The Jew Who Defeated Hitler Read online

  By mid-September, Morgenthau believed economic conditions had improved enough that the government could sell bonds. He personally was in a strong position because the president had told cabinet several times he had confidence in the Treasury.34 The fiercest resistance to bond sales came from the Federal Reserve, and Morgenthau fought the central bank tooth and nail, still piqued that its members had tried to grab power while he was in Europe. On September 18, he told the president they needed to raise money, though the president wasn't convinced. He didn't want to ask Congress to raise the $45 billion limit on the national debt, and he believed he didn't have to. Morgenthau learned that Marriner Eccles had told the president late in the summer that bond issues weren't needed. Rather, the government simply had to issue silver certificates—that is, securities backed by the government’s holding of silver—and sidestep worries about rising debt levels. It was a spurious plan because the silver holdings paid the government no income, so the Treasury would have to meet the interest payments from its own resources. Though it was supported by the White House economic adviser Lauchlin Currie and to some extent Harry Dexter White, Morgenthau had little faith in such financial hocus-pocus; in fact, he had little time for Marriner Eccles.

  A Mormon banker from Utah who'd become a millionaire by age twenty-two, Eccles was the most left-wing chairman of the Federal Reserve ever, with no clear contest for the runner-up. Some credited him with being the true architect of the New Deal, more so than Maynard Keynes, and he was often named as the leader among the New Dealers urging more government spending. He stated openly that he did not want strong industrial growth because that could spark inflation. “He has an almost fanatical belief in the soundness of his own theories and has worn out most of his friends talking about them,” Frank R. Kent wrote of Eccles. “As a matter of fact, though he is personally agreeable, genuinely able and possessed of many good qualities, he is not a man of many friends, either in or out of the Administration. Mr. Morgenthau and he, for example, do not get along at all.”35 Their harshest falling out had occurred at a September 9, 1937, meeting when Eccles, after a long, pointed discussion, wondered whether Morgenthau supported a policy of desterilizing gold (allowing banks to reduce the amount of gold that backed paper money) simply because he wanted to relieve the Treasury of some gold. “There’s never any use in talking to you, Marriner,” Morgenthau exploded at him. “It’s an insult for you to ask me a question like that. It’s an insult.”

  “You get irritated every time I come here and present anything, and I'm getting as tired of it as anybody else,” Eccles shot back.36

  Their relationship was fraught again in the autumn of 1939. As early as mid-September, Morgenthau privately complained to the president about Eccles and the Federal Reserve banks and opposed their plan to delay bond issues.37 Morgenthau often took liberties trespassing in other officials’ territory, but he reacted sharply when someone meandered onto his patch. He didn't like Eccles making recommendations on the bond program—clearly the purview of the Treasury, not the Federal Reserve—and he and Hanes both took umbrage when Eccles suggested publicly that taxes on moderate-income individuals and large corporations be raised to finance defense spending.38 Hanes bit back, publicly criticizing the proposal and once again earning the disapproval of Roosevelt for airing grievances outside the cloisters of the White House.39 Morgenthau knew the president had faith in his ability to run the Treasury, and now he wanted to perform one task at which he was a master—he wanted to do a big-bond issue.

  When Henry Morgenthau took over the Treasury in 1933, many were expecting this unproven farmer to mess up. The joke in Manhattan high society was that only Roosevelt could find the one Jew in New York who knew nothing about finance and make him Treasury secretary. In particular, the Treasury had to issue a staggering $1.5 billion—a 7 percent increase to the existing national debt—in bonds by the summer of 1934 to finance the New Deal. Few believed this novice could perform such a feat, certainly not without offering high interest rates to attract buyers. He raised the funds with no problems. In fact, throughout the New Deal, Morgenthau had never had a bad issue of bonds or notes. The interest rate on these bonds rarely if ever crept above 3 percent, and all sold out on the day of issue. It is easy to underestimate how difficult it is to issue bonds, for the issuer has to assess not only its own needs but also the demands of the market: How much appetite is there for new bonds or notes? What duration do institutional investors want to buy to fill holes in their portfolios? Is the appetite for issues from the Treasury or from a government agency? What interest rate is the market willing to pay? Will the market accept new debt or just the refinancing of maturing bonds and notes? Certainly it helped that the Treasury did not have to compete with many corporate issuers in the weak economy, as businesses were not financing expansion.

  It also helped that interest on government bonds was tax-free—a substantial incentive for wealthy individuals in the days when the income-tax rate was as high as 75 percent. Morgenthau was also blessed with a superb staff. And he was far, far more knowledgeable about business than the public perceived. Certainly the financial media had come to respect his dexterity in bringing bonds to the market. “Skillfully combining the investment and speculative features afforded by Federal issues of securities, Secretary Morgenthau yesterday was able to chalk up another outstanding success in the deficit financing and refunding,” the New York Herald Tribune had written in December 1938, the last time the Treasury had raised new money.40

  Now he wanted to raise more funds in an atmosphere dominated by uncertainty over whether fighting would erupt on the French–German border. Press reports said Hitler would propose a peace treaty with the democracies to consolidate his gains in Poland while avoiding a bloody conflict with the other great powers. Morgenthau told the media in late September that the Treasury would be more active in the market soon, then he prepared the president on October 9 for large issues.

  “All right,” replied Roosevelt. “But how about issuing some more silver certificates?”

  “Well, let’s keep that for a rainy day,” said Morgenthau, adding in his diary later, “He certainly sticks to his ideas.”41

  Soon the Treasury raised money for government agencies like the Reconstruction Finance Corporation and the Commodity Credit Corporation. Morgenthau felt the time was right for a bigger issue, even though the Treasury by late November still had a large reserve. He learned November 20 that Roosevelt wanted an issue of silver certificates to avoid asking Congress to raise the debt limits, and the two argued over financing the next day. “I had quite a difficult time with the president over getting him to agree to my doing some $500 million new money financing next week,” Morgenthau dictated into his diary. When the talk turned to silver certificates, Morgenthau said he was “sick and tired of all this monkey business.” They argued about the failure of the New Deal to solve unemployment and about John Hanes criticizing Eccles. Morgenthau eventually said he wanted to build up money going into an election year, making sure there were no financial problems during the campaign.42

  On November 27, the Treasury floated a $500 million issue of new money bonds that matured over nine to eleven years. The interest rate was 2 percent. The offering sold out in a day.43

  One other form of financing that Morgenthau approved of was US government savings bonds, and the Treasury wanted to increase their sales to diversify its sources of funds. In the first half of September 1939, the government sold $24 million of these bonds to individuals—an increase of 42 percent over the same period a year earlier. One official urged Morgenthau to advertise more to increase sales. “A million dollars a year, for two years, spent in magazines and newspapers and backed up by our great direct-by-mail campaign not only would sell more and more Savings Bonds and keep them sold, but bring tremendous and varied good that would stand our country in good stead in this dark hour of World history.”44 It was just one possibility the Treasury was studying.

  The Treasury team knew
it had to devise a fiscal strategy for the war, but it wasn't entirely sure what was needed. “I feel that the Treasury can make a real contribution toward maintaining our democratic form of government through its tax recommendations,” Morgenthau dictated into his diary. “The program I have in mind is not a program of war taxes. It is a tax program of national defense for a neutral country in a war-torn world.”45 The important point is that his fiscal plan was essential to perpetuate the form of government he loved. On September 20, Hanes penned a thoughtful memo advising a special tax package be prepared in case the United States was drawn into the war. Yet he also urged that no extraordinary measures be taken to disrupt economic growth as the country adjusted to a war economy. He said if Congress “keeps its hands off wartime taxes, that the revival of private enterprise in all its implications, which I shall not here detail, will multiply federal revenue, increase the national income to over eighty billion dollars, and thereby contribute to the solution of our great problem—the balancing of our federal budget.”46

  Morgenthau and Roosevelt believed it may be necessary to increase taxes on middle- and lower-income groups but did not want a wartime boom that rewarded only the wealthy. “Doesn't Hanes mean that if business gets better, our income will be so much better that we won't have to raise taxes?” Roosevelt asked Morgenthau at a private meeting in late September.

  “Absolutely.”

  “Well, I am very fond of Johnnie Hanes but Johnnie just does not understand,” Roosevelt continued. “If you take a plebiscite today as to whether the people would rather have price fixing by fiat or excess profits tax, it would be an overwhelming vote for excess profits tax. The people don't want to see individuals or groups profiteer.”47

  Roosevelt continued to believe in the excess-profits tax despite the evidence it had drained the economy of private investment. To the president, it was more important to prevent great increases in personal wealth than to strengthen the businesses that would be needed for the industrial production of the war economy. And Morgenthau agreed with him.

  “Well, strictly between us, Mr. President, I have not told this to John Hanes, I have asked Magill and Shoup [two Treasury officials] to prepare a memorandum for me on excess profits tax, to be ready on the first of October,” said Morgenthau. “The way I see it, we need excess profits tax.”48 Years after he left office, Morgenthau still portrayed the excess-profits tax as a just fiscal measure. It is also possible he was simply ignoring the damaging effects of this tax because he agreed with Roosevelt that it was more important to prevent the rich from getting richer than to improve the overall economy.

  Budget Director Daniel Bell in early November took a first stab at a proposed wartime budget and projected that within twenty-four months of the United States entering the war, defense spending would more than triple to about $10 billion, but other budget lines like public works and relief would plunge dramatically as the work force was drawn in to the military. Overall, the budget would swell to about $14.4 billion, more than 50 percent above the 1940 budget level. It was also about two and a half times the $5.6 billion the Treasury was expecting for revenue in 1940.49 By December, they had completed an extensive study on what taxes could be increased to raise additional revenue.

  On December 12, the president and Treasury secretary were sitting in the Oval Office, discussing the problem of taking gold from allies who were going broke, when the president outlined his financial plans for the coming year. He said he hadn't yet received all the budget figures for the 1941 fiscal year, but he wanted the Treasury to plan on a deficit of $2.6 billion. He did not say so, but Morgenthau had to assume that would push the national debt up toward $50 billion—certainly above the limit of $45 billion. FDR went on to say he wanted his budget message to Congress to show the national debt would be lower on July 1, 1941, than it had been on January 1, 1940. To achieve that and meet the rising defense expenditures, he said, the Treasury had to come up with $4.6 billion in assets that could be liquidated and whose proceeds could be channeled into current expenditures.

  “When the last Administration moved out, those bastards left us with $125 million in the Treasury,” said the president. He had obviously not yet decided whether to reoffer in 1940 because he told Morgenthau there was no reason to leave the next administration—especially if it were Republican—any more than that. That meant they could use about $1 billion to $1.25 billion of money now held by the Treasury for current programs. He proposed raising roughly $1.25 billion to $1.5 billion from the sale of silver certificates—an idea Roosevelt would not drop. Then he told the Treasury secretary he could extract a further $1 billion from the stabilization fund, a $3 billion pool of money that the United States, Britain, France, and other countries had built up to preserve the stability of major currencies. Morgenthau had pledged repeatedly over the years that the treasury of neither the United States nor any other country would touch this money other than to stabilize currencies or retire debt.

  Dumbfounded, Morgenthau asked him what he was expecting for revenues in fiscal 1941. The president’s answer of $6.6 billion exceeded the Treasury estimate by about $1 billion. “I don't think it’s going to be anything like that,” he told the president, referring specifically to the revenue projection.

  “Well,” said the president, “not only do not any two departments agree, but no two people in the same department agree.” And so he proceeded to chronicle the conflicting predictions he had received from various parties.

  Morgenthau calmly explained that for the past five or six years the Treasury had been accurate in its revenue estimates. Then he added that the president’s plan would still leave him with a big deficit, even though he may disguise the worsening debt picture.50

  “I personally feel…this is the worst thing he can do for himself,” Morgenthau told a confidential meeting that included his closest advisers other than Hanes.51 Morgenthau told them he would try to remain “detached” in his description of the meeting, but he found it difficult. “He has not done this thing during the time he was in and it would give the Republicans the ideal campaign issue as between financial sanity and financial something else,” said Morgenthau. “All that Mr. Dewey has to do is go out and campaign on honest bookkeeping. And it doesn't accomplish anything! The deficit isn't any smaller!” Concluding, Morgenthau said: “He’s trying to make a 40-inch waist go into a 28-inch corset, but when he got through there is still the 40-inch waist.”52

  There was a possibility Roosevelt was floating the idea to gauge Morgenthau’s reaction, but the secretary said he believed the president’s mind was made up. He wondered who was feeding him such plans. He authorized his officials to begin preparing documents that would prove conclusively that the plan simply would not work.

  Had Morgenthau been the yes-man that so many portrayed him to be, he would have gone along with the president’s harebrained scheme. That would have diminished the government coffers just as the world was preparing for the greatest global conflict ever, increased borrowing costs, violated international agreements, and decreased the government’s economic credibility. Would Roosevelt have pursued such a policy? He had in the past, such as the excess-profits tax and the government buying of gold. In those plans, Morgenthau had been his willing accomplice, arguably his yes-man. However, Morgenthau had matured in his position, and he moved swiftly and effectively to dissuade the president, and the plan never reached fruition.

  Roosevelt’s scheme might have been the final liberal straw that broke Hanes’s conservative back. On December 22, the White House announced his resignation. It was an amicable parting, and both the president and the secretary praised him publicly for his work. Arthur Krock noted in a Boxing Day column that conservative Democrats in Congress were heartily saddened by the departure because they had found in Hanes a member of the administration who understood their economic aspirations. “This strength was formed by a rare combination of ability, personality and character, a combination which won the regard of the presiden
t and some of his strongest critics alike,” wrote Krock.53 Frank R. Kent wrote the same day that in seven years the administration had had five different under secretaries of the Treasury. One, Morgenthau, had been promoted to secretary, and the four others quit because of policy differences with the president. (Kent neglected to mention that one, Dean Acheson, was still a senior administration official in the State Department.)54

  Hanes maintained his friendship with Morgenthau after he returned to the private sector, but he switched his political allegiance. By the election campaign of the following fall, he was an executive member of the National Committee of the Democrats for Willkie, a group of disillusioned Democrats actively campaigning for Roosevelt’s Republican opponent, Wendell Willkie. Hanes even addressed an October luncheon meeting of the Manhattan women’s division of the United Republican Finance Committee, held at the Hotel Roosevelt (which was named for Theodore, not Franklin). He told the audience that he resigned from Treasury because he had come to believe that “the country was being handled by a lot of incompetents.” Morgenthau clipped out the New York Times report on the speech and filed it with his personal papers.55

  Harry Woodring and Louis Johnson didn't agree on much, but they were unanimous in their displeasure with the liaison committee in which Henry Morgenthau Jr. had a prominent role.

  A former governor of Kansas, Woodring was the strongest isolationist in the cabinet. His objective was to strengthen the regular army, the national guard, and the reserve corps and to balance defense spending between personnel and procurement. But his critics—and there were many—sneered that he had led military procurement for years and still the military was undermanned and under-armed. As early as 1936, the year he was appointed to the cabinet, Harold Ickes noted that he understood “Woodring does not stand high in the president’s regard.”1 Morgenthau considered him ineffective and hard to deal with. So did Louis Johnson, the Virginia lawyer serving as assistant secretary. “Only when absolutely necessary do they speak to each other,” wrote Time magazine in October 1939. “When official business requires them to communicate, they do so in writing or through harried subordinates. Mr. Johnson despises Mr. Woodring. Mr. Woodring distrusts and despises Mr. Johnson, who for 27 months has gunned for Mr. Woodring’s job.”2