GENERAL STATEMENT

Chairman HAYDEN. All right, we will be glad to hear from you gentlemen, Mr. Hoegh of OCDM and Mr. Floete of GSA.

Mr. KENDALL. Mr. Chairman, my name is Charles Kendall. I am general counsel of the Office of Civil and Defense Mobilization. I regret that Mr. Hoegh cannot be here this morning. He is with his mother, who is seriously ill, in Iowa.

With the committee's permission, I would like to make a few introductory remarks and then let Administrator Franklin Floete of the General Services Administration give the committee the details. The General Services Administration has had the management of a very substantial majority of the funds involved in this matter. For that reason they have the answers to any detailed questions by committee members about the use of these funds.

Chairman HAYDEN. We will proceed in that way.

Mr. KENDALL. Almost exactly 9 years ago I had the privilege of appearing with the Chairman of the National Security Resources Board, now the junior Senator from Missouri, to present the Defense Production Act before the Senate Banking and Currency Committee, and you will excuse some pride on my part that we were able to present this substantial legislation within a few days after the crossing of the 38th parallel by the North Koreans, and that within 60 days after its introduction the Congress had considered this complicated bill, passed it, and it had been signed by the President.

EXPANSION OF SUPPLY CAPACITY

Not the least important provision of the bill was title III which had to do with the expansion of capacity and supply.

As you gentlemen may remember, at that time we had capacity to produce about 100 million tons of steel, about 700,000 tons of aluminum, and a handful of things like tungsten and nickel, and today we have 140 billion-odd tons of capacity of steel and we have three times the capacity of aluminum that we had in those days. We are producing tungsten at a much faster rate, several times over, and we even introduced some new industries, like titanium into the U.S. economy. This was done, in large part, with the assistance of the Government, and the major tool in that assistance was title III of the Defense Production Act.

If I may digress a moment, two of the things that bothered us after World War II about the expansion of industrial capacity were these: (1) that so much of the construction of basic materials plants was done by the Government itself, at the taxpayers' expense, leaving surplus plants on our hands after World War II and (2) when orders stopped after the war there were contract cancellations all the way down the line causing distress in the materials production industries.

It was our thought to avoid both of these developments in the Korean effort by providing, so much as possible, for the construction of new capacity with private funds so that the plants would be privately owned and would be integrated into the economy by their private owners. There would be no surplus sales of such plants after the emergency, and secondly, we tried to arrange it so that the contracts for the production of basic materials were not subject to can

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cellation, so that they would be carried out according to their terms to the very end.

PURCHASE OF MATERIALS TO EXPAND CAPACITY

Now a major tool in accomplishing this was the borrowing authority provided under the Defense Production Act. As the act was originally passed, it provided that the Government could purchase or make commitments to purchase materials, in order to expand capacity, and this made it possible to enter into arrangements with private concerns to build plants and the Government undertook that if the product could not be sold then it, the Government, would buy it.

APPROPRIATION AUTHORIZATION AND BORROWING AUTHORITY

The law provided $600 million of borrowing authority available for this purpose, and $1,400 million of appropriations was authorized. In the first presentation of an appropriation to the Congress for consideration in the spring of 1951, the Appropriations Committee did not make an appropriation, but increased the borrowing authority. In response to that the Congress amended the act to eliminate the provision for appropriations and set the amount of borrowing authority authorized at $2,100 million.

Further, the Congress authorized the executive branch to charge, as an obligation against this sum, only the probable ultimate net cost of the contracts entered into. That is, where we expected to use or to sell the material that was purchased under the guaranteed contracts, it was not necessary to carry as an obligation the full amount of the commitment. Thus it was possible over the years to enter into arrangements valued at better than $7 billion, with a borrowing authority of only $2,100 million.

Now I would submit that this tool has been a major factor in the expansion that I have briefly referred to, and that the market guarantee contracts have been the backbone of that expansion.

I call your attention to the fact that in such a contract the risk of failure is on the entrepreneur, the individual who puts his money into it. If he never produces any material, the taxpayer does not pay anything. If he does produce the material he probably will be able to sell it and again the taxpayer doesn't pay anything; and, if he cannot sell it and the Government has to buy it, at least the Government gets the material for its money.

This could be contrasted with the result after World War II when we were forced to sell major plants at a fraction, of course, of their original costs.

Chairman HAYDEN. I remember that situation very well. It was disastrous.

Mr. KENDALL. I am sure you do. I had some part in the disposal of surpluses overseas, and some of the others at the table had a part in the disposal of surpluses in this country, so we remember it, too.

The Korean experience, since the war ended, has been a little different than the World War II experience; but two things have contrived to give us some difficulty.

CHANGES IN BASIC CONCEPTS OF WARFARE

The first one was some changes in the basic concepts of warfare which resulted in a lowering of stockpile objectives from the basis of a 5-year emergency to a 3-year emergency, the theory being adopted that any emergency in the future is not likely to last 5 years because of the destructiveness of modern weapons and that a 3-year stockpile was enough.

This had the effect, of course, of reducing, by approximately two-fifths, the stockpile objectives of the United States, with the result that material purchased and anticipated to be purchased under the Defense Production Act contracts no longer had a home in the stockpile and had to remain a part of the Defense Production Act inventory.

SOFTENING OF METAL MARKET

The second, and more important development, was the softening of the metal market in the last couple of years. This has had two effects: In the first place, with a softened market, many of these contingent contracts, the privileges they provided to the producer, have been exercised. Because the market was soft, the producer brought his material to the Government.

Secondly, because the market was soft, a responsible Government could not turn around and offer the material for sale because that would simply lower the market further.

The result of this has been the piling up of very substantial inventories which we did not anticipate. The situation today is that we are going to be short of cash very shortly to meet the commitments which we made to expand defense production.

RESTORATION OF CAPITAL IMPAIRMENT

The proposal in this supplemental appropriation is that the capital impairment of this fund be restored and the capital impairment is arrived at by taking the actual losses which have occurred up to the end of last year, and they total $287 million, and that is the amount of the request.

I should say that in the House the position taken by the committee was apparently that rather than restore the capital as such, enough money would be provided to take care of the probable deliveries over the next year, and then we could come back and ask for more money next year for the year after.

This is a different theory than the President's submission of a capital restoration; but, more than that, and perhaps more serious than that, it is not as great as our exposure in the next year.

Our guess as to the material that will be put to us runs to $116 million, and it could be much greater than that. So we are here asking the restoration of the figure presented by the President.

Chairman HAYDEN. In other words, you want the capital investment restored in full, but the amount allowed by the House does not meet your immediate needs?

Mr. KENDALL. That is right. It is not a full restoration and it is not our own estimate of what we will have to spend this next year. Chairman HAYDEN. All right, Mr. Floete.

Mr. FLOETE. Mr. Chairman, I think Mr. Kendall has very fully covered this subject. I can add a few figures that will explain how this is worked and the situation we are now in.

TOTAL TRANSACTIONS

Under this $2.1 billion authorization received under the Defense Production Act, up until March 31 of this year we have entered into a total of $7,960,000 worth of transactions.

The role of GSA in this business matter has been primarily in expansion of the supply of strategic and critical materials. We have entered into contracts totaling $7,435 million. The deliveries under those contracts have amounted to $3,227 million, of which $1,182 million were sold to the national stockpile, $750 million were sold to industry, and we now have on hand an inventory of $1,330 million.

It seems to me that that is a remarkable record of how effectively this act has performed. That enters into a very large amount of transactions and to yet end up with an inventory of only $1,330 million.

The restoration which we are requesting of the capital funds consists of actual losses which have been sustained up until this time on resales of material, amounting to $96,600,000 and $152 million of Treasury interest and operating expenses of $38 million.

Of the $96 million loss, $59 million were incurred as sales to the stockpile, so it is not fair to say that those are a total loss. It is largely an intra-Government transaction. I feel that the operating expenses of $38 million on this very large volume of business is also reasonable, and of course the interest to the Treasury is again just an intra-Government operation.

INTEREST PAYMENT

Chairman HAYDEN. Well, that interest payment of $152 million is requested because the Government is in the red. If we had money to spare in the budget, that would be a different situation, but there is no other way for the Government Treasury to find the money except to go out and borrow it.

Mr. FLOETE. That is true, but the law requires that we do borrow from it. We actually borrow from the Treasury and give them a note. Chairman HAYDEN. But the Treasury has to go out and borrow the money from the public.

Mr. FLOETE. Well, that is true, but the entire $287 million will simply be transferred to the Treasury. We will actually pay off notes to that amount and that, of course, restores to the extent of $287 million the $2.1 billion.

HOUSE ACTION

I feel that in estimating our requirements for 1960 and 1961 necessarily it cannot be a very precise process because it is our best guess of what the deliveries will be; but, after all, it is still a guess, and, as economic conditions change, our estimates may not be correct, and I feel that the House, in limiting us to $100 million, has just cut it too fine. Nobody can guess that closely, and I am certain that it will not be enough.

The recent trend in the price of copper is indicative of the fact that our estimates might well be off. As you know, the producers recently, this week, reduced the price of copper a cent and a half. That is getting pretty close to the point where we know we will have more. produced from some of these producers, so I say again we made the best estimate we can of what our deliveries will be, but they simply cannot be completely precise and with $100 million we will be in trouble.

Chairman HAYDEN. Is that your general statement?

Mr. FLOETE. Yes.

Chairman HAYDEN. I have an announcement I want to make.

MANGANESE CARLOT PURCHASE PROGRAM

I have received a letter from Senators Murray and Mansfield, of Montana, of which I would like to read two paragraphs.

As you know, the so-called manganese carlot program was designed to operate through June 1961; and when it was established and later amended as to the quantity that was to be acquired by the Government for stockpile purposes, it was believed that not more than 28 million long-ton units would be offered for delivery prior to June 30, 1961. But, as a matter of fact, this quantity will have been delivered, it is estimated, sometime in the early fall of this year. and the second paragraph reads:

We suggest that you give serious consideration to including in the current supplemental appropriations bill, to be considered by your committee in the very near future, provision for the OCDM continuing the manganese carlot purchase program until an additional 10 million long-ton units have been acquired. It is estimated that this provision will make possible operation of the program through June 30, 1961, the date that domestic producers had visualized at all times as being the cutoff date of the Government purchase program.

now I have asked the Senators to present this matter to the committee next Monday and I think it would be advisable for someone representing you gentlemen to be present at that time, so that questions may be asked.

Thank you for your appearance here this morning.