Memorandum on conversation with X., 1939 March 16

Enclosed with No. 1178. Internal economic situation in Germany steadily deteriorating; export trade falling rapidly; conquest of Czechoslovakia will bring 400 million marks but according to X this will last only three months; X believes U.S. has two alternatives: (a) balancing public budget by economic measures, which would lower standard of living, or (b) restoring world markets and moving toward greater freedom for world trade, which cannot be done until Hitler and Mussolini and their systems are destroyed; X concerned about Bank of England; only 25 percent of Bank of England notes covered by gold; with imports increasing and exports decreasing, and increasing rate of rearmament, England may face financial crisis by end of 1940; in X's view time has arrived for quick action; his proposed plan of action: (1) a common pronouncement by England, France, and U.S. that (a) they will not recognize occupation of Czechoslovakia, (b) they will recall their Ambassadors, and (c) British government will immediately recall industrialists on trade mission from Berlin; (2) ask Hitler to come to conference, with firm conditions for conference; (3) more broadcasts in German to German people from England,France, and U.S.; (4) personal and public contact with leading Nazis must cease; (5) differentiation should be made between rulers of Germany and German people; X believes Hitler now on path which will lead to his destruction if Democracies move swiftly; three recent mistakes he made were (1) pogrom against Jews in Nov. 1938, (2) dismissal of [Hjalmar] Schacht, and (3) aggression in Czechoslovakia; last action may prove fatal blunder of his career; action to the West is held up temporarily because of firmness shown by democracies; next move will be to get oil from Rumania either by agreement with Rumanian Government for pipeline or by aggressive action; Hitler plans to stir up trouble in Yugoslavia by promising Croats an independent state; X believes war now inevitable; Hitler issue should be settled before end of year; if present situation continues into 1940, economic condition of the Democracies will have deteriorated through pressure of rearmament.