NEW WEAPONS REQUIRE MORE MONEY AND CRITICAL MATERIALS

The cost of military equipment has increased markedly since World War II. Apart from the general rise in prices, the increases in size, weight, and complexity of most items has added greatly to the costs.

The airframe weight of some of the new plane models, for example, is six times that of the comparable World War II models. The greatly increased use of electronic equipment, built to precision standards, results in heavy added cost. As a consequence, one B-36 of the present day costs $3,500,000—13 times the $275,000 paid for one B-17 in World War II.

Present-day military equipment requires, in addition, greater quantities of critical materials. Jet engines operate at considerably higher temperatures than do piston engines. Hence, their materials not only require more precise alloying and heat treating, with resultant increased expense, but also contain greater proportions of the hardening and high-temperature-resisting metals such as tungsten, chromium, cobalt, and molybdenum. The greatly expanded requirements for electronic equipment also require increased amounts of cobalt, cadmium, zinc, lead, and copper.

To offset these new demands, both industry and the Department of Defense are seeking means of saving critical materials by using substitutes. As an outstanding example of progress in this direction, cartridge and shell cases are new being made from steel instead of brass. Ammunition in World War II

accounted for as much as 50 percent of total consumption of copper.

POLICIES HAVE BEEN REVISED TO EXPEDITE PROCUREMENT

The stepping up of procurement demanded by the defense program has required revision of the contracting and purchasing policies that have been in effect since World War II. In revising procurement procedures, we have a threefold goal-first, to get what we need quickly and efficiently; second, to build a broad production base for all-out mobilization if that becomes necessary; third, to prevent profiteering.

The Secretary of Defense has directed that policies and procedures be adopted throughout the Department to accomplish the following specific ends: 1. To spread contracts across industry as widely as possible.

2. To utilize additional contractors in lieu of multishift or overtime operations, wherever time permits, in order to broaden the mobilization base. 3. To make the fullest possible use of small-business concerns.

4. To encourage, or if necessary require, subcontracting by prime contractors. 5. To provide maximum incentive to the producer to reduce his costs. 6. To place contracts with a view to the availability of manpower. 7. To place contracts with a view to economies in transportation.

To these ends, the negotiation of contracts in lieu of competitive bidding has been reintroduced, although formal advertising and competition are still employed where they do not adversely affect the acceleration of procurement or the desired broadening of the industrial base.

Pricing and profit policies have also been reexamined. The aim of the Department of Defense is to hold down prices and encourage the conservation of limited manpower, materials, and facilities. These aims are to be achieved primarily through forward pricing and repricing rather than through recovery of excessive profits by renegotiation or taxation. Nevertheless, renegotiation is provided for and its coverage broadened by the Renegotiation Act of 1951, passed in March. Programs for the careful selection and training of procurement officers, now being developed in all of the services, will also yield important returns to the Government.

SECTION IV. EXPANDING AND CONTROLLING PRODUCTION FOR DEFENSE

To meet the military requirements of the defense program and yet avoid cutting too deeply into civilian consumption, we must use two main approaches: 1. Expand production in critical fields.

2. Employ controls to insure that materials and industrial capacity are used to best advantage for defense and civilian purposes.

Both these approaches were used in World War II. Both are embodied in the Defense Production Act.

THE ECONOMY CAN EXPAND 15 PERCENT IN 3 YEARS

The economy was expanding when the Korean attack occurred. But with the stimulus of the defense effort in the last half of 1950, the rate of expansion was accelerated. Between the first quarter of 1950 and the first quarter of 1951 the rate at which the Nation was turning out goods and services rose by 10 percent, with a 5-percent increase occurring between the last two quarters of 1950. During the fourth quarter, the annual rate reached the $300-billion mark, approximately equal in real output to the peak war year of 1944.

We cannot sustain a rate of annual growth at 10 percent during the coming years. But we can continue a steady upward climb in total production for the duration of the defense program. In order to meet both defense and civilian needs, we should attain a further increase of something like 15 percent in the next 3 years, adding $45 billion to the total national output.

When this is accomplished, the defense program as it levels off can fit within the added capacity of our economy. We will have achieved our goals of military strength and production for normal civilian purposes can be higher than before Korea.

Government programs to assist in the expansion of production include accelerated tax amortization, direct loans, loan guaranties, long-term procurement contracts and stand-by purchase commitments, and the installation of Govern ment-owned equipment and plant extensions. The Defense Production Act of 1950 provided $600 million to carry out the direct loan, procurement, and equipment programs. Virtually all of this has been committed.

Accelerated tax amortization.-Under the program of accelerated tax amortization, companies investing in defense facilities may apply for the privilege of deducting plant costs, for tax purposes, at the rate of 20 percent per year in lieu of the normal depreciation rate. The acceleration is applied to that portion of the new facilities determined by the Defense Production Administrator to be attributable to defense purposes.

As of March 16, a total of 660 certificates have been issued covering private capital investment of nearly $4 billion in added productive capacity. The average proportion of plant costs allowed for accelerated tax amortization is 69 percent; this means that approximately $2.7 billion can be written off for tax purposes at the 20 percent rate.

Expansion of steel capacity has been the first object of the tax-amortization program. The iron and steel industry has received 50 percent of the total of $4 billion certified, with 124 projects of 50 separate companies approved. Rail transportation and the aluminum industry account for 14 and 6 percent, respectively. A wide range of defense activities is represented in the remainder. A total of $44 million has been loaned directly to 21 firms-exclusive of $53.5 million loaned by the Reconstruction Finance Corporation, in partnership with defense agencies, from its own funds. These loans are mainly for expansion of capacity.

Loan guaranties.-Each of the procuring agencies for the defense program has been delegated authority to guarantee loans for defense contractors. Where the

guaranties are made, commercial banks grant the loans at interest rates not to exceed 5 percent.

To date, 167 companies have participated in the guaranteed loan programs, receiving a total of $128 million in such loans, mainly for working capital.

Long-term procurement contracts and stand-by purchase commitments.Through long-term guaranteed purchase contracts, the Government agrees to purchase specified amounts of a producer's output for periods as long as 5 years. This is particularly important in the case of mining, where marginal high-cost shafts can often be brought into production only on the basis of such assurances. A large portion of the $600 million has been used to establish revolving funds for the import of tin and crude natural ruber and for purchases of aluminum, tungsten, castor beans, and oxygen-free copper. Other projects have included the development of tin resources and the establishment of a fund for a machine-tool "pool" to facilitate maximum machine-tool production.

Installation of Government-owned equipment and plant extensions.-Where increased production of certain kinds of materials or equipment is essential, the Defense Department utilizes procurement funds to finance plant extensions or the installation of special equipment in private plants. The equipment or facilities are used on a lease basis, with title remaining in the Government. If the equipment is used for work other than on Government contracts, a rental is paid to the Government.

As the result of both private and Government effort, the demand for new plant and equipment is expected to increase from about $18.5 billion in 1950 to almost $24 billion in 1951.

CONTROLS ARE BEING APPLIED TO PRODUCTION AND DISTRIBUTION

During the coming months, before expansion in each critical field can catch up with need, shortages must be met by the use of controls over production and distribution.

The priority system is the basic control device used to channel materials and industrial capacity into direct defense production. Under this system, authorized agencies assign "DC" (defense order) ratings to their contracts. The prime contractors in turn issue DO-rated orders to their subcontractors. Unlike the priority system used early in World War II, the pesent system is a "singleband" structure, with no degree of preference among the rated orders.

To make specific materials available for priority orders, as well as to divert materials from less essential to essential civilian needs, other types of controls are employed. The following are the most important:

1. Limitation orders, which limit the amount of material producers may use for nondefense production.

2. Simplification and standardization orders, which cut down or prohibit "frills," or reduce the variety, sizes, models, or styles of products.

3. Prombition orders, which prohibit the use of scarce material in specified end products or specified projects.

4. Inventory controls, which limit the amounts of specified items which companies may keep on hand at any given time.

5. Distribution orders, which require individual concerns to maintain a specifi pattern of distribution of scarce materials or products which they supply. The National Production Authority and the Defense Minerals Administrative have thus far found it necessary to apply controls of these types to the follow materials, products, or activities:

In addition, the NPA has issued certain broad regulations applying to critical materials and production.

A preliminary inventory control regulation limited the quantities of a specitis! list of materials that could be received or delivered and provided criminal pera ties for any unreasonable accumulation of materials by any individual or busi

ness concern.

Another regulation seeks to assure all establishments in the United Stateswarehouses, factories, service shops, schools-necessary supplies for maintenan repair, and operation. This directive was issued in recognition of the fact tha a few pounds of metal today to keep a machine running is better than severa tons of metal tomorrow to replace that same machine. The regulation gave eac establishment the right to issue DO-rated orders for supplies for maintenat repair, and operation.

Finally, directives are issued to individual companies when necessary to mee emergency situations, break bottlenecks, aid essential industries, assist hardship cases, or otherwise provide exceptions to the general orders and regulations These directives require a specific company to make delivery of a specifi amount of material to another company. Through March, over 650 have bet issued. The freight-car construction program and the Great Lakes cargo-vess. program are being made effective through such directives.

CONSUMER-GOODS PRODUCTION WILL REMAIN HIGH

Up to now, the consuming public has scarcely felt the impact of Government controls over production and distribution. Production of most consumer items during the first quarter of 1951 actually exceeded production during the s period of 1950.

Because defense orders have been placed in large quantities only in recent months and time is required to organize production, output of civilian goods has held to these very high levels.. NPA orders have restricted the use of scare materials for civilian consumption only to the extent that they were immediate required by the military, defense-supporting, and stockpiling programs.

While the production of the major consumer durables-radios, television. automobiles, refrigerators, and washing machines-will fall in 1951 below the all-time high of 1950, there will remain substantial output of these items. The accompanying charts show the comparison of 1951 production estimates with the output in recent years for certain key products. During the remainder of 1951, scarce materials going into nondefense production will be increasing restricted, with the greatest over-all restrictions, under present schedules, ocZring late in 1951 and early in 1952.

T

In the allocation of scarce materials, provision is being made to maintain hi anced production, including the continuation of lower-priced and medium-priced lines and models in due proportion to total production.

Weapons and production lines are made from metals. In a period of great military and industrial expansion, the availablity of metals sets the scope and the pace.

As indicated below, many of the important metals now are or will be in short supply. To overcome these shortages and to hasten the time when an adequate defense, together with a normal civilian economy, can be supported, great efforts are being made to expand the supply of metals.

This includes efforts to bring domestic production and imports to a maximum and, for the longer run, a widespread exploration program.

Steel. During the last 3 months military requirements took 12 percent of total steel production. The proportion will approach 20 percent by the end of the year. To make steel available for military and essential civilian purposes, the new control orders will limit the amount of steel which can be incorporated in consumer durable goods during April-June to 80 percent of the average in the first half of 1950.

The shortage of steel has developed despite the highest rate of production in our history. In 1940, the steel ingot capacity of the Nation was 81 million tons. The war expansion boosted capacity to 95 million tons by 1945. Last June the figure was 100 millions, and today it is 105 millions.

Yet when the Korean crisis struck, there was no excess capacity. The demand for steel exceeded all previous peacetime records. With the demands of defense superimposed on this civilian demand, the effect could be nothing other than an acute shortage.

The steel industry has thus been first in the Government's program of expansion, as reflected in the granting of tax amortization certificates and other finan82354-52--21