fine. 0: Okay. F: Thank you very much. 0: Wait a minute now. All right. That's all, Ed, I guess. F: Okay. O: Good-bye. F: Thank you. Regraded Unclassified 115 TREASURY DEPARTMENT Washington STATEMENT OF THE NEW MANAGEMENT OF GENERAL ANILINE AND FILM CORPORATION March 16,1942 The United States Government has acquired title through the Secretary of the Treasury to 97 percent of the stock of General Aniline and Film Corporation. Secretary Morgenthau and Alien Property Custodian Crowley have jointly requested Robert E. McConnell to act as executive officer of this company, and have jointly approved the election of the new four-man Board of Managing Directors, composed of Robert E, Wilson, A. E. Marshall, George Moffett, and Robert E. McConnell. The Board has been instructed to complete the Americanization of the company to make sure that all employees render faithful and loyal service, produce military requirements at maximum capacity, provide the corporation with efficient, business-like management and in all waye conduct the affairs of the company to the best intereste of the country, Until such time as it 16 possible properly to select competent experienced and permanent working management which will then be expected to function under the general supervision of this Board, the new Board will conduct all administrative and corporate affairs of the company. The corporation is already engaged in consummating important contracts for the Army and Navy. Plant production on such war material will be increased as rapidly 88 possible. -000- Given out in New York. 30-77 Regraded Unclassified TREASURY DEPARTMENT 116 INTER OFFICE COMMUNICATION CONFIDENTIAL DATEMarch 16, 1942 TO FROM Mr. Haas Secretary DA Morgenthau Subject: The Business Situation, Week ending March 14, 1942. Summary (1) A sharp increase in consumer expenditures in retail stores during January is disturbing, from an inflation stand- point, in view of the necessary curtailment in production of civilian goods. Unless such expenditures shortly begin to decline, in line with the trend of supplies, the result will be meroly 8 bidding up of prices for the available supply of goods. (2) Department store sales moderated somewhat in February, declining to 21 percent above the 1941 level as compared with 37 percent in January. Since prices of de- partment store goods on March 1 averaged about 18 percent higher than last year, consumers bought but little more in actual goods than they did in February last year, although spending 21 percent more money. (3) The effectiveness of over-all price control in Canada 1s indicated by the declining trends of living costs and retail food prices in that country since December 1, when the controls went into effect, as contrasted with sharp in- creases in the United States during the same period. (4) Basic commodity prices moved a trifle higher last week ae uncertainties over the outcome of legislative develop- ments and governmental measures confined price changes to & relatively narrow range. In the first week in March, the BLS all-commodity index of wholesale prices rose 0.1 point to & new high at 96.9. This 1e 29.2 percent above the level pre- vailing in August 1939, just before the outbreak of the war. (5) Stock prices showed a further gradual decline last week to new lows for the current move. The Dow-Jones indus- trial stock average sagged to within a fraction of the previous low point touched in 1938. Although industrial stock prices in London also moved lower, the recent decline in that market has been smaller than in New York. Regraded Unclassified - 2 - 117 Consumer expenditures show inflationary trend. of major interest in the current price situation 18 the growing disparity between consumer incomes and the supply of consumer goods. This disparity has already become an im- portant factor in the continuing rise of commodity prices, although its effect has been cushioned temporarily by the stocks of consumer gooda built up from previous production. All attempts of consumers to increase their spending will obviously have little or no effect in increasing the supply of goods, but will merely result in higher prices for the same goods. Knowing that the volume of consumer spending must be reduced drastically in the months ahead if price inflation 18 to be avoided, some measure of the developing inflation- ary pressure on prices may be derived from the actual trend of consumer expenditures. It 18 of especial interest from an inflation standpoint to know to what extent consumer incomes are currently being diverted from normal spending channels. In Chart 1, total consumer expenditures for goods and for services (Department of Commerce estimates) are compared with the trend of salaries and wages, monthly 1938 to date. For convenience in interpretation, "expected" expenditures are also shown, based on the average relationship of oon- sumer expenditures to salaries and wages during the 6-year period 1935-1940. It will be noted (upper section of chart) that expenditures for goods, AB indicated by retail store sales, increased sharply in January, instead of showing the decline needed to prevent inflationary pressure on prices. It will be noted that expenditures for goods are not as high as could normally be expected from the current high level of incomes, owing largely to the effect of such control measures as high taxes, Defense Bond purchases, installment credit restrictions, and shortages of available goods. Nevertheless, it is becoming more and more obvious that expenditures for consumer goods generally cannot be maintained even at present levels without inflationary effects, in view of the growing curtailment in production of consumer goods (with the important exception of food). Clothing heavily bought in January. The types of goods into which consumer buying was most heavily directed during January 16 indicated by Table 1. It will be noted that sales by apparel stores headed the list with an increase of 33 percent, as compared with an Regraded Unclassified - 3 - 118 increase of 8 percent for all stores. In that month a heavy hoarding movement developed in both mon's and women's sloth- ing, with widespread reports of customers buying far in excess of current needs. Sales by household furnishing stores were second, with B. 22 percent increase. The cur- tailment in automobile sales, on the other hand, caused a drop of 38 percent in sales by auto and auto supply stores. Confidential estimates by the Department of Commerce of consumer expenditures for services show a marked upturn 15 percent) between September and December 1941. January figures are not yet available. (See lower section of Chart 1.) Largest increases in the unadjusted figures were for household utilities and medical care. Increased expendi- tures for services probably have little immediate inflation- ary effect, although eventually they contribute to inflation through competition for labor and various materials. Department store sales gain narrows in February. After running 37 percent above year-earlier levels in January, the gain in Department store sales last month nar- rowed to 21 percent. This moderating of the sales pace was also evidenced by & drop in the FRB adjusted index of do- partment store sales to 125 for February from the record figure of 138 reached in the previous month. An indication of the sections of the country which are contributing most to the pressure of consumer buying is given in Table 2, which shows by Federal Reserve Districts the percentage increase in department store sales over the previous year in the most recent 3-month period, and in the month of February. Both comparisons, it will be noted, show the largest increases in the area centered around Washington, D. C. and nearby States. The amallest in- creases, on the other hand, are in the farming areas, parti- cularly in the ootton sections. Reflecting the pressure of heavy buying, retail prices continued to rise during February. By March 1 a representa- tive price index of typical department store items was 1.5 percent higher than & month earlier and 18.4 percent higher than on March 1, 1941. When consideration is given to this rise in prices, it will be seen that the unit volume of department store sales last month actually was very little above year-earlier levels. More recent sales show renewed rise. In the first week of Maroh, consumer buying again picked up, and the sales gain over the corresponding week of 1941 widened to 28 percent, as compared with 19 percent Regraded Unclassified 119 in the previous week. (See Chart 2.) While it 18 yet too early to draw accurate conclusions, this strong sales show- ing may foreshadow less slowing up in trade due to income tax payments than some observers had expected. At the be- ginning of next week, however, consumer buying will run into another retarding factor in the additional restrictions on installment buying recently ordered by the Federal Reserve Board. Minimum down payments will be increased for many items, and the time limit will be out down in most instances. Moreover, 7 additional articles will be added to the list now subject to regulation. Prices hesitate under week influences. Developments reported from Washington again dominated the price situation last week. Government purchases of war supplies were reported in great volume, particularly of such items as textiles and food products. Yet prioes moved only elightly, owing to uncertainty concerning the outcome of pending legislation designed to bar sales of most Government- owned farm products at prices below parity. Further prios uncertainty was caused by statements of the President in his press conference last Friday indicating that he was studying proposals to place ceilings on wages and profits as well as prices, and by new evidence of a rounded OPA program to halt cost-of-living increases. Wholesale price indexes of commodities little changed. As a net result, changes in basic commodity prices Were limited to a narrow, slightly upward movement. (See Chart 3.) The index for 16 industrial raw materials was up 0.4 percent, reflecting a further sharp advance in the price of flaxseed and small increases in wool and cotton prices. Among the 12 foodstuffs, hog prices again advanced, making 8 gain of 32.6 percent since December 6. The BLS all-commodity index in the previous week (ended March 7) continued its broad upward movement, rising 0.1 point to 96.9. This is 29.2 percent above the August 1939 pre-war level, and 5.1 percent above that of the week before the attack at Pearl Harbor. Living costs in the United States at Canadian level. Comparison of the cost-of-living indexes for the United States and Canada show strikingly the effect of over-all price control in the latter country. (See Chart 4.) It may be noted from the chart that the cost of living in the Regraded Unclassified - 5 - 120 United States, according to the BLS index, was substantially below that of Canada until our entry into the war. Since then the index has risen sharply, while the Canadian index has turned downward. (The BL8 index for February 18 est1- mated from the Conference Board cost-of-living index). The Dominion's over-all control of prices and wages was put into effect December 1. In the lower half of the chart, the effectiveness of the Canadian control of food prices is evidenced by 6. similar decline since November. This 18 in marked contrast to the sharp and continued rise of food prices in this country, now higher than Canadian prices, and 18 more telling in view of Canada's longer participation in the war. Ceilinge placed on pork and textile products. As war production needs cut more desply into suppliesof goods available for civilians, the OPA announced that temporary price ceilinge would be placed on two groups of commodities of major weight in the cost of living, - pork products and finished cotton and rayon textile goods. The schedule on pork products, at prices prevailing between March 3 and 7, becomes effective March 23. It 18 reported in the press that ceil- inga on beef and veal are also imminent. The ceiling on finished piece goods, the OPA stated, aims to check & "rapid and unwarranted rise in prices' for clothes and housefurnishings, including women's and children's dresses, suits, coats, and men'e shirts. The schedule limits prices to those prevailing between March 7 and 11, but the OPA considers many of those 8.8 entirely too high, and has indicated that the permanent ceiling to follow would be on a substantially lower scale. A WPB priorities order that 80 percent of top-grade leather soles be reserved for shoes for the armed services, has been followed by press reports of expected OPA action on shoe prices. Record production and consumption of ootton goods. The OPA action on prices for finished piece goods came after a fortnight of huge Government orders for various tex- tile products, including woolens. A record 1942 production of 12,500,000,000 yards of cotton goods 18 forecast by the President of the Cotton Textile Institute. Since the our- rent rate of war consumption on an annual basis 18 estimated by trade sources at more than 60 percent of such a total, it 18 believed that Government allocation of cotton textiles for civilian uses may be necessary. A further advance in the daily rate of consumption of raw cotton to a new record high is shown by census figures on consumption in February. At the February daily rate, raw cotton consumption in March would be largest of any month on record. Regraded Unclassified - 6 - 121 Stock prices show further decline. Stock prices continued to decline gradually last week to new lows for the current move, although some strengthening was noted near the end of the period. The Dow-Jones average of industrial stock prices dropped slightly under the 100 level for the first time since 1938, and came within a fraction of the low point touched that year. The average for utility stocks showed a further fractional decline to & new low since compilation of the average was begun in 1929. Railroad stocks also eased elightly, but continued to show relatively good resistance to the decline, although opposition of the OPA to some of the recently authorized freight rate increases checked rallying tendencies near the end of the week. The volume of trading was limited to moderate proportions throughout the week and on no day reached as much as 500,000 shares. Industrial stock prices also moved elightly lower in the London market last week, but the recent decline there has been of smaller proportions than in New York. (See Chart 5.) Both markets have been confronted with adverse war news, but selling in the New York market 18 also attributed in large measure to uncertainties over earnings and dividends 88 a result of prospective tax increases. Furthermore, some selling may have been going on recently to obtain funds for income tax payments. Early start in Great Lakes shipping planned. During the past week the Becretary of the Interior 1n- dicated that, under present plans, shipping on the Great Lakes would probably get under way by March 26, which would be considerably earlier than usual. However, it re- mains to be seen if weather conditions will permit such an early start. The ice in Buffalo Harbor, for example, was reported recently to be 20 inches thick. In any event, it 18 intended to lengthen the usual summer loading season for iron ore by at least a month. Recently it was reported that the WPB may request ship operators to move 92,000,000 tons of iron ore down the Great Lakes during the 1942 navigation season. Inasmuch as last year's record ore movement was only 80,000,000 tons, it will be seen that ship operators will be confronted with a formidable task. Last week, legislation authorizing the construction of an additional look at the Boo connecting channel was approved, and actual work now awaits only appropriation of the necessary funds by Congress. The con- struction of an additional look at the Soo has been advo- cated as a safeguard and an aid to the transportation of vital iron ore supplies down the Great Lakes. Regraded Unclassified - 7 - 122 Despite continuing complaints of scrap shortages, steel operations have been moving slowly higher. The tonnage of steel ingots scheduled for production this week will again exceed the previous record, as operations are scheduled to advance to 97.9 percent of capacity from 97.4 percent last week. Regraded Unclassified 123 Table 1 Sales by retail stores in January, seasonally adjusted, increase over December Type of store Percent increase Apparel 33 Household furnishings 22 General merchandise 21 Filling stations 12 Food stores 10 Building materials and hardware 8 Drug stores 4 Eating and drinking places 3 Auto and auto supply -38 All retail stores to Source: Department of Commerce Regraded Unclassified 124 Table 2 Increase in department store sales over previous year, by Federal Reserve districts 3 months Districts December 1941 to February 1942 February 1942 Percent increase Percent increase Richmond 33 35 Philadelphia 31 32 Cleveland 29 21 St. Louis 27 21 Boston 24 17 San Francisco 24 25 Chicago 24 20 Kansas City 23 14 Minneapolis 22 19 New York 21 18 Dallas 18 8 Atlanta 17 7 Regraded Unclassified 124 Table 2 Increase in department store sales over previous year, by Federal Reserve districts 3 months Districts December 1941 to February 1942 February 1942 Percent increase Percent increase Richmond 33 35 Philadelphia 31 32 Cleveland 29 21 St. Louis 27 21 Boaton 24 17 San Francisco 24 25 Chicago 24 20 Kansas City 23 14 Minneapolis 22 19 New York 21 18 Dallas 18 8 Atlanta 17 7 Regraded Unclassified CONSUMER EXPENDITURES COMPARED WITH SALARIES AND WAGES Adjusted for Seasonal 1938 1939 1940 1941 1942 1943 DOLLARS Billions PER CENT Expenditures for Goods (Retail Soles) 6.0 168 5.6 156 5.2 144 Salaries and Wages 1935-39-100, Dept of Comm 4.8 132 4.4 120 4.0 108 Retail Soles (Bittions of Dollars) Actual 3.6 96 Expected 1 3.2 84 2.8 72 1938 1939 1940 1941 1942 1943 DOLLARS PER Billions CENT Expenditures for Services 2.2 168 2.1 156 2,0 144 Salaries and Wages 1935-39-100, Dept. of Comm 1.9 132 1.8 120 1.7 IOB Services (Billions of Dollars) 1.6 Actual 96 Expected + 1.5 84 1.4 1938 72 1939 1940 1941 1942 1943 - Department of Commerce total refail seves adjusted for seesonal Department of Commerce estimates of refal consumer expenditures for SERVICES 125 1 Based - average relatronship to solories and wages, 1935 through 1940. Office of the Secretary of the Treasury - of - and - C-422 Regraded Unclass Chart 1 Chart 2 DEPARTMENT STORE SALES 1935 . '39 - 100, UNADJUSTED 126 JAN, MAR. MAY JULY SEPT. NOV. PER PER CENT CENT Weekly 200 260 240 240 220 220 200 200 180 180 160 150 140 110 '41 120 120 '42 100 100 BO 80 '40 60 3 JAN. MAY JULY SEPT. NOV. MAR. Per of - larrerary of the Treasury C 390 Items - - - - Regraded Unclassified MOVEMENT OF BASIC COMMODITY PRICES AUGUST 1939 -100 PERCENT PERCENT PERCENT PERCENT Weekly Average Daily 220 220 200 200 200 200 190 190 12 Foodstuffs 12 Foodstuffs 180 180 180 IBO 160 160 170 170 140 140 160 16 Row Industrial 160 16 Row Industrial Materials Materials 120 120 150 150 100 100 140 , - #1 is 1 " 140 ja OCT. FEB. APR. JUNE AUG. OCT DEC. a 18 a D a 9 of & a JUNE AUG. DEC. DEC JAN. FEB. MAIF 1941 1942 1941 1942 PERCENTAGE CHANGE FOR INDIVIDUAL COMMODITIES Aug. 1939 to Mar. 13, 1942 Dec. 6. 1941 to Mar. ,and Mar. 13, 1942 PERCENT PERCENT 12 Foodstuffs I2 Foodstuffs +40 200 +32 Hoge 324% 160 Cottomeed Oil cux Tollow ML7X Lard (D/X +24 Lard na 120 Hoge RMIX Corn H7% Coooo 067% Barley ea Borley N 7% +16 Tollow 79% Com 8472 80 Wheat 6.9% Wheat 78.03 Coffee 7722 = Sugar 6.9% Steers 6/X Steere Cottonesed Oil su 40 Butter 4X4X o Coffee ox Sugar Miex Butter 7% Coooo CET 0 -8 Aug Mar.13 Dec.6, Mar.6 Mar.13 1939 1942 1941 1942 1942 PERCENT Shellec PERCENT 16 Raw Industrial Materials 16 Raw Industrial +40 Materials Flowered are 200 Cotton were +32 Cotton 1132 160 Bunkep 004% Lood N.I. Animal Cloth 04/X Aven un Flowed 70.12 +24 Print Cloch 441 Zino 60/20 4X 120 Wba/ as Shellec ox Am 4143 +16 Zine 02 Niche N.72 a or 80 a MIX Rubber DE MAX : Capper or "Land NON & Screptore DX & 179% Tin oz 40 Copper M.OX D ox an AND Michee ox Tin ALT Burbp 4.3% 0 -8 Aug Mar.13 Dec.6. More Mar13 1939 1942 1941 1942 1942 127 F24-4 Chart Regraded Unclas COST OF LIVING, U.S. AND CANADA AUGUST 1939 - IDU FL# CENT PER CENT Cost of Living 120 120 115 115 (st Canada (Dom. BUR, OF STATE) 110 110 105 105 U.S. (B.L.S.) 100 100 95 95 J M M J $ N J M # J . M J M. M J $ N J M M 1935 1940 1941 1942 PER PER CENT CENT Fooda, Retail 130 130 125 125 120 120 115 115 Canada (Bun. OF STAT.) 110 110 105 105 U.S. (B.L.S.) 100 100 95 95 J. w M J 1 # - M M J 5 . a * M J M M J 1 - 1940 1941 1939 1942 128 Chart 4. the all the Secretary of the Treatery c - 412 - - - - - Regraded Unclassifi 129 Chart 5 INDUSTRIAL STOCK PRICES IN U.S. AND U.K. AUGUST 1936 - 100 Weekly (AVERAGE OF DAILY) 1941 1942 JAR. TCB. MAR. APR. MAY JUNE JULY AUG. SEPT. DCT. NOV. DEC. JAB. FEB. MAS. APR. MAY JUNE JULY AUG. SEPT. PER PER CENT CENT 100 100 95 95 90 90 as es U.D. 30 INDUSTRIAL STOCKS (DOW-JONES) 60 80 75 75 70 70 65 65 60 60 U.K. 56 INDUSTRIAL STOCKS 55 55 50 50 45 45 40 40 NOV. DEO. JAN. FEB, MAR. APR. MAY JUNE JULY AUS. ACPT. JAN. FEB. MAR. APR. MAY AME JULY AUS. SEPT. OCT= 1942 1941 Office gl the Secretary of the Treasury FO 150 Division of Research and Statistics Regraded Unclassified 130 falen war department WASHINGTON MAR 16 1942 The Honorable, The Secretary of the Treasury. Dear Mr. Secretary: I desire to acknowledge your letter of February 26, 1942, inclosing a copy of a telegram from Represen- tative John H. Tolan, Chairman of the House Committee Investigating National Defense Migration, and a copy of your reply thereto. Your attitude in this matter as indicated in your reply to Representative Tolan is carefully noted. I appeciate the forwarding of this information If NON 08 - SACE by you. Sincerely yours, Secretary of War Regraded Unclassified Treasury Department 131 Division of Monetary Research Date March 20, 1943 To: Mr. Southard From: Mr. Gass Since this relates only to the supply of gasoline for the transfer of gold in North Africa, I don't think it need be brought to the Secretary's attention. MR. WHITE Branch 2058 - Room 214} 132 C 0 P I DEPARTMENT OF STATE WASHINGTON March 16, 1942 In reply refer to FD 851.51/2943 The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and encloses a copy of strictly confidential despatch No. 1183, dated February 6, 1942, from the American Consulate General, Algiers, Algeria, concerning gold transfers to France from the Bank of Algeria. Enclosure: Departch No. 1183, February 6, 1942, From Consulate General, Algiers. Copy:1c:3/19/42 Regraded Unclassified C 133 0 P Y No. 1183 AMERICAN CONSULATE GENERAL Algiers, Algeria, February 6, 1942 STRICTLY CONFIDENTIAL Copy of confidential document from the files SUBJECT: of the Interior. THE HONORABLE THE SECRETARY OF STATE, WASHINGTON. SIR: I have the honor to enclose a copy of a confidential document from the confidential files of the Ministry of the Interior concerning gold transfers to France from the Bank of Algeria. The document is in French and a translation into English is also attached herewith. Vice Consuls Boyd and Knox secured this document from a very reliable source and felt it would be of interest to the Department. Respectfully yours, Felix Cole American Consul General JON/JE File No. 863.4 Enclosures: Confidential document from the files of the Interior in French. Translation into English of same. Copies: Quintuplicate to the Department 1 copy to Vichy 1 copy to Tangier Copy:1c:3/19/42 Regraded Unclassified 134 0 0 P Y TRES URGENT Vichy, Dec. 26, 1941 Ministery of the Interior General Secretariat for the Administration Under Direction for Algeria 131 The Minister Secretary of State /B/ for the Interior / To the Governor General of Algeria /2/ Industrial Production: /s/ Object: Transportation of gold from the Bank of Algeria. To insure the application of various committments undertaken by the French government, the Bank of Algeria is under the obligation to carry out, for the account of the Ministry of National Economy and Finance, numerous transfers of gold from its vaults to the airport of Algiers. In this regard, the resources of the Bank in respect to industrial alcohol and gasoline may very possibly soon be exhausted. In order to maice proper response to the wishes expressed by my colleague of the Financial Ministry. I have the honor to ask you to give satisfaction in the briefest delay possible to any requests for liquid automotive fuel which will be presented by the Bank of Algeria for such gold transfers and to keep me closely informed of any difficulties which might occur in the carrying out of these instructions. For the Minister The Counselor of State General Secretary for the Administration Signed: Illegible Reply made on the 10th of January stating that in the interval instructions have been given to comply to the Bank of Algeria's requests. Signed: Ettori Secretary General of the Governor General of Algiers. Copy:1c:3/19/42 Regraded Unclassified Treasury Department 135 Division of Monetary Research Date March 11, 1942 pgx To: Secretary Morgenthau From: Mr. White fi (1) The Colombian Central Bank has asked the Federal Reserve Bank if it could, in view of current transportation difficulties, hold in custody in that country the gold which it sells to the Federal. (2) A similar request was made by the Chilean Central Bank in January and was denied. It appears likely that many other coun- tries in Latin America would ask for this privilege if they thought it would be granted. Therefore the attached letter has been drafted todeny the Colombian request. 11 (3) Should the transportation situation become more acute and inability to ship gold to the United States con- sequently embarrass Latin American countries, we could of course review the situation in the light of such developments. MR. WHITE. Branch 2058 - Room 2141 136 MAR 16 1942 Dear IF. Knoker Reference 18 vade to your letter of March 6, 1942, melosing 4. translation of a letter from the Sanco de la lepublica, Bogota, Colomida, dated February 21, 1942, which refers t difficulties with respect to transportation facilities and inquiring 16 rold horeafter sold to the Federal Monerve Bank of See York might be left in Colombia in the custody of E. responsible enterprise until shipping conditions are core favorable. It 1a noted that you refer to your letter of January 6, 1942, in which you forwarded a similar request from the Panco Central de Chile, and that you suggest that you be authorized to reply to the Colombian Central Bank in terms sinilar to your reply to the Chilean Central Bank, es authorised in Mr. D. A. Sell's letter of January 16. The Treasury Department has given rereful considers- tion to the request of the Danes de is Republics, Bogota, Colombia, tot in this instance, as in that of Chile, does not deed it advisable at this time to depart from its policy of not purchasing gold for delivery outside of the United totas. You APP therefore authorised, AZ fiscal agent of the United States, to inform the Zanco de 10 Republics, Bogota, Colombia, accordingly. discerely, (Stense) s. its secretary of the Treasury. it. L. " inclos, more Vice President, Federal 1000770 Park of from York, How York, New York. 11ease mium to secretary's office FASTESH 3/11/42 Regraded Unclassified FEDERAL RESERVE BANK OF NEW YORK March 6, 1942 Attention Mr. Harry D. White Dear Mr. Secretary: with my letter of January 6, 1942, I forwarded translation of a letter dated December 20 from the Banco Central de Chile, Santiago, containing its suggestion, in substance, that, in view of the recent sharo increase in shipping charges vie, as fiscal agent of the United States, in future purchase gold from it for delivery in Santiago instead of New York. In that letter I discussed the prob- lem involved at considerable length end recommended that, unless reasons of national policy required compliance with the Chilean suggestion, we be authorized to inform the Banco Central that the Treasury Department did not see its way clear to comply with the suggestion made in the letter of December 20, 1941. The authority to inform the Banco Central accordingly was given to us by Mr. D. W. Bell's letter of January 16. We now enclose translation of a letter dated February 21, 1942 from the Banco de la Re publica, Bogota, Colombia, in which that bank requests that "in view of the extraordinary rise in the war risk rates during recent months", we consider hereafter leaving gold sold to us (as fiscal agent of the United States) by Banco de la Republica, in Colombia "in the custody of a responsible enterprise such as for instance the National City Bank of New York in order to have it shipped to the United States when conditions appear more favorable". The amount of gold involved might be sub- stantial, considering that in 1941 Banco de la sublica sold us slightly in excess of $24,000,000 worth of gold. The request made by the Banco de la Republica is, of course, of the same character as that made by the Banco Central de Chile and should, therefore, it seems to us, be treated in the same way. We accordingly recommend that we be authorized to inform the Banco de la Republica that the Treasury Depart- ment does not deem it advisable to depart from its policy of not purchasing goló for delivery outside of the United States, unless, of course, reasons of national policy should require different decision. Yours very truly, L. W. Knoke Enclosure Vice President. morable Henry Morgenthau, Jr., cretary of the Treasury, shington, D. C. Regraded Unclassified FOREIGN DEPARTM - FEDERAL - OF - - TRANSLATION FROM Bance de la Republica, Boreta DATE February 21, 1942 TO Federal Reserve Bank of Ken Tork, New York REF. NO. Sentlement Our Board of Directors has decided that in view of existing diffi- cultics with respect to transportation facilities, " consult with you if 10 would be possible for this bank to leave gold which " may hereafter sell to you, in Colombia in the custody of a responsible enterprise such as for 12- stance The National City Bank of New York in order to have it shipped to the United States when conditions supear more favorable. If this n gestion is acceptable to you in principle, we should, on ver part, provide all the facilities required in order to have the gold held In custody in erfect security, and ve should come to an agreement about the terms on which freight and insurance for your shipment to New York would have to be paid at the time that may appear desirable. " trust that you will give particular attention to this request primarily in view of the extraordinary rise in the was risk rates during 74- cent months. Yours very truly, BQUCO DE LA REPUBLICA (signed) Julie Care Manager. Regraded Unclassified 139 C 0 P Y DEPARTMENT OF STATE WASHINGTON March 16, 1942 The Secretary of State presents his compliments to the Honorable the Secretary of the Treasury and transmits herewith for consideration and appropriate action the enclosed Agenda Sheet and the material attached thereto. The Secretary of State would appreciate being advised of the disposition which is made of the problem raised by these enclosures. Enclosure: Agenda Sheet and material attached thereto. Copy:1c:3/16/42 Regraded Unclassified C 140 0 P I DEPARTMENT OF STATE FOREIGN FUNDS CONTROL DIVISION AGENDA P.R.A. DOCUMENT SUMMARY: SERIAL NO. 3-2-1 (1) DESCRIPTION: (a) Copy of telegram no. 156, dated February 27, 1942, from the American Legation, Helsinki. (b) Paraphrased copies of telegrams nos. 93. 110, 131, from the American Legation, Helsinki. (2) CONCERNING: Application for a Treasury license to permit the payment of $14,500 from Finnish funds in the United States in the settlement of debte owing to the Paramount Films Company from its Finnish Agency. (3) APPLICATION NO.: Unknown. (4) PRESENT STATUS: (5) ACTION TAKEN: (6) RECOMMENDATION: The Department of State recommends favorable consideration in order that American Filme may continue to be sent to Finland. Copy Attached Yes State Department File No. 860D.4961 Motion Pictures/23. 17, 15 and 20. Copy:1c:3/16/42 Regraded Unclassified 141 0 0 ? Y NMC Helsinki This telegram must be paraphrased before being Dated February 27, 1942 communicated to anyone other than a Governmental Rec'd 3:52 p.m. agency. (BR) Secretary of State, Washington. 156, February 27, 2 p.m. My number 131, February 18. A distributor of Paremount films today informed Secretary of Legation that he had learned that our Treasury Department had refused an application for B. license to permit the payment of $14,500 from Finnish funds in the United States in settlement of debts owing the Paramount Company from its Finnish Agency. He said the matter was of great importance in relation to the future importation of Paramount films for which he had a order for eighteen feature pictures as the Paramount Company would be reluctant to permit pictures to be shown here if no arrangements for payment could be made. I venture to repeat the inquiry in my telegram number 110 of February 11 as to the possibility of unfreezing Finnish dollar balances for the express purpose of paying for American motion picture films in Finland. Repeated to Stockholm. SCHOENFELD LMS Copy:1c:3/16/42 Regraded Unclassified 142 COPY PARAPHRASE OF TELEGRAM RECEIVED FROM: Legation, Helsinki DATE: February 4, 2 p.m. TO: Secretary of State NO.: 93 REFERENCE: Stockholm's 174, January 31, to Department. The Legation's Secretary was visited this morning by a delegation which represented the distributors of motion picture films of American origin. They called to consider what action should be taken in response to the German film chamber's demand that from next July 1 there should be neither importation nor even showing (repeat even showing) of American pictures in Finland. Board of Directors of Finnish Film Chamber of Commerce apparently confronted motion picture distributors in this country with a fait accompli according to the report of this delegation. The large Finnish film producing companies, Adams Film and Suomi Film, apparently have B. dominant voice in the Board. Latter accepted demand by Germans without con- sulting other members of Chamber. Their motive was apperently the fact that both companies use large quantities of raw film and act in the distribution of European. including German, films. The Government undoubtedly knew what was taking place but very cleverly kept away from the whole matter, being aware that today is the day that negotiations start with Germany for a new trade agreement. As a matter of fact, the head of the commercial section of the Foreign Office, Falsanti, and the Regraded Unclassified 143 - 2 - chief of the foreign exchange section of the Bank of Finland, Sundman, calmly stated to the distributors of American films that the present system of importing 75 pictures a year was entirely satisfactory to them. An attempt is now being made by the distributors of American films to gather support from all distributors in this country of American films to run counter to the deci- sion taken by the Finnish Film Chamber of Commerce's Board of Directors. They point out, however. that their situa- tion is very difficult since the Board of Directors has an irrefutable answer in pointing out to small distributors that they will be better off without American films than without films of any kind. Americans felt that position would be improved if assurances could be given that American or British rew filme could be exported to Finland by borrowing from Swedish stocks. Kain argument of Adams and Suomi Films would be overcome if enough raw film could be imported from July 1, 1942 to June 30, 1943, the normal film year, to manufacture fifteen full length features. 250,000 finnmarks will finance the pur- chase of enough film for the master film and all copies of a feature picture. Feature films here are estimated in terms of cost and not in terms of length. The Regraded Unclassified 144 -3- The delegation was informed by the Secretary of Legation that Swedish producers had already assumed an independent attitude before German demands of a similar nature and that both the American and British Legations at Stockholm had shown a helpful attitude with regard to helping such producers to obtain a. supply of raw film. He stated, however, that as far as Finland was concerned, the British Government had already stated that Sweden could not allow Finlend to receive supplies imported by Sweden, these supplies to be replaced by navicort imports. The British Government itself would have to allow the exception BO far a.8. raw film was concerned. Therefore, question should be settled by American and British Governments in collaboration. Undoubtedly advantage derived from B. continued showing in Finland of American motion pictures would be realised in London as well as in Washington. He promised that the Legation would enlist the Department's help in this matter and agreed that American distributors were right in thinking that for the time being the best procedure Wes one of delay in order to explore all possibilities of obtaining raw film from America, meanwhile delaying any definitive answer to German ultimatum. Notwithstanding fact that Board of Finnish Film Chamber had accepted German demand, such action has been disapproved by practically all theatre owners and they are holding a meeting on February 7 to reconsider the position of the chamber in & full session. Copy:1p:bj:3-16-42 Regraded Unclassified 145 C 0 ? Y PARAPHRASE OF TELEGRAM RECEIVED FROM: Helsinki DATE: February 11, 5 p.m. NO.: 110. REFERENCE: Legation's telegram no. 93. February 4. CONFIDENTIAL Representatives of the American motion picture com- panies in this country met this date with the Secretary of Legation. These distributors have won quite 8. victory in the Finnish Film Chamber of Commerce since last meet- ing with the Secretary of the Legation. As B. result of the public session of February 7. the Board of Directors of the Chamber was forced to resign and its action in acquiescing in the German demand was repudiated. The question of accepting the German ultimatum was made one of confidence by the ex-chairman of the board but he lost out, the vote being 95 to 103. He represented Adams Filmi. It may be realized how much the German proposal was resented and how strong the opposition to the Board was when one considers that Adams and Suomi Filmi together through their ownership of theaters had 23 votes at their disposal. It is interesting to note that Suomi and Adams Filmi, who are important Finnish producers, are not included in the membership of the new Board of Directors. Two of the five members represent Helsinki distributors while the Regraded Unclassified 146 - 2 - remaining three represent provincial theatre owners. Veckman, representative in this country for MGM, who is the Vice Chairman of the new board, was present with McClintock at the meeting which took place today. The new Board of Directors are, of course, very much encouraged by their recent success, but the Board, which has the backing of the American distributors is more than ever desirous of being assured that (1) the British and American Governments can facilitate the export to Finland of raw film and (2) that finished pictures will continue to be sent to Finland by motion picture companies in the United States. There is not much financial reward for American companies which send films to Finland inasmuch as the Bank of Finland only allowe 75 American features every year and a $200 remittance per film. American distributors, nowever, have been informed by the Bank that it is prepared to release all frozen funds due American film companies in this country up to April 19, 1941 and maybe even after that date. of course, in order that the Bank of Finland may be able to do this, dollar balances must be available. For this purpose the Treasury Department would have to issue licenses. According to American distributors no regular procedure with regard to the granting of such licenses has been established 60 far. As late as last November checks of the Bank of Finland were cashed in the United States by MGM. On the other hand, last May the representative of Regraded Unclassified 147 - 3 - Warner Brothers had similar checks returned to him, We believe that the Treasury Department should allow these accounts to be liquidated, and with that in view, Bank of Finland checks should be honored, especially as they represent payments for debts which in most cases were contracted before the war and which are due to American companies. Such action would encourage American motion picture producere to send additional films to this country. Raw films can only be imported with the acquiescence of the British Government and the estimate of 15 feature pictures for every year is confirmed. On the basis of 10 prints for each feature film it is necessary to obtain the following lengths of film, 10,000 metero for the picture negative; 15,000 meters for the sound negative: 42,000 meters for the positive film. In order to estimate the total amount needed in this country, the foregoing figures should be multiplied by 15. According to our informants, it is believed that no more than 10 full length feature films can be produced every year in war time. However, the shorts would require footage equal to that ra- quired for five feature films. The Regraded Unclassified 148 - 4 - The British Legation's Commercial Secretary in Stockholm according to our Legation there will refer the question of raw- film importation to Economic Warfare Ministry in London. It is just as important, however, that we assure Finnish distributors that such distributors may count on finished American feature pictures as well as raw film. Small theater owners who largely make up membership of Finnish Film Chamber of Commerce are naturally more interested in distribution problem than production problem. Germans, in their demand to Chamber, insist on lumping together both problems, which naturally 1e most advantageous to them. Essential matter be settled quickly if victory won BO far is not to be lost before new demand is made by Germany. SCHOENFELD Copy:ime 3/16/42 149 PARAPHRASE OF TELEGRAM RECEIVED FROM: AMLEGATION, Helsinki TO : Secretary of State, Washington DATED: February 18, 1942 NUMBER: 131 Reference is made to telegrams 93 and 110, February 4 and 11 from the Legation. The question of the demand by Germany that Finland deny iteelf American Films subsequent to July 1, was dis- cussed informally yesterday by the Legation's Secretary with the Chief of the Commercial Soction at the Foreign Office. It was stated by Jalanti that the importation of American motion pictures on the quota basis as during the past year was agreeable to his section and speaking as B. member of the Import License Board he stated import licenses would be granted. The question of providing sufficient foreign exchange to pay for raw film imports would be & difficult matter he stated; but the suggestion by McClin- tock that it may be possible to use Finnish dollar balances in the U. S. for that purpose was agreed to. It was frankly stated by Jalanti, however, that further imports of American motion pictures is & political question and that he was of the opinion that attempts to suppress American films in Finland would succeed. In addition to Finland and Swedon, he said incidentally, that similar de- mands had been nade in Portugal, Switzerland and Hungary. Copy:bj:3-16-42 Regraded Unclassified 150 WM Wellington This telegram must bE peraphreed before being Dated Norch 16, 1942 communicated to nnyone other thrn E. Governmental Rec'd 11:30 p.m. agency. (BR) Secretary of Strte, Washington. 32, March 16, 9 c.m. Please communicate the following to Trersury CS High Commissioner Scyre's telegram No. 29, February 22. "Committee described my 9, January 17 EXCEPT Nisto absent destroyed contents three boxes re- ferred to in my 3, Jenuery 10. Gontents at time of burning comprised United Strtes dollars 202,441 and P 61,488 letter constituting pasess accepted in exchange for dollars. Balance of United States dollars 146,000 represented by United Strtes Treasury checks, $10,000 reported my 16 February 6 and $100,000 rnd $36,000 reported my 28, Fabruary 22. Sayre." COX NK Regraded Unclassified 151 CABLEGRAM From: Basle To: Federal Reserve Bank of New York Date: March 16, 1942 #18 ATTENTION KNOKE Please obtain license to buy from U.S. Treasury gold bars containing approximately 38,500 fine ounces to be held earmarked for our own account #2 debiting our account B with countervalue. sgd. Bank for International Settlements Rec'd by telephone from Federal Reserve Bank of New York, March 17/42, 11:30 kaa 152 PARAPHRASE OF TELEGRAM SENT TO: AMLEGATION, Derm DATED: March 16, 1942, 7 p.m. NUMBER: 687 The Swiss-Spanish transfers were discussed on March 12 by Assistant Secretary Acheson and Mr. Gautier, the repre- sentative in the United States of the Swiss National Bank. It W&B stated that the Government of the United States would license the transfer of $2,200,000 to the sccount of the Inetituto Espanol de Moneda Extranjers from the Swies National Bank. Consequently, on March 13 the licenses necessary to permit the transfer of this amount were issued by the Treasury Department. Mr. Gautier indicated that the Government of Switzerland would agree to make available to either the United States Government or to such persons at it should direct, the Bwise franc equivalent of $2,200,000, as against the payment of $2,200,000 into the blocked account in this country of the Swiss National Bank. Because of the faot that Mr. Gautier's instructions from his bank did not refer to the proposal that the bank should purchase $1,000,000 from the British for Swine france, the figure was set at $2,200,000 rather than 200,000,000 previously mentioned in the Department's no. 606. It W&B pointed out to Mr. Gautier that upon his assurance that the Swise Government would make available the Swice franc Regraded Unclassified 159 -2- franc equivalent of $1,000,000 to the British, this Govern- ment would be prepared to approve the transfer of the additional $1,000,000. It was stated by Mr. Gautier that be would inform Mr. Aoheson later as to what assurances could DE given 20 to the additional $1,000,000, since Mr. Usutier preferred to confirm by cabling his bank. It was indicated by Mr. Gautier that his bank could not scoept as E, principle that further transfers could not be made from the Swiss socount to the blocked accounts of other neutral banks solely for Swime purposes. It was pointed out to Mr. Gautier that this Government merely indicated that its policy would be not to permit such transfers in the future and that it had not attempted to compel the Swice dovernment to soquiesce in this principle. Mr. Cautier was told that the transfer of $2,200,000, with the cossibility of reising it to $3,200,000, Va# simply an sttempt to settle the difficult financial questions which bed arisen between the Swice Government and the United States Government by warning the Swise of the future attitude of this Government and by sttempting to meet the present Swiss embarrasaments AB soon AE possible. This Government wee therefore urging the Bwien Government to make future payments in come other manner in order that there might be n practical demonstration of the correot- ness or incorrectness of the several predictions made by the Regraded Unclassified 154 -3- the Swies as to the effect of refusing further transfers of this nature. This explanation seemed to satisfy Mr. Gautier, This Government has authorized the transfer of $240,000 from Greek Government funds in this country 18 part of the $2,200,000 which the Swise Government has agreed to transfer, of which the equivalent in Bwise frence 1s to be made available to the Minister of Greece in Bern to buy foodstuffs and medical supplies for distribution by the International Red Cross in Greece through private channels and which is not to be entered into the accounts of the Legation. The additional telegraphic transfer of $650,000 to supplement the $350,000 mentioned in the Department's no. 139 of January 17 will soon be initiated. In the future other transfers will be made. It 1e suggested that you offer no official drafts for sale, in order to prevent confusion from arising " to the amount or dollars which the Swiss National Bank is required to accept, but as on alternative onsh from Swiee france such drafts as authorized under the procedure presented in telegram no. 307 of Fabruary 3, 1942 to the Legation. Regraded Unclassified TREASURY DEPARTMENT 155 INTER-OFFICE COMMUNICATION DATE March 16, 1942 TO Secretary Morgenthau FROM kr. Dietrich CONFIDENTIAL Registered sterling transactions of the reporting banks were as follows: Sold to commercial concerns £44,000 Purchased from commercial concerns £ 5,000 Upen market sterling remained at 4.03-3/4, with no reported transactions. In en unusually active market, the Canadian dollar discount widened further to 12-1/4% by the close, as compared with 12% on Saturday. The banks' estimates for today's turnover generally exceeded 500,000 Canadian dollars, as compared with the usual daily figure of about 100,000 Canedian dollars during the past few months, Most of today's offerings were believed to have represented the proceeds received by American holders of Canadian Pacific Railway bonds falling due today. Active support was given to the rate by the presence of the Post Office as a buyer of about 500,000 Canadian dollars. However, the banks believe that the Post Office has now satisfied most or all of its requirements end that the discount will widen Further in the next few days, especially since substantial amounts of Cenadian dollar redemption proceeds remain to be sold. In New York, closing quotations for the foreign currencies listed below were as follows; Argentine peso (free) .2365 Brazilian milrels (free) .0516 Colombian peso .5775 Mexican peso .2064 Uruguayan uego (free) .5295 Venezuelan bollvar .2825 Cuban peso 7/32% premium We sold $24,938,000 in gold to the Bank of Sweden and this vas earmarked in the Bank of Sweden account that is subject to the instructions of Messrs. Bostrom and Eriksson. We also sold $19,949.000 in gold to the Swiss National Bank, which was earmarked for its account. In order to partly cover the above sales of gold, we purchased $25,936,000 in gold from the General Fund through the New York Assay Office. Regraded Unclassified 156 -2- The Federal Reserve Bank of New York reported that the Bank of Canada vse shipping 43,370,000 in gold from Canada to the Federal for account of the Government of Canada, for sale to the New York Assay Office. In London, spot and forward silver remained at 23-1/2d, equivalent to 42,67#. The Treasury's purchase price for foreign silver was unchanged at 35#. Bandy RAC Harman's settlement price for foreign silver was also unchanged at 35-1/8#. We nade no purchases of silver today. 2 CONFIDENTIAL Regraded Unclassified 157 Copy No, BRITISH MOST SECRET (U.S. SECRET) OFTSI No. 38 Information received up to 7 A.M., 16th March, 1942. 1, SIAVEL A naval mine-sweeping wholer whot down TA. Ju 88 off MURMANSK on 13th. 15th. At 6.25 a.m. two motor gun-boata attacked an E-boat off the Dutch coast, at 7 a.m. the 5-boat surrendered, WAS boarded and taken in tom 10 prisoners being captured, At 9.30 a,m, 4 more E-boats appeared from Eastward, the too was slipped and the prize 1e believed to have sunk. In tho ensuing action one E-boat was severely damaged but contact was lost in fog at about 10 a.m. Our motor gun-boats sustained considerable above mater damage and 6 casuulties, Sub= requently Spitfires attacked 3 E-boats escorting a fourth which were damaged, arm of these was loft burning and the others were badly damaged. 2. LILITARY LIBYA. 14th, Increased enemy activity south-west of THIN, 12 miles scuth-east of MEXILI a Free French column met 14 Italian tanks which ware Magged and withdrow, BURMA. SHWEGYIN area - no change in forward position. PROME Road sector - all quiet. :. AIR OPERATIONS WESTERN FRONT. 15th, 5 Squadrona of Spitfires on returning from an unsuccessful operation against shipping off the coast of BRITTANY met with bad weather ever this country, 14 crashed or forced landed, two pilota being killed, LIBYA. 13th/14th, Wellingtons laid mines in BENGRAZI HARBOUR and bembed the mays, other Wellingtons attacked a concentration of M.T. near MEKILI, 14th. Bostons, escorted by Kittyhavks, bombed MARTUBA landing ground, the Kittyhawks, two of which were lost, shot down three enomy fighters and probably destroyed two others, MALTA. 15th, 102 aircraft attacked the submarine base and LUQA A number of service and civilian casualties were caused and much damage done to civilian property, Regraded Unclassified 158 UNITED STATES GOVERNMENT UNITED ANYONE COORDINATOR OF INFORMATION WASHINGTON, D. c. March 16, 1942 Honorable Henry Morganthau, Jr. Secretary of the Treasury Washington, D. C. Dear Henry: Enclosed is a summary of the British Home Intelligence Report for the week ending March 9. Sincerely, Bill William J. Donovan Attachment Regraded Unclassified 159 The following is a summary of the British Home Intelligence Report for the week ending March 9. Public opinion is calmer and less critical in some respects than last week. However, coupled with this are suggestions that the majority have settled down to a state of war weariness, apathy and frustration. "The mood of the people is more depressed than it has been since the war began." The general trends are a willingness to accept heavier burdens and sacrifices, a demand for strong leadership, and demands for more drastic punishment of "moral saboteurs" including not only black marketeers and slackers but all who do not pull their weight. 2. The high spot of the week was the raid on the Renault plant. However it was received with restraint. There were no caps in the air. Instead "its about time, too. The speech of Air Minister Sinclair promising renewed and neavier attacks was welcomed generally and likewise Sir James Grigg's proposal to comb out ineffective army officers. "It Is now accepted as clear that Capt. "argesson acted as a brake.' However, people ask, "Why stop at the Lieutenam Colonels, why not begin with the higher ranks?" 3. Regarding the Far East there was little comment but general depression. 4. Regarding the Empire. In two out of the thirteen regions the possibility of Australia's leaving the Empire after the war was freely discussed. It was felt "she has no confidence in us and is leaning more and more on the United States.' The widespread anxiety about India continues. British relations there are considered critical. Immediate Dominion status is urged. The attitude of the government is causing a growth of impatience. "It is thought that we lost Malaya through lack of sympathetic help by the natives and that we are making little attempt to enlist the whole hearted cooperation of the Indians." Regraded Unclassified 160 -2- 5. All interest in the Libyan campaign has been lost except for wondering when Rommel is going to spring and why PWG can't get one in first." 6. Regarding Russia there are the same "humiliating comparisons" as previously and the same gratitude and admiration. It 1s reported from several regions that "Stalin is still the most applauded figure on cinema screens." 7. The government's plan to curtail sports events was approved generally. 8. Special "disquieting" reports concerned several questions regarding the war. These are introduced by the statement that there is no doubt that a large proportion of the civilian population is still actively and whole heartedly forwarding the war effort, but a number of people have been encountered since mid January whose mood suggests a slackening of effort and a feeling of a lack of purpose- among all classes. Point A: What are we fighting for: "The public has no clear cut conception of the purpose of the war. The Russians have a definite purpose. They have a way of living that they believe is worth fighting for and which enables them to fight well. The Germans are thought to have a purpose. We have only vague conceptions, fluctuating between ideas of right and wrong and ideas of holding what we've got." Point B: How can we win the war? "There is less conviction of our ability to win and a growing tendency to think that unless we deserve to we shall not win." Point C: Let Hitler come. There is a feeling among submerged social groups that "when he does get here he can't do anything so very bad." Point D: "The admiration for Russia gives rise to a sympathy and interest in her institutions and ideals, drawn more from the conviction of our own inefficiency than from any liking of communism. Regraded Unclassified 161 -3- 9. Regarding news presentation. Disgust and apathy this week. The war news is less listened to and less read. There is still a "glossing over bad news" by BBC. 10. Regarding industry. There is disillusion at the lack of a sense of urgency and dissatisfaction with production. The public blames the managements for bad organization, overstaffing because of "cost plus system," window dressing, not taking workers into their confidence, running up costs on Sunday work and overtime and looking after their own present and postwar interests first. However, on the other hand a proportion of the workers are blamed because "they do not seem to be pulling their weight because: "get as much as you can for doing as little as you can." Regraded Unclassified 162 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 16, 1942 Secretary Morgenthau TO Mr. Kamarck FROM Subject: Summery of Military Reports Germany Germany 18 making an intensified drive to meet ite labor shortage. Demands have been made on Belgium and France to provide between them 600,000 edditional workers for Germany. The Germans have released 200,000 boys from school before the end of their school year for work in armament factories. (U.K. Operations Report, March 12, 1942) Jananese Air Losses it 18 estimated that the Japanese have lost approxi- intely 1,800 planes, half of these in combat and half in starr operations, such 88 accidents end forced landings. The Japanese are believed to have 8 total air strength of some 5,000 plenes, with R production of around 300 combat planes A month. Therefore, at this rate of expenditure, the Jananese Air fleet would diseppear in about sixteen months. (C.O.I., "The War This Week," March 5-12, 1942) Jannnese Shipping Situation Like the weak Japanese air nower, the shipping nvellable to the Jananese may prove to be A limiting Exctor on Japanese offensive plans. According to the C.O.I. calculations on the use of Jaoanese shipping, the Japanese do not have more than n. million and e half tone of shipping available for R possible Australian campaign. This would limit the size of the expeditionary force to Regraded Unclassified 163 000,000 men and risk the entire merginal merchant tonnage owned by Japan over And above the rock bottom minimum needed to sustain her life. (These calculations annear to be fairly reasonable. All of the operations carried out in the South Seas by Japan to date have used at most only 8 few hundred thousand men-) (C.O.I., "The War This Week, " March 5 - - 12, 1942) Royal Air Force During the night of March 8/9, the Royal Air Force used b2 neavy bombers in bombing Germany. (U.K. Operations Report, March 9, 1942) (This is the largest number of heavy bombers used to late. It probably indicates that the British nossess, In squadrons and in reserve, a total of about 200 heavy bombers. This does not include the Coastal Command to which most of the American heavy bombers were sent. It 18 now revealed by Lord Trenchard, Marshal of the R.A.F., that the British concentrated in 1941 on building un the Coastal Commend at the expense of the Bomber Commend. In view of the importance of shipping, it is difficult to cuarrel with this decision. It does explain why there has not been that increased intensity of bombing attack on Germany that otherwise might have been expected.) Regraded Unclassified 164 Lad VOICE OF THE CHIEF "with all their power, Messrs. Mundt and Schmidt, the tools of the Nazi Party Commune in the High Army Command have been working for disciplinary action against Major General Toussaint, military commander in the Protectorste (Sohemia and Moravia). They aim to have him relieved from his post and sent to Copenhagen as military attache.' Major Toussaint had been ordered to write a memorandum explaining why arms production at Prague had declined by 11 percent 98 against the same month last year. "Major Toussaint did not try to ingretiste himself with his superiors. Instead, he made it clear that the main reason for the declining output of the Czecha since Heydrich's (Protector of the Protectorate, Gestapo official) ascension, lies in the throttling of every healthy reason for industry and life among the population through the despotism and the brutality of the administration." According to Toussaint's report, the Czechs, "normally an active and industrious people, have sunk into complete apathy due to the Heydrich system. Their two main grievances are: (1) There is no redress against the despotic Acts of the S.S. And (2) The Population is allowed to keep only the smallest amount of money At their homes. Thue, a man cennot have the feeling that he 18 working for himself and his family." Toussaint's memorandum cites the case of a Polish criminal who, in the uniform of a Gestapo official, broke into houses and robbed people: "The worst of it is that everyone looked at the method of this Polish thief 88 the normal procedure of the Gestapo." "Thus went the report of Major General Toussaint, an unstanding German officer who, to be sure, is no friend of the Poles and Crechs and Slovake, but who has experience In the handling of subjugated populations." (Foreign Broadcast Monitoring Service; Federal Communications Commission, March 13, 1942.) Regraded Unclassified 165 OF POSSIBLE INTEREST Jananese Fifth Column (The assertion that the Jananese have imitated the Germane in organizing Fifth Columns 1s unwarranted. The following is B description written in 1904 of the Jannnese advance into Korea during the Russo-Jananese war.) Long 820 they (the Japanese) started Korean language classes in Tokyo for vicked soldiers. While some of the best Japanese officers were making their way through Manchuria and Mongolis others went all over northern Korea. Men living AB Koreans, speaking the language like natives, regarded even by the natives as people of their own race, were in every district. The Japanese knew not only every road and trail, but apparently every person. Thus, when fighting came, they knew the land, while the Russians living in its borders, did not. Every Japanese officer has his map of the part of the country he 18 working in. The Russians, apparently, have had to make their mans AS they go The first great movement northwards WAS not of troops, but of transport. A few soldiers were forced up to save Pingyang from the Russians, but the remainder waited until there were supplies ready for them. In every town between Seoul and Ping-yang, Jananese dressed AB coolies, but ermed with rifles, appeared on the streets. One man in plain uniform takes possession of A temple or a palace, and gigentic stocks of food and clothing srise, 88 it were, from the earth. Here 18 e mountain of red blankets, there an avalanche of coolie loads of rice. Here come men from fifty miles away driving cattle; while the advance guard of Japaneee troops 18 still miles AWAY in the rear. You enter 8 village, knowing that it 18 at least two days before the first soldiers pushing on from Seoul can reach there. At the entrance to the village you will orobably find B newly-erected notice-board with A large mad showing every house and road around, and with minute directions below for the billeting of the troops...." (London Daily Mell news account given in "From the Yalu to Port Arthur," by Colonel 0. E. Wood, Tokyo, 1905.) Regraded Unclassified 166 RESTRICTED MID 319.1 Situation No. 660 M.I.D., W.D. 11:00 A.M., March 16, 1942. 8-11-41 SITUATION REPORT I. Pacific Theater. Philippines: Nothing to report. Burma: Allied aircraft attacked several groups of Japanese troops in Lower Burma, Small mobile units on both eides are active. The British report the re- capture of Shwegyln. Australasia: Air action in the New Guinea area continues. Japanese aircraft attacked Port Moresby and Thursday Island, in the Torres Strait, on March 15. II. Western Theater. Nothing to report. III. Eastern Theater. There is no reported change in the general situation. (A situation map will not be issued this date.) IV. Middle Fastern Theater. British air and naval forces bombed and shelled the Italian Island of Rhodes on March 15. Aircraft of the R.A.F. bombed Tripoli on March 15. RESTRICTED Regraded Unclassified 167 TREASURY DEPARTMENT Washington FOR RELEASE, MORNING NEWSPAPERS, Press Service Tuesday, March 17, 1942. No. 30-78 3/16/42 The Secretary of the Treasury announced last evening that the tenders for $150,000,000. or thereabouts, of 91-day Treasury bille, to be dated March 18 and to mature June 17, 1942, which were offered on March 13, were opened at the Federal Reserve Banks on March 16. The details of this issue are as followe: Total applied for - $535,476,000 Total accepted - 150,273,000 Range of accepted bide: (Excepting two tenders totaling $90,000) High - 99.975 Equivalent rate approximately 0.099 percent If Low - 99.947 " Il If 0,210 Average Price - 99.951 " # H 0.195 If (99 percent of the amount bid for at the low price was accepted) -000- Regraded Unclassified 168 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 17, 1942. TO Harold Graves FROM Secretary Morgenthau The President of the United States called me up at 10 o'clook Monday night to tell me how pleased he was with the Treasury program. Do you suppose that you could find out what special features there were on the Program that drew his attention? I'd like to have an answer on that before noon on Tuesday. Be sure and get me an answer by noon Tuesday. (Mr. Kuhn had the program and showed it to the Secretary at 9:30 meeting this morning.) Regraded Unclassified 168-A March 17, 1942 9:30 a.m. GROUP MEETING Present: Mr. Bell Mr. Viner Mr. Thompson Mr. Buffington Mr. Paul Mr. Blough Mr. Graves Mr. Sullivan Mr. Kuhn Mr. White Mrs. Klotz Mr. Foley Mr. Haas H.M.JR: What are you doing here, Kuhn? MR. KUHN: Oh, I am all right. I just had a good cold. H.M.JR: I have got 8 good joke on Kuhn and most likely the rest of the office. At one minute past ten the White House phone rang. It was the President of the United States. He said, "Henry, that was the best program I have ever heard. That was a wonderful program the Treasury just put on." I said, "Yes, Mr. President. Yes, Mr. President. Which one of the programs?" He said, "You know, the one from nine-thirty to ten. That is what a program should be." I said, "Well, what is it called?" 'Oh, America something." He said, "Now why can't everybody put on programs like that?" I said Regraded Unclassified 168-B - 2 - "Yes, Mr. President. Thank you so much, Mr. President." He said, "Harry and I think it was wonderful. It was good for Harry and good for me." So I hung up and called up Kuhn and said, "Ferdie, what was the program?" "What program?" I called on Calla- han and Callahan wasn't home, and I don't know yet what the program was. MR. KUHN: I have it here. It is just the ordinary Monday night one, but they chose some very swell songs that everybody knows and likes, and they had some com- mercials in there that they think pleased him, one about labor unions and one about everybody sharing and so forth. H.M.JR: Is it in there? MR. KUHN: Yes, this is the script. H.M.JR: The Treasury Hour has a great following. Who here last night heard it? MRS. KLOTZ: We don't listen to it any more. (Laughter) MR. BELL: I tried to get the Treasury program. It was on WINX at eight forty-five, I thought. Is that the Treasury Parade or something? MR. KUHN: Treasury Staff Parade. MR. WHITE: You see everybody here is already sold on the idea. They don't have to be propagandized. MRS. KLOTZ: Oh, did you hear what Mr. Paul said? He said, "We don't get home in time to hear it." MR. BELL: That was good. H.M.JR: Well, I can't help it if you go out to dinner. Now, there is something disagreeable. I spent last night, part of it anyway, reading this blankety blank report on this man Hinckley. Regraded Unclassified 168-C - 3 - Now, all of this could have been avoided if we never had hired Mr. Hinckley, and Helen Dallas knew that this man was for two or three years President of the Youth Congress. MR. GRAVES: I don't think she did. H.M.JR: That is incorrect, Harold, she did. She recommended him to OCD and OCD turned him down. Mrs. Morgenthau turned to Mrs. Roosevelt and asked about it and she said no, not to take Hinckley, and you will find that she did know. MR. GRAVES: Perhaps. H.M.JR: You will find that she did know that he was for three years or whatever it was - she recommended him to OCD and took him down, and in the first place to take a man and pay him forty-six hundred who was getting thirty-two hundred, I can't understand. MR. GRAVES: It is bad. H.M.JR: And a man who was President for three or four years of the Youth Congress during its worst period - I mean, it is right in his application blank. Now, I am going to have to have this fight. You will find that Helen Dallas did know and furthermore Helen Dallas took the woman who was kicked out of OCD, this Boardman, whom they kicked out, this girl, and hired her. They dismissed Miss Boardman from OCD, you know, and as far as Mrs. Roosevelt - Mrs. Morgenthau asked Helen Dallas for suggestions. She suggested Mr. Hinckley. They looked into him, and Mrs. Morgenthau asked Mrs. Roosevelt and she said, "No, this man was President of the Youth Congress, and even though he got out he never has made 8. statement condemning any of the things that they have done." (Mr. Haas entered the conference.) H.M.JR: I am almost positive you will find that Miss Dallas did know. Regraded Unclassified 168-D - 4 - MR. GRAVES: Well, I talked with Miss Dallas and she gave me the impression that she did not know of that connection. H.M.JR: Well, she has a nice fight on her hands, and it is very unfortunate. Why, the amount of time that has gone into this thing is unbelievable. It all could have been avoided if anybody had just seen that this man was President of the Youth Congress. (Mr. Foley entered the conference.) H.M.JR: And it must say so in his application. Where is his application? MR. THOMPSON: That is his application. I don't think that was in it. I think that was found out in the investigating. H.M.JR: Well, we have got a beautiful fight, and it will all come up to me and everything else. It is just one of those thing which I think could have been avoided. It was very unfortunate. I am approving his dismissal. MR. GRAVES: Of course, it is not strictly 8. dis- missal, Mr. Morgenthau. He was hired subject to-- H.M.JR: I know, but this woman is going to want to see me and-- MR. GRAVES: Incidentally, I have promised to see Miss Nelson, and I intend to do that at the very first chance. H.M.JR: Ask Miss Dallas whether she didn't know that. MR. GRAVES: I will. MR. THOMPSON: There is always that risk where you appoint prior to the investigation. Regraded Unclassified 168 - 5 - H.M.JR: How is a man that never earned more than thirty-two hundred dollars & year getting forty-six hundred? MRS. KLOTZ: That is not unusual, is it? MR. THOMPSON: No, I wouldn't say so, MRS. KLOTZ: We do it all the time. MR. THOMPSON: That is the job set-up, in those grades. MR. GRAVES: There is no question about the man's ability. I have no doubt he has the ability to fill a forty-six hundred dollar position. H.M.JR: And there is nothing in there to prove he is 8. Communist, either. MR. WHITE: Why is he being fired? H.M.JR: Harry, if you want to get in it, God bless you. MR. WHITE: Well, I agree with you he might not be hired-- H.M.JR: He is being fired. He was taken on trial and - what do you pay him, for three months now? MR. GRAVES: Oh, no, as I recall, he began the ninth of February, and he will be paid for the time he actually worked. Answering Harry's question, he was hired, as every- one is in our department, subject to an investigation to determine his suitability from the point of view of a character investigation. MR. WHITE: Well, that is a pretty thin - I don't know much about the man, but if all he has been is Regraded Unclassified 168-F - 6 - connected with the American Youth Congress at 8. time like this and if he has dropped - you say he isn't & Communist and hasn't got a criminal record. I don't know. H.M.JR: Well, I dropped him on this because when he was President of the American Youth they stood for everything which I don't stand for. MR. WHITE: I hope not, but there are a lot of things they stood for that you stand for, Mr. Secretary. H.M.JR: I say they stood for a lot of things that I don't stand for, and 1 don't want a man who was Presi- dent of the American Youth Congress for three years con- tacting youth in America as my representative. There have been a lot of good people who have gone over this thing and concurred. Spingarn, Gaston, Odegard, Leo Goodman of the CIO-- MR. WHITE: All agree with you that he should be dropped? H.M.JR: Ch, they all recommend this. T. F. Wilson, Sloan. MR. WHITE: Did Gaston recommend it, Mr. Secretary? H.M.JR: Yes. MR. WHITE: He asked me whether I wanted to get in it, and I said no, I didn't. He wanted my opinion, and I said I didn't know enough about it and didn't want to get in it, and I thought he would be - I said I was sure that they would treat the case fairly. He sent me a copy of his recommendation. I read it differently if I saw the same one that you did. MR. GRAVES: As to that, Mr. Gaston did submit a memorandum to me recommending that we do not drop the man, and afterward we had more information and Mr. Spingarn talked at length with Mr. Gaston, and Mr. Gaston told me, as well as Spingarn, that he had changed his view and believed that the man should not be hired. Regraded Unclassified 168-G - 7 - MR. WHITE: I didn't know that. H.M.JR: Well, Mrs. Morgenthau, who always wants to give these people the break, read the whole thing for me last night, and she said, "The man should be dropped." He was the President of this Youth Congress at its worst, and he should not be contacting youth = for the Treasury. I mean, if I said to you, "Harold, please hire this person or woman, and for three years he was President of the American Youth Congress, from '36 to '39," you would laugh at me. You would laugh at me. On the other hand, there is this girl, Jane Seever, who is out of a job and who was over there, and did & swell job who could be hired, and I wish you would look into her. MR. GRAVES: Jane Stephens? H.M.JR: Seever. She is 8. good kid. She is in the two thousand dollar class. She was with OCD. I hate to have to take the time here, and I took an hour and a half last night to read it. Just take a look at Jane Seever. I think it is Seever. Norman? MR. THOMPSON: General Somervell has no order that he can give me a copy of for you here. They are still discussing it. I did get a copy of the order setting up the reorganization which covers the Trans- portation Division. H.M.JR: Well, I think I would rather wait. MR. THOMPSON: I will get it as soon as it is Regraded Unclassified 168-H - 8 - ready. H.M.JR: What else? MR. THOMPSON: I just have this Kamarck case. Do you want me to stay? H.M.JR: Yes, if you wouldn't mind. Dan? MR. BELL: We didn't have to borrow any money last night. We have about twelve million dollars after using ninety million of the Stabilization Fund. We have now used about a hundred and twenty-three million of that Fund. H.M.JR: Now much interest do you charge him, Harry? MR. BELL: That is without interest. MR. WHITE: Our policy is no interest now. MR. BELL: But we contacted six large banks in New York yesterday and told them that we might have an overdraft, and that we would like to sell them one- day certificates, and all but one said, "You can take any amount you want to up to the limit of our excess reserves, and whatever interest you want to give us," and we told them we would give them one fifth. They Regraded Unclassified 168-I - 9 - were all pleased with that except one, and before they committed themselves, they wanted to know what the interest rate was. It was very interesting. H.M.JR: So you are all right. MR. BELL: Yes, we are all right this morning. H.M.JR: Good. MR. BELL: Some of us thought we might get a lot of Saving Bonds redeemed this month, but there haven't been many come in, only eleven million up to the four- teenth. It hasn't been large at all. That is all I have. H.M.JR: Harry? MR. WHITE: The Cuban delegation that is here and going over monetary and banking systems are now ready to request the purchase of five million dollars worth of gold on credit. We took that up some time ago. It was in our recommendation of their immediate action. They are going to use that gold to redeem the notes, and then buy dollars and pay back the gold in sort of & rotating fund. It is different than the usual arrange- ment. H.M.JR: Where does the gold stay? MR. WHITE: They will probably keep it here, but they don't have to, and that would not be 8. condition of it. This difference from every other arrangement is that it is 8. sale of gold on credit, but they get the dollars very quickly to pay the gold back. H.M.JR: What gold do you sell them? MR. WHITE: Well, it will be out of the Stabil- ization Fund, a stabilization operation. H.M.JR: And the gold doesn't stay here? Regraded Unclassified 168.J - 10 - MR. WHITE: They probably will keep it here, because I think they would be unwise to move it, but I don't think it would be 8. condition. H.M.JR: Why not? MR. WHITE: Well, I think they would have & right to feel quite sore about it if we insisted on it. We might suggest it from the point of view of loss in trans- portation, of course, and I believe that they will quite readily agree with it. H.M.JR: Well, how would I feel if they had the gold and didn't pay me? MR. WHITE: Well, it is & pretty secure arrangement, because-- H.M.JR: I thought the Federal Reserve was against installment buying. (Facetiously.) MR. WHITE: This is installment selling of every- thing that we are short on, Mr. Secretary. MR. BELL: Is that the usual arrangement, Harry, of one and 8. half percent? MR. WHITE: There will be an interest, yes, of one and a half percent. MR. BELL: All it is then is just 8. regular stabil- ization loan in dollars, that is all it is. H.M.JR: What are you going to do, Harry? MR. WHITE: Well, we are going to submit it to you for approval. I am just letting you know ahead of time. H.M.JR: Has it got half my name already written on the signature? MR. WHITE: Everything but the period. (Laughter.) I think we got that a couple of months ago, didn't we, Dan? Regraded Unclassified 168-K - 11 - H.M.JR: Are you on his side? MR. BELL: I don't know a thing about it. This is the first I have heard of it. MR. WHITE: What? What? (Laughter.) Be careful, Dan, we have got your approval in writing. MR. BELL: Have you? MRS. KLOTZ: He made sure of that. MR. BELL: I don't remember it. It sounds to me just like a regular stabilization loan. H.M.JR: It looks as though you and I are sunk, Dan. MR. BELL: Usually. H.M.JR: Well, as a matter of high policy I will go along with you, Harry. MR. WHITE: Without a letter from the Secretary of State? (Laughter.) H.M.JR: All right? MR. WHITE: All right, sir. H.M.JR: Incidentally, this thing I broached without knowing a thing about alcohol and sugar in Cuba evidently is & very hot subject. MR. WHITE: Oh my, I got a memo on it, and I don't know whether it will all peter out or whether it will emerge in a fight. The WPB says they have got enough alcohol to drown everybody in the country, a surplus of alcohol, and there is apparently a difference of opinion, but we are pursuing it & little further, and we will have a final memorandum for you. Regraded Unclassified 168-L - 12 - H.M.JR: Well, one thing I wish you would look into, because there seems to be a difference of opinion, I gathered from these gentlemen who were here that there is a by-product which you can not make sugar out of which they have. You remember they talked about the left-hand molasses-- N MR. WHITE: Yes, there is a by-product of molasses-- H.M.JR: which can not be made into edible sugar-- MR. WHITE: I always thought that, but I am not sure. H.M.JR: which could be made into alcohol in Cuba. Would you just as a matter of interest - you remember they spoke of left-hand molasses. MR. WHITE: Yes. The State Department called up, in the person of Collado, who now speaks for Welles. He said that Welles is interested in knowing exactly-- H.M.JR: He speaks to Welles? Who does Welles speak to? MR. WHITE: Who does Welles speak to or for? He speaks to a lot of people. He speaks only for himself. H.M.JR: I thought it was like the Cabots. MR. WHITE: No, I don't think he is religious. He didn't bother with any handicaps. I mentioned the fact that sugar was taken up, or oil. The molasses, I mean. You have got me all balled up here. (Laughter.) Regraded Unclassified 168 - M - 13 - H.M.JR: Harry, don't let your left hand know what your right hand does with the molasses. MR. WHITE: It is the other way around. (Laughter) That is why I was confused. I had the wrong hand in my pocket. I said that you had suggested alcohol there and they said, "Why, we hope you won't get into that because we have been discussing that with them and have been making a good deal of progress." I said they didn't seem to have any knowledge of that. He said, "Well, the man we were talking to WRS Castro." He was the fellow who was sitting here. I said, "Well, we will keep you forward." So apparently the State Department is also con- cerned. H.M.JR: 1 would say it was a good subject. O.K. George? MR. WHITE: There is one other point on something else. I had sent a memo in. I think that you might consider appointing a committee to go into the subject or general rationing as distinguished from specific rationing. It is primarily the responsibility of Henderson's outfit, but it is intimately tied up with the question of forced saving and voluntary savings and inflation. I think it is something that you will want to become very familiar with and if you are convinced, take & position on it very quickly within the next couple of weeks. H.M.JR: I have. MR. WHITE: On what, on general rationing? H.M.JR: Yes. MR. WHITE: Well, if we mean the same thing by general rationing, which I suspect we don't, I don't think you have taken & position. (Laughter) H.M.JR: Would you tell ne confidentially what your position is? Regraded Unclassified 168 - 14 - MR. WHITE: Well, yes. General rationing-- H.M.JR: Nobody is listening. It is just for you and me. MR. WHITE: Nobody will tell anybody but their best friend. Well, this is a position I am not ashamed of because I think it will be the position you will come around to eventually. (Laughter) I mean, I think it will be adopted. General rationing relates to the rationing of spending power, of expenditures rather than specific items. In other words, it is an arrangement whereby you decide how much & man can spend on consumers' goods rather than the specific commodities upon which he can spend it, and some work has been done on it. I think a good deal more work will have to be done on it, but I think that if you appoint some committee here to give you a report on it there will be a good deal spoken of it, I think, in the next few months, and it is one of those things that takes about five or six months to put into operation. H.M.JR: Who is interested in the Harry White formula of the rationing? MR. WHITE: Who should be interested? H.M.JR: Raise their hand, who is interested. (Mr. Paul, Mr. Blough and Mr. Haas raised their hands.) H.M.JR: The Research Division certainly should be. Well, there is Bell and White and Haas and your cohorts. Paul? MR. PAUL: Yes. H.M.JR: All right, there is & committee. MR. HAAS: You don't want to confine it to just that one type, do you, Harry? Regraded Unclassified 168-0 - 15 - MR. WHITE: I did, just on that one report. H.M.JR: We will make White chairman of that Committee. MR. WHITE: Thank you. That will make it easy to disapprove the report. H.M.JR: George, have you got those airplane figures? MR. HAAS: Could I see you for a minute about them? There is a question. H.M.JR: It depends on when Senator Brown gets here. I can see you right afterward. MR. HAAS: Tickton is back and has an interesting story. H.M.JR: I want to see him. MR. HAAS: That is all I have. H.M.JR: Harold Graves? MR. GRAVES: I have nothing unless you want to talk about this Brown memorandum. H.M.JR: We will see how much time we have. MR. GRAVES: I have nothing else. H.M.JR: Let's try to have a meeting at 9:15 Thursday of your group. MR. GRAVES: Of my group? H.M.JR: Yes. MR. GRAVES: Nine-fifteen Thursday? H.M.JR: Yes, nine-fifteen. Regraded Unclassified - 16 - 168 - P MR. GRAVES: Yes. H.M.JR: Jake? Roy? Wonderful. Ferdie? MR. KUHN: Mr. Murray who has been doing those recorded programs, is coming on Thursday and we are all very anxious to put down a red carpet for him. I wondered if you could see him Thursday. H.M.JR: What is it going to be a funeral or a wedding? MR. KUHN: Just an elaborate pat on the back which I think he deserves. H.M.JR: What are we doing at eleven o'clock, Thursday? MRS. KLOTZ: Nothing. R.M.JR: All right, eleven o'clock. MRS. KLOTZ: What is his name, Murray? H.M.JR: Murray, and will you please hire a red carpet and & few potted palms? VR. BELL: on that Brown thing, Mr. Secretary, he gave ne a little memorandum at the hearing the other day and I gave it to George Buffington. I don't know whether he has done anything about it or not. Do you recall that pencilled memorandum I gave you that Senator Brown handed me on the proposition of paying overtime in savings bonds? MR. BUFFINGTON: I have 8 memorandum. H.M.JR: Well, I won't make any commitments, don't worry. MR. SULLIVAN: Norman Cann wanted to go to New York this afternoon and he wanted me to speak to you to see if it would be all right. I think we had better let him Regraded Unclassified 168-Q - 17 - go. He has been working pretty hard. H.M.JR: You don't have to clear those things with me. MR. SULLIVAN: All right. H.M.JR: It is your responsibility. MR. SULLIVAN: They had 8 hearing before the Rules Committee yesterday. When you have some time I will tell you about it, if you enjoy the Marx Brothers. H.M.JR: Can you take them off? MR. FOLEY: He took them off yesterday and did & good job. MR. SULLIVAN: I have never read anything like that performance up there. H.M.JR: On what? MR. SULLIVAN: The Cochran Bill. H.M.JR: Well, is it out or not out? MR. SULLIVAN: No, they may vote on it today. H.M.JR: I see. They couldn't get 8. ruie? MR. SULLIVAN: They didn't get it yesterday. H.M.JR: I want you to know that the next gentleman (Foley) is taking the New York and Washington lawyers and throwing them into the Potomac successfully. Nothing has happened since last night, has it? MR. FOLEY: No. MR. SULLIVAN: They are still in the Potomac. H.M.JR: He did what Dean Acheson said he ,couldn't Regraded Unclassified 168 R - 18 - do and everybody is out on Aniline and Dye who were in. Our people are in & hundred percent. Is that right? MR. FOLEY: That is right. Two law firms are both out and the entire board and all of the top executives. MR. PAUL: I left just in time, didn't I? MR. FOLEY: Yes. H.M.JR: As a result of that we are going to open 8. new law firm in New York called Foley, Paul and Morgenthau. We expect to live on the Republican WPA. MRS. KLOTZ: You will have to. H.M.JR: What else, Ed? MR. FOLEY: I have nothing. We will be ready with that order today when you want it. H.M.JR: All right, I am in good shape. MR. SULLIVAN: We will have those preliminary estimates on collections, I think, by noon. H.M.JR: All right. MR. SULLIVAN: You didn't use any of those figures yesterday in your press conference? H.M.JR: No. MR. SULLIVAN: I am very glad. H.M.JR: Well, they didn't press me, you see. MR. SULLIVAN: Well, I am glad they didn't because they looked 80 good I was afraid the press would stress the in- crease in collections and that might hurt on the Hill. MR. BELL: Let's don't use any of them. Remember '37 when we used them we were two hundred million off. Regraded Unclassified 168-5 TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 16, 1942 Secretary Morgenthau TO H. D. White FROM HDW There is appended a memorandum on a meeting with some of Leon Henderson's men held in my office to discuss Rationing of Consuming Power (as distant from goods' rationing). The meeting grew out of a conversation I had with Henderson on the subject following his letter to you. There is also ap- pended a preliminary memorandum prepared by Mr. Gass of this Division on "General Rationing". I believe the Treasury, in connection with the problem of forced and voluntary savings and inflation, should give careful consideration to the rationing of expenditures as outlined in the memorandum. A special committee in the Treasury consisting of a representative of each of the three research divisions might be assigned the task of preparing a written report to you to be ready within a short time. The problem will probably be- come acute six months from now and if that approach is found to be desirable, many months are needed to get Congressional approval and to complete preparations. I think you ought to be thoroughly familiar with the proposal and, if you find it favorable, take a position on it as soon as possible, even though the ultimate responsibility would rest on Henderson's organization. We are doing no further work on the problem. X Regraded Unclassified 168-T TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 12, 1942 TO Mr. White FROM Mr. Gass Subject: Meeting with representatives of O.P.A. on Compulsory Saving and General Rationing A meeting was held in Mr. White's office, at 3:30 p.m. on March 11, to discuss Mr. Leon Henderson's proposed immediate support for compulsory saving and the possibility of his accepting General Rationing six months hence as a substitute. Present were Mr. White (with an interval), Mr. R. Gilbert, Mr. W. Salant, Mr. E. M. Bernstein and Mr. Gass. The O.P.A. representatives were interested in winning Treasury support for immediate establishment of compulsory saving to yield $5-6 billion, in addition to the Treasury's $9 billion tax program. They regarded this compulsory saving as a part of & rounded program which would also include wage-rate stabilization, retail price control and the extension of specific rationing "as rapidly as administrative difficulties permit". Their plans on compulsory saving were apparently in the most preliminary stage; they had no idea of the rates, exemptions, consumption incidence, etc., which they would support. The O.P.A. representatives conceded that, in principle, General Rationing is superior to compulsory saving, but they argued that General Rationing is not politically possible now and that a program entailing further restriction of consumers' outlays is urgent now. They believed that Mr. Henderson would come out in favor of compulsory saving before the Ways and Means Committee. They indicated that Mr. Henderson would submit his proposed testimony to the Secretary before appearing and that they would also send the Treasury an analysis supporting their view of the urgency of further measures to restrict civilian consumption at the present time. The Treasury representatives argued that (1) the situation was by no means so urgent at present as O.P.A. suggested, (2) in the long run General Rationing was the correct solution, and (3) if the situation was as serious as Mr. Gilbert suggested, no material contribution to its solution would be made by $5-86 billion of compulsory saving. It emerged that there was no essential difference about forecasts insofar as they related to the real supply of goods and services for civilian consumption. The Treasury estimate has been about $64 billion, in average 1941 prices. Mr. Gilbert's estimate was about $65 billion. Regraded Unclassified 168-V - 2 - Division of Monetary Research However on the monetary demand side, especially insofar as demand is created by defense expenditures, there was a wide divergence. Treasury estimates have been that total defense outlays would rise, at best, from about $25-1/2 billion in December 1941 to about $56-1/2 billion in December 1942: this is the Budget program, and it implies total defense outlays of slightly over $40 billion this calendar year. Mr. Gilbert said that O.P.A. and W.P.B. were sure that defense expenditures would rise to about $70 billion by December 1942 and that defense expenditures this calendar year would be about $50 billion. Mr. Gilbert added that he did not know why the Treasury did not receive full information on scheduled expenditure programs and why the Treasury was not making the full analysis of expenditure flows which apparently it was not making and which, he thought, was its business. The O.P.A. representatives returned several times to the points (1) that, in principle, General Rationing would be the best way of securing the necessary war-time restriction of consumption, (2) that one General Rationing scheme would be easier to administer than the many specific rationing schemes that will be the necessary alternative, (3) that the basic objection to General Rationing is political, (4) that nevertheless they feel confident that, should the Treasury come out for General Rationing, O.P.A. will support the Treasury position, (5) that some further fiscal measure to restrict consumption is needed right now, (6) that the correct measure is compulsory saving, and (7) that Mr. Henderson will come out before the Ways and Means Committee in favor of compulsory saving. Regraded Unclassified 168-V TREASURY DEPARTMENT INTER OFFICE COMMUNICATION DATE March 11, 1942 Mr. White TO FROM Mr. Gass Subject: General Rationing and the War Production Program for the Fiscal Year 1943 1. The accomplishment of the war production program for the fiscal year 1943 will require that the supply of goods for civilian consumption in the year from July 1, 1942 to June 30, 1943, be about $10 billion less than during the calendar year 1941 (in average 1941 prices). About $7 billion of this reduction must come from a decrease in the supply of consumers' durable goods and about $3 billion from a decrease in the supply of non- durables. 2. This reduction in civilian consumption might be accomplished by reducing the consumption of the average size family from about $1,850 in 1941 to about $1,610 in fiscal 1943 and reducing the consumption of single consumers from about $1,185 to about $1,000. 3. To accomplish a reduction in consumers' outlays of $10 billion, at present income levels, through taxation or compulsory saving, would take such an amount of additional taxation or compulsory saving as Congress is not likely to be willing to impose. The magnitude involved depends on the character of the tax imposed, but even a. flat withholding tax on all incomes - without exemption - would probably have to yield something of the order of $18-$20 billion to reduce consumers' outlays by $10 billion. A compulsory saving levy, with the same flat incidence, might well have to yield something of the order of $25-$27 billion to reduce consumers' outlays by $10 billion. 4. Taxation and compulsory saving are inherently inequalitarian ways of achieving the desired reduction in consumers' outlays. There will inevit- ably be pressure to make their incidence as regressive as possible, to diminish the absolute amount required to be collected. Further, even 8. very progressive income levy would be offset - as far as current consump- tion is concerned - by the use of balances and credit on the part of the higher income groups. 5. It is suggested therefore that the possibility be explored of limiting consumption directly by a General Rationing or War Expenditure scheme, which would fix naximum consumption expenditure allowances for each consumer unit in the economy, on the basis of needs, income and possibly other factors. Regraded Unclassified 168-W Rough Estimates of Consumption of Single Consumers Calendar year 1941 and fiscal 1943 (Constant prices) Aggregate Aggregate Rationed Number Average Rationed Area Consumption Consumption (thousands) Consumption Consumption (millions) (Millions) Income Level 1941 1943 1941 1943 1941 1943 1941 1943 1941 1943 Under $500 1,774 1,538 $ 369 $ 370 $ 655 $ 569 $500 - - $750 1,628 1,411 618 620 1,006 875 $750 - $1,000 1,536 1,332 822 800 1,263 1,066 $1,000 - $1,250 1,359 1,178 1,014 975 1,378 1,149 $1,250 - $1,500 1,225 1,062 1,184 1,125 1,450 1,195 $1,500 - $1,750 822 713 1,350 1,250 1,110 891 $1,750 - $2,000 538 466 1,483 1,350 798 629 $2,000 - $2,500 791 686 1,738 1,500 1,378 1,029 $2,500 - $3,000 417 362 2,010 1,625 838 588 $3,000 - $4,000 397 344 2,368 1,775 940 611 $4,000 - $5,000 196 170 2,806 1,900 550 323 $5,000 - $10,000 176 153 3,937 2,200 693 337 $10,000 and over 91 79 9,967 5,000 907 395 All Levels 10,950 9,500 $1,184 $1,016 $12,963 $9,656 Treasury Department, Division of Monetary Research March 10, 1942 Regraded Unclassified 168 X 168 -X Rough Estimates of Consumption of Average Size Families Calendar year 1941 and fiscal 1943 (Constant prices) Aggregate Aggregate Rationed Number Average Rationed Area Consumption Consumption (thousands) Consumption Consumption (millions) (millions) Income Level 1941 1943 1941 1943 1941 1943 1941 1943 1941 1943 Under $500 2,315 2,366 $ 507 $ 510 $ 1,173 $ 1,207 $500 - $750 2,849 2,911 714 715 2,033 2,081 $750 - $1,000 3,027 3,093 919 920 2,781 2,846 $1,000 - $1,250 3,333 3,406 1,134 1,135 3,781 3,866 $1,250 - $1,500 3,682 3,763 1,322 1,325 4,868 4,986 $1,500 - $1,750 2,837 2,899 1,517 1,520 4,303 4,406 $1,750 - $2,000 2,260 2,309 1,699 1,600 3,840 3,694 $2,000 - $2,500 3,739 3,821 1,995 1,850 7,439 7,069 $2,500 - $3,000 2,338 2,389 2,312 2,050 5,406 4,897 $3,000 - $4,000 2,530 2,585 2,743 2,300 6,941 5,946 $4,000 - $5,000 1,311 1,340 3,310 2,500 4,339 3,350 $5,000 - $10,000 1,202 1,228 4,476 3,100 5,380 3,807 $10,000 and over 684 699 10,110 7,000 6,915 4,893 All Levels 32,097 32,800 $1,844 $1,617 $59,199 $53,048 Regraded Unclassified 168 - Y Table 1 - Deriviation of Gross National Product at Market Prices from National Income (at Factor Costs) (In billions of dollars) 1 1939 1940 1941 Gross National Product at Market Prices 86.3 94.3 114.7 National Income 70.8 77.2 94.5 Corporation Income, Excess Profits, and Capital Stock Taxes 1.6 2.4 6.4 Other Business Taxes 3/ 7.8 8.2 9.4 Depreciation and Depletion Charges 5.2 5.4 5.9 Other Charges and Reserves 4/ 1.1 1.0 1.5 Inventory Revaluations -0.2 /0.1 - 3.0 1/ Preliminary. 2/ Federal and State taxes, accrual basis. 3/ Excise, sales, and other direct business taxes, plus 75 percent of State and Local property taxes. Excludes pay roll taxes which are included in national income estimates. 4/ Emergency and contingency reserves and bad debt allowances. National Income Unit, Dept. of Commerce. Regraded Unclassified 168 - Z Table 2 - Composition of Gross National Expenditure, 1939-1941, and Calculated Requirements for Fiscal Year 1943 (In billions of dollars) 1 1939 1940 1941 1943 Gross National Expenditure (or Product) 86.3 94.3 114.7 132.0 Government expenditures for goods and services 15.3 16.2 24.7 64.5 National defense expenditures 2/ 1.4 2.8 13.3 56.0 Prepayments, land, etc. 3/ -0.3 -1.5 -3.0 Federal non-defense 4/ 6.0 5.7 5.1 4.5 State and Local 7.9 8.0 7.8 7.0 Private Output for Private Use 6/ 71.0 78.1 90.0 67.5 Private Cross Capital Expenditures 10.0 13.1 16.2 3.5 Construction: Residential 2.0 2.3 2.7 0.5 Factory and Public Utility 0.8 1.1 1.4 0.8 Other 0.9 1.0 1.1 0.2 Equipment 4.2 5.6 6.5 3.0 Net Change in Foreign Claims 7/ 0.8 1.3 1.5 0.5 Net Change in Inventories #1.3 /1.8 #3.0 -1.5 Consumers' Purchases 9/ 61.0 65.0 73.8 64.0 Durable goods 7.0 8.3 10.1 3.0 Non-durable goods and services 54.0 56.7 63.7 61.0 Fiscal year. All values in 1941 prices. Daily Treasury Statement total, plus changes in assets of national defense corporations (except for changes in cash balances). 3/ Adjustment to eliminate expenditures which are not against items included in the gross national product. 4/ Excludes transfer expenditures not included in the national income Based estimate. upon tax estimates plus changes in long-term debt. Excludes transfer expenditures. 6/ Includes output of public service enterprises for private purchase. 7/ Does not include lend-lease shipments. 8/ Current value of physical change in inventory holdings. Does not include Government stock piles. Residual, National Income Unit, Dept. of Commerce. Regraded Unclassified 168 - AA Table 3 - Changes from 1941 Required to Meet War Production Program in Fiscal Year 1943 1/2 (In billions of dollars) Net Increase in Projected War Expenditures 41.2 To be derived from: Increase in Gross Product 17.3 Decrease in Government non-defense expenditures for goods and services 1.4 Decrease in Private Construction expenditures 3.7 Decrease in Private Equipment expenditures 3.5 Reduction in increase in Foreign Claims 1.0 Reduction of absorption into Inventories 4.5 Decrease in consumers' purchases of durables 7.1 Decrease in consumers' purchases of non-durables 2.7 1/ Prices as of 1941. National Income Unit, Dept. of Commerce. Regraded Unclassified 0. Gass 3/6/42 168-BB OUTLINE General Rationing and the Restriction of Consumption in the United States A. The Problem 1. Character of the Problem During fiscal 1943, if war production program is fulfilled, there will be large gap between supply of goods available for consumer purchase (at, say, March 1942 prices) and amount of goods which consumers will want to buy at those prices, with their incomes as they will be even after Treasury proposed Revenue Act of 1942. This gap will cause: (a) bidding for short supplies, (b) rising prices, (c) shift of consumption in favor of the rich, (d) windfall profits to enterpreneurs, (e) pressure for increased wage rates, (f) morale stress due to feeling of inequity in carrying of war burden, (g) general anticipatory buying by those who have money, (h) concentration of "war profiteers" on holding inventories rather than increasing production, (1) damage to the war effort, (j) increased difficulty in securing full use of resources and equitable distribution of income in post-war period. 2, The Magnitude of the Problem (a) Treasury estimates (given in the table dated Feb. 4, 1942), which assume an increase of 10 percent in the cost of living between December 1941 and December 1942, give a gap of $11 billion for the fiscal year 1943. This gap means that the cost of living would increase only 10 percent if consumers could be brought to save $11 billion more than they are expected to save during the fiscal year 1943. (b) Kr. Henderson (in his letter of March 2, 1942) writes of "an excess of demand of 12 billion". Since the base points for the calculation of this 12 billion gap are not known, it is impossible to say exactly how much Mr. Henderson's estimate differs from the Treasury one. Regraded Unclassified 168-CC - 2 - (c) The Treasury estimate assumes & rise of national income of less than 5 percent, in real terms, between December 1941 and average fiscal 1942. It derives a needed reduction of about $7 billion (in average 1941 prices) in the civilian consumption of durables and about $3-1/2 billion in non- durables during fiscal 1943 in comparison with calendar 1941. Vr. Milton Gilbert, of the Department of Commerce, has a more favorable income estimate and consequently a smallar. gap. - (Neither of these estimates lends any support to Mr. Henderson's assertion that in & few months we shall necessarily be at 1932 consumption levels.) - The Treasury estimate of the gap 1s, perhaps, somewhat on the high side. 3. The Urgency of the Problem (a) Would be little inflationary pressure at present time if were not for general anticipatory buying. Index of department atore sales (seasonally adjusted) jumped from 111 in December to 137 in January. This is the most serious symptom. But went down to 114 in first week of February; may subside. 125 for month 125for fortuary (b) Cost of living index has risen in past two months from 110.2 in November to 110.5 in December but jumped to 111.9 in January. (c) Total defense expenditures are now running at an annual rate of just over $30 billion, compared with $25-1/2 billion in December and $56-1/2 billion projected for fiscal 1943. Given proposed taxes, Treasury estimated gap of $11 billion for 1943, but we are $26-1/2 billion below the then assumed dollar defense expenditures and only about $4 billion below the then assumed real income. (d) Query? Is not the public 80 tax conscious now that the $9 billion Revenue Act plus Social Security will have very nearly its full effect from now on? This would seriously limit spending even if the actual withholding provisions fail to be enacted. (e) Conclusion: Should be little inflationary pressure this summer unless (1) scares cause general anticipatory buying, (2) the new taxes are not "anticipated" or withheld, or (3) there is a general increase in the wage level. (f) Defense expenditures now about $2-1/2 billion a month. When defense expenditures have passed monthly rate of $3-3/4 billion will probably be first reasonable time to raise question of further general restriction of consumption beyond that involved in present $9 billion. Regraded Unclassified 168-DD - 3 - B. Proposed Solutions of the Problem (Assumed that the problem is to keep the average cost of living for fiscal 1943 not more than 10 percent higher than in December 1942) 1. Taxation (a) The amount of taxes needed would be greater than Congress would grant or the public accept. The Treasury gap estimate of $11 billion may be a little high: assume $10 billion. Need to reduce consumers' outlays by $10 billion. Would have to have taxes of at least $15 billion and probably over $20 billion. Taxes could be towards lower limit if regressive, would have to be towards higher if pro- gressive. But even a perfectly flat tax on all incomes, without exemption, would have to yield greatly more than $10 billion to reduce consumers' outlays by $10 billion. (b) Even if incomes after tax were left very equal, the rich could maintain their consumption by drawing on capital. Total bank deposits in U.S. about $70 billion; circulating money about $11 billion. These figures rough measure of extremely liquid assets. (Ownership distribution would have to be known to know how much might be used for consumption.) 2, Compulsory saving (a) The amount of compulsory saving needed to close the gap would be greatly larger than the amount of taxation. Total unabsorbed personal saving in fiscal 1943 is estimated at $15-1/2 billion. To reduce consumers' outlays by $10 billion might take $15-$20 billion of taxes; it would take about $25- $30 billion of compulsory saving - assuming that about 1/2 of the compulsory saving would merely replace positive voluntary saving and about 1/6 of the compulsory saving would be offset by using up balances and accumulating debte. (b) The willingness of the rich to use their capital assets to maintain their consumption would be much greater under compulsory saving than under taxation, and therefore the distribution of the burden of reduced consumption would be even more unequal under compulsory saving than under taxation. Regraded Unclassified 168 - E E 4 3. General Rationing (a) By general rationing 18 meant the limitation of consumers' demand through the fixing of maximum total consumption expenditure allowances for all families and individual consumers in the economy. The total general ration for the economy is fixed by the volume of resources available for consumption by civilians at the price leval which it is desired to maintain. The magnitude of the individual general ration may be determined by considerations of need, incentive, income and other factors. (b) General rationing should encounter less political opposition than equivalent reduction of consumption through taxation or com- pulsory saving because does not take people's money away: merely fixes total rationed consumption allowances. (c) Since fixes total rationed consumption allowances, can not be offset by the use of capital assets: therefore compatible with maximum equality. (d) Does not require specific price control or specific rationing of consumers' generally rationed goods, though allows specific control should it be desired in the case of disproportionately scarce necessities. (e) In principle, general rationing is the surest way of getting a desired reduction of total consumers' outlays and a desired degree of equality in consumption. In practice, general rationing has certain administrative problems which may offset its basic superiority to taxation and compulsory saving. These administrative problems need to be examined carefully before any decision is made. 4. Specific Rationing (a) Unless covers all commodities and fixes all prices, is not an instrument of general price stability. Does not withdraw purchasing power; merely diverts purchasing power. (b) If reduction in supply is to be met by equivalent reduction in total demand, this task must be accomplished by some other technique than specific rationing. Taxation, compulsory saving, and general rationing are such techniques. Regraded Unclassified 168 FF - 5 - C. General Rationing 1. Range of goods included (In principle, should include all consumption of goods and services. Should exclude all mere exchange of titles, all capital transactions, all savings, all gifts, all taxes. What it is desired to limit is consumers' demand for labor, materials and facilities usable for war production, but it is not desired to render non-convertible resources idle: these must be governing considerations in all special cases.) (a) The general ration should include food, household operations apart from rent (e.g. light, heat, power, telephone, domestic service, etc.), clothing, automobile expenditures, recreation, furnishings, personal service, tobacco, transportation other than auto, reading, etc. The approximate 1941 value of consumers' expenditures on these things were, in billions of dollars; food $22.1, household opera- tions $7.7, Clothing $8.1, automobile $6.5, recreation $2.7, furnishings $2.2, personal care $1.3, tobacco $1.3, transporta- tion other than auto $1.3, reading $0.8, other $0.4: total $54.4 billion. (b) The general ration should exclude rents, medical care, tuition fees, gifts, taxes, insurance and all capital trans- actions. The approximate value of consumers' expenditures on these items in 1941 was, in billions of dollars; rents, including imputed rents, $13.4, medical care $3.3, education $0.9 (category in statistics probably too wide), gifts and personal taxes $5.2, (category in statistics probably too narrow), savings $15.3 total $38.1 billion. Regraded Unclassified 168 - 6 - 2. Magnitude of the Total General Ration for the Economy (a) According estimates of Dept. of Commerce (Milton Gilbert), which are best yet made, war production program of fiscal 1943, requires reduction of $9.8 billion in consumers' purchases below level of calendar year 1941 (See appended tables). Further curtailment of civilian consumption would not release resources usable for war production - unless there is a general labor shortage. (b) Subtracting $9.8 billion from $54.4 billion of goods demarcated for rationing above (though Gilbert's estimate of 1941 output in this area would be somewhat higher) leaves $44.6 billion, at average 1941 prices. But since the cost of living in December 1941 was 110.5 compared to 105.2 average for the year, and since the cost of living is to be allowed to rise a further 10 percent from December 1941 to average fiscal 1943, this $44.6 billion may be expanded by about 15 percent or to $51.3 billion. (c) A magnitude of the rough order of $52 billion will be appropriate general ration for the whole economy when we reach the annual rate of defense output projected for fiscal 1943. This will surely not be before December 1942. (There will still also be unrationed consumption of about $17-1/2 billion at 1941 prices - including the imputed income from housing but not from other durable goods.) This ration might be larger if (1) total non-durable production expands more than projected or (2) it is decided to allow an even greater price rise than is here assumed. The ration might be smaller if (1) there is more war use of non-durable than is expected or (2) a. general labor shortage emerges or (3) it is decided to adopt a more severe price policy. 3. Distribution of the reduction in consumption by income groups (a) The total reduction in civilian consumption for fiscal 1943 in comparison with calendar 1941 is $10 billion, in 1941 prices. (b) About $2-1/2 billion might be derived from reduction in the consumption of individuals and families receiving incomes of over $10,000 in 1941. (1) There were about 775,000 families and individuals in this group in 1941. (2) Their aggregate income was about $18.1 billion, aggregate consumption $7.8 billion; average income $23,000, average consumption $10,000. Regraded Unclassified 168-HH - 7 - (3) To take $2-1/2 billion from them, would still leave them with average consumption of over $6,500 per family or individual consumer unit. (4) Since they spent, on the average, about $2,650 on non-rationed goods, the average size of their ration would be about $3,850, in 1941 prices, or about $4,775 in the prices assumed for December 1942. (c) About $2 billion might be derived from reduction in the consump- tion of families and single individuals receiving incomes of between $5,000 and $10,000 in 1941. ,000 (1) There were about 1,378/families and single individuals in this group in 1941. (2) Their aggregate income was about $9.4 billion, aggregate consumption $6.2 billion, average income $6,800, average consumption $4,400. (3) To take $2 billion from them, would still leave them with average consumption of just under $3,000 per family or individual consumer unit. (4) Since they spent, on the average, about $1,300 on non-rationed goods, the average size of their general ration would be about $1,700, in 1941 prices, or about $1,955 in the prices assumed for December 1942. (d) About $1 billion might be derived from reduction in consumption of the group receiving incomes from $4,000 to $5,000 in 1941. (1) There are about 1,507,000 families and single individuals in this group. (2) Aggregate income about $6.6 billion, aggregate consumption $4.9 billion; average income $4,350, average consumption $3,225. (3) Taking $1 billion would leave average consumption of about $2,360. (4) Since they spent average of $785 on non-rationed commodities, could have average ration of about $1,575 in 1941 prices or about $1,810 in assumed December 1942 prices. Regraded Unclassified 168-II - 8 - (e) About $1-1/4 billion might be derived from reduction in the consumption of the group receiving income of between $3,000 and $4,000 in 1941. (1) There were about 2,927,000 families and single individuals in this income group in 1941. (2) Aggregate income about $9.9 billion, aggregate consumption. about $7.7 billion; average income $3,380, average consumption $2,680. (3) Reducing their consumption by $1-1/4 billion would leave them with average consumption of $2,150. (4) Since they spent average of $575 on non-rationed goods, the average size of their ration would be about $1,575, in 1941 prices, or about $1,810 in assumed December 1942 prices. (f) About $1 billion might be the total reduction in consumption contributed by the income group from $2,500 to $3,000. (1) About 2,755,000 consumer units in group. (2) Aggregate income 1941 was $7.4 billion, aggregate consumption $6.2 billion, average income $2,700, average consumption $2,260. (3) Reduce total consumption of group by $1 billion would be to reduce average consumption to $1,900. (4) Since they spent, on the average, about $535 on non-rationed goods, the average size of their ration would be about $1,465, in 1941 prices, or about $1,658 in the assumed December 1942 prices. (g) About $1 billion might be the reduction in consumption con- tributed by the income group from $2,000 to $2,500. (1) About 4,520,000 consumer units are in this group. (2) Aggregate income 1941 was about $10.1 billion, aggregate consumption $8.8 billion; average income $2,237, average consumption $1,940. Regraded Unclassified 168 JJ - 9 - (3) To reduce total consumption of the group by $1 billion would be to reduce their average con- sumption to $1,720. (4) Since they spent, on the average, about $440 on non-rationed goods, the average size of their ration would be about $1,280, in 1941 prices, or $1,470 in the assumed December 1942 prices. (h) About $1/2 billion might be reduction in consumption contributed by income group from $1,750 to $2,000. (1) About 2,798,000 consumer units are in this group. (2) Their aggregate income in 1941 was about $5.1 billion, aggregate consumption $4.6 billion; average income $1,830, average consumption $1,650. (3) To reduce the total consumption of the group by $1/2 billion would be to reduce their average consump- tion to $1,470. (4) Since they spent on the average about $390 on non- rationed goods, their average ration would be $1,080, in 1941 prices, or about $1,240 in the assumed December 1942 prices. (i) About $1/2 billion might be contributed by reduction in con- sumption of income group $1,500 - $1,750. (1) About 3,659,000 consumer units are in this group. (2) Aggregate 1941 income $5.9 billion, aggregate consumption 85.4 billion; average income $1,610, average consumption $1,465. (3) Their average consumption would have to fall to $1,330 in 1941 prices - actually the whole of this reduction might be borns by single individuals and none of it by families: this will be shown in a later draft. (4) Since they spent on the average $345 on non-rationed goods, their ration would be $995 in average 1941 prices and $1,155 in the assumed prices of December 1942. (j) The total reduction in consumption accounted for above is, by addition, $9-3/4 billion. Actually it is larger than $10 billion because in fiscal 1943 there will be a decrease in the total number of civilian consumers. In fiscal 1943 the armed forces will average at least 4-1/2 million; or 3 million higher than their average for calendar Regraded Unclassified 168-kk - 10 - 1941. Population growth will make up only about 1-1/2 million. The net withdrawal will be of full consumers, most of them independent consumer units. Therefore, if consumption is with- drawn from all incomes having a 1941 dollar value as indicated above, there will be more than enough total reduction of civilian consumption. (k) To summarize, the fiscal 1943 war production program is consistent with no reduction in consumption for consumer units having incomes below $1,500, in average 1941 prices. This conclusion does not follow from mere arithmetical manipulation; it follows from reducing consumption most drastically in pre- cisely those income brackets which purchase the durable consumers' goods which compete with defense output. (1) It does not follow that maximum equity and efficiency would result from no effective general rationing of consumers' units below $1,500. On the contrary the consumption of those consumer units below this level which consist of single individuals might well be reduced sharply and the proceeds made available to family units in the same income bracket. Further, the ration of the whole population should be so ad- justed as to allow the maximum incentive to overtime work and special piece work performance. All overtime and special performance pay should have a high ration value - at least 50 percent. Regraded Unclassified 168 LL - 11 - D. Administrative Problems of General Rationing 1. Basic administrative problem of General Rationing derives from fact that it is two money system - one ordinary money and one special money for consumption of rationed goods. 2. General Rationing must take the form of giving consumers coupons equal to the value of their general ration. These coupons might be called War Spending Stamps and the whole system might be called the War Spending System. 3. War Spending Stamp distribution should be integrated with withholding tax administration. The employer will be responsible to the Treasury both for the tax withheld and for the stamps distributed. 4. In the case of the self-employed, individuals having such income will be required to file a. quarterly income return for withholding tax purposes. The same return could be used as a basis for War Spending Stamp distribution. 5. Equity would require that certain large classes of "self-suppliers", especially farmers, report their approximate non-market consumption and that their general ration bio fixed accordingly. 6. The stampa should be non-transferrable. For this purpose, they should be attached to a book and detachment should be equivalent to cancellation. 7. Giving each family only a single book may create some inconvenience, and therefore it may be desirable to issue more than one book in which the total general ration will be divided as the family requests. 8. Great inconvenience would result from having to use stamps to buy newspapers, in subway alots, pay telephones, etc. Expenditures not exceeding five cents should therefore be excluded from the general ration. A more liberal exemption would create great difficulties because it would place a premium on multiplying small purchases. 9. Money should be allowed to be used outside the general ration for the liquidation of existing debt incurred before some base date. New consumption debt is a great problem; in principle it should be allowed only in hardship cases of low incomes. Living on capital will probably have to be allowed on submission of evidence that it is necessary. Regraded Unclassified 168 - MM - 12 - 10. A series of regional offices for the adjustment of hardship cases should be established. These might have an element of local participa- tion, but local people should not be dominant if uniform practice is to prevail. 11. The stamps collected could be used, in the case of commodities, for inventory control. No retailer should be allowed to replace his stock without giving up an equivalent amount of cancelled stamps. 12. For maximum value, general ration should be brought up only when seriousness of situation makes likely quick passage. Otherwise rush to buy before general ration goes through may deplete inventories so much as greatly to offset its basic advantages. Regraded Unclassified