2. Developments on the financial and economic
site have not been encouraging*   The hoped-for
improvement in business hangs fire, and the Preside
is evidently deeply disappointed and embarrassed by the
failure' of the new spending campaign of 1938 to
stimulate private business*   Some progress has been
made regarding tax reform.   A programme of amendments,
mainly to the Corporation taxes, and designed to
remove impediments to business, was worked out by Mr.
Hanes, Assistant Secretary of the Treasury, under Mr.
Morgenthau's direction.   This programme at first
received a chilly reception from the President who
declared that he would not agree to the abolition or
reduction of the tax on undistributed profits unless
equivalent revenue was obtained from the same group of
corporations and steps were taken to prevent tax
evasion by retention of profits by corporations. He
appears further to have refused to allow the Treasury
plan to be put forward as an Administration proposal.
His hand has, however, been to some extent forced by
the determination of Congress leaders to take the
initiative themselves even at the cost of prolonging
the session.   After much coming and going it was
arranged that Mr. Morgenthau shall give evidence
before the House Ways and Means Committee on the 27th
instant.   A large part of the Secretary's statement
dealt with general problems, the improvement of
Congress procedure, and future taxation policy. But
he made some specific suggestions and it Is generally
anticipated that the outcome will be the expiry of the
undistributed profits tax;   the raising of
equivalent revenue by placing a flat rate of perhaps
18*/
-5-
18$ on Corporation incomes above $25,000 and a
graduated rata ef perhaps 12i# - 18% on lover incomes;
the removal of the $2000 Unit on the carry forward of
losses;   permission to carry forward losses for two or
three years instead of one only;   and certain other
amendments.   The exc .se duties which expire in June
or July and produce ^400,000,000 per annum will
probably be renewed.   But Congress is likely to
postpone action on the President's proposal, repeated
by Mr. Morgenthau, that Government securities issued
in future should not be exempt from income tax;
this is controversial and affects the relations of
the Federal and State Governments.
3« Meanwhile, in spite of the defeat of the
bill providing for export subsidies on cotton, the
Senate has increased the appropriations for the
Department of Agriculture by some $375,000,000,
which would probably enable the Government to introduce
the export subsidies as an administrative measure.
It seems probable that these increases will be
accepted, in spite of opposition, by the House and by
the President.   She President is, however, reported to
have observed that if Congress wished to vote this
extra expenditure they ought to have provided
additional revenue for the purpose.
4. The Presidents attitude on this matter
seems in contradiction with rumours which are in
circulation to the effect that the Administration will
advance a new spending programme as a cure for the
failure of the last.   This rumour seems at present
vary doubtful.   The President, though he vigorously
defended his policy in a recent speech, gives rather
the/
the impression of being afraid to make any definite
move, either In favour of more deficit spending or in
favour of economy and a reduction of the deficit, for
fear that either move night be the wrong one. A more
probable indication of the President98 thoughts seems
to be given by a message which he recently sent to the
Temporary National Economic Committee (commonly called
the "Monopoly Committee" and composed of Congressmen
and officials, set up last winter to consider the
question of trusts and free competition) suggesting that
they should enquire into the reason why capital remains
idle*   The Securities and Exchange Commission, which
has given evidence before this Committee, has been
staging a demonstration that the large Corporations are
self-sufficient as regards capital and that idle money
can only be mobilised e.g. by a system providing loans
for small businesses.   It is possibly in the direction
of Government guarantees for private loans that Mr.
Roosevelt will seek the way out from the impasse
which his present policy has reached.
5* The reform of the old age pension provisions
of the Social Security Act continue^to be discussed
without any definite progress.   It is believed in some
Quarters* however, that the Administration would be in
favour of retaining the present level of the payroll
taxes instead of raising them by 1% in 1940 as
originally provided, and further making the old age
benefits available in 1940 Instead of 1942. This
would enable the Administration to reap the political
harvest of this measure in time for the 1940 elections,
the shadow of which evidently lies darkly over all
financial and economic moves at the present time.

6* The session lias so far prayed that Congress
is only ready to take prompt and effective action in
one oatter of importance, namely national defence* On
the other two major issues, foreign policy which
involves neutrality legislation, and domestic
recovery, there has "been nothing hut delay, disunity
and deadlock.   The American Constitution is not in any
event ideally designed to promote close and continuous
confidential communication between the Executive and
Congress*   Sr. Roosevelt*s dominating personality and
the toe frequent inadequacy and unpopularity of his
principal executive assistants have undoubtedly
served to accentuate the lack of harmony between his
Administration and the legislature*   The President is
accused of failing to tales Congress into his confidence,
especially in matters affecting foreign policy, and
Congress is equally open to the criticism that it has
failed to create an atmosphere in which the President
could prudently take it into his confidence*   On the
other hand the Republican opposition have not been
playing their cards particularly well*   They are even
now paying lip service to economy in what they have
been pleased to declare "National Debt Week", a week
in which Republicans throughout the country are
expected te call attention to the prodigal and
unproductive financial undertakings sponsored by the
New Deal*   Yet on Hay 18th the Senate gratuitously
added nearly $400 millions to the agricultural
appropriation for the next fiscal year, or a 45$
addition to the appropriation asked for by the
Administration*   The Republicans have equally got
themselves into a considerable tangle over the
Neutrality/
1
Neutrality Act in which they are quite as unable to
present a united front as are the Democrats, All
this is in the long run encouraging for Mr. Roosevelt
and his liberal ideas, and the talk of a third tern
for him in 1940 is increasing again.   He has shown in
his reeent utterances that he is unrepentant.    In a
speech on May 22nd to the Retailers National Forum he
made it clear that he intended to follow up all the
principal policies of the Administration, especially
that of deficit spending, although he assured his
hearers that a continuation of deficits was not a
permanent part of the Government * s plans.    He invited
the retailers, over whose counters he calculated
that more than 50 eents of every Federally spent
dollar passes, to cooperate with him in improving
their business methods, hut added that they must first
approve the purposes lying "behind his policy. The
Secretary of Commerce before the same audience stated
that there must not, and would not be any compromise
with the underlying principles of the New Deal's
social and economic reforms.   The Administration
recognised however the necessity of fair business
profits as an essential basis for increasing employment
and private investment.   The President has also had a
word to say at his press conference on the subject of
public utilities.   Approving the plan just presented
by the New York Power Authority to the Governor of
that State, which suggested a new line of approach to
the problem of coordinating Government power
enterprises with private power systems, Mr* Roosevelt
said "the Power Authority's report is obviously
drafted to test the willingness of the private
utilities/
utilities to cooperate with government agencies in a
programme of expansion in order to make possible the
widest possible use of electricity at the lowest
possible cost",
7. The Secretary of Agriculture announced on
May 15th that there would be no wheat marketing quotas
under the Agricultural Adjustment Act this year and
consequently no referendum on this question by wheat
farmers*   The present estimate of the crop is not such
as to necessitate a quota*   The wheat acreage
allotment for 1940 will be 62 million acres, an
increase of 7 million acres over the present year*
8. The coal strike referred to in paragraph 4
l/%      of my despatch No* 507 S ended, as the result of the
President's intervention* in a victory for Mr* John L*
Lewis Insofar as the principle of the elosed shop was
conceded*   A new agreement has been signed with the
coal owners providing that henceforth in the bituminous
coal industry no miner will be employed until he joins
the United Mine Workers* and the anthracite miners have
fltist '..obtained a similar contract with their employers*
This will render it unnecessary for the National Labor
Relations Board set up under the Wagner Act to hold
any elections in either the hard or soft coal
industries to decide which unions are to bargain with
the employers*   The strike has however been unpopular
in the country at large and the upset in other
industries caused by it may not in the end improve
Mr* Lewis* authority with other trade unions*   A few
thousand miners in Harlan County, Kentucky at first
refused to go back to work and the troops had to be
called out* but eventually the miners succeeded even
there/
-8-
there la obtaining a closed shop contract. The
Congress of Industrial Organisations seem also to
have gained a tactical victory in the textile
industry by successfully resisting the American
Federation of Labor's attempt te via back the United
Textile Workers of America..   This group deelded to
amalgamate with the Congress of Industrial
Organisations Textile Workers Organising Committee
and thereby form a group which ^p*"* a membership
of 325,000.   nothing further has been heard of the
peaee parley between the rival organisations.
9. I am sending copies of this despatch to
the High Commissioner for the United Kingdom in
Canada, the Prime Minister of Australia, c/o the
Dominions Office, and the Department of Overseas Trade.
I have the honour to be,
with the highest respect,
My Lord,
Tour Lordship*s most obedient,
humble servant,
(SOD) H. C* LINDSAY