Memorandum by the Adviser on International Economic Affairs (Feis)

The Secretary of the Treasury asked me to come over at 11:30 this morning. I found him in the middle of vigorous telephone conversations with London and Paris. He gave me the following account of what had happened since yesterday afternoon, when an agreement between the three Treasuries was announced.

It will be recalled that the French Ambassador delivered to the Secretary of the Treasury yesterday morning May 4, a note from the Council of Ministers which in its final paragraph conveyed the assurance that the French Government established (“se fixé”) 175 as the final fall of the franc, and that it was largely on the basis of this assurance that Mr. Morgenthau sent word to the French Government that he would regard the action as within the spirit and letter of the Tripartite Agreement.

Cochran had telephoned him early this morning to say that the franc had been opened up at 179 to the pound, and had been more or less pegged there by the French Government even though the state of the exchange market plainly showed that a lower rate could be sustained without the slightest difficulty. There was taking place a great volume of purchases of the francs (about 30 million pounds was calculated to have returned in the course of the day). Cochran on his own initiative had visited the Minister of Finance and stated he was sure the American Treasury would think this rate had been set unfairly low, and was contrary to the assurances received. Mr. Morgenthau, on receiving this information, instructed Cochran to return to the Treasury and tell Mr. Marchandeau very distinctly and emphatically that he felt the French action had gone out of the agreed-on bound, was unnecessary, and would be disturbing, and to say that he insisted that the franc rate be brought down in accordance with [Page 281]assurances received. He said that if the French Treasury did not respect these assurances he might feel called upon to take his liberty of action for the American Treasury.

Mr. Cochran delivered this message. The French Minister of Finance stated that Mr. Morgenthau’s message raised a very serious question affecting the whole of the French economic program, and that he would have to consult the whole Cabinet, including Mr. Daladier and Mr. Bonnet. During all this period the franc was kept pegged near 179. Shortly thereafter, Mr. Bonnet asked Mr. Wilson, our Counselor of Embassy, to call upon him. He informed Mr. Wilson that he had not followed the matter closely—I share Mr. Morgenthau’s complete skepticism on this point—was surprised to find the franc at 179, and would immediately do his utmost to see that the French Government modified the situation and brought the rate down in accordance with assurances given.

He asked Mr. Wilson to ask Mr. Morgenthau whether Mr. Morgenthau would be satisfied if the franc rate were brought from 179 to 175 in the course of a few days by a succession of small measures.

When I entered the Secretary of the Treasury’s Office, he was engaged in a telephone conversation with Mr. Wilson and Mr. Cochran, reiterating what he had said previously. He instructed Mr. Wilson to tell Mr. Bonnet that this gradual action, extending over several days, was not satisfactory and that he expected the action to be more prompt and immediate. He explained that beginning at 12 o’clock the American fund would—in accordance with the customary arrangements under the stabilization fund—take over the market and that he expected the French Treasury to give him a rate lower than 179.

Immediately thereafter Mr. Butterworth telephoned and stated that the British Treasury informed him that they had sent a message to the French to the following effect:

That they were delighted at the French decision to stabilize and were glad of the way in which capital was coming back to France.
However, the fact that 30 million pounds had returned in one day indicated clearly that the rate set was too low, and
the fact that 3 million of these 30 million pounds came from Belgium proved that it was disturbingly low and might very well upset other currencies.

Mr. Butterworth was authorized to inform the British Treasury of the messages which Mr. Morgenthau had sent to the French.

In the course of the conversation with Messrs. Cochran and Wilson, the Secretary of the Treasury asked me to take the telephone. I spoke very briefly with Mr. Wilson and told him that from the beginning of these conversations the basic attitude of the State Department [Page 282]had been that the situation could be satisfactorily adjusted without interrupting the useful arrangements between the three Treasuries embodied in the Tripartite Agreement, and that it still persisted in that view. However, I did not see that the Secretary of the Treasury had any choice but to recall vigorously to the French the assurances received yesterday and to ask that French policy be made to conform to them—especially since every indication was that this was now entirely feasible.

The above was the situation as I reported it to you at noon today. I ought to add that the Secretary of the Treasury is convinced that at any rate one of the reasons why the French Government carried the franc down to 179 was in order to assist and make effective certain private speculations of French banks and even of French officials, and that Marchandeau wished to give them ample time to cover at the favorable rate of 179.

This afternoon the Treasury telephoned to keep me informed to the effect that what the French had done as a conciliation this afternoon was to take the rate down to 178.30 and to declare that they would lower it more tomorrow, and a little further the next day.

Mr. Morgenthau stated also that Cochran had reported that when he was talking with the Treasury they had said they had nothing but enthusiastic messages from the British Treasury and were saying it was difficult to understand why the American Treasury should make difficulties when the British Treasury was not doing so, even though its direct interest in the value of the franc was so much greater. Mr. Morgenthau said he believed that they were misstating the message received from London and that he had asked Butterworth to check up upon it.