The Jew Who Defeated Hitler Read online

  Like Churchill (and Hitler, for that matter), Franklin Roosevelt knew less about economics than other aspects of government, such as military affairs, diplomacy, and even social policy. Now he wanted to “get away from the dollar sign” in his program to support war-ravaged Britain. It was a simple term, elegant and vague, that would serve Roosevelt’s goal of aiding Britain without exciting isolationist sentiment in Congress.

  “I don't want to think of this thing in terms of dollars and loans,” he told Morgenthau over lunch on December 17. He wanted to increase production and let the British take what they needed to use against the Axis and return it if it survived the war. He would have given the stuff to the English, he told Morgenthau, but it would be better to have Congress think the White House was being too stingy and increase the aid rather than the opposite.1

  Certainly, America was now eager to help Britain. “We have been paid for every single thing [Britain ordered], and everything we have done has increased our own powers of production,” Eleanor Roosevelt had said publicly the day before. “I do not see that there is much reason for talking about loans. I think we might just as well talk about gifts.”2 Morgenthau, Dean Acheson, and others in the administration agreed. The only dissenters were die-hard isolationists, who were few in number and large in influence. “Anglophiles, refugees and important financiers” were conspiring to “plunge this country into war,” charged Senator Rush D. Holt, who said the United Kingdom had been given enough aid already.3

  The president repeated to a press conference hours after meeting with Morgenthau that the United States had to get rid of “that foolish old dollar sign” in its dealings with Britain. The important thing was that the United States provide Britain with arms, and the president proposed that they be lent or leased to the island nation.4 Two weeks later, Roosevelt delivered only his third fireside chat, in which he coined the term “arsenal of democracy” to describe the United States’ role in arming the countries opposing the Axis. The public at large applauded as the White House received six hundred messages in the first forty minutes after the speech with 99 percent approving of the general tenor.5 Within a couple of days, another new term entered the political lexicon of the day—lend-lease—describing Roosevelt’s new policy on supplying Britain and the Allies. John Maynard Keynes would one day write that the Lend-Lease Bill was Franklin Roosevelt’s single-greatest act of statesmanship, and it may have also been one of his greatest acts of public relations. The very term lend-lease clouded the issue, leaving the public unsure whether the United States was lending the material or the Brits were leasing it. The vagueness meant there was no need to repeal either the Johnson or the Neutrality Acts, which would have given isolationists a huge platform. All that was needed was to get the new Lend-Lease Bill through Congress—no mean feat in itself.

  Roosevelt brought in the Treasury to draft the legislation. On Thursday, January 2, three days after the fireside chat, Morgenthau instructed General Counsel Edward Foley and his associate Oscar Cox to write a bill that would concentrate the power to prosecute the war in the office of the president. Roosevelt wanted to be able to increase arms production without going back to Congress repeatedly. By this time, it was obvious lend-lease would apply to all Allies fighting the Axis. So the president wanted complete flexibility in deciding what materials would be allocated to which nations. The war could move to new theaters—maybe the Middle East, or Africa, or even Ireland—and the British would require different weapons in each theater. The president needed the flexibility to speedily deliver the right weapons to the right place. Finally, there was still a vague understanding of whether the material would be lent, leased, or given to the Allies. “I don't know any law, but if the word can be simply ‘lend’ and leave it up in the air as to how they should be repaid, I think that is what he wants,” Morgenthau told the lawyers.6

  Twelve hours later, Foley and Cox had prepared a rough draft as an amendment to the Neutrality Acts. Over the weekend, the Treasury brought in contributions from a range of supporters such as Arthur Purvis, Dean Acheson, Supreme Court Justice Felix Frankfurter, and senior War Department personnel. Morgenthau and Henry Stimson sat down with a finished bill Monday morning and worked out the fastest way to get it through Congress. They decided to recast it as new legislation rather than a Neutrality Act amendment and to seek a friendly congressional committee in which to introduce it. On Tuesday, January 5, Morgenthau took the finished bill to the president. The Roosevelt circle decided to introduce the bill in the Foreign Affairs Committee, despite worries it was packed with isolationists. On January 10, the bill was introduced in both houses and given the symbolic number of H. R. 1776.7

  It was a happy, harmonious time in the Roosevelt circle as everyone worked toward the common goal of aiding Britain. (As Elinor told Morgenthau one night, the United States had to “keep England going in order to let us prepare.”8) In mid-January, the senior members received their customary invitation to FDR’s birthday on January 30. In previous years, Eleanor Roosevelt had insisted on a special theme. In 1938, for example, everyone was asked to show up in a costume or bearing a present that represented a special incident, and the president had to guess what the incident was.9 But this year, it was a simple celebration of the chief’s fifty-ninth birthday.

  The harmony began to fade as Cordell Hull proved reluctant to lead the legislation through Congress. Morgenthau told Roosevelt of the problem in a phone call on January 13 and said the time had come for the State Department to contribute more to the effort to aid Britain. “The President did not take my suggestion too well,” he told his diary, adding that Roosevelt simply said the secretary of state would testify. When Morgenthau complained that the Treasury had done everything so far, up to writing speeches for key members of Congress, FDR said he knew that. “The important thing is that I have planted the seed in his mind,” said Morgenthau. The effort to pass these duties on to Hull came two months after Morgenthau tried to persuade Stimson to oversee aid to Britain. He obviously wanted now to focus on major developments within the Treasury.

  The second problem arose from Roosevelt’s wish that the British should invest a couple billion dollars in arms factories. Though many supporters agreed with the proposal, Morgenthau knew the British simply didn't have the money. In mid-December, a reporter had asked Morgenthau how the US military personnel reacted when they saw the British government’s balance sheet, and he drily quipped, “Nobody fainted.”10 But the joke masked a desperate situation. The British government told Morgenthau it had gold and US securities amounting to $1.78 billion and investments outside the United States and the United Kingdom worth $3.89 billion. It also showed that on the operational side, the British Empire, excluding Canada, was due to run a deficit of $1.46 billion in the calendar year of 1941.11 Yet Morgenthau could not even convince administration insiders—let alone the isolationist congressmen—of Britain’s desperate situation. Though the State Department’s economic guru Herbert Feis sided with Morgenthau, Hull continued to believe the Brits could put up collateral of $2 billion to $3 billion. Roosevelt himself thought they could come up with $1 billion. The Treasury’s preliminary analysis of the British situation showed that the British needed about $15 billion in military aid.12 The United States’ own defense budget for fiscal 1941 was an already-astounding $7.2 billion, more than three times the previous year’s figure. A donation of $15 billion was equal to almost 12 percent of the United States’ gross domestic product (GDP) in 1941.13 It’s quite possible that no industrialized country in modern history had shown such generosity to another. The entire Marshall Plan, in which the United States helped to pay for Western European reconstruction from 1948 to 1952, cost $13 billion, or roughly 5 percent of the 1948 GDP.

  The night before they were to testify, Morgenthau told Hull and Stimson that Britain had been selling down its holdings of US securities, raising $10 million per week. Then Stimson stated Britain should not be bled dry by the war even if it could scrape together a few b
illion dollars. It was one of the few democracies left in Europe, a country rich in culture and history that shared a common heritage with the United States. It was the type of moral argument that pleased Morgenthau. “I wasn't going up on the Hill as a banker and ask for collateral” from the British, Morgenthau later told his staff. “If the President wanted somebody to do that, he would have to get somebody else to do it.”14

  By the time the Foreign Affairs Committee convened on January 15, the room was packed with spectators, the atmosphere thick with tobacco smoke and conflicting opinions. Alone at the witness table, Hull opened by saying the bill would help the world return to an atmosphere of calm cooperation rather than the perpetual conquest by totalitarians. “Mankind is today face to face, not with regional wars or isolated conflicts, but with an organized, ruthless and implacable movement of steadily expanding conquest,” he read in a speech that was partly written by Roosevelt. “The most serious question today for this country is whether the control of the high seas shall pass into the hands of powers conquest.”15

  Flanked by seven underlings, Morgenthau opened by releasing the financial statements the British had given him. It was a considerable gamble because, as Hull told him, it told the Germans just how desperate the British were and increased the chance of an invasion. It might also have convinced Congress that Britain was as good as defeated and could have therefore resulted in a refusal to send it arms. But Morgenthau felt he had to shock the American people into realizing that the British were desperate. He also reminded the committee that the British were financing the war with tax rates far higher than those of the United States. “The British people are not only dodging the bombs and fighting for their existence,” he said. “They are also making a stupendous effort to pay for this war by themselves.”16

  Morgenthau had never performed well in testimony on Capitol Hill. (In his first appearance ever, he had introduced himself then asked an under secretary to read his statement.) Now isolationists Hamilton Fish, John Vorys, and George Holden Tinkham tore into him, claiming the bill gave the president excessive powers to arm another country. Vorys got Morgenthau to admit the bill would force the United States to raise its debt limit, then he said the bill should be known as “lend-lose” not “lend-lease.” As Morgenthau wore down, Tinkham said to him, “I am very sorry to say I haven't the same confidence in the President that you have.”

  “If you pardon my saying so,” shot back Morgenthau, “you are probably in the minority.”17

  Stimson spent a day and half on the stand, withstanding the isolationist assault and hammering home the point that American defense relied on the survival of the Royal Navy. They also attacked William Knudsen and Frank Knox before the Committee heard from Joseph Kennedy and Charles Lindbergh, both opposing the bill that was broadly supported across the country. “Only a few big isolationist newspapers roared hysterically: the Chicago Tribune, the New York Daily News, a few others,” said Time magazine. “The rest of the press mumbled a bit. But most papers said flatly: Pass the bill, and no nonsense.”18

  But Speaker Rayburn told the administration that amendments were needed—especially a reduction of the powers being vested in the presidency. They agreed to limit the time in which the president could approve lend-lease agreements and to require the administration to send a report to Congress on lend-lease activity every ninety days. The House added that Congress could end the president’s lend-lease powers before the bill expired and limit the existing order to $1.3 billion. The bill carried the House by 260 votes to 165, complete with amendments that Roosevelt could live with.

  A few senators then demanded Congress, not the president, have the final word on how much could be transferred to other countries, arguing that appropriations were the constitutional responsibility of Congress. Morgenthau and Stimson, however, believed this amendment changed the bill’s intention of ensuring flexibility in procurement. They wanted to fight the amendment, but the president was ill and Hull said he wanted to back off. Stimson and Morgenthau tried to persuade Hopkins—just returned from a special mission to London—to convince the president to resist the amendments. Morgenthau told his diary his report to Hopkins overall was “discouraging and gloomy.” Ed Foley worked out a compromise with the senators. It reversed the wording of the amendment so the president could dispose of any defense articles abroad unless Congress specifically imposed a restriction on them. The amendment was acceptable, and on March 8 the Senate passed the bill sixty to thirty-one.19

  By this time, Morgenthau—so often criticized for treading on other men’s turf—had told Purvis, Stimson, and Roosevelt that he wanted to be freed of any involvement in lend-lease unless the president ordered otherwise. He wanted to focus on Treasury business. The first two told him he was needed in the operation. FDR responded that Morgenthau should probably appoint an assistant secretary to work with Purvis so that he would at least keep a hand on the brief. The suggestion pleased Morgenthau, no doubt because it showed the chief valued the work he had done with Purvis.20 Roosevelt settled the matter February 25 when he struck a lend-lease committee comprising the secretaries of War, of the navy, and of state and headed by Harry Hopkins.

  Morgenthau told Hopkins he could have Philip Young, a Treasury man, if he needed staff. But within the bastions of the Treasury, he told his staff Hopkins was too sick to do the job. He wasn't familiar with the needs of the Chinese, Greeks, or South Americans. “Here is this list of eighteen things the British want,” he told his staff one day. “Hopkins has been carrying that around him since Sunday a week ago. The thing could have been mimeographed and everybody have a copy and [be] working on it. That is what would have happened in my shop.” He stressed, of course, that he wanted to move away from lend-lease unless the president asked him to help.21

  Hopkins didn't want Young; rather, he told the president he wanted Oscar Cox, who had done a splendid job assisting Foley on the lend-lease legislation. On March 1, an irate Morgenthau assembled Cox, Foley, and Young and told them explicitly that the president didn't know who Cox was. Hopkins “didn't tell the President that you were in the Treasury,” he told Cox. “You're just Oscar Cox. Oh, I have seen that before. That’s the way he works.” Morgenthau was damned if he would let Hopkins pluck the efficient Cox from his department. “We have a wonderful relationship here, and I am going to keep it that way,” he told them.22 Hopkins won. Cox was soon named general counsel of both the Office of Lend-Lease Administration and the Office of Emergency Management.

  A clerk read President Roosevelt’s budget message for the 1942 fiscal year to the House of Representatives on January 3. The preamble said this budget was “a reflection of a world at war,” and the main feature was increased defense spending. “It is not enough to defend our national existence,” read the clerk. “Democracy as a way of life is equally at stake.”23 Then the clerk proceeded to the total expenditures for the year: $17.5 billion. The house was silent, stunned, until one congressman let out a long, slow whistle. Speaker Rayburn pounded his gavel, and the clerk continued.24

  Seventeen and a half billion dollars. It more than doubled the $8.4 billion figure of a year earlier. What was worse, the figure did not include the lend-lease expenditures, which the administration privately estimated at $7.5 billion. The budget speech stated that between June 1940 and the middle of 1942, the US government would spend about $28.5 billion ($460 billion in 2012 US dollars) on defense, during which time the army (not including the navy) would more than quintuple from 250,000 men to 1.4 million men. The total two-year expenditure amounted to more than one-quarter of the United States’ GDP for 1940. It promised to be the greatest buildup of military equipment—in terms of both money spent and the modernity of the technology—the world had ever known. “The President still believes in spending Government money as if it were water,” cried Republican senator Robert Taft of Ohio. Senator Alben Barkley, a Kentucky Democrat, countered that it was “a minimum of what we ought to do.”25

  The Treasury now
faced an unprecedented task. The government had raised only $7 billion in revenue the year before, and Congress was expected to increase revenue slightly. But Morgenthau wanted to finance two-thirds of the defense expenditures from taxes. He also had to worry about inflation. Prices had been stable for years, but excess industrial capacity was falling and the unemployment rate had dropped from 17.2 percent in 1939 to 14.6 percent in 1940, a low for the Roosevelt administration. Inflationary pressures were building, and the Treasury knew World War I military expenditures were the main reason prices rose 85 percent between 1917 and 1919. Such high inflation in the current war would have driven up the cost of the war materials and military salaries, meaning the government would have to raise even more money. And inflation would drive up interest rates, again increasing war costs.

  If that weren't problematic enough, the customary means of raising public money was certain to exacerbate inflation. The process of deficit financing greatly increased money supply because it increased bank deposits for the entire banking system. For example, bank deposits rose from $38 billion in 1933 to $60 billion in 1941. Morgenthau was certain the United States would ignite inflation if the Treasury raised more money by turning again to the nation’s banks. Inflation promised to be such a problem that Marriner Eccles came up with an anti-inflationary plan, which would have expanded the powers of the Federal Reserve at the expense of the presidency and the Treasury. Morgenthau was apoplectic, but Roosevelt brushed off his concerns. “Henry, this is so unimportant, the Federal Reserve is so unimportant, nobody believes anything that Marriner Eccles says or pays any attention to him,” he said. “The important thing is the war.”26

  Morgenthau believed the best method of financing the war was the sale of war bonds. During World War I, the Treasury had raised $21.5 billion selling what it called “Liberty Bonds,” though most of these sales were to financial institutions, not to individuals. The sale of war bonds in the 1940s would simply be an expansion of the popular US savings bonds programs, which continually brought letters of support to the Treasury. “While serious concern—yes, genuine anxiety—is shown over Government spending and the increasing public debt, there is scarcely a word criticizing Savings Bonds, and, almost without exception, our mail reveals only friendship and admiration for the Secretary,” said one Treasury official in an April 1939 memo.27