price. The balance of the loss, namely, $5,587,052.16 represents sales to the national stockpile. Sales to the stockpile were made at the current market price at the time of delivery to the stockpile.

I would appreciate this explanation being made a part of the record of the hearings.

Very truly yours,

(Discussion off the record.)

A. J. WALSH, Commissioner.

Senator MALONE. On the record. Then will you give us that explanation?

Mr. MEDLEY. The term "punc," Mr. Chairman, is merely an abbreviation of the phrase "probable ultimate net cost." This phrase appears in section 304 (b) of the Defense Production Act, as amended, which provides in part, if I may read just one phrase of it:

Provided, further, That when any contract, agreement, loan or other transaction heretofore or hereafter entered into pursuant to section 302 or 303 imposes a contingent liability upon the United States, such liability shall be considered for the purposes of sections 3671 and 3732 of the Revised Statutes, as amended, as an obligation only to the extent of the probable ultimate net cost to the United States under such transaction.

The section provides further that—

the President shall submit a report to the Congress not less than once each quarter setting forth the gross amount of each such transaction under this authority and the basis for determining the probable ultimate net cost to the United States thereunder.

If I might at this time, Mr. Chairman, call the committee's attention to the fact that the Office of Defense Mobilization does render to the Congress a quarterly report on the borrowing authority and table 7 of this report includes a brief explanation of the basis for estimating the probable ultimate net cost on each contract and/or transaction. More specifically "punc" or probable ultimate net cost is nothing more than an estimate of the Government's total expenditures relating to a transaction less the Government's total receipts relating to the same transaction.

Senator MALONE. Are there any tables that you would like to submit for the record or just this statement that you have prepared? Mr. MEDLEY. I would submit the statement.

Senator MALONE. Then this statement will be admitted and made a part of the record at this point.

(The statement is as follows:)

The term "punc" is an abbreviation of the phrase "probable ultimate net cost" as used in section 304 (b) of the Defense Production Act, as amended. The pertinent section is as follows:

(b) Any agency created under this section, and any department, agency, official, or corporation utilized pursuant to this section is authorized, subject to the approval of the President, to borrow from the Treasury of the United States, such sums of money as may be necessary to carry out its functions under sections 302 and 303: Provided, That the amount borrowed under the provisions of this section by all such borrowers shall not exceed an aggregate of $2,100,000,000 outstanding at one time: Provided further, That when any contract, agreement. loan, or other transaction heretofore or hereafter entered into pursuant to section 302 or 303 imposes contingent liability upon the United States, such liability shall be considered for the purposes of sections 3679 and 3732 of the Revised Statutes, as amended, as an obligation only to the extent of the prob able ultimate net cost to the United States under such transaction; and the President shall submit a report to the Congress not less often than once each quarter setting forth the gross amount of each such transaction under this au

thority and the basis for determining the probable ultimate net cost to the United States thereunder ***.

The probable ultimate net cost to the United States under any transaction is nothing more than an estimate of the Government's total expenditures relating to the transaction less the Government's total receipts relating to the same transaction. In the majority of instances, a "transaction" will be an individual contract.

Background.

In order to understand what brought about this provision of the law certain background information is essential.

The original provision of this part of the law merely provided that

*

the total amount borrowed under the provisions of this section *** shall not exceed an aggregate of $600,000,000 outstanding at any one time * and was silent as to the accounting treatment to be given to the transaction involved. As a result, the first contracts made under authority of the Defense Production Act were recorded in accordance with the conventional Government accounting method on the basis of the maximum possible liability to the Government. To take an example, a contract for the purchase of 100 tons of copper at $490 per ton was obligated at $49,000 and no consideration was given to the proceeds to be realized from the sale of such copper.

After appropriate consultation between lawyers and accountants of various branches of the Government, including the staff of the Appropriations Committee, General Accounting Office, Bureau of the Budget, Defense Production Administration and General Services Administration, it was determined that under the Defense Production Act as originally enacted, total obligations computed on the basis of maximum liability to the Government should not be made in excess of the amount of borrowing authority authorized in the act.

While it was felt that this was the only determination that could be made under the law, it was recognized generally that the financing and accounting for the contracts on the conventional Government basis would overstate the ultimate cost of the programs to the Government and, at the same time, would unnecessarily restrict the scope of the program from the financing standpoint.

The 1951 amendments to the Defense Production Act repaired this situation by an appropriate amendment to section 304 (b) and introduced the "probable ultimate net cost" principle in recording and reporting these transactions.

It is presumed that the Congress had in mind the nature of the Defense Production Act programs and how they differ from regular Government operations. Normally, the Government procures materials for its direct use and funds are appropriated for the full purchase cost. Under the Defense Production Act programs, the material is generally procured for ultimate resale to industry or to the national stockpile. In case of resale to the stockpile, the purchase price would be paid from stockpile appropriations and the borrowing authority account is reimbursed in the same way as a direct resale to industry. Furthermore, under the commitment to purchase type of contract authorized by section 303, the Government may buy less than the full amount of the commitment. Generally, the ultimate

net cost to the Government is substantially less than the total commitments or the maximum possible liability under a given contract.

STATUS OF FUNDS

The revised basis of financing and accounting was introduced in September 1951. The total contracts entered into on a revised basis cumulative to June 30, 1953, have been $6,468,513,000 in gross transactions, and $614,144,000 in probable ultimate net cost.

The following table sets forth the commodities involving the greatest amount of transactions and "punc":

ESTIMATES OF PROBABLE ULTIMATE NET COST

The estimates of "punc" are made by GSA, subject to review by the Office of Defense Mobilization and the Bureau of the Budget.

The review by ODM is accomplished in two ways. First, before a given program is certified and approved by ODM, the probable ultimate net cost is estimated by GSA and reviewed by ODM. Second. the quarterly report to Congress, pursuant to section 304 of the act, includes the basis for estimating "punc" on each contract. In the course of preparing this report, ODM reviews the estimates of "punc."

The Bureau of the Budget, through the process of considering annual apportionment of funds and the phasing of expenditures and receipts by fiscal years, examines the bases on which "punc" is estimated.

This information is given in order to point up the fact that GSA action on estimating "punc" is subject to review within the executive branch, as well as by the Congress.

"Punc" is strictly a matter of judgment since it is the estimated difference between the total expenditures and total receipts of contracts. Usually, the "punc" on a short-term contract can be estimated easily and accurately. The materials are delivered currently and resale follows quickly. As a result, future market conditions do not have to be estimated.

Long-term contracts are another matter. The "punc" on these cou tracts will depend on the future course of market prices which, in turn, depends upon supply and demand. On these contracts, a rule was developed for estimating "punc." The rule takes into account (a) pre-Korea price, (b) ceiling price, (c) life of the contract and

time of delivery of material, and (d) unit price in the contract. The rule is as follows:

(1) It was assumed that there would be no price declines below OPS ceiling prices prior to June 30, 1954, and thereafter the average price decline would be, over the remaining contract life, 25 percent of the difference between the pre-Korea price and OPS ceiling.

(2) If the contract price was less than OPS ceiling, "punc" would be 25 percent of the difference between pre-Korea price and the contract price for deliveries after June 30, 1954. If the contract price was in excess of OPS ceiling, the full amount of the excess was provided in "punc," in addition to 25 percent of the difference between the pre-Korea price and the OPS ceiling.

The purpose of the rule was to provide a reasonable and conservative estimate of "punc." This rule was applied on the standard materials like copper, lead and zinc. Different approaches were used on the newer materials. Thus, because of the growing military, civilian, and stockpile demand for aluminum, it was assumed that there would be no need to buy aluminum under the "put" provisions of the contract and that there would be no "punc" on the aluminum expansion

contracts.

On the material like titanium, where the Government made advances for the construction of plants and where there is possibility of technological obsolescence, the full amount of the Government advance was considered as "punc." Thus the attempt was made to provide for "punc" on a realistic basis for each material and consideration was given to the specific circumstances of each material. A revised estimate of "punc" is made whenever it appears that the existing provision is inadequate. The quarterly report to Congress required under section 304 (b) of the Defense Production Act furnishes the occasion for a review of existing provisions for probable ultimate net cost on each transaction.

This report sets forth in brief form the basis for the calculation of "punc" on each transaction as required by section 304 (b) of the act. By this report the Congress is informed of the many aspects of how the borrowing authority is utilized.

Senator MALONE. The hearings in the past 2 days-and I make this statement for the benefit of those of you who are responsible for carrying out this program of stockpile and purchases under ECA and MSA and in nowise intended as a criticism of personnel. I think if the testimony has established any one thing it has established a weakness if not in the laws, in the coordination between the congressional acts and the power of administrative officials. The data submitted, and the testimony shows a very serious deficiency in the stockpile. The stockpile intended to be completed in 1951, having begun in 1946, even including the surplus inherited at that time, is woefully inadequate now.

One point that ought to be established, in the opinion of the chairman of the committee, beyond all question, is that the taxpayers of America do not profit through foreign importations from the low cost of sweatshop labor countries. They always sell for what the traffic will bear. If anyone has any different idea, I would be very happy to have it in the record at this point.

The country has been sold for 20 years a bill of goods that the reason we must have elimination of all duties, excises, and imposts, customarily referred to as tariffs and imports fees, is because the consumer will benefit. If there is any testimony that has been submitted for this record in the last 2 days through DMPA, the Defense Materials Procurement Agency, that purchases of materials through the money furnished through ECA and MSA, and through the Emergency Procurement Services for the stockpile that indicates any such saving to the consumers, the chairman has not detected it.

There again if anyone else knows of any, I would be glad to have attention called to it. Mr. Gumbel, do you agree with the chairman! Mr. GUMBEL. Yes.

Mr. WALSH. Except this, sir. The material to the stockpile only in a small case has been moved into the economy. The rest is being held. That is the only point.

Senator MALONE. I do not understand the point yet. Will you make it again?

Mr. WALSH. That the materials acquired for the stockpile with the exception of that small amount that was moved into the industry is being held as stock.

Senator MALONE. That is not a point on what the chairman is covering with his statement. We do have a certain stockpile, although entirely inadequate, but it is purchased at the market price, and not at a reduced price that people have been led to believe in the United States that we were getting it from a low-cost-labor country. You agree with that statement; do you not?

Mr. WALSH. Yes, sir.

Senator MALONE. In other words, there is absolutely no saving over purchases from Africa where the wages may have increased since the chairman was in Africa-but he visited every country in Africaand he found the wages to be 40 cents to whatever they cared to pay per day. We pay them exactly the same, if not a little more, often, for materials mined in that area and produced in that area than we do to our own domestic producers. Is that a fair statement, Mr. Walsh?

Mr. WALSH. Prices have been paid that are higher than in some cases to our domestic producers; yes, sir.

Senator MALONE. You say that prices have been paid in the lowwage countries even higher than in our own domestic purchases. Mr. WALSH. In some cases, yes.

Senator MALONE. And there are no cases to which the chairman's attention has been called where they paid less. Is that correct? Mr. WALSH. That is a correct statement. There may be cases, but they have not been brought to your attention.

Senator MALONE. I would be very happy if they were to be brought to my attention, because this has been propaganda from the State Department, the Department of Commerce, and practically all departments of Government, until it has seared into the brains and minds of the people of this country, and it is not true.

The effect of our purchases in the foreign sweatshop-labor nations is that the foreign producers establish a vested interest in the sweatshop labor since their profit represents the difference between the low-wage production and the American market price.