PRODUCTION COSTS AND PRICES

(See pp. 36, 48, 51)

General BURNS. With reference to the Army program, practically all of the items we get, with the exception of a relatively small percentage that is manufactured in our arsenals, have to be procured from industry under contracts entered into with the companies. That would be true of the British, and, by and large, we would have to procure that material from industry; although, as you know, we have supplemented industry and our own arsenals by new munitions plants which are being built, like that which is opening up today at Radford. Some might call that a Government arsenal or Government plant, but it was built by a private company and is being operated by the company.

Mr. CANNON. Will matériel be purchased direct or on a cost-plus basis?

General BURNS. They are fixed-fee contracts.

Mr. CANNON. The contract provides for a specific price per unit, or for a definite over-all sum?

General BURNS. It has to be on the basis of a fee plus cost.
Mr. CANNON. Per unit?

General BURNS. That is right.

Mr. WOODRUM. You are talking about the construction, are you not? General BURNS. I am talking about both.

Mr. WOODRUM. I think Mr. Cannon was talking about operation. Mr. CANNON. Both construction and operation. With regard to construction and the operation or these plants, which will be operated by a private company under contract, have you entered into any such contracts up to this time?

General BURNS. Yes, sir; we have entered into a good many of them.

Mr. CANNON. How do prices at which you have contracted for this material compare with prices on the market before the opening of the war?

General BURNS. I hate to attempt to give you a comparison of prices. I think, by and large, the prices we are obtaining are quite satisfactory. Now, of course, as you know, we have not reached the operation stage of most of these plants; so, as to what the element of cost would be per unit of product we do not know. The best we have so far is an estimate of cost.

Mr. CANNON. I misunderstood you, then. I thought you said you had already entered into definite contracts, and that the contracts specified the cost per unit.

General BURNS. No; I said that it is a cost-plus-fee contract, so you have got to pay whatever the cost turns out to be plus a fixed fee for operation. It is not a fixed-price contract insofar as the cost of the product is concerned.

Mr. CANNON. It is not a cost per ton; it is not a cost per day?
General BURNS. No, sir.

Mr. CANNON. It is an over-all cost plus a fixed fee for management? General BURNS. Plus a fixed fee for management, that is correct. We do not know what the cost is going to be at this time, though we know what the estimates are going to be.

Mr. CANNON. Then on what basis do you estimate the cost to be fairly satisfactory? If you do not know what it is going to be, how can you determine whether it is satisfactory?

General BURNS. I think perhaps that my statement was not in order, because when you analyze it you do not know what the element of cost is going to be so you do not know how the element of future cost is going to compare with past costs.

Mr. CANNON. You do not know what the cost is going to be, but you do know the cost of the items which enter into the cost of production-labor, material, and management. How would those costs compare with similar casts during the World War?

General BURNS. I do not know that I can answer that question, Congressman.

Mr. CANNON. Well, are you familiar with the cost of similar munitions during the World War? I should think that would be one essential in negotiations preliminary to making these contracts; that you would know what had been the cost of similar services on previous occasions.

General BURNS. Of course, you are trying to get down to the element of the cost of the product, are you not?

Mr. CANNON. Exactly. That is the essential thing. We are appropriating $7,000,000,000, but if the cost is going to be twice what it was before, we are only getting $3,500,000,000 worth of material. The important thing at this time, is to get the full value of the money appropriated. Now, shall we spend $2 for what cost us $1 in the World War, or are we going to get these munitions at reasonable prices?

General BURNS. I think our prices are reasonable. These contracts are cost-plus-fee contracts, and we have not reached the element of production yet, so we cannot tell what the element of production cost is going to be.

Mr. CANNON. But you do know the price of items entering into the cost of production?

General BURNS. Yes, sir. My definite impression is that all the prices are favorable.

Mr. CANNON. What is considered favorable? Is it your impression that they are about the same prices paid during the World War? General BURNS. No; I think they are better than the prices we paid during the World War.

Mr. CANNON. They are cheaper?

General BURNS. They are cheaper; that is right. For example, in the World War we had to pay roughly 50 cents a pound for TNT. Our recent fixed-price contracts with some of the munitions factories for TNT were in the neighborhood of 15 cents a pound.

Mr. CANNON. That is a gratifying drop; a fall from 50 to 15 cents a pound.

General BURNS. Yes, sir.

Mr. CANNON. Can we attribute that decrease to market conditions during the last war, or have they developed methods of production which enable you to effect those economies?

General BURNS. I think the prices of raw materials have gone down, and the efficiency of production has increased-both. Mr. SMITH. If I might add to that answer, in a general wayMr. CANNON. Yes.

Mr. SMITH. I am no expert on prices, but I know that in general so far as materials go at least, we have had no such disturbance with respect to prices as we had during the last war. Aluminum, for example, is probably the lowest in the history of the metal, in the face of the largest demand this country has ever had for aluminum. Is not that correct?

General BURNS. That is right.

Mr. SMITH. Would you say that that, in general, is true of most of the other items?

General BURNS. That is true.

Mr. SMITH. They are fairly stable or down. There may be some special items that are up, but the general answer to that question, I think, is that the costs are nowhere near what they were, during the last war, simply because there has not been any comparable disturbance in prices generally.

Mr. CANNON. That is a very satisfactory situation.

General BURNS. I would like to sum it up to you, Congressman, in order to get the statement clear.

Where we can compare our present prices with World War prices on the basis of fixed-price contracts, I think that our prices now are very favorable. In fact, I think they are considerably below World War prices. But, of course, where we are dealing with cost-plus-fee prices, we cannot tell you what the element of cost is going to be, because we have not reached the production stage yet. But I think we have every right to believe that those costs are going to be considerably below the World War costs.

Mr. CANNON. You expect to be able to adhere, then, in your costplus production to the price standards at which you have contracted with private companies up to the present time?

General BURNS. On the basis of fixed-price contracts.

COMPARISON OF PRICES IN ENGLAND AND THE UNITED STATES

Mr. CANNON. You are in close contact with the English situation, and you have exchanged with their purchasing agencies all information which might be considered to be of mutual value. What information have they given you as to the cost of production in England of the commodities inventoried in these categories, up to the present time? General BURNS. I have not received any information. Have you received any information, Colonel, as to what they are paying?

Colonel AURAND. We have found that the prices for corresponding items are lower there than they are here.

Mr. CANNON. How do you account for the fact that the prices are lower there, when they have been in the war now for several years and working under war conditions, which would naturally be expected to inflate prices, as compared with prices extant in the United States under peacetime conditions.

Colonel AURAND. I cannot account for that, sir. It must be in their domestic situation on both price and labor control.

Mr. CANNON. When you analyze prices, what comparable element in the production of standard commodities is lower in England than in the United States?

Colonel AURAND. We have not received such a price analysis as yet.

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Mr. CANNON. Mr. Smith, I take for granted that every consideration is being given to securing the materials enumerated in these categories at the most reasonable prices obtainable, and at favorable prices in comparison with prices at which they are being produced in England, where they are to be consumed?

Mr. SMITH. I can only say that I am confident that everybody is working to that end.

Mr. CANNON. That is one of the most essential things for which we can make provision at this time.

AGRICULTURAL PRODUCTS

(See pp. 13, 20, 35, 39, 51)

There are also in these inventories some materials for which, so far as we know, you were not called upon to make provision in the last war. For instance, agricultural products. In the last war, agricultural products for trans-oceanic shipment were bought by the governments to which consigned. So this seems to be a departure-or is it that our Government is buying and transporting agricultural products?

Mr. SMITH. I assume it would be a departure from the first World War.

Mr. CANNON. What plans have you developed for procuring agricultural products under this bill?

Mr. SMITH. Those products, of course, would be procured under the supervision of the Department of Agriculture. If they were surplus products, they would be procured, probably, through the Surplus Commodity Corporation. In some other cases they might be purchased through the Procurement Division of the Treasury. But in any event the processing of those requests would have to be done by the Department of Agriculture and the Defense Commission. to determine what effect the release of particular sorts of food products or agricultural products would have upon our own economy.

Mr. CANNON. You are under authority to send across existing material up to $1,300,000,000. Would that be interpreted to include existing supplies of agricultural products?

Mr. SMITH. Yes, sir.

Mr. CANNON. If you should avail yourselves of this prerogative, would you probably transport agricultural products already in the possession of the United States-for instance, cotton, wheat, corn, or other farm products already under seal in warehouses, on which the United States Government has lent money or would you buy it in the open market?

Mr. SMITH. I assume that would have to be determined at the moment by the Secretary of Agriculture in the light of what product it was that the British wanted and the effect of releasing that upon our own situation.

PROVISIONS IN PROCUREMENT CONTRACTS
(See p. 50)

Mr. CANNON. Have you with you now, Mr. Smith, copies of contracts or forms of agreements for the procurement of material or services under this bill?

Mr. SMITH. No, sir.

Mr. CANNON. Where are these contracts on file; in the War Department?

Mr. SMITH. There are no contracts, so far as I know, prepared specially

Mr. CANNON (interposing). You tell us you have entered into contracts for the erection of facilities and for their operation after they are completed. Where are those contracts?

Mr. SMITH. I misunderstood you.

Mr. WOODRUM. They are not under this bill?

Mr. SMITH. No; nothing under this bill.

Mr. CANNON. But you will follow the same procedure in the expenditure of the funds provided by this bill. Where are those contracts?

Mr. SMITH. Existing contracts are filed in the War Department, and in the Navy Department.

Mr. CANNON. Could you supply sample copies of them for inspection by this committee?

General BURNS. Yes, sir. We have them available.

Mr. CANNON. When would they be available for the use of the committee?

General BURNS. We could give them to you within an hour or two. All we would have to do would be to send down to the Department.

Mr. CANNON. We would be glad if you could let us have them this afternoon.

General BURNS. Yes, sir.

Mr. CANNON. In a general way, what is provided in these contracts? Can you briefly summarize the major provisions of these contracts.

General BURNS. Take a large TNT contract; we have to build the plant and then we have to operate it, and in order to do that, generally speaking, we have three contracts, one for architectural and engineering work, one for construction work, and one for operation.

Mr. CANNON. Is that the plan followed in the construction of cantonments up to this time?

General BURNS. Substantially, except, of course, you do not have the operating contract in the case of a cantonment. I am not so

familiar with that, because that pertains to a part of the Army to which I am not attached; but my understanding is that they have an architectural contract and they have a construction contract. Maybe the Quartermaster General could supply that information.

Mr. CANNON. Is it possible that contracts are too flexible or too indefinite, General Burns. We are told that in the erection of these cantonments your estimates were in some instances below actual costs of construction.

General BURNS. I would not attempt to speak on that, because I do not know about that.

Mr. CANNON. In making future contracts, under this bill, would it be possible to so revise those contracts as to secure construction and operation at a definite figure? Could they be so drawn that there would be no occasion for surprise and especially no occasion for this unexpected increase when the time came to pay?

General BURNS. Yes, sir. As I say, I do not know about the cantonments, because I have not been involved in them; but when it comes to these production-construction contracts, as we call them,