Indeed, we do not and should not duplicate the work of this fine group which Secretary Wilson has assembled. Our job as a legislative group is to investigate and evaluate results. If there are failures of law, we are dutybound to try to correct these deficiencies. If there have been administrative failures, these must be rectified. In a sense, we are together to write a chapter of management history. It is important that we look at the law and look at what it was intended to accomplish. We must assess those which are faults of law and those which we can describe as operational faults. Some of the most able minds in the country participated in thw formulation of title IV. Into it went untold years of top-management experience. The practices and procedures of proven worth in business modified in some instances to meet the peculiar demands' of the military establishment were adopted. The title was designed to establish clear lines of responsibility for fiscal management, to Erovide the means of obtaining uniform and accurate budgetary and seal data, and, generally, to furnish the mechanism for review and analysis of fiscal problems to eliminate waste and inefficiency. The predictions of success for title IV were universal. Our purpose here today is to help insure the success that the title deserves. Before introducing our first witness, it is my pleasure to make as a part of the record a most helpful letter which was received by me from that beloved elder statesman, Bernard Baruch. We asked Mr. Baruch to be with us and help in these hearings. He was unable to be present but he has put down in this letter his ideas on the problem and its solution. We are most grateful to him for his interest, and I'd like to add my sincere thanks to this outstanding American. (The document referred to is as follows:) October 16, 1953. Hon. Ralph E. Flanders, Chairman, Preparedness Subcommittee No. 3, Dear Senator Flanders: Replying to your letter of September 29, to which I have given careful consideration, it seems obvious and axiomatic to me that any procedures calculated to reduce vital waste are beneficial. I have looked over title IV and my impression is that the procedures outlined in that title are sound and aimed at giving the responsible officials of the Defense Department the mechanisms which they need to implement their decisions. May I draw your attention to the explanation and analysis of this amendment made by Mr. Ferd Eberstadt and which I think valid in the present circumstances and which would be of great benefit, if your committee would review it? I am not in a position to express any opinion as to the extent to which the measures and procedures outlined in title IV have in fact been implemented. Certainly if they had been fully implemented, our responsible officials would be In a position to know how much we had of each vital item. The shortage of ammunition in Korea leads one to conclude that this was not the case, at least with respect to that vitally important material. So that while, as I said, I have no detailed and intimate knowledge on the subject, based on the Korean ammunition episode I have a feeling that there is room for improvement. And so it seems to me that your committee's investigation is timely and should be helpful. I am sure that before your committee comes to conclusions, you will have examined the responsible department heads and those under them whose duty it has been to put the title into effect. That will disclose to you both the accomplishments and the deficiencies. Moving to the broader aspects of the subject, I feel that the thing we need most is a group of responsible and well-qualified citizens who in collaboration with the authorities and without the pressures of day-to-day administrative burdens can give consistent thought to our major policies. I also would like to feel sure that the Office of Defense Mobilization is keeping us as constantly and as well prepared as the legislation enacting this body contemplated that it should. Since I have no further substantial contributions to make to your valuable inquiry, I would be pleased if you would regard this letter as a substitute for my personal appearance. Sincerely, Bernard M. Babtjch. Senator Flanders. Before calling our first witness, I shall submit for the record a document setting forth the definitions of a few terms, prepared with the assistance of the Office of the Assistant Secretary of Defense (Comptroller), which we shall encounter in these hearings and which may be unfamiliar to persons who are not acquainted with title IV and its operation. (The document referred to is as follows:) PERFORMANCE BUDGET A performance budget is one in which all costs Incidental to the accomplishment of a specific Job or objective are consolidated into an identifiable project, with projects logically grouped into primary functions and in which, insofar as possible, fiscal responsibility and management responsibility are parallel. It contemplates a separation of capital expenditures from current operating expenditures. The performance budget is designed to focus attention upon the general character and relative importance of the work to be done or upon the service to be rendered, rather than upon the things to be acquired such as personal services, supplies, equipment, etc. WORKING-CAPITAL FUNDS Working-capital funds are of two types, commercial or industrial funds and stock funds. Each is defined below. COMMERCIAL AND INDUSTRIAL FUNDS Commercial and industrial funds are devices for the financing of commercialand industrial-type activities operated by the Department of Defense whereby cash and inventories are invested as capital for the operation of the activities on a basis comparable to private business. Under section 405 of title IV of the National Security Act of 1947, as amended, working-capital funds are authorized for the purpose of providing working capital for the operations of commercialand industrial-type activities. The act authorized the Secretary of Defense to provide capital for commercial and industrial funds and stock funds by capitalizing inventories on hand and, with the approval of the President, by transfer, until December 31, 1954, from unexpended balances of any appropriations of the military departments not carried to the surplus fund of the Treasury. The act also authorized, where necessary, direct appropriations to provide adequate working capital. STOCK FUND A stock fund is a type of working-capital fund established to finance the acquisition and maintenance of materials, supplies, and equipment for sale within a military department or to other military departments or to their personnel. It contemplates the operation of the inventory in a fashion similar to the operation of a privately owned merchandising organization. MANAGEMENT FUN.D A management fund is a device to finance certain activities which are performed for the joint account of two or more agencies within a military department or of two or more military departments. Management funds differ from Industrial funds in that the activities financed are not of an industrial or commercial nature and do not involve the financing of the procurement of materials for fabrication. For example, the expenses of the telephone system for the defense agencies in Washington are financed by a management-fund account for the Department of Defense and the three military departments. The expenses are distributed monthly by the management fund to the participating agencies, and the management fund is reimbursed by them for such charges. PROGRESS AND STATISTICAL REPORTING Title IV requires the rendition of reports containing data relating to current operations of programs, functions, organizational units, activities, projects, or processes. Such reporting may include data with respect to costs, but most commonly it is not confined thereto but includes data pertaining to workloads, measures of work performed, manpower utilized, equipment available for use, etc. Senator Flanders. Our first witness is Mr. Ferdinand Eberstadt. I should like to present for the record a brief statement of Mr. Eberstadt's achievements. (The document referred to is as follows:) Ferdinand Eberstadt Investment banker, born June 19, 1890, New York, N. Y. Graduated from Princeton with A. B., 1913, LL. B., Columbia, 1917. Partner, law firm of Cotton & Franklin, New York, N. Y., 1923-25; partner, Dillon, Read & Co., 1925-29; assistant to Owen D. Young, Reparations Conference, 1929; president, F. Eberstadt & Co., investment bankers, New York, N. Y., since 1931; president and director, Chemical Fund, Inc.; Chairman, Army and Navy Munitions Board, 1942; Chairman, War Production Board, 1943; prepared Eberstadt report for Secretary of the Navy, 1945; assistant to Bernard Baruch, United Nations Atomic Energy Commission, 1946; prepared report on operations of National Security Resources Board, 1948; Chairman, Committee on National Security Organization of the Commission on Organization of the Executive Branch of the Government; prepared report for Secretary James Forrestal on unification of War and Navy Departments. Senator Flanders. I first met Mr. Eberstadt as a member of the War Production Board, and he was Chairman of the Army and Navy Munitions Board when I was a member of the War Production Board. It was Mr. Eberstadt, who at Senator Byrd's request, first drafted the bill which ultimately became title IV, and it was the Committee of which he was Chairman, on the National Security Organization of the Commission on Organization of the Executive Branch of the Government that first made the recommendations which led to the corrective legislation known as title IV. I am sure Mr. Eberstadt's intimate knowledge of the problems which we are considering will be of inestimable help to this committee. Mr. Eberstadt has prepared a statement for the record. I should appreciate your giving us the benefit of your thoughts, sir. STATEMENT OF FERDINAND EBERSTADT Mr. Eberstadt. Mr. Chairman, I would like to thank you for that very generous and gratifying introduction. I feel complimented at being invited to appear before your committee in connection with the very important investigation which you have undertaken. As I advised your chairman when he asked me to testify, my familiarity with recent developments within the Department of Defense is limited. Thus my testimony will relate principally to the historical background of title IV of the National Security Act of 1947, as amended, and to the objectives at which that title was aimed. These matters may be relevant to your inquiry on the basis, as you said, Mr. Chairman, of the past being prolog. Prior to the Second World War, and for a while thereafter, the form and content of the military budget and the financial procedures of our military departments in seeking and in carrying out appropria Our job is to inquire into the extent to which the law has been put to work since 1949 and the result of its use in terms of efficiency and economy. Let the record be clear. We do not -write this off as a simple problem. We realize that the national defense is a most pressing problem. We devote tremendous amounts of our manpower and our wealth to it. We want to insure that we "work efficiently, that we spend wisely; that we buy what we need and that we know what we have in our inventories. Business managers have to adhere to these rules. Our defense people must be in a position to give us the necessary guaranties of protection at the lowest cost in men and money. Recognizing the size of the task, the Congress, in August 1949, passed title IV which Secretary McNeil described as follows: This title really provides the machinery for placing the operations of the military services on a more businesslike basis. No complete system was ever established—bits and pieces have been provided at times, but this is the first attempt, I think, to provide on an overall basis for businesslike operations. The importance of the legislation was dramatically underlined by its endorsement by former President Herbert Hoover, Mr. Bernard M. Baruch, Louis Johnson, Secretary of Defense at the time of the adoption of title IV, and by many other outstanding Americans. I do not wish to burden this audience with a lengthy history of this legislation so I will insert at this point a staff paper which states the history of this part of the 1949 amendments to the National Security Act of 1947. (The document referred to is as follows:) Title IV had its inception on March 29, 1949, when the Senate Armed Services Committee discussed amendments to the National Security Act of 1947 proposed by the Hoover Commission, designated S. 1269 (81st Cong.). Mr. Ferdinand Eberstadt, it will be recalled, testified before tthe committee as an individual but had been the Chairman of the Hoover Commission's Task Force on the National Security organization which made its report to the Commission. Approaching the conclusion of his testimony, Mr. Eberstadt was asked by Senator Byrd If it would be possible for him to prepare specific amendments in accordance with the budgetary and fiscal recommendations of the Hoover report to add to the bill then under discussion. Mr. Eberstadt, in response to the request adopted by the Senate Armed Services Committee, submitted a committee print under date of May 4, 1949, entitled "Proposed Amendments to S. 1269 Prepared Under the Direction of Mr. Ferdinand Eberstadt at the Request of the Senate Committee on Armed Services on March 29, 1949." It was later incorporated for submission to the Congress as title IV of S. 1843 under the heading of "Promotion of Economy and Efficiency Through Establishment of Uniform Budgetary and Fiscal Procedures and Organizations." The Senate shortly thereafter passed this bill known as S. 1843 as the National Security Act Amendments of 1949. The House had passed H. R. 5632 which was essentially the same bill without title IV. Therefore, the United States Senate on July 20, 1949, passed H. R. 5632 on motion of Senator Russell, of Georgia, and sent it to conference. On July 29, 1949, as a result of Conference Report No. 1142 agreed to by the committee on conference composed of members of both Houses of Congress, it was recommended that the conference report, which incorporated among other things title IV with minor amendments, be submitted for approval by the Congress and to accompany H. R. 5632. As a result thereof, Public Law 216 was passed by the Congress on August 10, 1949, and was entitled "An act to reorganize fiscal management in the National Military Establishment to promote economy and efficiency, and for other purposes." Title IV was included as section 11 within this law. Let me now pass on to what we hope to bring out in these hearings: 1. The magnitude of the problem of implementing title IV; 2. The difficulty of bringing about the reforms it calls for and at the same time carrying on the immense routine operations of the Department of Defense; 3. The reforms which remain to be effected; 4. The savings which can be expected by the elimination of waste at which title IV is directed; 5. The organization which is required in the Department of Defense and the services to accomplish these reforms. At this point I will place into the record the text of title IV as enacted into law as a part of the National Security Act. (The document referred to is as follows:) TITLE IV Promotion Of Economy And Efficiency Thbough EstablishMent Of Unifobm Budgetary And Fiscal Pbocedubes And Organizations COMPTBOLLEB OF DEPAETMENT OF DEFENSE Sec. 401. (a) There is hereby established in the Department of Defense the Comptroller of the Department of Defense, who shall be one of the Assistant Secretaries of Defense. (b) The Comptroller shall advise and assist the Secretary of Defense in performing such budgetary and fiscal functions as may be required to carry out the powers conferred upon the Secretary of Defense by this Act, including but not limited to those specified in this subsection. Subject to the authority, direction, and •control of the Secretary of Defense, the Comptroller shall— (1) supervise and direct the preparation of the budget estimates of the Department of Defense; and (2) establish, and supervise the execution of— (A) principles, policies, and procedures to be followed in connection with organizational and administrative matters relating to— (i) the preparation and execution of the budgets, (iii) progress and statistical reporting, (B) policies and procedures relating to the expenditure (3) establish uniform terminologies, classifications, and procedures in all such matters. MlLITABY DEPAETMENT BUDGET AND FISCAL ORGANIZATION—DE- Sec. 402. (a) The Secretary of each military department, subject to the authority, direction, and control of the Secretary of Defense, shall cause budgeting, accounting, progress and statistical reporting, internal audit and administrative organization structure and managerial procedures relating thereto in the department of which he is the head to be organized and conducted in a manner consistent with the operations of the Office of the Comptroller of the Department of Defense. (b) There is hereby established in each of the three military departments a Comptroller of the Army, a Comptroller of the Navy, or a Comptroller of the Air Force, as apppropriate in the department concerned. There shall, in each military department, also be a Deputy Comptroller. Subject to the authority of the respective departmental Secretaries, the comptrollers of the mili Comptroller of Military departments, budget and fiscal organization of. Military departments, comptrollers. Establishment. Deputies. Duties. |