UNITED STATES ARMY IN WORLD WAR II 

The War Department 

THE ARMY AND ECONOMIC 

MOBILIZATION 

by 

R. Elberton Smith 

CENTER OF MlUTARY HISTORY 

UNITED STATES ARMY 

WASHINGTON, D.C., 1991 





Foreword

In World War II the War Department, whose primary and traditional mission was to mobilize, train, and equip military forces and direct them in combat,

found itself drawn into the center of the gigantic effort to mobilize America's

industries for war. It became one of the principal agencies of the Government

in administering as well as planning the nation's economic mobilization. This

book, by an economist, tells how the War Department operated in performing

these tasks.

The experience had a lasting effect on the mission, organization, and outlook

of both the Army and the Air Force. Their present functions and structure

cannot be understood without reference to it. This volume is therefore of vital

interest to every officer.

Furnishing, as Dr. Smith's approach to his subject does, a comprehensive

view of the impact of war on the national economy, his book should prove invaluable to staff planners in all agencies of the Government, to industrial leaders, to

the civilian scholar, and to the thoughtful citizen.

The Army and Economic Mobilization is a complement, in the area of domestic economy, to the two-volume work, Global Logistics and Strategy, in the area

of international economy. It is the capstone to others in the U.S. ARMY IN

WORLD WAR II that deal with the procurement and distribution of supplies

in their organizational and operative aspects. The relations with labor into

which the War Department was drawn are set forth in a forthcoming volume,

The Army and Industrial Manpower. A separate volume, Buying Air Power,

is being devoted to the special problems of procurement by and for the Army

Air Forces.

Washington, D. C. R. W. STEPHENS

10 October 1957 Maj. Gen. U. S. A. Chief of Military History

ix
The Author

R. Elberton Smith is a graduate of the College of Wooster and received his

M.A. and Ph.D. degrees in economics at the University of Chicago. He has

taught economics at the University of Denver, Northwestern University, the University of Maryland, and Indiana University. At present, he is an economist for

the International Cooperation Administration at the United States Operations

Mission in Tokyo, Japan.

After a number of years in teaching and business, Mr. Smith entered government service early in World War II as an economist for the War Production Board

in Washington, D.C. In September 1942 he was commissioned in the United

States Naval Reserve and assigned for a year in the Office of Procurement and

Material in the Navy Department. Subsequently he served for two years as

industrial relations officer in the Navy Yard at Long Beach, California. In

1950 he joined the staff of the Office, Chief of Military History, U.S. Army.

In addition to writing the present volume, Mr. Smith is also author of the

book Customs Valuation in the United States—A Study in Tariff Administration,

as well as articles and reviews for professional journals.

x
Preface

The subject matter of the present volume derives its importance from a number of basic considerations. The achievements of the United States in the production of munitions and supplies for World War II provided this country, and

to a large extent its allies, with a decisive superiority in military power. Moreover, in the process of establishing and attaining its war production objectives,

the United States reshaped the structure of its economy and ushered in an era

of supertechnology which marked the beginning of a new epoch in history.

Now, some twelve years after the war, military procurement programs still

represent a substantial portion of the nation's economic activity. Also, to judge

from contemporary news items, the complexities, problems, and misunderstandings associated with military procurement are no less confusing to the general

public today than they were during the period of rearmament in the early 1940's.

Although both the nature of the procurement process and the character of military end items have increased in complexity since World War II, most of the

current issues and administrative problems have their origins or their counterparts

in the last great war.

These and other considerations all reinforce the basic purpose of the present

volume, which is to provide the reader with a fund of knowledge that will enable

him to understand the complex tasks associated with Army procurement and

economic mobilization in World War II. To achieve this purpose the author

has attempted to select and describe as clearly as possible the major areas of the

subject matter—beginning with prewar planning and the determination of military requirements, and running in logical sequence all the way to the settlement

and liquidation of the World War II procurement effort. To the extent that

the stated objective has been realized it is believed that the reader upon completion of the volume will feel at home in any discussion of basic problems of

procurement and economic mobilization.

The term "history" includes potentially "everything that existed or happened"

during a specified period of time in the past. Manifestly, nothing purporting to

be a "complete" history of so large a subject as the one in hand will ever be

written. The present study aims not at exhaustiveness but at maximum illumination of the subject matter. It attempts, therefore, to deal systematically with

the broad substantive issues of procurement and economic mobilization faced by

the War Department in World War II, and the basic policies and procedures

xi
developed to meet these issues. This approach, rather than the narration of

numerous incidents or illustrations in the form of procurement "case histories,"

is believed to offer a maximum of significance and usefulness in a single volume

devoted to the subject. Although the individual segments of each area are

treated in broad chronological fashion, the larger areas as well as the volume as

a whole are portrayed in topical, rather than chronological, sequence.

Until some time after World War II the Army consisted of ground forces,

air forces, service forces, and their multitudinous headquarters and field establishments, all operating under one administration known as the "War Department." For simplicity, and in keeping with the parallel usage of the term

"Navy," the word "Army" in the present volume is used synonymously with

"War Department." In view of the predominant size and importance of the

War Department as a procuring agency, and because of its special responsibilities for the planning of nationwide economic mobilization, the experience of the

Army in these areas reflects to a large extent the experience of the nation as a

whole.

In planning and executing his assignment the author has necessarily had in

mind many different classes of reader. So far as possible he has attempted to

assume the mantle of all his potential readers in the quest for what was most

significant and relevant. Nevertheless, he is well aware that the painful pressures

of time and space, as well as other limitations, have resulted in many important

omissions and other shortcomings. To help redress these imbalances and to

exploit more fully the government's great wealth of experience in all areas of

procurement and economic mobilization in World War II, the reader is urged

to consult other studies in this field—in particular, the numerous technical service

volumes in the U.S. ARMY IN WORLD WAR II series.

The present volume has been made possible by the efforts, ideas, and specific

suggestions of many individuals. For a period of a year the author enjoyed the

research assistance of Dr. Marvin Bernstein, who unearthed and synthesized basic

materials for a large part of the study in the areas of production and material

controls, facilities, and renegotiation. Dr. Albert A. Blum and Miss Ann Kannmacher provided valuable research and general assistance to the author at successive stages of the project. Mr. Israel Wice, Chief of the General Reference

Branch, OCMH, and numbers of his staff—especially Naomi Allen, Hannah

Zeidlik, and Valerie Stubbs—were perennially helpful in supplying specific information. Mrs. Eva Gediman and her staff in the Legal Reference Unit of the

Army Library contributed indispensable services in checking statutes, codes, and

other legal references. Mrs. Hazel Ward and her associates in the Departmental

Records Branch, AGO, Alexandria, furnished skillful guidance through the labyrinthine collection of records and files of the Army Service Forces and the Office

of the Under Secretary of War.

During most of the author's assignment it was his good fortune to occupy a

quiet and spacious office in the Industrial College of the Armed Forces at Ft.

xii
McNair, Washington, D.C. This made possible continuous and unlimited access

to the unique collection of materials in the college's Library, carefully accumulated and vigilantly preserved over the years by the indefatigable efforts of the

librarian, Miss Clara Widger. For this collection, as well as for her initiative

in supplying important specific materials for this study, both the author and the

users of this volume are permanently indebted to Miss Widger. Other members

of the library staff, especially Ruth Heisey and Myron Smith, were unfailingly

helpful.

Colleagues both within and outside the Army's Office of Military History

kept the author supplied with ideas and encouragement for the present volume.

Special mention should be made of Drs. Richard Leighton (Chief), Robert

Coakley, and Jonathan Grossman, the author's colleagues in the Logistics Section, OCMH; Drs. Benjamin Williams, Louis Hunter, and Marlin Reichley, and

Mr. Clarence Niklason, of the Industrial College of the Armed Forces; Dr. Harry

Thomson, Chief, Historical Section, Office of the Chief of Ordnance; Dr. Alfred

Goldberg, Chief, Air University Historical Liaison Office; Professor I. B. Holley,

Department of History, Duke University; and Mr. Stephen S. Fishe, formerly

of the Bureau of Aeronautics, now with the Office of Naval Material, Department of the Navy.

All students of the United States' World War II experience in procurement

and economic mobilization are deeply indebted to Dr. Harry B. Yoshpe, now

historian of the Army Transportation Corps, for his accurate, cogent, and voluminous monographic writings in this field when it was pioneer territory. The

author wishes to pay special tribute to Dr. Yoshpe for thus laying the foundation

for much of the present volume, as well as for his specific helpfulness and criticism at various intervals in the course of this study.

Col. Joseph Bent, Jr., of the Industrial College of the Armed Forces, and Col.

Ridgway Smith, of the Office of Military History, read the entire preliminary

manuscript and made numerous suggestions. Others who read and made helpful comments on chapters or sections of varying length include David Novick,

Gustav Seidler, Norman Parkin, William Coulson, Frank Fox, Reynold Bennett,

Hans Klagsbrunn, Melvin Copeland, Mark Massel, James Oates, Jr., Cols.

Elmer E. Barnes, George S. Foster, Vincent J. Esposito, George O'Connor,

Seneca Foote, and Lt. Col. Simon Frank. To Joseph Logan and Theodore

Whiting of the Army Comptroller's Office fell the thankless but highly important

task of reviewing the manuscript for the accuracy of statistical and tabular data.

Mrs. Norma Sherris located and selected the photographs.

The author's greatest debt is to the Army's Chief Historian, Dr. Kent Roberts

Greenfield, who prepared a critique that brought together and evaluated a wide

variety of ideas, suggestions, and criticisms. Dr. Greenfield's perennial good nature, understanding, and sympathy were a dependable source of encouragement

to the author during his protracted efforts to complete the project.

In the final stages of the tortuous journey from idea to finished volume, Dr.

Stetson Conn, the Army's Deputy Chief Historian, reviewed the entire revised

xiii
manuscript and made numerous helpful suggestions. Mr. Joseph Friedman,

Editor in Chief of the World War II series, lent his wise counsel and personal

assistance to the author on many occasions. Mr. David Jaffé, senior editor assigned to the volume, guided the book through the editorial process and substantially improved its readability. Mrs. Virginia Bosse, eagle-eyed copy editor,

rescued the author from many a typographical error and erroneous citation;

and Mrs. Helen Whittington, coming to her task late in the game, gathered up

the loose ends and put the volume to bed.

Two other specific acknowledgments are essential: first, to Mr. Glen A.

Lloyd, the Army's pricing director in World War II, who took the time from

a busy schedule to return to Washington for the volume's panel review; and

second, to Mrs. Mary Eva Oldfather, who typed most of the original manuscript

and supplied the author with first-hand knowledge of many developments in the

Assistant Secretary of War's Office dating back to its establishment shortly after

World War I.

Finally, the author wishes to thank the many others who provided assistance

directly or indirectly but whose names have been omitted either through inadvertence or for lack of space.

Bloomington, Indiana R. ELBERTON SMITH

7 December 1957

xiv
Contents

PART ONE

Introduction

Chapter Page

I. THE TASK AND THE ACHIEVEMENT ......... . 3

PART TWO

Prewar Plans and Wartime Organization

II. BACKGROUND OF INTERWAR PLANNING ...... . 35

Economic Mobilization in World War I ........... . 35

Planning Responsibility Under the National Defense Act ...... . 39

The Office of the Assistant Secretary of War ......... . 39

The Army and Navy Munitions Board ............ . 40

T h e Army Industrial College ............... . 4 3

The Supply Arms and Services .............. . 45

Basic Conception of the Planning Responsibility ........ . 46

III. WAR DEPARTMENT PROCUREMENT PLANNING ... 48

The Preparation of Specific Procurement Plans ......... . 48

Determination of Required Types ............. . 50

Computation o f Requirements ............... . 5 1

Apportionment of the Procurement Load ........... . 54

Allocation of Industrial Facilities ............. . 55

Preparation of Facilities for War Production ......... . 61

Consolidation, Approval, and Revision of Plans ........ . 65

General Planning for Wartime Procurement .......... . 67

Legislation ...................... . 6 7

Contractual Instruments ................. . 7 0

I V. INDUSTRIAL MOBILIZATION PLANNING. ...... . 7 3

Development of the Industrial Mobilization Plan ........ . 73

The Role of Superagencies Under IMP ............ . 77

The Concept of M Day .................. . 81

Functional Aspects of Industrial Mobilization Planning ..... . 86

Supply and Control of Materials ............. . 86

Price Control ..................... . 9 3

Other Problems in Industrial Mobilization. ......... . 95

xv
Chapter Page

V. ORGANIZATION FOR WAR ............. . 98

The Evolution of Central Mobilization Control Agencies ..... . 98

War Department Reorganization for World War II ....... . 105

The Defense Period: Hegemony of the Under Secretary of War ... 106

The War Period: Regime of the Army Service Forces ..... . 112

PART THREE

Determination of Army Requirements

VI. ARMY REQUIREMENT PROGRAMS: WORLD WAR I TO

PEARL HARBOR ................. . 11 9

Nature and Implications of Army Requirements ......... . 119

Army Attrition and Gradual Rehabilitation: 1920 to 1939 ..... . 120

The Munitions Program of 30 June 1940 ........... . 126

The Victory Program of 11 September 1941 .......... . 133

VII. ARMY REQUIREMENT PROGRAMS: PEARL HARBOR

T O WAR'S EN D ................. . 14 0

The President's Objectives and the War Munitions Program .... . 140

The Army Supply Program ................ . 143

Background an d Mature ................. . 14 3

Major Developments Under ASP ............. . 154

The Supply Control System ................ . 162

Demobilization Requirements ............... . 16 7

VIII. THE METHODOLOGY OF ARMY REQUIREMENTS DETERMINATION .................. . 17 2

Some General Considerations ................ . 17 2

Equipment Requirements ................. . 17 5

Initial Issue ..................... . 17 5

Replacement ..................... . 18 2

Distribution ..................... . 19 3

Requirements for Expendable Supplies ............ . 201

General ....................... . 20 1

Ammunition ..................... . 20 3

Concluding Observations ................. . 20 8

xvi
PART FOUR

Army Purchasing Problems and Policies

Chapter Page

I X. SURVEY OF ARMY PURCHASING: 1940 t o 1945 .... . 21 5

T h e Interwar Period ................... . 21 5

T h e Defense Period ................... . 21 9

Pearl Harbor t o V- J Da y ................. . 22 6

X. MAJOR ISSUES IN CONTRACT PLACEMENT ..... . 23 5

Military Responsibility fo r Procurement ............ . 23 5

Development o f th e Negotiated Contract ............ . 24 2

Background an d Early Us e o f Negotiation .......... . 24 2

Controversy Over Competitive Bidding ........... . 24 8

XI. GENERAL POLICIES IN CONTRACT PLACEMENT AND

CLEARANCE ................... . 25 7

Selection o f Contractors .................. . 25 7

Army Selection Policies ................. . 25 7

Criteria Established by Central Control Agencies ........ . 262

Contract Clearance .................... . 26 6

External Clearance ................... . 26 6

Internal Clearance ................... . 27 0

Contract Clearance an d Program Control ........... . 27 2

Evolution o f Wartime Pricing Policy ............. . 27 3

XII. TH E COST-PLUS-A-FIXED-FEE CONTRACT ...... . 28 0

Background an d Nature .................. . 28 0

Classes and Coverage of Army CPFF Contracts ......... . 283

Construction Contracts .................. . 28 3

Experimental, Research, an d Developmental Contracts ...... . 28 8

Service an d Time-and-Material Contracts .......... . 28 8

Cost-Plus-A-Fixed-Fee Supply Contracts ........... . 28 9

Administrative Control o f Fixed-Fee Contracts ......... . 29 7

T h e Conversion o f CPFF Contracts ............. . 30 2

XIII. PRICING I N FIXED-PRICE CONTRACTS ....... . 31 1

Price Analysis ..................... . 31 3

Instruments o f Price Analysis ............... . 31 4

Price Comparisons ................... . 31 7

Cost Analysis ..................... . 31 9

Price Adjustment Under Contractual Articles .......... . 32 5

Escalator Clauses ................... . 32 5

T h e Redetermination o r Ceiling Article ........... . 32 8

T h e Price-Revision Article ................ . 32 9

T h e Development o f Progressive Pricing ........... . 33 0

T h e Incentive Article; Other Changes ............ . 33 7

xvii
Chapter Page

XIV. MULTIPLE-CONTRACT PRICING REVIEW: THE COMPANY PRICING PROGRAM ............ . 33 9

Inadequacies of Individual Contract Pricing .......... . 339

Adoption of the Company Pricing Program ........... . 343

Procedures and Results of Company Pricing ........... . 345

XV. CONTRACT RENEGOTIATION: ORIGINS AND BASIC

PROCEDURES ................... . 35 1

The Background of Statutory Renegotiation .......... . 351

Basic Provisions of the Renegotiation Law ........... . 354

The 1942 Act and Amendments .............. . 354

The Renegotiation Act of 1943 .............. . 356

Organization for Renegotiation ............... . 358

The Renegotiation Process ................. . 361

Principal Features of Renegotiation ............. . 361

Identification of Renegotiable Sales ............. . 366

Renegotiation of CPFF Contracts ............. . 367

XVI. RENEGOTIATION: PRINCIPLES AND POLICY .... . 370

Definition and Measurement of Renegotiable Profits ....... . 370

Income and Profit Taxes ................ . 370

Reconversion Reserves. ................. . 37 2

Tax Amortization and Renegotiation Rebates ......... . 373

Exemptions From Renegotiation .............. . 375

The Determination of Excessive Profits ............ . 378

Development of Criteria Under the 1942 Act ......... . 378

Factors Listed in the 1943 Act .............. . 380

Application of the Factors ................ . 380

Renegotiation Statistics .................. . 38 8

Concluding Observations. ................. . 39 2

XVII. THE ARMY AND OPA PRICE CONTROL ....... . 397

Background and Nature of OPA Price Control ......... . 397

The General Maximum Price Regulation .......... . 398

Specific Price Regulations Affecting Procurement ........ . 402

General Exemption of Military Items From OPA Controls ..... . 403

Procurement Problems Arising From Price Ceilings ........ . 405

An Industry Case Study: Canned Meats .......... . 405

Relief of Individual Contracts From Price Control. ...... . 409

Concluding Observations. ................. . 41 1

xviii
Chapter Page

XVIII. THE ARMY AND SMALL BUSINESS ......... . 413

Emergence of the Small Business Problem ........... . 413

Early Attitudes and Efforts of the War Department ...... . 413

Small Business Policies of NDAC and OPM ........ . 417

The Small War Plants Program in Transition ......... . 419

Slow Beginnings Under the Small Business Act . ....... . 419

The Formative Period of Army-SWPC Relations ....... . 421

The Small War Plants Program in High Gear ......... . 429

PART FIVE

Expansion of Facilities for the Army

XIX. GENERAL ASPECTS OF FACILITIES EXPANSION . . . 437

Prewar Planning and the Crisis of 1940 ........... . 437

Land Acquisition by the War Department ........... . 441

War Department Command Facilities............. . 444

Facility Clearance Procedures ................ . 44 7

XX. PRIVATE INDUSTRIAL EXPANSION UNDER TAX

AMORTIZATION ................. . 45 6

Background of the Amortization Law ............. . 456

Administration of the Tax Amortization Program ........ . 460

Organization an d Procedures ............... . 46 0

Criteria o f Necessity .................. . 46 2

Nonreimbursement an d Government Protection ......... . 46 7

Transfer o f th e Certification Function ............ . 47 1

The Record of Plant Expansion Under Tax Amortization ..... . 472

XXI. GOVERNMENT FINANCED AND OWNED INDUSTRIAL

FACILITIES .................... . 47 6

T h e Emergency Plant Facilities Contract ........... . 47 6

Defense Plant Corporation Facilities ............. . 48 4

Origins o f DP C Financing ................ . 48 4

Basic Terms o f DPC Contracts .............. . 48 5

W a r Department Take-Out Arrangements .......... . 48 8

Operation an d Administration ............... . 49 0

Advantages o f DPC Financing .............. . 49 2

T h e Results o f DPC Financing .............. . 49 4

W a r Department Owned Facilities ............. . 49 6

xix
PART SIX

Production and Material Controls

Chapter Page

XXII. ESTABLISHMENT OF THE PRIORITIES SYSTEM ... . 505

Introduction ...................... . 50 5

Inauguration of the Priorities System ............. . 507

Evolution of Civilian Priority-Control Agencies ......... . 513

T h e Advisory Commission ................ . 51 4

The Office of Production Management ........... . 515

The Supply Priorities and Allocations Board ......... . 517

The War Production Board ............... . 517

Changes in the Basic Rating Structure ............ . 519

Priority Directives in the Defense Period .......... . 519

Major Developments After Pearl Harbor .......... . 522

XXIII. PRIORITIES: PROBLEMS IN APPLICATION AND

OPERATION ................... . 52 8

The Critical List and Preference-Rating Extensions ....... . 528

Interservice Discrimination; Abolition of the Critical List ..... . 533

Other Problems in the Operation of Priorities ......... . 537

Extent of Preference Accorded Higher Ratings ........ . 537

Higher-Than-Routine Ratings .............. . 53 9

Compliance Problems and Procedures ............ . 543

XXIV. MATERIAL CONTROLS IN TRANSITION ....... . 550

Allocations and Scheduling ................. . 550

The Production Requirements Plan ............. . 555

Special Procedures for Machine Tools ............ . 564

XXV. THE CONTROLLED MATERIALS PLAN. ....... . 567

The Adoption of the Controlled Materials Plan ......... . 567

Basic Features of CMP .................. . 570

Army Preparations for Launching CMP ............ . 573

The Determination of Requirements for Basic Materials ...... . 578

The Allotment of Controlled Materials ............ . 585

T h e B-Product Controversy. ................ . 59 1

XXVI. OTHER MEASURES FOR CONTROL AND CONSERVATION OF MATERIALS. .............. . 59 7

Miscellaneous Controls .................. . 59 7

Component Scheduling .................. . 59 7

Export Controls .................... . 59 9

Government-Furnished Materials ............. . 60 0

Importation and Stockpiling................ . 602

Conservation o f Materials ................. . 60 4

xx
PART SEVEN

Contract Termination and Settlement

Chapter Page

XXVII. CONTRACT TERMINATION: BACKGROUND AND PREPARATIONS .................... . 61 3

Nature and Implications of Contract Termination ........ . 613

Evolution of Contract Settlement Policy ............ . 616

The Liquidation of World War I Contracts ......... . 616

Development of the Negotiated Settlement. .......... . 618

Background and Passage of the Contract Settlement Act ..... . 621

War Department Preparations for Mass Termination........ 628

XXVIII. TERMINATION AND SETTLEMENT PROCEDURE ... 635

General Settlement Procedure ................ . 63 5

Special Settlement Procedures ................ . 64 3

No-Cost Settlements ................... . 64 3

Pretermination Planning and Agreements .......... . 645

The Consolidated Termination Program ........... . 651

Company-Wide Settlements ................ . 65 3

Other Subcontract Settlement Procedures ........... . 659

The Settlement of CPFF Contracts ............. . 663

XXIX. CONTRACT SETTLEMENT IN OPERATION ..... . 667

The Terms of Settlement ................. . 667

Financing of Contractors.................. . 674

Advance Payments ................... . 67 4

Guaranteed Loans ................... . 67 8

Partial Payments. ................... . 68 3

The Disposition of Contractor Inventory ............ . 686

Statistics of Contract Termination .............. . 694

Concluding Observations ................. . 69 8

PART EIGHT

Epilogue

XXX. THE SUMMING UP .................. . 705

Historical Recapitulation ................. . 70 5

Prewar Planning and the Launching of Rearmament ...... . 705

Determination of Requirements .............. . 706

Purchasing Policy ................... . 70 7

Expansion of Facilities ................. . 708

Production and Material Controls ............. . 710

Contract Termination and Settlement ............ . 711

Concluding Observations. ................. . 71 3

xxi
Page

BIBLIOGRAPHICAL NOTE AND GUIDE TO FOOTNOTES ... 718

LIST OF ABBREVIATIONS .................. . 721

INDEX ........................... . 72 9

Tables

No.

1. Budget Expenditures of U.S. Government, 1 July 1940-31 August

1945 ........................... . 4

2. U.S. War Program For World War II: By Procuring Agency, 1 July

1940-31 August 1945 .................... . 6

3. U.S. War Program For World War II: By Major Categories, 1 July

1940-31 August 1945 .................... . 7

4. Ordnance Department: Procurement Deliveries of Selected Major

Items, 1 July 1940-31 December 1945 ............. . 9

5. Quartermaster Corps: Procurement Deliveries of Selected Major Items,

1 July 1940-31 August 1945 ................. . 14

6. Signal Corps: Procurement Deliveries of Selected Major Items, 1

January 1940-31 December 1945 ............... . 18

7. Medical Department: Procurement Deliveries of Selected Major Items,

1 January 1940-31 December 1945 .............. . 21

8. Corps of Engineers: Procurement Deliveries of Selected Major Items,

1 January 1942-31 December 1945 .............. . 23

9. Transportation Corps: Procurement Deliveries of Selected Major Items,

1 January 1942-31 December 1945 .............. . 25

10. Chemical Warfare Service: Procurement Deliveries of Selected Major

Items, 1 January 1940-31 December 1945 ........... . 26

11. Army Air Forces: Procurement Deliveries of Airplanes, January 1940-

December 1945 ....................... . 2 7

12. Number of Manufacturing Facilities Allocated or Reserved, Summary

for Specified Years, 1923-1941 ................ . 58

13. Distribution of Allocations and Planned Procurement Load: By Army

Supply Arms and Services, 1 January 1938 ........... . 59

14. Geographical Distribution of Planned Procurement Load, Data as of 18

February 1938 ....................... . 6 0

15. First Educational Orders Program, Fiscal Year 1939 ........ . 63

16. Strength of Army and National Guard, 1920-1945 ........ . 122

17. Munitions Program of 30 June 1940 ............... . 132

18. Army Supply Program, Section I: Army Ground Forces Requirements

in Successive Editions of ASP ................. . 152

xxii
No. Page

19. Army Supply Program, Section I: Required Production for Calendar

Years 1943 and 1944 .................... . 152

20. Army Supply Program: Comparative Magnitude of Sections I-IV in

Mid-1943 ......................... . 15 3

21. Final Estimates of Army Procurement Requirements for World War II . 171

22. Victory Program Troop Basis, Summary of 15 December 1942 Revision . 177

23. Monthly Replacement Factors for Selected Items of Army Equipment at

Specified Dates ....................... . 19 0

24. Army Requirements for Major Expendable Items, 1 August 1943 ... . 202

25. Day of Supply of Ammunition for Theaters of Operations at Indicated

Dates ........................... . 20 7

26. War Department Procurement: By Purchasing Method, 1937-1940 . . . 218

27. Maximum Fixed Fees for CPFF Construction Projects With Corresponding

Percentages of Estimated Cost ................. . 284

28. War Department Supply Contracts Placed in World War II: Relative Use

of Fixed Price and CPFF Supply Contracts ........... . 290

29. Army Air Forces and Ordnance CPFF Contracts: Advance Estimate of

Costs in Individual Contracts over $10,000,000 ......... . 291

30. Unit Costs and Fixed Fees Under CPFF Aircraft Contracts for Individual

Contracts Placed at Specified Dates .............. . 292

31. Sales and Profit Margins Under CPFF and Fixed-Price Contracts ... . 294

32. Ordnance CPFF Heavy Equipment and Supply Contracts: As of 15 April

1943. ........................... . 29 5

33. Ordnance CPFF Management Contracts: As of 31 May 1943 . .... . 296

34. Costs and Fees for Small Arms Ammunition at Six Ordnance Plants as of

1 March 1943: Cost per Thousand Rounds of Complete Cartridges . . 297

35. Operations Under CPFF Contracts for Heavy Ammunition: Cumulative

Costs and Fees to 30 September 1944 .............. . 298

36. Use of Periodic Pricing Articles: By Ordnance Department, 1 April 1943-1

October 1944 ........................ . 33 5

37. Incentive Article Under Army Procurement Regulations ...... . 337

38. Reward for Fair Prices: Hypothetical Renegotiation of Three Firms With

Identical Costs ....................... . 38 3

39. Ratio of Net Profits to Sales: Before and After Contractors' 1942 Renegotiation With Base Period Comparison .............. . 385

40. Disposition of Renegotiation Assignments, 1942-1946 ........ . 389

41. War Department Price Adjustment Board Assignments: As of 6 February

1948. ........................... . 39 0

42. Renegotiable Sales, Profits and Profit Margins, and Amount Recovered . 392

43. Effect of Renegotiation on Corporations Grouped by Volume of Sales,

1936-1939: 3,178 Refund Cases Renegotiated by All Departments for

Fiscal Year 1943. ...................... . 39 5

xxiii
No. Page

44. Quarterly Index of Contract Price Changes: 1942-1945 for War Department and Component Agencies .............. . 412

45. War Department Prime Contracts and Subcontracts ....... . 416

46. War Department Prime Contract Awards by Size of Firm: Monthly

Placement of Supply Contracts in Excess of $10,000 Each, November

1943-December 1943. .................... . 43 1

47. Award of Prime Contracts by Size of Firm—Annual Placement of Supply

Contracts in Excess of $10,000 Each: By Major War Department

Agencies, 1943-1945 ..................... . 43 3

48. War Department Command Facilities: Summary by Major Types . . . 448

49. War Department Command Facilities: Cost of 50 Largest Installations . 449

50. War Department Certifications For Tax Amortization, 8 October 1940-

1 5 February 1945. ..................... . 47 3

51. Cost of DPC Plant Expansions Sponsored by War Department, 1 July

1940-1 October 1945. ................... . 49 5

52. Major DPC Facilities Sponsored by War Department ....... . 496

53. Nucleus of Ordnance Facilities Expansion for World War II: Ordnance

Projects Under Construction as of 28 February 1941 ....... . 500

54. Industrial Facilities Owned by War Department: Cost of 50 Leading

Establishments, 1 July 1940-30 September 1945 ......... . 501

55. Estimated Military Procurement Expenditures in 1942 and Percentage

Distribution by Rating Class, 26 February 1942 ........ . 523

56. Number and Value of AAA Ratings Approved by WPB Special Rating

Division: As of 3 February 1945. .............. . 544

57. War Department Advance Payments, Status as of 31 August 1945 . . . 678

58. War Department Contractor Inventory Disposals, 1 September 1945-

31 December 1946. .................... . 693

59. Plant Clearances Effected by the War Department, 1 September 1945-

31 December 1946. .................... . 694

60. War Department Contract Terminations and Settlements: Cumulative

Progress a t Specified Dates .................. . 696

61. War Contract Terminations and Value of Canceled Commitment: By

Agency and Type of Contract Through 31 March 1947 ..... . 697

62. War Department Contract Settlements: By Technical Service, Type of

Contract, and Type of Settlement .............. . 698

63. Comparative Use of No-Cost Settlements: By Principal Contracting

Agencies .......................... . 69 9

xxiv
Charts

No. Page

1. Organization of the Army Service Forces, 15 August 1944 ..... . 113

2. Approximate Ratios of Initial and Replacement Requirements to Total

Army Requirements, 1942-1945. ............... . 186

3. Profit Margins after Renegotiation (before Taxes): Navy Department

Fixed-Price Manufacturing and Shipbuilding Contractors, 1942-

1945 ........................... . 39 1

4. War Department Advance Payments: Advances, Recoupments, and Balance Outstanding, 30 June 1941-30 September 1945 ....... . 677

Illustrations

The Honorable Robert P. Patterson ............... . Frontispiece

Secretary of War Henry L. Stimson ................. . 108

W a r Resources Board ....................... . 12 6

Lt. Gen. William S. Knudsen. ................... . 130

General Brehon B. Somervell .................... . 145

Army and Navy Munitions Board, 1941 ............... . 146

Weekly Staff Conference. ..................... . 14 8

Heavily Burdened Soldiers Debarking ................ . 160

The Pentagon, Washington, D. C. ................. . 445

Advisory Board on Tax Amortization ................ . 461

Form for Settlement Proposal.................. . . . 638

All illustrations are from U.S. Department of Defense files with the exception of

the one appearing on pages 638-39, which is from the National Archives.

PART ONE

INTRODUCTION

CHAPTER I

The Task and the Achievement

The outstanding characteristics of World

War II were its magnitude and its highly

technological nature. The victory of the

United Nations in that war was attributable

basically to their ability to wage technological warfare on a scale far surpassing that of

the Axis Powers, and indeed that of any

other military coalition in all history. This

capacity for technological warfare on a

global scale required an abundance of superior weapons in the hands of highly trained

troops. But behind the lines of battle it required the capacity to develop, manufacture, and deliver a torrent of equipment and

supplies sufficient to overwhelm the enemy.

It was predominantly the United States that

demonstrated this capacity and furnished

the economic and industrial power which

proved to be the decisive factor in the

winning of the war.

The United States was fortunate in having a superior combination of total resources—materials, manpower, productive

equipment, widely diffused skills, and technical know-how—long before the outbreak

of World War II. Contrary to popular feeling, however, superiority in economic resources carried no automatic guarantee of

victory in war. As the United States learned

to its peril, there was a wide and dangerous

gulf between "economic potential" and the

capacity to deliver specific munitions in the

quality, quantity, and time needed to win a

major war. When America belatedly undertook rearmament after the British armies

were swept into the sea at Dunkerque and

France surrendered to Adolf Hitler at Compiègne, there was grave doubt that the U.S.

industrial effort could bear sufficient fruit in

the limited time available to forestall a German invasion of the Western Hemisphere.

And in the dark weeks and months after

Pearl Harbor, despite a year and a half of

intensive preparation in the United States,

the outcome of the battle of production was

still far from clear.

The task of harnessing a nation's economic potential for war has come to be

known as "economic mobilization." Its

basic purpose is to insure the procurement

of finished munitions—the sum total of

equipment, supplies, and services required

by the armed forces—while at the same

time supplying the essential needs of the

civilian economy. The demands of modern

technological warfare, when suddenly thrust

upon a nation lacking the specific equipment for war, are so novel, so complex, and

of such magnitude that their fulfillment requires a nationwide industrial and social

revolution. Such a revolution does not automatically "occur" when a nation goes to

war. It must be planned, directed, and

carried out in a manner which will accomplish its objectives with a minimum of hardship and dislocation. A faulty program of

economic mobilization might easily bog

down in a welter of confusion and disorder,
4 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 1—BUDGET EXPENDITURES OF U.S. GOVERNMENT, 1 JULY 1940-31 AUGUST 1945

[Billions of Dollars]

a

 Figures for 1940 include only period 1 July through 31 December; for 1945 only 1 January through 31 August.

Source: U.S. Treasury Department, Treasury Bulletin, Feb 52, Tables 6 and 6B, pp. 5, 9.

fail to accomplish its wartime mission, or

make impossible the reconversion and restoration of the economy at the end of the war.

The experience of the United States in

developing and utilizing its industrial capacity for World War II may well go down in

history as the classic example of economic

mobilization. Despite all the confusion,

error, and uncertainty that characterized the

two-and-a-half-year period from mid-1940

through 1942, the broad pattern of economic mobilization for the war as a whole

represented an orderly and systematic process, which ran the full cycle of planning,

build-up, full-scale war production, and demobilization. This pattern was possible because of a happy conjuncture of idle resources and the gift of a lengthy period of

"borrowed time" furnished by the insular

position of the United States and the heroic

resistance of its subsequent allies. Moreover,

the global character of World War II, with

its far-flung navies, immense land armies,

and massive airpower—for the most part all

built from scratch—gave rise to total military requirements which for sheer bulk and

quantity of matériel were without parallel

in the history of warfare. Military requirements for World War II constituted a heavy

drain upon economic resources all across

the board, creating some of the most stubborn and characteristic administrative problems of the war.

The starting point in understanding the

nature and complexity of economic mobilization for World War II is a knowledge of

the magnitude of the war program and the

kinds and quantities of munitions required

to fight the war.1 Actual dollar expenditures

of the U.S. Government during the war period totaled some $337 billion, of which

$304 billion was devoted to national defense

(Table 1). These amounts, as reported by

the Treasury Department, include prewar

expenditures of $16 billion during the

eighteen months of the defense period, but

1

 From the standpoint of economic mobilization

in the United States, World War II is generally

viewed as beginning in mid-1940 and ending on 31

August 1945.
THE TASK AND THE ACHIEVEMENT 5

omit substantial postwar expenditures associated with the final liquidation of the war

effort.2

The broad pattern of U.S. production for

World War II, and its progress throughout

the defense and war years, is revealed by

War Production Board estimates for the war

program as a whole (Tables 2 and 3). The

WPB statistics portray the gradual beginning of rearmament in the last half of 1940;

the rising tempo of defense production in

1941; the greatest absolute increase for the

whole war period in 1942; the reaching of

peak production—virtually determining the

outcome of the war—by the end of 1943;

and the sustained high level of production

throughout 1944 until August 1945 when

the collapse of enemy resistance signaled

the end of the World War II production

effort.

The role of the War Department (the

Army and its Air Forces) as the largest of

the war agencies is clearly indicated by the

expenditure of $167 billion out of the $304

billion total for the entire period. (See Table

1.) Whether measured in terms of actual expenditures or by the WPB estimates of physical production, the War Department share

represents approximately 55 to 58 percent of

the total for all agencies.3

It should be observed at the outset that

no statistical tables—however carefully devised—can hope to provide an accurate

measure of the total "cost" of World War

II, even if such cost is limited by definition

to money expenditures. Broad problems of

classification and allocation of expenditures,

both within and between the "war" and

"non-war" categories4—to say nothing of

continuing postwar disbursements for veterans' benefits and interest on the public

debt—make impossible any precise measure

of the "true" money cost of the war. At a

more fundamental level of analysis, the impact of the war upon the national real income, and the permanent influence of the

war upon the structure and future growth

of the national economy, render any accurate dollar or other statistical measure of the

costs of the war a will-of-the-wisp. Finally,

the ultimate "real" or human costs of the

war are largely a matter for individual

reflection and conjecture.

A broad panoramic view of the Army's

procurement objectives and achievements

in World War II is represented by the quantities of major specific items of equipment

and supplies delivered to War Department

2

 Statistics of Federal expenditures, especially for

particular categories, do not always provide a reliable measure of either the rate or the quantity of

war production. In World War II billions of dollars in payments of many varieties—loans, progress

payments, partial payments, advance payments, and

others—were made to contractors in advance of

delivery, production, or even incurrence of costs, in

order to supply the needs of manufacturers for both

fixed and working capital; thousands of procurement contracts were terminated in mid-stream, and

settlement charges bore no specific relationship to

current output; prices for identical items under different contracts were often divergent at a given

time and were constantly changing over periods of

time; contract renegotiation reclaimed contractor's

earnings on an over-all basis, thus distorting the significance of budget expenditures for procurement

as a whole, and of unit prices for individual items.

Nevertheless, the pattern of total war expenditures

of the Federal Government from 1940 to 1945 is

remarkably similar to estimated physical production.

3

 (1) 55 percent, if measured by the 167.4-to304.4 ratio of Table 1; (2) 57 percent, when measured by 179.9-to-315.8 "total war program" ratio

in Table 2; (3) 58 percent, by the 107.9-to-184.5

"munitions" ratio of Table 2. 4

 Thus, the Army in World War II referred to all

its procurement deliveries, including subsistence, as

"munitions"; the War Production Board classified

subsistence as "non-munitions."
6 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 2—U.S. WAR PROGRAM FOR WORLD WAR II: BY PROCURING AGENCY, 1 JULY 1940-

31 AUGUST 1945

[Estimated Magnitude in Billions of Dollars

 a]

a

 Figures contained herein were compiled by the War Production Board to show the pattern and progress of the war program for World

War II. In general, figures for major categories represent the following:

Munitions: Physical quantities of production for each year multiplied by standard unit-cost weights of mid-1945. The figures,

therefore, do not represent expenditures, or the value of output at current prices.

War Construction: Estimated cost of federally financed construction and equipment put in place during indicated periods.

Non-Munitions: Estimated expenditures for services, food, and other items.

War Program Total: Numerical sum of three major categories; shown as an index of general trends and to facilitate statistical calculation and comparison. b

 Figures for 1940 include only period 1 July through 31 December; for 1945 only 1 January through 31 August. c

 Less than .05 billions.

Source: Civilian Production Administration (WPB), The Production Statement, 1 May 47. Figures in "Total" column computed and

all figures rounded by OCMH.
THE TASK AND THE ACHIEVEMENT 7

TABLE 3—U.S. WAR PROGRAM FOR WORLD WAR II: BY MAJOR CATEGORIES, 1 JULY 1940-

31 AUGUST 1945

[Estimated Magnitude in Billions of Dollarsa]

a

 Figures contained herein were compiled by the War Production Board to show the pattern and progress of the war program for World

War II. In general, figures for major categories represent the following:

Munitions: Physical quantities of production for each year multiplied by standard unit-cost weights of mid-1945. The figures,

therefore, do not represent expenditures, or the value of output at current prices.

War Construction: Estimated cost of federally financed construction and equipment put in place during indicated periods.

Non-Munitions: Estimated expenditures for services, food, and other items.

War Program Total: Numerical sum of three major categories; shown as an index of general trends and to facilitate statistical calculation and comparison. b

 Figures for 1940 include only period 1 July through 31 December; for 1945 only 1 January through 31 August. c

 Less than .05 billions.

Source: Civilian Production Administration (WPB), The Production Statement, 1 May 47. Figures in "Total" column computed and

all figures rounded by OCMH.
8 THE ARMY AND ECONOMIC MOBILIZATION

procuring agencies throughout the war

(Tables 4 through 11).5 A complete listing

would contain thousands of additional

items, although these in general would be

smaller and less important. A careful

scrutiny of the listed items and quantities

suggests many things to the imagination:

the highly mechanized, technological, yet

diversified nature of Army activities and

operations in World War II; the extensive

planning, research, and development which

necessarily had to precede, as well as accompany, the war production effort; the

complex engineering and production problems which had to be solved by American

industry before the completed items could

become available to the Army; and the

tremendous logistical problems involved in

transporting, distributing, and servicing the

vast quantities of equipment and supplies in

all parts of the world. Because of the nature

and diversity of military procurement all

important sectors of the economy were involved, and military requirements absorbed

a major share of the productive capacity of

most industries. In both their quantitative

and qualitative implications, the statistics of

military procurement reveal the great

lengths to which the Army went to increase

the fighting power and effectiveness of its

troops and to enhance the health, comfort,

and chances of survival of the individual

soldier.

The essence of economic mobilization for

World War II was the development of a

complex array of governmental agencies,

activities, and controls for launching and

managing the nation's war production program. Most of these governmental operations were made necessary by two fundamental difficulties of war production—both

arising out of the nature of military requirements: (1) the great technical and engineering difficulty of mass-producing novel,

complex military items designed to meet the

most exacting specifications; (2) the general shortage of resources—reflecting the

great magnitude of military requirements—

which complicated and frustrated production in almost all sectors of the economy.

Both types of difficulty were aggravated by,

and indeed owed much of their existence

to, the compelling necessity for meeting the

goals of war production in the shortest possible period of time. The time element

greatly intensified the shocks and dislocations of all-out conversion to war production and magnified the task of devising and

applying control measures at all stages of

the war effort.

An appreciation of the physical characteristics and complexity of military items is

prerequisite to an adequate understanding

of the difficulties of war production. Consider, for a moment, a few of the technical

problems in producing ammunition which

had to be met before the Army could meet

its requirements for World War II. First

of all it was necessary to devise a type of

propellant powder, for each of dozens of

types of projectile, which would be powerful enough to hurl the projectile long distances with great penetrating force. The

powder had to be uniform, with almost completely unvarying performance characteristics permitting close-to-perfect ballistic

accuracy. It had to be chemically stable so

that it would not deteriorate, even when

stored for long periods in damp climates or

5

 Because of differences in the availability of data

Tables 4-11 contain differences in the length of the

period covered. For detailed explanation, as well as

for dollar value summaries of War Department procurement, see UNITED STATES ARMY IN

WORLD WAR II, Statistics, Procurement, 9 April

1952 draft, prepared by Richard H. Crawford and

Lindsley F. Cook under the direction of Theodore

E. Whiting.
THE TASK AND THE ACHIEVEMENT 9

TABLE 4—ORDNANCE DEPARTMENT: PROCUREMENT DELIVERIES OF SELECTED MAJOR

ITEMS, 1 JULY 1940-31 DECEMBER 1945a

See footnotes at end of table.
10 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 4—Continued

See footnotes at end of table.
THE TASK AND THE ACHIEVEMENT 11

TABLE 4—Continued

See footnotes at end of table.
12 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 4—Continued

See footnotes at end of table.
THE TASK AND THE ACHIEVEMENT 13

TABLE 4—Continued

a

 Data represent the numbers of listed items accepted by the procuring agency during the period indicated. Includes items subsequently distributed to other U.S. agencies and through lend-lease procedures to foreign governments. See source for additional information

as to technical content. b

 Includes stocks at depots and with troops 1 July 1939 plus deliveries from 1 July 1939 through 31 December 1945. c

 Includes 23,689 vehicles from frozen commercial stocks. d

 Deliveries from July 1940 through August 1945.

Source: U.S. Army in World War II, Statistics, Procurement, 9 April 1952 draft, prepared by Richard H. Crawford and Lindsley F.

Cook under the direction of Theodore E. Whiting.
14 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 5—QUARTERMASTER CORPS: PROCUREMENT DELIVERIES OF SELECTED MAJOR

ITEMS, 1 JULY 1940-31 AUGUST 1945a

See footnotes at end of table.
THE TASK AND THE ACHIEVEMENT 15

TABLE 5—Continued

See footnotes at end of table.
16 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 5—Continued

See footnotes at end of table.
THE TASK AND THE ACHIEVEMENT 17

TABLE 5—Continued

a

 Data represent the numbers of listed items accepted by the procuring agency during the period indicated. Includes items subsequently distributed to other U.S. agencies and through lend-lease procedures to foreign governments. See source for additional information

as to technical content. b

 Deliveries from 1 January 1942 through 31 December 1945. c

 Deliveries from 1 January 1943 through 31 December 1945.

Source: U.S. Army in World War II, Statistics, Procurement, 9 April 1952 draft, prepared by Richard H. Crawford and Lindsley F.

Cook under the direction of Theodore E. Whiting.
18 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 6—SIGNAL CORPS: PROCUREMENT DELIVERIES OF SELECTED MAJOR ITEMS,

1 JANUARY 1940-31 DECEMBER 1945a

See footnotes at end of table.
THE TASK AND THE ACHIEVEMENT 19

TABLE 6—Continued

See footnotes at end of table.
20 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 6—Continued

a

 Data represent the numbers of listed items accepted by the procuring agency during the period indicated. Includes items subsequently

distributed to other U.S. agencies and through lend-lease procedures to foreign governments. See source for additional information as to

technical content. b

 Deliveries from January 1942 through December 1945. c

 Deliveries from January 1940 through March 1945, Army Air Forces procured thereafter.

Source: U.S. Army in World War II, Statistics, Procurement, 9 April 1952 draft, prepared by Richard H. Crawford and Lindsley F.

Cook under the direction of Theodore E. Whiting.
THE TASK AND THE ACHIEVEMENT 21

TABLE 7—MEDICAL DEPARTMENT: PROCUREMENT DELIVERIES OF SELECTED MAJOR ITEMS,

1 JANUARY 1940-31 DECEMBER 1945

 a

See footnotes at end of table.
22 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 7—Continued

a

 Data represent the numbers of listed items accepted by the procuring agency during the period indicated. Includes items subsequently distributed to other U.S. agencies and through lend-lease procedures to foreign governments. See source for additional information

as to technical content.

Source: U.S. Army in World War II, Statistics, Procurement, 9 April 1952 draft, prepared by Richard H. Crawford and Lindsley F.

Cook under the direction of Theodore E. Whiting.
THE TASK AND THE ACHIEVEMENT 23

TABLE 8—CORPS OF ENGINEERS: PROCUREMENT DELIVERIES OF SELECTED MAJOR ITEMS

1 JANUARY 1942-31 DECEMBER 1945a

See footnotes at end of table.
24 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 8—Continued

a

 Data represent the numbers of listed items accepted by the procuring agency during the period indicated. Includes items subsequently distributed to other U.S. agencies and through lend-lease procedures to foreign governments. See source for additional information

as to technical content.

Source: U.S. Army in World War II, Statistics, Procurement, 9 April 1952 draft, prepared by Richard H. Crawford and Lindsley F.

Cook under the direction of Theodore E. Whiting.
THE TASK AND THE ACHIEVEMENT 25

TABLE 9—TRANSPORTATION CORPS: PROCUREMENT DELIVERIES OF SELECTED MAJOR

ITEMS, 1 JANUARY 1942-31 DECEMBER 1945a

a

 Data represent the numbers of listed items accepted by the procuring agency during the period indicated. Includes items subsequently distributed to other U.S. agencies and through lend-lease procedures to foreign governments. See source for additional information

as to technical content.

Source: U.S. Army in World War II, Statistics, Procurement, 9 April 1952 draft, prepared by Richard H. Crawford and Lindsley F.

Cook under the direction of Theodore E. Whiting.
26 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 10—CHEMICAL WARFARE SERVICE: PROCUREMENT DELIVERIES OF SELECTED

MAJOR ITEMS, 1 JANUARY 1940-31 DECEMBER 1945a

a

 Data represent the numbers of listed items accepted by the procuring agency during the period indicated. Includes items subsequently distributed to other U.S. agencies and through lend-lease procedures to foreign governments. See source for additional information

as to technical content.

Source: U.S. Army in World War II, Statistics, Procurement, 9 April 1952 draft, prepared by Richard H. Crawford and Lindsley F.

Cook under the direction of Theodore E. Whiting.
THE TASK AND THE ACHIEVEMENT 27

TABLE 11—ARMY AIR FORCES: PROCUREMENT DELIVERIES OF AIRPLANES, JANUARY 1940-

DECEMBER 1945

 a

a

 Data represent factory acceptances or receipt of legal title by resident factory representative of procuring agency. Includes all airplanes procured by the AAF regardless of subsequent distribution to Army, Navy, recipients of Lend-Lease, or others. These airplane

deliveries represent approximately 83% of all Army Air Forces procurement.

Source: U.S. Army in World War II, Statistics, Procurement, 9 April 1952 draft, prepared by Richard H. Crawford and Lindsley F.

Cook under the direction of Theodore E. Whiting.
28 THE ARMY AND ECONOMIC MOBILIZATION

other unfavorable conditions. It had to be

smokeless and, if possible, flashless. These

and many other exacting technical requirements had to be met, most of them under

the opposing pressures of urgency and tremendous safety hazards, while the nation

was building an entire new powder industry

from the ground up.

But the technical requirements for powder were inseparable from those of all the

other ammunition components and from the

controlling weapon itself. The designing,

forging, and machining of projectiles for

artillery—among the most exacting and

troublesome production problems of World

War II—were related, among other things,

to the quality and character of powder. Not

to be confused with propellant powder were

the high explosives used to provide the

lethal bursting charge in projectiles. The

nature of high explosives likewise depended

upon the total combination of components

for each type of ammunition, and the safety

hazards surrounding the production of high

explosives were the greatest of any on the

entire war production front. Perhaps the

most complex of all ammunition components were the marvelously intricate and

sensitive fuzes, which individually or as a

class had to perform some of the most difficult and versatile assignments of the war.

Some fuzes had to serve many different

calibers of ammunition and had to permit

a wide variety of settings. Others, despite

their sensitivity, had to be capable of delayed detonation even after the successive

shocks to their carrying projectile of launching, impact, and penetration through heavy

armor plate. Still others had to be able to

detonate upon attaining a certain proximity

to an aerial target or, failing to attain such

proximity, before reaching the ground in

order to avoid casualties to friendly ground

personnel. The problems of inventing, developing, and then mass-producing such

complex, sensitive, yet sturdy instruments

were legion, requiring the finest efforts of

pure and applied science, engineering, and

industrial organization.

Even so prosaic an item as the .30-caliber

cartridge case presented seemingly insoluble

production problems in the face of material

shortages in World War II. The pressures

generated in small arms cartridges upon

firing are extremely high—much higher per

square inch than in the case of artillery.

Years of experience and research had indicated brass as the only satisfactory material

for cartridge cases. It possessed sufficient

elasticity to expand under pressure and to

contract instantly after the pressure was

released. The expansion was necessary to

provide a tight seal (obturation) to prevent

the escape of gas backward into the breech.

The instantaneous contraction thereafter

was necessary to permit prompt ejection of

the empty case from the chamber. When the

copper shortage in World War II posed an

across-the-board threat to ammunition supply, it became imperative to develop a substitute material—with steel the only practicable possibility—for the manufacture of

cartridge cases. After many failures and

months of around-the-clock efforts, scientists, engineers, production workers, and administrators finally succeeded in adapting

steel to the purpose. Fortunately, the increased availability of copper made unnecessary the widespread substitution of steel

cases, as these had not become fully satisfactory at the time of peak demand.6

6

 See Constance McLaughlin Green, Harry C.

Thomson, and Peter C. Roots, The Ordnance Department: Planning Munitions for War, UNITED

STATES ARMY IN WORLD WAR II (Washington: 1955), especially Chapter XVIII, from

which this illustration was taken.
THE TASK AND THE ACHIEVEMENT 29

The exacting performance characteristics

required of military items led to production

problems of unprecedented difficulty in almost all categories of equipment. The

Army's .50-caliber aircraft machine gun

(M3), developed by Ordnance for the Air

Forces, was capable of firing at a rate of

1,200 rounds per minute. (Let the reader

try to visualize the discharge of 20 rounds

per second from a single weapon!) Apart

from the difficulties of producing a weapon

which could achieve and stand up under

such rates of fire, the resulting ammunition

requirements became astronomical. In order

to operate its machine guns the Army procured some thirteen billion metallic belt

links, each of which had to meet exact

specifications to prevent jamming of the

guns. The 21⁄2-ton Army truck—the workhorse of the Army—could climb a 65-degree

hill fully loaded from a standing start and

had such stability that it could proceed

across the face of the same hill without

toppling. It could speed smoothly along the

highway at forty-five miles per hour or mow

its way through a grove of 21⁄2-inch trees

without a tremor. Such a truck was manifestly of a different species from any commercial truck ever produced. The necessity

for all-wheel drives in Army trucks gave rise

to heavy demands for new and complex

components—constant velocity joints, transfer cases, bogie rear axles, and the like—

never before manufactured in quantity and

requiring the building of a whole new industry. So great was the Army's procurement of automotive vehicles that by the end

of the war it would have been literally possible to load and move its entire eight million

troops on motor vehicles at one time.7

In addition to the high performance

specifications required of military items, another factor dictated the necessity for extremely close manufacturing tolerances,

calling for numerous machining and other

operations which complicated production.

This was the need for the interchangeability

of parts and the complete uniformity in

other respects of all units of a given type of

equipment. One or two illustrations, from

the perspective of the production engineer,

will help to explain apparently unwarranted

production delays in the case of items widely

supposed to be easy of manufacture. The

familiar Springfield rifle, model 1903—of

which nearly a million and a half were produced for World War II—was made up of

ninety-three different parts. Production of

these parts, each of which had to be machined to perfection, required 103 different

dies, 463 different jigs and fixtures, 506 different special cutting tools, 1,320 working

gages, and 1,339 different inspection gages.8

The development, and preparation for

mass production, of the successor to the

Springfield—the more complex gas-operated, semiautomatic Garand (M1) rifle—

was a most difficult undertaking. Prior to

the setting up of production lines, an experienced engineering firm consulted by the

Springfield Armory estimated that 20,000

hours of engineering study would be necessary to plan large-scale production and

200,000 hours of engineering and design

time would be required to prepare the neces7

 Harry C. Thomson and Lida Mayo, The Ordnance Department: Procurement and Supply of

Munitions, a volume in preparation for the series

UNITED STATES ARMY IN WORLD WAR II,

Ch. IX, MS, OCMH. 8

 Maj Gen William H. Tschappat, CofOrd, Ordnance Procurement on M-Day, 15 Dec 37, AIC Lectures, 14:483. Lectures given at the Army Industrial

College during the period 1924-41 have been bound

into volumes and are on file in the library of the

reconstituted Industrial College of the Armed Forces

located at Fort Lesley J. McNair, Washington, D. C.
30 THE ARMY AND ECONOMIC MOBILIZATION

sary tool equipment.9 Early in 1939, several

years after the standardization of the M1,

its production required some 1,100 separate

machining operations, although new methods then in process of adoption promised to

reduce this number by half.10

This complexity was increased manyfold

for larger items of equipment. An antiaircraft gun carriage required 1,800 separate

drawings; an Army tank, 2,300; and the

number of drawings—including those containing specification changes—required for

the production of heavy bomber planes ran

into the thousands.11 But such widespread

complications were not peculiar to the

manufacture of large or complex items of

equipment procured by the Ordnance Department, the Signal Corps, and the Air

Forces. Because of universal material shortages and higher priority for competitive

items, the Quartermaster Corps and other

technical services of the Army experienced

production difficulties out of all proportion

to the basic complexity of the items procured. A full appreciation of the technical

difficulties of war production could be

gained only by a detailed study of the history

of each item.12

In the face of the problems indicated thus

far, as well as the administrative tasks to be

described in the remainder of this volume,

the production record of the United States

for World War II—the fruits of its economic mobilization effort—represented a

magnificent achievement. The costs of this

achievement were great; how great, can

never be measured or comprehended. But

the basic nature of the task and its achievement is well summarized in these words

written at the close of the war:

To turn potential into actual production

capacity was a titanic and complicated task.

It demanded policy decisions of extraordinary

difficulty, and then the translation of policy

into the infinite detail of execution. It touched

every aspect of the complex social and economic mechanism of the Nation. It required

the transfer of scientific genius from the research of peace to the development of new

weapons of war. It enlisted the services, not

merely of those in the prime of life, but of

young and old, of women as well as men, and

of even the partially crippled as well as those

sound of limb. It even reached into our penal

institutions, where valuable contributions were

made to war supply. It entailed teaching those

without mechanical experience and skill how

to build tanks, airplanes, and the many other

instruments of war. It compelled millions of

people to move from communities in which

they had long been settled to places which

were crowded and uncomfortable. It asked

business men to limit profits and workers to

forego wage advances. In short, it involved a

mass migration and a social and economic

revolution of vast dimensions, much of it accomplished voluntarily under government direction, in order that our forces and those of

our allies might have the superiority in weapons which is essential to victory in modern war.

9

 Maj James L. Hatcher, Ordnance Production

Difficulties and Their Solution, 20 Feb 39, AIC

Lectures, 15:866 1/2. 10

 The number of separate machining operations

for the major components of the M1 at this time

was as follows: receiver, 104; bolt, 48; follower, 17;

hammer, 13; trigger, 10; catch, 14; base, 13; gas

cylinder, 34; guard, 26; housing, 37; operating rod

assembly and handle, 42; slide, follower, 10. Ibid.,

15:868 1/2. 11

 (1) War Department Procurement Planning

(Army Extension Course, Special Text 98, 1941

ed.), par. 112, ICAF Library. (2) Irving Brinton

Holley, Jr., Buying Airpower, a volume in preparation for the series UNITED STATES ARMY IN

WORLD WAR II, MS, OCMH. 12

 These difficulties include, among others, the

whole array of problems associated with the inspection of military procurement—a function which at

its peak in World War II required more than thirty

thousand War Department civilian personnel. The

reader interested in pursuing further the whole subject of munitions manufacture will find a wealth

of material in the various volumes on the technical

services appearing in the series UNITED STATES

ARMY IN WORLD WAR II.
THE TASK AND THE ACHIEVEMENT 31

As a result of this immense effort the goal

of President Roosevelt, to make America the

"arsenal of democracy," was fulfilled. American weapons were employed on every battlefield. American raw materials and American

machinery increased the output of the factories of our allies. The headstart of the Axis

was overcome, and it collapsed in defeat under

our crushing material superiority.13

13

 Troyer S. Anderson, Munitions for the Army—

A Five Year Report on the Procurement of Munitions by the War Department Under the Direction

of the Under Secretary of War (9 April 1946),

pp. 2-3, OCMH.

PART TWO

PREWAR PLANS AND

WARTIME ORGANIZATION

CHAPTER II

Background of Interwar Planning

Economic Mobilization in World War I

The experience of the United States in

World War I was rich in object lessons for

those responsible for the nation's security in

future emergencies. Economic mobilization

for that war was largely a story of hasty

improvisation to meet unforeseen crises and

fill the void left by inadequate planning and

preparation. When war was declared on 6

April 1917, reserve supplies in most categories of military equipment were practically nonexistent and the Army had no

clear knowledge of the character and

magnitude of its wartime needs. No definite military plan was available to show

the intended size and composition of the

Army or the rate of its mobilization.

Standardization of equipment and detailed

specifications were badly lacking so that

prospective manufacturers could not be

informed precisely what it was that the

Army wished to buy. The Army entered

the war with a collection of independent

supply arms and services, each with separate

statutory powers to determine its requirements and to conduct procurement operations. As a result, there was only a vague

knowledge of the war load to be placed

upon industry, little semblance of a balanced program of requirements, and much

overlapping of procurement responsibility.1

At the level of actual procurement operations, the various supply arms and services

engaged in a competitive scramble for the

products of industry, basic plant capacity,

and contributory resources. This competition, augmented by the independent procurement activities of the Navy, resulted in

skyrocketing prices, greatly increased procurement costs, and inordinate profits for

manufacturers, middlemen, and speculators. Of even graver significance, the un-coordinated placement of contracts and scheduling of deliveries created heavy overconcentration of the war load in particular

plants and areas, congestion of transportation and port facilities, and the near pa1

 For various accounts and interpretations of

economic mobilization for World War I, see the

following: (1) Grosvenor B. Clarkson, Industrial

America in the World War (New York: Houghton

Mifflin Company, 1923); (2) Bernard M. Baruch,

American Industry in the War (New York:

Prentice-Hall Inc., 1941); (3) William Crozier,

Ordnance and the World War (New York: C.

Scribner's Sons, 1920); (4) Thomas Goddard

Frothingham, The American Reinforcement in the

World War (Garden City, N. Y.: Doubleday,

Page & Company, 1927); (5) William Franklin

Willoughby, Government Organization in War

Time and After (New York: D. Appleton & Company, 1919); (6) Harold J. Tobin and Percy W.

Bidwell, Mobilizing Civilian America (New York:

Council on Foreign Relations, 1940); (7) War Department Procurement Planning, Ch. I; (8) Lectures by Col Frank A. Scott, First Chairman, War

Industries Board (1936), eleven lectures, 1925-35

(hereafter cited as Scott Lectures), ICAF Library;

(9) Maj James C. Longino et al., A Study of World

War Procurement and Industrial Mobilization (1

June 1939), MS, ICAF Library.
36 THE ARMY AND ECONOMIC MOBILIZATION

ralysis of the war effort. The prevailing

atmosphere is suggested by the following

quotations:

Manufacturers, under a cross-fire of conflicting demands, attempted to please too

many procuring agencies, at home and abroad,

and became hopelessly overloaded. Promises

were given which were impossible of fulfillment. Some of the prime contractors sublet

the major portion of their contracts. In reality

they became a secondary line of governmental

procuring agencies, extending the confusion.2

Freight piled up at ocean terminals until

freight trains had to be unloaded in fields ten

to thirty miles inland.3

The situation got progressively worse. Finally, Senator Chamberlain of Oregon made

a speech in New York in which he said the

War Department supply program had fallen

down. President Wilson replied angrily to that

and in tactful words said Chamberlain was a

liar. Senator Chamberlain made one of the

most effective speeches ever heard in any Congress at a joint session of the Senate and the

House of Representatives, not oratorical,

mostly consisting of the reading of letters from

mothers about the kinds of things going on in

these camps due to the lack of all kinds of

supply. It became so dramatic just in a conversational tone that you could hear people

sob in the gallery. There was absolute silence

when he was through with his speech. If he

had cared to bring up a bill establishing a

ministry of munitions in this country, it would

have passed by acclamation.4

Much of the Army's lack of preparedness

could be traced directly to niggardly appropriations over the years and to ill-conceived

legislation which prevented effective planning and co-ordination of Army activities.

For example, the National Defense Act of

1916 was passed on the eve of war for the

purpose of facilitating American military

preparedness. Yet it contained a provision

forbidding more than half the officers of the

small General Staff from being located in

Washington at any one time. Thus the General Staff, which was the principal hope for

directing a systematic and co-ordinated program of requirements determination, was

precluded by law from mobilizing itself in

time of emergency.5

But the military procuring agencies were

not alone in their lack of preparedness. The

government as a whole was unprepared for

war. There were no long-range plans, carefully developed in peacetime, for the direction and co-ordination of the national productive effort in time of emergency. Hence,

when the emergency arrived, the nation

went through a lengthy trial-and-error process during which a pattern of wartime organization was eventually developed. The

statute creating a Council of National Defense was not enacted until August 1916,

and the council's executive arm—the Advisory Commission—did not hold its first

meeting until the following December. One

week before war was declared, the council,

on recommendation of the Advisory Commission, voted to create a purchasing board

to co-ordinate procurement, establish priorities, and facilitate the supply of materials

and manufacturing facilities. The resulting

General Munitions Board possessed only

vague powers and operated chiefly through

2

 Maj Scott B. Ritchie, The Allocation System, 18

Feb 38, AIC Lectures, 14:812. 3

 War Department Procurement Planning, par. 5.

In order to obtain unified co-ordination of transportation facilities, the government took over the

operation of the railroads, effective 1 January 1918.

This was followed on 1 August 1918 by government

operation of telegraph, telephone, and cable facilities. James H. Bogman, Economic Planning and National Defense (Washington: Government Printing

Office, 1933), p. 8. 4

 Brig Gen Hugh S. Johnson, Feasible Peacetime

Approaches to Industrial Mobilization, 2 Feb 40,

AIC Lectures, 16:392.

5

 See Clarkson, Industrial America in the World

War, pp. 30-31. Congress feared that officers would

be located in Washington for personal and social

reasons rather than for the good of the service.
BACKGROUND OF INTERWAR PLANNING 37

a proliferation of new committees, many of

which duplicated the established committees

of the Advisory Commission. Recognizing

the need for an agency with centralized

power and responsibility the council voted

on 8 July 1917 to replace the General Munitions Board with the War Industries Board.

The governing body of the War Industries

Board was a seven-man group in contrast to

the twenty-two members, representing various agencies and interests, of the General

Munitions Board. But the new War Industries Board chairman lacked final authority and the board as a whole had no

greater statutory power than its predecessor.

For several months, after the breakdown of

the first chairman and the resignation of the

second, the War Industries Board was without a leader. Finally, on 4 March 1918,

President Woodrow Wilson offered to Bernard M. Baruch the chairmanship of the

board, with the power of ultimate decision

in all matters except price control. Mr.

Baruch accepted and two months later the

Overman Act supplied the statutory basis

for a wide concentration of power in the

board. Thereafter, with steadily increasing

powers and accumulating experience, the

War Industries Board became an effective

instrument of central mobilization control.6

In addition to their organizational difficulties the central mobilization control agencies were faced with seriously inadequate

means for the discharge of their tasks. Prior

to World War I relatively little systematic

effort had been made by the government to

accumulate detailed information on the

existence, location, and capacity of the

nation's industrial establishments:

A need . . . apparent from the first that

became more vital every day and that was the

cause of great delay and confusion is embodied in the word STATISTICS. A hundred

times a day information was necessary that no

one could produce quickly. Such questions as:

How many looms are there in the United

States that can produce heavy duck? How

many spindles can make the necessary yarn?

Perhaps the trade association had to be requested to procure the answer. Perhaps there

was no trade association. . . .7

Only toward the end of the war did the

United States—under the broad direction of

the War Industries Board—succeed in

establishing the information, organizations,

policies, and procedures necessary to an

orderly pattern of economic mobilization.

The unexpected announcement of the armistice in November 1918 saw American

troops in France largely equipped and supported by the Allies.8

It is understandable, therefore, that a

widely held impression of America's performance in World War I is the one conveyed by the comments of England's wartime premier, David Lloyd George:

It is one of the inexplicable paradoxes of

history, that the greatest machine-producing

nation on earth failed to turn out the mecha6

 Clarkson, Industrial America in the World War,

and Baruch, American Industry in the War, both

contain a wealth of information on the World War

I economic mobilization process.

7

 Brig Gen Seth Williams, The Quartermaster,

U.S. Marine Corps, Thoughts on Industrial Mobilization Based on My Experience With the War Industries Board During 1917-1918, 25 Mar 38, AIC

Lectures, 14: 919. The dearth of industrial statistics

has been cited many times as typical of the difficulties faced by administrators in World War I.

For example, Maj Ritchie, AIC Lectures, 14:

8121⁄2. 8

 See testimony of SW Henry L. Stimson, April

1941, Special S. Com. Investigating the National

Defense Program, 77th Cong., 1st Sess., Hearings

on S. Res. 71, Investigation of the National Defense

Program, 1:11-14. These hearings, which extended from 1 March 1941 through 11 June 1948,

will hereafter be cited as Truman Committee, Hearings. The successive chairmen of this Committee

were Harry S. Truman, James M. Mead, and

Owen Brewster.
38 THE ARMY AND ECONOMIC MOBILIZATION

nism of war after 18 months of sweating and

toiling and hustling. . . . There were no

braver or more fearless men in any Army, but

the organization at home and behind the lines

was not worthy of the reputation which American business men have deservedly won for

smartness, promptitude and efficiency.9

In similar vein was the statement of General John J. Pershing concerning the dire

shortage of tanks in the European theater

in World War I:

It seems strange that, with American genius

for manufacturing from iron and steel, we

should find ourselves after a year and a half

of war almost completely without those mechanical contrivances which had exercised

such a great influence on the western front in

reducing infantry losses.10

In spite of these shortcomings, when

viewed in a larger perspective, America's

industrial performance for World War I

was ultimately successful. By virtue of improvisation, sacrifice, and the national will

to victory, the industrial effort of the United

States by the end of the war had reached

prodigious proportions and was a decisive

factor in attaining victory when it came.

The capitulation of the Central Powers in

World War I, like that of Japan in World

War II, was far ahead of schedule in the

Allied timetable. The formal inter-Allied

decision had been to prepare for a major

military effort in 1919 and 1920.11 By the

end of 1918 the United States was ready to

pour out a torrent of supplies and equipment which would soon overwhelm the

enemy. The following statement by the

first chairman of the War Industries Board

indicates the situation at the time of the

armistice:

The big production, of course, was coming

in 1919. . . . The guns that we prod

the winter of 1918, and would have been

issued in 1919, fought for us even though they

never fired a powder charge other than for

experimentation and test. The Germans knew,

probably almost as accurately as we ourselves

did, the number of guns we had in preparation, and knew they had to meet not only the

three thousand guns we had over there at

that time, but also the three thousand additional guns coming over the next year.12

Similar testimony was given by Bernard

Baruch:

When fighting ceased, war production in

the United States was reaching its peak.

Every unit of the vast machinery was keyed

up to high speed. There is no doubt but

that knowledge of this fact contributed

materially to Germany's sudden realization of

the hopelessness of her position.13

The classic tribute to America's industrial

mobilization achievement in World War I

is the eloquently exaggerated but frequently

cited statement of the German Chief of

Staff, Field Marshal Paul von Hindenburg:

Her brilliant, if pitiless, war industry had

entered the service of patriotism and had not

failed it. Under the compulsion of military

necessity a ruthless autocracy was at work

and rightly, even in this land at the portals

of which the Statue of Liberty flashes its

blinding light across the seas. They understood war.14

9

 War Memoirs of David Lloyd George (London:

Odhams Press, Ltd., 1942), II, 1831, 1833. 10

 Commission Appointed Under the Authority of

Public Resolution No. 98, 71st Cong., 2d Sess.,

Hearings on H. J. Res. 251, War Policies Commission (hereafter cited as War Policies Commission Hearings, 1931), p. 305. 11

 War Department Procurement Planning, par.

18.

12

 AIC Lecture, Col Scott, 10 Dec 25, title: Artillery Procurement in 1917, p. 10, in Scott Lectures. 13

 Ltr, Bernard Baruch, Chmn War Industries

Board, to Hon. Woodrow Wilson, President of the

United States, 24 Dec 19, reproduced in Baruch,

American Industry in the War, pp. 6-7. 14

 (1) Baruch, American Industry in the War,

p. 377. (2) Clarkson, Industrial America in the

World War, Title Page.
BACKGROUND OF INTERWAR PLANNING 39

Whatever the successes and failures of

America's industrial performance in World

War I, it was clear that many of the problems on the production front which arose to

plague the Army and the nation as a whole

were inherent in the nature of sudden, largescale economic mobilization. The number

one lesson brought home for the first time

by World War I was the importance of the

matériel side of modern war and the inevitable time lag between the mobilization

of troops and the mobilization of their allimportant supporting equipment and supplies. No longer could the United States rely

upon the affirmation of William Jennings

Bryan that in a national crisis "a million

men would spring to arms overnight." The

fighting of a major war under twentieth

century conditions required elaborate plans

for the industrial mobilization of the entire

nation and, when war actually arrived, the

subjection of the entire economy to a regime

of extensive controls. More than this it required an indispensable period of time,

reckoned not in hours or months but in

years, before the nation's economic potential

could be successfully harnessed and converted to producing munitions on the scale

required.

Planning Responsibility Under the National

Defense Act

The Office of the Assistant Secretary

of War

With these lessons fresh in mind Congress took steps to provide for a similar

emergency in the future. On 4 June 1920,

the National Defense Act of 1920 was approved, and industrial preparedness was

made the responsibility of the Assistant Secretary of War. Under the terms of the new

act, the Assistant Secretary was made responsible not only for War Department procurement to meet its own needs in peace

and war, but for peacetime industrial

mobilization planning for the entire nation:

. . . the Assistant Secretary of War . . .

shall be charged with supervision of the procurement of all military supplies and other

business of the War Department pertaining

thereto and the assurance of adequate provision for the mobilization of matériel and

industrial organizations essential to wartime

needs.15

Discharge of these two responsibilities became the principal occupation of the Assistant Secretary of War for the next twenty

years. In the year after the passage of the

National Defense Act of 1920, the Assistant

Secretary utilized the War Department General Staff in carrying out his planning responsibilities. In the fall of 1921, after a

change of administration and the clarification of certain jurisdictional problems, the

Office of the Assistant Secretary of War

(OASW) was reorganized.16 At that time

15

 41 Stat. 764, 4 Jun 20, National Defense Act

of 1920, Sec. 5a. The 1920 act was passed in the

form of a comprehensive series of amendments to

the National Defense Act of 1916; for all practical

purposes the 1920 legislation was an entirely new

act. The circumstances surrounding the adoption

of Section 5a have been recounted by Maj. Gen.

Charles McK. Saltzman, in Reminiscences of the

Battle of Washington, 26 Nov 35, AIC Lectures,

12:173. 16

 OASW Memo Order 1, 25 Oct 21. The jurisdictional problems referred to grew out of an apparent overlapping of the responsibilities of the

Assistant Secretary and those of the General Staff.

The resolution of this conflict was made by a board

of officers headed by Maj. Gen. James G. Harbord,

then the Deputy Chief of Staff. The decision of the

Harbord Board was formally incorporated in War

Department general orders and Army regulations.

(1) WD GO 41, 16 Aug 21. (2) AR 10-15, 25

Nov 21. See also Ray S. Cline, Washington Command Post: The Operations Division, UNITED

STATES ARMY IN WORLD WAR II (Washington: 1951), pp. 20-21.
40 THE ARMY AND ECONOMIC MOBILIZATION

the Procurement Division, OASW, was created to handle all the procurement and economic mobilization activities assigned by

statute to the Assistant Secretary. The

Procurement Division consisted of two

branches—a Current Procurement Branch

responsible for supervision of all peacetime

procurement operations of the War Department's several supply arms and services, and

a Planning Branch to handle all planning

activities. The Planning Branch became the

principal arm of the Assistant Secretary in

carrying out his mandate under the National

Defense Act.17

The Planning Branch began its life with

a nucleus of four officers whose initial assignment was "to start something to enable

the Assistant Secretary to carry out the provisions of Section 5a of the National Defense

Act."

 18

 During its twenty years of existence

it grew to a large organization and became

the focal point of the nation's peacetime

efforts to prepare for the effective harnessing of national resources in time of war. The

creation of the Army and Navy Munitions

Board (ANMB), the Army Industrial College (AIC), and the planning sections of the

supply arms and services, the formulation of

the basic pattern of procurement planning,

and the development of the Industrial Mobilization Plan (IMP) all resulted from the

efforts of the Planning Branch, OASW. In

time of war the Planning Branch was to be

merged with Current Procurement for the

execution of the manifold tasks of a wartime armament program. The life of the

Planning Branch came to an end on 14

February 1942 with its replacement by the

Resources Branch, Office of the Under

Secretary of War (OUSW).19 Less than

one month later the bulk of the Office of the

Under Secretary of War, including the

former Planning Branch, was absorbed by

the Army's newly created Army Service

Forces (ASF) under Lt. Gen. Brehon B.

Somervell.20

The Army and Navy Munitions Board

During the early 1920's, largely through

the efforts of OASW, two other organizations were created to assist in preparing the

nation for eventual economic mobilization.

These were the Army and Navy Munitions

Board and the Army Industrial College.

The establishment of ANMB recognized the

clear need for joint planning by the Army

and Navy, who would become the principal, as well as rival, claimants upon the

17

 The War Department's planning activities between World War I and II have been described in

considerable detail in the following monographs:

(1) Harold W. Thatcher, Planning for Industrial

Mobilization, 1920-1940 (QMC Historical Study,

August 1943); (2) Thomas M. Pitkin and Herbert

R. Rifkind, Procurement Planning in the Quartermaster Corps, 1920-1940 (QMC Historical

Study 1, March 1943); (3) Army Industrial College R56, Plans for Industrial Mobilization, 1920-

1939 (November 1945). This valuable study, prepared by Dr. Harry B. Yoshpe and filed in ICAF

Library, is reproduced as Exhibit 2675 in Truman

Committee, Hearings, 42:25985-26035. 18

 Gen Saltzman, AIC Lectures, 12: 1771⁄2.

19

 The Assistant Secretary of War had become the

Under Secretary of War on 16 December 1940. 20

 M. Mildred Mohler, Administrative Log of the

Production Division, Headquarters, ASF, and Its

Antecedent Agencies, 1939-1945 (1946), p. 22,

OCMH. Excellent summaries of the organization

and work of the Planning Branch during its heyday

are to be found in the AIC lectures by the successive

directors. For example, see: (1) Col Charles T.

Harris, Jr., The Planning Branch and Its Problems,

6 Dec 37, AIC Lectures, 14: 339; (2) Col Harry

K. Rutherford, The Planning Branch, OASW, 6 Jan

40, AIC Lectures, 16: 292.

The Army Service Forces was originally designated as the Services of Supply. On 12 March 1943,

by War Department General Order 14, the Services

of Supply was redesignated as the ASF. In the interest of simplicity the ASF designation is used

throughout the text of the current volume.
BACKGROUND OF INTERWAR PLANNING 41

economy in time of war. Although the National Defense Act of 1920 had given the

Assistant Secretary of War the responsibility

for nationwide economic mobilization planning, it soon became evident that effective

and authoritative planning would require

the active participation of the Navy. In

order to provide a balanced military program to meet an emergency, the armed

services would have to adopt co-ordinated

strategic plans and make them the basis of

joint plans for mobilizing the nation's

resources. Particularly important was the

determination of combined military requirements, the translation of military priorities

into industrial priorities, and the equitable

apportionment of industrial capacity between the Army and Navy. Other areas calling for co-ordination were the assignment

of procurement responsibility for common

items required by the two services, the compilation of raw material requirements, provision for obtaining and stockpiling strategic

materials, and broad issues of joint organization and operation to meet emergency

and wartime conditions.

The ANMB was originally established in

October 1922 at the suggestion of OASW

and consisted of the Assistant Secretaries of

the War and Navy Departments.21 The

work of the board was to be done by committees formed of officers on duty in the two

departments. Because of lack of interest on

the part of the Navy, as well as the absence

of co-ordinated strategic plans, the ANMB

made little headway during the 1920's and,

by the end of a decade, could show relatively

little in the way of accomplishment.22 The

apparent indifference of the Navy to industrial mobilization planning reflected a fundamental difference in the situation of the

two services. The Navy, as the nation's "first

line of defense," was to be kept in a state

of readiness in peacetime. This envisaged a

relatively smaller expansion of the Navy and

therefore a less difficult procurement problem upon the nation's entry into war.23

Nevertheless, by the end of 1929 a joint

strategic plan had been adopted by the two

services, and in 1931 the ANMB was reorganized to carry out its various missions

more effectively. At that time an Executive

Committee, consisting of two officers each

from the Army and Navy, was created to

guide the policies and activities of the organization, subject to the approval of the

two Assistant Secretaries.24

After its reorganization the prestige and

effectiveness of the ANMB steadily increased. It assumed sponsorship of the Industrial Mobilization Plan during the 1930's

and was designated therein to act as the

transitional agency to provide central mobilization control from the beginning of an

emergency until a civilian "superagency"

for this purpose could be developed. It

established lists of strategic and critical materials, made basic studies of raw material

21

 (1) WD GO 51, 7 Oct 22. (2) JB 346, Ser.

181, 27 Jun 22, and reference therein to prior proposal of ASW. 22

 Comdr Paul Hendren, USN, Navy Secy ANMB,

Organization and Functions of the Army and Navy

Munitions Board, 15 Jan 38, AIC Lectures, 14:7011⁄2.

23

 See: (1) Robert H. Connery, The Navy and

the Industrial Mobilization in World War II

(Princeton: Princeton University Press, 1951), pp.

44-45; (2) Col Rutherford, AIC Lectures,

16:2931⁄2; (3) Capt Ralph T. Hanson, USN, Inspector of Naval Material, The Navy Inspection

System, 11 Jan 38, AIC Lectures, 14:6141⁄2. 24

 In 1935 the Executive Committee was expanded to six members. The Army members were

the executive assistant to ASW; director of the

Planning Branch, OASW; and a representative of

the Supply Division (G-4) of the General Staff.

Members of the Executive Committee were usually

graduates of the Army Industrial College. See Col

Francis H. Miles, Jr., Comdt AIC, Orientation

Talk, 15 Sep 39, AIC Lectures, 16:51⁄2.
42 THE ARMY AND ECONOMIC MOBILIZATION

requirements in time of war, and eventually

succeeded in obtaining modest appropriations for importation and stockpiling. In the

field of procurement planning it conducted

surveys of major industrial establishments

and apportioned the productive capacity of

firms and industries sought by both the services.25

Although the Navy became increasingly

active in the ANMB during the late 1930's,

the major force behind the board throughout most of its existence was the Planning

Branch of the Office of the Assistant Secretary of War. With no full-time personnel

available for ANMB until the eve of World

War II, Army officers from the Planning

Branch doubled as the "Army half" of

ANMB, and the structure of ANMB as well

as of the Planning Branch was modeled

along the lines of the War Resources Administration proposed in the Industrial Mobilization Plan. Since the Assistant Secretary

of War had been made responsible for

nationwide industrial mobilization planning

without a corresponding grant of power to

compel the collaboration of other interested

agencies, it was necessary for him to rely

upon persuasion. The ANMB was his solution to the problem of achieving the joint

action of the Army and Navy essential to a

realistic and successful program.

In retrospect it would appear that the

National Defense Act of 1920 was seriously

deficient in assigning to the Assistant Secretary of War the planning responsibilities for

the entire nation, without commensurate

powers and without so much as mention of

the Navy and other important agencies. But

the sponsors of Section 5a had been convinced of two things: first, that a statutory

basis was indispensable to effective, longrange planning and the receipt of necessary

appropriations in peacetime; and second,

that any proposed legislation on this subject

would not stand a chance of passage unless

it was vaguely worded and innocuously presented. Section 5a had been quietly inserted

when the National Defense Act of 1916 was

up for revision by Congress two years after

the end of World War I.26 The following remarks indicate the slimness of the statutory

basis for industrial mobilization planning

and the necessity for close Army-Navy

co-operation:

. . . somebody has to make that na

plan and the Assistant Secretary of War is

the only man or agency that has a legal mandate to do it. But it is a logical conclusion that

no such plan would be acceptable to the

President and the Congress unless it were

acceptable to other Government departments, to industry and to labor; in other

words to the American people. Both the Army

and the Navy have come to realize this and,

in consequence, . . . they must make t

industrial mobilization plans in collaboration.27

On 5 July 1939 President Franklin D.

Roosevelt placed the ANMB directly under

the Executive Office of the President, giving

the Assistant Secretary of War direct access

to the Chief Executive at a time when the

incumbent Secretary was lukewarm toward

extensive rearmament. This action, together

with the Strategic War Materials Act of

1939 and other legislation, conferred upon

ANMB additional prestige and statutory

recognition which it had not formerly

25

 See: (1) Comdr Hendren, USN, AIC Lectures,

14:700; (2) Lt Col Charles Hines, Secy ANMB,

Organization and Functions of the Army and Navy

Munitions Board, 29 Mar 39, AIC Lectures, 15:

1057; (3) Comdr L. B. Scott, USN, Navy Secy

ANMB, The Army and Navy Munitions Board, 8

Jan 40, AIC Lectures, 16:328.

26

 Gen Salzman, AIC Lectures, 12:1761⁄2-771⁄2. 27

 Lt Col Francis H. Miles, Jr., Orientation Talk,

15 Sep 38, AIC Lectures, 15:4.
BACKGROUND OF INTERWAR PLANNING 43

possessed. With the arrival of the national

emergency and the adoption of the Munitions Program of 30 June 1940, the activities and importance of the ANMB were

greatly increased. Although it fulfilled

only in part the emergency and wartime

role cast for it under the Industrial Mobilization Plan, the ANMB made substantial

contributions to the rearmament program.

It launched and directed the original priorities system for World War II, apportioned

basic industrial capacity between the Army

and Navy, cleared foreign contracts for

munitions production in the United States,

had an important role in breaking the machine tools bottleneck, compiled military

requirements for numerous raw materials,

and performed a wide array of other services. At the peak of its activity it consisted

of a network of divisions, sections, and

committees, many of which were staffed

with full-time officers and civilian personnel. Shortly after Pearl Harbor the ANMB

was reconstituted under the leadership of

Ferdinand Eberstadt, who became its first

civilian chairman. But after the creation of

the Army Service Forces under General

Somervell and Eberstadt's appointment in

September 1942 as vice chairman of the War

Production Board, the importance of

ANMB declined and its duties for the remainder of the war were mainly of a routine

nature.28

The Army Industrial College

The Army Industrial College was established in 1924 under the direct supervision of the Assistant Secretary of War. Its

basic purpose was to provide instruction and

the opportunity for research in broad problems of procurement and industrial mobilization for officers in the armed forces who

would be called to important posts in a wartime procurement administration. As the

first institution of its kind anywhere in the

world, the Industrial College provided a

unique opportunity for full-time study and

investigation of the basic industrial, economic, political, administrative, and other

aspects of the total task of harnessing national resources in modern war. Beginning

with a small faculty of Army officers in the

Planning Branch, OASW, and a small student body composed solely of Army officers,

the Industrial College by the end of the

1930's had developed into a genuine interservice school where selected officers of the

Army, Navy, and Marine Corps were assigned for a full year's study. The curriculum of the college consisted of lectures, individual and group research, seminars, and

extensive problem assignments calling for

written solutions. The subject matter of the

courses exhibited a wide range and varied

from year to year. The principal fields forming a common nucleus throughout the prewar years were the history of industrial mobilization, principles of industrial organization and operation, basic economic concepts,

government and governmental controls,

military requirements, national resources,

major industries of the United States,

foreign economies and economic warfare,

and current and proposed measures in the

28

 (1) The history and accomplishments of ANMB

from its origin to the end of 1941 are concisely

summarized in the Eberstadt Report, accompanying

Ltr, Eberstadt to Hon. Robert P. Patterson, Under

Secy War, and Hon. James V. Forrestal, Under

Secy Navy, 26 Nov 41. A Photostatic copy of the report (34 pages) and its seven appendixes is on file

in OCMH. (2) For an account of the post-Pearl

Harbor attempts to revive ANMB, see Connery,

The Navy and the Industrial Mobilization, Chapter

VIII.
44 THE ARMY AND ECONOMIC MOBILIZATION

actual procurement and industrial mobilization plans of the armed forces.29

An important element in the instruction

was the large body of lectures given by outstanding leaders in military affairs, government, business, and such fields as labor, public relations, social psychology, and international relations. Military personnel currently engaged in every important aspect of

procurement and industrial mobilization

planning told successive classes of students

the detailed story of the War Department's

problems and planning activities. General

Staff officers responsible for strategic planning and the broad determination of military requirements furnished an insight into

the nature of military operations which

would have to be furthered by procurement.

The lectures by civilian leaders brought a

wealth of direct, comprehensive, and often

"inside" knowledge in the many fields which

constituted the broad framework within

which all industrial mobilization planning

would have to be made.30 Most of these lectures for the entire interwar period were reproduced and bound in permanent volumes,

thus providing successive classes of students

as well as other readers with a rich heritage

of information.

In addition to conducting its regular curriculum, the Industrial College advised and

collaborated with the ANMB and the Planning Branch, OASW, in the development of

the Industrial Mobilization Plan. The principal annexes to the 1939 edition of IMP

were said to have been based heavily upon

research and draft proposals prepared by

AIC faculty and students.31 Also, in 1938

the AIC undertook the preparation of textbooks in procurement and industrial mobilization for the education of Reserve officers

throughout the country under the Army extension courses distributed by The Adjutant

General. By 1941 impressive texts in procurement planning and industrial mobilization had been developed and reproduced for

distribution.32 These textbooks reflected

nearly two decades of experience and indicated the great amount of planning which

had been done by the War Department. Unfortunately, because of their late appearance

and the disruption of the extension program

with the outbreak of war in 1941, the texts

received relatively little use for their intended purpose.

By 30 June 1940, when large-scale rearmament was undertaken by the United

States, the Army Industrial College had

trained over eight hundred Regular officers

in the Army, Navy, and Marine Corps.

Most of the Army graduates were promptly

assigned to procurement responsibilities in

29

 Maj Joseph M. Scammell, History of the Industrial College of the Armed Forces (1946), Ch.

III, MS, ICAF Library. 30

 The following were among the nonmilitary

lecturers during the academic year 1938-39: John

M. Hancock (industrial mobilization), William S.

Knudsen (automotive industry), William S. Culbertson (foreign trade), Jan Masaryk (political

democracy), Mordecai Ezekiel (fiscal policy and

price controls), John P. Frey and William M. Leiserson (labor), Leo M. Cherne (wartime controls),

and Lothrop Stoddard (world affairs). Bernard

Baruch, head of the War Industries Board in World

War I, was a frequent lecturer throughout the

planning period.

31

 Comdr Scott, AIC Lectures, 16:331. 32

 (1) War Department Procurement Planning.

(2) Industrial Mobilization (Army Extension

Course, Special Text 20, 1941 ed.), copy in ICAF

Library. Shorter AEC texts on industrial mobilization planning had been developed as early as

1934 by the Planning Branch, OASW. See Industrial Mobilization (Army Extension Course, Special

Text 229, 1934 and 1936 eds.), copies in ICAF

Library. The AEC texts were used in training

Reserve officers for assignment to procurement

planning districts. See Maj Hugh C. Minton, Ex

Asst Pittsburgh Ord District, The Operation of a

Procurement District, 8 Jan 38, AIC Lectures,

14:553.
BACKGROUND OF INTERWAR PLANNING 45

OASW and the various supply arms and

services.33 Shortly after the beginning of

the emergency the training program was

stepped up to include Reserves as well as

Regulars, and by 30 June 1941 an additional 234 students had graduated. Two

weeks after Pearl Harbor the college was

closed down, ostensibly for the duration of

the war. Early in 1944 it was reactivated to

meet the heavy demand for training in contract termination and settlement procedures.

After V-J Day, it returned to peacetime

status and embarked upon an expanded

program of instruction and research, with

special emphasis on the economic mobilization experience of World War II.34

The Supply Arms and Services

The actual purchasing, storage, and distribution of supplies for the Army in peace

and war were conducted by the several procuring arms of the War Department. These

organizations had been created by statute

at various dates in the nation's history to

meet the changing and specialized needs of

the Army. Known as supply branches

throughout the 1920's, the procuring arms

were redesignated in 1931 as "supply arms

and services," a nomenclature retained until

after Pearl Harbor.35 On the eve of World

War II there were eight supply arms and

services: the Air Corps, Chemical Warfare

Service, Coast Artillery Corps, Corps of

Engineers, Medical Department, Ordnance

Department, Quartermaster Corps, and

Signal Corps. Each of these consisted of a

headquarters organization in Washington

and a wide array of field offices and other

establishments throughout the United

States. The chiefs of the supply arms and

services reported to the Chief of Staff in

military matters, which included the determination of military requirements, and to

the Assistant Secretary of War in procurement matters. The actual placing and administration of the Army's procurement

contracts for World War II was accomplished by contracting officers of the supply

arms and services, for the most part in field

establishments outside of Washington.

In carrying out his procurement responsibilities, the Assistant Secretary of War established broad policies to be executed by the

supply arms and services. Since these agencies would be the principal users of plans

for emergency procurement, the Assistant

Secretary relied heavily upon them for detailed planning. A procurement planning

section was established in May 1921 in each

of the supply arms and from these were

eventually issued the thousands of specific

procurement plans which guided the placement of contracts at the beginning of World

War II.

33

 By the end of 1939 there were 110 AIC graduates among procurement officers in the field for the

Army Ordnance Department alone. See Maj Gen

Charles M. Wesson, CofOrd, Ordnance Department

Procurement, 15 Jan 40, AIC Lectures, 16:338a. 34

 In 1946 the college was redesignated as The

Industrial College of the Armed Forces. Two years

later, in keeping with the reorganization of the

National Military Establishment, the college was

reconstituted as a joint educational institution operating under the direction of the Joint Chiefs of Staff

and was formally accorded status "on the highest

level of the educational field in the National Military Establishment." Pamphlet, The Industrial College of the Armed Forces, 1924-1949 (TwentyFifth Anniversary, 25 February 1949), pp. 18, 21,

ICAF Library.

35

 For a brief period (9 April 1942 to 15 May

1943) the procuring arms were known simply as

supply services. Thereafter they were known as

technical services. The short term "supply arms"

will be understood hereinafter to refer to the longer

"supply arms and services."
46 THE ARMY AND ECONOMIC MOBILIZATION

Basic Conception of the Planning

Responsibility

The planning responsibility of the Assistant Secretary of War under the National

Defense Act of 1920 embraced two closely

interrelated planning missions. These soon

came to be distinguished as (1) procurement planning, and (2) industrial mobilization planning. Procurement planning was

focused upon arrangements for the purchase

and production of specific munitions required by the Army in time of war. Industrial mobilization planning was concerned

with broad governmental policies designed

to facilitate the transition of the economy

from peace to war and to support the entire

war production effort. No hard and fast line

of demarcation could be drawn between the

two classes of activity. In general, they coincided or overlapped in areas where special

action would be needed to prevent shortages

of resources from interfering with the

prompt execution of procurement contracts.

For a number of reasons procurement

planning was given priority of attention in

the first decade of the planning period. First

of all it was evident that the initial step in

getting industry launched on an emergency

rearmament program would be the rapid

placement of procurement contracts. This

could not be done without a solid foundation of procurement planning. Moreover,

the Army's procurement planning activities

were concerned predominantly with measures for supplying its own needs and could

be undertaken immediately without the

need for consultation or collaboration with

other agencies. Industrial mobilization

planning, on the other hand, extended to the

needs of the entire economy. While the

Assistant Secretary of War had the basic

authority to carry out his procurement responsibilities, his statutory responsibility for

industrial mobilization planning was not accompanied by any specific grant of power.

Hence, in this area he would have to rely in

large measure upon the more time-consuming processes of persuasion and exhortation.

Finally, it became apparent that realistic

industrial mobilization planning could not

proceed very far in the absence of welldeveloped procurement plans. The primary

occasion for broad industrial or economic

mobilization would be the impact of largescale procurement in time of emergency.

The major economic problems which would

arise and the methods for dealing with them

would depend primarily upon the character

and magnitude of military requirements

and the manner in which procurement contracts would be placed and administered.

The supporting mobilization of raw materials, labor, power, fuel, transportation, and

other resources, as well as the associated

development of economic controls, would

be a derivative function whose difficulties

would be minimized if procurement planning was done thoroughly and well. For all

these reasons, and especially since War Department requirements would represent the

bulk of a national war production program,

the Planning Branch devoted its initial

efforts to the fundamental task of procurement planning. As a result, War Department procurement planning was well

developed by the late 1920's, whereas industrial mobilization planning on a significant scale did not begin until 1930.36

36

 It should be noted that by the mid-1930's the

term "industrial mobilization" was seen to be inadequately descriptive of the total process of harnessing the nation's resources in time of emergency

or war. This process would involve the broad direction of the entire economy (for example, controls

over prices, profits, exports, imports, and the like)

rather than merely the industrial sector thereof. In
BACKGROUND OF INTERWAR PLANNING 47

1938 the director of the Planning Branch, OASW,

proposed the name Economic Mobilization Plan in

lieu of Industrial Mobilization Plan. But the term

"industrial mobilization" had become so firmly established in the written, as well as oral, usage of the

military, the press, and the public that its retention

was considered desirable. See: (1) War Department Procurement Planning, par. 87; (2) Thatcher,

Planning for Industrial Mobilization, 1920-1940,

p. 58. Since World War II "economic mobilization"

has become widely accepted and the old terminology

has practically disappeared.
CHAPTER III

War Department Procurement Planning

The Preparation of Specific Procurement

Plans

In their procurement planning activities

throughout the 1920's and 1930's, the successive Assistant Secretaries attempted as

thorough a program as available funds and

personnel would allow. Early in the program the procurement planning function

was seen to possess two major objectives:

(1) the development of specific and detailed plans for the procurement of all

important items for which the War Department had procurement responsibility; (2)

the formulation of general policies, procedures, and organizational plans for the effective conduct of a wartime procurement

program. The specific procurement plans

were developed by the several supply arms

of the Army within the framework of the

general procurement policies laid down by

the Planning Branch. These in turn were

meshed with the broad plans for nationwide

industrial mobilization. All plans were, so

far as possible, kept up to date and responsive to current estimates of military requirements based on the latest staff plans for

troop mobilization. Finally, it was taken for

granted that the actual procurement of

munitions in time of war, as in peacetime,

would be accomplished by the established

military procuring agencies.

The task of devising realistic plans for

producing vast quantities of specific munitions was conceived as requiring a "cradleto-the-grave" type of planning which

would—for all important items—anticipate

and prepare for every step in the procurement process. Because of statutory limitations on the allowable number of planning

personnel and in order to reduce to manageable proportions the burden of procurement planning upon industry as well as the

government, the War Department confined

its detailed planning activities to items

known to present the most difficult procurement problems. In the mid-1930's the

supply arms were instructed to classify all

their procurement requirements into three

groups:

Section I—Those items which present difficult procurement problems and require intensive formal plans.

Section II—Those items which present only

minor procurement problems within the

branch, and for which only informal planning

is necessary.

Section III—Those items which present no

procurement problems, and for which no

plans are necessary.1

1

 OASW Planning Br Cir 2, the basic directive for

procurement planning. The first edition of Circular

2, issued on 20 July 1933, did not contain this

classification. The 10 June 1938 edition refers to

the three groups as "classes," but the term "section" was used throughout most of the planning

period (undoubtedly to prevent confusion with the

four official "classes" of Army supply as defined

by Army Regulations). See also: (1) War Department Procurement Planning, par. 138; (2)

Pitkin and Rifkind, Procurement Planning in
WAR DEPARTMENT PROCUREMENT PLANNING 49

For all Section I items formal, detailed plans

had to be prepared by the supply arms,

written abstracts filed with OASW, and

plans kept current. Specific plans were required for Section II items, but only the

dates of their completion were to be transmitted to OASW. No specific plans were required for Section III items, which consisted

mainly of commercial-type items considered

to be readily available.

The total number of potential items of

procurement, for which the War Department was responsible, was enormous. In

World War I the Army's "shopping list"

had contained some 700,000 different items;

this large number included not only militarytype end items but specialized parts and

components, as well as regular commercial

items.2 At the end of 1940 the Signal Corps

Supply Catalog alone listed some 50,000

items;3 at this time, however, only 7,400

items for the War Department as a whole

were recognized for procurement planning

purposes. These 7,400 items, which with

their major components made up Sections

I, II, and II, represented important items

of supply to be issued to troops, and the General Staff required them to be kept under

surveillance for procurement planning

purposes. The most important group, Section I, contained some 1,200 items, 578 of

which pertained to Ordnance.4 Many Section I items, especially for Ordnance and

Chemical Warfare Service, consisted of complex components and subassemblies to be

separately procured and assembled into a

single end item. The following figures indicate the relationship of Section I to the total

procurement planning list at the end of

1937:

 5

The completion of formal procurement

plans was the culmination of a lengthy process consisting of many separate steps, varying in number with the type of item

concerned.6 The principal stages in the development of procurement plans were:

1. determination of the types of end items

required in an emergency;

QMC, p. 62; (3) Quartermaster Corps Procurement Planning Guide, 1935 (hereafter this Guide

and others prepared under the direction of The

Quartermaster General are cited as QMC Planning

Guide, followed by the edition date), I, 2. A complete listing and classification of all Quartermaster

items from 1932 to 1939 may be found in the

several editions (1932, 1935, 1939) of the QMC

Planning Guide. Volume I of the 1939 edition is an

excellent source of information on procurement

planning procedures. All editions filed in ICAF

Library. 2

 War Department Procurement Planning, par.

136.

3

 AIC Short Course 1, January-April 1941, Problem 13, p. A3-2, ICAF Library.

4

 (1) Lt Col Edward E. MacMorland, Organization and Duties of the Planning Branch, 14 Sep 40,

AIC Lectures, 17:211. (2) AIC Short Course 1,

January-April 1941, Problem 13, p. 10. 5

 Lt Col Oscar J. Gatchell, Chf Procurement Plans

Div OASW, Procurement Planning, 29 Jan 38,

AIC Lectures, 14:763. 6

 In 1938 the Ordnance Department listed thirtythree steps in the entire cycle from item development through approval of a formal procurement

plan. A number of these steps in turn comprised

several subordinate parts, and it was said that "the

whole cycle requires years for its completion." Lt

Col Edward E. MacMorland, Chf Procurement

Plans Div, Planning Br OASW, Procurement Planning, 10 Dec 38, AIC Lectures, 15: 590.
50 THE ARMY AND ECONOMIC MOBILIZATION

2. computation of quantitative requirements by time periods beginning with M

Day;

3. apportionment of the total procurement load for each item among the various

manufacturing and procurement districts

throughout the United States;

4. selection and allocation of specific

manufacturing facilities for their productive

tasks;

5. preparation of these facilities for their

wartime responsibilities;

6. consolidation, approval, and revision

of plans.

The following pages provide a brief summary of the nature of each of these stages

and an indication of War Department

achievements thereunder during the two

decades of the interwar period.

Determination of Required Types

The determination of the types and specifications of military equipment and supplies

was a complex process involving the joint

action of many arms and agencies of the

War Department. In general, specific military supplies and items of equipment had

their genesis in a statement of desired military characteristics, followed by a successful

development program, the official adoption

and "standardization" of each item, and the

preparation of accurate, detailed specifications for manufacture. The using arms (Infantry, Coast Artillery Corps, Field Artillery, Armored Force, Air Corps, and others)

normally originated requests for development on the basis of desired performance

characteristics. It was then up to the appropriate supply arm (Quartermaster, Ordnance, Chemical Warfare, and the like) to

undertake the necessary development

through the point of engineering tests.7

The original authorization of development programs, as well as eventual approval

of items as "standard," was made by the

General Staff; final specifications for manufacture required the approval of the Assistant Secretary of War. In view of the mutually determining and all-pervasive interrelationships of military tactics, strategy,

research, development, and industrial mass

production, it was obviously essential for all

these factors to be considered more or less

simultaneously. Hence, the entire process of

conception, development, standardization,

and eventual procurement of munitions was

a joint affair escaping precise definition in

terms of organizational and jurisdictional

boundaries. The General Staff was the principal supervisory agency in the determination of types, but liaison committees between

the using and supply arms provided the bulk

of day-to-day co-ordination of activities.

The role of OASW was to insure that final

specifications would be available in time and

be of such nature as to permit the rapid

placement of contracts and the utilization of

mass-production techniques.

Inasmuch as the advance preparation of

adequate specifications was crucial to industrial preparedness, responsibility for this

work was placed in a separate division—the

Standards Division, Planning Branch,

OASW. The Standards Division was a

policy-making, supervisory, and reviewing

7

 Several of the supply arms were also using arms.

For example, the combat engineers, a part of the

Corps of Engineers, were the recipients of equipment which the corps had procured; Ordnance personnel used trucks procured by Ordnance; Signal

Corps personnel erected communications facilities

with matériel procured by the corps. See the various

volumes on the technical services in the series

UNITED STATES ARMY IN WORLD WAR II.
WAR DEPARTMENT PROCUREMENT PLANNING 51

organization. It was charged with the clearance of item-types for procurement feasibility, clearance of individual specifications

submitted by the supply arm, and co-ordination of War Department activities on standardization and specifications with other

federal agencies and with national engineering and technical societies. In its review of

individual specifications, the division paid

particular attention to the possibility of

simplifying production processes, maximizing the use of regular commercial specifications, reducing or eliminating the use of

strategic materials, and minimizing the

need for specification changes after the

commencement of actual production.8

The achievement of complete preparedness in the field of specifications was an ideal

impossible of fulfillment. The using and

supply arms inevitably tended to delay submission of final specifications as long as improvements in design were possible;

preparation of individual specifications was

a costly process requiring highly qualified

personnel, and appropriations for this purpose were perennially inadequate; moreover, until large-scale production was

actually undertaken, plans at the level of

the drafting table were necessarily subject

to change. In order to deal with this fluid

situation, OASW required monthly progress

reports from all supply services on the status

of their specifications and brought pressure

to bear to insure the existence of at least

minimum specifications, subject to later revision, of all adopted types. Although the

Army's specifications were reportedly only

about 75-percent complete toward the end

of the planning period, this represented a

major improvement over conditions on the

eve of World War I.9

Computation of Requirements

The determination of types of equipment

and supplies, as described above, represented the qualitative aspect of Army matériel requirements. Equally essential for War

Department procurement planning was the

determination of the quantitative requirements, by time periods, of the various items

of munitions whose actual procurement

would be undertaken beginning with M

Day, the day on which a general mobilization would be announced. A knowledge of

quantitative requirements was prerequisite

to the determination of the planned procurement load to be placed upon industry,

the apportionment of this load among the

several procurement districts, and the

advance selection and allocation of specific

firms which would undertake actual production in time of war. Furthermore, the

various activities involved in the larger area

of nationwide industrial mobilization—the

provision of adequate supplies of raw materials, power, fuel, transportation, and the like,

and the establishment of systems of program control, priorities, and allocation of

8

 (1) Lt Col John Mather, Functions of the

Standards Division, Planning Branch, OASW, 17

Feb 36, AIC Lectures, 12:386. (2) Col John

Mather, Chf Standards Div, Planning Br OASW,

Standards Division, 16 Feb 38, AIC Lectures,

14:795. (3) Lt Col William C. Young, Chf

Standards Div OASW, The Functions and Duties

of the Standards Division, 8 Dec 38, AIC Lectures,

15:496. (4) OASW, Notes on Industrial Mobilization, No. 3, 15 Jan 24, Changes in Specification

During Production. (5) Ibid., No. 13 (Revised),

October 1930, Procurement Planning, Pt. II, Specifications, and reference therein to AR 850-25.

Notes on Industrial Mobilization, Nos. 1 through

13, including No. 13 (Revised), have been bound

together and are on file at ICAF Library.

9

 (1) Louis Johnson, ASW, A Battle-Axe to

Bottlenecks, 1 Dec 38, AIC Lectures, 15:392-93.

(2) Col Young, chart "Status of Specifications,

October 1, 1938," AIC Lectures, 15:505.
52 THE ARMY AND ECONOMIC MOBILIZATION

production among the military, industrial,

and civilian-consumption sectors of the economy—all depended for their planning and

execution upon a knowledge of military

requirements.

In view of its implications for the basic

character and strength of the Army, the

determination of total supply requirements

was the responsibility of the General Staff.

The actual computation of requirements

was done by the several supply arms and

services, under broad Staff directives.10

Procurement requirements, on the other

hand, were determined under the supervision of the Assistant Secretary of War and

were defined as supply requirements minus

stocks or reserves on hand; for procurement

planning purposes they were time phased to

meet the planned expansion of the Army

after M Day.11 Intimately related to the

phasing of requirements in time was the

question of relative priority of the various

component portions of the supply program.

Such "military" priorities within the Army

were determined by the General Staff; as

between the Army and Navy they were

determined by the Joint Army and Navy

Board, commonly called the Joint Board,

and were translated into industrial priorities

by the ANMB.12

The role of the Assistant Secretary of

War with respect to requirements was one

of broad supervision and co-ordination to

insure "procurability." In this connection

two major difficulties of requirements determination, which became the subject of

much controversy after the beginning of

large-scale procurement for World War II,

were clearly recognized during the planning

period between the two world wars. These

issues were (1) the problem of obtaining

reasonable stability or firmness in wartime

requirements estimates, and (2) the task of

appraising and resolving "feasibility"

limitations upon stated requirements.13

Long before World War II, planning personnel in OASW were aware of the unsettling effects upon procurement of frequent changes in programed requirements.

By the end of the planning period it had

become established doctrine in OASW to

attempt to hold changes in requirements to a

desirable minimum while recognizing that

there was no simple or permanent solution

to the problem. On the one hand, OASW

was to take measures to reduce frequent

changes in requirements:

Changes imposed by unforeseen developments in strategy, tactics, technique, organization, Theaters of Operation, or of designs,

requirements, and specifications, play havoc

with orderly procurement and are to be

avoided. The properly placed representatives

of the Assistant Secretary of War can inform

and influence the General Staff on these

matters, and, if more forceful measures become necessary, appeal can be made to the

Secretary of War.

10

 The general methods used by the Army in

determining requirements are elaborated below in

Part Three. 11

 See Fig. 23, "War Department Mobilization

Requirements," and Figs. 22-A and 22-B, in War

Department Procurement Planning. 12

 The Joint Board was composed of the Army

Chief of Staff and the Chief of Naval Operations

and their principal assistants for strategic planning.

The Joint Board was created in 1903 and in most

of its functions was supplanted by the Joint Chiefs

of Staff early in 1942. Mark Skinner Watson, Chief

of Staff: Prewar Plans and Preparations, UNITED

STATES ARMY IN WORLD WAR II (Washington: 1950), p. 79.

13

 The term "feasibility," as applied to requirement programs in World War II, generally referred

to limitations of nationwide productive capacity

upon total requirement programs or major sectors

thereof, rather than the effects of specific bottlenecks upon particular items or minor segments of

the total program.
WAR DEPARTMENT PROCUREMENT PLANNING 53

Continuous changes in requirements preclude the establishment of a definite and orderly procurement program. Furthermore,

once industry has been committed to a production program any major change therein

is sure to cause serious difficulties and delays

in the receipt, by the combat forces, of necessary supplies and equipment.14

On the other hand, in view of the desirability and inevitability of many changes, an

important objective of procurement planning was to prepare organizations and personnel to absorb essential changes with a

minimum of dislocation:

Requirements are dynamic at best, and

properly so. Desirable changes must be made

from time to time as impelled by new designs,

new weapons, foreign developments, the probable location and nature of the war. . . .

many unforeseen situations will arise which

will require the modification of prepared plans

to meet actualities. The anticipation of a

coming need for modification and the ready

solution of the problem presented at the

proper time will make the greatest demand

on those responsible for procurement. . . .

The best preparation appears to be a thorough knowledge of past procurement efforts

in war to insure that past mistakes will not be

repeated and a complete understanding of

the industrial and economic organization of

the United States so that maximum advantage

may be taken of existing facilities and national

resources.15

The problem of broad feasibility limitations upon the total procurement effort was

encountered in procurement planning as

early as 1928. At this time a revised General

Mobilization Plan, based on the ability to

assemble manpower, was announced by the

General Staff. The plan proposed to mobilize three field armies, or about 1,600,000

men, within the first sixty days and one field

army every thirty days thereafter until

mobilization objectives were attained.16 It

called for a procurement objective considered impossible of attainment by the

supply arms, and a successor plan in 1933

reduced the planned rate of mobilization to

1,000,000 men in the first sixty days.17

Subsequent studies indicated that even this

rate of mobilization would place insuperable

demands upon available manufacturing

capacity. Anticipated shortages of Quartermaster equipment were so great that it was

proposed, as late as 1936, to require Army

enrollees in the event of a general mobilization to bring articles of clothing and equipment with them from their homes:

One is compelled to the conclusion . . 

that the mobilization regulations should be

more mandatory in requiring enrollees to

bring with them articles of clothing and equipment from their homes. . . . And they s

be recompensed if required to use their own

equipment, which is not provided in the existing Mobilization Regulations.18

The comments of the ANMB on the 1933

mobilization plan are also revealing:

The Army Mobilization Plan of 1933 was

apparently worked out with little or no reference to the possibility of equipping the troops

mobilized and trained under it. The result was

that when the supply possibilities were investigated, it was found that a war reserve costing

more than two billion dollars would be necessary to provide the needed equipment before

14

 War Department Procurement Planning, par. 140.

15 Ibid.

16

 Pitkin and Rifkind, Procurement Planning in

QMC, p. 22. Mobilization objectives varied with

the kind of war effort envisaged. The General

Mobilization Plan of 1926 contemplated as many

as 6 to 6.5 million men. The maximum defensive

effort envisaged by the 1933 plan required 4 million

men. Col Gatchell, AIC Lectures, 14:757. 17

 Pitkin and Rifkind, Procurement Planning in

QMC, p. 22, citing Maj Douglas C. Cordiner, Requirements and Statistics, 2 Jan 34, AIC Lectures,

10:45. 18

 Memo, Chf War Procurement Br OQMG, 23

Nov 36, quoted in Pitkin and Rifkind, Procurement

Planning in QMC, p. 23.
54 THE ARMY AND ECONOMIC MOBILIZATION

new production, under the most favorable circumstances, could meet the requirements. . . .

When the above facts came to light, the 1933

Mobilization Plan was withdrawn.19

The basic difficulty of the 1933 General

Mobilization Plan and its predecessors, from

the standpoint of supply, was that they imposed the heaviest procurement loads in the

earliest months of the mobilization period

before industry could adequately convert to

production of munitions. In order to eliminate the resulting gaps between time-phased

requirements and feasible production schedules, the General Staff developed the concept of "protective mobilization" to replace

the earlier "general mobilization" planning.

The Protective Mobilization Plan (PMP)

was announced in a directive by the Chief of

Staff on 16 December 1936 and by 1939

had become well developed.20 The various

versions of PMP contemplated immediate

mobilization of a small and well-equipped

defensive force (essentially the existing Regular Army and National Guard), with rates

of augmentation lower than those contemplated under the earlier general mobilization

plans. Broad estimates of supply requirements under PMP became available in the

spring of 1939, at which time OASW ordered procurement planning throughout the

War Department to be stepped up from the

earlier three-year cycle to a one-year basis,

with the intention of completing essential

procurement plans by 30 June 1940.21

Thereafter, matériel requirements were

based on successive revisions of the PMP

and were greatly augmented by the decision

to undertake large-scale rearmament in the

summer of 1940.22

Apportionment of the Procurement Load

The translation of mobilization requirements into specific procurement plans required the geographical "apportionment" of

the anticipated wartime load. For purposes

of peacetime planning, as well as to provide

the necessary decentralization of procurement in time of war, the War Department

had divided the United States into a number

of procurement districts. The number and

boundaries of these districts varied from one

supply arm to another; in general, they

were determined by the supply arms, subject

to approval by the Assistant Secretary of

War, in accordance with the procurement

characteristics of each supply arm and the

geographical distribution of manufacturing

facilities. Many of the districts were inactive,

except for planning purposes, until the

launching of the huge rearmament program

in 1940.23

19

 Annual Report of the Executive Committee of

the Army and Navy Munitions Board, 1 Nov 37. 20

 (1) Maj Robert W. Hasbrouck, GSC, The Protective Mobilization Plan, 2 Jan 40, AIC Lectures,

16:269. (2) Col MacMorland, AIC Lectures, 15:

5861⁄2. (3) For an excellent description of the

Protective Mobilization Plan as it stood at the beginning of 1939, see Col John H. Hester, GSC, The

Protective Mobilization Plan, 16 Jan 39, AIC Lectures, 15:764, with charts, tables, maps, and

diagrams.

21

 Pitkin and Rifkind, Procurement Planning in

QMC, p. 24. 22

 See below, Part Three. 23

 The districting problem was much more complicated than indicated above. Originally the

OASW thought it necessary to establish War

Department procurement districts to provide supervision over the districts of the several supply arms.

Hence, from 1923 to 1933 there were fourteen War

Department districts roughly coinciding with those

of the Ordnance Department. On 9 March 1933

these were reduced to four broad War Department

procurement zones. The zone system was discontinued on 8 November 1938, leaving only the districts of the individual supply arms. Thereafter

control over activities in the field was left to the

chiefs of the several supply arms, subject to general
WAR DEPARTMENT PROCUREMENT PLANNING 55

It was the duty of each procurement district to seek out and survey industrial capacity for the manufacture of items for which

the cognizant supply arm was responsible.

Reports of preliminary surveys, showing the

productive capacity for each item in each

district, were transmitted to the Washington

headquarters of the respective arms. These

reports formed the basis of a tentative apportionment, among the several districts, of the

total procurement load called for by existing estimates of requirements. In developing

these apportionment plans the supply arms

were instructed to distribute the load

throughout the United States in such a

manner as to prevent the overloading of

particular areas, to assure the availability of

raw materials, power, fuel, and other contributory resources, to reduce the need for

new construction, transportation, and migration of labor, and to prevent other undesirable consequences of large-scale procurement. Also, strategic considerations

called for the wide dispersion of the load

in order to minimize enemy interference

with production through sabotage, air attack, or actual capture of territory.24

After the tentative apportionment of the

load, each district conducted a detailed survey of the plant and equipment of individual

firms to determine the specific facilities

necessary for and capable of producing the

district load. Reports of available capacity

were transmitted to service headquarters

for consolidation and adjustment of the

apportionment until the load was best suited

to military and industrial needs. Because of

the magnitude and complexity of the task,

as well as continual changes in the underlying conditions, apportionments frequently

had to be modified.25

Allocation of Industrial Facilities

A central ingredient of procurement

planning during the interwar period was the

selection and "allocation" of existing manufacturing establishments for the production

of specific items of procurement in time of

war. The allocation system was designed to

earmark and prepare specific plants for particular tasks so that a minimum of time

would be lost in getting emergency production under way. In addition to saving time,

the careful advance selection of qualified

facilities would lead to greater output, lower

prices, improved quality of production, and

a more even distribution of the procurement

load. All these objectives had been seriously

impaired during World War I as a result of

ruinous interservice competition for particular facilities and frantic placement of

contracts without adequate consideration of

the many factors involved.26

An allocation was formally defined as the

assignment, to a particular procuring arm

or agency, of productive capacity in a facilpolicies of OASW. For further information, see Pitkin and Rifkind, Procurement Planning in QMC,

pp. 43-58. 24

 War Department Procurement Planning, par.

146.

25

 Ibid. For additional information and insight

into the nature of the apportionment, consult: (1)

Lt Col Ray M. Hare, Chf Facilities Div OASW,

The Allocation of Industrial Capacity for Emergency Procurement, 3 Oct 40, AIC Lectures, 17:

355; (2) QMC Planning Guide, 1935, I, 1-33;

(3) Ibid., 1939, I, 1-34; (4) OASW, Notes on

Industrial Mobilization, No. 13 (Revised), October

1930, Procurement Planning, Pt. IV, Apportionment. 26

 (1) Maj Ritchie, AIC Lectures, 14: 809. (2)

AIC R56, Plans for Industrial Mobilization, 1920-

1939, Allocation of Facilities, pp. 22-26. (3)

OASW Planning Br Cir 1, 1939, sub: Allocation

of Industrial Facilities. (4) War Department Procurement Planning, The Allocation System, pars.

158ff.
56 THE ARMY AND ECONOMIC MOBILIZATION

ity for purposes of procurement planning

and emergency procurement. The assigning

authority was either the Planning Branch,

OASW, or (in the case of possible Navy

interest in a facility) the Army and Navy

Munitions Board. Both allocation and the

subsequent assignment of tentative schedules of production were made with the

agreement and cooperation of the firms involved. Request for allocation originated

with the procurement districts after apportionment of the procurement load. Each

district of each arm would decide, on the

basis of available data from plant surveys,

which of the facilities within the district

were to be selected for the production of

each item. Possible conflicts among the different supply arms in the same area were

ironed out by the several district chiefs, with

appeal to the Planning Branch, OASW.

Allocation requests were sent by the districts

to the Planning Branch, via the chief of the

supply arm. In the absence of conflict these

were typically granted, and the supply arm

receiving the allocation had first call on the

facilities in question.27

Early in the development of the allocation

system it was found that two or more supply

arms often had an interest in the same establishment and that joint allocations were

necessary. Increasing experience with the

system indicated that unconditional allocations, of either the joint or single-service

variety, were too inflexible and wasteful of

capacity in the case of many large, complex

establishments capable of producing a wide

variety of components and military end

products. In order to achieve the desired results, the planners designated many of these

large multi-purpose plants as "reserved facilities." Reserved facilities were of two

classes: ANMB facilities, in which both the

Army and Navy had an interest; and OASW

facilities, which were to serve two or more

supply arms of the Army. All reserved facilities were allocated by the appropriate

authority on the basis of "capacity credits,"

which meant that a certain percentage of

total plant capacity would be allocated to

each of several procuring agencies. This arrangement permitted greater utilization of

capacity in the face of rapidly changing requirements and would make possible central

co-ordination of wartime production involving common bottlenecks and other interrelated production problems. Many facilities

in the steel, aeronautical, machine tool,

medical, and radio industries were classified

as reserved facilities.28

An important feature of the allocation system was the measurement and recording of

the total planned production load to be

placed in time of war upon individual facilities as well as upon industry as a whole.

During the early stages of the program the

measurement of load was based on a firm's

"normal" capacity, assuming a single-shift,

eight-hour day. In 1936 the system was converted to a basis of wartime "potential" capacity.29

 Under this method a firm's potential capacity was rated at 250 points, or

21⁄2 times normal peacetime capacity of 100

points.30 Each supply arm was required to

27

 Allocation conferred the right to contact and

survey a facility and to place schedules of production within the capacity credit authorized. Other

procuring arms could make surveys and place schedules if they received the permission of the arm possessing the allocation. War Department Procurement Planning, par. 187.

28

 Maj Ritchie, AIC Lectures, 14:809, and pp.

8, 12, 16, 20-23 therein. 29

 See Pitkin and Rifkind, Procurement Planning

in QMC, pp. 71-72. 30

 It was assumed that under wartime conditions

most plants would be operating on a three-shift

basis of eight hours per shift. The first two shifts

were each rated at 100 points of capacity, the third

shift at 50 points.
WAR DEPARTMENT PROCUREMENT PLANNING 57

report the planned procurement load, under

currently estimated requirements, to be

placed upon each of its allocated facilities.

Load reports were made by item as well as

by plant. This meant that a plant with several departments each capable of producing

a separate item was rated as having a potential capacity of 250 points for each item,

as well as 250 points for the plant as a whole.

For example, a particular plant might have

three departments—automotive, aircraft

engine, and drop-forging—representing respectively 50, 25, and 25 percent of total

plant capacity. If half the drop-forging department were slated for conversion to

armor-plate production for Ordnance, this

would indicate an item load of 125 points

and a plant load of 31 points. If at the same

time three fourths of the aircraft engine department were scheduled for the production

of engines for the Air Corps, this would account for an item load of 187 points and a

plant load of 47 points. The combined plant

loads for the two allocations would be 78

points, leaving 172 of the total 250 points

for civilian needs or additional military requirements.31

The measurement and recording of the

planned procurement load served several

purposes. First of all it was used to prevent

overloading individual facilities. From the

beginning of the program it was established

policy, except in special circumstances, to

confine plant loads to 200 points, leaving a

reserve of 50 points or 50 percent of normal

capacity. This policy was designed to leave

productive capacity for civilian and industrial needs in time of war, to maintain an

emergency reserve from which additional

military requirements might be met, and to

minimize conversion and reconversion problems faced by individual firms. At the same

time it would force a spreading of the load

to other plants, broadening the total procurement base and affording a more equitable distribution of war contracts. In

addition to indicating the plant-by-plant distribution of the load, recording load figures

by broad procurement zones made it possible to spot geographical overloads and to

take measures to improve the geographical

distribution. Finally, excessive load factors

for particular items suggested the extent to

which new construction and plant expansion would have to be undertaken to

supplement the existing structure of American industry.32

In general, allocations were confined to

Section I items, that is, those which required

formal procurement plans because of anticipated procurement difficulties resulting

from their novelty, complexity, and other

reasons. They were also made for items for

which combined Army and Navy requirements exceeded 50 percent of an industry's

normal capacity or which contained substantial amounts of strategic or critical materials. On the other hand, a number of

industry and product groups were not normally subject to allocation. The former included "nonindustrial" enterprises, such as

31

 For practical purposes loads were rated at the

nearest multiple of 5 points; thus the above figures

of 78 and 172 points would be recorded as 80 and

170. Plant capacity and load were measured in

terms most appropriate to each firm. Among the

different criteria were machine tools, labor, floor

space, organization, man-hours, physical output,

and value added by manufacture. War Department

Procurement Planning, pars. 150, 153.

32

 Load records by item, plant, and geographical

area were maintained by the Allocation Division of

the Planning Branch, OASW. They were periodically published in the form of the Directory of Load

by the Allocations Division and later by the ANMB,

The Directory of Load was often referred to as the

"watchdog" or "policeman" and served a valuable

purpose in promoting a balanced distribution of the

planned procurement load. See AIC R56, Plans for

Industrial Mobilization, 1920-1939, p. 25.
58 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 12—NUMBER OF MANUFACTURING FACILITIES ALLOCATED OR RESERVED

SUMMARY FOR SPECIFIED YEARS, 1923-1941

a

 Not available.

Source: 1941 data: ANMB, Geographical Directory of Industrial Facilities, 15 Jan 42. 1923-38 data: AIC Lectures, 14-829, Ex. "D".

transportation, public utilities, warehouses,

research laboratories, jobbers, distributors,

and similar groups. Among the product

groups eventually listed as not subject to

allocation were food, fuel, furniture, and

basic raw materials. Government facilities

and industrial facilities outside the continental limits of the United States were not allocated.33

From its inception in 1922 until its discontinuance in 1942, the allocated-facilities

program was kept flexible to permit desirable changes in specific allocations as well

as in general policies and procedures. At the

beginning of the program the various supply

arms and services rushed to stake out claims

for facilities and the total number of allocations grew rapidly, rising from nearly 5,500

in 1923 to over 20,000 in 1926. (Table 12)

More facilities were allocated than could

be surveyed and utilized, and individual

services frequently received an allocation of

a giant corporation with all its plants and

subsidiaries operating in many different

states. Shortly thereafter efforts were made

to reduce the number of allocations to the

minimum consistent with safe planning.

Single-service allocations were confined to

plants and divisions operating directly under

a main office, and many large plants and

firms were given reserved-facility status.

Likewise, the geographical distribution of

the national load, which had been badly

33

 OASW Planning Br Cir 1, 1939, Sec. III, p. 2,

and Sec. IV, pp. 1-2.
WAR DEPARTMENT PROCUREMENT PLANNING 59

TABLE 13—DISTRIBUTION OF ALLOCATIONS AND PLANNED PROCUREMENT LOAD: BY ARMY

SUPPLY ARMS AND SERVICES, 1 JANUARY 1938

Source: AIC Lectures, 14-835, Ex. "F".

skewed under the initial allocations, was

substantially improved.34 Greater latitude

was allowed the services, especially in the

case of Quartermaster Corps (QMC), to

utilize small firms.35

The progress of the allocated-facilities

program throughout most of the planning

period may be inferred from allocation statistics. (See Table 12.) The Navy was late

in coming into the program and its interests

were confined mainly to large plants, especially those in the ANMB reserved-facilities

category. The Quartermaster Corps accounted for by far the greater number of

Army allocations, although the Ordnance

Department claimed the largest dollar value

of allocated productive capacity. This is

borne out by a comparison of the number

and dollar value of allocations, and of the

average load per allocation, for each of the

Army's supply arms. (Table 13) Despite

efforts to distribute the procurement load

widely throughout the United States, the

geographical distribution of allocations as

late as 1938 still exhibited heavy concentrations in the northeastern part of the United

States. (Table 14)

The more than ten thousand plants kept

under allocation throughout most of the

planning period represented the bulk, as

well as "the cream," of American productive capacity. Planning personnel were well

aware that a prolonged war effort would

require the participation of many tens of

34

 Procuring services initially tended to request

allocations from plants which had supplied them in

World War I, resulting in an undesirable concentration of the load. Maj Ritchie, AIC Lectures,

14:809, p. 7 therein. 35

 Many small firms which had been allocated in

1923 had gone out of business by the time they

could be surveyed. Hence, in 1925 OASW ruled

that allocations should be limited to firms capitalized at $100,000 or more, that is, firms receiving

an "A" rating in Thomas' Register of American

Manufacturers (New York: Thomas Publishing

Company). This was reduced to $50,000 in 1934

and exceptions were made even to this figure. (1)

Pitkin and Rifkind, Procurement Planning in QMC,

pp. 65-68. (2) Maj Ritchie, AIC Lectures, 14:809,

p. 9 therein.
60 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 14—GEOGRAPHICAL DISTRIBUTION OF PLANNED PROCUREMENT LOAD, DATA AS OF

18 FEBRUARY 1938

[Percentage Distribution of Allocations and Load by Supply Arms and Zones]

a

 Zone I—All New England, N. Y., N. J., Del., eastern Pa., eastern Md. b

 Zone II—Western Pa. and western Md., W. Va., Ohio, Ky., Ind., Mich., Ill., Wis., Minn., Iowa, Mo., N. & S. Dak., Nebr., Kans., Colo. c

 Zone III—Va., N. C., S. C., Ga., Fla., Ala., Miss., Tenn., Ark., La., Tex., Okla., N. Mex. d

 Zone IV—Ariz., Nev., Utah, Wyo., Mont., Idaho. Wash., Oreg., Calif. e

 Not available.

Source: Adapted from AIC Lectures, 14:834, Ex. "E".

thousands of smaller firms. But they also

knew that in time of sudden emergency it

would be a sheer physical impossibility to

place and administer direct procurement

contracts with each of the quarter of a million firms comprising all of American industry. In the view of the Planning Branch

the most effective role which most small

plants could fill under emergency conditions

would be as subcontractors and suppliers

of vital materials, parts, and components to

firms operating under prime contracts with

the government. Many small plants in wartime would continue to supply the same

firms with which they maintained subcontracting and vendor relationships in peacetime. But all plants would be faced with

readjustments of varying severity in the

event of all-out war.

Although the allocation plans developed

in peacetime were of necessity specific, they

were not intended to be used without modification in time of emergency. In view of the

many inevitable changes in requirements,

technology, and commitments of the allocated facilities themselves—to mention only

a few factors—it was understood that the

plans would rarely be utilized in the form in
WAR DEPARTMENT PROCUREMENT PLANNING 61

which they stood at any particular time.

Moreover, as it became evident in the late

stages of the planning period that a prolonged period of limited emergency would

precede actual war, even the extent to which

the principle of allocation itself would be

invoked remained an open question:

The extent to which allocations are to be

applied will depend upon the nature of the

emergency and other circumstances which

cannot now be determined. . . . During the

period of strained relations information

would undoubtedly be available upon which

reasonable decisions could be made as to

what items should be placed in allocation and

what facilities should tool up for their production. Let us remember that the system is

flexible—not fixed—moving—not static—

responsive to changing conditions. If it is not

kept up-to-date and fully in accord with the

times it will lose of course much of its value.36

Preparation of Facilities

for War Production

The preparation of individual facilities

for their wartime responsibilities was attempted in various ways, the most common

being the development and adoption of an

"accepted schedule of production." After

the receipt of a specific allocation, procurement planning districts conducted a detailed

survey of the firm's plant, equipment, management, labor force, peacetime production

characteristics, and other relevant factors.

In co-operation with management, the district executive and his staff prepared a

proposed emergency production schedule indicating the monthly deliveries, up to twenty-four months after the initiation of production, of each item of procurement for which

the firm's capacity would be utilized. Acceptance of this schedule did not commit

either the firm or the government to a specific contract but indicated the firm's willingness and ability in an emergency to produce the desired items in the quantities and

time period specified.37

The amount of planning which went into

the preparation of each accepted schedule of

production varied with the complexity of

the item, the willingness of the firm to make

the necessary production studies, the availability of qualified district planning personnel, and other factors. A number of important items, especially of ordnance matériel, were the subject of intensive study and

pilot production at government arsenals.

Since they would be able to supply only a

small fraction of wartime requirements, the

arsenals prepared specific manufacturing

plans to be turned over to private firms at

the time of large-scale procurement. Manufacturing plans prepared by Ordnance were

of two classes: (1) Descriptions of Manufacture, containing a detailed description of

the process of manufacture; and (2) Preliminary Manufacturing Data, providing

lists of operations, a bill of material, and a

summary of machine tool requirements.

The information in Preliminary Manufacturing Data was used primarily to permit

more accurate surveys of plant capacity and

the determination of the suitability of particular plants for producing specific items.

The more complete Descriptions of Manufacture enabled firms to prepare specific

production studies applicable to their own

plants. Thus, the Description of Manufacture prepared in 1938 by the Frankford

Arsenal for turning out the 3-inch antiair36

 Maj Ritchie, AIC Lectures, 14:8241⁄2-25.

37

 OASW Form 102, copy reproduced in War Department Procurement Planning as Figure 32. In

view of the lack of appropriations, uncertainty as to

eventual wartime requirements, and many other

considerations, any attempt to place binding contracts long in advance of an emergency would have

been pointless as well as without legal sanction.
62 THE ARMY AND ECONOMIC MOBILIZATION

craft shell by the "upsetter" method contained the following: (1) general data on

the arsenal's shop practice and experience;

(2) general drawings of the product and its

component parts; (3) shop layout; (4) list

of machines required; (5) list of operations,

showing tools, number of operators, rate of

output, and required jigs, fixtures, and

gages; (6) drawings of tools, jigs, fixtures,

and gages; (7) bill of material per shell and

per 100,000 shells; (8) inspection procedures for contractor and government.38

 By

30 June 1939 the Ordnance Department

had prepared some 260 manufacturing

plans, consisting of Descriptions of Manufacture for 122 items and Preliminary Manufacturing Data for 139 items.39

An essential step in preparing allocated

facilities to meet their accepted schedules

was the development of production studies

showing in detail the manner in which firms

proposed to adapt their organization and

equipment to meet the specified objectives.

Production studies drew heavily from manufacturing plans, supplied by the arsenals

when such plans were available, but were

potentially more detailed and their scope

broader. Unfortunately, very few firms in

peacetime had the personnel, the funds, or

sufficient interest in planning for wartime

production to make adequate studies and

prepare the necessary detailed plans. Accordingly, production studies ranged from

detailed factory plans to "mere lists of requirements."

 40

 Nevertheless, a number of

firms prepared at their own expenses remarkably detailed factory plans showing

the entire manufacturing process, including

planned sources of supply for materials,

parts, components, tools, power, labor, and

other needs. Still, it was considered by some

observers that the general lack of adequate

production studies even as late as 1939 posed

a substantial threat to the realism of accepted schedules of production and, hence,

to the ability of the Army to supply its troops

in time of emergency.41 This condition was

partly alleviated early in 1939 with the passage by Congress of a statute permitting the

War Department to purchase, out of its regular appropriations, production studies from

private firms. For the fiscal year ending 30

June 1940, the War Department had

entered into contracts with ninety facilities

to supply production studies for ninety-seven

items at a cost of some $498,000.42

Whatever the status of production studies

and accepted schedules of production, it

was recognized by Army procurement planning personnel that these were essentially

paper plans. Although planning of this kind

was indispensable to the education and

preparation of American industry for rapid

conversion to war production, the heart of

the conversion process would be the actual

task of tooling up and eliminating the many

thousands of production "bugs" certain to

appear in the transition from paper plans

to actual mass production. For many years

38

 Col MacMorland, AIC Lectures, 15:591. At

this time emergency requirements for the 3-inch

antiaircraft shell were estimated at 648,000 per

month. 39

 Annual Report of the Chief of Ordnance, 1938.

For the general background and evolution of manufacturing plans, see the annual reports of the Chief

of Ordnance from 1931 through 1938. All filed in

OHF.

40

 Col MacMorland, AIC Lectures, 15: 591. It

was estimated that certain production studies for

aircraft firms would cost from $15,000 to $20,000,

a considerable outlay during the 1930's. 41

 AIC R56, Plans for Industrial Mobilization,

1920-1939, pp. 28-29. 42

 (1) Annual Report of the Secretary of War to

the President, 1940 (Washington: Government

Printing Office, 1940), p. 6. (2) Chapter 88, Public

Law 44, 26 Apr 39, 76th Cong., 1st Sess.
WAR DEPARTMENT PROCUREMENT PLANNING 63

TABLE 15—FIRST EDUCATIONAL ORDERS PROGRAM, FISCAL YEAR 1939

Source: ICAF, RP No. 28, VI-A, Jan 47, p. 15.

the various Assistant Secretaries of War had

sought to reduce the time involved in this

transition by requesting appropriations and

authority to place small-scale "educational

orders" for selected items with qualified

firms to enable them to resolve their toolingup problems well in advance of a national

crisis. But the War Department's requests

were regularly turned down, partly through

apathy, partly for reasons of economy, and

partly because of vocal opposition by pacifist groups who objected to any kind of

preparation for war.

Proposals for educational orders antedated World War I. The Naval Consulting

Board, in connection with nationwide surveys in 1916 and early 1917, recommended

educational orders as a measure of industrial preparedness, but Congress failed to

provide the necessary funds. The delays in

getting production under way after America's entry into the war were notorious. By

the end of the decade following World War

I most of the experience and know-how in

the field of munitions production, painfully

accumulated by the time of the armistice,

had become dissipated. In December 1927

an educational orders bill was introduced in

the House of Representatives. When it came

to a vote fifteen months later, it was overwhelmingly defeated. Similar bills introduced in 1929, 1931, and 1933 suffered the

same fate. Finally, with the growing threat

of war in Europe, Congress passed the first

Educational Orders Act, approved 16 June

1938.43 This act authorized the expenditure

of $2,000,000 in each of the five fiscal years

beginning with 1939. All educational orders

under the act were to be placed with firms

deemed by the Secretary of War to be competent to manufacture the particular item

in time of war. The selection of items and

firms was to be made by the Secretary solely

on the basis of the best interests of the

United States and the promotion of national

defense.

To obtain the maximum benefits from

available funds the War Department appointed a board of officers to appraise requirements, select items for orders, and recommend specific objectives to be achieved.

Out of fifty-six critical items proposed by the

supply arms, the board selected six for inclusion in the first year's program. (Table 15)

43

 (1) 52 Stat. 707. (2) Industrial College of the

Armed Forces R85, Plant Surveys and Educational

Orders (January 1947), pp. 1-3, ICAF Library.
64 THE ARMY AND ECONOMIC MOBILIZATION

The review of the Army's requirements of

critical items in connection with the first

educational orders program revealed that at

least 50 additional items were so difficult of

manufacture as to warrant educational orders with some 250 plants. Accordingly,

after the Munich crisis and the dismemberment of Czechoslovakia, Acting Secretary

of War Louis A. Johnson recommended the

appropriation of an additional $32,500,000

for this purpose. The President supported

this recommendation and Congress authorized funds substantially as requested, permitting an acceleration of the program so

that the bulk of the funds would be available by fiscal year 1941.44

The trend of world events and America's

adoption of a huge rearmament program in

the summer of 1940 relegated the educational orders program into the background.

By 1941 many of the educational orders had

been translated into quantity production orders under the rearmament program; others

had been completed; and still others were

lost in the administrative maze of the multibillion-dollar contract-placement activities

shortly before and after Pearl Harbor. But

despite its late beginning the program provided nearly three hundred key firms with

actual experience in tooling up for war production. Although educational orders were

confined to facilities previously or newly allocated, they were placed after competitive

bidding with those firms deemed to be most

qualified. Contractors were requested to review the designs for each item, recommend

appropriate changes in order to facilitate

quantity production, obtain the necessary

machine tools, devise jigs, dies, fixtures, and

other manufacturing aids, and for all manufacturing aids to prepare complete sets of

drawings to be made available to the government for subsequent distribution to other

contractors. Production methods were to be

actually tested, but only enough items were

to be manufactured to assure acceptability

of the methods adopted. Title to all tools,

equipment, and other manufacturing aids

obtained under the contract was to be vested

in the government. Personnel and matériel

requirements, as well as unit costs under

quantity production and other data, were

to be estimated and reported. The educational orders program was invaluable not

only in training industry but in educating

and preparing Army procurement personnel at many levels in the task which they

were soon to face on a large scale.45

The final and most effective means of

preparing industry for war production was,

of course, the placement of actual quantity

production orders. But opportunities in this

direction, until the end of the 1930's, were

negligible. Of the slim appropriations available for current procurement throughout the

planning period, the predominant share

necessarily had to go to government arsenals

in order to help keep alive the art of munitions making. The remainder, chiefly expended through contracts placed by competitive bidding, could not be directed to

allocated facilities and, in any case, could

not serve the purpose of educating large

numbers of firms. In the fall of 1938 the influx of foreign orders and the gradual stepping up of current procurement provided

44

 (1) 53 Stat. 560, 3 Apr 39. (2) H. Doc. 105,

76th Cong., 1st Sess., 12 Jan 39.

45

 For further information on the educational orders program, see: (1) Col. Harry K. Rutherford,

"Educational Orders," Army Ordnance, XX (November-December 1939), 2-6; (2) AIC R56, Plans

for Industrial Mobilization, 1920-1939, pp. 28-37,

and references cited therein; (3) ICAF R85, Plant

Surveys and Educational Orders; (4) Annual reports of the Assistant Secretary of War, 1938-41, in

annual reports of the Secretary of War to the President.
WAR DEPARTMENT PROCUREMENT PLANNING 65

solid education and training for many firms.

But it was only after the replacement of the

era of planning by the gigantic rearmament

program of 1940 that industry on a wide

scale received the actual experience in munitions production which was to bring the

nation to a relatively high degree of industrial preparedness by the time of Pearl

Harbor.46

Consolidation, Approval, and

Revision of Plans

The final stage in preparing formal procurement plans was the consolidation of all

accepted schedules of production and other

relevant information into a master plan for

each Section I item of procurement. This

was done by the planning office in the headquarters of each supply arm for all items

for which it was responsible. The master

plans varied in scope and detail in accordance with the importance and complexity

of the item under consideration, the magnitude of requirements, and the stage of development reached by interwar planning activities as a whole. An indication of the

contents of formal plans in the early 1930's

appears in this digest of minimum information required by OASW:

 47

1. Statement showing status of specifications, with War Department index number for each specification.

2. Statement of basis for computation

of requirements in sufficient detail to permit

checking of branch computations,

3. Table of monthly requirements for

the number of months prescribed in the

current general mobilization plan.

4. Table of apportionment of the load

to procurement districts.

5. Table of accepted schedules of production for all facilities in each district.

6. Statement of estimated time lag between initial production and delivery to

troops.

7. Statement of additional facilities required, and whether from new construction

or conversion of existing facilities.

8. Branch plans for inspection and acceptance of item, including plan for procurement of inspection gages.

9. Estimated unit cost of finished item

and table of total monthly cost of procurement program for the number of months

prescribed.

10. Charts indicating the following:

a. Cumulative requirements curve;

b. Cumulative expected production

and delivery curve;

c. Stock on hand;

d. Stock authorized.

11. Statement of following:

a. Weight of article;

b. Number of articles per container

or package;

c. Weight, size, and cubical content

of standard loaded container;

d. Number and weight of loaded

containers per standard railroad box car.

12. Summary of problems associated

with procurement of the item, and steps to

be taken to increase production in case of

indicated deficits.

46

 See below, pages 132-33. 47

 (1) Check List-Specific Procurement Plans for

Finished Articles, in OASW, Notes on Industrial

Mobilization, No. 13 (Revised), October 1930, Procurement Planning, pp. 21-23. (2) For comparison

of planning details required at various dates in the

prewar planning period, see the excellent presentation in QMC Planning Guide, 1932; Ibid., 1935,

Vol. I; Ibid., 1939, Vol. I. See also various editions

of OASW Planning Br Cir 2 (for example, editions of 9 Nov 34, 20 Oct 36, 10 Jun 38).
66 THE ARMY AND ECONOMIC MOBILIZATION

Special consideration in the consolidated

plans was given to the question of contributory items essential to production of the

item in question. These included not only

machine tools, gages, and other special

equipment but important raw and semifinished materials, components, fuel, power,

and labor. Although accepted schedules of

production were necessarily based on the

assumption that contributory items would

be made available to military contractors in

time of national shortage, the availability of

such items was not left to chance. Contributory requirements as indicated in individual

procurement plans were consolidated into

Army-wide estimates by personnel in the

Commodities Division or other appropriate

office of the Planning Branch, and these

estimates were used in the larger program

of nationwide industrial mobilization

planning.48

All procurement plans for Section I

items had to be approved by OASW and

were revised at least once every three years

until 1939, when the procurement planning

cycle was speeded up and placed on an annual basis. For approval purposes the supply

arms were required to file with the Planning

Branch, OASW, abstracts of each plan containing the minimum information for formal

plans as listed above. By 1934 Ordnance

Department procurement planning had

yielded substantial fruit in the form of completed plans submitted for OASW approval.

In that year Ordnance submitted plans for

fuzes, small arms ammunition, cannon,

artillery carriages, artillery cartridge cases,

armor plate, recoil mechanisms, loading

plants, cannon forgings, artillery projectile

forgings, small arms, bombs, adapter boosters, and high explosives.49

 In 1936, in order

to simplify administration, Ordnance

divided its formal procurement plans into

nine major groups: small arms and equipment, small arms ammunition, cannon,

artillery carriages and equipment, fire control, automotive, inspection gages, artillery

ammunition components, and loading.50 By

mid-1937 some 739 plans for major items

within the above categories had been completed and were on file with OASW.51

 During the same period the Quartermaster

Corps listed some 370 Section I items for

which formal plans were kept on file with

OASW and periodically revised.52

On the basis of the information received,

the Planning Branch, OASW, was able to

raise significant questions regarding the status of specifications, the realism of accepted

schedules of production, the degree of balance achieved by each of the supply arms in

developing its programs, and the adequacy

of proposed steps for removing anticipated

deficits as revealed by the plans. Collectively, the plans gave the Assistant Secretary

a summary picture of the status of procurement planning for the War Department as

a whole and furnished a valuable check

upon General Staff plans for troop

mobilization.

48

 See below, Chapter IV.

49

 Memo, Capt David N. Hauseman, OCofOrd,

for Dir Planning Br OASW, 15 Oct 35, sub: Plans

Submitted, 00 381/13955. 50

 Memo, Lt Col Charles A. Walker, Jr., OCofOrd, for Dir Planning Br OASW, 14 Nov 36, sub:

Program on Procurement Plans, Planning Br OASW

400.12/208.15. 51

 Memo, Capt Hauseman, OCofOrd, for Dir

Planning Br OASW, 16 Aug 37, sub: Program for

Procurement Planning, Planning Br OASW 400.12/

208.15. For a sample of Ordnance prewar planning, see the bound copy of the study, Procurement

Plan for Fire Control Instruments Under the War

Department Mobilization Plan, 1933, approved 4

November 1936, ICAF Library. 52

 QMC Planning Guide, 1935, I, Sec. I, 1-12.
WAR DEPARTMENT PROCUREMENT PLANNING 67

The specific procurement plans developed

by the Army during the interwar period

proved to be invaluable when the crisis arrived in 1940 and the United States was

suddenly compelled to launch a rearmament

program of unprecedented size. On this occasion, in contrast to the confusion of World

War I, the Army knew what it wanted to

buy and where to obtain it. With this knowledge it was able to place contracts and get

production rolling in a minimum of time.

Without such knowledge and planning, the

inevitable confusion attending large-scale

industrial mobilization would have been

magnified manyfold. These comments by a

spokesman for the machine tool industry

are representative of the testimony of those

who were close to procurement operations

at the beginning of World War II:

The army and navy knew what they wanted

when the present emergency began. That, in

the opinion of expert military men, is the

outstanding difference between 1917 and

today. The thousands of plants surveyed are

now starting to make the products allocated

to them under the plan. From the list of

20,000 plants have come many of the 30,000

manufacturers with direct defense contracts.

Precious time has been saved . . . . Altogether, the efforts quietly exerted by the army

and navy during the years when war seemed

remote have paid dividends.53

General Planning for Wartime

Procurement

The preparation of specific plans for the

procurement of individual items of munitions, as just described, represented the core

of War Department procurement planning.

At the same time it was necessary for planning personnel to anticipate and provide for

a wide array of general problems which

would inevitably arise under the changed

conditions of wartime procurement. These

problems included the need for removing

numerous legislative and administrative

barriers to efficient, large-scale procurement; obtaining many positive powers

previously nonexistent; developing new contract forms, terms, and procedures which

would effectively deal with difficult issues in

wartime pricing and other contractual

matters; reaching decisions as to when, how,

and to what extent to replace competitive

bidding with direct contract negotiation;

planning for the heavy expansion and

adaptation of organizations and personnel

to meet new responsibilities; and devising

procedures for the control and supervision

of procurement in order to assure timely

deliveries, balance among programs, and

responsiveness of procurement to changing

requirements. Although many of these issues

ramified into the larger area of nationwide

industrial mobilization planning, they arose

primarily out of procurement, that is, the

basic task of contract placement and administration. Limitations of time and space

do not permit an extensive review of these

planning efforts. The following paragraphs

contain only a brief summary of problems

and developments in two major areas of

general procurement planning—legislation

and contractual instruments.

Legislation

Few persons outside the specialized field

of federal procurement law can appreciate

the number, variety, and consequences of

laws and regulations which have accumulated over the years to complicate the peacetime tasks of government procurement

personnel. On the eve of World War II

53

 Burnham Finney (Editor, American Machinist), Arsenal of Democracy (New York: Whittlesey

House, 1941), pp. 23-24.
68 THE ARMY AND ECONOMIC MOBILIZATION

War Department procurement procedures

bore little resemblance to the direct, efficient,

and relatively simple purchasing practices

of private enterprise. Like barnacles on an

ocean-going vessel, a superfetation of statutes, court decisions, administrative regulations, decisions of the Comptroller General,

opinions of the Attorney General, and rulings of the Judge Advocate General had

developed to slow down or prohibit the

Army's effective purchase and procurement

of the material which it would need in time

of war.

Many of the basic statutes responsible for

this condition were designed to protect the

public purse; others were designed to favor

special interests at the expense of the public

purse; still others represented legislation enacted to meet specific problems which had

long since disappeared. In any case, whatever the purposes or merits of the laws and

regulations in question, they posed an impossible barrier to winning a war which

depended upon prompt and efficient military procurement. During World War I

many of these barriers to streamlined procurement had been relaxed, but only after

costly delays; by the mid-1930's they were

back approximately to their status in 1917.54

Moreover, in the period since World War

I, Congress had enacted a whole new crop

of special-purpose statutes further complicating government procurement. For example, under the terms of the Buy-American

Act of 1933, purchases had to be made at

higher prices and for slower deliveries from

domestic firms in preference to procurement

from foreign sources. In the case of strategic

materials, a special provision of the BuyAmerican Act gave domestic producers up

to a year to develop and produce—without

giving bond for delivery—the needed materials in preference to spot purchases from

foreign suppliers.55 These conditions in the

face of a totally inadequate domestic supply

made impossible the development of an adequate stockpile of desperately needed strategic materials before America's entry into

World War II.

Laws designed to protect or improve the

status of labor also interfered with efficient

procurement. The Copeland Anti-Kickback Act of 1934, the Bacon-Davis Act of

1935 pertaining to construction contracts,

and the Walsh-Healey Act of 1936 concerning the letting of public contracts all imposed time-consuming procedural and enforcement requirements upon the procuring

agencies and their contractors which could

not be tolerated in time of war.56 Severally

or individually these acts complicated the

entire process of contract placement and

administration—from the solicitation, obtaining, and evaluation of competitive bids

through the award of contracts, the supervision of work done, and the final settlement

of contracts. In time of peace many firms

preferred to forego all government business

rather than segregate their work forces,

54

 Maj Clarence C. Fenn, Legal Div Planning Br

OASW, sub: Legal Division, 12 Dec 38, AIC Lectures, 15:5951⁄2-606.

55

 See below, page 603. 56

 For example, the Anti-Kickback Act was passed

for the eminently desirable purpose of preventing

the sale of jobs under government construction contracts. But it was hardly recognizable after receiving

administrative treatment at the hands of the numerous departments, offices, and agencies involved.

Government contractors on construction projects

were debarred from making any payroll deductions

whatsoever, including hospitalization, group insurance, and payments for services rendered. Then the

Attorney General, by a reinterpretation of the term

"public works," extended the provisions of the act

to all contracts for the procurement of supplies involving governmental partial payments. The Department of Labor disagreed and the Army was in

the middle. Cited from Gen Wesson, AIC Lectures,

16:386.
WAR DEPARTMENT PROCUREMENT PLANNING 69

establish separate bookkeeping arrangements, and submit to other "red tape" required in order to participate in government

contracts. In time of war, however, the output of these firms would be desperately

needed regardless of their predilections, and

the urgency of the war effort would not permit the continuation of the time-consuming

procedures.57

Procedural requirements were not the

only objectional features of these laws. Some

of their substantive provisions were clearly

undesirable in time of war or large-scale

procurement. For example, the WalshHealey Act prohibited the employment, by

government suppliers, of female labor under

eighteen years of age. In the highly rural

and seasonal food-canning industry, which

was of vital importance to Army Quartermaster procurement, a significant portion of

the regular labor supply consisted of ablebodied girls of sixteen and seventeen. Their

employment in regular commercial production was permitted by the Fair Labor

Standards Act, but unless the Walsh-Healey

prohibition was relaxed they would not be

available to government suppliers even in

time of war when drastic manpower shortages would make their services indispensable. Many other industries would be similarly affected.58

Numerous other statutes and regulations,

both federal and state, stood between the

Army and efficient wartime procurement.

Revised Statute 3648 prohibited advance

payments to government contractors, but in

time of war hundreds of millions of dollars

in such payments would be needed to enable

contractors to convert quickly to war production. The eight-hour law of 19 June

1912 carried an outright prohibition of the

employment of mechanics and laborers,

under government contracts or subcontracts, in excess of eight hours per day. This

would clearly play havoc with emergency

production. Even more devastating was the

series of laws and regulations requiring formal advertising and the placement of government contracts with low bidders. In time

of emergency the procuring agencies would

need the power to negotiate contracts directly and to pay prices which would cover

the costs of each producer. Federal laws and

regulations governing the assignment of

claims, the amendment of contracts, accountability for government property, patent rights and royalties, the delegation of

powers, and countless other features of both

governmental and private economic activity

would have to be relaxed, modified, or

otherwise adapted to wartime conditions. A

galaxy of state laws and regulations which

had a direct or indirect bearing upon military procurement would also have to be

dealt with. These included sales and income

tax laws and laws governing employment,

the transfer of real estate, the licensing and

weight limits of trucks, the transportation

of explosives, the price and distribution of

milk, and so on ad infinitum.

The task of keeping the entire wartime

legislative picture under surveillance fell to

the Legal Division of the Planning Branch,

OASW. This task went beyond the development of a program for the removal of

existing legislative and administrative barriers to procurement. It included the preparation of drafts of new legislation, designed

to confer positive new powers upon the procuring agencies and the central mobilization

control agencies to be established under the

57

 For an elaboration of provisions and administrative requirements of the above-mentioned laws,

see Harry B. Yoshpe, Labor Problems in Quartermaster Procurement, 1939-1944 (QMC Historical

Study 11, April 1945). 58

 Ibid., especially p. 26, n. 51.
70 THE ARMY AND ECONOMIC MOBILIZATION

Industrial Mobilization Plan. Among these

were the powers in the industrial field

matching those of selective service in the

field of manpower—requisitioning supplies,

commandeering industrial plants, and

adopting priorities and price controls.

Some of the results of the legislative planning activities of the War Department during the interwar period appeared in the

legislative appendix to the Industrial Mobilization Plan; others were introduced and

debated in Congress during this period; still

others were kept within the files of the War

Department to be presented upon the arrival of an emergency. A substantial portion

of the program consisted of plans to negotiate the desired changes with federal department heads and others who possessed

the statutory power to waive legal requirements in time of war. The fruits of these

activities were to be seen in the crisis of

1940, when Congress promptly conferred

the extensive new powers requested by the

procuring agencies, along with freedom

from many existing statutory barriers to

rapid procurement. Shortly after Pearl

Harbor all remaining statutory barriers to

full-scale war production were swept away.59

Contractual Instruments

A second major area of general procurement planning involved the development of

suitable contractual instruments for the efficient conduct of large-scale procurement.

Experience in World War I indicated many

opportunities for improvement in this area.

First of all, in 1917 each of the six existing

supply branches had devised or adapted its

own contracts, with the result that War Department contracts had been let on some

four hundred different forms. The multiplicity of forms and terms had led to confusion

and difficulties of administration, variations

in policy between the different procuring

agencies, and uncertainties of interpretation

by the Attorney General and the courts. Secondly, the use of fixed-price contracts had

been hampered by the lack of provision for

price escalation or variation to meet unpredictable changes in the costs of materials and

labor. This had resulted in the extensive use

of the inefficient cost-plus-a-percentage-ofcost (CPPC) type of contract. A third major

difficulty was the absence of termination

clauses in contracts, giving rise to numerous

legal and other difficulties in the settlement

of contracts when mass terminations took

place after the armistice. Finally, the widespread signing of contracts by deputies of

regular contracting officers, followed by a

ruling of the Comptroller of the Treasury

that contracts so signed were nonenforceable

against the United States, resulted in great

confusion. Of some twenty-seven thousand

War Department contracts in existence at

the time of the armistice, four thousand were

said to have been "proxy signed." A special

act of Congress was required to permit payment of the contractors.60

In 1922 a permanent War Contract

Board was appointed within the War Department to make a continuous study of all

phases of contracting and to devise suitable

terms and forms. The board was composed

of officers in the Planning Branch, OASW,

and the several supply arms and services and

59

 For additional material on prewar legislative

planning, see: (1) Maj Clarence C. Fenn, Legal

Division-Planning Branch, 21 Feb 38, AIC Lectures, 14:848; (2) Maj Fenn, AIC Lectures, 15:

594; (3) Gen Wesson, AIC Lectures, 16:381, especially pp. 385ff.; (4) Lt Col Robert H. Young,

Patents in Relation to Procurement of Munitions

and Matériel, 20 Nov 37, AIC Lectures, 14:278.

60

 OASW Planning Br Rpt, General Procurement

Planning Conference, 1-2 December 1938, Incl 5,

p. 41, ICAF Library.
WAR DEPARTMENT PROCUREMENT PLANNING 71

was assisted by a special committee from the

office of the Judge Advocate General. By the

end of 1938 many of the contractual problems of the kind experienced in World War

I had been resolved by the adoption of suitable measures. Four basic contract forms

had been designed to meet most contractual

situations;

 61

 termination clauses had been

developed; the "proxy-signing" difficulty

overcome; and a number of the problems

which would be encountered in the administration of price-adjustment clauses had

been revealed.62

A brief view of the nature and purposes of

the several contract forms developed during

the planning period affords a basis for comparison with those which were actually used

in World War II. The War Department

planned to use fixed-price contracts to the

largest practicable extent, for the reason

that this would place responsibility squarely

on the contractor for holding costs to a minimum. It was recognized that contractors

would exert a greater effort to keep costs low

when their own money was at stake; also,

the use of fixed-price contracts would keep

administrative costs to a minimum, making

unnecessary the employment of an army of

government auditors at contractors' plants

throughout the nation.

Nevertheless, the planners knew that the

use of some kind of cost-reimbursing contract would be essential for novel and complex projects or items which could not be

fairly priced in advance of contract performance. Two forms were developed to fill

this need: the "evaluated-fee" contract for

construction projects and the "adjustedcompensation" contract for the production

of supply items such as planes, tanks, motors,

and ammunition. The evaluated-fee contract was similar to the cost-plus-a-fixed-fee

(CPFF) construction contract of World

War II, except that the fee was variable, depending on the quality of the contractor's

actual performance. The maximum fee was

a percentage of estimated cost almost identical with the scale adopted for World War

II; the minimum fee was about 60 percent

of the maximum. (See Table 27, page 284.)

Within this range the actual fee would be

determined, upon completion of the project,

by the chief of the technical service concerned. The planners anticipated that most

large construction projects would be covered by the evaluated-fee contract:

The fixed price Contract for Construction

will be used in contracting for small projects

when the scope of the work is known, specifications prepared, and where there is small

possibility of substantial changes in the cost

of labor or material; and where under

ordinary peace-time conditions bids would be

invited. For the larger construction projects

the use of the Evaluated Fee Construction

Contract is contemplated.63

The adjusted-compensation contract was

designed for projects of the type covered by

the big Ordnance and Air Forces CPFF contracts of World War II. Under this form the

contractor's basic fee was to be set at 6 percent of his investment with the added incentive of sharing in the savings or losses

when actual costs were less than, or in excess

of, the advance estimates. The contractor's

investment was considered to include both

fixed and working capital allocated to the 61

 These were (1) contract for supplies (fixedprice); (2) contract for construction (fixed-price);

(3) evaluated-fee construction contract, with subcontract form; (4) adjusted-compensation contract. 62

 OASW Planning Br Rpt, General Procurement

Planning Conference, 1-2 December 1938, Incl 5.

63

 Capt Charles E. Cheever, JAGD, Planning Br

OASW, Emergency Legislation—War-time Contracts, 11 Jan 36, AIC Lectures, 12:337.
72 THE ARMY AND ECONOMIC MOBILIZATION

contract over the life of the contract. The

proposed incentive addition to, or subtraction from, the contractor's basic fee was

equal to 25 percent of the savings or losses,

as indicated above, subject to a maximum

addition of 100 percent of the basic fee, or a

maximum subtraction equal to 50 percent

of the fee. If the contractor completed his

contract ahead of schedule, the effective rate

of return on his investment would automatically increase, since his facilities could

then be used for further contracts.

These forms and the rationale behind

their use were well developed by 1935. The

basic philosophy behind the adjusted-compensation contract, and the Army's prewar

pricing policy in general, was that the contractor's reward should bear a definite relation to his property investment. Spokesmen for the planners defended this view

against critics who felt that the contract

lacked "sufficient incentive":

Why is the additional compensation for

reducing actual costs below the estimated

cost limited to the amount of the basic fee?

The limitation on the additional compensation was to avoid a repetition of the World

War experience with certain of the cost plus

contracts, for example, the Liberty engine

contracts, where the estimates of cost were

almost double the actual costs, resulting in

very large profits to the contractors as compared with their actual investments involved.64

As indicated hereinafter, the principle of

gearing contractor rewards to the size of invested capital fell by the wayside in procurement pricing for World War II.

The twenty years of procurement planning by the War Department provided a far

greater degree of industrial and military preparedness than had existed a generation

earlier when the nation was suddenly drawn

into World War I. Procurement planning

was vital not merely as a prerequisite to

broad industrial mobilization planning.

Military procurement in time of war represents the very heart of the entire economic

mobilization process. Without a solid foundation in procurement planning, emergency

production for war could not get started.

A detailed study of the planning efforts of

the interwar period would uncover many

inadequacies, blind alleys, and other shortcomings. Nevertheless, even a cursory review conveys some idea of the magnitude of

the task involved and reveals an impressive

number of achievements.

64

 Ibid., 12:338. Captain Cheever's lecture includes illustrative figures showing in detail how estimated costs and return on fixed and working capital

were to be determined.
CHAPTER IV

Industrial Mobilization Planning

Development of the Industrial Mobilization

Plan

Industrial mobilization planning, as the

term had come to be used by the end of the

1920's, concerned all activities which would

be necessary to insure the success and minimize the burdens of a wartime procurement

program. More specifically, it was designed

to insure the availability of all contributory

resources—raw materials, labor, power, fuel,

transportation, and the like—for the largescale production of munitions, while at the

same time maintaining the nation's industrial establishment and supplying essential

civilian needs. Planning of this nature envisaged widespread controls over the entire

economy—controls which would vitally affect all segments of the population and raise

important and delicate questions of national

policy in many different areas.

In discharging his industrial mobilization

planning responsibilities under the National Defense Act, the Assistant Secretary

of War suffered under a number of limitations. He could not assure the preparation of

adequate procurement plans by the Navy

and other agencies external to the War Department, and it was not until the early

1930's that estimates of the Navy's wartime

needs began to become available as a basis

for industrial mobilization planning. Moreover, in time of emergency or war the actual

execution of the broad plans for industrial

mobilization—in contrast to the specific procurement plans—would not be the responsibility of the War Department. Throughout

most of the planning period it was taken for

granted that general controls over the entire

economy would be exercised by one or more

specially created wartime superagencies operating under civilian administrators appointed by the President. The Assistant

Secretary was thus obligated to make industrial mobilization plans for someone else to

carry out in time of war. The many doubts

as to the nature and number of wartime

superagencies, and the extent to which they

would adopt the plans prepared by OASW,

threw a cloud of uncertainty over the whole

planning operation.

Another difficulty faced by OASW

throughout much of the planning period

was the prevailing climate of public indifference or actual hostility toward measures of

any kind which could be described as "preparation for war." The failure of World War

I to create a lasting peace, widespread discussion of the costs and causes of the war,

assignment of war guilt to "munitions makers and militarists," and faith in disarmament as the only guarantee of peace were

among the many conditions which characterized the aftermath of that war.

Coupled with these influences were the

seeming remoteness of American involvement in any future war and the general preoccupation with peacetime pursuits in the
74 THE ARMY AND ECONOMIC MOBILIZATION

two decades of alternate high prosperity and

serious depression. On the one hand it was

difficult to arouse any considerable public

interest in planning for a hypothetical future

war; yet without such interest the appropriations and staff necessary for a thorough

planning job were not forthcoming. On the

other hand—especially in the early and

middle 1930's—it was virtually impossible

to conduct any public discussion of even

minimum plans for military preparedness

without generating accusations of "militarism" "war mongering," and the like. A

significant section of the general public was

suspicious of "war" plans, a "War" Department, and other instrumentalities with

similar nomenclature which failed to distinguish between aggressive intention and

defensive preparation. Yet widespread public understanding and support would be

indispensable to eventual adoption and success of any plans for nationwide industrial

mobilization.1

Nevertheless, in the decade after World

War I a number of accomplishments were

registered in various areas of industrial mobilization planning. By 1926 an elaborate

study of the nation's power industry had

been made and preliminary plans adopted

for control and distribution in wartime of

the electric power supply.2 In 1927 similar

accomplishment in the field of transportation was recorded.3

 But these and similar

planning efforts pertained only to certain

functions of industrial mobilization. Equally

important, as continually emphasized by

Bernard Baruch and other expositors of

World War I experience, was the need for

proper organizational planning. This required the development of clear-cut plans

for the emergency creation of central mobilization control agencies adequate to the task

of effectively marshaling all the nation's

resources in time of war.

By 1929 OASW felt that the time was

ripe for intensified efforts in this area. In

mid-1931 the Assistant Secretary of War

reported:

Approximately two years ago it was appreciated that procurement planning in the

Army had progressed to the point . . 

where attention should be turned to the

broader aspects of developing a system under

which the President could efficiently control

and direct American industry in a grave

emergency.

With this in view, my office initiated a

series of studies, conferences, and negotiations

which finally resulted in the formulation of a

fundamental proposal for national industrial

mobilization in emergency.4

The result of these efforts was the Industrial

Mobilization Plan of 1930, the first of four

major planning documents of this name

developed during the 1930's. The several

industrial mobilization plans (often collectively referred to as the Industrial Mobilization Plan) were essentially the broad recommendations of the Army and Navy as to the

functions and organizations essential to

1 effective mobilization of the nation's re- Thatcher, Planning for Industrial Mobilization,

1920-1940, especially pp. 187ff. An informative

resume of the issues and influences underlying industrial mobilization planning in the interwar

period may be found in Connery, The Navy and the

Industrial Mobilization, Chapter III. 2

 OASW, Notes on Industrial Mobilization, No. 9,

June 1926, Relation of Power to Procurement

Planning. 3

 Ibid., No. 12, July 1927, Relation of Transportation to Procurement Planning.

4

 Annual Report of the Assistant Secretary of

War, Hon. Frederick H. Payne, in Annual Report

of the Secretary of War to the President, 1931

(Washington: Government Printing Office, 1931),

p. 25. See also the informative 14-page summary

by Maj Dwight D. Eisenhower, Brief History of

Planning for Procurement and Industrial Mobilization Since the World War, 2 Oct 31, AIC Lectures,

8:15.
INDUSTRIAL MOBILIZATION PLANNING 75

sources for war production. The four editions of IMP appeared in 1930, 1933, 1936,

and 1939.5

The first edition of IMP was purely a

War Department plan, prepared by the

Planning Branch, OASW, although it was

accepted shortly thereafter by the Navy.

Meanwhile, in the summer of 1930, the

71st Congress created a temporary War

Policies Commission to conduct hearings

and study "policies to be pursued in the

event of war." The basic purpose of the

joint resolution creating the commission was

"to promote peace and to equalize the

burdens and to minimize the profits of

war."

 6 The hearings and recommendations

of the commission were focused mainly on

problems of price and profit control in time

of war, but they brought public attention to

the War Department's plans for industrial

mobilization and stimulated closer co-operation of the Navy in joint planning. As a

result, the Army and Navy Munitions Board

was reorganized and work was begun on a

revision of the 1930 plan. The 1933 edition

of IMP, which represented substantial improvement over the earlier version, was in

part a response to the hearings and findings

of the War Policies Commission and reflected the increased activity of the ANMB.7

In 1934 the Senate appointed a special

committee to investigate the munitions industry.8

 This committee, popularly known

as the Nye Committee, held extensive hearings over a two-year period on military procurement practices, the extent of profitmaking in the munitions industry, the

influence of profits upon governmental and

diplomatic activities, the desirability of government monopoly in the manufacture of

munitions, and many related issues. During

this investigation the Industrial Mobilization

Plan was subjected to analysis and criticism,

but the Assistant Secretary of War felt that

the plan had successfully withstood the test.9

The findings of the Nye Committee had

little effect upon the Industrial Mobilization Plan, although the ensuing 1936 edition

took "into consideration" proposed legislation recommended by the committee.10

 The

1936 edition represented merely a slight

modification of the 1933 plan. A number of

significant changes were made by the 1939

revision, the most important concerning the

organizational aspects of wartime industrial

mobilization.

All four published editions of IMP were

brief, highly concentrated documents approximately twenty pages in length, amplified by additional material in the several

appendixes. In general, each edition was

divided into two parts, one devoted to a

summary of procurement planning activities, the other to proposals for broad industrial mobilization in time of war. The latter

part was in turn subdivided into two sections, the first of which described briefly the

control measures to be adopted in time of 5

 The first edition of IMP (copy available in

original form in ICAF Library) is often referred to

as the 1931 edition because it was first published

in that year. It appears in full in War Policies

Commission Hearings, 1931, pages 395-470. The

other three editions, sponsored by the ANMB, were

published by the Government Printing Office.

(Hereafter all versions will be cited as IMP, followed by the edition date.) 6

 H. J. Res. 251, 71st Cong., 2d Sess., 27 Jun 30. 7

 IMP, 1933, Foreword, p. v. 8

 S. Res. 206, 73d Cong., 2d Sess., 12 Apr 34.

9

 (1) Annual Report of the Secretary of War to

the President, 1936 (Washington: Government

Printing Office, 1936), p. 19. (2) Thatcher, Planning for Industrial Mobilization, 1920-1940, p. 213.

(3) The Nye Committee's treatment of IMP and

the planning activities of the War Department was,

on the whole, friendly. See S. Rpt. 944, Pt. 4, 74th

Cong., 2d Sess., 1 Jun 36, pp. 7-11. 10

 IMP, 1936, Foreword, p. v.
76 THE ARMY AND ECONOMIC MOBILIZATION

war. These included priorities, price controls, control of foreign trade, commandeering of plant facilities as a reserve measure,

and the use of specially created government

corporations to carry on such activities as

trading in raw materials and the like. The

second section described the proposed governmental organization in time of war, listing the names and functions of the several

superagencies to be established. The appendixes, in turn, described in greater detail

the organization and functions of each of

the superagencies and included a final section on needed legislation.11

Despite the epithets frequently hurled at

the Industrial Mobilization Plan as a

"fascist blueprint for war," an "unblinking

Frankenstein monster," and similar terms,

those who took the trouble to look at the

plan found it a mild document setting forth

in a systematic and rational manner the

basic requirements for effective utilization

of the nation's productive resources in time

of war. The plan was recommendatory only,

and its application in whole or in part in

time of emergency would be a matter for the

President to decide.12

Another fundamental misconception was

that the published summaries of IMP represented the Industrial Mobilization Plan in

its entirety. Thus, even as late as 1946 IMP

was characterized as follows:

The plan, however, scarcely merited the

build-up it had been given; it was a document dealing only in generalities with the

problem of governmental organization for

war and it was formulated for conditions unlike those which actually arose.13

As indicated in the following pages the Industrial Mobilization Plan consisted not

only of the published summaries and their

appendixes or annexes, but of a great variety

of unpublished annexes, unit mobilization

plans, functional plans, studies, recommendations, and other data dealing with

policies and methods as well as with governmental organization for harnessing the nation's economic resources. The comprehensive nature of IMP was recognized by

students of the subject long before World

War II:

Considering this document as the product

of 20 years of discussion . . . an uninfo

person might get the impression that nothing

much had been accomplished . . . .

The thin document issued in 1939 . . . 

more comprehends our entire plan for industrial mobilization than does the document

drafted in Philadelphia in 1787 comprehend

the entire scheme of federal government.14

Nevertheless, only a handful of people

outside the Army and Navy ever took the

time to become familiar with any but the

11

 The above description applies most closely to

the 1933 and 1936 editions, which were quite similar

in both format and substance. The 1939 edition

omitted the appendixes but included similar material in the more elaborate "annexes", which were

separately published and given only limited circulation. The following eight annexes eventually made

their appearance, all in mimeographed form and

containing, with supplementary materials, approximately the number of pages indicated: War

Trade, 100; War Finance, 70; Facilities, 50; Labor,

90; Commodities, 50; Power and Fuel, 25; Transportation, 80; Price Control, 75. Copies of the

annexes are in ICAF Library. 12

 This was evident in all editions but was made

explicit in the foreword to the 1939 plan and was

implicit throughout the body of the plan. "This

plan does not propose the modification of any of our

constitutional processes. Indeed the prime purpose

of procurement planning and of the Industrial

Mobilization Plan is the preservation of these processes for the people of the United States." IMP,

1939, Foreword, p. iv. 13

 U.S. Bureau of the Budget, Committee of

Records of War Administration, The United States

at War (Washington: Government Printing Office,

1946), p. 23. 14

 Tobin and Bidwell, Mobilizing Civilian America, p. 55.
INDUSTRIAL MOBILIZATION PLANNING 77

superficial aspects of the Industrial Mobilization Plan, and opinions thereof continued

to be based on hearsay or, at most, on the

published summaries. In testimony at one of

the final hearings of the Senate's Special

Committee Investigating the National

Defense Program, commonly known as the

Truman Committee, former Assistant Secretary of War Louis Johnson was still attempting to dispel the conception of IMP held

even by those who had been active in the

economic mobilization program for World

War II:

Therefore, with all kindness, I say, this sentence is unfair. . . . This statement should

be made in justice to the men who signed this

report and to the men who worked out the

details of the 1939 program. Your first witness

did not reveal that the detail annexes of the

report are three to four feet thick.15

The summary nature of the published

editions of the Industrial Mobilization Plan

reflected two basic considerations—the

desire to avoid needless controversy over

details which were even less spectacular

than the published material, and the necessity for preserving flexibility in plans subject

to countless, day-to-day changes inevitable

in an undertaking so wide in scope. The

more important organizational and functional proposals contained in the several

versions of the plans are summarized in the

following sections.

The Role of Superagencies

Under IMP

In the decade before the appearance of

the Industrial Mobilization Plan, there had

been some variation of opinion within the

Army on the need for central mobilization

control agencies in future emergencies. This

need was taken for granted in the early

1920's when the experience of World War

I was fresh in mind. Since most of the key

civilians who had created and directed the

superagencies in that war were still in the

prime of life, it was assumed that they would

be available for similar activity in the foreseeable future. Hence, the Army planners

at this time felt it was unnecessary or even

gratuitous to make detailed plans for wartime superagencies. In the latter half of the

1920's, the incumbent director of the Planning Branch was opposed to the creation of

superagencies unless and until events in the

actual course of war compelled such action.

It was his belief that the Army's detailed

procurement plans, including the allocation

of industrial facilities, made unnecessary

any outside supervisory control over industrial mobilization. This view was changed

in 1929 with the appointment of Brig. Gen.

George Van Horn Moseley as Executive to

the Assistant Secretary of War. General

Moseley was a vigorous exponent of

thorough industrial mobilization planning

and believed it was the duty of the Assistant

Secretary to prepare in detail the operational and organizational plans of the

needed superagencies. This position was

supported by Bernard Baruch and other reviewers of early drafts of the Industrial

Mobilization Plan. Accordingly, a major

element of the several versions of IMP was

the provision for central mobilization control agencies to guide and direct a nationwide war production effort.16

The superagency features of IMP rested

upon three basic premises: (1) The agencies would be temporary, created only in an

15

 Truman Committee, Hearings, 23 Oct 47,

42:25664.

16

 This paragraph is based on the account in Maj

Eisenhower, AIC Lectures, 8:19ff. See also

Thatcher, Planning for Industrial Mobilization,

1920-1940, Chs. I-V.
78 THE ARMY AND ECONOMIC MOBILIZATION

emergency and disbanded at the end of the

war. (2) They would be created by the

President under the terms of existing and

supplementary legislation and would be subject to his control. (3) They would be directed, and for the most part staffed, by

civilians.17

Many reasons were cited to support the

use of temporary wartime agencies rather

than the established departments of the government. The following statement made by

Chief of Staff Douglas MacArthur before

the War Policies Commission in 1931 summarizes the major considerations:

It is evident that the existing Cabinet de- partments are not adaptable to the performance of these duties. (a) Their functions are specifically defined by law and custom and are not directly

related to any of the activities which must be

undertaken by the central industrial control

in war. In general, they are overburdened by

their normal peace-time functions. (b) Several of the more important departments exist to serve particular classes, both

in peace and war. It would be unfair to expect

them to exercise emergency restrictive control

over the people that they were created to serve.

(c) The changes required in our institutions to make use of the Cabinet departments

as control organizations in war would be immensely greater than those necessary if a temporary organization is created especially for

the emergency.

(d) The controls and functions under

discussion are not and should not be exercised

in peace. The emergency organization would

automatically terminate after the war. If these

controls were exercised by a Cabinet department, they might be continued after the end

of the war, to the great detriment of the

country.

(e) The greatest objection to the use of

Cabinet departments for war control is the

difficulty of collecting all the scattered agencies and authorities into a focus and directing

them toward the accomplishment of a definite

purpose.18

In elaborating upon the desirability of temporary war agencies, the War Trade Annex

of the 1939 IMP made the following

observation:

Confusion or lack of cooperation might re- sult from a condition where one peacetime

agency attempts to direct the activities of

branches or departments of another equally

powerful peacetime agency. War trade measures are often harsh and cause resentment in foreign relations when applied. . . . In

uals stationed in foreign countries and assigned

the duty of applying harsh War Trade measures will undoubtedly become "persona non

grata" before the war ends. . . . F

reason it is desirable that in the early stages

of the transition period the peacetime foreign

representatives of the Departments of State,

Commerce, and Agriculture be relieved of

responsibilities connected with the execution

of war trade measures.19

The number of proposed superagencies

and their position in the wartime governmental hierarchy varied from one edition of

IMP to another. The 1930 version provided

four separate superagencies to direct the following: war industries, war labor, selective

service, and public relations. The directors

of these agencies, together with the secretaries of the War and Navy Departments

and their military chiefs of staff, would

compose a wartime Advisory Council to the

President. Broad decisions of wartime policy

would be made by the President and his

council, to be executed by the council members through their respective organizations.

17

 (1) IMP, 1930 (original paging), pp. 10, 34

ff., 170. (2) IMP, 1933, p. 13. (3) IMP, 1936, pp.

13-14. (4) IMP, 1939, pp. 2-5.

18

 War Policies Commission Hearings, 1931, p.

369. Several of these points were later criticized by

those who favored the use of the existing departments of the government. See Thatcher, Planning

for Industrial Mobilization, 1920-1940, pp. 289-90. 19

 IMP, 1939, War Trade Annex, pp. 5-51⁄2.
INDUSTRIAL MOBILIZATION PLANNING 79

The 1933 edition specifically added a

fifth superagency, a War Trade Administration (foreign trade), and suggested other

possibilities, such as food, fuel, and transportation. A Price Control Committee and

a Capital Issues Committee were shown

under the heading of "independent boards

and commissions." Several "national service

corporations," a category which had appeared in the 1930 plan, were included as

supplemental to the basic superagencies.

This general arrangement, under which all

the superagencies would have independent

and co-ordinate status, with representatives

on an Advisory Council to the President,

persisted until the appearance of the 1939

edition of IMP.

Despite the co-ordinate status assigned to

the several superagencies under the first

three editions of IMP, the War Industries

Administration had been recognized from

the outset as the largest and most important

agency of the new wartime organization.

This agency, comparable to the powerful

War Industries Board of World War I,

would have the basic responsibility for harnessing the nation's resources to meet all

production requirements in time of war.

It would have numerous powers and functions, an elaborate organization, and wide

contacts with industry, the armed forces,

and other governmental agencies.20 In the

1933 edition of IMP this superagency was

described as follows:

The War Industries Administration is the

industrial pivot about which war-time control turns. It is the most powerful arm of the

President for converting the industries into

war uses. It is the meeting point of the war

machine and industry. It will clear requirements for the Government war agencies, industry, and the civilian population, allocate

to the trade the output of commodities required immediately or in the future, assign

priority of production and delivery to war

materials, curtail nonessential production,

conserve wasteful production by various restrictions, and collaborate with other governmental agencies in controlling prices.21

In the 1936 plan, the name of this proposed superagency was changed to War

Resources Administration. Its nature and

functions as described above were elaborated. Also, in recognition of the probability of a transition period of indeterminate

length between peace and war, the 1936

plan gave this agency a special place in the

superagency hierarchy:

When a war emergency is imminent, the

establishment of the War Resources Admin- istration should be effected by the President

based upon the wartime powers of the Gov- ernment and existing supporting legislation.

Other administrations provided later in this

plan will require definite legislative authority

for their establishment. The War Resources

Administration is initially in effect a transition

organization to bridge over economic control

from peace to war. Pending the establishment

of other superagencies, it would, insofar as it

is able, perform the duties prescribed for all

superagencies. Legislative authority does not

now exist for some of the control measures set

forth to be exercised, but the plan provides

drafts for the necessary legislation.

The War Resources Administration is the

pivot about which the wartime industrial

control turns.22

By 1939, with war clouds looming on the

horizon, the ANMB planners had concluded that the existing scheme for independent superagencies was altogether too

loose to provide the degree of co-ordination

needed in time of war. Also, it was incompatible with the successful functioning of

a War Resources Administration in the discharge of its broad responsibilities. Accord20

 IMP, 1930, p. 45, and Charts 4 and 5.

21

 IMP, 1933, p. 17. 22

 IMP, 1936, p. 17.
80 THE ARMY AND ECONOMIC MOBILIZATION

ingly, the 1939 plan called for the establishment of the War Resources Administration

as the key superagency with supervisory

power over all other superagencies whose

principal functions were directly related to

economic mobilization:

All economic functions which must be

exercised in time of war are interrelated and

interdependent. It is therefore highly important that one emergency agency be created

to coordinate the performance of these functions and that other agencies be set up only

as the necessity arises to supplement the work

of the key agency.

It is considered highly desirable that the

key superagency for wartime industrial coordination should be the War Resources Administration. In order that . . . planned

measures may anticipate the problems which

will inevitably arise to disrupt our national

war economy, the War Resources Administration in skeleton form should be set up as early

as practicable when an emergency is

envisioned.23

In keeping with this prescription, four

principal superagencies—War Finance,

War Trade, War Labor, and the Price Control Authority—were shown as subordinate

to the War Resources Administration in

the 1939 plan. The other two superagencies—Selective Service and Public Relations—would be independent, reporting

directly to the President. These agencies

would be less directly concerned than the

War Resources Administration with the administration of wartime industrial effort and

would deal with important matters outside

the scope of industrial mobilization. The

War Resources administrator, who would

report directly to the President, would be

assisted by an Advisory Council composed

of the heads of all superagencies, including

Selective Service and Public Relations. This

arrangement would relieve an overburdened

wartime President of the responsibility for

the regular co-ordination of economic mobilization matters:

While it has long been recognized that such

direction in time of war is a function of the

President, acting under the authority accorded him by the Constitution and by the

Congress, it is obvious that the magnitude

and emergency nature of the task require the

services of an adequate organizational set-up

to which this responsibility may be delegated.

It is contemplated that such a set-up will be

manned by qualified civilians chosen by the

President.24

A further important organizational proposal of the 1939 plan was the transitional

role to be played by the Army and Navy

Munitions Board. Foreseeing the possibility

of a delay in creation of the War Resources

Administration upon the arrival of an emergency, the planners proposed that the

ANMB guide and co-ordinate the industrial

mobilization effort until the establishment

of the key superagency. The relevant personnel and records of the ANMB would

then become available for assimilation into

the new agency. Regardless of the period

of time required to set up the War Resources

Administration, the ANMB would perform

the important function of transmitting to

the personnel of the newly created superagency the accumulated knowledge and

preparations of years of peacetime planning.

The 1939 plan devoted more attention

than its predecessors to the role of existing

federal agencies and departments in time of

war. By 1939 many new governmental

agencies had been created and the general

functions of the federal government had

been greatly expanded. The 1939 version

of IMP proposed that existing agencies, in

addition to performing their normal func23

 IMP, 1939, p. 6. 24

 IMP, 1939, p. 4.
INDUSTRIAL MOBILIZATION PLANNING 81

tions, be utilized to "administer any assigned war missions for which they are

naturally adapted." At various points the

plan mentioned the prospective wartime

contributions of existing agencies, specifically referring to the Departments of State,

Commerce, Treasury, and Agriculture, as

well as the Federal Reserve Board, the Federal Loan Agency, the U.S. Maritime Commission, the Reconstruction Finance Corporation, the Securities and Exchange Commission, and the Export-Import Bank.25

In one of its provisions the 1939 plan

was unfortunate. This was the statement

that "positions of responsibility" in the War

Resources Administration should be filled

by "patriotic business leaders of the Nation." This provision was designed to insure

the recruitment of able men, well-known to

the public, who would themselves be familiar with the resources and industries

they would be directing in time of war. But

the implication—which was easily and frequently drawn—that the management of

the entire wartime economy would be

"turned over to business interests" did not

rest well with many important groups.

For various reasons, to be indicated later,

the foregoing plan of organization was not,

as such, adopted, either at the beginning of

the national emergency in 1940 or at any

other time. But the creation of the War

Production Board shortly after Pearl Harbor

did reflect, in many respects, the conception

of the War Resources Administration set

forth in the Industrial Mobilization Plan.

Most of the plan's other features, both organizational and functional, were utilized in

the course of the emergency, as well as after

Pearl Harbor, but without specific attribution to or necessarily resulting from the Industrial Mobilization Plan itself.

The Concept of M Day

Throughout its history prior to World

War II, the United States had never subscribed to a large standing Army or large

reserves of military equipment. In the event

of a serious emergency the nation's defensive

strength would depend upon the rapid mobilization of troops and munitions, relying

heavily upon selective service and new production. The basic responsibility of military

planning in peacetime was therefore conceived to be the preparation of plans to

meet a major emergency. This would require the expansion of the Army, in the

shortest possible period of time, from its

peacetime skeleton status to a force of several million men. Accordingly, the bulk of

military planning during the interwar period

centered upon plans for a general mobilization.26

Plans for the rapid, large-scale mobilization of troops required the most careful and

elaborate attention to problems of timing.

Without a detailed time schedule—carefully

planned in advance and providing comprehensive operations in support of a balanced

program of troop induction, training, organization, movement, and progressive supply—the sudden mobilization of hundreds

25

 IMP, 1939, pp. 5, 8, 9, 10, and 11. The annexes went into greater detail; thus the Labor

Annex referred to nine separate divisions and offices of the Department of Labor.

26

 (1) Testimony of Gen Douglas MacArthur,

War Policies Commission Hearings, 1931, pp. 356ff.

(2) Lt Col Marvin A. Kreidberg and 1st Lt Merton G. Henry, History of Military Mobilization in

the United States Army, 1775-1945 (Department

of the Army Pamphlet 20-212, June 1955), especially Chs. XII-XIII. In addition to general

mobilization plans, the General Staff also prepared,

in collaboration with the Navy, strategic concentration or "color" plans to meet specific types of

attack.
82 THE ARMY AND ECONOMIC MOBILIZATION

of thousands or millions of men would result

in complete chaos.27

The concept of M Day (Mobilization

Day) was the device adopted by the General Staff in the early 1920's to permit the

construction of such a time schedule. In the

absence of foreknowledge of the specific calendar date in the future upon which a general mobilization would be ordered, the

Staff resorted to simple algebra. The beginning date of such a mobilization was considered to be a hypothetical date in the

future, which might or might not ever occur.

This hypothetical date was labeled as "M

Day," and related points in the schedule

were identified as "M plus" or, where appropriate, "M minus" days or months.28

For planning purposes all the manifold operations of troop induction, training, organization, and movement, the supply and

distribution of matériel, and the underlying

procurement and industrial mobilization

efforts required for Army supply were to be

co-ordinated in a master time schedule with

M Day as the common denominator in time.

Some such nomenclature, and the underlying concept which it represented, was indispensable to the advance planning of timephased mobilization of troops and all their

supporting equipment, facilities, and

supplies.

The M-Day concept was loosely applied

to procurement planning as early as 1925:

M-Day for the supply branches is the day

on which they receive adequate funds to operate; M-Day for the combatant arms is the

day they receive orders to mobilize. These two

days should be brought as close together as

possible.29

This statement reflected the hope of the

Assistant Secretary that in a future emergency the mobilization of matériel would

begin at least as soon as troop mobilization.

In World War I this had not been the case;

even the appropriations indispensable to

wartime procurement had not become available to the Army until three months after

the declaration of war.30

With the elaboration of planning in the

late 1920's and early 1930's, the concept of

M Day was utilized in many ways—often

in an idealized and oversimplified fashion—

especially in the field of procurement planning. Estimated supply requirements for an

emergency, and in turn procurement requirements, were time phased with M Day

as the point of origin. Required war reserves,

to be sought in peacetime through special

appropriations, were determined on the

basis of estimated production deficits at

various periods after M Day. Accepted

schedules of production placed with allocated facilities were to be implemented by

actual contracts, and to go into operation,

on M Day. The announcement of M Day

would be the signal for the activation of the

procurement districts, the merger of the

planning and current procurement organizations and activities throughout the War

27

 The extremely complex nature of the process

of mass mobilization of troops and the kind of

planning undertaken to support such mobilization

are described in Kreidberg and Henry, History of

Military Mobilization. For excellent short statements, see the following papers: (1) Col Hester,

AIC Lectures, 15:764; (2) Maj Hasbrouck, AIC

Lectures, 16:267. 28

 The nomenclature of M-Day chronology varied

from time to time, making use of days, months, or

even "mobilization periods" defined in terms of

attained objectives rather than in fixed time units.

Kreidberg and Henry, History of Military Mobilization, Chs. XII-XIII.

29

 Col Dwight F. Davis, ASW, . . . Principles of

Industrial Preparedness, in OASW, Notes on Industrial Mobilization, No. 8, 20 May 25, p. 5. 30

 War Department Procurement Planning, par.

219.
INDUSTRIAL MOBILIZATION PLANNING 83

Department, and the adoption of wartime

procurement procedures and policies.

Finally, M Day would call for the passage of

emergency legislation and the launching of

the many organizations and activities contemplated by the Industrial Mobilization

Plan.31

The spectacular possibilities of the MDay concept lent themselves to wide excesses

of the popular imagination, especially during the 1930's when a substantial body of

left-wing and pacifist opinion was opposed

to any kind of preparation—at least by the

United States—for war. The Industrial Mobilization Plan was violently attacked

shortly after the publication of its first edition by the War Policies Commission.32

 By

1938 M Day had been widely publicized as

the date marking the adoption of a complete "military dictatorship," an "ironheeled Fascism," whose basic purpose was

to "save capitalism" and the opportunities

for war and postwar profits. M Day would

bring the sudden end of all individual liberties, the "crushing of every democratic principle," and the denial of the right of workers to strike, to quit their jobs, to choose

their occupations, and demand higher

wages.33 Two years later, when the emergency was at hand, other writers sought to

reassure the public of America's state of preparedness by dramatically portraying the

government's readiness to impose complete

wartime controls over all facets of individual and public activity in a matter of hours

after the arrival of M Day.34 One result of

these interpretations, apart from their effects upon public enthusiasm for the Industrial Mobilization Plan, was to make it appear that the substance and validity of all

the Army's twenty years of planning were

inextricably bound to the M-Day concept.

This led to the facile inference, in a number

of accounts of the subject, that inasmuch as

M Day was never actually invoked the

twenty years of interwar planning were

worthless and therefore wasted.

Despite the wide use of the M-Day concept in the War Department's planning activities, the validity and usefulness of most

of the plans did not depend upon the invocation of M Day at any particular date in

the future. M Day represented a major

methodological tool, but not the substance

of the prewar plans. Most of the procurement and industrial mobilization plans concerned matters of function and policy which

would have to be dealt with in any major

31

 Ibid., passim, especially pars. 65, 66, 72, 86, 91,

114, 122-26, 133, 158, 170, 183, 194, 218, 220, and

Figs. 22-A to 27. 32

 For example: (1) Seymour Waldman, "Seven

Per Cent: Hearings of the War Policies Commission," World Tomorrow, XIV (July 1931), 216-18;

(2) Seymour Waldman, Death and Profits: A Study

of the War Policies Commission (New York:

Brewer, Warren, and Putnam, 1932). 33

 These sentiments are variously expressed in the

following samples: (1) Rose M. Stein, M-Day, the

First Day of War (New York: Harcourt, Brace and

Company, Inc., 1936); (2) Harold E. Fey, "M-Day

Marches On," Christian Century, LV (January 12,

1938), 43; (3) American League Against War and

Fascism (Cleveland Chapter), Resolution on Industrial Mobilization Plan Presented at the Annual

Conference, February 28, 1937; (4) National Council for the Prevention of War, Pamphlet, Industrial

Mobilization Plan as of October 1, 1936; (5) Frank

B. Blumenfield, pamphlet, A Blueprint for Fascism

(New York, February 1937). All cited in Thatcher,

Planning for Industrial Mobilization, 1920-1940,

pp. 213-14, 254-60. 34

 Donald M. Keyhoe, M-Day—What Your Government Plans for You (New York: E. P. Dutton &

Co., 1940). See also: (1) "Be Ready for M-Day,"

New Republic, Vol. 100 (October 4, 1939), 229-

30; (2) Leo M. Cherne, "M-Day and the Business

Man," Harper's Magazine, Vol. 181 (July 1940),

113-35; (3) Harold J. Tobin and Percy W. Bidwell, "M-Day and the Press: Review of Mobilizing

Civilian America," Publisher's Weekly, Vol. 137

(June 22, 1940), 2330.
84 THE ARMY AND ECONOMIC MOBILIZATION

war, whether this war came suddenly or

after a prolonged period of transition from

a peacetime situation. The M-Day aspect of

the prewar plans represented the War Department's response to its gravest planning

responsibility—preparation to meet a major

emergency suddenly thrust upon the nation

with little or no warning and requiring immediate action to get war production rolling. If actual events turned out to be more

favorable, the substantive plans could be

adapted to a modified time schedule or

otherwise adjusted to meet existing conditions.

An examination of the Industrial

Mobilization Plan in its context of general

prewar planning indicates that the M-Day

concept was much more important to procurement planning than to broad industrial

mobilization planning. The several versions

of IMP made practically no reference to M

Day. Only the 1930 edition explicitly used

the term in the body of the plan, and then

only incidentally.35 The activities discussed

in the various editions of IMP were envisaged as taking place "in time of war," "in

time of emergency," "when" or "after" a

state of war or emergency was declared, and

the like. Early in its development the Industrial Mobilization Plan recognized that the

most urgent requirement in the event of

sudden involvement in war would be the

immediate placement of procurement contracts to start production going:

Provisions for procuring equipment must be

detailed and exact and essential production

must begin immediately upon the outbreak

of war.36

Industrial mobilization, on the other hand,

was seen as a gradual process:

The measures adopted must be such as to

minimize damaging effects of sudden changes

in industrial activity and to maintain an

approximate equilibrium throughout the Nation. No radical changes in normal economic

relationships between individuals and between

an individual and the Government should be

instituted. The methods and customs of peace

must be employed as far as practicable, otherwise confusion and chaos will result. The attempt should be to guide and influence the

operation of natural forces rather than to

oppose them by arbitrary and unfair regulations.37

By the mid-1930's it had become clear

that industrial mobilization planning should

explicitly deal with the period of transition

from normal peacetime operations to the

full-fledged establishment of a war economy. At first this transition period was

thought of as the period from the outbreak

of war to the time when the wartime superagencies could be brought to the stage of

full operation.38 Later it was seen that the

transition period would probably begin

before the nation's actual involvement

in war, thus overlapping in both directions

a formal declaration of war. The 1936 edition of IMP provided for the Army and

Navy Munitions Board to exercise, so far as

possible, co-ordination of the industrial

mobilization effort during this period of

transition. The transition was defined as the

period of time beginning "when a war

emergency is imminent" and lasting until

the "War Resources Administration is

functioning."

 39

35

 IMP, 1930, pp. 21, 23. One or two of the annexes to the 1939 edition explicitly referred to M

Day as a possible date for the initiation of certain

controls. 36

 IMP, 1933, p. 1.

37

 Ibid., p. 10. 38

 Kreidberg and Henry, History of Military

Mobilization, pp. 524-25, citing Memo, Com To

Develop Organization for Transition Phase for Ex

Com ANMB, 19 Jul 34. 39

 IMP, 1936, p. 6.
INDUSTRIAL MOBILIZATION PLANNING 85

Under the 1939 version of IMP, the key

War Resources Administration was to be

established in skeleton form and begin operations "as early as practicable when an

emergency is envisioned." Thus, the basic

organizational program was not tied to the

announcement of M-Day. Extensive provision for the transition problem was made in

the several annexes to the 1939 edition. Six

of the eight annexes recognized at least three

distinct stages for which various degrees of

economic control would be necessary.40 Because of the different conditions and circumstances affecting their respective areas, the

several annexes did not—and could not—

exhibit uniformity in their delineation of the

various stages of the transition. It was

evident from the context of the annexes as

well as other data in support of the prewar

plans as a whole that any division of an

anticipated transition period into hard and

fast stages would be highly artificial. The

major effort in dealing with the transition

period was therefore the identification of

the problems to be faced and the various

danger signals indicating when appropriate

controls should be applied.

The increased recognition given to the

transitional aspects of economic mobilization in the latter part of the planning period

was a reflection of the gradual deterioration in international relations, the rearmament of hostile nations with avowed

aggressive intentions, and the abandonment

by such nations of the honorable procedure

of a formal declaration of war prior to military action. With the outbreak of war in

Europe in September 1939 it was evident

that the United States could not much

longer afford to remain in its chronic state

of military unpreparedness. The fall of

France at the end of May 1940 brought the

crisis which resulted in the adoption of the

Army's huge, across-the-board Munitions

Program of 30 June 1940. In many respects

this date was the equivalent of the M Day

for which the Army had long planned. In

other respects, however, it clearly was not.

In the face of a tremendous reservoir of idle

manpower and industrial capacity and a

procurement program still well below the

major effort contemplated in the M-Day

plans, strict adherence to planned facility

allocations and other proposed M-Day

procedures was deemed unnecessary. The

formal invocation of M Day, as well as the

formal adoption of the Industrial Mobilization Plan, was considered by President

Roosevelt to be politically and otherwise

undesirable at the time. Moreover, the important but delicate task of passing a selective service law had not yet officially come

before Congress, and this body would not

reconvene until the fall. Until such an act

was passed, the Army could not execute its

M-Day plans for troop mobilization, and

certainly there would be little point in announcing two M Days, one for matériel,

the other for manpower mobilization. In

view of these and other circumstances M

Day was not invoked at the beginning of

the emergency in the summer of 1940.

The Selective Service Act was passed in

the fall of 1940 and large-scale troop mobilization began almost immediately. As the

defense period lengthened and the goals of

troop mobilization and defense production

were successively raised, it became increasingly evident that the M-Day concept, as

such, was no longer relevant. In his testi40

 These were the Price Control, Labor, Transportation, Finance, Power and Fuel, and War Trade

Annexes. Several of the annexes did not appear until after the beginning of the defense period, when

many of the problems of transition were already

present.
86 THE ARMY AND ECONOMIC MOBILIZATION

mony before a Senate committee in the

spring of 1941, a high-ranking Army officer responsible for troop mobilization

made the following observation:

It is impossible to compare the rate of mobilization actually achieved with that which

was provided in the protective mobilization

plan. As has been pointed out, M-Day—the

day set in the plan on which mobilization is

to begin—has never been announced. This

day has been reached and passed but no one

can say when it actually occurred. As a matter

of fact M-Day has no significance other than

as a basis for the computation of time in

mobilization planning.41

Although little was heard thereafter of the

possibility of a future announcement of

M Day, the idea did not altogether die out

until after Pearl Harbor. Because of the

frequent association of this concept with the

Industrial Mobilization Plan as a whole,

there were many who felt that to abandon

the M-Day concept in its entirety would be

to abandon all hope of getting the kind of

unified direction of the national economy

which was provided for in the Industrial

Mobilization Plan. Pearl Harbor came and

went without any formal invocation of M

Day, but America's entry into the war left

no doubt that M Day had, in substance,

been reached and passed.

Functional Aspects of Industrial

Mobilization Planning

The structural or organizational aspects

of the Industrial Mobilization Plan, culminating in the proposal for a key superagency

to guide a major industrial effort, represented the endeavor to fulfill two major

planning objectives: (1) to provide in advance an appropriate pattern of governmental agencies needed to carry out the

many functional activities required in time

of emergency; and (2) to insure that a nationwide industrial mobilization program

would be given unified direction and control.

On the functional side, industrial mobilization planning attempted to anticipate the

major problems which would arise in the

process of harnessing national resources and

to provide techniques, procedures, and policies for minimizing and resolving these

problems.

Supply and Control of Materials

Shortages of contributory materials in the

World War I production program had

brought home to the War Department the

necessity for advance planning to meet the

requirements of a future emergency. As

early as 4 December 1920 this type of planning was begun, with a request by the General Staff upon the various supply branches

to prepare, in order of their importance, a

list of raw materials not produced in the

United States in sufficient quantities to meet

the needs of the country in time of war.42

As a result, the so-called Harbord List of

forty-two strategic items was prepared, and

studies were made looking to a consolidated

estimate of War Department requirements.

Shortly thereafter, the newly organized

Planning Branch, OASW, took over the

task of determining the nation's material requirements for emergency procurement and

the steps which would be necessary to their

fulfillment. During the next twenty years a

substantial foundation was laid for coping

41

 Testimony of Brig Gen Harry L. Twaddle, Chf

Opns and Training Div (G-3) WDGS, 22 Apr 41,

Truman Committee, Hearings, 1:194.

42

 Lt Col Harold D. Rogers, Chf Commodities

Div, Planning Br OASW, The Commodities Division, 13 Dec 38, AIC Lectures, 15:617.
INDUSTRIAL MOBILIZATION PLANNING 87

with material problems which arose in

World War II.

The War Department's material planning

activities were assigned to the Commodities

Division of the Planning Branch. The basic

responsibility of the Commodities Division

was to identify the various materials essential to war production, to compute requirements, to estimate the availability of supplies, and to prepare plans to meet deficits.

By 1930 the organization and procedures for

the discharge of this responsibility had become well established.43

For administrative purposes essential materials were divided into two broad groups.

The first of these consisted of "strategic"

materials whose principal source of supply

lay outside the United States. Included in

this strategic material list, which comprised

twenty-six items in October 1930, were

manganese, chromium, nickel, tungsten,

other metals, rubber, coffee, hides, wool,

fibers, and a number of medical and other

items. Each of the strategic materials was

assigned for study and recommendations to

the procurement branch having the largest

total requirements (direct and indirect).

The branch was responsible for computing

total Army requirements, as well as estimating civilian and Navy needs (if the latter

were not obtainable from the Navy). Requirements were estimated for twenty-four

months after the beginning of an emergency,

based on procurement needs under the existing general mobilization plan, and arranged

in order of relative essentiality to indicate

a basis for apportionment in the event of

shortage. The responsible branch was also

required to estimate the available supply

and to make studies of foreign and domestic

sources, quantities and locations of normal

stocks, shipping lanes, and other factors. All

this information, together with recommended plans to meet deficits—including

proposals for conservation, substitution, and

material controls in time of emergency—

was to be submitted to OASW as a formal

"procurement plan." These plans were to

be revised annually.44

The efforts of the Commodities Division,

OASW, and later the ANMB, to plan for

an adequate supply of strategic materials

were more successful in providing knowledge of what ought to be done than in obtaining the necessary action. Repeated proposals for legislative authority and funds to

import and stockpile strategic materials

were regularly turned down by Congress,

partly out of apathy and economy-mindedness and partly because of the chronic resistance of domestic producers.45

The second broad group of essential materials comprised a larger list (fifty-two item

classes in October 1930) of semiprocessed

and manufactured "commodities." The

commodity list was a heterogeneous group

of items representing all major domestic industries whose products would be essential

to the operation of a wartime economy.

Most of these items were basic materials

which would be physically incorporated into

end products needed by the armed services.

Among these were building materials, chemicals, dyes, textiles, basic foodstuffs, leather,

optical glass, paints and pigments, paper

and pulp, iron and steel, and wood products.

43

 OASW, Notes on Industrial Mobilization, No.

13 (Revised), Oct 30, Procurement Planning, pp.

26-30.

44

 Procurement plans for strategic raw materials

were, in general, to follow a detailed outline supplied by the Commodities Division, OASW. A copy

of this outline appears in OASW, Notes on Industrial Mobilization, No. 13 (Revised), October 1930,

Procurement Planning, pp. 29-30. 45

 See below, Chapter XXVI, and references cited

therein.
88 THE ARMY AND ECONOMIC MOBILIZATION

Also on the commodity list were important

items of equipment, materials, and supplies

not to be incorporated in end products but

nonetheless essential to manufacturing processes or military operations. In this category

were abrasives, alcohol, coal and coke, hardware and hand tools, machine tools, petroleum products, railway equipment, vehicles, and refractories.46

The organization and procedures for

dealing with the commodity group differed

considerably from those used for strategic

materials. Each of the fifty-two items or

item groups on the commodity list was handled by an individual "commodity committee," which operated as a unit of OASW

and was responsible to the Assistant Secretary of War. Each committee was composed

of a chairman selected from the procurement branch having the major interest in

the commodity (for example, Ordnance for

iron and steel), representatives of the other

branches with requirements for the commodity, and a technical adviser from

OASW. The commodity committees had

the basic mission of obtaining and consolidating estimates of requirements, planning

the assurance of adequate supply in time of

emergency, maintaining contacts with the

industry concerned, and keeping abreast of

all relevant developments therein.

The OASW commodity committees were

thus the counterpart of the commodity sections of the War Industries Board in World

War I. The commodity sections, which had

been described by Bernard Baruch as "the

background of the whole structure," were

the focal point of demand and supply for

the basic material resources of the nation.

Their essential purpose was to provide the

mechanism whereby the indirect material

requirements of the procuring agencies,

which were organized along end-product

lines in accordance with their procurement

mission, could be translated into terms appropriate to the organization of American

industry in the field of raw material supply.

It was only through some such organization

that the so-called functional activities of industrial mobilization—conservation, distribution, price-fixing, and the like—could

be developed and executed with any degree

of effectiveness and co-ordination.47

The length and composition of the strategic material and commodity lists varied

from time to time with the stage of procurement planning, developments in manufacturing technology, changes in military

requirements, and the availability of supply.

In making studies and developing plans for

materials on both lists, the Army developed

an extensive array of contacts with other

governmental agencies, trade associations,

manufacturers, engineering institutes, scientific societies, and other sources of industrial

and technical information.48

These relationships were expanded in the

1930's as the ANMB took over the task of

sponsoring the Industrial Mobilization

Plan and co-ordinating the efforts of the

Army and Navy. The Commodities Division, ANMB, was organized along lines

parallel to the Commodities Division in the

Planning Branch, OASW. Since ANMB

had no full-time personnel (other than an

executive secretary) until the end of the

planning period, the Commodities Division,

46

 OASW, Notes on Industrial Mobilization, No.

13 (Revised), October 1930, Procurement Planning,

p. 26.

47

 (1) Baruch, American Industry in the War, Bk.

One, Pt. II, Ch. 1. (2) Clarkson, Industrial America in the World War, Ch. XVII. (3) Donald M.

Nelson, Arsenal of Democracy (New York: Harcourt, Brace and Company, 1946), p. 90. 48

 Some 260 organizations and agencies are listed

in the Commodities Annex, IMP, 1939.
INDUSTRIAL MOBILIZATION PLANNING 89

OASW, did most of the basic work and

became the office of record for ANMB in

the area of material planning.49 Beginning

in 1936 the ANMB commodity committees

(which consisted of the Army chairman of

the corresponding OASW committee and

his opposite number in the Navy) assumed

the task of reviewing and approving the

strategic material and commodity plans prepared within OASW and the Navy. These

plans then became the basic supporting data

underlying the commodities annex of the

Industrial Mobilization Plan.

An important responsibility of the Commodities Division, OASW, was the preparation of broad plans for the emergency

control of materials which would insure the

distribution of scarce items to their most

important uses. Because of wide variation in

the conditions under which essential materials were customarily produced and distributed in the United States, the planners

felt that different methods of control would

have to be devised to fit different materials.

Also, they did not attempt to work out control systems in elaborate detail; this could

only be done during the transition period

and later when the magnitude of wartime

requirements, the structure of governmental

control agencies, and other relevant conditions would take definite form. Hence, the

planning efforts were directed primarily to

the development of fundamental principles

and basic methods of material control which

could be translated into detailed procedures

in time of emergency.50

The general concept of priority as the

basis for all systems of material control was

stated in the Industrial Mobilization Plan:

Priority can be applied in a number of

forms, no one of which may be considered as

a panacea for all the problems which may

arise in war. All the various methods of applying priority may be required to meet varying

conditions; they must be coordinated to assure

a united, effective program.51

The plan went on to summarize three broad

methods of applying priority:

(a) Classification ratings.—Priority classification of orders, items, facilities, or industries may be established to determine the order

in which resources are to be used. Such ratings

were found most useful during the World War

in promulgating broad priority policies, capable of ready interpretation by all concerned,

and avoided a tremendous load on the commodity divisions of the War Industries Board

that would have been incurred in the assignment of individual priorities. There is every

reason to believe that such an automatic

priority classification would prove equally advantageous in any future national emergency.

(b) Allocations.—Allocations assign the

productive capacity of individual plants, or

parts thereof, to specific agencies in cases

where serious procurement difficulties are

anticipated or develop. This measure establishes priority for sources of supply among

requiring agencies.

(c) Licenses, embargoes, permits, and

warrants.—These are mechanisms of priority

which may be set up to establish precedence

in the utilization of resources in war. By such

means, resources, especially materials in foreign and domestic trade, may be made to flow

in such a manner as to insure their most

advantageous use.52

In developing the supporting plans within

each of these categories the Commodities

Division, OASW, laid the foundation for 49

 Col Rogers, AIC Lectures, 15:6151⁄2. 50

 (1) OASW Planning Br, War Department Procurement Planning (October 1936) (draft copy intended to supersede Industrial Mobilization (Army

Extension Course, Special Text 229, 1934)), Control and Distribution Measures, p. 46, ICAF Library. (2) Col Rogers, AIC Lectures, 15:621,

6211⁄2 . (3) Col Rogers, Strategic and Critical

Materials, 19 Feb 38, AIC Lectures, 14:8401⁄2, 841. 51

 IMP, 1939, p. 3. 52

 Ibid., pp. 3-4.
90 THE ARMY AND ECONOMIC MOBILIZATION

the three familiar types of material control

system used in World War II—the priorities system, allocations of mill capacity, and

the Controlled Materials Plan (CMP).

Priorities—Plans for the use of simple

priorities in the form of various preference

rating classes were based largely on the experience of the War Industries Board in

World War I. These ratings would indicate

to industry the relative urgency of procurement contracts in accordance with military

priorities for end items established by the

Joint Board. At the beginning of an emergency these military priorities would be

translated into industrial priorities and administered by the Army and Navy Munitions Board, acting with the voluntary compliance of industry until specific enabling

legislation was passed.53

Two basic principles for the application

of the priorities system were stated by the

planners. First, the preference rating granted

to finished items should automatically establish priority for the supply of contributory materials.54

 Unless this was done the

priorities system would not be a system for

material control but would only confer a

preferred claim upon plant facilities for end

products, a claim already provided by the

facility-allocation system and contractplacement procedures. Secondly, the priorities system was not considered to be an

adequate instrument for the distribution of

materials under conditions of seriously short

supply. It was to be used as a general system

of material control at the beginning of an

emergency, together with measures for conservation, increased importation, and augmented domestic production, until detailed

control procedures could be put into effect

for specific commodities.55

The priorities system actually adopted at

the beginning of the defense period made

use of preference rating classes as envisaged

above. But a ruling of the Advisory Commission to the Council of National Defense

(NDAC), and later the Office of Production Management (OPM), prohibited the

automatic extension of preference ratings

to essential materials, however necessary

these might be to the production of highpriority end items of procurement. This

seriously limited the use of priorities as

an instrument for the distribution of materials. By the time the automatic extension

feature was generally permitted, material

shortages had grown to the point where

effective distribution could not be accomplished by an open-ended priorities system.

Allocations of Mill Capacity—In one area

it was felt particularly essential that detailed

plans should be developed in peacetime for

the control of materials beyond the level of

simple priorities. This was the important

case of basic iron and steel production. Discussion of a plan for the allocation of steel

mill capacity had begun as early as 1923,

and the first "steel plan"—developed by the

Army in collaboration with the American

Iron and Steel Institute—appeared in 1927.

In 1936 a revised and much more comprehensive Steel Mobilization Plan was completed. This version, sponsored by the Army

and Navy Munitions Board, is the document

customarily referred to as the Steel Plan.56

53

 Memo, Capt Wallace E. Niles, Production Div

Planning Br OASW, 27 Dec 37, sub: Equitable Application of National Resources in War, p. 8,

OCMH. 54

 Col Rogers, AIC Lectures, 15:521.

55

 Ibid.

56

 The original steel plan of 1927 was prepared by

Maj. Raphael R. Nix, Planning Branch, OASW.

The 1936 revision was prepared by Maj. (later

Brig. Gen.) Hugh C. Minton, who was for a number of years the Executive Officer for the Pittsburgh

Ordnance District. The 1936 edition was a printed

and bound volume running to approximately 180

pages; only 100 individually numbered copies were
INDUSTRIAL MOBILIZATION PLANNING 91

The Steel Plan was a plant-allocation system comparable in many respects to the

facility-allocation system for end products

under the War Department's procurement

planning program. Some three hundred or

more steel-producing plants throughout the

country, representing virtually the entire

steel-making capacity of the nation, were

listed in the plan. The basic purpose of the

plan was to insure an adequate and timely

supply of steel to fabricators engaged in

production for the wartime procurement

agencies. The plan was also designed to

present to OASW, the ANMB, and the appropriate superagency "a well-defined picture of the war requirements for steel, the

productive capacity of the steel industry, the

placement of the war load, and the percent

of the placed war load to the capacity of

individual companies and plants."

 57

 More

specific objectives were to eliminate competition for steel-producing facilities among

the wartime procuring agencies and their

contractors; to reduce unnecessary crosshauling; to uncover shortages of specific

types of capacity; and to afford an equitable

distribution of the war load throughout the

steel industry. In furtherance of these ends

the first year's emergency steel requirements

of the three major wartime procurement

agencies—Army,58 Navy, and Emergency

Fleet (Maritime)—were estimated and

matched against available capacity. Requirements and capacity data were broken

down into considerable detail. The requirements classifications included nine principal

classes of steel and numerous subdivisions

thereof (forms, shapes, chemical composition, and so forth); the various supply arms

of the Army and bureaus of the Navy; and

the geographical districts of the procuring

agencies.59

These requirements were then allocated

to firms with available capacity of the desired type. Allocations were made in the

form of annual capacity credits stated in

terms of actual tonnage. Thus, each procurement district of each supply arm of the

Army, each bureau of the Navy, and the

agency for the Emergency Fleet was granted

specific capacity in individual steel-producing plants substantially equal to its annual

tonnage requirements. Apportionment of

this capacity among fabricators of munitions

within each procurement district would be

made by agreement between the procuring

agencies and their contractors under the

broad direction of the Iron and Steel Commodity Committee, ANMB, and eventually

by the iron and steel section of the War Resources Administration or its equivalent.

Total steel requirements of the three procuring agencies for a single year of war, estimated as indicated above, amounted to 13.5

million tons under the 1936 plan. This compared with equivalent shipments in 1918 of

9.9 million tons. Total capacity credits alloprinted. A further revision, in the form of a sum- cated under the plan amounted to 12 mil- mary of data in the current records of the ANMB,

was made in 1940. See Photostatic summary, The

Steel Mobilization Plan, Revision of 1940, prepared

by Maj. Ward E. Becker, Planning Branch, OASW,

by direction of ANMB, 1 July 1940, copy in ICAF

Library. 57

 Steel Mobilization Plan (1936), p. 1, ICAF

Library. 58

 The Army's requirements (which omitted new

plant and building construction) were for the maximum year of a two-year emergency.

59

 The naval districts were sixteen in number and

included Pearl Harbor, Panama Canal Zone, and

Cavite, Philippine Islands. The War Department's

fourteen procurement districts were identical with

those established by Ordnance; adjustments were

made for supply arms using fewer districts. The

Emergency Fleet procurement districts in the 1936

plan conformed to those of the War Department; in

the 1940 revision they conformed to the continental

naval districts.
92 THE ARMY AND ECONOMIC MOBILIZATION

lion tons or approximately 19 percent of the

total existing capacity of the industry.60

The Steel Mobilization Plan did not purport to forecast total iron and steel requirements for the duration of any war. Rather,

its basic mission was to provide the mechanism for an orderly transition from peace to

war. It provided both a functional plan and

the organizational structure and procedures

for a progressive adjustment to actual conditions as they arose.61

 But as in the case of

other aspects of the Industrial Mobilization

Plan, the Steel Plan was not adopted by the

central mobilization control agency during

the defense period when it was badly needed.

Even the application of priorities to steel was

delayed beyond the period when priorities

could successfully achieve their purpose.

When it became evident to OPM in the

summer of 1941 that priorities were an inadequate instrument for the effective distribution of steel, allocations were adopted

on a piecemeal basis with little, if any, resemblance to the systematic procedures contemplated by the Steel Plan.62

Rationing Proposals—The foundations of

the Controlled Materials Plan adopted at

the end of 1942 are to be found in proposals

developed during the 1930's by the Commodities Division, OASW, in conjunction

with ANMB, for rationing scarce materials

in time of war. As indicated above, the application of a simple priorities or preference

rating system, with automatic extension of

the indicated rating to essential materials,

was recommended as an initial control system at the beginning of an emergency. During the transition to an all-out M Day, specific plans for a tighter control system would

be developed for individual commodities:

Generally speaking such a plan should be

based on a ration method using permits or

commodity credits for the use of raw materials

and the licensing of dealers.63

The nature of such a rationing system, as

well as its essential similarity to the later

Controlled Materials Plan, is indicated by

the following description:

b. Methods after M-Day. It is proposed

when strict control is necessary at the beginning of war to issue warrants from the

Commodities Division of the highest control

agency then in existence which will state the

amount of a given commodity set aside for

each department (Army and Navy) issuing

"commodity credits" from existing stocks and

make this amount immediately available to

the supply arm or service (or Bureau) for

use in its manufacturing problems. This does

not assign a definite amount of a strategic raw

material for a given project, but places at the

disposal of the Chief of the Supply Arm or

Service, as nearly as possible, his first three

months requirement. The Chief of the Supply

Arm or Service in turn issues subwarrants

against his allotment to each manufacturer

interested, each warrant listing the location

and amount of the commodity under consideration. This method affords the desired

flexibility to the Chief of the Supply Arm or

60

 Steel Mobilization Plan (1936), pp. 4, 11, 178.

Figures refer to short tons. It is interesting to note

that the second Gano Dunn report on iron and steel,

made in mid-1941, estimated total defense requirements for iron and steel at 12.4 million tons for

1941 and 13.8 million tons for 1952. See: (1)

Civilian Production Administration (formerly War

Production Board), Wartime Production Achievements and the Reconversion Outlook: Report of the

Chairman, War Production Board, (Washington:

Government Printing Office, 1945), p. 43; (2)

Civilian Production Administration, Industrial

Mobilization for War, I, Program and Administration (Washington: Government Printing Office,

1947) (hereafter cited as Industrial Mobilization

for War), 137. This is the official history of the

War Production Board. 61

 These were amplified in The Steel Mobilization

Plan, Revision of 1940. 62

 See Chapter XXIV, Material Controls in Transition, especially pages 551-53. 63

 Col Rogers, AIC Lectures, 15:6211⁄2.
INDUSTRIAL MOBILIZATION PLANNING 93

Service, permitting him to shift stocks whereever needed; avoids competition and promotes efficiency.64

This allotment procedure, making use of

the principle of decentralized operations

through the individual supply arms and

services and their respective procurement

districts, would be continued beyond the

first three-month period:

Subsequent commodity credits will be

cleared and readjustments of requirements

made based on needs of the procurement program. The district representatives must be

constantly informed regarding their own programs and are responsible for keeping their

supply arms and services conversant with their

needs. The supply arms and services will keep

the War Department Commodity Committees

informed as to their needs through their representatives on these committees and submit

requests of commodity clearance accordingly.

In a similar manner the War Department

representative on the Army and Navy Munitions Board submits combined requisitions to

this joint board. The Army and Navy Munitions Board will either issue the credit or

request clearances for credits from the Commodities Division of the War Resources

Administration.65

The central feature of the plan was summed

up as a system of "Apportioning controlled

materials to the various supply arms and

services, in accordance with established

priorities, by credits or warrants approved

by a higher authority."

 66

These proposals for a rationing type of

system for the controlled distribution of

scarce materials were relegated to temporary oblivion with the failure to adopt

the Industrial Mobilization Plan early in the

defense period. In the year after Pearl Harbor, when existing systems for the distribution of materials had broken down, the

growing demand for a closed system of material control resulted in the eventual adoption of the Controlled Materials Plan. This

plan, sponsored primarily by the military

agencies under the leadership of Ferdinand

Eberstadt, was far more complex than anything which could have been envisaged during the planning period. Nevertheless, its

main features represented the conceptual

framework developed by the OASW planners during the 1930's.

Price Control

Plans for emergency and wartime price

control formed an important part of the

several industrial mobilization plans. Responsibility for this area of planning fell

to the Contributory Division, Planning

Branch, OASW. Studies of the behavior

of prices during World War I led to the

inescapable conclusion that adequate and

timely control of prices would be essential

to the success of procurement and economic

mobilization in any future war. In the

eighteen months before America's entry

into World War I the "all commodity" price

index, under the stimulus of heavy European purchases, rose from 104 to 156. Many

individual commodities showed a much

more exaggerated price rise.67

Active price control to curb the rising tide

of inflation did not begin until the passage

64

 Ibid., 14:841. 65

 Ibid., 15:622. 66

 Ibid., 14:841.

67

 For example, the price index for metals had

risen to 247 and by July 1917 reached a peak of

333. See Baruch, American Industry in the War,

p. 74; also, IMP, 1939, Price Control Annex, App.

A. By March 1917, prices of basic pig iron and

steel plate at Pittsburgh had risen some 800 percent

above pre-1914 quotations. See page 19 of draft,

Price Control Appendix to Industrial Mobilization

Plan, 1933, attached to Memo, Lt Col Earl McFarland, Ex OASW, for Col Alvin C. Voris, Dir

Planning Br OASW, 18 Jun 32, USW Planning

Br (ASF) file.
94 THE ARMY AND ECONOMIC MOBILIZATION

of the Food and Fuel Conservation Act on

10 August 1917, which provided the statutory basis for government price fixing in

loosely defined areas of the economy. But

American industry was skeptical of any "unnatural" interference with the law of supply

and demand, and Congress failed to provide

the President or any other agency with

blanket authority to develop an integrated

and balanced array of price controls.68

Under the circumstances price control measures were improvised by a variety of federal

agencies—including the Food and Fuel Administration, the Price Fixing Committee

(established by Executive order in March

1918), the War Industries Board, the War

Trade Board, the Federal Trade Commission, and the War and Navy Departments.

Heavy reliance was placed on reaching

voluntary price agreements with individual

industries. This was aided by the power of

the War Industries Board to control the distribution of materials, transportation, and

other essentials of industrial operation.

These powers proved to be highly persuasive, and despite its belated, piecemeal, and

improvised nature, price control in World

War I succeeded eventually in bringing a

substantial degree of stability to the prices

of basic commodities as well as to many

consumer goods. In so doing it demonstrated the possibilities of price control in

promoting an orderly procurement program, reducing the dollar costs of the war,

curbing war profiteering, and promoting a

more equitable distribution of the costs of

the war.69

Beginning with the 1933 edition, the Industrial Mobilization Plan contained a separate price control appendix or annex describing the history, objectives, and methods

of price control, together with recommended

legislation and a wartime price control organization. The following distillation of the

Price Control Annex of the 1939 IMP represents the thinking of industrial mobilization

planners on the eve of the emergency leading to World War II:

1. Price control should be exercised immediately upon indication of significant

price increases under an emergency procurement program. Delay would permit

runaway markets, the development of an

unbalanced general price structure, the disruption of orderly contractual arrangements

for military procurement, and the creation

of hardship in the civilian sector of the

economy.

2. Both general price ceilings and individual or piecemeal price controls would

probably be necessary. Advance commitment to either method to the exclusion of

the other would preclude flexibility in guiding the economy through the several stages

of the transition from peace to all-out war.

After their establishment, price ceilings

would have to be kept responsive to the

changing circumstances of a war economy.

3. Prices of military-type items with no

prior price or production history should be

exempt from formal price control. The desired results in this area could best be

achieved by negotiation in the placement

and administration of individual procurement contracts.

4. General price ceilings for commercial

products should be established on a "bulk

68

 Baruch, American Industry in the War, p. 75. 69

 A wealth of information on the price behavior

of specific commodities, as well as on general price

control problems in World War I, with recommendations for future emergencies, may be found

in Baruch, American Industry in the War, passim,

especially Bk. One, Pt. II, and Bk. Two. See also

Bernard M. Baruch, "Priorities—the Synchronizing Force," Harvard Business Review, XIX (Spring

1941), 261-70.
INDUSTRIAL MOBILIZATION PLANNING 95

line" basis to cover the marginal costs, including a reasonable profit, of the indispensable volume of output required. The

tailoring of prices to the costs of individual

firms was considered administratively impossible and productive of all the evils of

"cost plus" pricing.

5. The control of wages and other "factor

prices" was assumed as part of a general

price control program.

6. Five possible stages were envisaged,

for purposes of price control, in the transition from a purely peacetime situation to

all-out war. Recommended actions, or possible alternative actions, were indicated for

each stage.

7. An interim Price Control Council during the transition period would give way to

a permanent wartime Price Control Authority. The Price Control Authority would be

one of the civilian superagencies subject to

broad supervision by the key superagency,

the War Resources Administration. The

functions of the Price Control Authority

would be quasi-judicial, with enforcement

left to other wartime and permanent agencies of the government.

Although the Industrial Mobilization

Plan was not formally adopted, many of the

foregoing elements of price control as proposed by the prewar planners were utilized

in the World War II economic mobilization

program.70

Other Problems

in Industrial Mobilization

Limitations of space preclude more than

brief mention of the prewar plans in other

functional areas of industrial mobilization.

The Contributory Division, OASW, had the

responsibility for surveying the problems and

formulating proposals to meet emergency

requirements in the areas of labor, power

and fuel, transportation, finance, and international trade. Continuous study during the

interwar period resulted in the accumulation of much basic knowledge in the indicated areas and the development of systematic plans for meeting an emergency.

In the field of electric power, for example,

a comprehensive and continuous survey of

the nation's generating and distributing facilities had been maintained since the early

1920's. Responsibility for the electric power

survey was placed upon the Corps of Engineers, which provided an annual report to

OASW of available power in each War Department procurement district. Attempts

were made to estimate power requirements

for the military program by procurement

districts, but the results were never considered satisfactory. For a time each supply

branch was required to submit annual reports to OASW showing the direct power

requirements for each accepted schedule of

production in excess of $500,000 for one

calendar year. These reports, which included anticipated war production from

new facilities and government arsenals as

well as existing private establishments, indicated the name and location of the facility,

class of material to be manufactured, the

peak electrical load, the kilowatt hours for

the maximum month's production, and the

expected source of electrical power.71

The major barrier to reliable estimates of

wartime power requirements lay in the area

of cumulative indirect requirements below

the finished product level. The manufacture

70

 For a discussion of price control as it affected

military procurement in World War II, see below,

Chapter XVII.

71

 OASW, Notes on Industrial Mobilization, No.

9, June 1926, Relation of Power to Procurement

Planning, pp. 6, 15.
96 THE ARMY AND ECONOMIC MOBILIZATION

of contributory raw materials, components,

parts, and supplies below the prime contractor level required power in varying and unascertainable amounts at each level. Efforts

were made to compute indirect requirements

by the development and application of interindustry power factors, based on peacetime

dollar-value or physical-output ratios, but

these were considered unreliable in view of

changes in interindustry alignments in time

of war and for other reasons.72 Hence, reliance was placed on the larger efforts of

OASW to distribute the total procurement

load equitably throughout the country and

on the basic ability of the power industry to

meet wartime requirements. Close relationships between the Army Engineers' power

survey organization and key personnel in the

industry, as well as with regional and local

sectors thereof, were utilized to prepare the

industry to meet the increased demands of

war production.

Three principal measures were envisaged

to cope with wartime power shortages: (1)

redistribution of power to areas of power

shortage; (2) partial reallocation of the

procurement load; (3) provision of additional power-generating facilities. All of

these, together with priorities and limitation

orders upon nonessential power consumption, would be applied under the direction

of a wartime power control administrator in

the Power and Fuel Division of the proposed

War Resources Administration.73 In view of

unused generating capacity, constantly increasing efficiency in distribution, other

conditions in the power industry, and plans

for both normal and emergency expansion,

it was believed by the Army as well as

spokesmen for the industry that no nationwide power shortage would arise in time of

war and that local shortages could be met

by the methods indicated.74

In the field of transportation the capacities and characteristics of the five basic

types—railroad, highway, waterway, airway, and pipeline—were studied and plans

made for their efficient utilization in time

of war. In view of the impossibility of calculating dependable wartime transportation

requirements, planning activities were devoted mainly to the objectives and methods

of wartime control. The broad objectives

of control were to give preference to the

movement of war traffic in accordance with

its relative importance, to assure the effective use of all forms of transportation, to

curtail nonwar traffic, as required, without

unduly restricting essential civilian needs,

and to maintain a high degree of mechanical effectiveness for all transportation facilities. Collateral objectives included the

avoidance of unnecessary crosshauling and

congestion of transportation facilities, the

augmentation of transportation facilities

where necessary, and so on. The basic rationale underlying the planning activities

and proposals was to rely upon the voluntary co-operation of the various carriers and

to make no greater use of government controls than was actually necessary. Govern72

 (1) Ibid., pp. 9-14. (2) Maj Gen Edward M.

Markham, CofEngrs, Power in War, 20 Apr 36,

AIC Lectures, 12:520. (3) Col Warren T. Hannum, CE, AIC Lectures, 12:523. 73

 (1) Gen Markham, AIC Lectures, 12:520-21.

(2) Maj William H. Sadler, The Contributory

Division, OASW, 17 Feb 38, AIC Lectures, 14:

8071⁄2. (3) IMP, 1939, Power and Fuel Annex.

74

 (1) AIC R56, Plans for Industrial Mobilization, 1920-1939, pp. 48-49. (2) Brig Gen Charles

Keller, USA (Ret.), The Supply of Power to Meet

a War Demand, 27 Apr 36, AIC Lectures, 12:535ff.

(3) For a concise summary of how the power industry met wartime requirements, see CPA, Wartime Production Achievements and the Reconversion Outlook, pp. 39-43; also, Nelson, Arsenal of

Democracy, pp. 365-66.
INDUSTRIAL MOBILIZATION PLANNING 97

ment possession and operation of transportation systems, as in the case of the railroads in World War I, was considered

unnecessary except as a last resort. Major

attention was devoted to railroads as the key

transportation agency.75 Close collaboration

between the military agencies and the Association of American Railroads resulted in

the formulation of a wide array of plans for

adapting practices in the railroad industry

to emergency conditions. Relationships were

also established with national trucking and

motor bus associations, associations of marine, lake, and inland waterway carriers,

with the American Petroleum Institute

representing the pipelines, and the Air

Transport Association of America. Studies

were made of the numerous governmental

agencies, including those within the armed

services, for dealing with transportation

problems in peace and war. Existing legislation affecting transportation, including antitrust laws, was reviewed and recommendations made to facilitate wartime operations

and control. All wartime controls in the

field of transportation were to be directed

and co-ordinated by the chief of the Transportation Division in the proposed War Resources Administration, as indicated in the

Industrial Mobilization Plan.76

Analogous planning was done in the fields

of foreign trade, labor, finance, and construction, each of which was discussed in an

appropriate annex to the Industrial Mobilization Plan. Some of the annexes were slim

documents written in very general terms.

But behind all of the annexes and all the

published summaries of IMP was an abundance of supporting detail and information

in the files of the relevant divisions of the

Planning Branch, OASW, and the Army

and Navy Munitions Board. All this material, together with informed and trained

personnel from ANMB and OASW, would

be assimilated at the outset of an emergency

into the appropriate offices of the War Resources Administration and other superagencies. This would make possible the utilization of the fruits of twenty years of

industrial mobilization planning and provide an intimate working relationship between the military procuring agencies and

the central mobilization control agencies.

Out of this close relationship and familiarity

with the nature of the problems to be

faced—so the planners hoped—would

emerge an integrated program of industrial

mobilization which would keep to a minimum the inevitable dislocations of the nation's economy.

75

 In 1937 the railroads hauled 363 billion tonmiles, or 64 percent of all commercial freight traffic

handled by the five types of transportation. IMP,

1939, Transportation Annex, p. 47. This annex was

one of the better developed annexes to the 1939

IMP. 76

 IMP, 1939, Transportation Annex.
CHAPTER V

Organization for War

The Evolution of Central Mobilization

Control Agencies

The transition period granted to the

United States for converting its economy

from peace to war was not a thirty-day,

three-month, or even a twelve-month

period. A full year and a half elapsed between the fall of France in June 1940 and

the Japanese attack upon Pearl Harbor. A

large-scale military procurement program

was begun at the end of June 1940, but the

nation did not embark upon an all-out war

production program until after 7 December

1941.1

The Industrial Mobilization Plan had

been devised to afford an orderly transition

from peace to war, but it was not officially

adopted at the beginning of the defense

period or, indeed, at any other time. Nevertheless, many functional as well as organizational elements of the plan were utilized—

some at the outset of the defense period and

others at later dates both before and after

Pearl Harbor. But what was regarded by

some authorities as the keystone of the Industrial Mobilization Plan—the proposal

to establish, at the very beginning of an

emergency, unified organizational control

over the economic mobilization program—

was rejected. Both the reasons for and the

consequences of this decision have been the

subject of much speculation and debate.2

The decision to select an alternative organizational structure instead of the one

proposed by IMP was made by President

Roosevelt in a milieu of complex and delicate political circumstances. The factors

which led to this decision are too numerous

for more than a brief summary of the subject. Fundamentally, the President believed

that the nation as a whole was not ready for

the degree of economic control implied by

the formal adoption of the plan. In particular, he had serious misgivings as to the

desirability of creating, in time of peace, the

kind of powerful superagency represented

by the War Resources Administration. Such

an agency, he felt, would interfere with his

1

 This eighteen-month period of preparation is

usually referred to as the "defense period," in contrast to the "planning period" which preceded it

and the "war period" which followed Pearl Harbor.

From the standpoint of economic mobilization.

World War II included both the defense and war

periods.

2

 For example: (1) Truman Committee, Hearings, 21-24 Oct 47, 42:25573-789 and Exhibits

2672-83; (2) AIC R56, Plans for Industrial Mobilization, 1920-1939, especially pp. 66-85; (3)

Connery, The Navy and the Industrial Mobilization, Ch. III; (4) Albert A. Blum, The Birth and

Death of the M-Day Plan (draft copy for inclusion

in Twentieth Century Fund, Study of Civil-Military

Relations [circa 1955], OCMH; (5) CPA, Industrial Mobilization for War, Pt. I, Chs. 1 and 2; (6)

U.S. Bureau of the Budget, The United States at

War, Chs. 1-5, passim; (7) Nelson, Arsenal of

Democracy, Ch. 5, especially pp. 87-92; (8) Eliot

Janeway, The Struggle for Survival (New Haven:

Yale University Press, 1951), Chs. I-V, especially

Ch. III.
ORGANIZATION FOR WAR 99

own close supervision of the rearmament

program at a time when important political

considerations, both domestic and international, required that all aspects of national policy be closely controlled by the

Presidency.

The circumstance which precipitated the

President's decision was the controversy

arising out of the report of the War Resources Board, created early in August 1939.

Two years previously Mr. Louis Johnson—

a vigorous exponent of industrial preparedness—had been appointed Assistant Secretary of War. Shortly thereafter, Johnson

took steps to obtain a wider public understanding and acceptance of the Industrial

Mobilization Plan. In a letter to Bernard

Baruch on 5 October 1937, he proposed the

appointment of a board of distinguished

citizens to review and pass upon the War

Department's plans for mobilizing industry

in time of emergency:

Plans for such magnitude and importance

should be analyzed by a disinterested group

of citizens who can not only pass upon the

merits of the plans but whose review will

carry sufficient prestige to be convincing to

the country at large.3

No definite action was taken at the time but

Johnson proceeded energetically to spread

the gospel of industrial mobilization:

. . . I have visited industrial plants, Government arsenals, air fields, and airplane

factories from coast to coast, and I have

presented the problems of industrial mobilization and war-time procurement planning

in 77 speeches to widely disparate groups—

industrial, patriotic, military and social—in

practically every section of the country. This

activity has required over 50,000 miles of

travel. . . . As a result of this effort, 

lieve the purposes and objectives of industrial

mobilization, as well as the necessity for cooperation between labor, capital, and industry . . . are more widely and more c

understood.4

In the summer of 1939, shortly after completion of the 1939 edition of IMP and with

tension in Europe reaching the breaking

point, Johnson again approached the President with the proposal for such a board. The

President agreed and suggested Mr. Edward

R. Stettinius, Jr., chairman of the United

States Steel Corporation, to head the board.

Stettinius was a relatively young but wellknown liberal businessman, whose father

had held important posts in the World War

I administration. Stettinius accepted the

chairmanship of the new board and, together with the cochairmen of the ANMB,

selected five additional members.5 The

formation of this board, designated as the

War Resources Board, was announced to

the press on 9 August 1939. The name of

the board reflected Assistant Secretary Johnson's hope that it would not only perform

the functions indicated in his letter to

Baruch, but that it would be transformed

into the nucleus of the War Resources Administration contemplated by the Industrial

Mobilization Plan. The press release jointly

sponsored by Johnson and Assistant Secretary of the Navy Charles Edison went so

3

 Ltr, Johnson to Baruch, 5 Oct 37, cited in

Thatcher, Planning for Industrial Mobilization,

1920-1940, pp. 296-97. Johnson also broached

the matter to President Roosevelt at this time.

Blum, The Birth and Death of the M-Day Plan,

p. 17.

4

 Annual Report of the Assistant Secretary of

War, in Annual Report of the Secretary of War to

the President, 1938 (Washington: Government

Printing Office, 1938), pp. 19-20. 5

 These were Karl T. Compton, President, Massachusetts Institute of Technology; Walter S. Gifford,

President, American Telephone and Telegraph

Company; Harold G. Moulton, President, The

Brookings Institution; John L. Pratt, Director and

former Vice President, General Motors Corporation; and Brig. Gen. Robert E. Wood, President,

Sears, Roebuck and Company.
100 THE ARMY AND ECONOMIC MOBILIZATION

far as to state that in an emergency the War

Resources Board "would become an executive agency of the Government with broad

powers similar to those of the old War Industries Board" and "would report directly

to the President as a War Resources

Administration."

 6

In the political atmosphere of 1939, with

its heritage of years of antiwar sentiment,

strife between labor and industry, and controversy over the New Deal in all its aspects,

the composition of the board and even its

appointment were widely criticized. Pacifists, isolationists, and many others who opposed rearmament looked upon the board

as a step toward war. Many New Dealers

and heads of existing governmental agencies

saw in the imminent creation of a War Resources Administration a threat both to the

principles of the New Deal and to the status

of established agencies. Anti-New Deal businessmen deplored the possibility of further

interference by government in industry. The

board was criticized as a "tool of Wall

Street" heavily loaded with MorganDuPont men. The omission of representatives of labor and agriculture, especially unfortunate in view of the statement that the

board might become the War Resources

Administration, was looked upon as an indication that big business was about to displace the New Deal, take over the economy,

and destroy the gains for which labor had

fought so desperately during the past ten

years. Other criticisms centered on the

chairman's lack of experience in economic

mobilization matters and noted the conspicuous absence of Bernard Baruch, the

acknowledged authority in the field.7

In addition to criticisms of the War Resources Board there were other factors of

long standing which influenced the President in his decision not to use the superagency proposed in the Industrial

Mobilization Plan. As far back as 1931, Mr.

Walter S. Gifford—who became a member

of the War Resources Board in 1939—had

recommended the revival, under existing

statutes, of the Advisory Commission to the

Council of National Defense as a peacetime

planning agency for co-ordinating national

resources, to be called upon in time of an

emergency.8 Shortly after his re-election in

1936, President Roosevelt discussed the

problem of emergency management of the

national economy with Louis Brownlow,

chairman of the President's Committee on

Administrative Management. At this time

he suggested that Brownlow investigate the

possibility of statutes remaining in effect

from the World War I period which might

serve the purpose. Brownlow learned that

the Council of National Defense was technically still in existence and that the President

had the power to appoint an Advisory Commission to the council. This information apparently made an impression on the

President, for he later referred to it on several occasions. After the passage of the Reorganization Act of 1939, plans were made

for the establishment of an Office for

Emergency Management in the Executive

Office of the President. On 29 August 1939,

6

 AIC R56, Plans for Industrial Mobilization,

1920-1939, p. 67. 7

 This last criticism was met by the appointment

of Baruch's long-time associate, John M. Hancock,

to board membership on 6 September 1939. For

general criticisms of the board and its report, see

sources cited in note 2, above. 8

 War Policies Commission Hearings, 1931, pp.

776-87, especially p. 781. Mr. Gifford had been the

executive director of the old Council of National

Defense from its inception in 1916. The council itself consisted of the Secretaries of the War, Navy,

Interior, Agriculture, Commerce, and Labor

Departments.
ORGANIZATION FOR WAR 101

the day before his first and only meeting

with the War Resources Board, Roosevelt

discussed with Brownlow the possibilities of

such an agency. On this occasion the President indicated misgivings over the concept

of an all-powerful War Resources Administration which would stand between him and

the public in the administration of important areas of national policy. Accordingly, he sketched out a proposal to reactivate the Council of National Defense and

confine the activities of the "Stettinius

Board" to the mobilization of industrial

supplies, one of six contemplated subdivisions of the council's activities.9

On the following day the President met

with the War Resources Board and indicated his views on governmental organization for economic mobilization. Again he

sketched an outline of an advisory body of

some six or seven members, reporting to him

as Co-ordinator. In view of "uncertainty

over the dividing line" between the Council

of National Defense and the War Resources

Board, he requested that the functions of

the board be described in detail before additional funds were granted for continuing its

work. The meeting lasted only fifteen minutes, and at the Cabinet meeting two days

later the President indicated his intention to

revive the Council of National Defense if an

emergency required.10 This was on 1 September 1939, the day Germany invaded

Poland. On 6 September the War Resources Board submitted to the President, in

accordance with his earlier request, a memorandum describing its proposed functions.

Included in these was the establishment of

a "nucleus of an adequate War Resources

Administration, through which the President may, in an emergency, coordinate his

war control over the industrial, material and

economic resources of the nation."

 11

This memorandum did not alter the

President's position. On 8 September 1939,

five days after France and England had declared war against Germany, he proclaimed

a limited national emergency and signed the

order providing for the Office for Emergency Management (OEM) in the Executive Office of the President. At the 11 September Cabinet meeting he referred to "a

very comprehensive blueprint prepared by

the Stettinius committee, from which it

appeared that this committee was prepared

to take over all of the functions of the Government." He stated that "he had no intention of permitting this and that he would

not approve this blueprint."

 12

 At the same

time he reaffirmed his intention to utilize

the Council of National Defense. Hence,

when he received the final report of the War

Resources Board some six weeks later, the

President took no action on it and declined

to make the report public. Thereafter the

War Resources Board remained in a state

of suspended animation until it became clear

that its service would no longer be required.

The final report of the War Resources

Board was a compromise to meet the President's objections and still retain the core of

the organizational structure developed over

the years in the Industrial Mobilization

Plan. The report abandoned the key superagency role of the War Resources Administration while still retaining its basic structural and functional characteristics for 9

 See Blum, The Birth and Death of the M-Day

Plan, pp. 33-37. 10

 The Secret Diary of Harold L. Ickes, II, The

Inside Struggle, 1936-1939 (New York: Simon and

Schuster, Inc., 1954), 710.

11

 Min, WRB Mtg, 6 Sep 39, and Memo, same

date, cited in Blum, The Birth and Death of the

M-Day Plan, p. 39. 12

 The Secret Diary of Harold L. Ickes, II, 720.
102 THE ARMY AND ECONOMIC MOBILIZATION

mobilizing the nation's material resources.

Six other superagencies proposed for operation independent of a War Resources Administration were Selective Service, Public

Relations, War Labor, War Finance, a Price

Control Board, and if necessary a Food

Administration. All of the proposed machinery would, as repeatedly emphasized in

IMP, be under civilian control and subject

to the authority of the President. But the

report in its compromise form apparently

had ho more appeal to the President than

the original position of the board; he had

already committed himself to the concept

of an advisory commission.13

An additional factor militating against

the adoption of IMP at this time was the

schism existing within the War Department

itself. Secretary of War Harry H. Woodring was lukewarm toward rearmament on

a large scale and took exception to the energetic activities in this direction on the part

of the Assistant Secretary. Although he

could not overrule Mr. Johnson in the discharge of the economic mobilization responsibilities conferred upon the Assistant

Secretary by the National Defense Act, Mr.

Woodring openly expressed disapproval of

his nominal subordinate. At a Cabinet

meeting on 26 September 1939 he criticized

Mr. Johnson's promotion of the War Resources Board during his absence. When

President Roosevelt, at a press conference

after the meeting, indicated that the War

Resources Board would file its report and

then disband, Mr. Woodring stated to the

press that the "War Department is not setting up any permanent war boards or war

machinery and I hope never will."

 14

These developments in the fall of 1939—

after war had been declared in Europe and

while Congress was in the process of abandoning "neutrality"—made unlikely the

formal adoption of IMP at any time in the

future. When the crisis arrived in the

spring of 1940 and the formulation of a

huge military procurement program was

under way, the actual establishment of a

central mobilization control agency became

imperative. A number of prominent individuals suggested the recall of the War Resources Board and the adoption of the

Industrial Mobilization Plan. This was

vigorously opposed by members of the

White House staff, who objected that IMP

was not geared to changes which had taken

place since World War I and that it neglected the problem of civilian supply. Some

of the objections were made in innocence of

any but the most superficial knowledge of

IMP and mobilization planning in its

entirety:

They also told the President that the needs

of the military were arrived at under IMP

by the "most elementary rule-of-thumb"

methods by Army officers "after a half-a-day

lecture on statistics." In fact, the White House

advisors stated that many of the war plans are

"nothing more profound than student exercises, worked up in a few hours or days as a

problem in a brief Army Industrial College

course."

 15

At this time President Roosevelt again

indicated his feeling that adoption of the

Industrial Mobilization Plan would remove

him from active control of the mobilization

effort:

He told members of the Department of

Commerce Business Advisory Council on May

23 that he would not set up a War Resources 13

 The report of the War Resources Board, kept

secret until the end of World War II, is reproduced

in full in Truman Committee, Hearings, 42:

25957-71. 14

 Press Conference, 26 Sep 39, cited in Blum,

The Birth and Death of the M-Day Plan, p. 42, and

Janeway, The Struggle for Survival, p. 69. 15

 Blum, The Birth and Death of the M-Day

Plan, p. 48.
ORGANIZATION FOR WAR 103

Board or a War Industries Board and turn

over the war effort to "complete outsiders

who don't know anything about running government. It would be unconstitutional; the

final responsibility is mine and I can't delegate

it."

 16

In view of these circumstances and with

such problems as the third-term decision

and a controversial selective service bill

looming upon the horizon, the President

acted under existing law and revived the

Advisory Commission to the Council of National Defense on 29 May 1940.17

It is probable that a War Resources Administration, or an equivalent organizational structure under a happier name,

could have been created by Executive order

under existing law. But many of the powers

long contemplated as essential to a War Resources Administration under large-scale

mobilization (for example, material and

price controls) did require new legislation.

This, of course, was equally true for NDAC

and its successors. Nevertheless, the opportunity of reviving NDAC without additional

legislation and presumably with a minimum

of controversy formed an important element

in the President's decision.18

The Advisory Commission was composed

of seven independent commissioners each

representing a particular segment of the

economy.19 The commission had no chairman or other head, reporting to the President either directly or through its executive

secretary via the Office for Emergency Management. With the ramification of the effects

of the procurement program during the remainder of 1940, the problems of managing

the defense economy became more and more

complex. By the end of the year it was clear

that the organizational form and powers of

NDAC were unequal to the task. On 20

December 1940, the President announced

plans to establish an Office of Production

Management, and these were brought into

effect by Executive order on 7 January

1941.20

The Office of Production Management

immediately took over the functions formerly discharged by the NDAC commissioners for production, materials, and employment. On 11 April 1941, the President

established the Office of Price Administration and Civilian Supply (OPACS), which

became responsible for the duties previously

exercised by the commissioners for price

stabilization and consumer protection. In

the following month, on 5 May 1941, the

Office of Agricultural Defense Relations was

created by Executive order, thereby relieving the commissioner for farm products of

16

 Ibid., pp. 48-49. 17

 General Services Administration, Federal Records of World War II (Washington: Government

Printing Office, 1950) I, 127. 18

 (1) CPA, Industrial Mobilization for War, p.

18. (2) U.S. Bureau of the Budget, The United

States at War, pp. 23-24.

The subsequent development of the central mobilization control agencies for World War II has

been recounted elsewhere and needs only a brief

summary in the present discussion. See the following principal sources and references cited therein:

(1) CPA, Industrial Mobilization for War; (2)

U.S. Bureau of the Budget, The United States at

War; (3) Herman Miles Somers, Presidential

Agency: OWMR, The Office of War Mobilization

and Reconversion (Cambridge: Harvard University

Press, 1950) (hereafter cited as OWMR); (4)

Nelson, Arsenal of Democracy.

19

 The seven commissioners and their respective

spheres of interest were William S. Knudsen (industrial production), E. R. Stettinius, Jr. (industrial materials), Sidney Hillman (employment),

Leon Henderson (price stabilization), Chester C.

Davis (farm products), Ralph Budd (transportation), and Harriet Elliott (consumer protection).

Donald M. Nelson was later appointed as Coordinator of National Defense Purchases, with status

equivalent to that of a commissioner. The actual

Council of National Defense was a nonoperative

body. CPA, Industrial Mobilization for War, pp.

22-23. 20

 Executive Order 8629, 7 Jan. 41.
104 THE ARMY AND ECONOMIC MOBILIZATION

his responsibilities. On 21 October 1941,

the principal remaining duties of NDAC—

the review and certification of tax amortization applications—were ordered discontinued by a resolution of Congress, and the

Advisory Commission held its last meeting

on the following day.21

The policy-making powers of the Office

of Production Management resided in its

council, consisting of the director general

(William S. Knudsen), the associate director (Sidney Hillman), and the Secretaries of the War and Navy Departments.

In this respect it was an improvement over

the NDAC, since it formally provided for

a closer, high-level relationship between the

control agency and the agencies for military

procurement. But like NDAC, OPM lacked

a head with final authority and looked to the

President for decision on major policies and

internal disagreements. The three major

operating divisions of OPM—Purchases,

Production, and Priorities—were "functional" divisions, each of which dealt independently with all product sectors of American industry. Thus, no industry had a

central point of contact with OPM, and individual firms had to deal separately, under

time-consuming procedures and often conflicting orders, with each of the functional

divisions.22 Not until mid-1941 were industry advisory committees and unified commodity committees—whose creation at the

very beginning of an emergency was contemplated by the Industrial Mobilization

Plan—established in OPM to permit an

integrated approach to industry.

Nor did the structure of the Office of

Production Management provide a satisfactory basis for dealing with the military

procurement agencies. The Industrial Mobilization Plan had contemplated that the

various echelons of ANMB would be to a

large extent merged and integrated with

the central control agency. Instead of fostering such an intimate relationship, OPM

like its predecessor resisted proposals for

War and Navy Department representation

on its Priorities Board and elsewhere, preferring to deal at arm's length with the military agencies. This made impossible OPM

participation in the formulation of programs and policies which by their nature

had to emanate from the military agencies.

Hence, urgent military programs, such as

elaborate plans for locating and constructing complex high explosives and munitions

plants, often had to be reviewed by OPM at

short notice with little prior knowledge on

which to base approval.

The conditions described above led to

new proposals to adopt the War Resources

Administration. Early in April 1941 the

OPM Production Planning Board recommended a type of organization for OPM

more closely approaching the proposals of

IMP.23 This suggestion was repeated on 8

21 May 1941 with more specific recommenda- Civilian Production Administration, Minutes of

the Advisory Commission to the Council of National

Defense, June 12, 1940, to October 22, 1941 (Washington: Government Printing Office, 1946) (hereafter cited as NDAC Minutes), pp. iii-iv. The

NDAC commissioner for transportation continued

to function as a part of the Office for Emergency

Management until the establishment, on 18 December 1941, of the Office of Defense Transportation. 22

 (1) CPA, Industrial Mobilization for War, pp.

98, 101-02. (2) Nelson, Arsenal of Democracy,

p. 144.

23

 CPA, Industrial Mobilization for War, p. 101.

The OPM Production Planning Board was a broadly

representative body for formulating long-range

policies for OPM. It was composed of 2 representatives of labor, 3 from industry, 2 from the

armed services, and 2 others. Its initial members

were George W. Meany, AFL; James B. Carey,

CIO; Samuel R. Fuller, Jr. (chairman), President,

American Bemberg Corporation; William E. Levis,

Owens-Illinois Glass Company; John L. Pratt, Gen-
ORGANIZATION FOR WAR 105

tions concerning the establishment of industry "war service committees" and OPM

commodity sections. Meanwhile, a bill was

pending in the Senate which would replace

OPM with a War Resources Administration.24

 On 27 May 1941 the President's

declaration of an unlimited national emergency provided an additional basis for the

formal adoption of the Industrial Mobilization Plan.

Although the proposals concerning the

commodity sections and industry advisory

committees were adopted in the June reorganization of OPM, no steps were taken to

replace OPM as a whole with the War Resources Administration of IMP. Major

problems in the field of priorities, allocations, and related matters were coming to a

head, and their resolution was attempted by

the establishment, on 28 August 1941, of the

Supply Priorities and Allocations Board

(SPAB). This was a more widely representative and powerful body than the OPM

Priorities Board, which it replaced. Presided over by the Vice President and composed of representatives of the military

agencies, civilian supply, foreign requirements, and other claimants on the nation's

productive resources, SPAB made broad

allocations of basic materials and attempted

to assemble long-range estimates of requirements. It put increased pressure behind

conversion of industry, curtailment of nonessential production, and expansion of the

nation's capacity for producing basic materials. But SPAB was destined to be shortlived. It was a policy-making body only,

without staff or organization, and relied

upon other agencies, chiefly OPM, to make

the studies which it needed and to execute its

decisions. Moreover, there were a number

of internal contradictions in the OPMSPAB lines of authority. Shortly after Pearl

Harbor the entire structure was replaced

by the War Production Board, which in

many respects resembled the War Resources

Administration proposed by the Industrial

Mobilization Plan.

War Department Reorganization for World

War II

Concurrently with the development of the

superagencies for central mobilization control, the War Department underwent continuous expansion and reorganization. With

the adoption of the Munitions Program of

30 June 1940, procurement districts, corps

areas, arsenals, depots, and other field establishments both within and outside the continental limits of the United States were

activated, expanded, or newly established.

The Washington headquarters of the supply arms and services, the Office of the

Assistant Secretary of War, the General

Staff, and all other War Department offices

and agencies began an extended period of

expansion. This process culminated in a

gigantic organization eventually containing

nearly two million civilian workers, the

largest of all U.S. governmental agencies

and greater in size than the entire federal

government at any time in all its previous

peacetime history.25

eral Motors; Admiral William H. Standley, Navy;

Maj. Gen. James H. Burns, Army; Harry L. Hopkins, representative of the President; and Robert E.

Doherty, President, Carnegie Institute of

Technology. 24

 Ibid., pp. 102, 107.

25

 Civilian employment by the War Department

reached the peak figure of 1,881,495 in the month

of June 1945. Nearly 734,000 of these (mostly

natives of foreign countries) were engaged in overseas theaters. Theodore E. Whiting et al., Statistics,

a volume in preparation for the series UNITED

STATES ARMY IN WORLD WAR II, Civilian

Personnel, 16 Jan 53 draft, Table CP-1, MS,

OCMH.
106 THE ARMY AND ECONOMIC MOBILIZATION

The Defense Period: Hegemony of the

Under Secretary of War

On 11 July 1940, in order to facilitate

the launching of the Munitions Program

and to provide more effective supervision

of the procurement activities of the supply

arms and services, the Assistant Secretary of

War reorganized his office. The Current

Procurement Branch, OASW, which had

supervised the War Department's peacetime

contract placement and administration activities, was divided into two branches—

Purchases and Contracts (P&C) and

Production.26

The Purchases and Contracts Branch,

eventually composed of some eleven sections, had the basic mission of expediting the

placement of orders under the procurement

program. It reviewed and formulated purchase policy, established basic contract

forms and placement procedures, supervised

the assignment of claims and the making of

advance payments to contractors, administered the tax amortization program, established basic auditing policies of the War

Department, handled legal and legislative

matters for OASW, and co-ordinated generally the purchasing activities of the various

supply arms and services. In March 1941,

the Defense Aid Section was created to

supervise placement of all contracts for lendlease procurement assigned to the War Department. By the beginning of 1942, the

various sections of the Purchases and Contracts Branch had been consolidated into six

major divisions—Legal, Progress, Construction Contracts, Advance Payments, Defense

Aid, and Control.27

The newly created Production Branch,

OASW, had the mission of expediting the

production and delivery of munitions after

contracts had been placed. It established

and administered procedures for analyzing

the progress of production and construction

programs, discovering choke points and unbalanced production, expediting the flow of

materials, eliminating other bottlenecks,

and speeding the delivery of finished munitions. As a part of these activities the Production Branch was responsible for assembling requirements information, surveying

industrial capacity, executing priority policy,

and establishing and supervising plant protection procedures and agencies. The

branch at first consisted of four divisions—

Aircraft, Ordnance, Miscellaneous, and

Construction. Subsequently four new divisions—Labor, Priorities, Plant Protection,

and Steel—were added.28

The fortunes of the major peacetime

branch of OASW—the Planning Branch—

were curiously mixed during the defense

period. The various unit mobilization plans

of the War Department, as part of the Industrial Mobilization Plan, had contemplated the merger of the planning and

operating agencies of the War Department

as soon as IMP was put into effect. But the

failure to adopt the superagency features of

IMP at the beginning of the defense period

threw these plans off balance. The Assistant

Secretary of War, as well as officers in the

Planning Branch, still hoped for the future

invocation of IMP, if not of M Day, and

preferred to keep the planning organizations

and many of their functions intact.

The Munitions Program, great as it was

in terms of previous procurement magni- 26

 OASW Office Order, 11 Jul 40. 27

 Mohler, Administrative Log of the Production

Division, Headquarters, ASF, and Its Antecedent

Agencies, 1939-1945, pp. 5-8. By this time a number of functions had been transferred out of the

P&C Branch. 28

 Ibid., pp. 8-13.
ORGANIZATION FOR WAR 107

tudes, was roughly only half the size of the

maximum effort contemplated by IMP. In

the face of an abundance of idle plant

capacity inherited from ten years of depression, strict observance of facility allocations

was considered to be economically undesirable and politically unwise. Informal competitive bidding among allocated facilities

as well as other qualified firms would secure

the most advantageous terms to the government for the majority of contracts. Nevertheless, it was considered highly desirable to

keep facility records and allocation plans up

to date, both for current use and to provide

for possible strict allocation at a later time.

All this work, as well as many other planning

activities, had been carried on by the Planning Branch and it was thought that these

activities would be disrupted by a premature merger of planning with current

procurement.29

As a result, the Planning Branch occupied

a compromise position throughout the defense period. On the one hand, it continued

its peacetime-type activities on an accelerated basis—revising and enlarging its

records of available productive facilities,

supervising the revision and augmentation

of the procurement plans of the supply arms

and services, bringing up to date its studies

of strategic and critical materials, and continuing its role as the "Army half" of the

Army and Navy Munitions Board. But these

and other activities necessarily brought it

into areas of current procurement and production occupied by the P&C and Production Branches. Thus, the Planning Branch

maintained a Legal Division, a Priorities

Division, a Construction Division, a Defense

Aid Division, and other offices identical in

name and similar in many functions to

counterparts in the P&C and Production

Branches. A modus vivendi was gradually

worked out, with the Planning Branch concentrating its efforts in fields not adequately

covered by the operating branches—especially in the broader aspects of economic

mobilization and longer-range planning. In

this capacity the Planning Branch was

deeply involved in launching and developing the priorities system, coping with the

shortage of machine tools, computing raw

material requirements, presenting the

Army's views on economic mobilization

matters to the NDAC and its successor

agencies, and in many other activities of an

operating as well as a planning nature.

Notwithstanding these adaptations to the

circumstances, failure to provide an effective integration of the procurement planning and the operating agencies of the War

Department at the outset of the defense

period was the source of considerable confusion and frustration. This was evident not

only within OASW but in the headquarters

and field offices of several of the supply arms

and services, most notably in the case of the

Quartermaster Corps. Procurement planning in the QMC had envisaged a changeover in time of emergency from centralized

depot procurement to decentralized purchasing, with each military corps area as

nearly self-sufficient as possible. In the

launching of the Munitions Program, the

central depots simply expanded their current procurement operations and resisted

any major organizational changes. This resulted in considerable friction between the

planning and current procurement organizations in the QMC field establishments:

29

 (1) AIC R56, Plans for Industrial Mobilization, 1920-1939, pp. 76ff. (2) Pitkin and Rifkind,

Procurement Planning in QMC, pp. 119-28. (3)

Brig Gen Harry K. Rutherford, Dir Planning Br

OASW, The Organization and Functions of

OASW, 12 Sep 40, AIC Lectures, 17:168.
108 THE ARMY AND ECONOMIC MOBILIZATION

SECRETARY OF WAR HENRY L.

STIMSON (1940-45).

The unhappy relationship between the two

field organizations was long a thorn in the side

of the Quartermaster body. Its intended mis- sion unrealized and its current efforts un- appreciated, the procurement planning or- ganization rapidly disintegrated. Much re- duced in strength and effectiveness, it was

ordered discontinued in the fall of 1942, and

its remaining personnel absorbed in the cur- rent procurement depots.30

The Ordnance Department, on the other

hand, was not confronted with this problem. Its peacetime procurement was relatively small and its emergency program

followed very closely the pattern established

by procurement planning. These basic differences partly account for the wide divergences of opinion on the issue of whether

and to what extent the results of the Army's

peacetime planning efforts were actually

utilized for World War II.

Effective 12 December 1940, Congress

passed new legislation transferring to the

Secretary of War all the statutory duties

assigned to the Assistant Secretary by the

National Defense Act of 1920. The new law

also permitted the appointment of an Under

Secretary of War and the complete delegation by the Secretary—to any of his staff

members—of his procurement and industrial mobilization responsibilities. Assistant

Secretary Robert P. Patterson, who had

joined the War Department shortly after

Secretary Henry L. Stimson in the summer

of 1940, was promoted to the Under Secretariat, and the Office of the Under Secretary

of War completely replaced the Office of the

Assistant Secretary of War. The new legislation, by removing the statutory authority

formerly conferred upon the Assistant Secretary, insured a unified civilian command

in the War Department, preventing the possibility of a recurrence of the kind of schism

which had existed in 1939.

The responsibilities of the Office of the

Under Secretary of War (OUSW) and its

predecessor, OASW, during the defense

period were of a magnitude and importance

seldom visited upon a single organization or

agency. Relatively few persons in the United

States as a whole knew or understood the

nation's utter lack of military preparedness

to defend itself against a major aggressor, or

that it would require some two years before

this deficiency could be substantially overcome. Under Secretary Patterson, like Louis

Johnson before him, was keenly aware of

this situation and, from the time of his appointment to the end of the war, devoted his

efforts with singleness of purpose to filling

the Army's needs for munitions and the asso30

 AIC R56, Plans for Industrial Mobilization,

1920-1939, p. 79.
ORGANIZATION FOR WAR 109

ciated tasks of mobilizing the nation's productive resources.

The dominant mood prevalent in OUSW

during the defense period was the sense of

urgency, coupled with the frustration inevitably flowing from the difficulties of getting rapid action when the nation was still

at peace. Urgency required that many

things be done which could not be done

without a revolution in national psychology,

statutory requirements, administrative regulations, organizational prerogatives, and

countless other elements in the institutional

fabric of government as well as of the community at large. Above all was the huge

question mark, with its many ramifications,

which pervaded the entire rearmament effort: Would war actually come to the

United States, and if so, would our preparations be enough and in time? Or would all

the elaborate efforts of economic mobilization—the conversion of industry, the creation of a vast empire of industrial plant and

equipment, the erection and expansion of

military posts, camps, stations, and other

field establishments throughout the nation,

all requiring the expenditure of billions of

dollars and vast changes in the way of life

of millions of people—turn out to be unnecessary, or at best a form of insurance

against the advent of a war which never

came?

The burden of decision as to the proper

course of national policy in the midst of this

uncertainty fell upon the Congress of the

United States and—more than any other

single individual—upon the President. But

the task of formulating the vast program of

action to be taken fell chiefly to the military

agencies, the senior and largest of which was

the War Department. Among the War Department's many responsibilities, none were

greater than those resting upon the Under

Secretary and his office. Mr. Patterson was

determined that whether war came or not

the responsibilities of his office would be

met.

The relationship which developed between the War Department—as represented

by OUSW—and the Advisory Commission

to the Council of National Defense was considerably different from that envisaged by

the Industrial Mobilization Plan and from

the corresponding relationship achieved by

the end of World War. I. At the beginning

of that war the department's serious lack

of a distinguishable military program and

supporting plans for procurement placed

it in roughly the same position as the embryonic central mobilization control agencies. All offices of the government were

feeling their way on a trial-and-error basis

toward a positive and integrated war munitions program. This experimental period

came to an end with the revitalization of the

War Industries Board under the leadership

of Bernard Baruch. Thereafter the Army

and Navy leaned heavily upon the board

and looked to it as their guide and advocate.

When the crisis of 1940 arrived the military procuring agencies were in a position

much different from that of their predecessors a generation before. Twenty years

of planning had given them far more specific ideas of what they needed and of the

vigorous measures which would be necessary to supply these needs. The NDAC, on

the other hand, came suddenly and without

preparation to a bewildering task which

had to be discovered and defined in the

midst of day-to-day decisions and operations of the first magnitude. In addition to

this handicap, NDAC's seven independent

advisory commissioners lacked the organization and clear-cut authority to adopt many

of the policies essential to rapid mobili-
110 THE ARMY AND ECONOMIC MOBILIZATION

zation. Moreover, the vaguely defined

charters of the individual commissioners carried at least some implication that they represented the interest of special groups rather

than a unified effort to rearm the nation as

quickly as possible.

These and many other considerations

produced a kind of administrative vacuum

in the area of central mobilization control

for which the military agencies, who for

years had looked to the establishment of a

powerful War Resources Administration,

were unprepared. Anxious to get on with

their procurement programs, which required the immediate placement of contracts with the most capable firms, the

launching of vast new construction projects,

the expansion and conversion of existing industrial establishments, and the application

of production control measures, the services

chafed over what they thought were unnecessary delays and reviewing procedures.

As a result the Army and Navy moved in

to fill the vacuum left by the absence of

decisive action on various issues and went

ahead with specific programs without waiting for the formal approval which NDAC

often felt should have been obtained in advance of action.

In several areas in particular, the Under

Secretary of War and many of his staff often

felt that NDAC and its successor, OPM,

were too cautious and overly concerned with

considerations secondary in importance to

preparation for the war which seemed imminent. These areas were the approval of

new plant facilities, the administration of

the tax amortization program, the application of adequate priority controls, and

the curtailment of regular commercial production. For their part, authorities in

NDAC and OPM felt that the Under Secretary of War was indifferent to civilian

needs, to the dangers of sudden dislocations

of industry, and to the permanent effects of

a hastily adopted economic mobilization

program upon the national economy and

social structure. These attitudes on both

sides were far from universally or permanently held but they tended to establish a

pattern which persisted on into the war,

when—with the aid of the nation's ubiquitous and eager press—they occasionally

broke out into open controversy. A number

of the major disputes over the economic

mobilization program for World War II

can be traced to foundations established

during the defense period.31

A factor in the development of OUSW

which had an important bearing on War

Department policies and activities during

the defense period was the change in character of its key personnel. Throughout the

planning period OASW had been manned

and operated almost exclusively by Army

officers. Years of military tradition and practice had provided the greatest opportunities

for advancement in command and General

Staff positions, resulting in the relegation of

procurement duty to secondary status if not

to that of poor relation. Even for officers

specializing in matters of procurement and

supply, assignment to OASW—especially at

middle and low echelons—was often regarded as a period of alienation from the

supply arm or service in which they were

permanently commissioned and to which

they looked for long-run advancement.

31

 For the further exploration of this subject as

well as the general history of OUSW, the reader is

referred to Troyer S. Anderson, Introduction to the

History of the Under Secretary of War's Office

(1947), copy in OCMH. This manuscript provides

a highly readable and informative account of the

evolution of OUSW from its antecedents in World

War I, and of the problems of economic mobilization during the defense period.
ORGANIZATION FOR WAR 111

Hence, it was not the custom of the various

supply arms to send their best men for duty

with OASW. Furthermore, relations between OASW and the General Staff were

marked by a certain atmosphere of aloofness. This resulted partly from the failure of

the General Staff to obtain full control of

procurement in the early 1920's and partly

from the minor frictions accumulating out

of conflicts of authority and interest in areas,

such as requirements and specifications,

where the activities of the two offices met.

For all these reasons the officers in

OASW, including those of superior ability

in key positions, did not possess the rank

which was clearly called for in an office

having policy-making powers and authority

over all the supply arms and services, the

procurement districts, and other field establishments. The highest ranking officer in

OASW, the executive officer, was still only a

colonel several months after the launching

of the defense program. In a body as "rank

conscious" as the Army this was a serious

handicap in dealing with other agencies

both within and outside the War Department. Apart from general matters of prestige

and authority in day-to-day operations, this

factor made it difficult to get and retain the

most capable officers in OASW.

In order to offset this disadvantage and

to obtain personnel who could adjust rapidly

to the unusual problems faced by his office,

Mr. Patterson built up a personal staff of

key civilians who became largely responsible

for the formulation of policies in OASW

throughout the defense period. Most of

these were lawyers, trained at Harvard and

with professional practice in the New York

area. Since many of the major problems

connected with the launching of the defense program were legal in nature—involving complex issues in contractual

policy, negotiations with the nation's leading corporations, the exploitation of existing

statutes to the advantage of the rearmament

program, recommendation of new legislation, and testifying before Congress—the

services of the group of legally trained advisers came to be indispensable. Although

a few of them were recalled to active duty

as Reserve officers, they constituted a closely

knit team with a definite civilian orientation.

This important and often decisive influence

of civilians in the Under Secretary's office,

as well as elsewhere in the War Department,

was usually overlooked in the course of

various interagency conflicts which took

place from time to time throughout World

War II. Differences in viewpoint between

civilians in the War Department and civilians in other agencies were typically labeled

as "military-versus-civilian" controversies,

when more often they merely reflected

understandable divergences of interest between different agencies responsible for the

accomplishment of distinctive missions.32

The basic foundation for the great outpouring of Army munitions during World

War II was laid during the period of OUSW

hegemony as the War Department policymaking and co-ordinating body in the field

of procurement and economic mobilization.

Actual deliveries of finished munitions during the defense period were small in comparison with the astronomical quantities

reached at the peak of the war. But they

were large by peacetime standards and were

of critical importance to the lend-lease program in its initial stages, as well as to the

rehabilitation and expansion of the U.S.

Army. The most significant element of

32

 The above discussion of OUSW personnel has

been based on Anderson, Introduction to the History of the Under Secretary of War's Office, Chapter

VI, especially pages 57-63.
112 THE ARMY AND ECONOMIC MOBILIZATION

progress during the defense period was not

the increase in procurement deliveries but

the creation of productive facilities essential

to the output of munitions. This rate of

facilities expansion greatly overshadowed

the rate of actual production prior to Pearl

Harbor, which accounted only for some 4

to 5 percent of total production for the entire war. Some $3 billion, or nearly one

third, of all War Department sponsored facilities for World War II had been authorized by the end of 1941. According to one

estimate, some three fourths of these were

in at least partial operation by the end of

1942.33 Closely related to the preparation

of facilities was the entire array of developments in the field of contract placement, the

tooling up of industry, and other steps in the

total field of economic mobilization—factors not susceptible of statistical measurement but vital to the eventual outcome of

the war.

The War Period: Regime

of the Army Service Forces

The role of OUSW as the active director

of the War Department's procurement and

production program came to an end with

the basic reorganization of the War Department on 9 March 1942.34

 At this time the

War Department organization in the United

States was divided into three main parts:

the Army Ground Forces (AGF), the Army

Air Forces (AAF), and the Army Service

Forces (ASF). The Army Service Forces,

under the command of Lieutenant General

Brehon B. Somervell, was made responsible

for all Army procurement and economic

mobilization (except for items peculiar to

the Air Forces) as well as many other activities, subject only to general supervision by

the Under Secretary of War and the Chief

of Staff.

The Army Service Forces embraced three

broad echelons of War Department offices

and agencies: (1) ASF headquarters, which

included a wide array of functional staff

divisions; (2) headquarters and field establishments of the several technical services;

(3) the nine geographical service commands throughout the United States.

(Chart 1) Collectively, the ASF organization comprised the vast bulk of War Department activities and civilian personnel within

the United States. On 30 June 1943, when

the number of War Department civilians

within the continental United States reached

its peak, the ASF accounted for over a million civilian employees, or some 75 percent

of the War Department total in the

country:

 35

Number of

Location Employees

Total War Department______ 1,545,457

Total Within United States—— 1, 375, 457

Total Army Service Forces___ 1, 022, 074

Headquarters, Army Service Forces—— 32, 778

Technical Services_____________ 635, 714

Service Commands____________ 352, 075

U.S. Military Academy and Command

and General Staff School_______ 1, 507

Headquarters, ASF, absorbed all but a

handful of the office and staff formerly attached to OUSW. It also absorbed large

portions of the War Department General

Staff. These included most of G-4 (Supply

Division), portions of G-1 and G-3 (the

Personnel, and Organization and Training

33

 Anderson, Munitions for the Army—A Five

Year Report on the Procurement of Munitions by

the War Department Under the Direction of the

Under Secretary of War, p. 22. 34

 (1) Executive Order 9082, 28 Feb 42, effective

9 Mar 42. (2) WD Cir 59, 2 Mar 42.

35

 Whiting et al., Statistics, Civilian Personnel, 16

Jan 53 draft, Table CP-4.

114 THE ARMY AND ECONOMIC MOBILIZATION

Divisions, respectively), and minor functions of G-2 (Intelligence Division). In addition, ASF headquarters took over bodily

a large number of administrative offices

formerly reporting to the Chief of Staff.

These included the offices of The Adjutant

General, Judge Advocate General, The Inspector General, Provost Marshal General,

Chief of Finance, and Chief of Chaplains.

Many new offices were soon created within

ASF to meet the rising demands of war in

all of the functional areas concerned.

Throughout the war, the Army's coordinating machinery for procurement and

economic mobilization—lodged primarily

in the Office of the Director of Materiel—

constituted the hard core of ASF headquarters.

The second echelon of ASF consisted of

the seven technical services and their multitudinous field establishments—procurement

district and field offices, arsenals and proving grounds, powder, high explosives, and

loading plants, ammunition and storage

depots, ports of embarkation, market centers, and many other varieties. The technical

services were the renamed "supply arms and

services" of the 1930's, which in turn had

replaced the "supply branches" of the

1920's. The seven technical services were

the Ordnance Department, Quartermaster

Corps, Signal Corps, Corps of Engineers,

Medical Department, Chemical Warfare

Service, and the newly established Transportation Corps.36

The technical services were the operating

agencies of the War Department in all its

supply activities. They were responsible for

the design and development of equipment,

detailed computation of requirements, the

placing and administration of procurement

contracts, and the inspection, receipt, storage, and distribution of finished munitions.

Each technical service specialized in major

categories of equipment, supplies, and services assigned to it by statute or administrative order. All of the technical services

procured equipment for lend-lease, the

Navy, and other users in addition to the

combat and service arms of the U.S. Army.

They also had service or combat functions

to perform in overseas theaters of military

operations.

Although the technical services varied

greatly in size and scope of operations, all

were gigantic organizations, with headquarters in Washington and field establishments throughout the United States. Some

idea of their size is conveyed by the following figures indicating the peak number of

civilians (in addition to all military personnel) employed by each in World War II:

 37

Technical Service Employees

Ordnance ___________________ 259, 484

Engineers_____________________ 174, 906

Quartermaster ________________ 138, 711

Transportation _________________ 91, 533

Signal _____________________ 61, 628

Medical____________________ 33, 632

Chemical_____________________ 29, 058

The third ASF echelon referred to above

was composed of the nine former corps

areas—the nine geographical districts for

military administration throughout the

United States—renamed in June 1942 as

service commands. The service commands,

each headed by a commanding general,

36

 The procurement activities of the former Coast

Artillery Corps were transferred to Ordnance, and

the Air Corps had become the Army Air Forces—

one of the three major components of the reorganized War Department.

37

 Whiting et al., Statistics, Civilian Personnel, 16

Jan 53 draft, Table CP-4. The figures shown are for

various dates. Engineer figure includes civilians in

civil functions (for example, rivers and harbors) as

well as in military functions.
ORGANIZATION FOR WAR 115

were responsible for a variety of administrative and "housekeeping" functions for

the Army within their respective geographical areas. They had administrative and

supply responsibilities in the operation of

AGF posts, camps, and stations but no control over troops in training therein. Although field installations of the AAF and

the technical services were exempt from

service command jurisdiction, minor functions—such as supervision of army exchanges, repair and maintenance, laundry

operations, and disbursing—were performed for these installations by the service

commands. On the whole, the procurement

and related activities performed by the service commands were of a local and minor

nature and of relatively small importance to

the present study.38

The ASF organization brought together

under one command all the scattered functions of the War Department concerned

with services and matériel. It greatly reduced the number of officers reporting to the

Chief of Staff, thereby enabling General

Marshall to give his full attention to problems of strategy and national policy requiring decisions at the highest level. Under

the vigorous leadership of General Somervell the Army Service Forces made an outstanding contribution to the war effort and

to the program of economic demobilization

at the war's end. The life of the ASF came

to an end, on 30 June 1946, as a prelude

to the authorization of a separate U.S. Air

Force and the creation of a unified National

Military Establishment.

38

 John D. Millett, The Organization and Role

of the Army Service Forces, UNITED STATES

ARMY IN WORLD WAR II (Washington: 1954).

The reader is also referred to the other volumes in

the UNITED STATES ARMY IN WORLD WAR

II series covering the activities of the various technical services.

PART THREE

DETERMINATION OF ARMY

REQUIREMENTS

CHAPTER VI

Army Requirement Programs:

World War I to Pearl Harbor

Nature and Implications of Army

Requirements

The starting point for all military procurement is the determination of military

requirements—the kinds and quantities of

end items required to carry out the military

mission. Until some decision is reached as

to what and how much is to be procured in

a definite time period, no procurement

operations can take place. Likewise, in the

absence of knowledge of the types and quantities of end items needed, requirements for

productive facilities, materials, manpower,

and other contributory resources cannot be

estimated, requests for appropriations cannot effectively be made, and even procurement planning cannot be projected much

beyond the level of broad generalities.

Paradoxically, although it is the starting

point for procurement activity, the formulation of military requirements is, of all aspects of industrial mobilization and procurement, the most difficult of satisfactory

achievement. For World War II in particular, two decades of disarmament, grave divisions in political opinion prior to Pearl Harbor, the eventual magnitude and scope of

Army operations, their dispersion to all parts

of the world, their technological complexity,

the rapidity of change in the kinds and uses

of needed equipment, and the heavy Allied

claims upon the United States as the "arsenal of democracy," all made the task of

accurately estimating requirements wellnigh impossible. The domestic political difficulties which hindered the formulation of

national objectives previous to 7 December

1941 gave way thereafter to broad problems

of determining Allied strategy and its supporting logistical arrangements on a global

basis.

To the many political and methodological

problems involved in computing requirements for World War II were added numerous practical barriers of an administrative

nature. These included shortages of experienced personnel, the necessity for developing

new organizations and procedures, the pressure of cruel deadlines in an atmosphere of

urgency, and many other elements—all contributing to the difficulty of the underlying

task. It is not surprising, therefore, that the

armed services were sometimes slow in computing firm, long-range estimates of requirements and that these were subject to a

substantial margin of error and the necessity

for constant revision.

The importance of timely and accurate

determination of its requirements for World

War II extended far beyond the procurement operations of the Army itself. Since
120 THE ARMY AND ECONOMIC MOBILIZATION

the Army in that war was the greatest single

claimant upon the nation's productive resources the industrial mobilization plans of

the entire nation depended heavily upon the

nature and magnitude of Army requirements. Thus the central economic mobilization control agencies had a vital interest and

stake in the designation of Army needs. But

beyond the Army, and beyond the technical

problems of industrial mobilization and war

production, was the ultimate interest of the

nation as a whole in the adoption of procurement objectives which were at once adequate to assure victory and sufficiently

controlled to keep wasteful procurement to

a minimum. The magnitude of Army requirements for World War II was such that

overstatement could easily nullify economies

of both materials and money painfully obtained by conservation, substitution, close

pricing, contract renegotiation, and other

measures. On the other hand, understatement would not only jeopardize the nation's

security but would also be economically

costly by resulting in piecemeal procurement and other inefficient production

arrangements.

A detailed exposition of the Army's activities in planning its requirements for the

World War II period, its achievements and

its shortcomings, would require many

volumes. The present condensation (Part

Three) attempts only a broad portrayal of

the evolution of requirement programs, the

methods by which the Army computed its requirements, and some of the major issues in

the area of requirements determination

which arose throughout the planning cycle.1

Army Attrition and Gradual Rehabilitation:

1920 to 1939

During the two decades between World

War I and II, Army requirements problems

rested upon two related but distinguishable

questions: (1) What should be the peacetime strength and equipment of the Army?

1

 The best source of primary information on Army

requirements and their relation to procurement in

World War II is the interim history, The Determination of Army Supply Requirements, prepared in

1945 by Lt. Col. Simon M. Frank, QMC, of the

Requirements and Stock Control Division, ASF.

The documentary collection (159 documents) in

support of this monograph is unusually rich in

pertinent materials. The Frank monograph, a copy

of which may be found in OCMH, is hereafter cited

as Frank, Requirements; specific documents in the

collection are cited by number as Frank, Doc.

(no.). For a broad chronological treatment of the

influence of strategy and logistics upon Army requirements, see the two volumes by Richard M.

Leighton and Robert W. Coakley, Global Logistics

and Strategy, 1940-1943, UNITED STATES

ARMY IN WORLD WAR II (Washington: 1955),

and Global Logistics and Strategy, 1943-1945, in

preparation for the series UNITED STATES

ARMY IN WORLD WAR II, MS, OCMH. On

this subject, see also Logistics in World War II,

Final Report of the Army Service Forces, A Report to the Under Secretary of War and the Chief

of Staff by the Director of the Service, Supply, and

Procurement Division of the War Department General Staff (1947), especially Chapter 4, in OCMH.

A wealth of illustrative detail concerning specific

items as well as general trends in Army requirements throughout the war period may be found in

the chapters on requirements in the annual reports

of the Army Service Forces for fiscal years 1942

through 1945. Copies of the reports are filed in the

Pentagon Army Library. Two other useful references are Richard U. Sherman, Jr., The Formulation of Military Requirements for Munitions and

Raw Materials (Ph.D. thesis, Harvard, March

1953); and George A. Lincoln (professor at U.S.

Military Academy), "Economic Problems of Military Mobilization—Planning Military Requirements," American Economic Review, XLII (May

1952), 438-52.

The complex task of determining the Army's indirect requirements for raw materials is discussed in

Chapter XXV, "The Controlled Materials Plan."

Throughout the present volume the term "matériel"

is used to refer collectively to the complex array of

end items procured by the Army. "Material" is

used to refer to raw materials and components

entering completed end items.
REQUIREMENTS: WORLD WAR I TO PEARL HARBOR 121

(2) What plans should be made regarding

the size and equipment of the Army to be

mobilized in case of war? The answers to

these questions were furnished by the interaction of a complex set of factors and influences, many of which were outside the jurisdiction and scope of War Department

activity.

At the end of World War I the United

States had approximately 3.5 million men

under arms, together with huge surpluses of

war matériel belatedly accumulated before

the sudden cessation of hostilities. With

painful memories of poorly planned mobilization fresh in mind, Congress in 1920

adopted the statutory expression of U.S.

peacetime military policy. The National Defense Act of that year provided the basis for

definite answers to the two questions stated

above: (1) it defined in considerable detail

the organization, composition, and size of

the peacetime Army; and (2) it made specific provision for advance planning of the

mobilization process to be used in the event

of war.2 It is of interest to examine the record during the interwar years in the light of

the policy expressed in this act.

The National Defense Act specified, in

Section 2, the size of the peacetime Army as

"not to exceed" 280,000 men. This figure,

plus some 425,000 men contemplated under

the National Guard, would give the United

States nearly three quarters of a million

trained soldiers as an Initial Protective

Force (IPF) in case of emergency.3 Such a

force was regarded by military planners as

the minimum needed for initial defense and

for providing a balanced nucleus from

which Army expansion would be evenly and

rapidly made in the event of war.

The size of the Army contemplated by the

National Defense Act was never realized

in the two decades following its enactment.

Lack of funds, together with specific limitations upon the Army's size by successive appropriation acts, confined the Army's actual

strength throughout most of the interwar

period to a fraction of the 1920 objective.4

The desire of a war-weary nation to "return to normalcy," the heritage of a war

debt of unprecedented size, the lack of any

apparent urgency, and faith in disarmament

as the only sure pathway to peace were

among the factors contributing to Army deterioration. As early as mid-1923, the enlisted strength of the Army had fallen to

less than 120,000 and not until a dozen

years later did it exceed 130,000. For the

bulk of the period, Army strength hovered

around 40 percent of the target expressed in

1920. The National Guard fared little

better, becoming stabilized at around 190,-

000 men in the early 1930's. (Table 16)

The effects upon the Army of its attrition

in manpower could not be adequately

measured by the simple ratio expressed by

2

 41 Stat. 759, 4 Jun 20. 3

 The National Defense Act of 1916 (39 Stat.

166, 3 June 1916) provided for the creation of a

National Guard with a strength of eight hundred

enlisted men per member of Congress.

4

 An analysis of strength limitations in the eighteen regular appropriation acts from 1923 to 1940

reveals a number of methods used by Congress to

limit the size of the Army. From fiscal year 1923

through fiscal year 1927, the appropriation Pay of

the Army flatly prohibited any excess over 125,000

enlisted men. From 1928 to 1935 there was no

limit on numbers but guns were provided for an

average strength of only 118,750. The 1936 and

1938 appropriations authorized an average of

165,000; 1939 and 1940, an average "not to exceed 165,000." The 1937 appropriation interestingly provided for an enlisted strength of "not less

than an average of 165,000." All such numerical

limitations were eliminated by the Supplemental

Appropriation Act of 1940 and successive acts

throughout World War II. See Military Laws of

the United States, 1939 (8th ed.; Washington:

Government Printing Office, 1940), pp. 28, 32.
122 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 16—STRENGTH OF ARMY AND NATIONAL GUARD, 1920-1945

[Actual Strength as of 30 June for Each Year]

a

 U.S. Army figures include personnel in AAF and its predecessors, Philippine Scouts, Army Nurse Corps, WAC, and miscellaneous

components on active duty. b

 Assimilated into U.S. Army.

Source: Records of Statistics Branch, Program Review and Analysis Division, Office of the Comptroller of the Army, Office, Chief

of Staff.

a 60-percent reduction from the National

Defense Act objective. This curtailment

meant the virtual abandonment of the major

peacetime function of the Army—the progressive training of both individuals and

organizations as specialized and co-operating units in military activity. The balance

in the size and composition of the several

combat arms—the Infantry, Cavalry, Field

Artillery, Coast Artillery Corps, combat

engineers, and others—as well as of individual battalions, regiments, divisions, and

larger organizational units, was drastically

upset. The necessity for preserving essential overhead activities, vital to the existence

of the Army as a national unit, threw the

burden of reduction heavily upon functional

units at lower echelons. The end results
REQUIREMENTS: WORLD WAR I TO PEARL HARBOR 123

were cogently expressed by General MacArthur in his annual report as Chief of Staff

in 1932:

After all these essential needs have been

satisfied there is left in the United States for

organization into tactical units approximately

3,000 officers and 55,000 men. Due to the

requirements of civilian training, and because

of the distribution of existing housing facilities, these units are scattered in small posts and

detachments throughout the length and

breadth of continental United States. . . .

in this situation combined training by the

various arms and services of the Regular Army

is limited to small concentrations. Many garrisons are at such reduced strength as to constitute little more than service detachments

for local maintenance and for civilian training

camps. . . . it has become extremely difficult, and in some cases almost impossible, for

even the smallest units to follow a progressive

training program.5

This attrition in the size and quality of

the Army was accompanied by an even

more serious deterioration in the Army's

stock of effective equipment. Several factors

combined to intensify the matériel deterioration. The existence of huge surpluses of

equipment at the end of World War I

proved to be an embarrassment for the next

decade and a half. Much of this surplus

stock was already obsolescent at the war's

end, and the rapid, world-wide technological advance of the 1920's rendered it still

less usable. Yet it was manifestly out of the

question in the early postwar years for the

Army to ask for any appreciable funds for

new equipment. Without relaxing its attempts to develop improved weapons and

other equipment for future procurement,

the War Department adopted the policy of

continuing to issue old types until existing

stocks were exhausted.6

By the beginning of the 1930's most of

the Army's equipment, apart from quantitative considerations, was antiquated or depreciated to the point of being worn out.

Unfortunately for prospects of replacement,

the arrival of the prolonged economic depression resulted in substantial cuts in the

War Department budget—already heavily

deficient in its provision for equipment.

From a figure of $345 million for fiscal year

1931, War Department military expenditures were cut over the next three years to

a new postwar low of $243 million for fiscal

year 1934. In the face of such retrenchment,

the Army chose the alternative of further

sacrificing its position in matériel:

So far as possible every reduction has been

absorbed by continuing in service obsolete and

inefficient equipment, and where absolutely

necessary, by suspending technical research

and development work. There has resulted

also a serious shortage in ammunition both for

target practice and for reserve stocks.

The risks involved in such a policy are

clearly recognized, yet in view of the necessities of the situation, it has been followed as a

lesser evil than that of permitting deterioration either in strength or efficiency of the

human organization maintained as the backbone of our land defense establishment.7

Long before retrenchment had reached its

maximum in 1933-34, the various Secre5

 Annual Report of the Secretary of War to the

President, 1932 (Washington: Government Printing Office, 1932), p. 59. Of total Army strength

as of 30 June 1932, 1,915 officers and some 36,000

men were stationed in overseas garrisons. Another

7,000 officers and nearly 30,000 men were required

in departmental and corps area overhead, the supply

arms and services, river and harbor development,

and miscellaneous activities.

6

 Ltr, TAG to TQMG, 15 Sep 22, sub: Annual

Survey of Adopted Types of Equipment, AG

400.114 (9-14-22) (Misc.) D, cited in Erna Risch,

The Quartermaster Corps: Organization, Supply,

and Services, UNITED STATES ARMY IN

WORLD WAR II (Washington: 1953) (hereafter

cited as QMC Supply), I, 52. 7

 Annual Report of the Chief of Staff, in Annual

Report of the Secretary of War to the President,

1933 (Washington: Government Printing Office,

1933), p. 19.
124 THE ARMY AND ECONOMIC MOBILIZATION

taries of War, Chiefs of Staff, and other War

Department spokesmen had repeatedly

called to the attention of Congress the seriousness of the Army's position with respect

to equipment.8 The following statements

near the end of the years of attrition summarize the entire period:

This deficit has not occurred suddenly

but . . . is the cumulative result of years of

failure to provide adequately for procurement

and replacement.9

Ten years of relative stagnation . . . cannot, under any circumstances, be overcome

instantaneously.10

Concerning such matters, the War Department function is advisory only and in this

capacity it frequently, between 1922 and

1935, expressed its conviction that in conditions then prevailing resided grave potentialities for disaster. During the past 5 years,

the Department has insistently urged upon

appropriate congressional committees the

stark seriousness of this situation.11

Thus, in the early 1930's the Army was

seriously deficient in almost all items of

equipment required to fight a modern war.

Specifically, it lacked motorized equipment

essential to rapid transportation of troops:

the Army still moved almost entirely on foot.

Its mechanized combat equipment was limited principally to tanks, and these (with the

exception of a handful of test units) were

the obsolete World War I stocks with a

maximum speed of four to five miles per

hour and highly vulnerable armor. Its field

artillery consisted largely of 75-mm. units

lacking both mobility and flexibility of fire

power: the lateral traverse was limited to 6

degrees, as compared with 90 degrees for

later models, and the guns could not be

towed at even moderate speeds. The infantry rifle was still the Springfield 1903 boltaction model: as of 30 June 1934 the Army

possessed only eighty semiautomatic rifles.12

Ammunition reserves were inadequate for

any emergency; in mid-1935 General MacArthur hopefully proposed as a concrete

objective the gradual accumulation of a

thirty-day operating supply of ammunition

in the essential calibers for the small peacetime Army called for by the National Defense Act. Such items as antiaircraft guns,

aircraft cannon, and aircraft detection

equipment had only recently been developed

and improved models of these items were

needed in large quantities. Only in airplane

development was the Army's equipment

situation deemed reasonably satisfactory,

but vastly greater numbers of the new planes

would be needed in wartime.13

In order to remedy its manifest weakness

in matériel and to remove its peacetime procurement program from a hand-to-mouth

basis the Army devised a number of longrange programs in the hope that they would

receive the support of Congress. As far back

as 1927 a Ten-Year Ordnance Program

had been adopted for the development and

procurement of a limited number of items.14

In September 1932, a Six-Year Rearma8

 (1) A compilation of official and public statements by War Department spokesmen on the inadequacy of Army appropriations and national defense measures between 1919 and 1941 may be

found in Cater files, 1941 folder, General Reference

Br OCMH. (2) A number of these statements

appear in Truman Committee, Hearings, 1:364-

68, Exhibit 36. 9

 Annual Report of the Chief of Staff, in Annual

Rpt of the SW, 1933, p. 19. 10

 Ibid., in Annual Report of the Secretary of War

to the President, 1934 (Washington: Government

Printing Office, 1934), p. 39. 11

 Ibid., in Annual Report of the Secretary of War

to the President, 1935 (Washington: Government

Printing Office, 1935), p. 42.

12

 Ibid., in Annual Rpt of the SW, 1934, p. 41. 13

 Ibid., in annual reports of the Secretary of War,

1932-35, especially 1934, p. 42. 14

 Green, Thomson, and Roots, The Ordnance

Department: Planning Munitions for War, pp. 46ff.
REQUIREMENTS: WORLD WAR I TO PEARL HARBOR 125

ment and Re-equipment Program, together

with a corresponding Research and Development Program, was adopted by the

Supply Division of the General Staff as a

basic objective in the rehabilitation of the

Army. The purpose of the six-year program

was to develop and supply for the existing

Army and National Guard the most urgent

items of equipment; the period to be covered was 1936-41. Lack of funds prevented

realization of these objectives, and, in any

case, additional study of problems of mechanization and motorization indicated that

the program was inadequate to meet any

serious threat of war; it would be necessary

to provide reserve stocks of equipment, requiring a year or more to produce in quantity, to be available for sudden expansion of

the Army beyond its existing strength.

Hence, it was deemed advisable to project

the six-year program beyond the term

originally contemplated.15 Eventually a War

Reserve Program was separately established with the goal of providing and maintaining stocks of critical, "long-term" items,

which would be needed immediately to

equip an expanding Army in the event of an

emergency. In the late 1930's annual expenditures for this program averaged about

$30,000,000.16

The circumstance initially arresting the

deterioration of the Army's matériel condition was the availability of funds under New

Deal measures to combat the depression and

restore employment. In fiscal year 1934 a

grant of $10 million from the Public Works

Administration (PWA) was applied to the

procurement of motor vehicles for the Army.

By 30 June 1935 approximately $100 million had been allotted to the Military Establishment of the War Department from the

PWA; of this amount $68 million went into

construction projects (posts, camps, stations, depots, and the like ) and the remainder into equipment, including $6 million for ammunition and $7.5 million for

aircraft. By 1938 some $250 million of relief

and emergency funds had been devoted to

the rehabilitation of the Military Establishment.17

From 1935 to the end of the 1930's, the

record reveals moderate but steady increases

in appropriations and corresponding progress in the re-equipment of the Army. Apart

from the greater liberality of the New Deal

government, events in Europe as well as in

the Far East exerted a real and increasing

influence upon the course of U.S. rearmament. During this period an average of some

$20 million annually was spent for equipment under the Rearmament and Re-equipment Program, $30 million for War Reserve, and $7 million for Research and

Development.18 The minimum motorization

program for the peacetime Army, reported

15

 (1) Memo, ACofS G-4 for DCofS, 7 Sep 34,

sub: Rearmament and Re-equipment Program, War

Department. (2) Memo, ACofS G-3 for ACofS

G-4, 27 Sep 34, same sub. (3) Memo, ACofS G-1

for ACofS G-4, 23 Oct 34, sub: Revision of SixYear War Department Program, FY 1936 to 1941,

Both Inclusive. All in G-4/29552-1. (4) Watson,

Prewar Plans, p. 38. 16

 Frank, Requirements, p. 4.

17 Annual Report of the Chief of Staff in Annual

Rpt of the SW, 1935, pp. 53-54. For interesting

sidelights on the Army and relief expenditures, see

Robert E. Sherwood, Roosevelt and Hopkins: An

Intimate History (New York: Harper & Brothers,

1948), pp. 76, 101. In its May 16, 1942 issue, the

Army and Navy Register stated: "In the years 1935

to 1939 when regular appropriations for the armed

forces were so meager, it was the WPA worker who

saved many Army posts and Naval stations from

literal obsolescence." 18

 (1) Background of the Army Supply Program

[circa 1943], pp. 7-9 and Charts 4 and 5, OCMH.

This little brochure was apparently written by Maj.

Gen. Walter A. Wood, Jr., for lecture presentation.

(2) Frank, Doc. 3.
126 THE ARMY AND ECONOMIC MOBILIZATION

WAR RESOURCES BOARD, August 1939. Seated, left to right: Dr. Harold S.

Moulton, Charles Edison, Assistant Secretary of the Navy; Edward R. Stettinius, and Louis

Johnson, Assistant Secretary of War and Chairman of the War Resources Board. Standing:

Cmdr. A. B. Anderson, Admiral Harold R. Stark, Dr. Karl Compton, John L. Pratt, Brig.

Gen. George C. Marshall, Acting Army Chief of Staff; and Col. H. K. Rutherford.

as 59-percent of the goal complete by the

end of fiscal year 1936, had reached 79 percent by 1939. The 75-mm. field guns, left

over from World War I, were gradually

being modernized, both in mobility and in

flexibility of fire, and the new 105-mm.

howitzer for divisional artillery had been

successfully developed. Stocks of the semiautomatic rifle had reached the point, with

fiscal year 1939 appropriations, where "the

initial equipment for all active units of the

Regular Army and National Guard . . .

[would] be available."

 19

 The Army had

made similar progress in the light tank program and had recorded a modest beginning

in the procurement of the medium tank.

Shortages in antiaircraft equipment, scout

and combat cars, seacoast defense equipment, the 81-mm. mortar, the 37-mm. antitank gun, gas masks, radio equipment, and

many other items had either been eliminated

or substantially reduced. Measured by the

later astronomical figures for the war years,

the 1935-39 gains were paltry; but compared with the history of the preceding

fifteen years they marked a substantial

achievement and paved the way for the

accelerated defense programs of 1940 and

1941.

The Munitions Program of 30 June 1940

Ever since Hitler's seizure of power in

1933, German rearmament and open

19

 Annual Report of the Chief of Staff, in Annual

Rpt of the SW, 1939, p. 31.
REQUIREMENTS: WORLD WAR I TO PEARL HARBOR 127

threats against the peace had led to mounting unrest throughout the world. The last

two years of the 1930's witnessed the transformation to actual invasion and open warfare. On 12 March 1938 Germany occupied

Austria in a "bloodless invasion." Six more

months brought the Munich pact and 12

March 1939, the invasion of the remainder

of Czechoslovakia. Late in 1938, William

C. Bullitt—U.S. ambassador to France—

had returned from Europe with a dire message of warning to President Roosevelt.

Mr. Bullitt forcefully described the fear

which had spread throughout Europe and

expressed his opinion of the inevitability of

war. In particular, his description of the

mighty German air force and the terror

which it inspired made a profound impression on the President. The Bullitt report

has been described as leading to the first

"acute White House concern over the

mounting powers of the Axis as a substantial threat to the security of the United

States."

 20

 This concern led to a reappraisal

of the state of American defenses, especially

airpower, and to definite action to build

them up.

From this time on, the nature of the Axis

threat and the seriousness of America's state

of unpreparedness became President Roosevelt's major concern. In view of the powerful isolationist and pacifist sentiment in the

United States, he proceeded with caution.

It nevertheless became known within the

War Department that the President was

anxious to secure an additional military appropriation from Congress in the near

future, and G-4 went to work on estimates

covering the more urgently needed items.

On the basis of G-4's recommendations, the

President went before Congress early in

January 1939 with a request for a special

$110 million appropriation for the Army

ground forces. This measure was passed by

the House without change on 2 March, ten

days before Germany overran Czechoslovakia, and was finally approved in May.21

In the middle of the summer—9 August

1939—the President appointed the War Resources Board to review the existing Industrial Mobilization Plan, and three weeks

later Germany invaded Poland. On 3 September England and France declared war

on Germany and on 8 September 1939 the

President proclaimed a state of limited national emergency.

The year 1940 opened in the peculiar atmosphere of what was known at the time

as the "phony" war. Military planners in

the United States—under no illusion as to

the continuation of the impasse in Europe—

regarded the letdown in operations as a

fortunate gift of borrowed time. General

George C. Marshall, testifying in February

in support of the War Department budget

for the coming fiscal year (1941), prophetically remarked: "If Europe blazes in the

late spring or summer, we must put our

house in order before the sparks reach the

Western Hemisphere."

 22

Since 1936 General Staff plans for emergency mobilization of the Army had contemplated the immediate availability, on

Mobilization Day, of an Initial Protective

Force composed of the existing Army and

the National Guard. A more inclusive force,

proposed in the Protective Mobilization

Plan, was to be available within ninety days

after M Day by the induction of new recruits. In general, throughout the 1936-39

20

 Watson, Prewar Plans, pp. 131ff.

21

 53 Stat. 642, 2 May 39, Second Supplemental

Military Appropriation Act, FY 1940. 22

 Subcom. of the H. Com. on Appropriations,

76th Cong., 3d Sess., Hearings on H. R. 9209,

Military Establishment Appropriation Bill for 1941,

p. 3.
128 THE ARMY AND ECONOMIC MOBILIZATION

period, the PMP envisaged the availability

of some 730,000 men in M plus 90 days,

consisting of an IPF of 400,000 (165,000

Army and 235,000 National Guard) plus

new recruitments of 330,000. Another 270,-

000 men to be obtained shortly thereafter

as "replacements" would bring the total to

1,000,000 men for whom equipment would

have to be available in the vicinity of M

Day. It was this hypothetical 1,000,000-

man force which was the basis for the

Army's equipment objectives during the late

1930's and on into 1940.23

At the time of General Marshall's testimony before the House committee, appropriations for 1940 and previous fiscal years

had financed what was then termed "full

equipment" for the existing forces of the

Army and National Guard. The primary

objective of the pending budget for fiscal

year 1941 was therefore the provision of

"critical items" for the PMP force of 1,000,-

000 men—now stated as 750,000 for

organized units and 250,000 individual

replacements. Critical items were those difficult-to-procure items of equipment—ammunition, semiautomatic rifles, tanks, artillery, and so on—which would be needed

immediately in an emergency but which

would require from one to two years or

longer to produce in adequate quantities.

The early possession of such items was described by General Marshall as "like . . .

gold in the vault against a financial

crisis."

 24

 Included also in the War Department fiscal year 1941 budget requests were

the regular items normally covered by the

annual appropriation, noticeably expanded

in recognition of the existence of war in

Europe.

Before the budget had been considered by

the Senate, the apparent stalemate in Europe was broken with startling suddenness.

On 9 April 1940 the German invasion of

Norway began a rapid succession of events

which in two short months saw the successful occupation of Norway, the capture of

the Low Countries, the evacuation of Dunkerque, and the fall of France. The Axis

threat to the Western Hemisphere and the

rest of the world was now painfully obvious,

and all previous estimates of U.S. military

requirements were rendered obsolete. During this two-month period, the General

Staff, the Under Secretary, and the various

supply arms and services of the War Department were all engaged in constant review

and revision of requirements estimates.25 It

was clear that any major defensive force

would require vastly greater supplies and

munitions than the PMP force only partly

provided for in the pending budget. It soon

became clear, also, that a major conversion

and expansion of the nation's industry

would be necessary if the supplies were to

be produced in time.

23

 Watson, Prewar Plans, pp. 30, 128, 154.

Throughout the 1930's both the Army and the

National Guard were chronically below IPF

strength, and the equipment objectives were not

reached until after 1940. 24

 (1) Page 2 of hearings cited above, note 22.

(2) Memo, ACofS G-4 for CofS, 15 Jan 40, sub:

Remaining Shortages in Critical and Essential Items

Required for the Present Existing Army and National Guard (After FY 1940), G-4/31349-1.

25

 For example, Memo, ACofS G-4 for CofS,

7 May 40, sub: Program for National Defense,

submitting an over-all national defense program

totaling $2,826 million beyond requests in the fiscal

year 1941 budget. This program would provide

critical equipment for a PMP strength of 1,166,000

men, temporary shelter, pay, rations, and maintenance of this force for one year, an air force of

5,806 planes, and miscellaneous facilities, spare

parts, and so forth. The proposal was returned for

further study, and on 6 June 1940, G-4 submitted

an elaborate revision requiring $4.8 billion beyond

the original fiscal year 1941 proposals of the War

Department. G-4/31349-1.
REQUIREMENTS: WORLD WAR I TO PEARL HARBOR 129

On 16 May 1940 the President addressed

a special message to Congress, urging the

development of aircraft productive capacity

in the United States of fifty thousand planes

per year and requesting immediate appropriations of $896 million for national defense. Of this amount, $546 million would

go to the Army, $250 million to the Navy

and Marine Corps, and $100 million to a

special Presidential emergency fund. An

additional $286 million in contract authorization was also requested. These requests

were added to the regular military appropriation bill under consideration in the Senate, along with additions permitting Army

expansion to the full peacetime strength of

280,000 specified in the National Defense

Act of 1920. Under these influences, on 13

June 1940 a total Army appropriation of

$1.5 billion in cash and $257 million in contract authorization was approved for the

fiscal year 1941.26

Even before the passage of the regular

appropriation act, successive German victories were compelling the consideration of

additional measures to meet the situation.

On 27 May 1940 the Chief of Staff requested a supplemental half-billion dollars

for current production of tanks, antiaircraft

guns, bombs, and three thousand planes.

At the request of Col. James H. Burns, Executive for the Office of Assistant Secretary

of War, $200 million was added for the

creation of new productive facilities. Colonel Burns, who as the ranking officer in

OASW was deeply involved in getting the

industrial mobilization program under way,

had been concerned for some time about

the disparity in the length of time required

to induct additional troops and the longer

period required to provide them with critical equipment. The President approved

these requests and placed them before Congress on 31 May. As a result, the First

Supplemental National Defense Appropriation Act for Fiscal Year 1941 was approved

and signed by the President on 26 June

1940.27 This act provided $821 million in

cash and $254 million in contract authorization and specifically permitted expansion of

the Regular Army to a total of 375,000 enlisted men. Including the regular fiscal

year 1941 appropriation, the War Department now had a total of some $3 billion to

prepare for the emergency.

The important appropriation acts just

described were not, however, sufficient to

implement the President's 50,000-planecapacity objective or to commit the economy to a long-range program of industrial

mobilization. They represented essentially

a short-run response to a series of events

which had barely begun and whose culmination could only be a matter of speculation.

What was needed in mid-1940 was a bold

program which would look beyond the fiscal

year and enable American industry to make

the heavy capital commitments, plant expansion, and organizational changes essential to large-scale armament production.

Such a program would state procurement

objectives in large and round numbers, in

contrast to the meticulous calculations used

in previous years to defend to the penny

each War Department budget request.

On 11 June 1940—a little more than a

week after his appointment—William

Knudsen, the NDAC commissioner for pro- 26

 (1) Public Law 611, 76th Cong., 3d Sess.,

Military Appropriation Act, 1941 (54 Stat. 350,

13 Jun 40). (2) For Presidential address to Congress on 16 May 1940, see Vital Speeches, VI

(1939-40), 482-84.

27

 Public Law 667, 76th Cong., 3d Sess. (54 Stat.

599, 26 Jun 40). See also Biennial Report of the

Chief of Staff of the U.S. Army to the Secretary

of War, 1 July 1939 to 30 June 1941, p. 4.
130 THE ARMY AND ECONOMIC MOBILIZATION

LT. GEN. WILLIAM S. KNUDSEN, NDAC Commissioner for Production, World

War II.

duction, conferred with Assistant Secretary

of War Johnson. Mr. Knudsen raised two

basic questions, the answers to which he desired at the earliest possible moment: How

much munitions productive capacity does

this country need and how rapidly must it

become available?

 28

 In reply to these questions, on 13 June 1940 Mr. Johnson presented the broad outlines of a program: (1)

for the ground Army, productive capacity

sufficient to meet the needs of an expanding

Army of 1,000,000 men by 1 October 1941,

2,000,000 men by 1 January 1942, and

4,000,000 men by 1 April 1942; (2) for the

aircraft program, annual productive capacity of 9,000, 18,000, and 36,000 planes, respectively, for the dates mentioned. The latter was in keeping with the 50,000-plane

program called for by the President: 36,500

of these would go to the Army, 13,500 to

the Navy.29

On 18 June Assistant Secretary Johnson

outlined for Mr. Knudsen the probable cost

of the program. On the basis of sample estimates, it would total more than $11 billion—over $6 billion for Ordnance, $3

billion for the Air Corps, and $2 billion for

the remaining supply arms and services.

This figure was considered too high by the

President, and word was sent back to the

War Department that cuts would have to be

made. With these instructions in mind, G-4

supervised the preparation of an itemized

and detailed program—more comprehensive than its earlier plan of 6 June30—which

was completed on 20 June. This program

known as the Munitions Program of 20 June

1940, amounted to some $7.3 billion. It

contemplated equipping the Army with the

critical items—over and above existing

stocks and items provided in the fiscal year

1941 appropriations—necessary "for one

year of a major national defense effort."

This major effort assumed that the Army

would be mobilized to a strength of 4 million

men within fourteen months and would

reach a strength of 2.6 million in theaters of

operations at a corresponding period. The

memorandum of transmittal noted that "it

is of the utmost importance to realize that

adequate production for such a force cannot be obtained in one year."

 31

The program of 20 June was transmitted

to Mr. Knudsen and shortly thereafter received the approval of the President. As28

 Memo, Burns, Ex Asst to ASW, for ASW, 13

Jun 40, sub: National Policy on Munitions Productive Capacity, copy in G-4/31773.

29

 (1) Ibid. (2) Memo, Johnson for Knudsen,

same date and file. 30

 See above, note 25. 31

 Confidential Memo (mimeographed), Johnson

for Knudsen, 20 Jun 40, formally transmitting the

Munitions Program of 20 June 1940, G-4/33473.
REQUIREMENTS: WORLD WAR I TO PEARL HARBOR 131

sistant Secretary Johnson subsequently

summed up the situation for the Chief of

Staff:

The main purpose is to put American industry to work in a big way and as expeditiously as possible to produce those important

and essential machines of war, together with

their accessories, ammunition, etc., that would

require an extended period of time for their

manufacture; and to fill in the gaps and deficiencies of present productive capacity by

the creation of necessary additional capacity.

This program, approved by the Secretary of

War, was submitted to the President by Mr.

Knudsen and Mr. Stettinius of the Advisory

Commission of National Defense. It was approved by the President. It should not be

changed except by approval of this office and

this office does not feel authorized to make

changes except with the concurrence of Mr.

Knudsen. However, if you believe that

changes should be made at this time, this

office will gladly discuss them with Mr.

Knudsen.32

The 20 June program had been hurriedly

put together and possessed a number of defects. G-4 was dissatisfied with certain

features and appointed a committee to revise the plan within the terms of the basic

directive. Also, for reasons of both urgency

and practicality, it had become clear to

Colonel Burns that specific procurement objectives should replace the creation of productive capacity for the first two stages of

the ground forces' portion of the program.

There were indications, moreover, that production bottlenecks would require a limitation upon the four-million-man program for

critical items; it would therefore be preferable to set up the program as an objective to

be accomplished as quickly as possible but

without pinning it to particular completion

dates.

Accordingly, a further meeting was held

in the office of the Assistant Secretary of

War. The result was the basic directive for

what was to become known as the Munitions Program of 30 June 1940:

1. . . . it is desired that the Mu

Program of June 20, 1940 be revised as

follows:

a. Procure reserve stocks of all items of

supplies needed to equip and maintain a

ground force of 1,000,000 men on combat

status.

b. Procure all reserve stocks of the important long-time items of supplies needed

to equip and maintain a ground force of

2,000,000 men on combat status. c. Create facilities which would permit a

production sufficient to supply an army of

4,000,000 men on combat status. d. Procure 18,000 complete military airplanes (less the 2,181 planes for which funds

have already been appropriated), together

with necessary spare engines, spare parts,

guns, ammunition, radio and other supplies

and accessories pertaining thereto. e. Provide productive capacity available

to the Army of 18,000 complete military airplanes per year, together with necessary engines and all other accessories and supplies

pertaining thereto.

f. Provide necessary storage for above.

2. Above to be ready for submission to the

President by 9:00 a. m., July 1, 1940.33

With this mandate for revision and the

latest troop basis supplied by the War Plans

Division (WPD) of the General Staff, G-4

went into action to meet the forty-eight-hour

deadline. It prepared standard forms to be

filled in by each of the supply arms, listing

items of equipment included in the existing

PMP Critical Items Program; these would

be needed in sufficient quantity for augmentation to a two-million-man force. A directive was sent to the various supply arms on

29 June, with instructions for computing

32

 Memo, Johnson for Marshall, 24 Jun 40,

G-4/31773(2).

33

 Memo, Johnson, Actg SW, for CofS, 28 Jun

40, G-4/31773.
132 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 17—MUNITIONS PROGRAM OF 30 JUNE 1940

[In Millions]

Source: Figures taken from Memo, Marshall for Johnson, 2 Jul 40, sub.: Program of Adequate Preparedness for the Army (written by

Col. H. S. Aurand).

initial requirements, replacements, new

items, estimated transportation costs, and

funds required for warehouses, magazines,

repair of arsenals, acquisition of land, and

other needs. Indicating that time was of

the essence, G-4 directed that the estimates

be completed in pencil and the data returned at the earliest possible time, but "in

any event, not later than 4:00 P. M. this

date." 34

On the next day, the final estimates were

tabulated, and the program was henceforth

known as the Munitions Program of 30 June

1940. At a preliminary conference with

the President's advisers, it was suggested that

requests for immediate appropriations be

held to $4 billion; provisions in the bill for

deferment of a portion of the costs for future

financing by supplemental appropriations

would permit the program to go ahead with

a minimum of delay. Accordingly, the

Chief of Staff submitted a recapitulation of

the program as shown in Table 17, and on

3 July a meeting with the President took

place. The program was approved with

negligible change, and in a series of supplemental appropriations throughout the fiscal

year, Congress provided the necessary

funds.35

The adoption of the Munitions Program

of 30 June 1940 marked a major development in the preparedness policy of the

United States. In the nineteen fiscal years

1922 through 1940, the United States had

spent something less than $6.5 billion on

War Department military activities. The

30 June 1940 program alone called for expenditures of $6 billion. Although this was

little more than half the $11 billion program

proposed by the War Department on 18

June, it was sufficient to get the rearmament

program under way. Together with the $3

billion appropriated in the month prior to

34

 Memo, G-4 (no addressee), 29 Jun 40, sub:

Instructions for Computation of Additional Critical

Items Required for a Force of 2,000,000 Men, Tab

A, G-4/31773.

35

 (1) A concise summary of the appropriations

made to implement the Munitions Program is reproduced in Frank, Requirements, pp. 10-11. (2)

The two principal appropriations for this purpose

were the Second Supplemental National Defense

Appropriation Act, FY 1941 (54 Stat. 872), approved 9 September 1940, covering some $3.9

billion, and the Fifth Supplemental National Defense Appropriation Act, FY 1941 (55 Stat. 123),

approved 5 April 1941, covering nearly $1.6 billion.
REQUIREMENTS: WORLD WAR I TO PEARL HARBOR 133

the adoption of the program, the total Army

commitment for the coming year was close

to $9 billion. Contemporaneous Navy,

Marine Corps, and other defense expenditures would amount to many more billions.

Hitler might well have paused to read the

signs of the times.

The Victory Program of 11 September 1941

The adoption of the Munitions Program

of 30 June 1940, and its ratification in the

form of appropriations by Congress, represented a major turning point in the rehabilitation of the U.S. Army. In spite of

large elements of political isolationism,

pacifism, and opposition to the administration, the U.S. Government had succeeded in

launching a program of industrial mobilization and military procurement which would

require from one to two years to bear significant fruit in the form of delivery of

actual munitions. The passage of the Selective Service Act three months later indicated

that the United States was ready, even in

an election year, to match its mobilization of

matériel with the mobilization of its manpower.

The 1940 program, great as it was in

comparison with the Army's meager equipment objectives during the interwar period,

was limited in concept. It was essentially

defensive, designed primarily to repel a possible attack upon the Western Hemisphere.

Although the size of the 1940 objective was

sufficient to keep American industry, as well

as the War Department, busy for many

months to come, events throughout 1941

converged to force a reconsideration of U.S.

military requirements. Observation of actual combat operations in Europe indicated

the desirability of substantial changes in the

organization and equipment of fighting

units of the Army. On 30 January 1941, a

recomputation of supply requirements,

based on revised tables of organization and

allowances, indicated the need for an additional $600 million for essential items and

$4 billion for critical items.36

 Moreover,

British and French orders for munitions

from firms in the United States, combined

with the unprecedented demands of the

Munitions Program, revealed an increasing

number of material shortages and production bottlenecks. But this was merely the

beginning of such difficulties. On 11 March

1941 the Lend-Lease Act was passed, appropriating some $7 billion for military and

defense aid to nations at war with the Axis.

It was evident to the U.S. military agencies

that large sectors of their own procurement

programs would be seriously jeopardized by

this tremendous additional burden upon

American industry and that a reconciliation

of total requirements was essential. At the

same time, Germany was consolidating its

victory in Europe, and informed sources

anticipated an early break with the Soviet

Union. If Hitler were to conquer the Soviet

Union, the outlook for the future of the

entire Western Hemisphere would be grim.

This prospect compelled the Army to survey

all the probable alternatives and to formulate some conception of its requirements for

an all-out war.

It was many months before the concept of

hemisphere defense gave way to broader

strategical foundation for U.S. Army requirements. The Army's G-4 had, in the

meantime, developed a series of schedules to

control procurement under the 1940 Munitions Program. These schedules, known as

Expenditure Programs, served both as shortrun statements of requirements and (after

36

 Frank, Requirements, p. 11.
134 THE ARMY AND ECONOMIC MOBILIZATION

appropriate adjustment) as approved programs of procurement. A separate Expenditure Program was developed for each appropriation act showing the quantity of each

item to be procured under the specific appropriation and listing unfilled requirements

needed to complete the Munitions Program

under future appropriations. As the world

situation continued to deteriorate in late

1940 and 1941, Army staff planners proposed successive increases in the PMP force

and in procurement of both critical and

essential items to meet the expansion. For

each proposed expansion the supply arms

and services were directed to prepare a tentative Expenditure Program, listing all the

items required to meet the objectives stated

in the directive. The accumulated statements of the several supply arms were reviewed, revised if necessary, and presented

to Congress as the basis for a budget request.

With the increasing liberality of Congress,

appropriations were made substantially as

requested, and G-4 would then approve the

Expenditure Programs of the supply arms

with only minor modifications. This procedure for stating short-term budget requirements and approving expenditures continued long after the complete financing of

the Munitions Program and was not discontinued until the summer of 1942 when the

Army Supply Program (ASP) became the

basis for budget requests and the sole procurement authority. All together eight Expenditure Programs were published from

12 August 1940 to 30 June 1942, authorizing procurement expenditures totaling

nearly $34 billion.37

Meanwhile, numerous pressures for a

complete statement of the demands upon

the nation's productive capacity had been

accumulating since early in 1941. On 18

February 1941 Mr. Knudsen had urged

development of a unified American production program to meet all current and expected military and foreign requirements.38

Throughout the spring of 1941 the Production Planning Board of the Office of Production Management called for the establishment of over-all production objectives

based upon a general strategic plan.39 The

War Plans Division of the General Staff,

pointing to the confusion resulting from

numerous isolated proposals and demands

upon American productive capacity, recommended the preparation of over-all estimates

of munitions production required for national security. Accordingly, on 21 May

1941, the Chief of Staff—General

Marshall—requested WPD to prepare "a

more clear-cut strategic estimate" which

would provide the basis for evaluating the

many individual suggestions continually being made for increases in matériel. While

WPD was at work on this difficult assignment, a request from the President provided

both the authority and the national objectives upon which to base long-range

strategic and procurement planning.40

The Presidential request, which led to the

broad statement of strategy and requirements later known as the Victory Program,

had its genesis in two memoranda prepared

by Maj. Gen. James H. Burns who now, in

addition to being the Executive in OASW,

was assistant to Harry Hopkins on lend-lease

matters. Convinced of the inadequacy of the

existing industrial mobilization effort of the

United States, General Burns urged both 37

 Approximately $20 billion of this amount was

appropriated early in 1942. For further discussion

of the Expenditure Programs, see Frank, Requirements, pp. 8-15, and supporting documents.

38

 CPA, Industrial Mobilization for War, p. 134. 39

 Ibid., p. 136. 40

 Watson, Prewar Plans, p. 335.
REQUIREMENTS: WORLD WAR I TO PEARL HARBOR 135

Mr. Hopkins and the Secretary of War to

work toward a raising of the sights. On 2

April 1941 he had prepared for Hopkins'

signature a memorandum to the Secretaries

of the War and Navy Departments urging

the study and recommendation of an all-out

program of munitions production. Hopkins,

stating that it would exceed his authority to

make such a request, dictated the substance

of the Burns proposal in a new memorandum for the President's own signature.41

During the same month General Burns prepared for Under Secretary Patterson's signature a similar memorandum to the Secretary

of War, urging that a munitions program be

undertaken sufficient "to achieve victory on

the basis of appropriate assumptions as to

probable enemies and friends and theaters

of operation." Patterson not only signed the

memorandum but obtained the approval of

Secretary Stimson and had it forwarded to

the Chief of Staff.42

These efforts bore no immediate fruit.

But on 9 July 1941, two weeks after the

German attack on the Soviet Union, President Roosevelt—in words obviously indebted to the earlier Burns memoranda—

addressed identical letters to the Secretaries

of the War and Navy Departments requesting the preparation of "over-all production

requirements required to defeat our potential enemies." Stating that his request involved "the making of appropriate assumptions as to our probable friends and enemies

and to conceivable theaters of operation,"

the President continued:

I wish you would explore the munitions

and mechanical equipment of all types which

in your opinion would be required to exceed

by an appropriate amount that available to

our potential enemies. From your report we

should be able to establish a munitions objective indicating the industrial capacity

which this nation will require.

I am not suggesting a detailed report but

one that, while general in scope, would cover

the most critical items in our defense and

which could then be related by the OPM into

practical realities of production facilities. It

seems to me we need to know now our program in its entirety, even though at a later

date it may be amended.

I believe that the confidential report which

I am asking you to make to me would be of

great assistance, not only in the efficient utilization of our productive facilities, but would

afford an adequate opportunity for planning

for the greatly increased speed of delivery

which our defense program requires.43

Although the Presidential request was

addressed to the problem of matériel requirements and more specifically to the

"most critical items," it appeared to General Staff planners to require a comprehensive estimate of the size and composition

of the Army needed "to defeat our potential

enemies." Matériel requirements for the

Army could not be computed in vacuo;

they were always related to a given troop

basis or mobilization plan indicating the

total number of troops required by the plan

and their detailed organization into armies,

corps, divisions, and lesser organizational

units. Each distinct type of unit within its

own class (for example, infantry, armored,

motorized, and other divisions) required

different kinds and quantities of equipment

according to established allowance tables.

It was impossible, therefore, to compute

matériel requirements in the absence of a

relevant troop basis, which in turn would

depend upon general strategic plans. The

co-ordination of the troop basis with

41

 Ltr, Burns to Maj Gen Harry J. Malony, Chf

of Military History, 13 Apr 49, OCMH 330.114. 42

 Memo, Patterson for Stimson, 18 Apr 41, JB

325, Ser. 692. The text of this important memorandum is reproduced in Watson, Prewar Plans,

p. 332. 43

 Ltr, President to SW, 9 Jul 41, Frank, Doc. 14.
136 THE ARMY AND ECONOMIC MOBILIZATION

strategic plans was the responsibility chiefly

of the War Plans Division of the General

Staff.

Upon receipt of the Presidential directive,

WPD immediately went to work to devise a

comprehensive strategic plan and troop

basis. The many assumptions and calculations which went into the plan have been

recounted elsewhere in considerable detail.44

Basically, the plan rested upon the calculated maximum number of troops available

to the Army out of the nation's total population. With strategic assumptions that the

major effort would be in Europe and that

1 July 1943 would be the date of full attainment of U.S. military strength, the planners

estimated the number and types of organizational units required. Consideration was

given also to the availability of shipping, the

control of sea lanes, the neutralization of the

Pacific area, and numerous other factors.

On 23 August 1941, WPD forwarded the

completed and highly secret troop basis to

G-4.45 It was then up to G-4 to determine

the matériel requirements needed to support

the Army organization detailed in the troop

basis.

Three days later G-4 issued a directive to

the Chief of the Air Corps and the supply

services with basic instructions for the computation of requirements. The new requirements were to be those over and above all

items already provided for by previous programs and were to be confined principally

to critical items and motor vehicles. Some

additional essential items were needed for

the expanded PMP force. Quartermaster

estimates were to be confined to critical

items of cloth and findings and motor

vehicles.46

While the estimates of U.S. Army requirements were still in the process of formulation, the Secretary of War received another

urgent request from the President. Hitler's

attack on the Soviet Union on 22 June 1941

had added a potentially powerful ally to the

anti-Axis alignment, but the Russians were

desperately in need of munitions. Harry

Hopkins, in his August visit with Marshal

Joseph Stalin in Moscow, had received a

preliminary indication of Soviet needs, and

a more definitive conference had been arranged for 1 October. While this was pending, the President's new request, dated 30

August 1941, asked for a schedule of total

U.S. production of important munitions

and their recommended distribution among

all friendly powers for the period ending 30

June 1942:

I desire that your Department, working in

cooperation with the Navy Department, submit to me by September 10, 1941, your recommendation of distribution of expected United

States production of munitions of war as between the United States, Great Britain, Russia

and the other countries to be aided—by important items, quantity time schedules and

approximate values for the period from the

present time until June 30, 1942. I also desire your general conclusions as to the over-all

production effort of important items needed

for victory on the general assumption that the

reservoir of munitions power available to the

United States and her friends is sufficiently

superior to that available to the Axis Powers

to insure defeat of the latter.47

This meant that the new estimates would

have to include not only U.S. requirements

44

 Watson, Prewar Plans, pp. 331-36. 45

 Memo, Actg ACofS WPD for ACofS G-4, 23

Aug 41, sub: Ultimate Requirements for the Army,

Frank, Doc. 15.

46

 Memo, ACofS G-4 for Chfs of Services, 26 Aug

41, sub: Special Computation Relating to the Status

of Equipment, Frank, Doc. 16. 47

 Ltr, President to SW, 30 Aug 41, WPD 4494-1.
REQUIREMENTS: WORLD WAR I TO PEARL HARBOR 137

for all its armed forces but the needs of

Great Britain, the Soviet Union, China, and

Latin America as well.

After desperate efforts to meet the President's deadline, the Army finally assembled

its completed estimates. These requirements,

together with an elaborate strategic estimate

and statements of Navy and merchant shipping objectives, were published in a secret

report by the Joint Board on 11 September

1941.48 The total production requirements

and their associated strategical foundation

became known as the Victory Program, a

title indicating the shift in purpose from

mere hemisphere resistance to one of overcoming the potential enemy.

The term "Victory Program" possessed a

variety of meanings both at the time of

its appearance and in subsequent usage.

Strictly construed, it referred to the ultimate

requirements of munitions of all types, as

estimated in the Joint Board report, necessary for the defeat of the Axis Powers. As an

ultimate production goal, it thus included

the Munitions Program of 30 June 1940

and all other past, current, and future procurement required to make up the ultimate

Victory Program objective. The term was

also loosely used to describe parts of the overall program, such as the Army or Navy component thereof, and frequently implied the

strategic plan as well as the production requirements for victory. The successive revisions of the Army's troop basis continued

to be known as the Victory Program Troop

Basis long after the corresponding matériel

requirement programs ceased to bear the

same name.49

The ultimate production requirements

specified in the report of the Joint Board carried only quantitative estimates of required

matériel. Although estimated unit costs of

Army equipment (except planes) were

shown, the shortage of time and lack of reliable or complete cost data precluded any

meaningful summary prior to the deadline

set by the President. It was, nevertheless,

evident that the total production requirements under the program would be staggering. Subsequent estimates indicated that

the Victory Program would call for expenditures of nearly $150 billion and would

require until spring of 1944 to complete.50

U.S. Army ground forces under the proposed new troop basis totaled 216 divisions, 61 of which would be armored. Also

planned were fifty-one separate motorized

divisions and nearly half a million men for

antiaircraft artillery units. Matériel requirements for all of these were exceptionally

heavy as compared with regular infantry divisions. The Army's ground force

requirements for additional critical items

alone under the Victory Program called for

48

 JB 355, Ser. 707. Because of delays in reconciling Army and Navy estimates, the completed

joint report was not delivered to the President until

25 September. (Watson, Prewar Plans, p. 351.) The

seventeen-page report was buttressed by two appendixes. Appendix II, Army Requirements, was

replete with maps, charts, tables, and statements

covering not only production requirements but

highly secret data such as detailed strategic assumptions and purposes, potential military objectives and

targets, estimates of enemy strength, and the like.

49

 For additional treatment of the Victory Program, see Leighton and Coakley, Global Logistics

and Strategy, 1940-1943, Ch. V. 50

 (1) Memo, Donald Nelson, Ex Dir SPAB, for

SW, 11 Dec 41, cited in Memo, Brig Gen Brehon

B. Somervell, ACofS G-4, for CofS, 16 Dec 41,

sub: Victory Program, OCS 21145-42. (2) CPA,

Industrial Mobilization for War, p. 140. (3) Civilian Production Administration, Minutes of the Supply Priorities and Allocations Board, September 2,

1941, to January 15, 1942 (Washington: Government Printing Office, 1946) (hereafter cited as

SPAB Minutes), mtg of 4 Nov 41, p. 24.
138 THE ARMY AND ECONOMIC MOBILIZATION

estimated expenditures of $29 billion.51

The magnitude of the entire program had

led General Marshall to conclude the 11

September 1941 Joint Board report in the

following words: "The position of the Chief

of Staff is that the maximum requirements

of the Navy and Army, as related to tonnage

and the probable conflicts in material, priority, and production facilities, should be

surveyed by OPM and then if necessary readjusted by the Joint Board within the

limits determined by OPM."

 52

 This was

probably the first recorded statement in connection with the World War II production

program which recognized the problem of

over-all production "feasibility" and the

broad administrative procedure for effecting

the necessary cutbacks.

At the time of its formulation, the Victory

Program was only a hypothetical plan, to be

available in the event of full-scale participation of the United States in the war. It

made no commitments, called for no immediate action, and was to be kept as a

secret document within the War Department and other appropriate agencies.

Nevertheless, a leading isolationist newspaper which had long been hostile to the

administration was successful in obtaining

a copy of the plan. In a widely syndicated

news story this newspaper described the

secret plan in great detail, quoting extensive

passages verbatim and revealing the strategic plans of the United States in the event of

war, the location of projected overseas bases,

intelligence estimates of German strength,

and similar matters. The account went on

to indicate that the Victory Program represented "a war against the German people,"

rather than one to overthrow Hitler and the

Nazi regime, and that the primary purpose

of sending American forces outside the

Western Hemisphere was "the preservation

of the British empire."

 53

The attack upon Pearl Harbor three days

later put an end to the political repercussions

of this disclosure. But this incident, together

with the multiplicity of problems involved

in the Victory Program's compilation, reveals some of the difficulties faced by the

Army during the defense period in determining "firm, long-range requirements" to

be adopted as a positive production program. The lack of such requirements during

the defense period has been cited repeatedly

as a basic weakness of Army planning which

complicated the tasks of NDAC and OPM

in adopting appropriate policies in the fields

of production, priorities, and other areas of

economic mobilization. But it was impossible for the Army to come up with "dependable, long-range estimates," much less to

make these the basis of an actual production

program, in the absence either of adequate

appropriations or of reliable assumptions as

to future national policy, the course of world

events, and the total military strategy to be

adopted when and if the nation became involved in war. At the time of the fall of

France, the Army submitted an $11 billion

program and was given one of only $6

billion. In the delicate political milieu of

1940 and 1941 the only course which

51

 Tabulation, "Army Estimate of Production Requirements for the Victory Program—Critical Items

Only," performed by Statistics Sec, World War II

Div, OCMH, copy in OCMH. 52

 JB 355, Ser. 707, p. 17.

53

 Chicago Tribune, 4 Dec 41. The release of the

article, which appeared three days before Pearl

Harbor, was timed to "scoop" the new Chicago

Sun—a competitor of the Tribune—on the day of

its launching. For additional details, see Watson,

Prewar Plans, pp. 359-60.
REQUIREMENTS: WORLD WAR I TO PEARL HARBOR 139

seemed open to the Army was to prosecute

the Munitions Program as effectively as

possible and to raise the sights as circumstances permitted and required. The Victory Program in the fall of 1941 was only

a paper program but it provoked a storm

of controversy which might have impaired

the whole defense effort had it not been

followed immediately by an actual attack

upon the United States.
CHAPTER VII

Army Requirement Programs:

Pearl Harbor to War's End

The President's Objectives and the War

Munitions Program

The advent of Pearl Harbor converted

the Victory Program from a planning document to a working basis for immediate expansion of Army procurement and subsequent requirements planning. Despite its

heavy requirements, the Army's Victory

Program had included only major items

of equipment (critical items, motor vehicles,

and the like). In response to a letter from

Donald Nelson, requesting a statement of

requirements by time periods, Assistant Secretary of War John J. McCloy pointed to

the need for a restudy of the program in the

light of recent events: ". . . it is now evident that the basic foundation on which

the Victory Program was based should be

re-analyzed prior to its commitment to a

vast industrial effort".1 Ten days later Secretary Stimson informed the President of the

Army's procurement progress in the two and

a half weeks since Pearl Harbor:

The Victory Program is now on its way to

becoming a reality. The Office of Production

Management and Supply Priorities and Allocations Board estimate that the total munitions production potential of the country for

the year 1942 is approximately 40 billion dollars. Of this 40 billion dollars, 27 billion

dollars of munitions are already scheduled.

...Of the margin available for new production in 1942, it is expected that approximately 6 billion dollars will be for ground

army munitions, 31⁄2 billion for aircraft and

accessories, and the remainder for military

construction, the Navy, Maritime Commission, andother purposes....the War Department will continue with its re-analysis of

the list of matériel originally submitted for the

Victory Program to the end that its portion

of that program will be on as firm a basis as

it is possible to make it for an all-out industrial

effort.2

Definite steps to obtain the desired revision followed shortly thereafter. On 29

December 1941 Brig. Gen. Brehon B. Somervell, the new G-4, issued a directive to the

supply arms and the Air Forces calling for

a recomputation of the Army's total requirements for equipment and ammunition

through 30 June 1944. The new figures

were to be based on three estimates of Army

troop strength: Force A (4,150,000 men)

to be mobilized by the end of 1942; Force B

(8,890,000 men) required by the end of

1943; and a total force of 10,380,000 men

to be available by 30 June 1944. All items

of initial equipment, plus six months' com1

 Memo, McCloy for Nelson, Ex Dir SPAB, 16

Dec 41, sub: The Victory Program, Frank, Doc. 17.

2

 Memo, SW for President, 26 Dec 41, sub: Victory Program, Frank, Doc. 18.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 141

bat supplies of equipment and ammunition,

were to be covered in the new program.3

While the War Department was working

on its program of total munitions requirements, high-level conferences on broad Allied strategy and the matériel requirements

therefor were being held by President Roosevelt and Prime Minister Winston S. Churchill, along with the British Minister of Supply, Lord Beaverbrook. Influenced by

Beaverbrook's observations Roosevelt independently announced, in his 6 January 1942

State-of-the-Union Message to Congress, his

celebrated "Must" Program for the production of astronomical quantities of planes,

tanks, merchant ships, and antiaircraft guns.

The President was convinced that a dramatic, publicly announced program for

selected crucial items would rally the American public behind the war production program and serve notice upon the entire

world—allies, enemies, and neutral powers

alike—that U.S. industrial capacity was so

enormous there could be no doubt about the

final outcome of the war. In announcing the

program the President made clear that he

was in earnest:

This production of ours in the United

States must be raised above present levels,

even though it will mean the dislocation of

the lives and occupations of millions of our

own people. We must raise our sights all along

the production line. Let no man say it cannot

be done. It must be done—and we have undertaken to do it.4

The President then announced the specific

production goals which he had set for the

nation:

Item 1942 1943

Planes. ............... . 60, 000 125, 000

Tanks................ . 45,000 75,000

Antiaircraft guns....... . 20, 000 35, 000

Merchant ships (d. w.

tons)............... . 6, 000, 000 10, 000, 000

This dramatic announcement—made at

a time when reports of fresh Allied losses

were received almost daily—provided a degree of inspiration badly needed by the

American public and allied nations. Nevertheless, it soon became evident that an attempt to realize the President's "must" objectives at all cost would severely hamper

other segments of the war production program. Moreover, unless the selected items

were accompanied by all the required complementary items, they could not be successfully utilized. The production of 185,000

planes without adequate landing fields,

hangars, operating supplies, and maintenance facilities—to say nothing of trained

personnel at all echelons—might well be a

liability to the war program as a whole. The

Army later attempted to raise its other requirements in keeping with the President's

objectives, but the total added up to more

than the nation was capable of producing.

For several months, however, the President

was adamant in his position that the goals

should not be lowered and later permitted

modification only when they were demonstrated as clearly unattainable, or on condition that any reductions would be compensated by increases elsewhere in the program. By the end of 1942, the modified

objectives had become fairly well assimi3

 Memo, Somervell, ACofS G-4, for CofAAF and

Chfs of Services, 29 Dec 41, sub: Munitions Requirements for the Victory Program, Frank, Requirements, p. 24, and Doc. 19. 4

 The Public Papers and Addresses of Franklin

D. Roosevelt, compiled by Samuel I. Rosenman,

1942 volume: Humanity on the Defensive (New

York: Harper & Brothers, 1950), p. 32. For evidence of Lord Beaverbrook's influence in the determination of the President's "Must" Program, see

Calendar of Hopkins Papers, Bk. V, Item 3, OCMH.
142 THE ARMY AND ECONOMIC MOBILIZATION

lated into the general production program

and caused no great concern thereafter.5

In the meantime, after the announcement

of the President's objectives on 6 January

1942, the War Department abandoned the

Victory Program nomenclature for its new

statement of requirements then under

preparation:

The Victory Program has been replaced by

the War Munitions Program. The document

submitted to the Supply Priorities and Allocations Board containing quantities of various

items for the Victory Program is now obsolete

and has no further usefulness.6

The new estimates, captioned as the Overall Requirements for the War Munitions

Program, were completed and distributed

on 11 February 1942. The total dollar value

of the new program was estimated at

roughly $63 billion for the two-and-onehalf-year period in question.7

Although a more accurate statement of

Army requirements than the superseded

Victory Program, the hastily computed War

Munitions Program was defective in many

respects. Its estimates had been made on

the basis of total need, with generous allowances for combat maintenance, but without regard to stocks of equipment and

ammunition on hand; to that extent it exceeded actual production requirements.

On the other hand it failed to cover miscellaneous and expendable supplies, construction, Navy and lend-lease requirements to

be filled by Army procurement, and other

items. Moreover, its methodology of requirements computation was crude, omitting distribution requirements, zone of

interior (ZI) replacement, and other refinements, as well as neglecting in toto the

question of whether shipping facilities would

be adequate to transport the Army and its

equipment overseas at the rates contemplated by the several force augmentations.

As a consequence of these inadequacies and

in the light of developments which were taking place even before its completion, the

Army's War Munitions Program was replaced, within two months of its publication.8

5

 It is interesting to note that two of the four

items—merchant shipping and antiaircraft guns—

were actually produced in greater quantities in 1942

and 1943 than initially called for by the President.

Tank production was later deliberately cut back;

total tank output for the war rested at 88,410,

Whiting et al., Statistics, "Procurement," 9 Apr 52

draft, p. 37. Plane production fell behind in schedule but eventually exceeded the quantitative objectives of the President. Total U.S. plane production for the five-year period 1 July 1940 to 31

August 1945 ran to approximately 300,000, of which

nearly 100,000 were produced in the single calendar

year 1944 (actual figures 299,300 and 96,318, respectively). Civilian Production Administration,

Industrial Mobilization for War, pp. 754, 962; CPA,

Wartime Production Achievements and the Reconversion Outlook, p. 106. For further discussion of

the President's objectives see (1) Leighton and

Coakley, Global Logistics and Strategy, Ch. VIII;

(2) CPA, Industrial Mobilization for War, pp.

299-92, 599ff. 6

 Memo, Maj Gen Richard C. Moore, DCofS,

WPD, 7 Jan 42, sub: Former Victory Program,

OCS 21145-51. 7

 (1) ASF Annual Rpt, 1943, p. 18. (2) CPA,

Industrial Mobilization for War, p. 274.

8

 The War Munitions Program of 11 February

1942 has occasionally been referred to as "the

first edition of the Army Supply Program." (Background of the Army Supply Program, p. 4.) Elsewhere it has been referred to as a "dry-run" edition

of ASP. Donald F. Bradford, Methods of Forecasting War Requirements for Quartermaster Supplies (QMC Historical Study 14, May 1946)

(hereafter cited as QMC Requirements), p. 34.

It was, to be sure, a transitional computation of

Army requirements leading to the first edition of

ASP, but the directive upon which it was based

(29 December 1941) appeared nearly a month

before the Somervell memorandum of 25 January

1942 formally proposing the Army Supply Program. See also ASF Annual Rpt, 1943, p. 16.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 143

The Army Supply Program

Background and Nature

Events Leading to Adoption of ASP—

Observers of the Washington scene at the

beginning of 1942 may well remember the

peculiar atmosphere of urgency, confusion,

frustration, and perpetual reorganization

which characterized the early post-Pearl

Harbor period. The word "defense" was

summarily replaced by "war" in all agency

names, programs, and activities; individuals

and organizations alike, eager to contribute

as directly as possible to the war effort,

sought positions of indispensability in the

prosecution of the war. All were looking for

an objective and a mandate—a definite goal

toward which to apply their energies and the

authority to go ahead. For the home front,

such objectives depended ultimately upon

a firm and comprehensive statement of

munitions requirements.

The U.S. Army in World War II was

only one—albeit the major—claimant upon

the nation's resources. The Army's strategic

plans, which called for frequent re-examination and adaptation of its basic requirements, were a part of the larger strategic

program approved by the allied powers at

the highest level. The administrative machinery for formulating basic Allied strategy

came into being gradually after Pearl

Harbor.9

Briefly, top-level strategy of the United

States and Great Britain was formulated by

the Combined Chiefs of Staff (CCS), which

reported directly to President Roosevelt and

Prime Minister Churchill. The American

members of CCS also constituted the U.S.

Joint Chiefs of Staff (JCS), which was responsible for the development and co-ordination of basic strategic plans for the armed

forces of the United States. The JCS consisted of the military heads of the Army,

Army Air Forces, and Navy, together with

the President's chief of staff.10

The Joint Chiefs of Staff, which gradually

replaced the prewar Joint Board, originated

early in 1942 and grew rapidly thereafter

into a large and influential organization.

Many joint staffs and committees were eventually created to support the work of JCS.

Among these were the Joint Strategic Committee and the Joint Logistics Committee,

whose activities in determining military priorities and adjusting total military requirements to production limitations brought

them into the field of economic mobilization. Within the Army the Operations Division (OPD) replaced the War Plans Division of the General Staff and became the key

staff agency which developed and co-ordinated broad strategic and logistical requirements into programs to be refined and

executed by the procurement and distribution machinery of AAF and ASF.

The Army had procurement responsibility for equipment and supplies for a wide

variety of non-Army users in addition to its

own combat and supply arms and the AAF.

Requirements for outside users, after broad

screening by CCS and JCS, were assigned

to the Army and in turn to its technical serv9

 The nature of this machinery, as well as the substantive decisions made thereby, is discussed in

detail elsewhere. For example: (1) Cline, The

Operations Division; (2) Maurice Matloff and Edwin M. Snell, Strategic Planning for Coalition Warfare, 1941-1942 (Washington: 1953); (3) Leighton and Coakley, Global Logistics and Strategy,

1940-1943; all in UNITED STATES ARMY IN

WORLD WAR II.

10

 Throughout most of World War II these were

General Marshall (Army), General Henry H.

Arnold (AAF), Admiral Ernest J. King (Navy),

and Admiral William D. Leahy (Presidential chief

of staff).
144 THE ARMY AND ECONOMIC MOBILIZATION

ices on the basis of normal procurement responsibility for the classes of items involved.

The largest single category of additional

procurement thus assigned consisted of the

great array of lend-lease requirements for

allied nations. Army procurement of lendlease equipment and supplies amounted to

many billions of dollars, in most cases involving items identical with those used by

the U.S. Army and procured from the same

sources under common contracts. Under the

lend-lease machinery, munitions were assigned to all the allied powers, including the

United States, from a common pool.11

A substantial portion of Navy (including

Marine Corps and Coast Guard) requirements for certain classes of items was filled

by Army procurement. Thus, 90 percent of

all perishable foods and 85 percent of nonperishable foodstuffs for the Navy were purchased by the Army Quartermaster through

the Chicago Quartermaster Depot. On the

other hand, the Navy procured certain items

for the Army, and in some cases joint procurement operations were conducted.12

 The

Army also procured items for the Office of

Strategic Services, the French forces in

North Africa, and other non-Army users.

In computing these requirements the Army

acted only in a liaison and screening capacity; the agencies involved made their

own estimates and periodically presented

them for incorporation into the Army's

statement of its total procurement requirements. By the end of 1941, the multiplicity

of demands upon Army procurement made

imperative the early development of a system for the orderly recording and programing of requirements; otherwise the Army's

whole procurement program threatened to

bog down in confusion.

During the last half of 1941, OPM and

SPAB had been bringing increasing pressure

to bear upon the procuring agencies for

more definite statements of requirements

and, above all, requirements spelled out in

terms of time objectives. With excess industrial capacity rapidly disappearing the question of priority, or relative production

urgency, became increasingly important. In

a milieu in which everything could not be

produced at once, the question of "when"

to produce became co-ordinate with "what"

to produce. Now, in the face of all-out war,

the Army made renewed efforts to determine its needs by time periods, both for its

own purposes and for those of the newly

established War Production Board.

Within the Army, the most vigorous exponent of a fresh approach to the formulation of requirements was the new Assistant

Chief of Staff, G-4, General Somervell.

Known as a man of action from his early

days as WPA administrator for the New

York district and more recently as the reorganizer of the Army Quartermaster construction program, Somervell brought to

G-4 an unusual combination of engineering

knowledge, administrative ability, and

drive. When he "took over" in G-4, his influence was felt from the start.13

11

 See discussion of policies of the Munitions Assignment Board in Leighton and Coakley, Global

Logistics and Strategy, 1940-1943, Chapters X-XI. 12

 The cross procurement and joint procurement

activities of the Army and Navy, as well as many

other co-ordinating activities of the two services

in the broad field of economic mobilization, are summarized in the so-called Draper-Strauss Report.

(Rpt, Col William H. Draper, Jr., GSC, and Capt

Lewis L. Strauss, USNR, Co-ordination of Procurement Between the War and Navy Departments

(February 1945), 3 vols., ICAF Library.) A condensation of the Draper-Strauss findings is found in

Millett, Organization and Role of the ASF, pp.

270-80.

13

 See Millett, Organization and Role of the ASF,

Introduction.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 145

GENERAL BREHON B. SOMERVELL,

Commanding General, Army Service Forces,

throughout World War II. (Photograph taken

in 1945.)

G-4 had long been the duly constituted

War Department agency for supervising the

formulation of the Army's matériel requirements. With the advent of the Defense Aid

Program and the growth of civilian production control agencies, as well as the expansion and addition of offices and agencies

within the War Department, the total task

of estimating military requirements had become widely scattered. Foreign military requirements, which of necessity cut into and

shaped the formulation of the Army's own

program, were handled by the independent

Office of Lend-Lease Administration, with

liaison groups in OASW as well as in G-4

and the various supply arms and services.

The reconciliation of Army and Navy requirements, especially with respect to their

impact upon raw materials and industrial

facilities, was handled by the ANMB. The

civilian mobilization control agencies—

NDAC, OPM, SPAB, and now WPB—had

been in continual contact with the Army,

Navy, and Maritime Commission in an endeavor to determine the over-all objectives

of war production.

Almost immediately after his arrival in

G-4, General Somervell proposed the adoption by the War Department of a single,

comprehensive Army Supply Program, to

be set forth in a publication which would

become the bible of the Army supply system.

Responsibility for the consolidation and

publication of all requirements (Army,

Navy, lend-lease, and others) to be filled by

Army procurement would be vested in a

single agency of the War Department. This

agency would be charged with the continual

refinement and improvement of the program and with representing the War Department in relations with all outside agencies in matters of supply requirements.

Somervell believed that the appropriate

agency for this task was an expanded G-4.

On 22 January 1942 he addressed a tenpage memorandum to the Deputy Chief of

Staff, outlining with great vigor and in great

detail the need for a consolidated Army

Supply Program, the kind of organization

required to administer it, problems to be

faced, and methods of meeting them. The

memorandum stressed such important matters as the development of a sound strategic

base for requirements, keeping requirements

within the realm of production feasibility,

the need for a single set of requirements

estimates based on a common set of assumptions, and the responsiveness of the pro-
146 THE ARMY AND ECONOMIC MOBILIZATION

ARMY AND NAVY MUNITIONS BOARD, 1941. Seated, left to right: Brig.

Gen. Charles Hines, Brig. Gen. H. K. Rutherford, Under Secretary of War Robert P. Patterson, Under Secretary of the Navy James Forrestal, and Capt. E. D. Almy, USN. Standing:

Maj. G. K. Heiss, Col. H. S. Aurand, Cmdr. V. H. Wheeler, and Cmdr. L. B. Scott (ret.).

gram to changes in the underlying economic

and military situation. Somervell did not

wait for a directive but concluded his

memorandum with the words: "In order

to make its Supply Program more complete

and useful, the Supply Division, G-4, is proceeding at once with the following action . . . ." A full page followed listing

intended activities on the part of G-4, all

indicating the early launching of the Army

Supply Program.14

Before the first complete edition of the

Army Supply Program could be published

by G-4, the far-reaching reorganization of

the War Department on 9 March 1942 had

taken place. Instead of heading an expanded G-4, Somervell now found himself

in command of the Army's entire machinery

for procurement, economic mobilization,

and supply—the Army Service Forces. Under the new regime, the development of the

Army Supply Program was given top priority and there soon emerged a complex

but systematic organization and procedure

for determining and presenting the multifarious requirements upon Army procurement.

14

 Memo, Somervell, ACofS G-4, for Moore,

DCofS, 22 Jan 42, sub: Army Supply Program, CG

ASF, Chief of Staff, General Staff (1), 1941-42.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 147

Character and Content of ASP—In its

broadest sense, the Army Supply Program

as developed by the Army Service Forces

represented the entire framework of activity

carried on by the War Department for

equipping and supplying the U.S. Army

and other recipients of matériel procured by

the Army during World War II. In this

sense, ASP was the integrated program of

activity which included the formulation of

the Army's matériel needs and the conversion of these requirements into programs,

contracts, production schedules, procurement deliveries, and the distribution of

finished supplies to troops in the field.

In its narrower and more specific sense,

ASP was the periodically published document setting forth the long-range objectives

of Army procurement in all important categories by calendar years for two and sometimes three years in advance. In this

capacity, ASP became the Army's authoritative statement of requirements and its

basic procurement directive. It was used as

the basis for requesting Congressional appropriations, authorizing procurement expenditures, establishing production schedules, assigning priorities, determining raw

material requirements, and allocating

materials and other scarce resources. In

short, the Army Supply Program became

the foundation for the Army's entire

procurement effort.

Inasmuch as ASP was a dynamic program attuned in varying degrees to constantly shifting circumstances and strategic

needs, the types, quantities, and dollar value

of supplies covered by the various sections

changed from one edition to another. With

the passage of time, ASP covered not only

the Army's regular procurement and construction needs but Navy and lend-lease

items, as well as special requirements for

task forces, the Office of Strategic Services,

the French forces in North Africa, and civil

governments in occupied areas.

ASP was published in a number of sections. The first completed edition contained six sections, each appearing separately in 1942 at the indicated dates:

Section Issued

I. Equipment-Ground ________ 6 Apr

II. Equipment-Air _____________ 9 Apr

III. Miscellaneous and Expendable Supplies-Ground_____________ 17 Mar

IV. Miscellaneous and Expendable Supplies-Air _________________ 4 Jul

V. Construction ______________ 11 Apr

VI. International Aid-Miscellaneous__ 1 Sep

Section I, which covered ammunition as

well as all important items of Army Ground

Forces equipment—guns, tanks, motor vehicles, clothing, personal equipment, signal,

medical, engineering items, and so on—was

by far the most important. It normally accounted for some 80 percent of the total

dollar value of the entire Army Supply Program. Along with basic equipment for the

organized units of the ground forces, it included common items for the Air Forces,

Navy, and allies under lend-lease. It was

this section which was most affected by

changes in the troop basis and which underwent the most frequent revision.

Section II covered items of equipment

and munitions (except aircraft) peculiar to

the Army Air Forces, regardless of procuring agency. Many of these were procured

by the Army Air Forces directly; the greater

share, consisting of important items such

as ammunition, armament, and signal

equipment, was procured by the several

technical services under the ASF. Requirements for aircraft, as such, were omitted;

these were entirely outside the Army Supply

Program. Aircraft requirements were separately determined, in keeping with the
148 THE ARMY AND ECONOMIC MOBILIZATION

WEEKLY STAFF CONFERENCE, Headquarters, Services of Supply, June 1942.

Seated, left to right: A. R. Glancy, Brig. Gens. James E. Wharton, Henry S. Aurand,

Charles Hines, Charles D. Young, Maj. Gen. John P. Smith, Brig. Gen. Lucius D. Clay,

Robert P. Patterson, USW, Lt. Gen. Brehon B. Somervell, Commanding General, Army

Service Forces, Brig. Gens. Wilhelm D. Styer, LeRoy Lutes, Clarence R. Huebner, C. P.

Gross, Mr. James P. Mitchell, Cols. Frank A. Heileman, A. Robert Ginsburgh, and Albert J.

Browning. Standing: Cols. Clinton F. Robinson, Walter A. Wood, Jr., Robinson E. Duff,

Brig. Gen. A. H. Carter, Col. J. N. Dalton, and Capt. Harold K. Hastings.

President's objectives, and published as production schedules for engines, airframes,

and propellers. This was done by a joint

agency—the Aircraft Resources Control

Office (and predecessor agencies) at Dayton, Ohio—which handled all aircraft

scheduling and dealt directly with industry

and the War Production Board. The dollar

value of the Army aircraft program, though

less than total requirements for the Army

Service Forces, was far larger than that of

the air items in Section II of ASP, although

this section included air items for Navy and

lend-lease.

Sections III and IV—later incorporated

in Sections I and II as Part B of each—

covered expendable supplies (other than

ammunition) for the ground and air forces,

respectively, as well as all items of equipment (except motor vehicles) for zone of
REQUIREMENTS: PEARL HARBOR TO WAR'S END 149

interior posts, camps, stations, general hospitals, and other establishments. Also included in Miscellaneous and Expendable

Supplies were thousands of minor items so

numerous that they were frequently grouped

together in classes and reported in dollar

value rather than in quantitative terms.

Among the more important expendable supplies were subsistence, fuel, and lubricants.

Section V (later designated as Section

IV) comprehended all uncompleted War

Department construction projects—proposed, authorized, and under way—essential to the execution of the Army's total war

effort. Data included cost, source of funds,

location, description, estimated completion

dates, and eventually estimates of the total

value of completed jobs as well as forecasts

of annual maintenance, repair, and operating expenses for all completed War Department establishments. Data for highly secret

construction projects, such as for the atomic

bomb, were carried in a separate subsection

with only limited distribution.

Section VI (International Aid, Miscellaneous)—later designated as Section III—

did not appear until 1 September 1942, by

which time Section I had already been twice

revised. Its purpose was to concentrate in

one section all minor items and expendable

supplies required by the allied nations.

Hence, all items of International Aid originally carried in Section III were transferred

to Section VI upon its appearance. This

procedure was particularly desirable because of the noncommon nature of many

International Aid items and the difficulty

of including them in the classification

scheme used in Section III. Major items of

equipment for lend-lease continued to be

carried in Section I.

The procurement objectives stated in the

Army Supply Program represented "required production" from U.S. sources rather

than gross military requirements. Gross military requirements for given time periods

were reduced by the exclusion of three categories in order to arrive at net required

production: (1) supplies on hand; (2)

overseas procurement; (3) production

limitations.

The determination of "on-hand" figures

was a laborious assignment never satisfactorily accomplished. Total supplies on hand

consisted of quantities in the hands of

troops, wherever located, as well as unissued

stocks in depots, in transit, and at many

hundreds of posts, camps, stations, and other

installations. The acquisition of accurate,

uniform, and timely inventories of unissued

stocks of thousands of different items from

all of the Army's scattered establishments

and troop locations was a mountainous

undertaking. Moreover, estimates of quantities in the hands of troops were at best a

matter of rough judgment. For the first few

editions of the ASP, a calculated over-all

on-hand figure was used. This was a composite of available inventory figures for

major issuing depots plus estimates of station supplies in the hands of troops. The lastnamed estimate was made by deducting calculated losses from previous issues; no attempt was made early in the war to burden

field commanders with the taking and reporting of inventories. For the 1 August

1943 ASP, an attempt was made to gather

inventory figures at posts, camps, and stations as well as at major issuing depots. This

proved to be impractical, especially for several of the technical services, and by mid1944 the use of inventories for requirements

purposes was confined for all services to

major issuing depots. At the same time the

theoretical estimate of equipment in the

hands of troops was abandoned. Except for
150 THE ARMY AND ECONOMIC MOBILIZATION

known shortages, all troops were assumed to

be fully equipped and supply "pipelines"

filled. Thereafter requirements were largely

determined by fluctuations in replacement

needs and the distributional stock levels required to insure timely delivery.15

Overseas procurement, consisting primarily of subsistence items and miscellaneous supplies for troops based in the British

Empire, was a part of the lend-lease program known as reverse lend-lease. It was

given considerable encouragement by the

agreement between the President and the

British Prime Minister early in 1942 to make

maximum use of the productive capacity of

each allied country and to conserve shipping

space wherever possible. By the fall of 1942

overseas procurement had reached sufficient volume to warrant the adjustment of

planned procurement in the United States.

Required production in the Army Supply

Program was therefore reduced by the

amount of anticipated overseas procurement

under the War Department's General Purchasing Board.16

A major purpose of the Army Supply

Program was to achieve a balanced program

in keeping with production limitations as

well as with military needs. Organizations

and procedures for this purpose were difficult to develop but by the end of 1942 the

task was fairly well in hand. Standard procedures were developed for the advance

screening by ASF production personnel of

preliminary estimates of requirements.

Each of the technical services was required

to develop "master production schedules,"

based upon actual contracts and deliveries

thereunder, showing estimated monthly deliveries of each item of procurement in keeping with the annual production targets of

ASP. A careful month-by-month comparison of production schedules with actual

procurement deliveries revealed deficiencies

in procurement, calling for appropriate action to overcome shortages of materials,

facilities, manpower, or other contributory

resources. Quite frequently, however, shortages of basic resources could not be

overcome and constituted a definite limitation upon production. In this event, efforts were made, prior to the next edition

of ASP, to adjust stated requirements to

feasible levels. Major cutbacks for feasibility reasons were usually requested by the

War Production Board after a careful exploration and discussion of the alternatives,

and an appropriate notation was carried

in the ASP to distinguish requirements thus

modified from those representing true military needs.17

Those responsible for the determination

of requirements realized from the beginning

that the ASP would undergo continual revision to reflect changes in the troop basis,

the improvement of military technology, the

progress of the war, the refinement of esti15

 The problems associated with the use and abandonment of the over-all on-hand estimates are

treated in greater detail in Frank, Requirements,

pp. 44, 57-58, 71-74, 157, and documents cited

therein. 16

 (1) Memo, Maj Gen Lucius D. Clay, ACofS

for Materiel ASF, for Dirs Reqmts and International Divs ASF, 22 Feb 43, sub: Procedure for

Securing and Disseminating Information Concerning Overseas Procurement to be Incorporated in

the Army Supply Program, Frank, Doc. 59. (2)

Memo, Brig Gen Walter A. Wood, Jr., Dir Reqmts

Div ASF, for CofOrd et al., 22 Mar 43, sub: Adjustments in Section I of the Army Supply Program

to Reflect Overseas Procurement, Frank, Doc. 57.

(3) WD TM 38-210, Preparation and Administration of the Army Supply Program, 25 Jan 44, par.

131.13, Oversea Procurement. (4) Frank, Requirements, pp. 39-41.

17

 In the 1 August 1943 ASP, required production

was reduced for more than 100 items in Section I

because of production limitations. Ordnance suffered the most heavily with 83 items, or over 10

percent of all items listed, subject to such limitations.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 151

mating techniques, and many other expected as well as unforeseen developments.

Originally it was hoped that complete recomputations of the program could be limited to an annual basis, with interim changes

only for individual items and categories as

the need arose. Sweeping changes early in

the program led to an announced policy of

complete revisions once each quarter; by

1943, however, a planned schedule of semiannual recomputations, in February and

August, had been adopted. Important interim changes in Section I were accomplished by the periodic publication of summary sheets reflecting such changes; these

were distributed to all recipients of the Army

Supply Program. Changes involving less

than 10 percent of required production, or

more in the case of readily procurable items,

were made by the relevant technical service

but not published until the next recomputation of the program.18

Each separate edition of ASP was the

result of an intensive period of preparation

and activity within the ASF. The recomputation cycle was launched with the issuance of a basic directive by Headquarters,

ASF, to the technical services responsible for

preparing the several segments of the program. The basic directive transmitted the

latest revision of the troop basis, the methods

of determining combat replacement and

reserve levels, and so far as practicable all

other specific policies and procedures affecting the recomputation.19

 In addition to the

specific directive governing the recomputation of individual editions, there was

throughout the life of ASP a succession of

memoranda and administrative orders constituting a cumulative statement of its general purpose, scope, policy, and procedures.

These scattered instructions were replaced

on 25 January 1944 by the issuance of War

Department Technical Manual 38-210, entitled Preparation and Administration of the

Army Supply Program.20

All together seven editions of the Army

Supply Program were published from its inception to its formal replacement by the

Supply Control System (SCS) in January

1945.21 The early editions were relatively

crude, showing cumulative instead of separate annual estimates and expressing required production in terms of physical quantities only. The lack of dollar-value totals

was a considerable shortcoming, handicapping analysis and discussion of the program

18

 (1) Memo, Maj Gen James A. Ulio, TAG, for

CG AGF et al., 12 May 42, sub: War Matériel Requirements, Frank, Doc. 36. (2) WD Memo W310-

3-42, 26 Sep 42, Computation of Munitions Requirements, Frank, Doc. 37. (3) Memo, TAG for

ACofS G-3 et al., 27 Feb 43, sub: Computation of

Munitions Requirements, Frank, Doc. 82. (4)

Memo, Wood for CofCWS et al., 5 Mar 43, sub:

Changes in Section I of the Army Supply Program Frank, Doc. 66.

19

 For copies of the basic directives underlying the

seven major editions of Section I of ASP, see Frank,

Docs. 23, 39, 47, 73, 83, 93, and 122. 20

 Publication of TM 38-210 was delayed for

about five months because of differences between

ASF and AAF over procedures relating to the Air

Equipment Section of ASP. (Frank, Requirements,

pp. 108-09.) This manual provides excellent insight into the procedures and problems involved

in the complex task of determining Army requirements at the peak of the World War II procurement program. A copy of the manual is available as

Frank, Doc. 106. The principal predecessor of TM

38-210 was SOS Admin Memo 38, 16 Sep 42, sub:

Procedure of the Determination and Administration

of the Army Supply Program. (Frank, Doc. 26.) 21

 The seven editions of ASP represented the original publication and major revisions of Section I;

publication of other sections did not always appear

on schedule with the corresponding edition of Section I. The successive editions of ASP were distinguished by dates, not by an edition number.

The present discussion follows Frank, Requirements,

which apparently treats the 29 May 1942 revision of

Section I as a republication, rather than as a new

edition.
152 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 18—ARMY SUPPLY PROGRAM, SECTION I: ARMY GROUND FORCES REQUIREMENTS

IN SUCCESSIVE EDITIONS OF ASP

[In Billions]

a

 First three editions include Section III, later carried as Part B, Section I.

Source: ASP editions as indicated, except for first three. For first editions: WPB, Div of Statistics, tabulation of 8 Apr 42; second and

third editions; Frank, Doc. 48.

TABLE 19—ARMY SUPPLY PROGRAM, SECTION I: REQUIRED PRODUCTION FOR CALENDAR

YEARS 1943 AND 1944

[In Millions]

Source: Army Supply Program, Sec. I, 1 Feb 43.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 153

TABLE 20—ARMY SUPPLY PROGRAM: COMPARATIVE MAGNITUDE OF SECTIONS I-IV

IN MID-1943

[In Billions]

a

 AAF procurement covered for last 6 months only of 1943. b

 Uncompleted projects to be put in place without specification

of calendar year.

Source: Frank, Requirements, pp. 78-79.

until special tabulations could be made for

the purpose. Since changes were often made

in the interim, and since tabulations were

made by different agencies, the resulting

figures were often difficult to reconcile. This

condition was rectified in the 1 February

1943 and subsequent editions, which contained dollar-value summaries and numerous improvements in form as well as

substance.22

An indication of the magnitude of Army

Ground Forces requirements, as well as the

gradual reduction in the dollar value of

these requirements under successive editions

of ASP, is shown in Table 18. The largest

share of the general reduction was represented by changes in the planned composition of the Army under which the number

of heavily armored and motorized divisions

was drastically cut.23 Together with curtailment in the over-all size of the Army as

planned at the beginning of 1942, reductions in unit costs, adjustments in the lendlease program, and numerous other factors,

this decision resulted in the paring of many

billions of dollars from Army requirements

as estimated at the beginning of 1942.24

A broad summary of Army requirements

for Ground Forces matériel, classified by

technical services, is furnished by Table 19.

This table shows estimated requirements for

the calendar years 1943 and 1944, as they

stood on 1 February 1943. Especially to be

noted are the heavy demands for Ordnance

equipment and ammunition by allied nations under the lend-lease program. For

1943 these amounted to nearly two thirds

of the Army's own requirements for such

items.

The comparative magnitude of the several sections of ASP is suggested by Table

20, which contains partial figures from the

program as it stood in the summer of 1943.

At this time Section IV (Construction) car22

 During its heyday, Section I of the ASP was a

handsomely bound volume, 9 x 13 inches, containing several hundred pages; the other sections were

similar in format but with fewer pages. Each significant item of procurement was listed under the

appropriate technical service. Data included the

item entry, unit cost, stocks on hand, and net required production in physical quantities for each

calendar year to supply the U.S. Army, Navy, and

international aid. Total dollar-value figures were

confined to summaries by procuring service and

requiring agency. 23

 See below, page 156 and note 35. 24

 The Army's War Munitions Program of 11 February 1942, which included finished aircraft for the

Army but omitted expendable supplies and other

items, totaled some $62 billion in estimated expenditures for 1942 and 1943. See: (1) Statement of

Brig Gen Lucius D. Clay before the War Production Board on 1 December 1942, in Civilian Production Administration, Minutes of the War

Production Board, January 20, 1942 to October 9,

1945 (Washington: Government Printing Office,

1946) (hereafter cited as WPB Minutes), p. 166;

(2) ASF Annual Rpt, 1943, p. 18.
154 THE ARMY AND ECONOMIC MOBILIZATION

ried $2.8 billion of uncompleted projects

remaining to be put in place without specification of calendar year. Although the

relative shares of the several sections of ASP

fluctuated from one edition to another, Section I remained the overwhelmingly predominant portion of the Army Supply

Program.

Major Developments Under ASP

The Feasibility Dispute—Despite the efforts of the ASF properly to control the

Army's procurement program, there were

numerous shortcomings—especially during

the exploratory period of organization and

planning to meet the numerous problems

which descended upon the War Department

immediately after Pearl Harbor. Foremost

among the problems of 1942 was the determination of long-range Army requirements

which, together with other essential programs, would be within the nation's capacity to produce. The controversy which

developed between the Army and the War

Production Board over this issue—later

known as the Feasibility Dispute—was one

of the most acrimonious of the war.

The Feasibility Dispute has been described in detail elsewhere,25

 but a brief recapitulation is necessary to indicate the

Army's role in the controversy. Early in

1942 the War Production Board, particularly its Planning Committee headed by

Robert R. Nathan, became convinced that

total military procurement objectives for

1942 and 1943, when added to the needs of

the civilian and industrial economy, were

greatly in excess of the nation's productive

capacity. The problem was aggravated by

the fact that proposed construction programs for both military and industrial facilities accounted for a substantial portion of

the total war production program. In view

of serious existing material shortages, it became clear that further diversion of materials to construction programs would result

in still greater imbalance. Not only would

new construction chew up vast quantities of

materials needed for finished munitions;

after their completion the new facilities

themselves would be forced to remain idle

or operate at a fraction of capacity for lack

of raw materials.26

At various times in the spring and summer of 1942, WPB called the attention of

the procuring agencies to the feasibility

problem and some adjustments in programs

were made. But the procuring agencies were

preoccupied with placing contracts and expediting production; moreover, considerable research was needed to estimate the

nation's production potential with any degree of accuracy. Finally, on 8 September

1942, Nathan transmitted to General Somervell an extended report on the feasibility

problem prepared by Dr. Simon Kuznets, a

WPB economist with an established reputation in the field of national income analysis.

25

 (1) John E. Brigante, The Feasibility Dispute

(Washington: Committee on Public Administration

Cases, 1950). (2) CPA., Industrial Mobilization for

War, pp. 282-92. (3) Nelson, Arsenal of Democracy, pp. 376-81.

The general relationship between national productive capacity and military requirements is discussed in an informative article written during

World War II by one of the leading generals in the

Army Service Forces. See Maj. Gen. Lucius D. Clay,

"The Army Supply Program," Fortune, XXVII,

No. 2 (February 1943), 95ff.

26

 A number of Army facilities did in fact shut

down after short periods of operation. But these

shutdowns resulted from many causes, including

curtailment of requirements and unanticipated increases in productivity as well as material shortages.

Thomson and Mayo, The Ordnance Department:

Procurement and Supply of Munitions. See also,

Part Five, below.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 155

The Kuznets analysis pointed to two major

barriers to the attainment of existing production objectives: (1) inadequate capacity of the economy as a whole, measured

by dollar-value estimates; (2) material

shortages and defects in the scheduling of

production all down the line. The report

recommended a drastic curtailment of military procurement objectives and the establishment of a superboard—with full powers

over the Army, Navy, Maritime Commission, and other agencies—to co-ordinate

military strategy with production possibilities.27

The Kuznets report, together with a

transmittal memorandum from Nathan

elsewhere described as "somewhat peremptory in tone," came to Somervell's attention

late on a Saturday afternoon. Somervell's

reaction was immediate. He did not agree

with the findings and referred to the proposal for a superboard on strategy as "an

inchoate mass of words." He wrote out a

reply to Nathan in longhand, concluding

with the words: "I am not impressed with

either the character or basis of the judgments expressed in the reports and recommend that they be carefully hidden from

the eyes of thoughtful men."

 28

Needless to say, the Somervell memorandum provoked considerable discussion

within WPB and a formal meeting of the

War Production Board, on 6 October 1942,

was devoted to a showdown on the issues.

This meeting was attended by seventeen invitees, including Somervell and Nathan, in

addition to the fourteen regular participants. Early in the meeting, Nathan reviewed the Kuznets feasibility study and

urged the creation of "an administrative

mechanism to combine strategy and production."

 29

 Thereupon a general discussion

of the feasibility problem ensued, in which

the programs of the armed services came under considerable attack. Somervell conceded

that the 1942 program would probably fall

some 10-percent short of completion by the

end of the year but indicated that the material-shortage problem was being relieved by

a number of measures and that dollar figures

could not be relied upon as a measure of

national productive capacity. At this point,

Leon Henderson, director of the Office of

Price Administration (OPA) and ex officio

member of the War Production Board,

stated that dollar figures represented the

"best common denominator of capacity."

Then after a lull in the discussion in which

it appeared that the meeting might end

without a positive decision of the issues,

Henderson is reported to have reflected on

Nathan's $90 billion estimate of 1943 munitions capacity and to have stated in substance: "Maybe if we can't wage a war on

90 billions, we ought to get rid of our present

Joint Chiefs, and find some who can."

Henderson then "turned to Somervell and

proceeded to make the most violent personal

attack ever heard in a meeting of the War

Production Board. . . . For a con

period Henderson gave vent to every grievance he had accumulated throughout the

first year of the war."

 30

The explosive 6 October meeting made

it clear that early cutbacks in military requirements would have to be made. On the

following day, Under Secretary Patterson

addressed a memorandum to General Som27

 CPA, Industrial Mobilization for War, pp. 284-

87.

28

 Brigante, The Feasibility Dispute, p. 83.

29

 CPA, WPB Minutes, 6 Oct 42, p. 140. Under

Secretary Patterson regularly represented Secretary

Stimson at WPB meetings. Both the Secretary of

War and the Secretary of the Navy were members

of the War Production Board. 30

 Brigante, The Feasibility Dispute, p. 95.
156 THE ARMY AND ECONOMIC MOBILIZATION

ervell conceding the correctness of WPB's

basic position:

The WPB position, that production objectives ought not to be far in front of esti- mated maximum production, is believed to be

sound as a general rule. Otherwise our scheduling of production cannot represent reality,

and it is generally agreed that without realistic

scheduling we will continue to suffer from

maldistribution of materials, thus cutting

down the actual output of finished weapons.31

Patterson went on to state that it would be

up to the Joint Chiefs of Staff, acting within

the framework of strategic considerations, to

reduce the program to a limit set by WPB

and that the bulk of the reduction would

undoubtedly fall upon the Army and Navy;

the aircraft and shipbuilding programs as

well as those for expansion of raw material

production probably would not be touched.

Accordingly, at the next meeting of WPB,

on 13 October 1942, Somervell and Patterson suggested that WPB inform the Joint

Chiefs that their existing program, together

with the President's objectives, was not

capable of attainment. It would then be the

JCS responsibility to redefine the program

within the limits established by WPB.32

This was the solution actually adopted. It

avoided the question of a superboard on

strategy and production and spared WPB

the necessity of again challenging the President's objectives, an unpleasant task which

had been attempted with embarrassing results earlier in the year.33

 The Joint Chiefs

went to work on the combined military program for 1943 and pared it down from $93

billion to $80 billion. Of the $13 billion reduction, $9 billion came from the Army

Supply Program alone.34 This change, published in the 12 November 1942 edition,

represented the greatest single reduction

during the life of the Army Supply Program.

To accomplish the reduction the Army revised its troop basis, decreasing its planned

strength for 1943 and 1944 by some 300,000

men and effecting heavy reductions in armored, motorized, airborne, and infantry divisions, as well as in tank battalions, field

artillery units, and tank destroyer battalions.

Also, the Army at this time extended the

practice of issuing only 50 percent of standard allowances of critical equipment to

training units in the United States.35

The 12 November 1942 cutbacks in military requirements put an end to a controversial situation which had been growing in

seriousness for nine months. There has since

been some speculation as to why the resolution of the controversy was so long delayed.36

The Army has frequently been charged with

ignoring the existence of the feasibility problem early in 1942, and Somervell specifically

with failure to understand the use of dollar31

 Memo, Patterson for Somervell, 7 Oct 42, CG

ASF. 32

 CPA, WPB Minutes, 13 Oct 42, p. 144. 33

 CPA, Industrial Mobilization for War, pp.

281-82, 295.

34

 Ibid., p. 289. Apart from the Army construction program, which was reduced by 31 percent,

procurement for Army Ground Forces suffered the

most drastic curtailment (21 percent). See Kent

Roberts Greenfield, Robert R. Palmer, and Bell I.

Wiley, The Organization of Ground Combat

Troops, UNITED STATES ARMY IN WORLD

WAR II (Washington: 1947), p. 215. 35

 Frank, Requirements, p. 35. The inadequate

supplies of ammunition and equipment for training purposes throughout 1942 and early 1943 contributed to poor morale as well as impaired training in the Army Ground Forces. See Greenfield,

Palmer, and Wiley, Organization of Ground Combat Troops, pp. 220-23. The changes in the structure of the Army at this time are summarized in

Kent Roberts Greenfield, The Historian and the

Army (New Brunswick: Rutgers University Press,

1954) pp. 60-85. 36

 For example, Brigante, The Feasibility Dispute,

"Concluding Observations," pp. 107-15, wherein

the author attributes responsibility for the delay

to both the Army and WPB.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 157

value estimates of national productive capacity. Neither of these offers adequate

explanation. General Marshall, it will be

recalled, had raised the feasibility question

as early as September 1941, at the time of

the submission of the Victory Program.

Moreover, it was Marshall's suggestion at

that time that any feasibility problem be resolved by a reformulation of the military

program within limits established by OPM,

the then existing civilian mobilization control agency.37

 Likewise, General Somervell—even before he became the head of

the Army Service Forces—had clearly indicated his understanding that military programs would have to be kept within the

limitations of productive capacity:

The supply program is primarily based on

military need. It must, however, be conditioned by the practicalities of production and

conflicts with Navy, Allied, and civilian needs.

There is nothing to be gained and an actual

danger in setting up requirements that are

wholly impossible of attainment. This means

that the Supply Division itself can only

formulate a tentative program of requirements which must be reviewed from the procurement and allocation standpoint before

it can be set up as a program for execution.38

The real issue, so far as Somervell was

concerned, turned on questions of fact

rather than principle. In the early post-Pearl

Harbor period, he did not believe the data

available were sufficiently accurate to afford

a reliable measure of national productive

capacity, especially in the field of munitions

production. His distrust of dollar-value estimates was not a failure to understand the use

of dollar figures in national income analysis

but a direct inference from his knowledge

of the state of procurement contract prices.

In the spring of 1942 Somervell had testified at length before the Senate Appropriations Subcommittee on the impossibility of

setting initial contract prices close to cost.39

Initial contract prices, upon which the estimated dollar value of military procurement

programs was based, would inevitably be

greatly reduced as production got under

way, and this reduction would reflect

greater efficiency in the use of real resources

with corresponding increases in physical

productive capacity. In view of all the uncertainties in the spring and summer of

1942—the manifold problems of industrial

conversion to war production, the constant

flux in prices and costs, repeated changes

in the composition of military requirements,

and so on ad infinitum—Somervell considered it premature to rely on tentative national income estimates as the basis for a

major reduction in the program, and he was

optimistic in the matter of increased output

and improved distribution of essential materials. Moreover, in common with President

Roosevelt, Somervell believed in the efficacy

of "incentive goals" as an important determinant of the nation's productive capacity.

Finally, there is no doubt that both Somervell and Patterson—in their role as champions of the military program—customarily

assigned a lower importance to civilian

claims upon the nation's productive resources than they did to military requirements.

By the fall of 1942, however, the war

economy had become sufficiently developed

and stabilized to permit the satisfactory resolution of the Feasibility Dispute. The substantial completion of industrial conversion

to war production, the corresponding development and stabilization of governmental

war agencies, the steadily augmented and 37

 See above, page 138. 38

 Somervell memo cited above, note 14. 39

 See below, pages 352-53.
158 THE ARMY AND ECONOMIC MOBILIZATION

refined flow of statistical and other information, and the growing crisis in material

shortages and the administration of material control systems all converged in late

1942 to force as well as to permit the necessary cutbacks in military programs. It is

questionable whether intelligent and appropriate adjustments thereto could have

been achieved much sooner in the absence

of the necessary underlying conditions.

After coming to a head in October 1942,

the controversy over feasibility rapidly subsided, and its resolution marked the widespread acceptance of one of the most significant lessons to be learned from the World

War II industrial mobilization experience.

This was the painful but unavoidable conclusion that even the U.S. economy, great as

it was, could not undertake widely unattainable production objectives without slowing down production all along the line. The

resolution of the Feasibility Dispute was

soon followed by the successful adoption of

the Controlled Materials Plan and collateral

measures to ration the nation's industrial

capacity for the achievement of balanced

procurement objectives.

The War Department Procurement Review Board—A second major development

during the life of the Army Supply Program

occurred in connection with the review of

War Department procurement activities

during the summer and fall of 1943, when

the war economy was approaching peak

production. Early in the summer of 1943,

the newly established top-level co-ordinating agency—the Office of War Mobilization

(OWM)—requested each of the major procuring agencies to appoint a board of review

to examine the composition of its requirement programs in terms of essentiality and

balance and to make recommendations concerning the control and efficiency of

procurement as a whole.40 The War Department Procurement Review Board

(WDPRB) was appointed as a result of

this request. The Procurement Review

Board studied the strategic plans of the

Joint Chiefs of Staff, the background of the

Army Supply Program, and the current

status of requirements, procurement activities, and inventories of finished matériel. In

the course of its activities, the board made

two field trips and interviewed some seventythree witnesses including War Department

officials concerned with military requirements and procurement. The board's report of sixty-eight pages and associated material, submitted on 31 August 1943, furnishes excellent insight into the problems,

achievements, and shortcomings of the

Army's supply system at the peak of its

World War II procurement program.41

In general, the board found that the

Army's supply operations were successful:

"No approved operation has been hampered by shortage. The quality of equipment has been good. All those connected

with design, procurement, production, and

distribution are to be commended on the

40

 The origin and history of OWM (later the

Office of War Mobilization and Reconversion) are

presented in Somers, OWMR. See pages 62-64

therein for background of the War Department

Procurement Review Board. 41

 The complete report of the War Department

Procurement Review Board—often called the McCoy Board for its chairman, Maj. Gen. Frank R.

McCoy, USA (Ret.)—is Appendix B in the twovolume publication of the War Department entitled "Levels of Supply and Supply Procedure"

(1 January 1944). This publication also includes

the report of the Special Committee for Re-Study

of Reserves (Richards Committee) (Appendix

F); the McNarney Directive of 1 January 1944

(Appendix A); and detailed comments of War

Department staff and command agencies on the

recommendations of the two reports (Appendixes

C and G).
REQUIREMENTS: PEARL HARBOR TO WAR'S END 159

results."

 42

 The board noted "a war cannot

be run like an industry; the criterion is not

low costs but victory. The enemy is resourceful: changes in strategy and equipment are

constantly necessary—regardless of expense

in money and materials—if the enemy is to

be countered vigilantly, driven to the defensive, and finally overwhelmed."

 43

On the debit side, the board felt that the

time had come for a much more adequate

screening of requirements, especially for

certain categories of supply. It found the

Quartermaster Corps' ninety-day reserve

supply of nonperishable food in the United

States too high; the nation's food-raising

capacity and a transportation system insuring quick movement, the board believed,

would permit a substantial reduction in zone

of interior reserves. The Army's methods of

determining requirements for ammunition

came in for particularly heavy criticism. The

use of the "day of supply" concept, with

arbitrary estimates of probable expenditures

per gun, had resulted in the building up of

huge reserves of ammunition:

Our stocks of small arms ammunition are

now measured in billions of rounds. If we

continue to produce on the basis of assumed

figures which are widely variant from actual

expenditures, our reserves of ammunition will

soon be astronomical. They are now tremendous. The on-hand stock of small arms ammunition in this country amounts to some

2.5 billion rounds. In reserve in North Africa

is an additional 1.4 billion rounds.

The Board is convinced that the War De- partment must take steps to bring production

of ammunition and stocks of ammunition into

the realm of reality.44

Extending its observations to the matter

of reserve supplies in general, WDPRB

noted an increase in the value of major ASF

items in storage from $2 billion to $4 billion during the period December 1942 to

June 1943. Specific examples included

stocks of gas masks (from 500,000 to

1,800,000) and demolition bombs (from

346,000 tons to 800,000 tons). Accordingly, the board recommended greater attention to inventory control and a thorough restudy of reserve levels.45

A further target of the board's criticism

was the automatic supply of equipment

to troops and organizations on the basis

of established tables of allowances without

distinction between different theaters and

often without serious consideration of the

actual usefulness of the equipment under

specific circumstances. The report pointed

out that complete organizational transport

equipment was furnished to units on

Pacific islands where roads still had to be

hacked out of the jungle. Similarly, the

board observed that 155-mm. howitzers,

highly essential in ordinary terrain, might

be entirely too cumbersome for the mountain roads of the Balkans. Complex radio

equipment suitable for trained American

troops was probably not practicable for

Chinese troops supplied on a divisional

basis by the U.S. Army. Furnishing full

allowances of ground radio equipment to

air squadrons in England appeared to be

gratuitous since the British communications network could be used.46

The board also noted a repetition of the

World War I tendency to overequip the

individual American soldier:

In the last war the American soldier and

many of his units were overequipped. As a

result, the first engagement or extended

march saw French villages and French roads 42

 WDPRB Rpt, p. 61. 43

 Ibid., pp. 1-2. 44

 Ibid., p. 36. The "day of supply" concept is

discussed at some length below; see pages 203 ff.

45

 WDPRB Rpt, pp. 46-52, 67. 46

 Ibid., pp. 48, 54.
160 THE ARMY AND ECONOMIC MOBILIZATION

HEAVILY BURDENED SOLDIERS DEBARKING at Phosphate Pier, Casablanca.

littered with discarded equipment. The Board

senses that a similar situation exists in this

war.

A visit to the New York Port of Embarkation provided visual evidence. It was a hot

July evening and troops on a North River pier

were pouring aboard a transport. As they

went up the gangplank, bowed down with

the weight of their equipment, they looked

like pack mules. They carried their weapons,

a full pack, a barracks bag, an overcoat, and

an antigas suit. An additional barracks bag

for each soldier already had been stowed in

the ship's hold.47

These observations were pointed up with

the statement that "the issue of equipment

to individuals and units simply because the

documentary tables call for it is sheer

waste."

 48

Still another condition observed by the

board was the failure to curtail construction and supply operations in obsolete

theaters of operations:

No nation is rich enough or productive

enough to supply and maintain battlefronts

where there is no longer a battle. 47

 Ibid., pp. 53-54. Lt. Gen. Lesley J. McNair

testified before the board that the Casablanca

landing indicated overequipment of troops. Elsewhere it has been noted that the amount of individual equipment in the North Africa invasion

raised serious problems of "ships, space, loading

and unloading, transportation, storage, deterioration of contents, theft, and failure of [duffel] bags

to catch up with fast moving combat units."

Bradford, QMC Requirements, p. 73. As a result of this experience the War Department

adopted The Soldier's Payload Plan, reducing the

amount of equipment to be carried and providing

for issue in the field of other needed items. 48

 WDPRB Rpt, p. 54.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 161

The Caribbean area is a case in point. In

the dark days of 1940 when it appeared possible that Germany might overrun Europe

and Western Africa, when there was at least

reasonable doubt as to the continued availability of the British fleet, we embarked on a

program of bases in the Caribbean. When

the tide of war turned in our favor, the need

for these bases became less pressing. Nevertheless, construction of bases for large garrisons continued. Today we have in these areas

"ghost" camps which cost more than $200,-

000,000 and which were laid out for garrisons

that will probably never be there.

It appears evident that the difficulties encountered in the Caribbean will be repeated

on a much larger scale in North Africa unless

strong measures of control are taken forthwith

to prevent such repetition.49

A similar illustration was the continuation of 1940 plans for modernization of

U.S. harbor and seacoast defenses. Although it had been revised downward

from time to time, the program still contemplated the completion of twenty-two

16-inch and eight 12-inch gun batteries

in addition to fifty 6-inch gun batteries.

In the light of current conditions, the

board doubted the wisdom of the heavy

gun program, particularly since it involved

the manufacture and installation of mechanical and electrical components requiring the highest type of workmanship

and shop facilities badly needed throughout the war production program. The

board therefore recommended the reexamination and curtailment of the seacoast heavy gun program.50

Many of the recommendations of the

Procurement Review Board had been put

into effect by the time of its report.51 A

major consequence of the report was the

appointment by the Deputy Chief of Staff

on 3 September 1943 of the Special Committee for the Re-Study of Reserves. This

committee, known as the Richards Committee after the name of the chairman

(Brig. Gen. George J. Richards), was

charged with the responsibility for the resurvey of five specific areas of requirements

determination: (1) the strategic reserve;

(2) theater reserves; (3) stockpiles in the

United States; (4) day of supply; (5)

maintenance, distribution, and shipping loss

factors.

Like the Procurement Review Board, the

Richards Committee conducted intensive

hearings and studies and submitted its report

within a two-month period. While it warned

that the heaviest fighting of the war still lay

in the future, the committee also found the

Army's current requirements estimates excessive and made numerous recommendations for their reduction. It also suggested

the adoption of improved procedures in

gathering pertinent data and in computing

and screening requirements. The committee's fifty-seven specific recommendations

were incorporated in whole or in part in a

general implementing directive issued by the

Deputy Chief of Staff on 1 January 1944.

The McNarney Directive made a number of

important changes in procedure as well as

substance, transferring certain functions

49

 Ibid., pp. 57-58. 50

 Ibid., pp. 40-41, 66. 51

 In addition to thirteen formal recommendations made by the board, the investigation had revealed various other opportunities for the improvement of the procurement practices. On the other

hand not all the official recommendations were considered desirable by the War Department. See WD,

Levels of Supply and Supply Procedure, App. C,

Comments of the War Department on the Recommendations and Related Conclusions Contained in

the Report of the War Department Procurement

Review Board, dated 31 August 1943.
162 THE ARMY AND ECONOMIC MOBILIZATION

from the Army Service Forces to the Supply

Division of the General Staff.52

The general result of the reports of both

the Procurement Review Board and the

Richards Committee was a broad reduction

in Army requirements together with increased attention to the improvement of

the procedures for requirements determination. The reports had the effect of expediting the development of the Supply

Control System, which gradually replaced

the Army Supply Program in the last year

and a half of the war.

The Supply Control System

By the end of 1943, procurement of initial

equipment for the expanding Army was for

the most part complete and stocks of munitions in many categories had reached comfortable or even excessive levels. After the

report of the Richards Committee and the

ensuing McNarney Directive, the ASF took

steps to refine its methods of determining

requirements and to bring into balance all

stages of the procurement and distribution

process. On 28 January 1944, Maj. Gen.

Lucius D. Clay, Director of Materiel, indicated to all his staff divisions the need for

many changes in procedure and announced

that specific instructions would soon be

issued.53

The new instructions issued on 7 March

may be regarded as launching the Army's

Supply Control System.54 The basic purpose of the procedures established by the

new system was to improve and co-ordinate

four related activities: (1) requirements

determination; (2) revision of procurement schedules; (3) distribution and issue

of matériel; and (4) the disposal of surpluses. All items of procurement were to

be divided into two control groups: Principal (P items) and Secondary (S items).

P items were those which were important

from a military or monetary standpoint and

which fell into either or both of the following categories: (1) central control necessary because of production considerations

(lengthy production "lead time" or controls

over materials, components, manpower, facilities); (2) past issue experience inadequate for the computation of requirements

(sporadic or special project issues). S items

included all matériel not specifically listed

as P items. Classification of items was made

the responsibility of the technical service

chiefs, who were directed to submit by 15

March 1944 lists of all items under their

cognizance to be designated as P items. It

was anticipated that many items in the

P category would eventually shift into the

S group as control procedures were perfected. Requirements for P items were to be

carefully reviewed at least once quarterly

and individually listed as long-range procurement objectives in the Army Supply

Program. Requirements for S items were to

be grouped in item or dollar categories

deemed appropriate by the technical services for publication in ASP.

The new approach to requirements determination for all items was based on "sup52

 Memo, Lt Gen Joseph T. McNarney, DCofS,

for CG AAF et al., 1 Jan 44, sub: Changes in

Supply Procedure and Supply Levels. This document, hereafter cited as the McNarney Directive,

is reproduced as Appendix A, in WD, Levels of

Supply and Supply Procedure. The report of the

Richards Committee, as shown above in note 41, is

found in the same volume (Appendix F). Many of

the actions required by the McNarney Directive

had already been independently undertaken by appropriate echelons of the War Department as part

of their regular responsibilities. 53

 Memo, Gen Clay, Dir of Materiel, for Dir Purchases Div et al., 28 Jan 44, Frank, Doc. 119. 54

 ASF Cir 67, 7 Mar 44.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 163

ply and demand studies" to be conducted

by the technical services. The total demand

for each item was described as consisting

of two elements: future issue requirements

and total authorized stock levels. Future

issue requirements were to be based wherever possible on recent issue experience. It

was considered that this basis would be appropriate for most S items. The majority

of P items, on the other hand, were not expected to possess stable rates of issue and

requirements for these would have to be

based on equipment tables and other data

previously used in computing the Army Supply Program. In all cases, current and past

issue data were to be accumulated and used

in conjunction with other information in

forecasting future needs. The total authorized stock level for a given item was defined

as the quantitative sum of all stockage authorized to be physically held within the

continental United States for depot distribution as reserves. Reserve levels were established at forty-five days of supply for the

zone of interior and sixty days for theaters

of operations distribution, plus certain special reserve categories.55

From the sum of estimated future issues

and total authorized stock levels was to be

deducted total stock on hand; the remainder

indicated a "desired total receipts schedule."

Against this schedule was to be matched

total expected receipts from contracts in

force, overseas procurement, reclamation

schedules, and any other sources. The difference between desired and expected total receipts—that is, shortages or excesses—

represented the "desired adjustment." Indicated shortages were to be overcome by

augmenting procurement schedules; excesses were to be dealt with by curtailment

of procurement and, where appropriate, by

disposal action. The new system focused attention upon supply and demand at depots

in the United States through which the distribution of all Army supplies was actually

or theoretically channeled. Moreover, the

system would force the co-ordination of all

aspects of Army supply—requirements, procurement, distribution and issue, reclamation, stock control, and disposal of

surpluses.56

The inauguration of the new system, soon

to be known officially as the Supply Control

System, required Herculean efforts. Major

changes in organizations and procedures

were necessary. In June 1944 the Requirements Division, formerly under the Director

of Materiel, ASF, was merged with the Supply Control Division, formerly under the

Director of Supply, ASF. The resulting new

Requirements and Stock Control Division

was placed in the Office of the Director of

Plans and Operations. The rationale behind

these changes was threefold: (1) Feasibility

considerations were no longer a serious limitation upon general requirements, hence

retention of the function of requirements

determination by the office concerned with

production matters—the Director of Materiel—was no longer required; (2) the

great importance of inventories at this stage

of the war called for the closest relationship

between requirements determination and

stock control; (3) this consolidated activity

could best be directed from the highest planning echelon of ASF, where major plans

originated for the pending shift from a twofront to a one-front war, with implications

of drastic changes in requirements.57

55

 Ibid., pp. 12-14.

56

 Ibid., pp. 14-24. 57

 Millett, Organization and Role of the ASF, pp.

342, 355.
164 THE ARMY AND ECONOMIC MOBILIZATION

In order to carry out the purposes of the

Supply Control System, planners devised an

elaborate scheme of forms and records to

permit the accumulation of up-to-date information on all elements and phases of the

supply and demand situation. For P items

the basic supply-control Long Form (WD

AGO Form 0470) was developed. This

form, which underwent a number of revisions, brought together on one page all important supply and demand information for

the procurement item concerned, time

phased by months for the three months preceding and following the date of estimate,

and by quarters thereafter. For S items,

stock record cards or supply-control short

forms were maintained by each technical

service. The general instructions governing

the Supply Control System were published

and revised in successive editions of ASF

M-413, which superseded ASF Circular

67.58

The number of principal items under

supply control coverage rose from 950 in

August 1944 to nearly 1,900 by March

1945, when it accounted for approximately

80 percent of the total dollar value of ASF

procurement. In December 1944 it was

decided that all P items should be reviewed

monthly and that the supply computations

resulting therefrom would be published in

the Monthly Progress Report, MPR-20

series. Thereafter the monthly progress reports took the place of the semiannual revisions of the Army Supply Program, and the

1 October 1944 edition of ASP (originally

scheduled for 1 August 1944) was the last

to be published. This final edition of the

Army Supply Program contained requirements developed under SCS procedures and

thus effected a transition to the new system.

Each monthly supply computation for the

1,900 principal items, initially performed

by the technical services, was critically appraised in a "review meeting" attended by

requirements, production, and distribution

personnel from the technical services and

ASF staff divisions. Representatives of the

divisions were authorized to take final approval action for their respective agencies,

and the computations as revised in review

meetings became the official basis for publication in the monthly progress report. This

procedure not only eliminated an enormous

quantity of paper work but permitted a

degree of staff co-ordination never before

achieved. Furthermore, the 1,900 principal

items published in MPF-20 represented a

considerable reduction from the 4,500 items

formerly listed individually in each semiannual recomputation of ASP.59

Secondary items under the Supply Control System numbered about 900,000 but

constituted only 20 percent of the dollar

value of ASF procurement. Spare parts accounted for the major share of secondaryitem procurement, and in March 1944 the

Spare Parts Branch of the Requirements

Division was established to co-ordinate various requirements, procurement, and distribution activities relating to spare parts.

This branch did much to improve the flow

of information as well as the formulation

58

 See ASF M-413, The Supply Control System,

editions of 20 Jul 44, 22 Dec 44, and 10 Apr 45.

Although the Supply Control System was the result

of many developments, it owed much to the stock

control system and supply and demand studies

initiated by the Quartermaster Corps. The representations of the QMC led to a detailed study and

report by Mr. Howard Bruce, who later succeeded

General Clay as the Director of Materiel, ASF. The

Bruce report was an important influence leading to

the adoption of the Supply Control System. See:

(1) Bradford, QMC Requirements, p. 51; (2)

Risch, QMC Supply, I, 226-29. 59 Frank, Requirements, pp. 159-63.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 165

and execution of procurement policy in the

field of its activity. In view of the large number and lower importance of S items, requirements thereof were at first reviewed

only quarterly. In the spring of 1945, however, it was found that stocks and prescribed

stock levels of secondary items amounted to

some five billion dollars, or nearly a year's

supply. Inasmuch as tactical plans for the

remainder of the war indicated a substantial

decrease in the rate of issue demand, a comprehensive survey of secondary items was

ordered by the Commanding General,

ASF.60 The governing directive called for

the suspension of procurement deliveries or

the cancellation of contracts for items exceeding specified levels and ordered prompt

redistribution and disposal action for all

items reaching redistribution and disposal

levels. Within four weeks the Office, Chief

of Ordnance—Detroit, in response to the

directive, completed the review of 216,303

secondary items, revealing stocks valued at

$145,718,021 to be in excess of disposal

levels. This so-called blitz review for all

technical services covered more than

600,000 items and resulted in the cancellation of $491 million in procurement and

the declaration of $334 million in property

as excess.61

Continued attention to secondary items,

highlighted by various directives, meetings,

and visits of ASF personnel to stock control

points, revealed that 6 percent of the more

than 900,000 secondary items accounted

for 80 percent of total annual procurement

of these items. On 3 July 1945 an elaborate

directive was issued calling for accurate

monthly progress reports for secondary

items to be published as MPR-19, Secondary Items. The purpose of the directive

was to bring increased pressure to bear

upon the services in reducing procurement

and effecting disposal actions, as well as to

accumulate timely information. The first

presentation of the supply position of secondary items on a monthly basis appeared

in MPR-19, dated 30 June 1945. This

publication, which covered some 833,000

secondary items, revealed that the value of

the total stock on hand as of 30 June 1945

amounted to $3,194,000,000—a notable

reduction from the estimate of $5 billion in

the Somerville directive of 21 April 1945.62

The Supply Control System represented

the final stage of the Army's organization

and procedure for controlling procurement

in World War II. Like the Army Supply

Program, the Supply Control System was

the focal point of all the Army's procurement and supply operations. But it was far

more comprehensive and detailed than ASP.

Instead of providing only annual production targets, revised twice a year, SCS contained monthly and quarterly details and

was recomputed and republished each

month. Instead of showing only requirements and stocks on hand at the beginning

of each year, SCS showed the supply as well

as the demand position of each item for each

60

 Memo, Gen Somervell, CG ASF for CofOrd,

21 Apr 45, sub: Excessive Stock on Hand in Secondary Items, Frank, Doc. 146. 61

 Frank, Requirements, p. 178.

62

 (1) Memo, Brig Gen Theodore M. Osborne, Dir

Reqmts and Stock Control Div, for CofOrd et al.,

9 May 45, sub: Supply Control-Progress Report for

Secondary Items, and incl., Frank, Doc. 147. (2)

Memo, Osborne for CofOrd et al., 5 Jun 45, same

sub, Frank, Doc. 148. (3) Memo, Osborne for

Somervell, 9 Jun 45, sub: Improved Reporting of

Technical Services Supply Control for Secondary

Items, ASF Reqmts and Stock Control Div 401.1.

(4) Memo, Osborne for CofOrd et al., 3 Jul 45,

sub: Instructions for the Preparation of Monthly

Progress Report, Section 19, Secondary Items (Reports Control Symbol RLP-9), Frank, Doc. 149.

(5) ASF, Monthly Progress Report, Section 19, 30

Jun 45. (6) Frank, Requirements, pp. 172-82.
166 THE ARMY AND ECONOMIC MOBILIZATION

time period involved. Also, SCS provided

for all its users a wealth of detail formerly

available only in the work sheets of the various offices responsible for compiling the

Army Supply Program. The SCS Long

Form for each principal item was a masterpiece of economy and arrangement for the

presentation of comprehensive information

on a single page. Divided into seven major

areas,63 as well as additional data sections,

the Long Form contained individual spaces

for nearly five hundred statistical entries.

In addition to showing data for the detailed

components of supply and demand for each

time period, the Long Form contained an

abundance of information such as the unit

cost of the item, procurement lead time,

supply classification, approved substitutes,

replacement factors for each theater of operations, and special remarks.

The adoption of the Supply Control System was not without attendant disadvantages. Some of these were administrative in

nature but others were substantive difficulties arising out of the basic character of

the system itself. The task of preparing the

elaborate assemblage of information and

summaries once each month—especially in

the developmental stages of the system—

was a major ordeal for technical service personnel, requiring feverish efforts and long

hours of overtime and leaving little opportunity for careful and considered review of

the resulting estimates. More serious was the

fact that marked, and sometimes violent,

fluctuations in procurement schedules resulted from adjusting procurement to

monthly changes in requirements estimates.

Early in 1945 the chief of the Procurement

Division, Office of the Chief of Engineers,

pointed up the consequences for Engineer

procurement: "Production items cannot be

handled on a 30-day 'stop and go' basis,

primarily because of the lead time required

and secondarily . . . because labor gets away

from us never to return."

 64

 Fortunately,

there were saving circumstances which minimized the consequences during the remainder of World War II. First, the overburdened technical services were slow in changing procurement schedules during the early

months of SCS.65 Secondly, as indicated in

the following pages, by this stage of the war

the trend of requirements for the great

majority of all items was progressively

downward, resulting for the most part in

one-directional changes in procurement

schedules.

The Supply Control System was developed in coincidence with the substantial

increase in contract terminations during

the final year of the war and greatly facilitated the making of termination decisions.

Throughout 1943 it had been official policy

under the Army Supply Program to keep

to a minimum cutbacks in production and

their resulting dislocations: "Because of the

cost, difficulty and delay which result from

changes in production schedules which have

been agreed upon, and which are now serving as the bases for determining raw material allocations, the general policy established for the 1 August 1943 revision of Sec63

 These were I-Identification of the Item; IIThe Past; III-The Present; IV-The Future; VStock Status; VI-Disposal; VII-Annual Data Comparisons. See WD AGO Form 0470 (Revision of

10 Apr 45), reproduced as Fig. 2, p. 8 of ASF

M-413, The Supply Control System, 10 Apr 45.

64

 Memo, Chf Procurement Div for ACofEngrs

for Military Supply, 29 Jan 45, sub: Terminations

and Cutbacks, OCofEngrs Procurement Div. Ex

Off file, Cancellations, Cutbacks, and Terminations,

1 Jan 45 through 31 Dec 45. 65

 Blanche D. Coll, Jean Keith, and Herbert H.

Rosenthal, The Corps of Engineers: Troops and

Equipment, a volume in preparation for the series

UNITED STATES ARMY IN WORLD WAR II,

Ch. XXII, MS, OCMH.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 167

tion I of the Army Supply Program is to

make no changes in required production for

1943 except where deemed absolutely necessary."

 66

 Peak production had been

achieved by the end of 1943 only through

heroic measures on the part of industry and

government alike. With military requirements ultimately needed for the invasion of

Europe still in doubt, the partial dismantling of the nation's productive machine so

painfully created over a period of three years

was considered to be an unnecessary and

foolhardy proceeding. Hence, even though

stocks of many items were accumulating beyond short-run needs, production cutbacks

throughout 1943 were confined mainly to

major items of imbalance, such as tanks, for

which basic changes in organization and

strategy had led to permanently reduced requirements. By mid-1944 the situation had

materially altered. The new supply control

procedures as well as independent studies indicated a fairly general overaccumulation

of inventories and the consequent desirability of readjusting procurement schedules.

The authorization of production in advance

of scheduled requirements was prohibited

except for special circumstances, and increasing numbers of contracts were terminated.67

 (See Table 60, page 696.)

Demobilization Requirements

During the last year of the war the necessity for demobilization planning placed

heavy burdens upon requirements personnel while they were still in the throes of the

change-over to the Supply Control System.

Initial planning for demobilization had begun, however, many months before the

adoption of the Supply Control System. On

7 October 1943, the Requirements Division,

ASF, issued instructions to the chiefs of the

technical services calling for the computation of a Special Army Supply Program for

Demobilization Planning. These instructions established the basic concepts and procedures to be used in formulating requirements for the stages of demobilization following victory in Europe and the subsequent victory in the Pacific. The initial

stage—the period of a one-front war following V-E Day—was described as Period

I. The final stage of demobilization following the defeat of Japan was designated as

Period II, although no computations for

Period II, as such, were made in the several

series of Army demobilization plans. For

purposes of the initial "dry-run" or experimental computation, Period I was assumed

to last for one year and Period II for six

months. Hypothetical dates for V-E and

V-J Days were assumed as 31 December

1943 and 1944, respectively.68

The resulting special computation of

ASP for demobilization planning purposes

was published on 1 December 1943. In

general the methods of computing requirements for Period I were similar to those already in use in connection with the twofront war. Initial-issue, replacement, and

distribution requirements were computed

for the forces assumed to exist in the zone

of interior and overseas at the end of Period

66

 Memo, Wood, Dir Reqmts Div ASF, for

TQMG et al., 15 Jun 43, sub: Computation of

Requirements Section I, Army Supply Program, 1

August 1943, Frank, Doc. 83. 67

 Authorization of advance production had also

been restricted under ASP, but exceptions were

more freely granted. Increased restrictions were

adopted as early as January 1944. Memo, Brig

Gen Hugh C. Minton, Dir Production Div ASF, for

TQMG et al., 29 Jan 44, sub: 1944 Army Supply

Program—Policies Affecting Production.

68

 Memo, Col Lee A. Denson, Actg Dir Reqmts

Div ASF, for CofCWS et al., 7 Oct 43, sub: Special

Army Supply Program for Demobilization Planning, and 5 incls, Frank, Doc. 150.
168 THE ARMY AND ECONOMIC MOBILIZATION

I. The basic differences from the regular

ASP stemmed from problems relating to redeployment and demobilization. In the first

special computation, it was assumed that the

Army as a whole would shrink by 2,059,000

men (from 7,670,000 to 5,611,000) during

Period I. This would reflect decreases from

5,465,000 to 2,246,000 men in the continental United States and possessions, and

from 1,532,000 to 529,000 in the EuropeanAfrican area. Deployment to the PacificAsiatic area on the other hand would raise

the strength in that area from 673,000 to

2,836,000. An even rate of demobilization

of the 2,059,000 men was assumed during

Period I, as well as an even rate of expansion to maximum strength in the PacificAsiatic area during the same period. These

changes in troop strength introduced special

considerations, since maintenance and severance allowances had to be provided for

demobilized units and since large-scale redeployment to the Pacific area created novel

requirements for transportation and special

operational projects in addition to normal

differences in the needs of separate theaters

on opposite sides of the globe.

The second special computation of demobilization requirements appeared on 1

October 1944, the date of the final edition

of the regular Army Supply Program.

Period I for this computation was designated as the twelve months following

1 October 1944. The second special computation, like the first, was limited to

Period I and was also merely a dry-run

computation designed more to provide increased experience in demobilization planning than to arrive at anything like firm

estimates of demobilization requirements.

The directive ordering the second recomputation was far more detailed and realistic than its predecessor. In addition to

carrying special instructions tailored to the

needs of individual technical services, it

included plans for disposing of supplies in

theaters, en route to theaters, at ports, en

route to ports, and elsewhere. Also, it

made more specific provision for establishing peacetime war reserves of equipment

to be held in the United States for possible future mobilization needs. Since the

new computation was based on a special

Demobilization Planning Troop Basis, it

reflected later developments in troop redeployment planning for the demobilization period.69

By the end of 1944 it was evident that

the time was rapidly drawing near when

firm demobilization requirements would

have to be determined as the actual basis

for procurement. Also, by this time the

Supply Control System had been developed to the point where it was about to

replace ASP completely; all future requirements would then have to be stated

within the framework of SCS. On 8

January 1945 the Requirements and Stock

Control Division called for a new computation of Period I requirements, this time

to be performed under SCS procedures

and published as a special edition of the

Monthly Progress Report series. The ensuing publication reflected the elaborate

accumulation of redeployment and demobilization plans which had been de69

 Memo, Denson, Chf Reqmts Div ASF, for

CofCWS et al., 15 Apr 44, sub: Special Army

Supply Program for Demobilization Planning,

Section I, Period I, 15 July 1944, and 10 incls,

Frank, Doc. 151. Publication of this estimate of

demobilization requirements was, like the scheduled 1 August 1944 edition of ASP, delayed until

1 October 1944 because of difficulties in obtaining a satisfactory troop basis and the problems of

merging supply control computations with the

Army Supply Program.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 169

veloped with increasing intensity since the

summer of 1944.70

The 31 January 1945 computation of

demobilization requirements assumed the

cessation of hostilities in Europe on 30 June

1945 and a Period I duration of eighteen

months thereafter. Computations were

based on the War Department Troop Deployment and Supply Supplement of 1 December 1944. As before, even rates of demobilization and redeployment were assumed, but in the absence of direct redeployment data it was assumed that all

troop redeployment from Europe to the Pacific would take place via continental

United States. This meant that for requirements planning purposes all troops destined

for the Pacific area would be completely

reequipped within the United States. All

theaters were classified as active or inactive, and stock levels, replacement rates,

and other determinants of requirements

were modified and applied in accordance

with this revised theater status. Timephased estimates were made of the percentage of recovery of all important initial

equipment in each inactive theater. Recoverable equipment, including repaired

equipment, was included as assets in computing net requirements, with an estimated

time for transshipment to depots in the

United States of forty-five days from date

of availability at either staging areas.71

The computation of 31 January 1945,

as set forth in MPR-20-X, represented a

major achievement in bringing together the

multiplicity of plans and assumptions for

redeployment and demobilization and in

producing estimates of Period I requirements which would more closely approximate actual procurement needs after V-E

Day. During the ensuing weeks these estimates were intensively studied, and on 11

March 1945 the Director of Plans and Operations presented to the Commanding

General, ASF, a formal report on the adequacy of Period I supply plans. The report

recommended that MPR-20-X be continually revised on an up-to-the-minute basis

so that it could immediately become the

authorized procurement program upon the

announcement of V-E Day. The report

also recommended that procurement be authorized at once on the basis of MPR-20-X

where requirements for the one-front war

exceeded existing requirements for the twofront war as carried in the regular MPR20. There were numerous items, either peculiar to the Pacific area or required in

greater proportions as a result of the build70

 ASF, Monthly Progress Report, Section 20-X,

31 Jan 45. The "X" designation of specific monthly

progress reports early in 1945 indicated their status

as planning documents rather than approved programs. The full story of the development of demobilization planning in the final year of the war

would fill many volumes. Among the principal

planning documents prepared during this period

were: (1) ASF Basic Plan for Period I (Redeployment, Readjustment, and Demobilization), 31 Oct

44, and revisions thereof; (2) Logistic Study for

Projected Operations, ASF-P-SL-1, accompanying

Memo for Chfs of Technical Services, 11 Dec 44,

sub: Procurement Planning for Military Operations (3) Logistics Study for Projected Operations,

ASF-P-SL-2, accompanying Memo for Chfs of

Technical Services, 18 Dec 44, sub: Procurement

Planning for Military Operations; (4) successive

issues of War Department Troop Deployment and

Supply Supplements thereto.

Additional references to sources may be found in:

(1) Directive for the 31 January 1945 special

computation, Memo, Maj Gen Walter A. Wood,

Jr., Actg Dir of Plans and Opns ASF, for CofEngrs

et al., 8 Jan 45, sub: Supply Control Reports for

Period I, and 2 incls, Frank, Doc. 152. (2) Frank,

Requirements, Planning for Period I, pp. 183-207.

71

 Large movements of both troops and supplies

were of course made directly from Europe to the

Pacific. To the extent that such movements took

place, the computed estimates of both supply and

demand were overstated by amounts roughly canceling each other. See Frank, Requirements, p. 192.
170 THE ARMY AND ECONOMIC MOBILIZATION

up in the Pacific, for which requirements

would increase with the change from a

two-front to a one-front war. These included construction materials and equipment for building roads, airfields, railways,

housing, and dock and storage facilities;

material-handling equipment; tentage and

tarpaulins; special packaging, crating and

preserving materials, as well as new issues

of clothing and supplies of health protection equipment, all made necessary by climatic conditions in the Pacific area. Distribution requirements resulting from the

longer supply lines, nearly three times the

length of those to Europe, were likewise

generally increased. Transportation requirements would be heavier under the

double strain of demobilization and largescale redeployment to the Far East.

The recommendations submitted to General Somervell were tentatively approved by

him, subject to his personal approval later

of all items and dollar values representing

absolute increases for the one-front war.

The 31 January 1945 MPR-20-X revealed

544 items for which one-front requirements

exceeded those for a continued two-front

war. These were subject to careful screening and on 31 March 1945 General Somervell approved for increased procurement a

limited list of eighty-nine items.72

Events in the spring of 1945 rapidly converged to bring to an end the Army's task

of determining requirements for World War

II. The spreading collapse of German resistance indicated that Allied victory in

Europe was imminent. A new MPR-20-X

to improve the statement of Period I requirements was ordered late in March and

was published as of 31 March 1945. In this

issue no specific date was assumed for V-E

Day, and Period I was defined as the nineteen months following V-E Day. The publication reflected revised instructions for

establishing stock levels and computing replacement requirements. The equipment

reserve for Period I (the successor to the

strategic reserve briefly discussed in a later

section) was blanketed into the War Department's planned war reserve for peacetime security. Greater attention was given

to recoverable excesses of equipment in inactive theaters. Requirements for special

operational projects in the Pacific were

refined and time phased to provide for

handling in theaters prior to operations.

Numerous other considerations and refinements brought the 31 March issue of MPR20-X into close conformity with actual

procurement needs as they would materialize with the arrival of V-E Day.73

During the month of April 1945, various

directives to the several technical services

had the practical effect of adopting the 31

March 1945 MPR-20-X as the actual basis

for procurement, and objectives based on

the continuation of a two-front war were

abandoned.74 These directives reduced

total procurement objectives for 1945 and

1946 by nearly eight billion dollars and

"constituted a major adjustment of the industrial front to meet the new conditions of

Period I."

 75

 Earlier, during the last week

72

 (1) Frank, Requirements, p. 197. (2) Memo,

Wood, Actg Dir of Plans and Opns ASF, for CG

ASF, 31 Mar 45, sub: Period I Increases in Procurement, Frank, Doc. 154.

73

 Memo and incls, Wood, Actg Dir of Plans and

Opns ASF, for TQMG et al., 25 Mar 45, sub:

Supply Control for Period I, MPR-20-X, 31 March

1945, and MPR-22-G-X, 30 April 1945, Frank,

Doc. 155. 74

 The last issue of MPR-20 for the two-front war

appeared on 28 February 1945. No issue of MPR20 had appeared on 31 January, since all efforts

were being applied to the first issue of MPR-20-X. 75

 Frank, Requirements, p. 202.
REQUIREMENTS: PEARL HARBOR TO WAR'S END 171

TABLE 21—FINAL ESTIMATES OF ARMY

PROCUREMENT REQUIREMENTS FOR

WORLD WAR II

[In Billions]

a

 MPR-20 and MPR-20-X for indicated dates.

Source: ASF Monthly Progress Reports.

of March and the first two weeks of April,

eighty-two uncompleted facility expansion

projects, estimated to cost some $230 million and scheduled for full production after

1 September 1945, had been canceled. On

20 April 1945 additional instructions were

issued to cancel virtually all facility expansions not required for Period I.76

Further important reductions in planned

procurement were accomplished with the

publication of MPR-20 of 30 April 1945.

This was the first published program for

the one-front war officially adopted as a

basis for procurement, and the X designation was dropped. This issue reflected sharp

reductions in the day of supply for ammunition, termination of production of the

M4A3 tank, use of combined and generally

lower replacement factors for the Pacific

area, and the elimination of numerous requirements, including current unfilled demand for the European and Mediterranean

theaters, initial equipment for French rearmament not supplied as of 30 April 1945,

and reserves of arctic clothing and equipment. Other changes in addition to the foregoing resulted in cutbacks of combined 1945

and 1946 procurement objectives by nearly

$5 billion.77 The last few months of the war

witnessed a steady reduction in the Army's

computed requirements. (Table 21) The

30 June 1945 estimates were the last to be

made for World War II.78 The arrival of

V-J day in mid-August was the signal for

the mass contract cancellations which

brought the World War II procurement

program to an end.

76

 Ibid., p. 201.

77

 Ibid., pp. 204-05. 78

 Frank, Requirements, p. 207.
CHAPTER VIII

The Methodology of

Army Requirements Determination

Some General Considerations

The Army's requirement programs in

World War II were the end result of many

millions of detailed calculations made by

many thousands of individuals in the Army's

complex organization in Washington, its

numerous field establishments throughout

the United States, and its far-flung network

of organizations in overseas theaters. Each

of these programs possessed its own basic

assumptions and objectives, as formulated

at high policy levels and spelled out in the

directives and instructions which launched

each individual program or recomputation.

Indispensable to the development of all such

programs was the underlying foundation of

concepts, principles, and procedures which

comprised the basic methodology of Army

requirements determination.

With the heavy expansion of procurement during the defense period, the shortage

of personnel experienced in applying the

concepts and procedures of requirements

determination was a serious handicap to the

Army in computing, assembling, and presenting its requirement programs. Lack of

knowledge in this area also handicapped the

central mobilization control agencies in interpreting and screening military requirements. After Pearl Harbor the War Production Board had the task of appraising the

validity of Army requirements as measured

against the stated requirements of other

claimants upon the nation's supply of resources. It soon became evident that the

ability to make intelligent allocations of

national productive capacity presupposed a

dependable knowledge of the considerations

which entered the determination all down

the line for each claimant agency. This required a lengthy process of indoctrination—

usually when time was lacking—in basic

methodological matters before the rationale

behind a given estimate of requirements

could be comprehended, much less evaluated.1

As in virtually every other area of its activities, the Army at the beginning of the

second world war had an extensive body of

doctrine to govern the determination of requirements. Underlying all specific procedures was the twofold logistical principle

that supply should be adequate and so far as

possible automatic:

...combat troops should not have their

attention diverted from their task of defeating

1

 As noted in the preceding chapter, the Army

Air Forces, which gained substantial autonomy by

the 9 March 1942 reorganization of the War Department, was responsible for computing its own

requirements. AAF requirements for items other

than aircraft were published in the Army Supply

Program with only perfunctory screening by the

ASF.
REQUIREMENTS: DETERMINATION 173

the enemy by anxiety concerning questions of

supply. The impetus in the movement of supplies and replacements should be given by the

rear, which so organizes its services that the

normal routine requirements are replaced automatically and without the preliminary of

requisitions. . . . Assurance of adequate supply necessitates provisions of the broadest

character involving calculations . . . as to

probable requirements incident to the development of operations and as to the time required for supplies to reach the troops. . . .

Boldness in placing orders for equipment that

will probably be required is essential.2

In application this principle meant that

the determination of requirements would

have to precede actual combat operations by

from one to several years. Before such operations could take place, requirements estimates would have to be translated into appropriations, contracts, production schedules, procurement deliveries, and the distribution of matériel to the far corners of the

earth.3 Requirements determination was

thus an act of prediction, whose fulfillment

depended upon a complex array of unknown

future events only partly under the control

of those making the prediction. In view of

this basic condition of uncertainty and the

tremendous issues at stake, it was a fundamental principle of Army supply that all

doubts were to be resolved in the direction

of oversupply rather than undersupply. The

worst kind of failure of a military supply

system was conceived to be one which could

be summed up in the words "too little and

too late."

The most difficult phase of requirements

determination in World War II—from the

standpoint of successful prediction—was the

period in advance of the actual outbreak

of war and up to the time when strategic

plans had been crystallized, theaters of operations established, and rates of munitions

consumption determined on the basis of

current experience. It necessarily followed

that, until long after Pearl Harbor, Army

requirements rested upon broad considerations of the anticipated size and composition of the Army, generalizations regarding

the character of its equipment needs, and

a wide array of more or less arbitrary assumptions as to rates of equipment loss, ammunition expenditure, and other operational

requirements. With the progress of the war,

the concept of automatic supply based upon

long-range estimates of future needs was

substantially modified. Automatic supply

gave way in large measure to supply on the

basis of specific requisitions from theater

commanders. This permitted procurement

and issue of supplies more closely tailored

to specific theater needs, as indicated by operational experience and changes in strategic plans.4

2

 War Department Procurement Planning, par. 75. 3

 For purposes of mobilization planning, a basic

principle of requirements determination was that

war reserves must be adequate to equip and maintain troops until the rate of production could be

brought up to the rate of consumption. This principle underlay the Munitions Program of 30 June

1940.

4

 (1) Logistical History of NATOUSAMTOUSA: 11 August 1942 to 30 November 1945,

compiled by Col. Creswell G. Blakeney (Naples,

Italy: G. Montanino, 1946), especially pp. 53-54.

(2) Leighton and Coakley, Global Logistics and

Strategy, 1940-1943, especially Ch. XII, "The

Army's System of Requirements and Controlled

Distribution," and Ch. XIII, "The Support of

Overseas Operations." Theater requisitions, except

for normal replacement, were screened for essentiality under the current strategic plans. This work

was done by the Operations Division of the General

Staff, which translated the broad directives of the

CCS and JCS into more specific terms for action

by ASF. In this manner, theater projects were kept

in conformity with the requirements of the strategic

concept established by higher authority: Ltr, Col

Vincent J. Esposito, professor of Military Art and

Engineering, U.S. Military Academy, to Maj Gen

Albert C. Smith, Chf of Military History, 15 Feb

55, OCMH.
174 THE ARMY AND ECONOMIC MOBILIZATION

Broadly speaking, the Army's matériel

requirements for World War II, as in other

wars, fell into two classes—equipment and

expendable supplies. Equipment items—

such as clothing, rifles, tanks, trucks, and

planes—were analogous to "capital" items

in industry: they had a relatively long life

and were normally "used up" only after

repeated operations of the type for which

they were designed. Expendable supplies, on

the other hand, were comparable to "operating supplies" in industry and characteristically could be used only once. Expendables consisted of such items as subsistence, ammunition, various medical supplies, fuels, and lubricants.

This simple classification into equipment

and expendables was the basis for the Army's

broadest division of principles, terminology,

and procedures in determining its requirements. Important logistical considerations

demanded, however, a further classification

which would recognize important differences in the character of demand for the

various items of supply, and hence procurement. From this standpoint there were at

least three major types of item: (1) items

of regular or standard issue whose quantitative requirements depended primarily upon

the size of the Army (subsistence, standard

allowances of personal and organizational

equipment); (2) expendable items whose

demand fluctuated widely with variations

in the intensity of combat (ammunition,

aviation gasoline for fighters and bombers);

(3) special equipment subject to urgent but

often sporadic demands arising out of major

strategic plans and operations and numerous

special projects. Among the activities requiring special equipment were intensive overseas shipping operations, the creation or rehabilitation of port facilities, the clearing

of sites for airfields, the building of transportation and communication systems in

undeveloped areas, and a host of other construction projects at home and abroad.

Equipment required for such operations included bulldozers, steamshovels, cranes,

troop transports, tugboats, locomotives,

rails, telephone poles, electric wire, lumber,

concrete, and so on. Obviously, no clean-cut

classification could be developed to reflect

accurately all the various logistical considerations. The Army's approach to the problem was the use of five standard classes of

supplies, some of which in turn were further subdivided. Two of these classes (II

and IV) consisted primarily of equipment

items; three of them (I, III, and V) represented expendable supplies.5

 This classification of procurement items according to the

nature of demand for them was an important tool in the formulation of policies, such

as the establishment of differential reserve

levels, designed to insure adequacy of supply.

Computed requirements were not, however,

published in terms of this classification.

A third classification of procurement

items was made, as already seen, on the

basis of distinctions in their characteristics

of supply, rather than of demand. In order

to state requirements in terms of the diffi5

 The five classes of supplies were Class I, those

consumed at approximately uniform daily rates

under all conditions and issued automatically without requisitions (for example, rations); Class II,

those for which allowances were fixed by tables of

allowances and tables of basic allowances (clothing,

weapons, and vehicles); Class III, fuels and lubricants (those for aviation were separately grouped

as Class III (A)); Class IV, supplies for which

allowances were not prescribed, or which required

special measures of control and were not otherwise

classified (aircraft (specially grouped as Class IV

(E)), construction and fortification materials, and

heavy machinery); Class V, ammunition, pyrotechnics, chemical warfare agents, and the like.

WD TM 20-205, Dictionary of United States Army

Terms, 18 Jan 44, pp. 271-72.
REQUIREMENTS: DETERMINATION 175

culty of procurement, items were classified

as "critical" or "essential." Critical items

were those which required a long production period, generally a year or more. These

were the items which required extensive

conversion of industry, the development of

new and difficult production skills, special

machinery and equipment, and the solution of complex problems in research and

development, material substitution, and

other barriers to rapid production. In the

critical category were ships, planes, tanks,

guns, ammunition, surgical instruments,

blood plasma, penicillin, and other items

which as a whole or because of the inclusion of complex components were difficult

and slow of production. Essential items

were in many cases no less necessary to the

Army than critical items, but they were

obtainable on shorter notice, either through

regular commercial channels or under special contracts involving relatively little industrial conversion. Essential items included

a large number of Quartermaster items—

numerous articles of clothing and personal

equipment, food, soap, paper products, and

miscellaneous housekeeping supplies—as

well as larger items which American industry was well equipped to produce in large

quantities on relatively short notice. The

distinction between critical and essential

items was most important during the defense period and the first year of the war.

At this time the requirements for critical

items were based on a planned force of approximately double the size of that for which

essential items were stated.6 The purpose of

stating requirements for critical items on an

augmented basis was to make sure of their

procurement and delivery—despite their

lengthier production periods—in substantially the time needed to meet actual schedules of troop activation and deployment.

As indicated above, the point of departure in computing total Army requirements

was the broad distinction between equipment and expendable items. Equipment requirements, as visualized throughout most

of World War II, were composed of three

principal elements—initial issue, replacement, and distribution. Requirements for

expendables, on the other hand, were computed in terms of only two elements—consumption and distribution. The relative importance of the several elements, as well as

the methods of their computation, changed

substantially with the progress of the war.

Equipment Requirements

Initial Issue

"Initial issue" consisted of all types and

quantities of equipment needed to outfit

the expanding Army in its growth from

barely 200,000 men at the beginning of

1940 to over 8,000,000 in 1945. It included

standard allowances of post, camp, and station equipment in the United States as well

as personal and unit equipment for organized components of the Army as these were

activated and moved into overseas theaters

of operations. In addition to standard allowances, initial issue also included exceptional issues to troops of all organizations, 6

 For example, the Munitions Program of 30

June 1940 called for the production of essential

items for a force of 1,000,000 men and of critical

items for 2,000,000 men. The Supplemental Estimates, FY 1942, provided for essential items for

a force of 1,725,000 men, critical items for

3,000,000 men. By February 1943, the Army Supply Program stated requirements for both essential and critical items on the basis of the same

troop strength, except that requirements for most

critical items for training units in the United States

during 1943 were reduced to 50 percent. Frank,

Requirements, pp. 8-11, 54-55.
176 THE ARMY AND ECONOMIC MOBILIZATION

special allowances for task forces, and

equipment for construction and other operational projects.

Most initial-issue requirements were determined by multiplying unit allowance figures by the number of units to be equipped.

Unit allowance figures were obtained from

official allowance tables published and kept

current by the several using arms and technical services of the Army. The number of

units to be equipped was obtained from the

troop basis. Because of the apparent simplicity of multiplying known figures and

summarizing the resultant totals, the determination of initial-issue requirements

was commonly thought to be the easiest of

the several stages in requirements determination. Actually, the process was unbelievably complicated, not only because of the

multitude of items, sources of information,

and other considerations involved, but because these were all subject to constant

change. Moreover, the two basic determinants of Army requirements—the troop

basis and unit allowances—were themselves

mutually determining. A troop basis could

not be developed without a preconceived

pattern of unit allowances, and the composition of unit allowances in turn depended

upon fundamental preconceptions as to the

organization and structure of the Army as

a whole.7

The Troop Basis—The troop basis was

the most important variable in the determination of Army requirements. Prepared by

the General Staff (G-3 in conjunction with

OPD), the troop basis was the Army's official troop mobilization program, indicating the total number of armies, corps, divisions and miscellaneous supporting units—

engineer, ordnance, chemical warfare,

signal, cavalry, field artillery, and others—

scheduled to be in existence at the end of

each calendar year for two years, and

sometimes longer, in the future. The heart

of the troop basis was the number of Army

divisions classified by types—infantry,

armored, motorized, airborne, mountain,

and the like. The troop basis indicated the

number of enlisted men composing each

type of unit and referred to the governing

tables of organization for further details. A

summary of the troop basis as it appeared at

the end of 1942 is presented in Table 22.8

The troop basis was subject to change

from time to time and any major change in

it called for a recomputation of matériel

requirements. Before Pearl Harbor the troop

basis for procurement consisted of the several components of the Protective Mobilization Plan force, and matériel requirements

to support the PMP were programed as

funds became available. For broad purposes

of industrial mobilization, the Munitions

Program of 30 June 1940 established basic

procurement objectives for forces of one

million, two million, and four million men

in terms respectively of essential items, critical items, and the creation of industrial

capacity. As the Munitions Program got

under way and the danger of war increased,

the various PMP force requirements were

successively raised to levels above those in

the Munitions Program. Finally, in the fall

7

 Detailed illustrations of the mutually determining influence of organization and equipment for

the Army may be found in: (1) Greenfield, Palmer,

and Wiley, Organization of Ground Combat

Troops; (2) Watson, Prewar Plans, especially

Chapter VI.

8

 For a thorough discussion of the conceptual nature as well as the evolution of the War Department troop basis for World War II, see the following studies of Robert R. Palmer: (1) "Ground

Forces in the Army, December 1941-April 1945:

A Statistical Study."; and (2) "Mobilization of the

Ground Army." Both in Greenfield, Palmer, and

Wiley, Organization of Ground Combat Troops.
REQUIREMENTS: DETERMINATION 177

TABLE 22—VICTORY PROGRAM TROOP BASIS: SUMMARY OF 15 DECEMBER 1942 REVISION

a

 Includes AAF, as well as troops in training, replacements, etc., for ground forces. b

 Figure in parentheses after each class indicates the number of distinctive types of unit in each class. Types of unit consisted of various

kinds of specialized regiments, brigades, battalions, companies, or other groups. c

 Not available.

Source: Adapted from Frank, Requirements, Docs. 72 and 75.
178 THE ARMY AND ECONOMIC MOBILIZATION

of 1941, the preparation of the Victory Program estimates marked the first statement

of troop requirements considered to be necessary in order to win a full-scale war. As

already indicated, at the time of its preparation the Victory Program was not adopted

as an actual program of troop activation or

matériel procurement. Shortly after Pearl

Harbor, however, a troop basis was adopted

which in size and composition was largely

in keeping with the earlier Victory Program

estimates.9

It was during 1942 that the great problems and controversies arose in connection

with the establishment of a sound troop

basis. Two major, interrelated questions

predominated: What shall be the ultimate

size of the Army? and What shall be its

structural composition? The smashing successes of Hitler's armored divisions in

Europe had indicated the need for a heavily

armored and mechanized Army. Hence, the

troop basis for the U.S. Army as conceived

in 1941 and early 1942 was heavily

weighted with armored and mechanized divisions, calling for a far greater physical

and dollar volume of procurement than

would an army of the same size composed

chiefly of infantry and other more lightly

equipped divisions. The total size of the

Army, estimated to reach nearly 10.5 million men in 1944, likewise called for matériel requirements huge in comparison with

the program eventually carried out.

A number of influences, including the

Feasibility Dispute already discussed,

emerged in the course of 1942 and thereafter to compel a reduction in the planned

size of the Army and even greater changes

in its structure. A fundamental consideration was the lack of shipping capacity to

move troops and supplies overseas; the mobilization of a huge Army, only to let it be

frozen in the United States thousands of

miles from combat areas, would be a wasteful undertaking.10

 The shortage of rubber,

steel, and other materials, together with a

re-examination of the strategic and tactical

roles of armored, motorized, and other

heavily mechanized divisions, led to successive reductions in these units. Increased

emphasis on the importance of the air arm,

the need for larger numbers of service

troops, and growing indications of a manpower shortage dictated still further reductions in the size of the ground forces.

Early in 1942, the troop basis called for

a total (by the end of 1944) of 213 divisions—including 88 infantry, 67 armored,

and 34 motorized. By the end of 1942 these

figures had shrunk to a total of 148 divisions, with 70 infantry, 35 armored, and 17

motorized. (See Table 22.) But this was

barely half the reduction which was ultimately to take place. The final number of

divisions activated by the U.S. Army in

World War II was only 89—including 66

infantry and 16 armored; motorized divisions had been reconverted to standard

infantry divisions and were discontinued as

a separate type. Instead of attaining the

early 1942 objective of 10.5 million men,

9

 This was the Troop Basis of 27 December 1941,

upon which the War Munitions Program of 11

February 1942 was based. The term "Victory Program Troop Basis" continued to be used for the

successive revisions of the troop basis until well

into 1944. See above, page 137.

10

 Greenfield, Palmer, and Wiley, Organization

of Ground Combat Troops, pp. 281-89.

The involved estimates and considerations

entering into the availability of shipping to meet

the Army's needs for movement of troops and matériel are described in the following: (1) Leighton

and Coakley, Global Logistics and Strategy, 1940-

1943; (2) Chester Wardlow, The Transportation

Corps: Responsibilities, Organization, and Operations, UNITED STATES ARMY IN WORLD

WAR II (Washington: 1951), Chapter V.
REQUIREMENTS: DETERMINATION 179

the actual peak strength reached by the

Army in 1945 was 8,291,336.11

The troop basis was a fundamental determinant of requirements for replacement

and distribution as well as for initial issue

and applied to expendable supplies as well

as to equipment. Since the troop basis was

prepared for long-range planning purposes,

it frequently differed both from the shortrange troop activation schedules prepared by

G-3 and from actual inductions and activations. Furthermore, the broad estimate of

overseas shipment and deployment of

troops to theaters of operations, as contemplated by the troop basis, was normally at

variance with actual troop movements.

This was inevitable in view of the many

barriers to either the formulation or the

perfect execution of complex plans for the

mobilization, training, equipment, and

transportation of millions of men for service

in all parts of the world.

The disparity between different plans, as

well as between plans and execution, occasionally reached sizable proportions and was

a cause of frequent difficulty in determining

and reconciling matériel requirements. In

mid-1943, for example, the current revision

of the Victory Program Troop Basis provided for 8.2 million men by the end of

1943, while the activation schedule of G-3

indicated activations not in excess of 7.6

million. The 15 August 1943 edition of ASP

was computed on the larger basis, as

directed by the Chief of Staff, to provide

a strategic reserve of equipment to meet

contingencies and exploit favorable developments in combat operations.12

The strategic reserve was originally

decided upon in November 1942 and was

approved by the Chief of Staff and the

President. The purpose of the reserve was

to provide for the sudden activation of additional troops, either of the United States

or of liberated forces in occupied countries,

as circumstances and opportunities might

require. The 1 February 1943 ASP contemplated a strategic reserve by the end of

1944 of approximately 20 percent of initial

equipment needed to support the 7,500,000

U.S. troops then planned for activation.

Since the strategic reserve omitted various

categories of equipment and supplies, the

computation of requirements to meet the

reserve introduced many additional complexities into the task of requirements determination. The Richards Committee late in

1943 recommended the reduction of the

planned strategic reserve by some 50 percent.

As a result of these recommendations and

other developments, the Victory Program

Troop Basis was revised and brought into

line with troop activation schedules. A

related development in the last year and a

half of the war was the refinement of the

troop basis to show expected troop deployment on a theater-by-theater basis. Only

with such a breakdown was it possible to

apply revised replacement and distribution

factors which were also by this time developed on an individual theater basis.13

11

 (1) Watson, Prewar Plans, p. 344. (2) Figures

for early 1942 taken from Frank, Doc. 30, showing

troop basis data for the first edition of the Army

Supply Program. (3) End-of-war figures for total

divisional activations are found in Greenfield,

Palmer, and Wiley, Organization of Ground Combat Troops, pp. 161, 189.

12

 Frank, Requirements, p. 67. 13

 For additional treatment of the strategic reserve, see: (1) Richards Committee Rpt, Pt. III,

The Strategic Reserve, pp. 11-22; (2) WDPRB

Rpt, Troop Basis, pp. 7-8; (3) Memo and 17 incls,

Brig Gen Walter A. Wood, Jr., Dir Reqmts Div

ASF, for TQMG et al., 15 Jun 43, sub: Computa-
180 THE ARMY AND ECONOMIC MOBILIZATION

Unit Allowances—The second basic factor in the computation of requirements for

initial issue consisted of unit allowances.

Unit allowances were specified in allowance

tables which at the beginning of the war

were of two broad types: tables of allowances (T/A's), covering equipment issued

at posts, camps, and stations, mostly in the

zone of interior; and tables of basic allowances (T/BA's), covering equipment issued

to organized units of the Army. In general,

equipment issues authorized by T/A's were

based on the functions and capacity of individual stations and remained at the installations concerned; such equipment included a multitude of camp and station

furnishings, motor vehicles, and training

equipment, in addition to personal clothing and other items required to administer

the induction, training, and utilization of

troops before their assignment to permanent,

organized units of the Army. Equipment

issued under T/BA's, on the other hand,

became the property of organized units and

moved with the individual divisions, regiments, and other units from station to station and ultimately into theaters of operations. T/BA's showed the full complement

of allowances to individuals (clothing,

blankets, personal equipment, and similar

items per man) as well as allowances to

organizations (number of vehicles, heavy

weapons, signal items, and other units of

equipment per company, battalion, regiment, and so on).14

The task of formulating and keeping up

to date the Army's numerous allowance

tables was a formidable one. New items of

equipment were constantly being developed

and standardized, and old ones eliminated.

Quantities of standard items were increased

or reduced as wartime experience accumulated. A multiplicity of factors entered into

decisions to change allowances and it was

difficult to obtain relevant and accurate information; opinions were often conflicting

and evidence fragmentary; the issues involved ran the gamut from the aesthetic

qualities of the "Eisenhower jacket" to the

role of basic weapons and equipment in

modern warfare. The availability of raw materials and substitute items, the general procurement situation, and many other considerations besides purely military ones all

played a part in the adoption of items for

general issue purposes.15

As the war progressed the Army tightened

its procedures for determining its allowances

and for publishing and disseminating information on changes therein. Allowance

tables were systematically reviewed in an

attempt to reduce or eliminate items of

equipment not strictly essential to the accomplishment of the mission of the organition of Requirements Section I, Army Supply

Program, 1 August 1943, Frank, Doc. 83. This

memorandum was the basic directive for the computation of the 1 August 1943 Army Supply

Program.

For other references to the difficulties caused by

the disparity between the troop basis and activation

schedules, see: (1) Risch, QMC Supply, I, 213;

(2) Bradford, QMC Requirements, pp. 40-41; (3)

Lt Gen LeRoy Lutes, The Army Supply Program,

23 Sep 46, ICAF Lecture (L47-17), p. 5.

14

 The basic prewar regulations defining the purpose and scope of allowance tables and the procedures for their publication and revision are found

in AR 310-60, Military Publications—Tables of

Organization, Tables of Basic Allowances, and

Tables of Allowances, 1 December 1936. This was

superseded by the edition of 1 May 1941, bearing

the same title. 15

 Greenfield, Palmer, and Wiley, Organization of

Ground Combat Troops, pp. 265-68. For further

information on the development, standardization,

and allowance of equipment, see the various volumes

on the technical services in the series UNITED

STATES ARMY IN WORLD WAR II.
REQUIREMENTS: DETERMINATION 181

zation concerned.16 Numerous scattered allowance tables, which before the war had

been issued by each of the fourteen using

and supply arms, were combined into fewer

publications. On 1 October 1941, the

Quartermaster Corps issued its consolidated

T/BA 21, covering all Quartermaster clothing and individual equipment regardless of

using arm or service. This led to the separation of personal from organizational

equipment in official allowance tables. In

October 1942, tables of equipment (T/E's)

were introduced to cover all organizational

equipment needed by units described in

official tables of organization (T/O's). By

August 1943 tables of equipment had been

combined with tables of organization to become tables of organization and equipment

(T/O&E's). Thereafter all allowances of

personal clothing and equipment were published in tables of clothing and individual

equipment.17

The computation of initial-issue requirements would have been far from simple even

if a stable troop basis and unchanging allowance tables had prevailed throughout

the war. Difficulties in adopting and using

standard nomenclature and classification

systems for the many tens of thousands of

Army procurement items gave perennial

trouble; standard allowance tables necessarily permitted discretionary issue of many

items by troop commanders in the field; and

production limitations dictated that the issue

of both essential and critical items to troops

in training be restricted to certain percentages of authorized allowances. Not only did

the technical services have to make conjectures as to probable authorization of optional issues; they also were required to develop and apply probability factors as a

basis for size tariffs and requirements based

on variable allowances.18

Special Projects—Perhaps the most difficult task in computing initial-issue requirements fell to the Corps of Engineers and the

Transportation Corps, both of which had to

determine needs for complex and heavy

items of equipment required for special operational projects. To the Transportation

Corps fell the assignment of determining the

considerable fleet of vessels and other transportation equipment which would be

needed by the Army to carry out its mission. Army vessels in World War II included

large and small transports, landing craft,

lighters, ferries, tug boats, and motor

launches.19 Railway items procured by the

Transportation Corps included locomotives,

rolling stock, thousands of miles of track,

and a wide assortment of related equipment.

The Corps of Engineers was responsible for

anticipating the Army's eventual needs for

construction equipment and materials, port

rehabilitation equipment, tractors, bulldozers, cranes, bridging equipment, aircraft

landing mats, and many other major items

of special equipment.

16

 (1) ASF Annual Rpt, 1943, pp. 15-16. (2)

Greenfield, Palmer, and Wiley, Organization of

Ground Combat Troops, pp. 217-20. 17

 (1) AR 310-60, editions of 12 Oct 42 and 28

Aug 43. (2) Risch, QMC Supply, I, 214. (3) A

sample copy of T/O&E 6-67, covering Field Artillery Battery, 8-inch Howitzer, Motorized, TruckDrawn, is shown in the 28 August 1943 edition of

AR 310-60.

18

 Risch, QMC Supply, I, 215-16. (2) Bradford,

QMC Requirements, pp. 73-74. 19

 For example, the Army's tug boat program in

1943 called for the procurement in 1943 and 1944

of 211 large tugs of 100 feet or more, as well as

some 1,200 small tugs and motor-tow launches, to

meet the unknown requirements of future operations in the islands of the Pacific, the rivers of

Burma, the ports of Europe, and elsewhere throughout the world. (1) WDPRB Rpt, pp. 39-40. (2)

Wardlow, The Transportation Corps: Responsibilities, Organization, and Operations.
182 THE ARMY AND ECONOMIC MOBILIZATION

Equipment for special projects could not

be specified in regular allowance tables but

was of vital importance to the ultimate success of the Army's basic mission. Moreover,

it consisted largely of long-term, difficult-toproduce items whose requirements had to be

determined at least eighteen months in advance of use. During the early stages of the

war when Allied strategy was still in the

process of formulation, the ASF was unable

to obtain from either the General Staff or

theater commanders anything like firm,

long-range operational plans upon which to

base special project requirements:

It just seemed impossible to get the Staff to

understand the importance of lead time in

production. This was . . . true of strategic

and operational plans which affected in large

measure the supply of equipment in addition

to the basic troop equipment. Firm decisions

on these plans were seldom made sufficiently

far in advance to meet the required lead time

for production. It was necessary for Army

Service Forces to do its own strategic and

operations planning in an attempt to outguess the Joint and Combined Chiefs of Staff;

otherwise we would not have been in a position to meet supply requirements of the operation finally decided upon.20

Many of the difficulties experienced by

the ASF in determining special project requirements were removed as Allied strategy

solidified and theater staffs accumulated

field experience. In planning the Normandy

invasion, for example, the European Theater of Operations (ETO) as early as August

1943 submitted requests for equipment

and materials for the huge reconstruction

project anticipated for the port of Cherbourg. Procurement directives to obtain the

needed items were issued within the month—

eight months before the actual invasion.21

The basic dilemma faced by Army planners in attempting to gauge special project

requirements long in advance of actual need

was simply the fundamental problem faced

in the determination of all Army requirements involving a significant production

period. This dilemma was aptly summed up

by the War Department Procurement Review Board in 1943 after scrutinizing the

validity of Army requirements in general:

Those charged with procurement are in an

onerous and difficult position. If they hold up

production on items which take a long time

to produce, they may jeopardize an important

military operation for want of material at the

time it is needed. If they produce in advance

of demand and the demand does not materialize, they may be charged with waste and

unnecessary extravagance.22

Replacement

The Army's replacement requirements

represented the quantities of equipment

needed to offset losses after initial issue.23

As soon as equipment was issued, it was subject to loss through depreciation, destruction, capture, abandonment, pilferage, and

other causes. Actual loss rates varied widely

both within and between theaters of operations because of differences in climate, ter20

 Gen Lutes, ICAF Lecture (L47-17). See also:

(1) Leighton and Coakley, Global Logistics and

Strategy, 1940-1943, Ch. XXVII; (2) Millett, Organization and Role of the ASF, Chs. III-VI.

21

 Logistics in World War II, pp. 58-59. 22

 WDPRB Rpt, pp. 39-40. 23

 The term "replacement" was not officially

adopted by the War Department until 13 November 1943, with the issuance of WD Circular 297.

Prior to this time the term "maintenance" had been

used for this purpose, denoting requirements of

additional equipment needed to "maintain" all

forces in a state of full equipment in the face of

operational losses. After the official change in terminology, "maintenance" was restricted to the concept of upkeep and repair. For simplicity the term

"replacement" is used throughout the present discussion.
REQUIREMENTS: DETERMINATION 183

rain, intensity of combat, and other influences. They also varied within the zone of

interior, depending upon whether equipment was intensively used in training activities or merely awaited overseas shipment.

Because of the many uncertainties involved,

even after combat experience was available,

accurate prediction of replacement requirements was an ideal which could only partially be realized.

For most of World War II the Army determined its replacement requirements by

the use of replacement "factors" which were

multiplied by total initial issue to yield total

replacement needs. Replacement factors

were percentage figures indicating the estimated average monthly loss of each type of

equipment from all causes.24 A 5-percent

factor indicated an average life expectancy

of twenty months for the item involved. To

keep a given force fully equipped for a full

year, assuming an even loss-rate of 5 percent per month, would thus call for a replacement supply equal to 60 percent of

initial-issue requirements.

Replacement factors were determined on

the basis of a wide variety of considerations

and were changed from time to time to

reflect the latest dependable information.

Until the middle of 1944, only two factors

were specified for each type of equipment—

one applicable to the zone of interior, and

one (usually higher) for all theaters of operations collectively.

In using replacement factors, it was necessary to determine from the troop basis

the anticipated average strength of overseas forces in each year in order properly

to apply the theater of operations rates of

replacement to total initial issues of equipment which would be in use overseas. This

consideration led to the adoption of techniques of computation which promoted considerable confusion and led to estimates of

doubtful accuracy throughout a large part

of the war. In order to standardize and

simplify machine computations and associated procedures, it was desirable to relate the various segments of total requirements for each year to the single end-ofthe-year strength figure as shown in the

governing troop basis. Thus, in the first edition of the Army Supply Program (6 April

1942) the estimate of the average number

of troops to be sustained overseas throughout the year was roughly 25 percent of the

total end-of-period strength called for by

the troop basis:

Item 1942 1943

Total end-of-year strength. 4,150,000 8,890,000

Average overseas strength. 1,000,000 2,250,000

For computational purposes, instead of directly prescribing a year's combat replacement requirements for the 1 million and

2.25 million men serving overseas for 1942

and 1943, the governing directive called

for three months' (25 percent of one year)

replacement requirements at theater of operations rates for the entire terminal

strength, which was approximately four

times as large as the anticipated average

overseas force in each year. Although the

actual number of months used for this purpose gradually shifted upward with the relative increase in overseas deployment, this

method of computing overseas requirements, both for replacement and distribution (especially theater levels), was standard practice until 1944 when separate replacement factors and troop deployment

figures were made available on a theaterby-theater basis. An analogous procedure

was used for determining replacement re24

 Sinking losses and loss of personal equipment

from separation of personnel from the Army were

not included in replacement loss estimates.
184 THE ARMY AND ECONOMIC MOBILIZATION

quirements for troops in the zone of interior,

employing the lower replacement factors

appropriate to the ZI.25

Apart from errors resulting from the assumption that all theater forces were collectively composed of units reflecting the

same composition as that of total forces

contemplated by the troop basis, this

method augmented the possibility of error

common to all factor methods for determining requirements: a small change in a factor would result in a large change in total

requirements when the factor was used as a

multiplier against large magnitudes. Thus

the number of months selected as the overseas multiplier became an independent and

important factor itself, superimposed upon

the underlying replacement factors which

were themselves subject to error. Throughout 1942 and 1943 it was the practice to

express this number of months in round-unit

figures for computing replacement requirements; for computing stock-level requirements the multiplier was rounded to the

nearest half month. Inasmuch as actual

troop activations in 1942 and 1943 fell far

below the end-of-year strength figures expressed in the troop basis (a difference of

around 1.5 million men for 1943), it can be

seen that the method of determining replacement and distributional requirements had a

heavy upward bias. This result was augmented by overestimates of average, as opposed to end-of-year figures, and even more

by the lag in downward revision of replacement factors to reflect equipment loss rates

that were lower than anticipated throughout

the war.26

The specific rate of replacement called

for by each of the Army's numerous and

widely divergent, individual replacement

factors was a matter of historical evolution.

In the late 1930's the factors consisted

largely of those inherited from World War

I. Numerous changes in the types and uses

of equipment, the quality of materials and

construction, the destructiveness of enemy

weapons, and other elements all combined

to render the old factors obsolete. In December 1937 the General Staff ordered an

annual revision of all replacement and distribution factors. At that time the Ordnance

Department appointed a special board of

officers, headed by Col. Clarence E. Partridge, to study the entire problem of replacement and distribution requirements.

The resulting report (known as the Partridge Report) appeared on 13 June 1938

and made a substantial contribution to the

theory of requirements determination.27

After the Partridge Report staff planners

made efforts to obtain recent replacement

data from German as well as British and

French sources but the results were generally unsatisfactory. During this period the

Army drew heavily upon the findings of development and testing personnel, recom25

 (1) Memo, Somervell, ACofS G-4, for CofAAF

et al., 2 Mar 42, sub: Equipment Section of the

Army Supply Program, Frank, Doc. 23. (2) Application of Maintenance Factors—Section I, Army

Supply Program, Frank, Doc. 31. (3) Memo, Col

Walter A. Wood, Jr., Dir Reqmts Div ASF, for

CofCWS et al., 15 Jul 42, sub; Recomputation of

Section I, Equipment, Ground Requirements for

the Army Supply Program, Frank, Doc. 39. (4)

Memo, Brig Gen Walter A. Wood, Jr., Dir Reqmts

Div ASF, for TQMG et al., 15 Dec 42, sub: Computation of Requirements Section I, Army Supply

Program, 15 January 1943, Frank, Doc. 73. (5)

Wood memo cited above, note 13(3).

26

 Early in 1942, theater of operations replacement requirements for 1942 were based on an estimated average overseas force of 1,000,000 men. At

the end of 1942 theater losses during the year (computed for the purpose of estimating stock and

equipment in the hands of troops) were based on

an average overseas troop strength of 0.4 million

men. See page 3, par. 6b(2)(c ) of Wood memo

cited above, note 25(4). 27

 Frank, Requirements, pp. 114-15, and Doc. 107.
REQUIREMENTS: DETERMINATION 185

mendations of the using arms, and the

experience of private industry with comparable items. Nevertheless, on the eve of

Pearl Harbor many of the factors were

admittedly artificial and could only be corrected in the future as information on current battle experience and other operations

became available.28

With the March 1942 War Department

reorganization, the function of supervising

the determination of replacement factors

formerly exercised by G-4 was transferred to

the Allowance Branch of the Requirements

Division, ASF. In September 1942 the Allowance Branch proposed the semiannual

submission by theater commanders of reports on the adequacy of existing factors for

both replacement and distribution in the

light of current field experience. This proposal was rejected by the Control Division,

ASF, on the ground that such reports would

be too general and too infrequent to be of

significant help under the rapidly changing

conditions prevailing at this stage of the war.

Moreover, throughout the early phases of

the war, it was established policy to keep

theater reporting and paper work to an absolute minimum.

Nevertheless, the pressure for improvement in the quality of replacement factors

continued. As early as the summer of 1942

the Quartermaster Corps had questioned the

basic methods for determining distribution

requirements, and these were intimately related to the determination and use of replacement factors. But the greatest impetus

to increased attention to replacement factors

was the steadily rising proportion of total

Army requirements represented by replacement needs as the war progressed. Replacement needs rose from around half of total

requirements for 1942 to virtually 100 percent of all requirements for 1945. (Chart 2)

The shift from initial issue to replacement

as the dominant element in Army requirements had important implications for the

task of requirements determination. As already indicated, the basic method of determining replacement needs lent itself to

astronomical variations in total requirements. An increase from 4 to 8 percent in

the monthly replacement factor for an item

with an initial issue of two per man for

an eight-million-man Army would increase

annual replacement requirements by 7,680,-

000 units. In the early part of the war, substantial overestimates in replacement requirements for one million or two million

men might easily be absorbed in the subsequent combat operations of a much larger

force. Clearly, the need for accuracy in the

determination of replacement requirements

would attain urgent proportions as the war

reached its maturity.29

On the other hand, if events proved that

replacement factors had been set too low,

major combat operations at the crucial

stage of the war might be seriously jeopardized. To be sure, the Army provided reserve stocks for such contingencies but the

time lag between requirements determination and procurement delivery of critical

items as expressed in months was often

28

 As an indication of the state of pre-Pearl Harbor replacement factors, Frank cites the arbitrary

factor of 10 percent for all Corps of Engineers

equipment in theaters of operations and the flat

rate of 1 percent for all such items in the zone of

interior. Signal Corps replacement factors represented a combination of judgment and experience

dating back to the days of the American Expeditionary Forces in World War I. Frank, Requirements, pp. 113-14.

29

 Economists will recognize in the variation of

Army replacement requirements a specific illustration of the principle of "acceleration of derived

demand." This concept is conventionally used in the

analysis of fluctuations in the replacement demand

for industrial capital goods.
186 THE ARMY AND ECONOMIC MOBILIZATION

CHART 2—APPROXIMATE RATIOS OF INITIAL AND REPLACEMENT REQUIREMENTS

TO TOTAL ARMY REQUIREMENTS, 1942-45 a

a

 Includes distribution attributable to replacement.

Source: ASF Manual, Determination and Use of Maintenance Factors and Distribution, July 1943, p. 32.

double the number of month's supply represented by combined stock levels. In any

case, whether from the standpoint of avoiding wasteful procurement or insuring the

adequacy of supply, it was necessary for the

Army early in 1943 to undertake the most

careful refinement of its estimates of replacement needs for 1944 and 1945.

In view of all these considerations the

Army began in 1943 an intensive program

which eventually resulted in basic changes

in its methodology of requirements determi-
REQUIREMENTS: DETERMINATION 187

nation. In February 1943 a separate Maintenance Factor Section was set up in the

Program Branch of the Requirements Division, ASF. This section was charged with

the establishment of basic methods and procedures to be followed by all the technical

services in the determination and application of replacement and distribution factors.

Almost immediately the new Maintenance

Factor Section prepared for general use a

memorandum stressing the importance of

accurate replacement factors, defining numerous associated terms and concepts, and

specifying procedures to be followed in

gathering information from all sources for

the purpose of bringing the factors up to

date. Each technical service was directed

to submit twice a year, in time for the semiannual revision of the Army Supply Program, a complete list of all current replacement and distribution factors under its

cognizance.30

On 24 June 1943 theater commanders

were directed to submit reports, at least

quarterly, on all equipment losses and expenditures of ammunition and other important supplies in their respective theaters

for the period in question. Commanders

were requested to submit their estimates of

the reliability of such data for the forecasting of future requirements. At the same time

it was announced that specially trained officers would be sent to each theater to assist

commanders in collecting the required data,

to remain on temporary duty status until 1

October 1943. Thereafter it was expected

that additional personnel regularly assigned

to theaters would discharge this responsibility.31

In July 1943 a comprehensive manual—

prepared by the Maintenance Factor Section—was issued by the War Department,

expanding, revising, and consolidating all

outstanding regulations and procedures for

the determination and application of replacement and distribution factors.32

 By this

time field teams representing each of the

technical services were being organized and

trained for the conduct of replacement factor surveys at posts, camps, stations, and

depots in the zone of interior. As data on

actual rates of replacement accumulated

from both the ZI and theaters of operations

throughout the remainder of 1943 and 1944,

the Maintenance Factor Section made numerous changes—for the most part downward—in the individual factors for Army

equipment. During the last six months of

1943, factor changes were made for 796

supply items. Of these 713 were downward

revisions. Thus, the theater of operations

factor for service shoes, which on 15 June

1943 had been lowered from 20.2 percent

to 16.7 percent, was further reduced on 15

December 1943 to 14.2 percent. The theater

of operations factor for tractors (Corps of

Engineers equipment) was reduced on 30

August 1943 from 8 percent to 4 percent.33

Major refinements in the determination

of replacement requirements took place in

1944. Since late in 1942 there had been

30

 TAG Memo S700-9-43, 20 Feb 43, sub:

Determination of Distribution and Maintenance

Factors. 31

 AG Ltr to CINC SWPA et al., 24 Jun 43, sub:

Determination of Maintenance Factors and Rates

of Consumption and Expenditure, AG 400 (21 Jun

43 OB-S-SPOPP-M. This attempt to gather theater data was not altogether successful, largely

because theater commanders did not give complete

co-operation. ASF officers sent on this mission were,

in many cases, assigned responsibilities in addition

to, or in lieu of, those for which they were intended.

Frank, Requirements, p. 121. 32

 WD ASF Reqmts Div, Manual for the Determination and Use of Maintenance Factors and

Distribution, July 1943. 33

 Frank, Requirements, p. 122.
188 THE ARMY AND ECONOMIC MOBILIZATION

pressure from within the Requirements Division, ASF, as well as in certain of the

technical services, to treat each theater of

operations individually in the determination

and use of replacement factors. Under the

existing system, which used an over-all combat replacement factor for all theaters, the

Army's total replacement requirements were

subject to wide margins of error, especially

in view of the deployment of increasing

numbers of troops to areas differing widely

in actual equipment loss rates. In June 1944,

for example, data revealed that .30-caliber

carbines were used up at the rate of only 0.4

percent per month in the North African

Theater of Operations (NATO) but 9.3

percent in the South Pacific. Bayonets were

replaced at the rate of 0.85 percent in

NATO but 13.5 percent in the South Pacific Area. Trench knife replacements were

twenty-five times as great in the South Pacific as in NATO, with a rate of 31.4 percent as compared to 1.26 percent.34

 For

large items of equipment smaller differences

between theaters would still exert an important influence on total requirements.

Furthermore, as replacement factors were

used more and more for the actual distribution of matériel to the various theaters,

it was important from the supply as well as

the procurement point of view to develop

a more discriminating yardstick of individual theater needs. But the use of separate

theater factors awaited the development of

two prerequisites: information on individual

theater loss rates, and a troop basis showing

anticipated deployment by separate theaters.

In preparing for the determination of

separate theater factors it was necessary

greatly to increase the flow of information

and experience data from the several individual theaters. The War Department Procurement Review Board in 1943 had noted

the reluctance of theater commanders to

become involved in paper work:

They share the impatience of the Duke of

Wellington who said, in effect, "On with the

campaign and an end to quill driving." But

modern war does not parallel the campaigns

of the past. . . . In the United Sta

whole industrial system has been realigned

so that our productive effort may have its

maximum effect on the field of battle. . 

Inventory control may have a vital effect on

the outcome of the struggle, and overseas

commanders should be conscious of the fact

that it is not "quill driving," but an essential

part of strategic planning.35

In accordance with the McNarney Directive of 1 January 1944, the commanding

generals of the six major theaters were directed on 10 February 1944 to submit each

month a comprehensive Report of Material

Consumed for a long list of supply items

classified by procuring technical service.36

Data called for in the report included quantities of authorized allowances in the theater,

losses, loss rates, and theater recommendations as to future replacement factors. Brief

experience under this directive revealed

that equipment actually in the hands of

troops varied greatly from authorized allowances. This resulted in erroneous loss

rates, since the rates were determined by

relating issues to total allowances. On 14

May 1944 the instructions were amended to

require all theaters to report actual quantities on hand with troops each month and to

compute loss rates on this basis. This was a

laborious assignment, especially since the

reports eventually required a breakdown be34

 Ibid., p. 128.

35

 WDPRB Rpt, pp. 51-52. 36

 AG Ltr to CINC SWPA et al., 10 Feb 44, sub:

Determination of Replacement Factors, Rates of

Consumption, and Expenditure, 3 incls, AG 400

(5 Feb 44) OB-S-D-M.
REQUIREMENTS: DETERMINATION 189

tween active and inactive equipment within

each theater.37

The first step in the use of separate theater

factors was taken in July 1944 when all

theaters were grouped into two major areas

for factor purposes: the European area (including ETO and NATO) and the Pacific area (including the Central, South, and

Southwest Pacific Areas and the ChinaBurma-India theater). Separate factors

were established for the two major areas

and requirements in the next edition of the

Army Supply Program were computed on

this basis.38 By the end of 1944 the War

Department was able for the first time to

publish and apply separate factors for each

of its six major theaters, in addition to the

zone of interior. Theater commanders were

notified of the change on 9 December 1944

and the new factors were published the following week.39

 In the meantime, the War

Department troop basis had been refined to

show troop deployment by individual

theaters. Thereafter until the end of the

war, replacement factors, as well as consumption factors for a number of expendable items, were maintained on an individual theater basis.

An indication of replacement factor magnitudes at specified dates may be found by

reviewing figures for selected items of equipment for several technical services. (Table

23.) A portrayal of the life histories of the

replacement factors covering each of the

many thousands of individual items of

Army equipment throughout World War II

would make a fascinating story. Such a

story would reveal the impact of many

forces—changes in the strategy, intensity,

and character of warfare, improvement or

deterioration in the design, quality of materials, and construction of equipment items,

the complexities and shortcomings of methods of requirements determination, and

many other elements—all influencing the

determination of the individual factors at

various dates. One or two abbreviated examples will serve to illustrate the point. In mid1944 the combat replacement factor for the

M4 medium tank stood at 9 percent. Battle

losses of 559 tanks in one month, after the

Allied breakthrough of the Normandy

hedgerows in July 1944, led to a change

in the factor to 11 percent. In the autumn,

increased German resistance resulted in

more losses in excess of planned rates and

the factor was increased to 14 percent. On

1 January 1945, after still more losses in

the Ardennes, the factor was again increased, this time to 20 percent. During

the same period the replacement factor for

the 60-mm. mortar was doubled, rising from

15 to 30 percent per month; for the Browning automatic rifle the rate moved from 15

to 28 percent. Similarly, the combination of

adverse weather conditions and sustained

activity in the ETO in the winter of

1944-45 led to the widespread development

of trench foot among U.S. troops. The daily

change of socks ordered to alleviate this

condition resulted in an increase in the replacement factor for the cushion-sole, wool

sock from 11.1 to 25 percent, heavily affect37

 AG Ltr to CINC SWPA et al., 14 May 44, sub:

Determination of Replacement Factors, Rates of

Consumption, and Expenditure, AG 400 (3 May

44) OB-S-D-M. 38

 AG Ltr to CINC SWPA et al., 11 Jul 44, sub:

Determination of Replacement Factors, Rates of

Consumption and Expenditure, AG 400 (7 Jul 44)

OB-S-D-M. The area factors were published in

WD ASF Reqmts Div, Replacement Factors (Control Approval Symbol RME-8), revision of 15 Jun

44.

39

 (1) AG Ltr to CINC SWPA et al., 9 Dec 44,

sub: Determination of Replacement Factors, Rates

of Consumption and Expenditure, AG 400 (28

Nov 44) OB-S-D-M. (2) WD ASF Reqmts Div,

Replacement Factors (Control Approval Symbol

RME-8), revision of 15 Dec 44.
190 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 23—MONTHLY REPLACEMENT FACTORS FOR SELECTED ITEMS OF ARMY EQUIPMENT

AT SPECIFIED DATES

a

 Various dates. b

 On 15 Jun 44, the overall T/O factor gave way to separate factors for ETO and Pacific Areas. c

 On 15 Dec 44, factors were separately shown for 6 theaters, only two of which are shown herein. d

 Expressed in rates per 1,000 men (except Kit, 1942 and 1943, and Blanket, 1943). e

 Not shown in Source.

Source: ASF, Rqmts Div, "Replacement Factors" (Control Symbol RME-8) eds. of 15 Dec 43, 15 Jun 44, and 15 Dec 44. Earlier data from files of Requirements Division, ASF.

ing required production of this item for

1945.40

Many developments in the fields of requirements determination, procurement

practice, and modern technology all converged in the course of the war to affect

the significance of the Army's equipment

replacement factors. By 1943, in addition to

their use in the computation of replacement

requirements as such, replacement factors

had also come to be used in determining

certain elements of "distribution." The most

important of these were various reserve or

stock "levels" required to insure the availability of adequate supplies to troops at all

times. Since these levels were expressed in

40

 This account is based on Frank, Requirements,

pp. 129-30.
REQUIREMENTS: DETERMINATION 191

terms of months or days of supply, it was

necessary to have dependable rates of wastage per month or day to determine the

quantities of equipment needed to establish any particular reserve level. As indicated in a later section, replacement factors

gradually supplanted distribution factors in

this computation. By the end of 1944 the

Army's replacement factors served three

official purposes:

(1) as fundamental bases in the computation of the over-all requirements for the Army

Supply Program;

(2) as a unit of measure for the initial

establishment of reserve levels in the zone of

interior and theaters of operations;

(3) as a unit of measure in the supply of

equipment and supplies to oversea theaters,

bases, and commands.41

Spare Parts in Relation to Replacement—Of increasing importance as the war

continued was the gradual shift from complete units of equipment to spare parts as

the basis for estimating replacement demand.42

 It was standard practice from the

beginning of the defense period for the

Army to procure spare parts in varying

proportions along with finished items of

equipment. Spare parts for many items

constituted a substantial portion of total

Army procurement both in physical and

dollar terms.43 Some of the most complex

and thorny problems in the administration

of Army procurement and supply arose out

of the spare parts program. The determination of requirements for spare parts was

often more difficult than that for finished

items. The distribution of parts in proper

proportions to Army installations throughout the world posed virtually insoluble problems. The establishment of a far-flung empire of maintenance and repair facilities

equipped with tools and machinery and

staffed with trained mechanics required the

investment of billions of dollars and the employment and training of hundreds of thousands of military and civilian personnel.

The build-up of the Army's repair facilities

took a long period of time, thus forcing

greater reliance, during the early stages of

the war, upon complete replacement.

The Army's spare parts program, as part

of the larger program of repair and maintenance, arose out of military necessity as

well as the desire to maintain combatworthy forces at the least cost. Initial issues

of complex items of equipment regularly

included a complement of spare parts in

order to permit emergency repairs under

battle conditions, and additional quantities

of parts were distributed to various repair

echelons. In many instances the availability of spare parts was more important than

complete replacement: the emergency repair in mid-ocean of an Army transport

laden with troops and cargo was, for example, to be preferred to complete replacement. But in the year and a half after Pearl

Harbor, in the general effort to attain high

procurement objectives for complete end

items, spare parts procurement was often

subordinated. Parts originally earmarked

for spare purposes were utilized in turning

out additional quantities of end items. This

practice, most notable in the case of aircraft procurement, became known as the

"numbers racket" and was roundly criticized by the Richards Committee. As a result of the committee's recommendations,

the McNarney Directive of 1 January 1944

41

 WD Cir 375, 15 Sep 44. This was modified by

War Department Circular 123 of 24 April 1945. 42

 This development was visible as early as the

spring of 1943. ASF Annual Rpt, 1943, p. 15. 43

 For example, the value of required production

of automotive spare parts for the Army exceeded

$1 billion for the calendar year 1944. ASF Annual

Rpt, 1944, p. 105.
192 THE ARMY AND ECONOMIC MOBILIZATION

ordered both the AAF and the ASF to procure adequate spare parts even at the expense of reduction in the output of end

items.44

The increased attention to repair and

maintenance in the later stages of the war

had the effect of reducing substantially the

Army's procurement requirements for complete replacement. Reclaimed equipment

returned to stock after previous replacement

had the effect of increasing total assets to

meet gross requirements, thus avoiding additional procurement. Lower-echelon repairs to in-service equipment accomplished

a similar end by lowering replacement factors and hence replacement requirements.

The general falling off of replacement rates

for complete equipment was accompanied

by the increased significance of spare parts

replacement, making necessary a much

more refined instrument of inventory and

supply control. Such an instrument was

made available in the spring of 1944 in the

form of the Supply Control System, with

its elaborate records of issue experience and

monthly analysis of the supply and demand

position of all important procurement items.

The development of the Supply Control

System had important effects on the Army's

methods of determining replacement requirements. After a study by the chiefs of

the technical services in April 1944, planners concluded that accurate forecasts of

requirements for numerous items could be

made directly upon the basis of recent issue experience. Monthly redeterminations

of replacement rates would be made and

substituted for formal replacement factors

whose revision tended to lag behind the realities of recent issue experience, with generally inflationary effects upon total requirements. Consequently in June of 1944

the number of items to which War Department (G-4 approved) replacement factors

were assigned was reduced from 4,300 to

around 600.45 At the same time concentrated attention to spare parts requirements

led to a basic change in procurement policy. The practice for many items of equipment had been to order an estimated year's

supply of replacement parts concurrently

with the complete item. This resulted in unbalanced inventories. To remedy the situation, detailed information on issues of individual parts was obtained from the Supply Control System and from special teams

sent to the European and Mediterranean

theaters. Beginning in November 1944,

spare parts procurement was based on actual issue experience and excess stocks were

returned to manufacturers for completion

of end items still under production. Basic

allowances of spare parts for major ASF

items were prepared, and by the end of

1944 more than 3,500 spare parts catalogs,

covering 90 percent of all major items, had

been published.46

The broad effect of the developments just

described was not abandonment of formal

replacement factors but confinement of their

application to important tactical items of

concern to the General Staff. Decisions as

to the methods of computing replacement

44 requirements for the much larger number (1) Richards Committee Rpt, p. 8, and Recommendation 10. (2) McNarney Directive, par.

10. It should be observed that over procurement of

spare parts for many items was likewise a serious

problem throughout the war. Bad labeling and packaging with resultant loss of spare parts in storage

resulted in exaggerating theater requisitions for

spare parts.

45

 (1) Frank, Requirements, pp. 126-27. (2) WD

Bull SB-38-4-WD, Replacement Factors, 11 Aug

45. G-4's authority over replacement factors had

been reinstated by the McNarney Directive of 1

January 1944. 46

 ASF Annual Rpt, 1945, p. 181.
REQUIREMENTS: DETERMINATION 193

of less important items were largely decentralized to the several technical services.47

Distribution

Changing Concepts of Distribution—Initial-issue and replacement requirements, already discussed, would have been adequate

for all the Army's equipment needs only on

the assumption that these requirements had

been predicted with perfect accuracy, that

procurement to meet the requirements had

been completed exactly as needed, and that

the finished items had been miraculously

and instantaneously transferred in proper

proportions from factories in the United

States to individual using troops throughout

the world. Needless to say, any war waged

under such an assumption would be lost almost before it began. The exigencies of warfare, the impossibility of perfect prediction

of requirements in complete detail with respect to types, quantities, and time and place

of eventual use, and the technical and economic aspects of production, transportation,

and distribution all required that the process

of procurement and supply be conceived and

executed primarily on a bulk basis well in

advance of actual need. These considerations made necessary the inclusion in Army

requirements of the important element of

distribution.

For World War II "distribution" referred to the additional quantities of matériel, over and above initial issue and replacement, required to "fill the pipelines"

in the Army's world-wide system of supply.

The basic purpose of allowances for distribution was to insure, without fail, the timely

delivery of supplies from point of acceptance

from the procurement source to the point of

ultimate issue. Often likened to their counterpart in a municipal water supply system,

distributional requirements were theoretically large while the pipelines and reservoirs

were being filled and extended, negligible

when only minor leakages occurred after

the system was filled, and negative when

supply lines were curtailed or withdrawn.

But the crude analogy was merely suggestive,

since the military supply system comprehended many tens of thousands of different

items instead of a single homogeneous commodity and involved numerous and constantly changing sources of supply, ultimate

destinations, and techniques as well as channels of distribution. The Army's distribution

system for World War II included not only

matériel in transit via every available type

of transportation throughout the world, but

multitudinous inventories of equipment and

supplies in post, camps, stations, warehouses,

depots, and ports of embarkation in the

United States and corresponding ports of

debarkation, base depots, intermediate

depots, advance depots, and ultimate supply

dumps in forward areas.

In principle, the Army's distribution requirements as defined from time to time

consisted of four elements:

1. stocks of matériel at various points of

distribution;

2. matériel in transit;

3. distributional losses (ship sinkings and

other in-transit losses); and

4. tariff of sizes for appropriate items.

Actually, there was considerable confusion

throughout the war surrounding the entire

concept of distribution. This confusion was

reflected in numerous changes in the methods of computing distribution requirements,

in the adoption of constantly changing and

often inconsistent terminology, and in the

47

 WD Bull SB-38-4-WD, Replacement Factors,

11 Aug 45, Sec. I, 1g, Replacement Factors Developed by Technical Services.
194 THE ARMY AND ECONOMIC MOBILIZATION

unintelligible accounts which have subsequently appeared in connection with the

entire subject.48

At the beginning of the World War II

procurement program, little or no attempt

was made to evaluate separately the several

elements comprising distribution. In computing total distribution requirements for

an item, a blanket distribution "factor" or

percentage figure was applied to the sum of

initial-issue and replacement needs. This

factor varied from one technical service to

another and frequently within a particular

service for different classes or items of equipment. For the Corps of Engineers the distribution factor prior to Pearl Harbor was 10

percent for all items of equipment. For the

Quartermaster Corps it was 25 percent for

all nonsized items and 27 to 50 percent for

most items subject to size tariffs. Distribution factors ranging all the way from 5 to

90 percent were used in computations of

the Army Supply Program until mid-1943.49

Two basic assumptions underlay the use

of distribution factors. The first was that

distributional requirements were directly

proportional to the total quantity of supplies

needed to equip and maintain forces in the

field. Therefore the application of a given

percentage factor to the sum of initial issue

and replacement was considered to yield the

best available measure of distributional

needs.50 Distribution factors were, of course,

subject to revision from time to time on the

basis of experience; until the 1 August 1943

edition of the Army Supply Program which

discontinued the use of distribution factors,

directives for the recomputation of the program prescribed the use of "the latest approved distribution factors."

The second basic assumption was that

after the distributional "pipelines" and "reservoirs" had once been "filled" no further

quantities for distribution would be needed,

except for specific types of leakage and loss

which could thereafter be directly computed and provided for. Distribution was

thus conceived primarily as a nonrecurring

demand, under which maximum distribution allowances would remain "frozen" in

supply pipelines until supply lines were

eventually curtailed.51 Accordingly, for any

given period the distribution factor would

be applied only to increments of total initial48

 For example, the terms "distribution" (a major

element of total requirements) and "distribution

factor" (a percentage figure used in determining

"distribution") were often used interchangeably;

elements of distribution were frequently defined as

"replacement"; and the term "distribution" itself

was repeatedly defined both as including and at the

same time as not including overseas and other

reserve levels. These inconsistencies even appear in

the reports of the War Department Procurement

Review Board and the Richards Committee, both

of which made a special study of the subject. (1)

WDPRB Rpt, especially pp. 18-22. (2) Richards

Committee Rpt, p. 56. 49

 Frank, Requirements, p. 113. (2) Bradford,

QMC Requirements, pp. 31-32. (3) Richards Committee Rpt, p. 56.

A distribution factor of 100 percent was used by

the QMC for service shoes and several other items in

computing requirements during the spring of 1942.

QMC, Work Sheets—Mobilization and Training

Program (Status of Equipment for Minimum Training and Mobilization Program During 1942, dated

21 Mar 42).

50

 This was the established doctrine at the beginning of the defense period. See: (1) Bradford,

QMC Requirements, pp. 31-32; (2) Maj. Herbert

A. Gardner, "Supply Requirements, Quartermaster

Corps," The Quartermaster Review, XIX (MarchApril 1940), 59; (3) Maj. George A. Horkan, "The

Quartermaster Problem—the Computation of Requirements," ibid., 54-57. 51

 Individual items would, of course, continue to

"flow" through the pipelines while total pipeline

quantities remained frozen. Unfortunately, instances were reported throughout the war in which

individual items, particularly of subsistence, remained in storage so long that substantial spoilage

was experienced. See Richards Committee Rpt.

pp. 73-74, recommending careful attention to rotation of stock.
REQUIREMENTS: DETERMINATION 195

issue and replacement requirements over

the maximum for the previous period. This

was accomplished without difficulty in the

case of initial issue, which was by nature

an incremental quantity for each period.

But in applying the factor to replacement,

which consisted largely of recurring needs

from year to year, it was necessary in principle to isolate and use only increments to

previous replacement maxima. In view of

all the practical difficulties involved, no such

accurate division of replacement requirements was made. For requirements through

1942, the distribution factor was apparently applied by the several technical services in accordance with their own interpretation of policy. But in the summer of 1942,

and again at the beginning of 1943, the

ASF Requirements Division directed that

the distribution factor be applied only to

initial issue and then only for requirements

prior to 1944. Although this approach did

not fully accord with the theory underlying

the use of distribution factors, the limitation

in question was prescribed at a time when

every effort was being made to curtail requirements and with the assumption that

various buffer elements in the total estimates

would provide adequate reserves.52

By the fall of 1942, the use of the simple

factor method for computing distribution

requirements had been seriously challenged

by the Quartermaster Corps. Requirements

personnel in the Office of the Quartermaster General (OQMG) as early as July 1942

had pointed out that blanket distribution

factors were both crude and inelastic. Instead of basing distribution requirements

upon the specific elements entering into the

distribution process, the factor method arbitrarily assumed that distribution bore a

fixed or given ratio to total issue requirements (initial issue plus replacement). This

assumption ignored completely the fact that

even if total issue requirements remained

fixed, distributional needs would vary

widely with the expansion and contraction

of supply lines throughout the world.

OQMG personnel in 1942 feared that with

supply lines steadily lengthening the existing distribution factors might prove to be

grossly inadequate.53

The alternative proposed in the Quartermaster Corps was the so-called "carry-over

method", which focused attention upon the

principal element of distribution, that is,

stocks (often referred to as reserves). The

carry-over method contemplated the establishment of sufficient stocks, both in theaters

of operations and in the zone of interior, to

carry operating forces at all times until any

probable interruptions in the supply function could be overcome. The quantitative

carry-over of supplies to be held at various

points of distribution would be prescribed

in terms of stock or reserve levels, expressed

as the number of months or days of supply

deemed adequate by higher authority to

meet the contingencies in question. A day

of supply was defined as one thirtieth of one

month of supply; one month of supply was

determined by applying current monthly

replacement factors to total initial issue for

the forces concerned. With stock levels thus

defined in terms of operational needs, separate computations could be made for "intransit" requirements, sinking losses, and

size tariffs. Total distribution requirements

52

 (1) Page 3 of Wood memo cited above, note

25 (3). (2) Page 4 of Wood memo cited above, note

25 (4).

53

 (1) Bradford, QMG Requirements, pp. 35-37,

and memo cited therein, TQMG for CG SOS, 23

Jul 42, sub: Supplemental Computation of ASP.

(2) Risch, QMC Supply, I, 218-21. (3) Frank,

Requirements, pp. 115-17.
196 THE ARMY AND ECONOMIC MOBILIZATION

would then be functionally determined and

would automatically possess the desired degree of flexibility.

The foregoing summary of the carry-over

method is at once oversimplified and more

inclusive than the original Quartermaster

proposal. Many of the details and corollaries

of the plan emerged only after repeated conferences and discussions. The ASF Requirements Division did not approve the plan at

the time of its presentation; the entire process of requirements determination was in a

state of flux and all of its elements required

re-examination and clarification. Moreover,

the Quartermaster proposals were accompanied by specific recommendations for

stock levels which would have raised requirements at the very time when the Feasibility

Dispute and other pressures were compelling

reductions. But the basic merit of the plan

was recognized, and its adoption by the

Quartermaster Corps for the 1 February

1943 edition of ASP was approved. By the

time of the 1 August 1943 recomputation,

the plan had been adopted by the War Department for all technical services, and directives governing the computation of

distribution requirements were amended

accordingly.54

Stocks—The revised procedure for determining total distribution requirements

called for careful attention to each of the

elements of distribution. As the most important element, stocks (reserves) received

the greatest attention and gave rise to the

most difficult policy decisions and problems

of control.55 Stocks fell into a number of

classes, including theater stocks, stocks reserved for theater needs at ports and filler

depots in the United States, stocks at major

distribution depots in the United States for

zone of interior needs, and post, camp, and

station stocks. Theater stock levels were prescribed by the General Staff and consisted

of two components—a minimum level and

an operating level. The minimum level was,

so far as possible, to be maintained at all

times to meet emergencies; the operating

level represented working stocks over and

above the minimum. Theater levels were determined in accordance with distance from

the procurement source and other conditions. The 1 August 1943 Army Supply Program was designed to provide procurement

adequate to establish and maintain minimum levels averaging 75 days of supply for

all theaters, and operating levels of 45 days

(operating stocks were considered to fluctuate in size from 0 to 90 days of supply, depending upon fluctuations in issues and ar- 54

 (1) TAG Memo S700-9-43, 20 Feb 43, sub:

Determination of Distribution and Maintenance

Factors. (2) WD ASF Reqmts Div, Manual for the

Determination and Use of Maintenance Factors

and Distribution, July 1943. The carry-over method

was apparently first proposed by OQMG at a conference with ASF representatives on 13 July 1942.

The proposal was reaffirmed in the 23 July 1942

memorandum of The Quartermaster General cited

above, note 53 (1). An alternative proposal was

submitted by OQMG on 7 September 1942, followed by further conferences in which the basic

principles of the carry-over method were approved.

These were subsequently refined and integrated into

the revised procedures for determining all the

Army's distribution and replacement requirements.

See Risch, QMC Supply, I, 218-21. The term

"carry-over" was never used by the War Department

in its official terminology of requirements determination. 55

 The terms "stocks" and "reserves" were used

more or less interchangeably throughout World

War II, although reserves were sometimes thought

of as minimum stock levels. Stock or reserve levels

(often collectively referred to as "supply levels" or

"levels of supply") were the quantitative objectives

of stock control considered to be strategically essential or desirable. Actual stocks on hand at any time

or place were usually different from and, as the war

progressed, frequently in excess of, the prescribed

levels. Richards Committee Rpt, especially Section

IV, Theater Reserves, and Section V, Stock Levels

in the United States.
REQUIREMENTS: DETERMINATION 197

rivals of matériel in transit). Total theater

levels thus averaged 4 months of supply as

measured by current replacement factors.

At the same time theater of operations reserves to be maintained at ports and filler

depots in the United States ranged from

50 days of supply for Ordnance up to 120

days for the Quartermaster Corps. Stock

levels for troop requirements in the ZI consisted of 60 days of supply in distributing

depots, plus an average of 60 days of supply

at posts, camps, and station.56

The change-over from the use of blanket

distribution factors to the expression of distribution requirements in terms of days or

months of supply tended in practice to break

down the distinction between distribution

and replacement. Not only stock levels but

in-transit and sinking-loss requirements were

now expressed in terms of days or months

of supply. Since replacement requirements

were also expressed in terms of a number

of months' supply applied to the entire terminal force in the troop basis for a given

calendar year, it became standard procedure

in the ASP to add the total number of days

of supply required for distribution (likewise

applicable to end-of-period strength figures)

to the total for replacement and to lump the

whole under the general heading of replacement (maintenance) requirements. Not

only did this tend to confuse the record; policy makers at the time also apparently suffered considerable confusion over the distinction between replacement and distribution. Thus in the 1 February 1943 computation of ASP requirements, while the

change-over to the new methodology was

in transition, the technical services were ordered to continue the use of blanket distribution factors while at the same time making provision, under the heading of "maintenance," for 41⁄2 months' theater stock

levels for average overseas forces.57 Although

this double provision for distribution requirements was formally rectified by the

abandonment of the use of distribution factors in the 1 August 1943 edition of ASP, the

production requirements for 1943 were at

this time frozen on the 1 February 1943

basis.58

Stock levels, regardless of type or location,

were redetermined from time to time in accordance with the procurement as well as

the strategic situation. The entire question

of the state of Army stock levels was raised

by the War Department Procurement Review Board in 1943 and shortly thereafter

was carefully investigated by the Special

Committee for the Re-study of Reserves

(Richards Committee). The numerous findings and recommendations of the Richards

Committee for the most part remain outside

the scope of the present study. In general,

prescribed levels as well as actual stocks both

overseas and in the zone of interior were

found to be too high. Substantial reductions

and changes in procedures were ordered by

the McNarney Directive of 1 January

1944.59

56

 Basis for the Determination of Maintenance and

Distribution—1 August 1943 Revision, Section I,

Army Supply Program, Frank, Doc. 84.

57

 (1) Page 4, pars. 7c and 7d of Wood memo

cited above, note 25 (4). (2) Basis for the Determination of Maintenance, Army Supply Program

Directive for Recomputation of January 15, 1943,

Frank, Doc. 75. 58

 (1) Wood memo cited above, note 13 (3). (2)

Frank, Doc. 84, cited above, note 56. (3) Richards

Committee Rpt, pp. 56-57. The freezing of requirements for 1943 was done to avoid disruption of estab- lished production schedules. See above, pp. 166-7. 59

 The reductions were effected by the 1 February

1944 ASP. For stock levels before and after the reduction, see: (1) Comparison of Elements of Distribution for Classes II and IV Supplies, 1 August

1943 and 1 February 1944 Revisions of Section I,

Army Supply Program, Frank, Doc. 95; (2) ASF

Annual Rpt, 1944, pp. 102-03.
198 THE ARMY AND ECONOMIC MOBILIZATION

The actual procedures for computing procurement requirements needed to establish

and maintain the prescribed stock levels were

of labyrinthine complexity. For each edition

of the Army Supply Program the governing

directive laid down the broad stock-level objectives and the general estimating procedures to be followed. The great burden of

obtaining the necessary detailed information

and translating this information into requirements data in a form suitable for manipulation by automatic tabulating machinery fell to the technical services, working

under the close supervision of the Requirements Division, ASF. A detailed understanding of the complexity of the problems surrounding this one element of distribution

would provide for anyone a healthy insight

into the magnitude of the task of determining Army requirements as a whole.60

In-Transit Allowances—Requirements

to meet the elements of "in-transit distribution" were not separately calculated so long

as the factor method of computing distribution requirements was used; the blanket

factor was deemed adequate to cover all

elements of distribution. With the adoption

of the carry-over principle and the abolition of blanket distribution factors, it became necessary to compute separately the

increments in each calendar year to the total

quantity of matériel "frozen" in transit.

This was accomplished by applying a complex formula which underwent change from

time to time until no further additions to

in-transit pipeline quantities were authorized. The procedure as revised in July 1943

called for the use of two weighted "in-transit times"—one for the zone of interior and

one for theaters of operations collectively—

as officially determined by the director of

the Requirements Division, ASF, in consultation with the chief of the Transportation

Corps and other technical service chiefs. Intransit time was the average period required

in months or days for all types of equipment

to be physically moved from points of acceptance at the procurement source to the

zone of interior point of issue or the theater

of operations port of debarkation. These

two weighted periods were then applied to

increments of initial and replacement issues

destined respectively for the zone of interior

and the theater of operations in the calendar

year in question. In the 1 August 1943 ASP,

which allowed an average of 45 days intransit time to all theaters, theater of operations in-transit requirements for the year

1944 were defined as 45 days of supply to

maintain the additional 3,186,000 troops to

be sent overseas in that year; for the year

1945, the figure was 45 days of supply for

1,750,000 additional troops. At the same

time, the approved zone of interior in-transit allowance was 15 days of supply at the

lower ZI replacement rates and was applied

to ZI troop requirements for the years in

question.61 By the end of 1943, transportation pipelines had generally been filled, and

in accordance with the recommendations of

the Richards Committee in-transit requirements were thereafter eliminated. This

60

 For additional treatment of the problems of

Army stocks and stock levels in relation to requirements for World War II, see: (1) WD Levels of

Supply and Supply Procedure; (2) Risch, QMC

Supply, I, especially Chs. VI and X; (3) Bradford,

QMC Requirements, passim; (4) ASF M-301,

Army Service Forces Organization, 15 Aug 44; (5)

documentary collection in support of Frank, Requirements.

61

 Basis for the Determination of Maintenance

and Distribution—1 August 1943 Revision, Section

I, Army Supply Program, pars. 1d and 1g; Tab C

to Incl 1; and various tabs to Incls 2 and 3, Frank,

Doc. 84.
REQUIREMENTS: DETERMINATION 199

change took effect with the 1 February 1944

edition of the Army Supply Program.62

Sinking Losses—The early editions of

ASP made no specific provision for requirements to compensate for sinking losses, although actual losses were deducted from estimated quantities "on hand" in each revision of ASP. In the two 1943 editions of

ASP a separate allowance equal to 2 percent of all theater of operations replacement

requirements was included to cover sinking

losses. This allowance conformed closely to

rates of loss actually experienced. From 1

January 1942 to 1 October 1943, U.S.

Army cargoes lost at sea totaled 1.74 percent of all cargoes shipped. After the peak

loss of 6.72 percent for March 1943, sinking

losses declined rapidly and amounted to

only 0.39 percent for the six-month period,

April through September 1943.63 At the end

of 1943, the Richards Committee, noting

that the submarine menace had been fairly

well overcome and that loss rates had fallen

to less than a half of 1 percent, recommended the elimination of the sinking loss

factor as a procurement requirement. This

was approved in the McNarney Directive.64

Size Tariffs—The problems associated

with "tariffs of sizes" were of particular importance in computing Quartermaster requirements, although other services were

faced with size problems.65 During World

War I the failure to predict the composition

of total Army personnel by size groupings

led to grave shortages in particular sizes of

shoes and clothing. The nature of the problem is illustrated in the following statement

of Senator James Wolcott Wadsworth, Jr.,

during the World War I Senate investigation of the War Department:

For instance, at Camp Custer it became

necessary, in order that a detail of one regiment of infantry could go to target practice,

to march half of the detail to the target range,

as I understand it, with the available shoes

that could be gotten together; that they then

had to march back, change those shoes, and

put them on the other half of the detail in

order to send that half of the detail to the

range, such was the scarcity of shoes that the

men could wear, while at the same time thousands of pairs of shoes were there which no

one could wear.66

In order to determine total requirements of

shoes, it was not enough for the Quartermaster Corps to know in advance the total number of troops to be activated, the exact initial

allowance of shoes per man, and normal replacement and distribution requirements.

Provision also had to be made for wide differences in individual size requirements, and

these could not be perfectly predicted.

The first approximation to a solution of

this problem was the development of size

tariffs, somewhat comparable to mortality

62 tables for life insurance purposes. A size tar- Frank, Doc. 95, cited above, note 59 (1). For

further definition of terms and procedures associated with computation of in-transit requirements,

see WD ASF Reqmts Div, Manual for the Determination and Use of Maintenance Factors and Distribution, July 1943, pp. 16, 27-28. 63

 Richards Committee Rpt, p. 61. 64

 McNarney Directive, par. 54. For method of

computing requirements to meet shipping losses

in the 1 February 1943 ASP, see Basis for the Determination of Maintenance, Army Supply Program Directive for Recomputation of January 15,

1943, Tab D, Frank, Doc. 75.

65

 For example, Ordnance, as well as the Air

Forces, had the task of supplying interchangeable

fuzes and projectiles of different types which could

be used in varying proportions in the expenditure

of a given basic caliber of ammunition or type of

bomb. The determination of spare parts requirements was also comparable in many respects to the

task of computing size requirements. 66

 Senate Investigation of the War Department,

1918, p. 607, cited in Bradford, QMC Requirements, p. 19.
200 THE ARMY AND ECONOMIC MOBILIZATION

iff for a particular item indicated the probable number of units, based on past issue

experience, required in each size to meet the

issue requirements of a large number of

troops (1,000-man, 10,000-man, and 100,-

000-man bases were the most common).

The process of constructing a dependable

tariff of sizes ran into endless complications.

The peacetime issue experience of the Army

did not provide a satisfactory norm, and it

was largely for this reason that the size tariffs

of World War I had proved faulty. At the

beginning of the procurement program for

World War II, elaborate efforts were made

to avoid a repetition of the earlier fiasco.

Data were obtained from chain stores, mail

order houses, and large retail establishments;

the results were co-ordinated and distributed

to field installations as guides in making

requisitions and establishing inventories until the Army could accumulate adequate issue experience of its own. In November

1941 posts, camps, and stations were ordered

to report weekly to the OQMG in Washington the sizes and measurements of each enlisted man. These reports were continued

until September 1943 and provided much

valuable information for the construction

of size tariffs.67

Regional and other special conditions indicated that reliance could not be placed

upon a single tariff of sizes for a particular

item. For example, it was found that inductees from North Atlantic states were

shorter and stockier than those at southern

reception centers, and separate bases for

stockage to meet initial issues had to be

prepared. This did not apply to replacement centers since these were filled by men

from all parts of the country. Also, the size

tariffs developed prior to 1942 were not appropriate to the new conditions which permitted the induction of youths of eighteen

and nineteen years of age. Quartermaster

studies in advance of the enabling legislation resulted in preparations to meet the

needs of younger men of less weight and

smaller stature.68

But the preparation of size tariffs was not

by itself the solution of the problem of advance determination of size requirements.

The crux of the matter was that no tariff—

however representative it might be of the

Army as a whole—could be relied upon to

predict actual issues to small detachments

and groups at widely different intervals in

space and time. The smaller the group, the

greater the probability of variations in sizedistribution from that of the troop population as a whole. If a post quartermaster

wished to be 100-percent certain of correctly fitting each of one thousand unknown

recruits with a pair of shoes on a given day,

he would have to have on hand one thousand pairs of shoes in every size.69

 Clearly,

an attempt to provide complete certainty in

meeting all size requirements at any particular time would result in the procurement

and stocking of absurdly large quantities of

matériel in the 5,500 to 6,000 different sizes

found in Quartermaster shoes and clothing.

In resolving its size problems for both

procurement and stock control purposes, the

Quartermaster Corps engaged expert statisticians to apply the principles of probability

theory to the mass of empirical data rapidly

accumulating in the form of records of the

issue experience of hundreds of Army in67

 Reports were forwarded on Individual Form 32.

See Bradford, QMC Requirements, p. 83.

68

 Ibid.

69

 See Memo, Dir Military Planning Div OQMG

for Deputy QMG for Supply Planning and Opns, 4

May 44, sub: Size Tariff Factors, cited in Bradford,

QMC Requirements, p. 84.
REQUIREMENTS: DETERMINATION 201

stallations. A series of size-tariff factors was

developed to show for each size of an item

the percentage of excess stock needed—over

and above the basic size-tariff allowance—to

achieve a given degree of certainty in the

adequacy of supply. Separate tables were

prepared for various categories and types of

clothing, such as regular, protective, arctic,

jungle, mountain and winter warfare, parachute, and clothing for members of the

Women's Army Corps. Size-tariff factors

varied not only from size to size and item to

item, but for larger and smaller groups of

men. The probable number of men to be

fitted at particular points of issue varied with

the size of particular installations, as well as

with the length of requirements periods.

Thus when the annual requirements estimates under the Army Supply Program gave

way to monthly estimates under the Supply

Control System additional adjustments were

necessary because of the relatively greater

fluctuations from normalcy to be expected

within the shorter periods. These adjustments were accomplished by the establishment of special "size levels." In mid-1944,

when authorized stock levels for regional

depots in the zone of interior were set generally at 70 days' supply in terms of anticipated issues, QMC size levels were 85 days

for items requiring a size factor of less than

15 percent and 90 days for items with larger

factors.70

Like all other facets of the task of determining Army requirements, size problems

were far more complex than can adequately

be portrayed in a brief treatment. Enough

has been said to indicate that, thanks partly

to the application of scientific analysis,

American soldiers in World War II were

fitted much more adequately than their

fathers in World War I.71

Requirements for Expendable Supplies

General

In principle, Army requirements for expendable supplies in World War II differed

from equipment requirements in that they

contained no counterpart of initial issue.

Since expendables were procured for purposes of consumption rather than as permanent equipment, it was necessary to provide

only for anticipated expenditures and for

such stocks and other distributional requirements as were essential to insure the availability of supplies when and wherever

needed.72

In practice the line of demarcation between equipment and many classes of expendables was not a clear one. Office supplies, for example, ranged from such clearcut expendable types as stationery, lead pencils, and paper clips through intermediate

items (books, desk lamps, and drafting instruments) on up to large and highly durable

items such as typewriters, furniture, and

costly business machines. Supplies at posts,

camps, stations, repair depots, and other installations ran the gamut from pure expendables such as soap, paper, chemicals, raw

materials, numerous items of commercial

70

 Bradford, QMC Requirements, p. 45.

71

 For additional material, see: (1) Dr. Sidney

Hoos, Some Size-Tariff Problems and Their Applications (30 June 1942); (2) Dr. Hoos, The Necessity for a Size Supply Level (20 September 1944);

(3) Memo cited above, note 69. All cited in Bradford, QMC Requirements, pp. 82-85. 72

 There were, of course, initial requirements of

expendables in the sense of mobilization requirements to meet a sudden outbreak of war and for

subsequent Army expansion. But these were stocks

awaiting issue and, as such, an element of distribution. WDPRB Rpt, p. 22.
202 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 24—ARMY REQUIREMENTS FOR MAJOR EXPENDABLE ITEMS, 1 AUGUST 1943

[Dollars in Billions]

Source: 1 August 1943 edition of Army Supply Program, Section I.

hardware, and spare and replacement parts

to small hand tools, power machines, and

heavy items of equipment. In the nature of

the case there was substantial diversity both

in the classification of items and in methods

of determining their requirements.

The three most important expendable

items required by the Army were ammunition, subsistence, and petroleum products.

Each of these actually comprehended a

whole class of items; collectively, they accounted for about a third of all ASF procurement for World War II.73

 In the three

years 1943 through 1945 there was a strong

upward trend in the ratio of expendables to

total requirements. (Table 24) This was to

be expected as subsistence requirements

mounted to meet the needs of over eight

million men and as intensive combat operations followed the furnishing of the Army

with its basic capital equipment.

Under the Army Supply Program, expendable items (except ammunition) for

the ground forces, Navy, and lend-lease

were carried in Section I-B Miscellaneous

and Expendable Supplies. But this section

also included many nonexpendable items

not considered as important tactical equipment, and the same was true of the corresponding Section H-B, for Air Forces

items. With the advent of the Supply Control System in 1944, all items were classed

either as principal or secondary items without regard to their expendable or nonexpendable nature. For these and other reasons there are no available figures showing

the ratio of requirements for expendables to

total Army requirements for World War II.

A rough estimate would place this figure in

the range from one third to one half.74

73

 ASF procurement deliveries of ammunition, subsistence, and petroleum products in the calendar

years 1942-45 amounted to approximately $26 billion or 38 percent of all deliveries of $69.2 billion

for the period. This included subsistence and ammunition procured by ASF for Army Air Forces.

The $26 billion consisted of Ordnance ammunition, $12.1 billion; CWS ammunition, $1.1 billion;

subsistence, $11.4 billion; petroleum products (estimated), $1.4 billion. Whiting et al., Statistics, Procurement, pp. 15-18.

74

 See the various editions of ASP as well as note

73, above. This question, although of technical interest, is somewhat academic not only because of the

indicated problems of classification but because of

the generally expendable nature of all items in a

global war.
REQUIREMENTS: DETERMINATION 203

As in the case of equipment items, Army

requirements for expendables were based,

so far as possible, on allowance tables and

the troop basis. Instead of using replacement

factors, which were appropriate to equipment, the Army used "consumption factors"

or "the day of supply" to indicate estimated

rates of expenditure. But there were many

expendable items for which requirements

could not be directly related to the troop

basis, and for important items in this category special estimating techniques as well

as special organizations within the Army

were provided in order to obtain the greatest possible accuracy. The adoption of the

Supply Control System marked an important advance in the methods of determining

requirements for expendables since these lent

themselves particularly to SCS procedures.75

Ammunition

Ammunition was of such fundamental

importance to the functioning of the Army

that every effort was made to insure the

adequacy of supply, in terms of both sufficiency of procurement and timeliness of

distribution. Apart from the question of its

military significance, ammunition was of

tremendous dollar importance in the total

program of procurement. Its production,

storage, and distribution, moreover, called

for a greater volume of plant and facilities

expansion than any other single item. The

policies and procedures relating to the determination of ammunition requirements

were therefore under continual scrutiny, and

the requirements were published in the

equipment section of the Army Supply Program rather than with other expendable

items. Since the major part of the war was

fought with ammunition procured under

the Army Supply Program, the present brief

summary of the methods used in determining ammunition requirements is confined to

the broad procedures used under ASP.

The basic unit of calculation in the determination of ammunition requirements

was "the day of supply" for each caliber and

type of ammunition. The day of supply represented the average number of rounds per

weapon per day expected to be consumed

on a theater-wide basis.76 Like replacement

factors for equipment, the day of supply for

ammunition was established during the interwar period on the basis of World War I

experience and was modified from time to

time with new developments in weapons

and fire power. Also, as in the case of replacement factors, until 1944 there was

only one War Department day of supply

(for each type of weapon) for all theaters

collectively. No separate rates were shown 75

 Space limitations in the present discussion prevent further treatment of expendables except in the

selected case of ammunition. For information and

sources on the determination of subsistence requirements, see: (1) Risch, QMC Supply, I, 231-38;

(2) WDPRB Rpt, pp. 33-35; (3) Richards Committee Rpt, pp. 68-74; (4) Computation of Subsistence Requirements for Section I of the Army

Supply Program (2-1-43), Frank, Doc. 77; (5)

The Methods of Computing Subsistence for the

Army Supply Program, 1 August 1943, Frank, Doc.

89.

For petroleum requirements, see: (1) Risch,

QMC Supply, I, 238-42; (2) Erna Risch, Fuels for

Global Conflict (QMC Historical Study 9, 1952).

76

 The day of supply is not to be confused with the

"unit of fire" (sometimes referred to erroneously

as the "day of fire"). The day of supply in World

War II was essentially a procurement concept, designed for the estimate of procurement requirements

for the Army as a whole. The unit of fire was a tactical concept, designed to indicate the quantity of

ammunition needed for combat purposes by forces

at the divisional level. The unit of fire was typically

greater than the day of supply. See: (1) WD FM

101-10, Staff Officers' Field Manual—Organization, Technical and Logistical Data, 21 Dec 44, par.

317; (2) Leighton and Coakley, Global Logistics

and Strategy, 1940-1943, App. F.
204 THE ARMY AND ECONOMIC MOBILIZATION

for the zone of interior since, except for

training purposes, ammunition was to be

consumed only under combat conditions.

Total requirements for ammunition consisted of estimated expenditures plus distribution requirements. Estimated expenditures represented the sum of combat requirements plus training allowances in the

zone of interior, which were separately calculated on the basis of the number of troops

estimated to be in training in the United

States during a given calendar year. A year's

combat requirements for a given caliber

were determined, in principle, by multiplying the day of supply by 365 and then by

the total initial issue of weapons of that caliber in the entire theater of operations.77

The sum of requirements for all calibers

thus determined, plus special project allowances, represented total combat requirements for the Army as a whole.

Special methods were adopted by the

Army Air Forces in estimating combat expenditures of bombs and aircraft ammunition to be provided by the Ordnance Department and the Chemical Warfare Service. During the life of the Army Supply

Program combat requirements under these

methods were based on the total number

of combat planes scheduled for production,

attrition rates for planes, the size and composition of bomb and ammunition loads,

missions per month, and expenditure rates

permission.78

The methods for estimating distribution

requirements for ammunition were basically the same as those for equipment and

went through comparable stages of development. Reserve levels for ammunition

were specifically established by the various

directives for the recomputation of ASP;

these differed in details from equipment

levels. Requirements to bring stocks up to

prescribed levels, in-transit requirements,

and sinking losses were all converted into

days of supply for the entire terminal force

and were added to the figures for combat

and training expenditures to determine total

ammunition requirements.79

In its report late in the summer of 1943,

the War Department Procurement Review

Board pointed to the fact that the validity

of Army requirements for ammunition

turned largely upon the character of the

day of supply and the manner of its application. Like other multipliers in the determination of requirements, day-of-supply

77

 The procedure actually used was similar to that

for determining replacement requirements discussed above, pages 183-84. Instead of estimating

directly the number of weapons in the theater for

each year, the Requirements Division based its computations upon cumulative initial issues for the

entire Army at the terminal strength for each year,

as shown in the current troop basis. A year's combat requirements for a given caliber of ammunition

thus became the product of three factors:

a. the day of supply

b. the number of initial-issue weapons for the

total terminal force

c. the number of days of supply determined by

the formula: Average oversea force

Total terminal force X 365

See Frank, Requirements p. 102, and Doc. 88.

78

 For example: (1) Ltr, Maj Gen Davenport

Johnson, Dir of Military Reqmts, HQ AAF, to CG

SOS, 8 Jan 43, sub: Basis for Computation of Procurement Requirements of Army Air Force for

Army Air Force-Ordnance and Army Air ForceChemical Warfare Service Equipment, Frank, Doc.

76; (2) revision of (1) above, dated 13 May 43,

Frank, Doc. 90. For an appraisal of the results of

these methods, see WDPRB Rpt, pp. 36-38. 79

 See: (1) Frank, Requirements, pp. 102-07;

(2) Ammunition, a seven-page summary of procedures for determining 1943 ammunition requirements, Frank, Doc. 88; (3) Memo, Col Henry R.

Westphalinger, Actg Dir Reqmts Div ASF, for

CofOrd, 20 Dec 43, sub: Special Instructions for

the Computation of Required Production for Ammunition for Section I, Part A of the Army Supply

Program, 1 February 1944, and 3 incls, Frank,

Doc. 101.
REQUIREMENTS: DETERMINATION 205

figures were initially established on the basis

of arbitrary assumptions, and small errors

would be multiplied to astronomical dimensions in total estimates: "They [factors] are

based at best, in a war where new and untried automatic weapons are constantly appearing, on knowledgeful estimates and educated guesses. The present estimate of a

day of supply for .30 calibre rifle ammunition is 5 rounds. If this factor were changed

to 4.5 rounds or 5.5 rounds, it would make

a difference of hundreds of millions of

rounds in the Army Supply Program."

 80

As indicated earlier, the Procurement Review Board showed considerable concern

over the mounting stocks of small arms and

aircraft ammunition and recommended "a

sober re-examination of the factors."

 81

 As

a consequence, the Richards Committee

shortly thereafter was specifically charged

with the study of the role of the day of supply in estimating Army requirements. The

Richards Committee made no objection to

the basic method of computation but recommended greater efforts in obtaining current rates of consumption:

The Committee realizes that these factors

with values as then known, were essential for

this first computation. . . . All testimony indicates that the original values of some of

these factors were much in error, as might

normally be expected, and have had to be

revised, generally downward. . . . The Committee believes that more positive action is

indicated to secure factual data for correcting these factors to current conditions in order

to better control production.82

Despite the Procurement Review Board's

previous admonitions, the Richards Committee could find no basic fault with the

status of ammunition stock levels in mid1943:

Further consideration was given to 2,200,-

000,000 rounds on hand as of 1 July 1943, and

the fact that current schedules provide for the

production of 13,000,000,000 rounds in 1943

and 16,000,000,000 rounds in 1944. Ammunition must be produced and enter

the pipe line well in advance of its contemplated use. To avoid violent fluctuations in

production, requirements must be based on

an average consumption for the entire period

of a war.

To date our campaigns have been on a

minor scale. We have not yet encountered

any large portion of either the German or

Japanese Armies. Very few of our divisions

have attained the average expenditure con- sidered normal in battle. Stockages of ammunition have accumulated when battles were

won with the expenditure of much less ammunition than anticipated. This condition is

fortunate, and does not, of itself, imply incorrect factors, original over-supply or ultimate

waste if collected, redistributed and expended.83

The committee went on to estimate the possible expenditures of thirty-eight divisions in

active combat by the end of 1944 (half of

the seventy-six divisions planned for overseas deployment). Using "unit of fire" figures and assuming seven days per month of

heavy combat, the committee reasoned that

a monthly rate of expenditure of 1.4 billion

rounds was well within the realm of possibility. Existing stocks of 2.2 billion rounds

would then amount to less than two months'

supply. In its conclusions, the committee

recommended that the day of supply be retained as a factor in determining ammunition requirements but that separate factors

be established and kept up to date for individual theaters of operations.84

80

 WDPRB Rpt, p. 46. 81

 Ibid., p. 47. Also see above, page 159. 82

 Richards Committee Rpt, pp. 45-46.

83

 Ibid., pp. 49-50. 84

 Ibid., Recommendations 45, 46, 50.
206 THE ARMY AND ECONOMIC MOBILIZATION

On 10 June 1944 the War Department

abandoned the single day of supply for all

theaters and published separate days of

supply for each of four major areas: the

ETO, NATO, Asiatic and Pacific Theaters,

and all other departments and bases including the zone of interior.85

 Although a

troop basis showing deployment by theaters

did not become available until 1 July 1944,

the ASF, making use of recommendations of

theater commanders, on 25 June 1944 published for the first time a computation of

ammunition requirements based on individual theater needs. Thereafter, until the end

of the war, increasingly detailed reports and

recommendations from individual theaters

were obtained and used for still further refinement of requirements estimates.86

Many influences went into the establishment and revision of day-of-supply figures.

As in the case of replacement factors each

day of supply had its own complex history

and reflected the ebb and flow of combat

activity, changes in the strategic and tactical

situation, shifts in preferences for and uses

of different weapons, developments in the

technology of weapons and ammunition,

and variations in the quality of estimating

procedures. One or two illustrations will suffice to point up these influences. During the

interwar period the day of supply for the

old models of the .30-caliber rifle was two

rounds. The newly developed Garand (M1,

semiautomatic) was estimated to possess

two-and-one-half times the rate of fire of

the older models, and as early as 1938 the

day of supply for this weapon was listed as

five rounds. In the general revision of dayof-supply figures in December 1941, five

rounds was made the day of supply for all

.30-caliber ammunition on the assumption

that the Garand would be used exclusively

in combat. Later, in 1944, separate days of

supply were once more shown for the older

models since the Garand was not produced

in sufficient quantities to fill all combat

needs.87

Early in the war a high day of supply was

in force for the .50-caliber machine gun,

and enormous quantities of .50-caliber ammunition were procured. Attainment of Allied air superiority drastically curtailed the

need for antiaircraft ammunition at the

same time that sharp upward increases in

requirements for heavy caliber ammunition

were experienced. In general, the day of

supply for small arms ammunition was gradually and steadily reduced as experience

data became available. The opposite trend

took place right up to the end of the war

in the case of artillery ammunition, leading

to the authorization of facility expansions

some of which were not scheduled for completion until late in 1945.

A representative picture of the trends as

well as the actual levels of the day of supply

is shown by figures covering the principal

weapons of the Army at specified dates.

(Table 25) This abridged summary conveys but little of the complexities underlying

the establishment, revision, and publication

of day-of-supply figures. The complete picture would include the Army's entire catalog

of weapons, numerous dates of revision, an

array of percentage figures indicating for

each caliber the composition of shell requirements for each day of supply (ball,

tracer, armor-piercing, high explosive, white

85 phosphorus, and so on), and by the end of AG Ltr, AG 471 (9 Jun 44) OB-S-D-M, 10

Jun 44, sub: Day of Supply for Ammunition, and

incls. 86

 Frank, Requirements, pp. 104-07.

87

 Richards Committee Rpt, p. 47. Also see Table

25, opposite page.
REQUIREMENTS: DETERMINATION 207

TABLE 25—DAY OF SUPPLY OF AMMUNITION FOR THEATERS OF OPERATIONS

AT INDICATED DATES

[Rounds per Weapon per Day]

a

 Days of Supply were published for individual theaters after 1943; ETO rates selected as illustrative.

Source: TAG letters and inclosures, AG 471 series, for dates indicated.

the war numerous variations from theater

to theater.

The broad subject of the Army's requirements for ammunition in World War II is

a complex and controversial one, with ramifications extending throughout the whole

process of procurement. At the outset of the

war, shortages of ammunition—especially

in the small arms category—assumed frightening proportions, and new productive facilities were hastily authorized and constructed to meet the combined demands of

the Army, the Navy, and allied countries

under the Defense Aid Program. Even before all of the facilities were completed,

shortages of copper prevented most of them

from operating at capacity. Fortunately, expenditure rates were low in the early stages

of the war and production soon out-stripped

current requirements. Unforeseen increases

in efficiency raised actual output far in excess of the design capacity of most plants.

This development, as well as independent

factors such as the copper shortage and successive reductions in requirements, resulted

in large excesses of plant capacity, partial

rates of operation, and plant shutdowns

long before the end of the war. It has been

estimated that by the end of the war only

one half of the twenty-one million tons of

ammunition produced in the United States

had been sent overseas and less than one

fourth actually expended.88 Some observers

would see in this a substantial degree of confusion and waste. Others would see a combination of circumstances—most of them

88

 See Sherman, The Formulation of Military Requirements for Munitions and Raw Materials, p. 109.
208 THE ARMY AND ECONOMIC MOBILIZATION

unforeseen and many of them fortunate—

which made it unnecessary for the United

States to exhaust the reserves and the productive capacity it had provided in order to

achieve victory in a global war of uncertain

character and duration.89

Concluding Observations

The task of estimating military requirements for World War II was one of great

importance and great complexity. The

purely military aspects of the problem were

alone enough to stagger the imagination. If,

on 7 December 1941, the Army could have

instantaneously received for the asking any

desired quantity of each item of munitions

known to exist, the job of correctly stating

its needs would still have been stupendous.

Ideally, those responsible for the determination of requirements would first have

to know the exact size of the Army at all

dates until the end of the war; its subdivision

in terms of armies, corps, divisions, regiments, battalions, companies, and other

units; its composition in terms of infantry,

artillery, air, engineer, and other combat as

well as service arms; and the desired allowance of weapons, ammunition, personal

equipment, vehicles, rations, medical supplies, clothing, construction equipment, materials, spare parts, and other supplies for

each echelon of the Army organization.

They also would have to know precisely

when and where all these items were to be

delivered. This in turn would require a

knowledge of basic strategic plans, enemy

capabilities and probable intentions, related

plans of the Navy and allied nations, and

so on. After engaging in combat, meeting

enemy resistance, adjusting strategic and

tactical plans, and learning of the need for

new or altered weapons and equipment, the

Army would be faced with the continual

necessity for changing its requirements and

specifications to meet the new conditions.

The actual requirement problems faced

by the Army in World War II were far

greater and more complex than those reflected in the simplified situation presented

above. Munitions in any desired quantity,

place, and period of time could not be obtained by waving a magic wand. They had

to be designed, developed, produced, and

delivered by a complex process which engaged a major share of national resources.

Competing needs for resources, and especially for the ultimate resource—the nation's

manpower—imposed serious limitations

upon production feasibility. These limitations, as dramatically demonstrated in

World War II, forced a continuous reappraisal of the size, the structure, and operations of the Army as well as of its matériel requirements.

A review of the major phases of the evolution of Army requirement programs from

1920 to 1945 reveals a complete cycle.

World War I was followed by rapid disarmament and the nationwide scramble to

"return to normalcy." In an atmosphere

hostile to military preparedness and in the

absence of any urgent threat to national security, Army appropriations during the

1920's and early 1930's were pared to the

bone. The Army's size was kept below National Defense Act objectives, its wartime

abundance of equipment was used up or became obsolete, and its activities were confined to localized training and minimum

maintenance. The Army organization was

reduced to an incomplete skeleton, lacking

89

 For greater detail on the Army's ammunition

requirements and production program, see Thomson and Mayo, The Ordnance Department: Procurement and Supply of Munitions.
REQUIREMENTS: DETERMINATION 209

even the complementary units essential to a

balanced structure at its existing depleted

strength. Repeated protests by War Department Secretaries, Chiefs of Staff, and other

spokesmen had little effect on the course of

events. Under the circumstances, the Army

relied upon advance planning and such research and development as it could finance

to prepare itself for meeting wartime needs.

After 1935, in the face of growing unrest

in Europe, modest increases in funds resulted in a gradual but significant rehabilitation of the Army. But not until the fall of

France in June 1940, did the United States

make an earnest effort to attain military

preparedness. This great rearmament effort—known as the Munitions Program of

30 June 1940—was an across-the-board

program of Army procurement designed to

obtain as quickly as possible complete

equipment for a force of over a million men

and to create the industrial facilities for supplying difficult-to-procure items for a far

larger force.

The Munitions Program of June 1940

was substantially less than the War Department had requested to meet the Axis threat.

Still it was astronomical in magnitude when

compared with previous levels of procurement, and the War Department was hard

pressed to administer and control the program. The structure of the Army at every

stage of anticipated expansion had to be

carefully planned; tables of allowances and

equipment for all Army units had to be revised and kept current with the adoption of

new weapons and supplies; the new allowance tables had to be applied to the anticipated troop strength at successive stages of

mobilization and deployment; construction

and maintenance requirements for posts,

camps, stations, arsenals, and a host of other

military establishments had to be drawn up;

and finally all the various types and quantities of required matériel had to be consolidated and converted into dollars and

cents in order to prepare the War Department budget, to devise orderly expenditure

programs, and to place tens of thousands of

contracts with industry.

Nevertheless, even before the Munitions

Program was well under way, the continued

deterioration of the world political situation

dictated the progressive raising of procurement objectives. America's role as the arsenal of democracy, implemented by the

adoption of the enormous lend-lease program in March 1941, and the increasing

threat of actual involvement of the United

States in a war with both Germany and

Japan, compelled a thorough reappraisal of

military requirements. Moreover, with the

appearance of serious production difficulties

and material shortages, the Office of Production Management began to press the

military agencies for the development of

firm, long-range estimates of requirements

in order to enable industry to go forward

with large-scale conversion and expansion

activities essential to quantity production.

The development of the Army's Victory

Program in the fall of 1941, a paper program to be used in the event of war, was a

step in this direction. With the advent of

Pearl Harbor "the lid was off," and both

the formulation of requirements and the

placing of contracts were hurriedly consummated at high levels with the all-compelling

objective of adequacy for meeting the crisis.

Earlier estimates which seemed at the time

of their adoption to be overstatements typically turned out to be understatements as

the demands of mobilization and expansion

continued to mount.

After Pearl Harbor and the announcement by the President of spectacular new
210 THE ARMY AND ECONOMIC MOBILIZATION

production objectives for planes, tanks,

guns, and merchant ships, the War Production Board found that military requirements

for all the armed forces, plus the essential

needs of the civilian economy, added up to

more than the nation was capable of producing. Material shortages and production

bottlenecks—culminating in the Feasibility

Dispute—forced a reconsideration of all requirements estimates, and planned programs

had to be brought within the scope of production possibility. At this stage of development, the task of computing Army requirements became increasingly complex. Not

only did estimates for military end items

require careful review and balancing, but

all such items, when significant, had to be

translated into their equivalent in scarce

materials and other resources. Only with

such information could the Army and the

War Production Board make intelligent

program adjustments and allocations of

scarce materials. Thus, by the end of 1942

the criterion of adequacy in the determination of requirements was tempered by the

need for feasibility and balance in the production and delivery of finished munitions.

By the end of 1943, war production in

many categories had caught up with demand and the formulation of requirements

reached a third stage of development. The

findings of the War Department Procurement Review Board and the Richards Committee for the restudy of reserves called for

a shift in emphasis from adequacy and feasibility to accuracy in the process of forecasting requirements. The initial equipping

of the expanded wartime Army was nearing

completion and substantial reserves of equipment were either in storage or scheduled for

early delivery. The mounting supplies of war

matériel would no longer automatically be

absorbed by Army expansion, and the pressing needs of the civilian economy, many of

them long deferred, demanded closer scrutiny of military requirements. It then became necessary to develop refined methods

of reporting the issue, consumption, and inventories of military supplies in all theaters

of operations as well as in military establishments throughout the United States. This

refinement of procedures and estimates

could be accomplished only after the firm

establishment of theaters of operations, a

step which for the first time made it possible

to base requirements upon actual rates of

consumption rather than upon hypothesis

and conjecture. Replacement demand,

rather than demand for expansion, became

the new guide to Army procurement.

While the Army's Supply Control System

for refining the determination of requirements was still in the process of development, the collapse of Germany in the visible

future became reasonably assured and requirements determination entered a fourth

stage—the planning of the shift from a twofront to a one-front war. This was a complex

operation which entailed increases in numerous specific requirements in the face of a

general reduction.

The final stage—planning for the tapering off of requirements and providing for

widespread contract termination and reconversion associated with the end of the war—

went on simultaneously with the third and

fourth stages. Although the reconversion issue was highly controversial, particularly

during the temporary resurgence of Germany in the Battle of the Bulge, the obvious

desirability of an orderly transition from a

war to a peacetime economy compelled substantial efforts on the part of reconversion

specialists even as others continued to plan

for war production.
REQUIREMENTS: DETERMINATION 211

Thus ran the cycle of military requirements—from an extended period of Army

deterioration, through rapid mobilization

and war, and back, for a time at least, to

peacetime conditions. Both during and after

World War II, there was a considerable

lack of understanding of the problems involved in the determination of military requirements for technological warfare on a

global basis. This situation existed in varying degrees in many sectors of the Army

and complicated its task. But the misunderstanding was considerably greater and more

widespread outside the Military Establishment, giving rise to unrealistic expectations

and requests for "prompt" determination of

"firm" and "accurate" statements of requirements which by their very nature could

be only rough and changing approximations

to eventual needs.

Perhaps the most common misunderstanding was the one reflected in numerous

references to the Army's lack of firm strategic plans upon which to base its matériel

requirements. Implicit if not explicit in these

references was the assumption that strategy,

of a kind not always specified, would provide the primary foundation for military

requirements. Actually, the history of both

the methods and the results of the Army's

determination of requirements for World

War II indicates that strategy played—and

in the nature of the case could play—only

a secondary role in the formulation of requirements. World War II was primarily

a technological war, with the odds in favor

of the side possessing the greatest abundance

of technical and material resources. The

victory of the United States and its allies

represented a triumph of superior military

power, consisting basically of a general and

marked superiority of equipment and supplies in the hands of trained men. This superiority was the result of the adoption of

a broad, across-the-board program of military requirements independent of the nation's commitment to any specific strategic

plan.

The basic sequence of planning in World

War II thus ran from requirements to strategy, not strategy to requirements. Once a

preponderance of general military power

had been established, strategy could be

crystallized, and at this point the specific

needs of strategy could be translated into

additional specific requirements and special

project needs. But because of the length of

the average period of production, the adequate and timely supply of even these needs

was in most cases possible only after they

had already been anticipated and included

in bold and imaginative requirement programs previously adopted.

The grounding of strategy in a general

preponderance of military power was not

unique to World War II. But it had profound significance for a nation which, except for its naval strength, had allowed itself

over the years to become virtually disarmed.

With the fair of France in 1940 the vulnerability of the Western Hemisphere suddenly became evident, and the attack on

Pearl Harbor brought home the fact that

America's survival depended upon the rapid

attainment of superior military power.

This objective could not be gained by

timidity. It required positive decisions, usually in the face of inadequate information

and uncertainty as to the outcome but always on the side of boldness. Both in its

Commander in Chief and in its military

and civilian chiefs of supply, the U.S. Army

in World War II was fortunate in having

at the time of its greatest crisis the kind of

bold leadership which was prerequisite to

the attainment of decisive military power.
212 THE ARMY AND ECONOMIC MOBILIZATION

Such leadership would inevitably challenge

feasibility limitations and, by establishing

high production objectives, would raise the

limits of feasibility itself.

Needless to say, the Army made numerous

errors in forecasting its requirements for

World War II, whether viewed from the

standpoint of economic efficiency or of military necessity. But the goal, and to a considerable extent the very concept, of

"precision" in the formulation of military

requirements is a will-of-the-wisp. A victorious army is likely to be one which will

end a war with surpluses of equipment and

supplies:

There are a lot of people, sir, who would

like to have us fire the last cartridge at the

last Jap after we have eaten the last K ration

and after we have dropped the last bomb in

the last emplacement. We don't think we are

going to be able to do that. Naturally, we are

going to wind up with stocks . . .90

Conversely, an army whose supply situation is characterized by "too little and too

late" is not likely to be victorious. In World

War II the final result was a compromise

between the exuberant demands of the individual procuring agencies and the more conservative estimates of those responsible for

bringing all programs into balance within

the limits of feasibility. Fortunately, the

United States possessed both the resources

and the opportunity to satisfy the unprecedented needs of its armed forces without

seriously undermining the living standards

of its civilian population.

90

 Testimony of Lt Gen Brehon B. Somervell,

Truman Committee, Hearings, 26:12013.
PART FOUR

ARMY PURCHASING PROBLEMS

AND POLICIES

CHAPTER IX

Survey of Army Purchasing: 1940 to 1945

The procurement of Army matériel for

World War II represented the greatest purchasing operation ever conducted by a single

agency in the history of the American economy. The value of War Department procurement deliveries under supply contracts

from 1 July 1940 to 31 August 1945 has

been estimated at $117 billion, consisting

of nearly $44 billion for the Army Air Forces

and the remainder for claimants supplied

by the ASF.1 Yet even this figure, which

would dwarf by comparison the operations

of the nation's most gigantic corporation,

fails to suggest the true magnitude of War

Department purchasing activities in World

War II. In order to obtain the needed deliveries of munitions and to train and house

its troops, the War Department was obliged

to contract, directly or indirectly, for many

additional billions of dollars in industrial

facilities, machinery and equipment, and

Army installations throughout the world.

The combined value of total war production

for the Army, including its air forces, during

this period has been estimated at approximately $180 billion.2

 Moreover, these figures

do not take into account the fact that the

value of purchase contracts originally placed

with industry in order to achieve these results was much higher: the canceled value

of the Army's World War II contracts which

were terminated prior to completion ran

from $40 billion to $50 billion. (See Table

60, page 696.)

No amount of statistical presentation can

fully reveal the complexities of the Army's

wartime purchasing operations. The expansion of Army purchases to more than one

hundred times their previous annual rate

in peacetime suggests only the quantitative

changes which took place as a result of the

war. The most difficult aspects of wartime

purchasing were those which involved qualitative departures from peacetime methods

of buying and which required the development of an entire new philosophy of pricing and contract placement, as well as the

formulation of countless other details of

purchase policy. The following pages attempt to portray the background and nature

of the problems faced by the Army in its

wartime purchasing activities and the policies which were developed in an effort to

provide their solution.

The Interwar Period

The revolution in Army purchasing activities and policies brought about by World

War II can be understood only by contrast

with peacetime procurement. Army pro1

 Whiting et al., Statistics, "Procurement," 9 Apr

52 Draft, p. 14. These totals, computed from

physical quantities delivered and unit costs of 1945,

do not reflect final cost to the government; they do

not, for example, take into consideration price

changes or contract renegotiations. For other qualifications see source. 2

 Civilian Production Administration, The Production Statement (1 May 1947). See Table 2, p.

6, which is subject to qualifications similar to those

in note 1, above.
216 THE ARMY AND ECONOMIC MOBILIZATION

curement in peacetime was practically

synonymous with purchasing. The low volume of purchases in relation to the nation's

industrial capacity made unnecessary any

of the elaborate measures for the expansion

of productive facilities, the allocation of raw

materials and other supplies, and the expediting and control of production indispensable to procurement in time of war. For

similar reasons, the purchasing function itself was largely confined to the awarding of

contracts to low bidders under the rigid

procedures prescribed for peacetime governmental procurement. Few of the complex problems of contract distribution, pricing, renegotiation, and related measures

which came to be the essence of wartime

purchasing activity and policy were experienced or more than dimly conceived during the placid period between the two world

wars.

Total War Department appropriations in

the nineteen fiscal years 1922 through 1940

amounted to some $6.4 billion, or an average of $339 million annually.3

 These appropriations provided for all War Department

military activities—pay and subsistence of

the Army, the support of the National

Guard, the Organized Reserve, Citizens'

Military Training Camps, and the Reserve

Officers' Training Corps, the operation of

arsenals and storage depots, War Department overhead, and many other activities

in addition to the limited procurement programs of the regular supply arms and services. Peacetime purchasing was a routine

function—small in magnitude, leisurely

conducted, and relatively unencumbered by

issues calling for constant judgment and reformulation of policy.

As already implied, the essence of the

Army's peacetime purchasing methods was

the advertised demand for limited quantities of specific items, followed by the automatic award of a single contract to the lowest qualified bidder for each item. Under

this procedure, prescribed by statute and

rigidified by administrative order and court

interpretation, no contract distribution

problem existed. The question of which

firms in the nation's economy were to receive contract awards was decided largely

by the operation of the competitive, freeenterprise economic system. Likewise, pricing problems were for the most part nonexistent, and nothing approaching a price

"policy" was required by the procuring

agencies. Price, like the selection of the contractor, was the result of competition, and

under competition it was presumed to be

reasonably close to cost. Furthermore, under competition, cost itself would be held

to a minimum, since it would reflect the

expenses of the least-cost producer. The

competitive bid system, in theory and to a

large extent in practice, resulted in maximum efficiency of production, the conservation of government funds, and the absence of excessive profits to contractors—

all without the conscious direction or concern of procurement personnel. It is hardly

surprising, in view of the persistence of these

idyllic conditions for nearly two decades,

that contracting officers were ill-prepared

to meet the Pandora's box of problems suddenly released in the summer of 1940 by

the deluge of appropriations exceeding,

within three short months, the total for the

previous nineteen years.4

3

 War Department, Office of the Budget Officer,

War Department and Total Government Appropriations and Expenditures—FY 1922 Through 1948

(3 April 1947), copy in OCMH. These figures do

not include civil works projects conducted by the

Army Engineers.

4

 War Department appropriations during the first

quarter of fiscal year 1941 amounted to more than
SURVEY OF ARMY PURCHASING: 1940 TO 1945 217

The formal competitive bid system and all

its associated procedures represented the

accumulation of Congressional and administrative efforts over the years to insure

maximum economy in governmental procurement. It provided safeguards against

the inertia of public servants who were presumed to lack the stimulus of the profit

motive and would probably fail to conduct

their buying operations with the same aggressiveness as their counterparts in private

industry. Also, it was designed to make extremely difficult if not impossible the collusion of public officers with individual

firms and to keep to a minimum any possible corruption in the dispensing of public

funds. Above all, it reflected the belief that

the American economy was, on the whole,

basically competitive and that prices obtained by the solicitation of competitive bids

would, in fact, be close to cost and thus allow only a normal profit. That the competitive bid system had many shortcomings

for military procurement, in both peace and

war, has been indicated elsewhere.5 Even

its principal peacetime virtue—encouragement of and dependence upon widespread

competition throughout the underlying

economy—was to become a major handicap

during the defense and war periods as the

possibility and desirability of competition

were drastically reduced.

Despite the relative simplicity of peacetime procurement, many specific difficulties

arose in the administration of the prewar

system of competitive bidding. The preparation of "foolproof" invitations to bid, including the careful statement of specifications and contract terms, occasionally required the application of a complex admixture of legal and engineering principles.

Arrangements for the public opening of bids

at a specified time and place had to be made

and scrupulously followed. The determination of the "responsibility" and hence the

eligibility of each bidder required in many

instances considerable industrial and engineering knowledge and investigation on the

part of contracting officers. Questions as to

the possible collusion of bidders and the

noncompetitive status of particular firms or

industries sometimes arose to plague procurement officials. For the most part, however, these difficulties did not become a

major problem and except for large or unusual purchases, such as aircraft, could be

handled on a routine basis.

Even in peacetime the practical necessity

for numerous exceptions to the standard procedure arose, and over the years a number

of exemptions were permitted by statute.

Emergency procurement, which could not

await the time-consuming process of advertising and related procedures, was exempt; purchases in amounts of less than

five hundred dollars and contracts for various secret items of equipment were also

exempt. Likewise, a number of types of purchase in circumstances where competition

was inpracticable or nonexistent could be

made by negotiation in the same manner as

purchases by private firms. In this category

were patented items, articles produced by a

sole manufacturer, parts of apparatus already in use furnished by a single dealer, and

items for which the price was fixed by governmental or other competent legal authority. In cases where advertising failed to elicit

$6.6 billion as contrasted with the $6.4 billion for

the period 1922 through 1940. See W. B. Harris,

A History of Army Purchasing, June 1940-June

1944 (5 September 1944), p. 1, OCMH. 5

 (1) John Perry Miller, Pricing of Military Procurement (New Haven: Yale University Press,

1949), especially Ch. III, "Peacetime Procurement

Techniques Before 1939." (2) Holley, Buying Airpower.
218 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 26—WAR DEPARTMENT PROCUREMENT: BY PURCHASING METHOD, 1937-1940

[Dollars in Millions]

Source: ASF, History of Purchases Division, p. 27.

bids and further advertising was deemed

useless, resort to open market purchases was

permitted. But even for exempted items, administrative procedures were established requiring the informal solicitation of bids or

other actions designed to insure economical

procurement. Finally, for various reasons a

number of items or item-classes were relieved

by specific statutes from competitive bidding.

Included in this category were advertising

services, bunting, horses and mules, gages,

jigs, dies, medical supplies, exceptional items

of subsistence stores, and purchases from Indians. The purchase of aircraft, as well as

aircraft parts and accessories, was subject to

various procedures and exemptions which

changed from statute to statute. Of all procurement problems faced by the War Department during the interwar period, aircraft purchase policy created the most difficulty. Frequent investigations and statutory

changes by Congress complicated the task

of obtaining the suitable development and

production of aircraft.6

Many of the standard commercial items

required by the War Department in peacetime were obtained by the Procurement Division of the Treasury, which conducted central buying on a large scale for federal agencies. The Procurement Division also served

to co-ordinate the purchasing standards of

all federal agencies by prescribing mandatory contract forms and procedures for the

solicitation of bids and the making of

awards. The War Department obtained

most of its requirements of fuels and lubricants through the Navy, envelopes from the

Post Office Department, paper and related

items from the Government Printing Office,

and a miscellaneous assortment of items

from the Federal Prison Industries, Inc.,

and the Committee on Purchases of BlindMade Products. In general, interdepartmental procurement in peacetime worked

well, produced economies through largescale purchases, and freed the War Department from much red tape which would have

been associated with the advertising and

placement of numerous small contracts.7

6

 (1) ASF, History of Purchases Division [circa

1945], pp. 1-28. The original of this manuscript is

filed in OCMH under the title ASF, Production and

Purchasing Division, Purchasing Policies and Practices. (2) Holley, Buying Airpower. (3) Miller,

Pricing of Military Procurements, pp. 27-36. (4)

Harry B. Yoshpe and Marion U. Massen, Procurement Policies and Procedures in the Quartermaster

Corps During World War II (QMC Historical

Study 17, June 1947) (hereafter cited as QMC

Procurement Policies), especially pp. 22-24. 7

 Yoshpe and Massen, QMC Procurement

Policies, pp. 18ff.
SURVEY OF ARMY PURCHASING: 1940 TO 1945 219

Despite the numerous possible exceptions

to the procedure, competitive bidding accounted for the overwhelming preponderance of War Department purchases in the

interwar period. Purchases under this

method amounted to well over 80 percent

of the total during the four years immediately preceding the launching of the Munitions Program of 1940. (Table 26)

The Defense Period

The growing awareness of the United

States of the dangers of Axis aggression prior

to World War II can be measured roughly

by increasing preparations in the field of

military procurement. The invasion of Poland in September 1939 had little immediate

effect upon the availability of procurement

funds to the Army. Total War Department

appropriations for fiscal year 1939 had been

approximately $496 million, a figure not

much above the average for the previous ten

years. The 1940 appropriation was more

than double this amount, and with an additional $100 million voted in February 1940,

it totaled nearly $1.1 billion. But it was not

until June 1940 that appropriations were

made and related measures undertaken on a

scale commensurate with the needs of a significant rearmament effort. Thus the term

"defense period" has appropriately come to

be used to denote the eighteen-month period

from June 1940 to Pearl Harbor, during

which the United States actively prepared

for war. The defense period stands in contrast to the longer, twenty-seven-month "period of grace"—from the German invasion

of Poland to the Japanese attack on Pearl

Harbor—during the early part of which the

intentions and capabilities of Axis aggression were more discernible than any defensive action on the part of the United States.

With the fall of France in June 1940, all

doubts in the minds of the majority in Congress as to the reality of the national peril

came to an end, and the rising determination of the United States to prepare its defenses was indicated by the steady stream of

appropriations for rearmament. Before the

month of June was out, Congress had provided $23⁄4 billion for War Department procurement. In August the Battle of Britain

began and in the following month Congress

made available an additional $4 billion.

This was followed in October by a further

$1.4 billion. The passage of the Lend-Lease

Act in March 1941 brought another

$4.8 billion to the War Department, making

the total for fiscal year 1941 nearly

$13.5 billion.

On 22 June 1941 Germany attacked the

Soviet Union and eight days later the regular fiscal year 1942 War Department appropriation was made by Congress. This

amounted to some $10.6 billion. After the

announcement of the Atlantic Charter in

August 1941, Congress added another $41⁄4

billion to War Department funds. Less than

a month before Pearl Harbor, the "cash

and carry" provisions of the Neutrality Act

were repealed, and by Pearl Harbor another

$7.4 billion had been granted to the War

Department. Thus in the last six months of

1941 some $22 billion had been made available to the War Department over and above

the $13.5 billion for the previous fiscal year.

The eighteen-month total of nearly $36 billion was larger than the combined expenditures of the War and Navy Departments

during World War I.8

8

 Figures for the defense period in above paragraphs taken from ASF, History of Purchases Division, pp. 29-31. Expenditures by the War and

Navy Departments for World War I, as reported in

annual reports of the U.S. Treasury, amounted to

approximately $33 billion.
220 THE ARMY AND ECONOMIC MOBILIZATION

As in the case of all other areas of economic mobilization and procurement, the

defense period brought about far-reaching

changes in Army purchasing. To meet the

avalanche of appropriations beginning in

the summer of 1940, the Army's purchasing

organization in Washington and throughout

the entire United States was steadily expanded. District procurement offices were

reactivated or newly established, and thousands of persons were recruited, trained, and

put to work in the placement and administration of procurement contracts. New procedures and policies were developed, and

most important of all, Congress provided a

steady stream of new legislative enactments

abolishing statutory barriers to rapid procurement and conferring upon the armed

forces positive new powers indispensable to

the enlistment of industry in the greatest

industrial mobilization effort in the nation's

history.

Among the first and most important legislative acts of the defense period was the

National Defense Expediting Act of 2 July

1940.9 This act authorized the Army to

make all defense purchases under the new

appropriations "with or without advertising," thus eliminating the legal compulsion

to go through the time-consuming and often

inappropriate procedure of formal advertising, waiting for suitable bids, and awarding a single contract to the lowest responsible

bidder. Under the new legislation, the Army

was free to make awards directly to allocated or other desired facilities, to broaden

the procurement base by wide distribution of

contracts under split awards to many producers of a single item, and to continue the

advertising procedure on a modified basis

as deemed essential or desirable.10

The defense expediting act outlawed the

cost-plus-a-percentage-of-cost type of contract but gave specific sanction to the costplus-a-fixed-fee contract, subject to a maximum fee of 7 percent of estimated cost. This

was a highly significant and timely provision.

The straight CPPC contract of World War

I proved expensive and wasteful; yet without some type of cost contract legally available, the Army in 1940 would have been unable to place many of its contracts for construction, research and development, and

supplies. During the defense and war periods there were innumerable situations in

which costs could not be estimated in advance with sufficient accuracy to warrant

the adoption, by either the government or

the contractor, of a fixed price at the time

the contract was signed.

The National Defense Expediting Act

permitted the government to make advance

payments up to 30 percent of the contract

price. This was a most important consideration underlying the decision of many producers to accept contracts and undertake

cash outlays for conversion to war production; during peacetime the government had

been prohibited from making any payments

in advance of procurement deliveries, or

equivalent performance, by the contractor.11

Also, the act conferred upon the Secretary

of War authority to construct and operate

industrial plants, to be owned either wholly

or partly by the government. This was the

foundation upon which the War Department's vast assemblage of powder, ammu9

 54 Stat. 712, 2 Jul. 40. 10

 The power to negotiate all contracts without

advertising was extended the following year by 55

Stat. 366, of 30 June 1941, and subsequently by

the First War Powers Act. 11

 A similar provision for advance payments had

been provided for World War I. See 40 Stat. 383, 6

Oct 17. For discussion of the administration of advance payments and other wartime provisions for

the supply of working capital to contractors, see

Chapter XXIX, pp. 674-78.
SURVEY OF ARMY PURCHASING: 1940 TO 1945 221

nition, chemical, atomic bomb, and other

plants was to be built and operated during

the next four years. Finally, the defense expediting act included provisions for licensing and prohibiting exports of machinery

and critical materials, an important aid in

conserving and making available these items

during a period of grave scarcity.

Four days before the passage of the National Defense Expediting Act, Congress

had provided the initial statutory basis for

the granting of priority to all Army contracts

and orders over civilian and foreign orders.12

 The 28 June 1940 act and the subsequent provisions for its execution were designed to facilitate both the placement and

the administration of Army contracts; the

authority to extend the priority power vertically to subcontractors and vendors was

an important key to the completion of prime

contracts on schedule. The 28 June 1940

act also suspended the provisions of the

eight-hour law of 19 June 1912, which prohibited the employment of laborers or mechanics under government contracts or subcontracts for more than eight hours in any

one day.13

On two successive days in October 1940,

Congress enacted two statutes of far-reaching importance to Army procurement—the

Second Revenue Act of 8 October and the

Assignment of Claims Act of 9 October

1940. The revenue act contained the revolutionary "tax amortization" provision

which exerted a profound stimulus upon

the expansion of privately financed production facilities during the defense and war

periods. The tax amortization law converted high wartime tax rates from a liability into an asset so far as their effect on

plant expansion was concerned. By permitting the complete charge-off, for tax purposes, of all approved new capital facilities

within a period of five years or less, the act

made it decidedly profitable for contractors

to convert to war production and removed

much of the sting of high wartime tax rates.

The same act also suspended, for the duration of the emergency, the Vinson-Trammel

profit-limitation act, which held aircraft

manufacturers and shipbuilders to a flat

profit rate of 8 and 12 percent, respectively.14

The Assignment of Claims Act was a

major instrument in the mobilization of

bank credit in support of war production.

By permitting contractors to assign—to

banks and other lending agencies—their

claims to payment under government contracts, the act provided a high degree of

security to lenders. Many of the financial

aids to contractors developed in the course

of World War II rested squarely upon the

foundation of the Assignment of Claims

Act.15

A number of other statutes enacted during

the defense period deserve mention as facilitating the Army's purchasing activities.

On 10 October 1940, the power to license

and prohibit the export of critical items was

augmented by the power to requisition such 12

 See 54 Stat. 676 (28 Jun 40), extended by 55

Stat. 236 (31 May 41), and later by the Second

War Powers Act, 56 Stat. 177 (27 Mar 42). The

priorities system is discussed in detail below in Part

Six.

13

 On 9 September 1940 the suspension was qualified by a proviso requiring a payment of time-anda-half for hours worked in excess of eight in one

day. 54 Stat. 884.

14

 54 Stat. 974ff., 8 Oct 40, especially Title III,

beginning at 998. For further treatment of tax

amortization matters and the suspension of the Vinson-Trammel act, see below, Part Five. 15

 54 Stat. 1029, 9 Oct 40. For many years previously the assignment of claims under government

contracts had been prohibited by law. See Revised

Statutes 3477 and 3737.
222 THE ARMY AND ECONOMIC MOBILIZATION

items for military use.16 The following year a

general requisitioning statute was enacted,

enabling the military services and other

agencies of the government to seize and fix

the compensation for any property, with

minor exceptions, considered necessary to

the national defense.17 A related power, the

authority to place mandatory orders and to

commander industrial plants, was granted

by the Selective Service Act of 16 September 1940.18

 On 29 April 1941, Congress conferred upon the Secretaries of the War and

Navy Departments the power to waive the

terms, in both outstanding and new contracts, which required the filing of performance and payment bonds by contractors.19

These bonds had previously been required

of government contractors in order to

indemnify the government against nonperformance and to protect workers and

suppliers against nonpayment of charges

growing out of the prime contract. Such

bonds were practically unnecessary for contractors in an obviously strong financial position, and the costs of furnishing the bonds

merely increased the cost of the contract to

the government. In the case of other contractors, difficulties with surety companies

slowed down the placement and performance of contracts and threatened to undercut the purpose of Assignment of Claims

Act.20

The foregoing legislative enactments, together with the numerous revenue, appropriation, and other acts passed during the

defense period, laid the foundation for

American industrial mobilization and rearmament. Although basically the responsibility of the Congress, they were the products of the joint efforts of Congress, the

NDAC, and the procuring agencies. The

importance of an adequate legislative basis

for its entire procurement program was

never lost sight of by the Army. Throughout

the war legal and other experts in the War

Department devoted much of their time to

proposing and criticizing drafts of pending

legislation, testifying before appropriate

Congressional committees, and discussing

the issues with procurement personnel and

representatives of industry. Long before the

defense period the Legal Section, OASW,

had prepared lists of additional War Department powers which would have to be

authorized by Congress in order to meet the

necessities of emergency or wartime procurement. The prompt adoption of most of these

proposals at the outset of the defense period

helped make possible the substantial progress toward rearmament achieved prior to

Pearl Harbor.21

In utilizing its expanded legislative

powers the War Department undertook a

long succession of administrative changes

designed to streamline the cumbersome procedures of peacetime procurement and place 16

 54 Stat. 1090. This authority was extended by

56 Stat. 467 (2 Jul 42) and 58 Stat. 624 (28

Jun 44). 17

 55 Stat. 742 (16 Oct 41), subsequently extended by 56 Stat. 181 (27 Mar 42), 57 Stat. 271

(30 Jan 43), and 58 Stat. 624 (28 Jun 44). 18

 54 Stat. 885, 16 Sep 40. 19

 (1) 55 Stat. 147, 29 Apr 41. (2) Public Law

800, 8 Oct 40, 76th Cong., 3d Sess. 20

 Surety companies, besieged with applications

for bonds early in the defense period, did not consider it worth while to issue bonds in amounts required by small contractors. Also, they claimed

status as financial institutions under the Assignment of Claims Act and took prior assignments of

rights to the proceeds of the contracts. This was

greatly disturbing to banks, who feared involvement

in litigation with surety companies and were therefore reluctant to make defense loans necessary to

the execution of contracts. See Harry B. Yoshpe,

Production Control in the Quartermaster Corps,

1934-1944 (QMC Historical Study 8, December

1944), p. 59, for additional details. 21

 See legislative appendixes to the several editions

of the Industrial Mobilization Plans.
SURVEY OF ARMY PURCHASING: 1940 TO 1945 223

them on a basis adequate for the large-scale

rearmament effort. On 12 June 1940, while

the formulation of the Munitions Program

was still under way, the Assistant Secretary

of War alerted the supply arms and services

to the greatly augmented procurement program and ordered all possible steps to be

taken in anticipation of its adoption. Among

the Assistant Secretary's recommendations

were the advance issue of circular proposals,

reduced time of advertising, prompt making

of awards, splitting of awards, spreading

work to subcontractors, simplifying and

freezing specifications, eliminating pilot

models where practicable, speeding up inspection, shortening delivery schedules under both new and existing contracts, rendering all possible assistance to manufacturers,

and adoption of plans for the acquisition

and training of additional personnel needed

at all echelons.22

On 2 July 1940, the same day the enabling legislation was passed, OASW approved the use of CPFF contracts and

authorized all supply arms and services to

make use of the power to negotiate contracts without formal advertising wherever

this would expedite the defense program.23

In the summer of 1940 new contract forms

and clauses were approved, signalizing the

beginning of a movement that was to culminate in far-reaching changes in the powers of contracting officers and the adaptation

of contractual instruments to the manifold

purposes of war. The steady revision and improvement of contract forms served to standardize, so far as desirable, contract terms

and conditions for all technical services, to

simplify purchase, shipping, and disbursing

procedures, and to provide a flexible array

of readily available "boiler plate" contract

provisions embodying the fruits of the War

Department's rapidly accumulating procurement experience.24

 Especially important

during the defense and early war periods

was the development and use of various

types of preliminary contractual instrument—letters of intent, letter orders, letter

contracts, and letter purchase orders—

which enabled contractors to undertake

work immediately on urgent items of procurement without waiting for a formal contract. Under these arrangements, each of

which possessed considerable flexibility,

contractors were authorized to acquire

necessary machinery, equipment, materials,

and other supplies and to proceed to manufacture the needed item of procurement in

advance of agreement on specific contract

terms such as price, quantities, detailed

specifications, and similar matters. These

were determined as rapidly as possible and

the contractor was guaranteed reimbursement of all costs incurred prior to the adoption of a formal contract.25

Various administrative determinations

during the defense and early war periods

freed the supply arms and services from the

compulsion to acquire supplies through

22

 Ltr, Johnson, ASW, to CofAC et al., 12 Jun 40,

sub: 1941 Procurement Program, copy in Special

S. Com. To Study and Survey Problems of Small

Business Enterprises, 77th Cong., 2d Sess., Hearings

on S. Res. 298, Problems of American Small Business, 10:1301. These hearings, which extended from

15 December 1941 (76th Congress) through 18

December 1946 (79th Congress), will hereafter be

cited as Senate, Small Business Hearings. 23

 Memo, Col John W. N. Schulz, Dir Current

Procurement OASW, for CofAC et al., 2 Jul 40,

sub: Procurement Without Advertising, copy in

Senate, Small Business Hearings, 10:1303.

24

 Standard contract terms were eventually codified, set forth, and kept current in War Department

Procurement Regulations. PR 13, Forms of Contracts, contained a massive array of general contract forms to meet various types of purchase situation. 25

 (1) PR 13. (2) Yoshpe and Massen, QMC

Procurement Policies, pp. 90ff. See also below,

pages 247-48.
224 THE ARMY AND ECONOMIC MOBILIZATION

specified channels, such as the Procurement

Division of the Treasury, the Federal Prison

Industries, Inc., and the Committee on

Purchases of Blind-Made Products.26 Far

more important in permitting timely and

adequate procurement was a series of determinations made by the Under Secretary

of War in 1941 and early 1942, relieving

contracting officers from the prohibitions

imposed by the "Buy-American Act" of

1933. This legislation, adopted at the bottom of the depression, forbade government

purchase of materials or supplies from foreign countries except under highly restricted

conditions. By March 1942 the Under Secretary had determined, in accordance with

the applicable provision of the statute, that

except for items of food and clothing further observance of the prohibitions would

be contrary to the public interest. In the

case of Canadian products, even food and

clothing could be purchased by the U.S.

Army as needed without regard to the problem of national origin.27

Numerous other changes in the Army's

purchasing procedures and organization

took place during the defense period. These

included the relaxation of provisions governing liquidated damages for delayed deliveries, modification of performance, payment, and other bonding requirements upon

contractors, and the establishment and refinement of procedures for administering

advance and progress payments, guaranteed

loans, and other financial aids to contractors. At the organizational level, large numbers of additional personnel from private

industry were recruited, including specialists

in many fields of purchasing, who brought

new ideas and enthusiasm to the task of

rationalizing the Army's buying methods

and organization. In the field of subsistence

purchasing, for instance, a nationwide network of market centers was soon established

to permit rapid and efficient buying of

meats, vegetables, and other food items in

carload lots directly from sources of supply.

This development and many others owed

much to leading individuals in NDAC and

the OPM, who possessed wide contacts

throughout industry and carried a powerful

mandate from the President as well as Congress to get the rearmament program under

way as rapidly as possible.28

During the defense period, material shortages and the growth of the priorities system

complicated the task of contracting officers

and required the adoption of complex new

procedures which tied together the functions of purchase, contract administration,

and production control. As the procurement

26

 For further details, see Yoshpe and Massen,

QMC Procurement Policies pp. 79-81. 27

 (1) OUSW Memos, 18 Apr and 24 Jul 41, sub:

Determination Under Buy-American Act. (2)

OUSW P&C Gen Dir 94, 27 Dec 41, sub: War Production Policy for Canada and U.S. (3) Hq SOS

Gen Dir 30, 16 Mar 42, sub: Buy-American Act.

(4) PR 5, Foreign Purchases.

28

 (1) Nelson, Arsenal of Democracy, pp. 99-104.

(2) Testimony of Albert J. Browning, July 1941,

Truman Committee, Hearings, 6:1623, 1630-32.

The elaborate and far-flung purchasing empire

established by the Army to meet its needs for World

War II had its foundations in the defense period.

Some idea of the scope of this empire and the manner in which it came into being may be inferred

from a study of certain subcomponents under the

Quartermaster Corps. (1) Herbert R. Rifkind, Fresh

Foods for the Armed Forces: The Quartermaster

Market Center System, 1941-1948 (QMC Historical Study 20, 1951). (2) Marion U. Massen,

Canned Vegetables: A Case History in Central

Procurement at the Chicago Quartermaster Depot

During World War II (CQMD Historical Study 3,

1943). (3) Marion U. Massen, Central Procurement of Dehydrated Vegetables for the Armed

Forces (CQMD Historical Study 6, March 1945).

(4) Marion U. Massen, Canned Meats Procurement for the Armed Forces During World War II

(CQMD Historical Study 7, March 1946). (5)

Risch, Fuels for Global Conflict, p. 147.
SURVEY OF ARMY PURCHASING: 1940 TO 1945 225

program accelerated and claimed a larger

share of the nation's resources, many firms

of all sizes found themselves cut off from

sources of supply necessary to carry on their

regular commercial business. At the same

time the inevitable concentration of prime

contracts in the hands of large corporations

gave rise to complaints that the Army was

discriminating against small business. To alleviate distress, minimize criticism, and

broaden its procurement base, the Army

established procedures to promote wider distribution of prime contracts and a greater

degree of subcontracting by holders of prime

contracts. The focal point of all these procedures and responsibilities was the contracting officer in each procurement office,

for it was the contracting officer and his

staff who were basically responsible for the

administration as well as the placement of

contracts. In turn, the contracts themselves

represented the basic instruments for achieving the objectives of the entire procurement

program.29

Despite the remarkable progress made by

the Army in launching its heavy procurement program during the defense period,

many unresolved problems remained or

emerged on the eve of Pearl Harbor. Much

confusion and duplication existed in the

assignment of purchase responsibility for

common items, not only among the supply

arms of the Army but among the several

military procuring agencies. This allowed

the competitive scramble for the available

supply of many items to drive up prices, interfere with orderly production, and prevent equitable distribution. Moreover, interservice competition was not confined to

end products. In the face of constantly rising requirements a shortage of productive

facilities was inevitable. The facility allocation system was kept on a flexible basis

and many firms were not covered by it.

Hence, procuring agencies resorted to the

hasty placement of long-term contracts—

often in excess of balanced requirements—

in order to "sew up" productive capacity

for particular services.

Although the Army's purchasing organization had expanded considerably by the

end of 1941, it was still far short of current

needs, to say nothing of the expanded requirements of all-out wartime procurement.

The problem of orienting personnel at all

echelons to their new responsibilities was

tremendous. There was a marked reluctance on the part of the several headquarters of the technical services to decentralize purchase responsibility; "directed" procurement from Washington

headquarters often interfered with the negotiation and placement of contracts by

district offices. Most pressing of all was the

lack of an adequate philosophy and machinery for the pricing of military procurement in an economy in which the traditional mechanism of competitive pricing

had largely disappeared or broken down.

The absence of a well-developed pricing

policy and the technical and organizational

means for its implementation complicated

the Army's use of its power to place contracts by direct negotiation and contributed

to widespread overpricing and excessive

profits, soon to be dramatically revealed.

29

 Contracting officers were the sole custodians of

power to sign binding contracts for the War Department. They were appointed by the chief of each

technical service or higher authority and included

the technical service chiefs as well as other appointing officials. All contracting officers received their

powers through a series of redelegations from the

Secretary of War. (1) PR 107 (4-7-44) Authority

with respect to procurement. (2) PR 204 (2-8-45)

Contracting authority. (3) PR 302.3 (11-23-44)

Contracting officer.
226 THE ARMY AND ECONOMIC MOBILIZATION

Pearl Harbor to V-J Day

The impact of Pearl Harbor upon Army

purchasing activities transcended all developments in this field during the entire defense period. In less than a month, President Roosevelt had announced to the world

the spectacular production objectives for

planes, ships, tanks, and guns which set the

pace for the entire war production effort.

The Army had raised its over-all procurement program from the needs of a fourmillion-man Army, conceived primarily for

defense, to the requirements of a ten-million-man Army dedicated to victory. Ten

days after Pearl Harbor, Congress passed

the First War Powers Act, which came to

be regarded for the duration of the war as

the Magna Charta of the procurement

agencies as well as of the entire executive

arm of the government. Title II of this act

permitted the making or modification of

any or all government contracts previously

or thereafter entered into, as well as the

making of advance, progress, and other

payments related to such contracts, without

regard to previously applicable provisions

of law, so long as such action was deemed

by the President to facilitate the prosecution of the war. The only significant strictures in Title II were the prohibition of the

CPPC form of contract and the retention

of existing statutory limits on profits.30

Under a sweeping redelegation of these

powers

 31

 the Army in the first three months

of 1942 placed nearly $15 billion in war

contracts. So far as Congress was concerned

"the lid was off," and throughout the entire war period the Army did not lack for

money to carry out all its multifarious activities. In two successive acts, on 31 January and 6 March 1942, Congress appropriated to the War Department new sums of

$12.5 billion and $23.5 billion, respectively.

Thus, in less than three months after Pearl

Harbor, the War Department had received

somewhat more in new appropriations than

it had during the entire eighteen months

of the defense period.

Large appropriations of money could not

alone suffice to win the war. Appropriations

had to be translated into finished munitions

at the earliest possible date, and this in turn

depended upon the rapid placement of contracts. Until after Pearl Harbor all contracts

over $500,000 had to be reviewed and approved, both by the Under Secretary of War

and the Office of Production Management,

prior to actual placement. From the outset

these contract "clearance" requirements had

tended to slow down procurement and create interagency friction; as the number of

contracts rapidly increased they became increasingly onerous. Ten days after Pearl

Harbor the Under Secretary of War authorized the technical service chiefs to award all

contracts, either for supplies or construction,

up to $5 million without higher War Department approval and permitted redelegation of this authority under appropriate safeguards to the extent deemed necessary by

the service chiefs. At this time contract review by the OPM was required for all contracts in excess of $1,000,000.32

 Shortly

thereafter, following consultations with the

procuring agencies, the newly established

War Production Board discontinued its own

separate contract review function and transferred its personnel concerned with that activity to the War and Navy Departments.

Thus by 3 March 1942, interagency dupli- 30 55 Stat. 838, First War Powers Act, passed on

17 December and approved 18 December 1941. 31

 Executive Order 9001, 27 Dec 41.

32

 OUSW P&C Gen Dir 81, 17 Dec 41, sub: Decentralization of Procurement.
SURVEY OF ARMY PURCHASING: 1940 TO 1945 227

cation in contract clearance procedures and

personnel was eliminated.33

Before the first quarter of 1942 had

ended, it was evident that the War Department's existing organization and policies for

procurement were grossly inadequate for

coping with the flood of wartime contracts

already in effect and certain to be placed in

the visible future. The War Department reorganization of 9 March 1942, made under

the authority of the First War Powers Act,

was designed to bring order out of the chaotic conditions following Pearl Harbor. The

procurement functions formerly divided between the Office of the Under Secretary of

War and the General Staff were now concentrated under the Commanding General,

Army Service Forces. Within ASF, the commanding general and his staff undertook to

rationalize the entire procurement operation

by the appropriate regrouping of functions

and the creation of corresponding organizations and procedures to handle all functions,

old and new, made necessary by the novel

demands of modern industrial and economic

warfare.

Under this reorganization the former Purchases and Contracts Branch, OUSW, became the Purchases Branch, Procurement

and Distribution Division, ASF. Because of

the scope and importance of the War Department's purchasing activities, many new

functions were shortly acquired by the Purchases Branch, which soon attained division

status in the Office of Procurement and Distribution (later Office of Materiel).

Throughout the entire war period the Purchases Division was one of the most influential policy-making offices in the whole

ASF organization. Although subject to supervision by the Director of Materiel and the

Commanding General, ASF, and ultimately

by the Under Secretary of War, the Purchases Division was basically responsible for

the formulation of all elements of War Department purchase policy affecting both the

Army Air Forces and the technical services

of ASF. It played a leading role in the development of principles for contract renegotiation when this was a pioneer endeavor

on an uncharted sea; it sponsored and supervised the formulation of contract termination and settlement procedures, long before

the establishment of the independent agency

for this purpose—the Office of Contract Settlement. Above all, it carried the heavy burden of developing a basic philosophy of

pricing—and the associated policies and instruments thereof—in a milieu in which the

familiar process of competitive pricing had

given way to a regime of administered price

determination conducted by the procuring

agencies themselves.

In addition to purely policy-making functions, the Purchases Division also discharged

many supervisory and operating responsibilities. It was broadly responsible for the

progress of the Army's procurement program in terms of the placement of contracts

to meet scheduled requirements, the basic

provision of important types of financial aid

to contractors, and the removal of barriers

to contract completion stemming from traditional contract terms and other long-established elements of purchase policy. The

Purchases Division was concerned with the

adequate organization of technical service

headquarters as well as of the procurement

districts, so that purchase policy could be

efficiently implemented and controlled

throughout the War Department. It aided

these offices in obtaining key purchasing personnel and trained the Army's purchasing

representatives for overseas procurement. It

33

 (1) WPB Gen Admin Order 12, 3 Mar 42. (2)

CPA, Industrial Mobilization for War, p. 522.
228 THE ARMY AND ECONOMIC MOBILIZATION

instituted procedures and controls for local

purchasing by field installations within the

several service commands so that these installations could take advantage of largescale purchasing by higher echelons and

avoid encroachment upon local civilian

needs.

On the Washington scene the Purchases

Division represented the War Department

to other governmental agencies, to Congress,

and to industry. The director of the division

was chairman of the WPB Procurement

Policy Board, an interagency unit functioning under the auspices of the War Production Board for the formulation and control

of broad wartime procurement and purchasing policies jointly affecting all procurement agencies. In its relations with Congress

the staff of the Purchases Division prepared

drafts of legislation, testified before appropriate Congressional committees, and interpreted the War Department's position on

legislation affecting the purchase function.

The division also had the general responsibility for the War Department's implementation of the various small business programs and policies established by Congress

and the War Production Board. In its relations with industry the Purchases Division

had numerous contacts with individual contractors, trade associations, and industrial

leaders having membership on the War Department's Purchase Policy Advisory Committee. Throughout its life the Purchases

Division, like other War Department offices

and agencies, modified its organization and

functions to meet the changing needs of the

Army's fluid wartime procurement program.

Hardly had the War Department reorganization of 9 March 1942 been announced when the problem of overpricing

and excessive profits in war contracts was

thrust into the foreground of national attention. This development was the result of

widely publicized hearings and findings of

several Congressional investigating committees. The Army had already begun to explore ways and means of curbing these

excesses; nevertheless, the Congressional

hearings and the resulting renegotiation law

compelled a concentrated and sustained attack upon the fundamental problem of the

pricing of military procurement.

On 28 April 1942, the day of the passage

of the first renegotiation law, the newly established Office of Price Administration issued its General Maximum Price Regulation, and in the following months OPA rose

to a dominant position on the Washington

scene. The thorny question of whether and

to what extent military procurement would

be subject to OPA price controls became a

matter of major concern to the procuring

agencies. The Army and Navy were properly fearful that the imposition of price ceilings or similar controls upon complex military end items such as aircraft, tanks, ships,

and ordnance materiel would have grave

consequences for the war effort. Most military end items were of novel and complicated design and had no previous price or

production history. Any attempt to hold

producers of such items to ceiling prices fixed

in advance of production would inevitably

cripple both the placement of contracts and

the actual production of the items in question. Yet some means would have to be devised to keep the prices of war goods in line.

With a steadily rising proportion of the nation's output going into military items, uncontrolled prices in this sector would add to

general inflation, the dissipation of government funds, and the swelling of already excessive profits. Most dangerous of all, they

would encourage the extravagant use of the

nation's resources of materials and man-
SURVEY OF ARMY PURCHASING: 1940 TO 1945 229

power, the ultimate limitations upon war

production. The repeated prohibition, both

in statutes and administrative regulations,

of the wasteful CPPC form of contract

would be reduced to a futile gesture if identical consequences were permitted to take

place through uncontrolled prices and costs

under either the fixed-price or CPFF form of

contract. As events turned out, the procuring agencies were successful in obtaining the

general exemption of military items from

OPA price control. This arrangement was

specifically contingent upon the development by the armed services of adequate

means for controlling the prices of their own

procurement, and it added substantially to

the general pressure upon the services to

develop a satisfactory pricing program.

Throughout the summer of 1942, the

Purchases Division wrestled with the task

of formulating an integrated body of sound

pricing policies. Much intensive analysis of

the issues was made by the War Department

Price Adjustment Board in attempting to

set forth the basic principles under which

contracts would be renegotiated and excessive profits recovered from War Department contractors. By the late fall of 1942,

sufficient knowledge had been accumulated

to permit a broad synthesis of essential pricing and purchase policy. Hence, on 19 November 1942, as a result of a three-day

conference of top-ranking purchasing officials at Tryon, North Carolina, a formal

statement of War Department purchase

policy was set forth. This pronouncement,

which came to be known as the Tryon Statement, was the foundation of War Department pricing policy for the remainder of

the war.34

The basic policy affirmation of the statement was that price and cost control should

be achieved by careful negotiation of close

prices early in the life of each contract.

Only under initial close pricing, with periodic price revision to reflect the actual

trend of costs, could sufficient downward

pressure upon costs be achieved to stimulate maximum productive efficiency

throughout the life of the contract and keep

to a minimum the waste of real resources.

This policy stressed the minimum use of

the CPFF form of contract and the development on an intensive scale of cost-analysis procedures essential to sound pricing. Because of the dynamic and complex nature

of wartime procurement, pricing policy and

the organizations and procedures for its

implementation underwent cumulative

change and refinement until the end of the

war.

Many other important purchasing problems of an administrative nature had to be

resolved if vital military production was to

be achieved in time to win the war. Foremost among the practical problems faced

by the ASF immediately after Pearl Harbor was the decentralization of actual procurement responsibility and operations.

Despite the desirability and necessity of

adequate control over the Army's massive

procurement program, the task of actual

procurement was simply too great to be

accomplished from the Washington headquarters of the seven technical services. The

Army's wartime procurement organization

had been planned for many years to rest

upon the principle of decentralization as applied in World War I. But the district procurement offices had, on the whole, lain

dormant during the interwar period and

despite their reactivation during the defense

period had not achieved by Pearl Harbor

the degree of independence required to discharge their wartime responsibilities. This 34

 See below, page 277.
230 THE ARMY AND ECONOMIC MOBILIZATION

lack of independence was due partly to local

inadequacies and partly to restrictions

placed from above, chiefly at technical service headquarters in Washington. The service headquarters were understandably slow

in permitting district offices to negotiate,

unaided, important contracts many times

the size of anything handled by the headquarters themselves during the long period

of peacetime inactivity. In many cases the

district offices lacked the personnel, the

knowledge, and the general administrative

facilities for adequately performing the

tasks for which they would eventually have

full responsibility. In other cases, however,

district offices by the time of Pearl Harbor

were far more familiar with available

sources of supply and the productive capacity of potential contractors in their district than were the Washington headquarters. Not infrequently districts would receive special procurement directives from

Washington, requiring the placement of a

contract with a specific firm after the district had made ample surveys of facilities

and conducted lengthy negotiations with

another contractor considered more suitable

for the procurement in question. Such interference by Washington headquarters was

discouraging to local offices and deprived

them of the degree of autonomy required to

carry out their assigned functions.35

Effective decentralization of operational

authority depended upon the development

of a uniform set of War Department procurement regulations and the adoption, so

far as practicable, of uniform procedures

throughout the several technical services and

their many field procurement offices. The

need for a comprehensive body of procurement regulations was painfully apparent at

the time of the War Department reorganization in March 1942. For many years,

regulations governing procurement had

been scattered among a wide variety of

sources—Army regulations, War Department circulars, OUSW circulars, and numerous special memoranda and documents

issued for particular purposes by various

echelons of the War Department. Nowhere

was there a comprehensive bible of procurement to which contracting officers and

others could have recourse in ascertaining

War Department policy and practice. As a

result, knowledge of the complexities of procurement—like the arcane rituals of ancient

religions—became the property of an elite

few who had carefully cultivated their lore

over the years and had accumulated, filed,

and cross-referenced their own collections of

numerous scattered documents covering the

subject. This confinement of a working

knowledge of procurement policy in all its

ramifications was an impossible barrier to

decentralization of procurement operations,

and immediately after the establishment of

the ASF the Purchases Division went to

work on a complete codification. Despite the

magnitude of the task the first edition of

the new Procurement Regulations was available by June 1942. All previous regulations,

contained in the equivalent of some 1,500

pages, were rescinded and superseded by a

single loose-leaf volume initially containing

only one hundred pages. This edition was

circulated among the technical services for

criticism and suggestions, and on 1 Septem35

 (1) Col. Chester Mueller, The New York Ordnance District in World War II (New York: The

New York Post Army Ordnance Association, 1947),

p. 116. (2) ASF, History of Purchases Division, p.

82.

The subject of "directed" or "earmarked" procurement was intensively explored during the Senate hearings on small business problems. For informative testimony and statistics on this issue, see

Senate, Small Business Hearings, 10: 1137-53,

1213-19; 11: 1432-77, 1484-94; 12: 1770-78.
SURVEY OF ARMY PURCHASING: 1940 TO 1945 231

ber 1942 an entirely new edition was published and widely disseminated. Thereafter,

Procurement Regulations was revised once

each month on the basis of interim circulars, and a system of distribution independent of The Adjutant General's Office placed

revisions in the hands of users in a matter

of hours after publication. Procurement

Regulations eventually grew to many hundreds of pages but was well organized,

clearly written, and carefully cross-indexed;

with few exceptions the regulations could

be easily understood and used by procurement personnel at all echelons.36

The consolidation of War Department

procurement policies in the form of Procurement Regulations was a vital but not the

only prerequisite to successful decentralization of the Army's purchasing operations.

Despite the progress that had been made in

expanding technical service headquarters

and in reactivating procurement districts

during the defense period, there had been no

systematic, department-wide effort to control the pattern of mushrooming organizations or to simplify and standardize routine

purchasing procedures.37 As a result, the

post-Pearl Harbor deluge of appropriations

and contract authorizations found the services and the district offices still unprepared

to handle the ensuing mass-purchasing operation on an efficient basis. Forms, documents, and procedures, as well as organizational structures, were far from adequately

streamlined to permit the smooth and efficient dispatch of business on the scale of allout war. Moreover, surveys instituted in

1942 by the Purchases Division, as well as

by higher authority in the ASF, revealed

widespread diversity in organization and

methods, not only between the various technical services but among the numerous district offices of a given service. This diversity

went far beyond the special requirements

imposed by unique conditions peculiar to

individual offices; it made impossible the

application of uniform policies, reporting,

and control procedures. The lack of structural similarity between different offices prevented the identification of common problems and posed a substantial barrier to effective intercommunication between different

echelons in the total procurement organization.38

A few examples will suffice to indicate

the kinds of diversity in operations and policy which hampered rapid contract placement and administration during the early

war period. Certain procurement offices

made wide use of their power to place contracts quickly by direct negotiation; others

required a minimum of thirty days to solicit

an inordinate number of potential contractors for a single item. One technical service, badly understaffed with experienced

buyers but anxious to avoid any taint of

venality, made a ruling that none of its personnel could deal with an entire industry if

he had been associated with that industry

during the previous five years. This virtually

ruled out, ab initio, any possibility of obtaining qualified persons and went beyond

the War Department's applicable regulation which confined the prohibition to par36

 By the end of 1944, Procurement Regulations

comprised sixteen major sections with the following coverage: (1) General Instructions; (2) General Purchase Policies; (3) Contracts; (4) Bonds

and Insurance; (5) Foreign Purchases; (6) Interbranch and Interdepartmental Purchases; (7) Disposition of Surplus and Unserviceable Property;

(8) Federal, State, and Local Taxes; (9) Labor;

(10) Plant Facilities Expansion; (11 ) Miscellaneous Purchase Instructions; (12 ) Renegotiation

and Price Adjustment; (13) Forms of Contracts;

(14) Requisitioning of Personal Property; (15)

Termination of Contracts; (16) Priorities. 37

 ASF, History of Purchases Division, p. 79. 38

 Ibid., pp. 87ff.
232 THE ARMY AND ECONOMIC MOBILIZATION

ticular firms with which the individual had

formerly been associated. Some technical

services decentralized their operations along

geographical lines, while others had their

district operations specialized along commodity lines. This basic organizational difference, apart from the relative merits of

the two alternatives, made for especial difficulty in the matching of supervisory and

control organizations at the staff level. Most

services contracted almost exclusively for

end items, but one service leaned heavily

upon component buying; while this had certain advantages it multiplied the number

of prime contracts and complicated the application of material controls, expediting

and inspection procedures, property accounting burdens, and other operations. Undesirable duplication in the purchase of

particular items, both within and between

the several technical services, was discovered

to exist in varying degree.39

As a result of continuing surveys sponsored by the Control Division, ASF, the Purchases Division devised a standard manual

of procedures for all procuring offices. On

18 May 1943, a tentative manual M-603,

Procurement District Operating Manual,

was published. The need for greater detail

and refinement, as well as for separate treatment of many problems peculiar to particular technical services, resulted in a thorough

revision of the manual. Largely through the

efforts of the ASF Control Division staff in

consultation with the Purchases Division, a

new and final version—ASF M-603, Procurement Office Purchasing Procedures—

was published in December 1944 and its

provisions made mandatory. The purpose of

the manual was to accomplish in the procedural field what Procurement Regulations

had achieved in the policy field. The manual

covered the entire contracting process—the

receipt and processing of procurement directives, obtaining proposals, making

awards, preparing and distributing contracts, preparing and distributing purchase

action reports, the processing of contract

modifications, supplemental agreements,

and change orders, and countless other routine but essential activities of contracting officers. Although many of the prescribed operating procedures were already in effect

the manual's publication marked an important step forward in simplifying and

standardizing desirable procedures and in

providing a sound basis for staff supervision

and control.40

Throughout the defense period and the

year-and-a-half after Pearl Harbor, the primary emphasis in the Army's procurement

program had been the rapid placement and

administration of contracts to insure the

timely delivery of supplies to meet the needs

of the expanding Army. During this period

it was clear that the outcome of the entire

war depended upon adequate procurement

deliveries, and the Army was not disposed to

sacrifice this major objective to the niceties

of contract distribution, correct pricing, cost

control, prevention of excessive profits, and

so forth. By mid-1943 the initial needs of the

Army—including its successful transship- 39

 These and many other purchasing difficulties

were revealed in the Red Tape Report, submitted

by a special committee appointed by General Clay

in October 1942 to recommend improved purchasing procedures. (1) Maj Richard M. Leighton,

History of Control Division, ASF, 1942-1945

(1946), pp. 166-67, MS, OCMH. (2) ASF, History

of Purchases Division, pp. 80-82.

40

 Annual Report, Purchases Division, ASF, Fiscal

Year 1944-45, accompanying Memo, Col Fred C.

Foy, Dir Purchases Div ASF, for Dir of Materiel, 15

Jun 45, sub: Annual Report of ASF for Fiscal Year

1945, in files of Purchases Div ASF.
SURVEY OF ARMY PURCHASING: 1940 TO 1945 233

ment to theaters of operations—had been assured and the pattern of requirements was

shifting to replacement and operational

needs. By this time also, major achievements

in the basic organization of the entire process

of nationwide economic mobilization and

procurement had been made, providing the

indispensable foundation for refinements of

detail. Accordingly, from mid-1943 to V-J

Day, procurement policy was increasingly

concentrated in two major areas: (1) improvement of basic policies and procedures

already developed; (2) anticipating and

preparing for the problems posed by the

coming liquidation of the wartime procurement program.

In the first area, substantial progress was

made both in the fields which have already

been discussed and in numerous other aspects of purchase policy and procedure. In

the field of pricing policy, the many new

price revision and redetermination clauses

for individual contracts were supplemented

by a "company pricing" program designed

to improve the over-all pricing policies of

large firms holding many contracts, especially major subcontractors who could not ordinarily be reached by Army contracting officers. In the general area of price and cost

analysis, new organizations, techniques, and

programs were developed, eliminating much

of the guess-work previously inevitable in

the negotiation and placement of fixed-price

contracts. A major program for converting

outstanding CPFF contracts to fixed-price

agreements was launched, and the number

of CPFF contracts was greatly reduced by

terminations, conversion, and restrictions

upon new procurement. Liaison arrangements with WPB, the OPA, and other war

agencies were perfected and the interagency

frictions which characterized the earlier period were substantially reduced. Thus, in the

field of OPA price control, War Department purchasing experts systematically reviewed many hundreds of price regulations,

both old and new, to determine their effects

upon Army procurement in the light of

changing conditions. As a result of their

recommendations, the OPA modified or

withdrew objectionable terms of many of its

regulations, thereby minimizing harmful

effects upon procurement.

In response to the War Production

Board's request, "mandatory flow-down"

clauses were introduced in prime contracts

to force the prompt placement of orders and

subcontracts for contributory items. This insured the availability of many parts and

components indispensable to war production and relieved suppliers with long production "lead time" from the necessity of

speculating on future demand in a milieu

of increasing contract termination. Also in

response to representations by WPB, the

Army imposed strict controls on local purchases by posts, camps, and stations in order

to avoid impingement upon civilian needs

for many commercial-type items undergoing

extreme shortages. A revised agreement with

the Smaller War Plants Corporation

(SWPC) was reached, setting forth simplified and decentralized procedures designed

to promote the widest possible distribution

of Army contracts to small business. Increased efforts and patient negotiations by

the Army's Procurement Assignment Board

clarified and simplified the problems of procurement responsibility for thousands of

items used by two or more technical services; assignment determinations—in addition to deciding purchase responsibility—

also had to specify, in the case of each item,

which service would be responsible for specifications, determination of requirements,

provision of funds, and inspection.
234 THE ARMY AND ECONOMIC MOBILIZATION

In order to handle the increasing number

of contract terminations throughout the last

two years of the war, as well as to make

ample provision for mass terminations upon

the cessation of hostilities, the Purchases Division was faced with many problems. In

addition to meeting problems of termination

and settlement, the War Department had to

revise its contract placement policy. To

shorten its commitments as the end of the

war approached, the ASF imposed increasing restrictions upon the letting of long-term

contracts, quantities to be obtained, and the

advance placement of contracts. Shorter

term purchasing paralleled the shift in requirements planning from annual estimates

under the Army Supply Program to monthly

estimates under the Supply Control System.

A monthly survey of outstanding preliminary contractual agreements was instituted

and firm measures were taken to convert

these into formal contracts; only by keeping

letters of intent, letter purchase orders, and

similar instruments to a minimum could the

War Department protect itself against excessive termination charges and other complications resulting from the absence of

standard termination articles in existing

agreements. Extensive interchange of information between the Army and other government procuring agencies was provided

in order to prevent termination of contracts

which could be economically assumed by

another agency in need of identical items.

Similar measures were undertaken to prevent the placement of new contracts by one

agency for items carried in surplus by

another agency and hence likely to be disposed of. Purchase policy during the final

year of the war also reflected shifts of emphasis in the field of price analysis growing

out of the gradual liquidation of the war

program. With the reduction in pressure

upon the nation's productive facilities, provisions for payment of overtime were less

justifiable, greater competition could be expected, especially among subcontractors,

and price revision articles could be used to

take advantage of probable increases in

efficiency. Likewise, with nongovernmental

business absorbing a larger share of the

efforts of contractors, the allocation of overhead costs to government contracts was subjected to closer scrutiny. Company pricing

programs were used more and more to effect

better pricing in individual contracts rather

than to control a firm's over-all price and

profit situation.41

From the foregoing it is evident that the

Army's purchasing problems in World War

II were of a magnitude and complexity to

stagger the imagination. But no summary

of broad policies and developments can do

more than suggest the vast underlying structure of operations involving more than a

million individual purchase transactions per

year. Each of these transactions possessed its

own interesting history and unique significance. Many of them were of simple, routine, or repetitive nature, involving only

minor sums. Others, involving commitments running to nearly a billion dollars,

would require many volumes to indicate

their countless ramifications. No complete

description will ever be made, since the

written records—even if completely available—would reveal only a fraction of the

total amount of planning, discussion, and

effort which actually went into their execution.

41

 (1) Ibid. (2) Annual Report, Purchases Division, ASF, Fiscal Year 1943-44, in files of Purchases

Div ASF.
CHAPTER X

Major Issues in Contract Placement

Military Responsibility for Procurement

A primary question in the field of contract placement was who should conduct

the actual purchasing and contracting operations essential to military procurement.

Consideration of this question, which arose

early in World War II, illuminates a number of important aspects of the total task

of economic mobilization.

Fundamental to the Army's entire scheme

of organization and operation was the premise that it would have and retain direct responsibility and authority for the procurement of its own equipment and supplies.

By the time of World War II, Army procurement was deeply rooted in history and

law, going back to the early part of the

nineteenth century. During the Revolutionary War, the Continental Congress had

conducted or directed many of the procurement operations needed to fill the Army's

crude and relatively small matériel requirements. In 1792 the U.S. Congress established the office of Purveyor of Public Supplies, whose procurement jurisdiction extended to arms and ammunition. The War

of 1812—the first to be waged by the new

republic—necessitated greater specialization of the military procurement responsibility. In March 1812 Congress created the

position of Commissary General of Purchases under the Secretary of War and reestablished the office of Quartermaster General which had existed during the Revolutionary period. In May 1812 the Ordnance

Department was created, and by 1815 it

had obtained permanent jurisdiction over

the procurement of arms and ammunition.

The overlapping procurement responsibilities of the Quartermaster General and the

Commissary General were gradually clarified by the ascendancy of the Quartermaster

General and the discontinuance, in 1842, of

the office of the Commissary General of

Purchases.1 Meanwhile, the establishment

of the Corps of Engineers and the Medical

Department on a permanent basis in 1802

laid the foundation for eventual procurement responsibility in these branches of the

Army. By the beginning of World War I,

there were five Army branches or departments charged with procurement; by the

end of the war the number had grown to

eight.2

During the first year after America's entry

into World War I, when confusion was rampant and the fruits of the nation's industrial

mobilization were meager, considerable

sentiment arose in favor of proposals to

1

 (1) Risch, QMC Supply, I, 3-5. (2) Green,

Thomson, and Roots, The Ordnance Department:

Planning Munitions for War, pp. 14ff. (3) U.S.

Statutes at Large, II, 696-99, 816-18; III, 203;

V, 513. 2

 (1) Francis B. Heitman, Historical Register and

Dictionary of the United States Army (Washington: Government Printing Office, 1903), I, 41-43.

(2) War Department, Engineer Procurement Manual, 1933 ed., p. 2, ICAF Library.
236 THE ARMY AND ECONOMIC MOBILIZATION

transfer military procurement out of the

hands of the military departments into a

civilian ministry of supply, or single department of munitions.3

 These proposals were

rejected by President Wilson who decided

instead to reconstitute the War Industries

Board as the supreme co-ordinating agency,

under a single powerful head. In his appointment of Bernard Baruch, Wilson specifically indicated that the procurement

function was to be retained by the agencies

established for that purpose:

The duties of the Chairman are:

(2) To let alone what is being successfully done and interfere as little as possible

with the present normal processes of purchase

and delivery in the several departments.4

The leading chronicler of the World War I

industrial mobilization experience has summarized as follows the relationship of the

War Industries Board to the purchasing

function:

It should be said that, although it [the War

Industries Board] was the exchange of the

Government agencies involved in the prosecution of the war—the universal meeting-place

of requirements, resources and facilities,

maker of prices, moulder of contracts, accelerator and brake of industry—it was not a purchasing agency in the strict sense. Except for

its own expenses it never spent a cent of Government money. It made agreements with the

trades, but it did not sign contracts. Actual

purchases, contracts, and all the details of

business transactions were attended to by the

proper agencies within the departments that

were statutorily charged with purchasing

functions. In a broad sense it was certainly a

comptroller of purchases, but it did not make

them. This lack of actual purchasing power

was sometimes a very serious handicap, but it

was offset by a detachment from an infinitude

of details and personal contacts that made for

added power in dealing with the fundamentals

of Government relations to the industry.5

The retention of the military procurement

function by the military agencies was confirmed by the National Defense Act of 1920,

and virtually all industrial mobilization

planning during the following twenty years

was predicated on this foundation.6 In 1940

when Bernard Baruch was invited to give

the newly established NDAC the benefit of

his experience in World War I, he included

as a major element of advice the warning to

leave the actual contracting process in the

hands of the military agencies.7 No serious

proposals were made during the defense

period to disturb the basic pattern of procurement responsibility.

The attack on Pearl Harbor suddenly

focused the country's attention upon the importance of war production as a major prerequisite of victory. Many of the nation's

citizens who had given the matter no previous thought now assumed that no machinery

or principles of procurement existed and

that these would have to be established de

novo. It was natural for such observers to

suppose that the task of purchasing equipment and supplies was a matter for civilians

and civilian agencies and that all the Army

and Navy had to do in this area was to furnish a civilian production board with a statement of military requirements in the form of

3

 (1) Baruch, American Industry in the War, p.

23. (2) Clarkson, Industrial America in the World

War, pp. 8, 69, 80. 4

 Ltr, Wilson to Baruch, 4 Mar 18, reproduced in

Clarkson, Industrial America in the World War,

pp. 49-50.

5

 Clarkson, Industrial America in the World War,

p. 46. 6

 For a time in 1929 Brig. Gen. George Van Horn

Moseley, who as Executive Officer of OASW had a

prominent part in preparing the first industrial mobilization plan, believed that the Army should divest

itself of procurement in time of war. He later concluded that this would be impracticable. See Maj.

Eisenhower, AIC Lectures, 8: 20. 7

 Nelson, Arsenal of Democracy, pp. 90, 103, 199.
MAJOR ISSUES IN CONTRACT PLACEMENT 237

a "shopping list." The board would then do

all the purchasing and attend to production

matters, while the Army and Navy would

devote full time to "fighting the war."

In addition to this simplified view, various

pressures had accumulated by the time of

Pearl Harbor to challenge the propriety of

procurement by the armed services. By the

beginning of 1942 the dislocations attending conversion of the nation's economy to

war production were seriously felt in many

communities. Emigration of labor from

rural areas to centers of munitions production, together with the military draft of manpower, had denuded local communities of

able-bodied farm workers, mechanics, unskilled labor and population in general. The

plight of these "ghost towns" was matched

by a contrasting set of conditions in overcrowded communities at the receiving end

of "defense migration." These "boom

towns" were unable to provide adequate

housing, schools, utilities, and other community facilities. Small towns and substantial cities alike found their familiar atmosphere and customary conveniences destroyed by an invasion of construction workers, trailer communities, and hordes of freespending war workers. Shortages of everything from seating space in schools, restaurants, and theaters, to parking space and

staple grocery items soon developed to make

life unpleasant for all concerned. Despite

the evidence of widespread financial prosperity, many small businesses were obliged

to shut down for lack of workers, managers,

materials, parts, or general supplies.

The resulting chorus of complaints from

all directions soon filled the newspapers and

resounded in the chambers of Congressional

investigating committees. As in the corresponding period of World War I, many

critics of the existing order felt that the dislocations of the war effort were attributable

to carelessness and indifference on the part

of the military procuring agencies and that

the hardships of war on the home front

could be avoided or minimized by transferring the procurement function to civilian

hands. The Tolan Committee of the House

of Representatives quickly reached the conclusion that "poorly planned production"

on the part of the War Department "has

been the primary cause of the unplanned

and unnecessary migration up to the present

time." The committee recommended the

centralization of all procurement in a single

purchasing agency as the solution to the

problem.8

In January 1942, some two months before the appearance of the Tolan Committee recommendations, Donald Nelson was

engaged in drafting the Executive order

which would define the powers of the War

Production Board. The first great issue he

had to resolve after becoming chairman of

WPB was whether or not to remove the procurement function from the armed services

and place it in the hands of a civilian organization. Nelson decided to leave this function with the military agencies, partly because of inherent advantages in the existing

arrangement, and partly because of the irrecoverable loss of time required to create a

new purchasing organization from scratch.9

This decision was criticized as a sign of

"weakness" on Nelson's part by many observers who were unfamiliar with the nature

of military procurement but who believed

8

 H. Rpt. 1879, 77th Cong., 2d Sess., National

Defense Migration, Third Interim Report of the

Select Committee Investigating National Defense

Migration, On the Need for a Single Procurement

Agency To Effect All-Out Production and Achieve

Full Use of Labor Supply, 9 Mar 42, pp. 1, 3-18,

83 ff. 9

 Nelson, Arsenal of Democracy, pp. 197-201.
238 THE ARMY AND ECONOMIC MOBILIZATION

on a priori grounds that all purchasing was

necessarily a civilian function. Despite the

fact that military procurement in peace and

war had resided with the military agencies

for more than a century and that it was

firmly embedded in a mosaic of statutes,

administrative regulations, court decisions,

and organizational arrangements, critics of

Nelson spoke as if he had suddenly turned

over to the armed services a current and

long-standing function of civilian agencies:

Everything that WPB attempted to do with

respect to procurement was conditioned by the

primary fact that Nelson had delegated the

power of actual procurement to the Services.10

It is clear that Nelson could not "delegate" to the military agencies what they already possessed. On the other hand, he

might have withdrawn the procurement

function from them by so recommending to

the President at the beginning of 1942.

Nelson's decision against such a recommendation provided an easy target for criticism

by many who viewed the administration of

war production essentially as a contest of

power between "civilians" and "the military," and who believed that the WPB

chairman had needlessly "surrendered,"

"abdicated," "defaulted," or "frittered

away" his powers to the military.11

The Nelson decision, followed by the War

Department reorganization of 9 March

1942 and the WPB-War Department functional agreement of 12 March 1942, disposed of immediate proposals to transfer

the responsibility for procurement.12 But

1942, like the year after America's entry

into World War I, was a year of feverish

trial and error in harnessing the nation's resources for war production. By the end of

1942 the failure to reach stated production

objectives, the development of strained relations between the Army and WPB, and

increasing complaints of small business that

it had been left out of the procurement program, all combined to raise anew basic

questions of procurement policy and responsibility. There were complaints that the

armed forces, and especially the Army,

wanted to "take over" the entire economy.

On 16 December 1942 Under Secretary

Patterson, alarmed by what he considered

to be widespread misconceptions and by

various proposals to remove military procurement from the military agencies, testified at length before the Truman Committee on the necessity of War and Navy Department retention of the procurement authority.13

 Two months later the War Department issued a printed brochure describing

in considerable detail the reasons why it

considered retention of the procurement au10

 CPA, Industrial Mobilization for War, p. 521. 11

 Nelson's alleged "default," or worse, in whatever decisions he made throughout World War

II is the principal theme of Janeway, The Struggle

for Survival, especially Chapter XI. But even a

friendly observer regards Nelson's decision not to

take over Army procurement as the starting point

in "the progressive decline in the prestige and

power of Donald Nelson." Bruce Catton, The War

Lords of Washington (New York: Harcourt Brace

and Company, 1948), pp. 115, 200 ff.

12

 The functional agreement, which broadly defined the respective activities of the War Production Board and the War Department, is reproduced

in full in Millett, Organization and Role of the

ASF, Appendix D. 13

 Truman Committee, Hearings, 16:6675-95,

especially 16: 6690-91. A week earlier, on the anniversary of Pearl Harbor, General Somervell had

testified in similar vein before the Senate Small

Business Committee. Senate, Small Business Hearings, 11: 1551-57. The most alarming proposal was

a bill introduced into Congress for the combination

of the existing functions of the procurement agencies with those of WPB into a new "super" economic mobilization agency. See Millett, Organization and Role of the ASF, pp. 284-85.
MAJOR ISSUES IN CONTRACT PLACEMENT 239

thority indispensable to military victory.14

This publication set forth, in full, the

grounds on which the War Department resisted all moves to divest it of procurement

responsibility.

The crux of the War Department's position was that successful military operations

were inseparable from successful military

supply. Modern technology had raised the

problem of adequate supply to a dominant

place among the factors determining victory or defeat. Victory would go to the nation whose armed forces possessed superior

mobility, destructive power, and stamina.

These characteristics were largely determined by the quality and abundance of

equipment and supplies in the hands of the

troops. The task of obtaining adequate supply was a continuous and integral process

from the determination of requirements,

through the placing and administration of

purchase contracts, all the way to the receipt, distribution, and servicing of finished

munitions. To jeopardize this integrity and

continuity by "ripping out" the purchasing function and placing it in the hands of

another agency would be to court defeat.

In elaborating upon the integral nature of

the procurement process, the War Department listed fifteen "major steps" in the flow

of munitions:

 15

1. Strategical and tactical planning.

2. Development of requirements for

all types of supplies and equipment, based

on that planning.

3. Research to develop new and improved weapons and other matériel, including research to find available substitutes for

scarce materials.

4. Design of items of supply and

equipment, including the preparation of

specifications and drawings.

5. Production and testing of pilot

models.

6. Determination of facilities capable

of producing military equipment, and construction of new facilities where necessary.

7. Placing of contracts.

8. Expediting and following up of production.

9. Inspection for quality.

10. Testing and proof firing.

11. Issuance of shipping orders to the

manufacturers.

12. Transportation, both domestic and

overseas.

13. Modification before distribution.

14. Distribution through bases and intermediate depots, subdepots, holding and

reconsignment points, and ports of embarkation to troops either in the United States

or overseas.

15. Maintenance of supplies and equipment, including procurement and distribution of spare parts and tools, salvage, and

reclamation.

These steps occurred in rough chronological sequence for individual units of

production, but all steps took place simultaneously for a given type of equipment

as a whole. Thus, while some units of the

medium tank were rolling off the production

lines, others were being inspected at various

stages of completion, some were undergoing

modification before shipment overseas, and

still others were being repaired, rehabilitated, or otherwise serviced in Army depots

throughout the world, usually with the aid

of spare parts and special tools supplied by

the same manufacturer who built the tanks.

At the same time new models were being

developed and tested, designs and specifica14

 War Department, Military Responsibility for

Equipping the Armed Forces (19 February 1943,

34 pp.), copy in OCMH. 15

 Ibid., App. I, p. 13.
240 THE ARMY AND ECONOMIC MOBILIZATION

tions were frequently changing, and change

orders were continually served upon and requested by contractors, both to improve the

end product and to facilitate production.

The search for substitute materials required

constant communication between contractor

and customer to ascertain the acceptability

of all the many changes resulting from a

given substitution. Inevitable revisions in

military requirements and programs necessitated adjustments of production schedules,

cancellation of some contracts, and revision

of others—all on the basis of an intimate

knowledge of the ability and performance

records of various contractors, the state of

production in the several plants, and so on.

These and many other elements in the

complex process of military procurement

were all related; actions could not be taken

in one segment of the process without affecting other segments. In particular, all segments affected and were affected by actual

details of the contractual process—selection

of contractors, negotiation of terms, revision

or termination of contracts, and countless

aspects of contract administration and

supervision, varying widely in nature from

one type of procurement to another.

All proposals to lift procurement out of

the logistical process and transfer it to a

civilian agency would necessarily deprive the

Army of its face-to-face relationship with

producers of military equipment and supplies. This would mean, at best, delays,

misunderstanding, and confusion in the

transmittal—through a third party—of all

specifications, orders, requests, proposals,

and information between customer and producer. In practice, it would also inevitably

mean the ever-increasing substitution of the

judgment and decisions of the civilian procuring agency for that of the Army in such

vital matters as delivery schedules, priorities,

and the character and quality of military

equipment and supplies.16

The War Department pointed out other

disadvantages of a transfer of procurement

authority: (1) scrapping the experience and

knowledge of Army officers who had been

seasoned and trained over a twenty-year

period in procurement and economic mobilization, as well as in the design, development, production, and actual use of specific

weapons and equipment; (2) the loss in

morale to labor and management alike in

destroying the direct relationship between

the workingman and the fighting forces implicit in Army and Navy contracts with industry—Army and Navy E awards and

attendant ceremonies had indicated the high

morale value of this direct relationship;

(3) military personnel could translate

front-line observations and experience into

the production of better weapons; (4) military personnel were likely to exhibit a greater

sense of urgency and singleness of purpose

in meeting procurement objectives in support of the military effort.

The War Department also dealt with

major "misconceptions" or collateral criticisms of the armed forces often used in

support of proposals to transfer the procurement authority. The first of these was the

supposition that dislocations and inconveniences on the home front were the fault of

the Army and Navy, or that such hardships

could be avoided in any serious economic

mobilization effort. In refuting this notion

the statement on military responsibility

pointed out that defense migration, curtailment of regular commercial business, failure

of many small firms, and widespread shortages of materials and consumer goods were

inevitable in any major war. Just as the mili16

 Ibid., App. II, p. 17
MAJOR ISSUES IN CONTRACT PLACEMENT 241

tary draft of manpower necessarily caused

dislocations and hardships in the lives of

individuals so the draft of the nation's economic resources would cause unavoidable

disturbances to the economic community.

The War Department was concerned with

minimizing these dislocations to the fullest

possible degree consistent with its primary

objective of winning the war; it had placed

contracts outside of normal channels in

order to avoid congested areas; it had made

wide use of substitute materials, encouraged

subcontracting, and achieved a wider distribution of prime contracts. But general

shortages were inevitable and some businesses "simply cannot be used to make

instruments of war. They must be taken care

of by some other means than delaying our

production of munitions."

 17

The other principal misconception was

that the Army and Navy were seeking to

"take over," "control," or "impose a military dictatorship upon" the national economy. The statement pointed out that the

highest ranking officers of the War Department—the Secretary and the Under Secretary—were civilians operating under a

civilian president; that the vast majority of

officers, as well as enlisted men, in the wartime Army and Navy were recently inducted "civilians in uniform" with a

confirmed civilian outlook; and that in any

case regular Army and Navy officers fully

subscribed to the American way of life

under the Constitution and had no aspirations to dictatorship. The charge that "the

military" aspire to dictatorship, the statement affirmed, "is uncharitable in peacetime, it is vicious in time of war."

 18

Finally, the War Department argued that

the worst possible time for a transfer of such

responsibility to a new and untried organization, which would have to be built up

from scratch, was in the midst of a major

war. The existing military procurement organizations had behind them two years of

expanded, major, procurement operations

under the leadership of seasoned procurement officers. Although much remained to be

done, the War Department was proud of the

accomplishments of its procurement organizations:

An army of over 5.000,000 men has been

fully armed. Over 1,000,000 of them have

been sent overseas fully equipped for combat

duty, with the most modern and highly technical equipment known in history. They are

presently conducting military operations in

many theatres in all parts of the world. They are armed with varied and specialized equipment necessary to combat unprecedented conditions in the Arctic, in the tropics, on mountains, in swamps, deserts and jungles. A continuous flow of supplies is going to them daily.

This would not have been possible with failure on the production lines.19

Many other illustrations were given of

achievements on the war production front—

achievements which did not "just happen"

but rested solidly on the foundation of years

of War Department planning. In view of all

this, it would be disastrous to replace "one

of the few phases of the war effort which has

proceeded according to plan" with an "untried, unproven, experiment."

 20

After the publication of the War Department's statement in February 1943, pro17 posals to transfer the procurement authority Ibid., p. 10. This quotation referred to a provision of the Small Business Act giving the WPB

chairman authority to transfer the military contracting power to the Smaller War Plants Corporation. For further discussion, see below, Chapter

XVIII.

18

 WD, Military Responsibility for Equipping the

Armed Forces, App. V, p. 34. 19

 Ibid., App. III, p. 21. 20

 Ibid., App. I, p. 16.
242 THE ARMY AND ECONOMIC MOBILIZATION

gradually faded away. This development

was the result not so much of the War Department's verbal representations as of

achievements in the field of war production.

Before the year was out, it became evident

that the procurement program was highly

successful in supplying both American

troops and allied nations and that most of

the associated problems were being resolved.

In the face of the success of military procurement in meeting its basic objectives the

question of procurement responsibility

ceased to be a real issue.21

Development of the Negotiated Contract

Background and Early Use

of Negotiation

The peacetime laws and regulations governing the letting of U.S. public contracts

required that all such contracts, unless specifically exempt, be let to the lowest responsible bidder after an appropriate period of

advertising and the observance of other prescribed formalities. These laws, together

with an elaborate array of administrative

regulations and judicial interpretations,

were designed to insure procurement by the

government at the lowest possible price and

to give all potential bidders an equal opportunity to receive contracts.22

Both the machinery and the objectives of

peacetime contract placement were unsuitable for emergency or wartime procurement.

The period of time required to satisfy the

various provisions of public contract law—

preparation of invitations to bid, advertising

for a sufficient period, allowance of a waiting period long enough for potential bidders

to estimate and submit bids, and the numerous details attending the formal opening of

bids, evaluation of bidders' qualifications,

announcement of awards, and the like—ran

into months and sometimes to more than a

year.23 All these procedures had to be completed before actual production could begin,

and the delivery of the first completed items

under the contract might still be a year or

more away.

Apart from the question of time, compulsory award of contracts to low bidders

would hinder the attainment of wartime

procurement objectives in other ways. The

lowest bidder—although technically qualified—might be much less suitable than many

other firms for a particular contract: he

might be less well equipped for rapid, largescale production where quantity of output

was a major consideration; his facilities

might be much more urgently needed for the

production of a different item soon to be

contracted for; or he might be located in a

labor-shortage area, in a "strategic" area

vulnerable to enemy bombing attack, or far

away from depot or port facilities. Conversely, for various reasons the most suitable

producer for a given contract might not

even submit a bid, even though potentially

available.

Moreover, World War I had demonstrated that competitive bidding in time of

21

 Additional details and sources in this subjectarea may be found in Millett, Organization and

Role of the ASF, pp. 281-88. 22

 The basic statutes were Sections 3709 and 3710

of the Revised Statutes, dating back to the 1870's.

Together with related material, they were prescribed and interpreted in Army Regulations (AR

5 series).

23

 For the Army Air Corps, whose emergency procurement program was perhaps the most urgent of

all, the advertising period in peacetime had extended

from 1 to 12 months, with an additional period of

1 to 3 months for the opening of bids, evaluation,

and award. See S. A. Zimmerman, Procurement

in the United States Air Force, 1938-1948 [circa

1950], pp. 70, 100-101, OCMH.
MAJOR ISSUES IN CONTRACT PLACEMENT 243

nationwide shortages was often either an

empty formality or a farce. With competition in many lines all on the buying side of

the market, solicitation of bids from overloaded suppliers would meet with little or no

response. The few bids submitted were often

so high as to indicate a complete lack of

interest in additional contracts except at

ridiculously inflated prices. As previously indicated, it was largely to avoid the consequences of such one-sided competition in a

future emergency that procurement planning in the 1920's and 1930's included the

allocation of the nation's productive establishments among the several procuring agencies. The compulsory award of contracts to

the lowest responsible bidder without regard

to other factors would run counter to the

fundamental purposes and procedures of the

facility allocation plans built up by the Army

and Navy over the years.

For all these reasons a basic assumption

and recommendation of Army procurement

planning long before World War II was

prompt suspension, at the beginning of an

emergency, of the peacetime restrictions on

contract placement. The suspension of these

restrictions would give military procuring

agencies the same freedom to negotiate contracts which private corporations had always

possessed and which permitted them to conduct their purchasing operations with speed

and flexibility. With freedom of negotiation

the procuring agencies could place contracts

with whatever firms, and under whatever

procedures and terms, were necessary to assure the delivery of munitions in the quality,

quantity, and time required to win the war.

Procurement planners were well aware

that this freedom would not be an unmixed

blessing. Like all significant freedoms it

would entail grave responsibilities. Whatever the disadvantages of peacetime procedures, the automatic award of contracts

to low bidders simultaneously disposed of

the two most fundamental and difficult

problems of contract placement—selection

of contractors and pricing of procurement.

In the absence of an automatic procedure,

these matters would have to be determined

in each instance by specific administrative

decisions. Ideally, decisions of such importance and difficulty as those involved in the

placing of major procurement contracts

would be made only after lengthy investigation, study, and dispassionate analysis; in

time of emergency, despite the best efforts

of advance planning, they would have to be

made in the face of inadequate information,

great urgency, and political or other pressures.24

In formulating basic principles for the

placement of contracts by negotiation, procurement planners were convinced of the

desirability of utilizing competition in time

of emergency or war so long as it was genuinely available. Even where the problem of

contractor selection was clearly resolved by

plant surveys and other features of facility

allocation and procurement planning, the

difficult problem of pricing would still remain. One important instrument in the

pricing of negotiated contracts, as indicated

in the Industrial Mobilization Plan, would

be the application of cost analysis:

24

 In time of war political and similar pressures

could be expected to decrease; at the same time the

problem of urgency would be greatly increased.

Shortly before the arrival of the emergency in 1940,

the Army's Chief of Ordnance made the fallowing

remarks: "Should we undertake to get a removal

of these legal restrictions in peacetime? Our conclusion is 'No.' . . . there are a great many 

advantages when you remove these restrictions.

Politics come into play and all that sort of

thing. . . . We can withstand political pres

time of emergency that we can't withstand in time

of peace." Gen Wesson, AIC Lectures, 16: 388.
244 THE ARMY AND ECONOMIC MOBILIZATION

(5) Prices will be determined by negotiation, controlled by the knowledge, obtained in

peace time planning, of the items that make up

costs and by all information that can be collected by the Government. A contractor refusing to take a contract at a fair price would

be in a most unenviable position in war.25

But there were serious limitations upon the

widespread use of cost analysis. The task of

obtaining reliable cost information from

thousands of contractors for a much larger

number of individual contracts posed administrative as well as theoretical problems

which were almost insurmountable. In the

early stages of an emergency—with its inevitable confusion, shortages of trained cost

accountants, and rapid changes in the trend

of unit costs—effective price determination

based solely on cost analysis for any large

number of contracts would be impossible,

and prices determined under such conditions would be highly unfavorable to the

government.26

For these reasons the Army planned to

make the widest possible use of competitive

bidding consistent with the objectives of

emergency procurement:

Where competition is possible within a procurement district, more satisfactory results will

be secured by open bidding. This is true even

among allocated facilities where requirements

at the time do not exceed the production capacity for the item concerned. War conditions

may change the method of securing competition and the number of producers available

may be limited, but the policy of open bidding

is sound and should be abandoned only when

the necessity of the situation may so require.27

Emergency bidding procedures—assuming

appropriate changes in regulations—would

be of any required degree of informality;

they could be limited to the most capable

or desirable facilities whether allocated or

not; and the procuring arms would be free

to use or reject any or all bids, to make split

awards, or to negotiate further if bids were

unsatisfactory. By combining all the advantages of the facility allocation program with

informal bidding among suppliers, the procuring agencies would approach a position

of monopsony.28

In attempting to anticipate more specifically the areas in which competitive bidding

might not be practicable in time of emergency, the planners identified two types of

capacity shortage which would preclude effective competition: shortages of capacity

for particular items and a general shortage

for the economy as a whole. The former

would exist at the outset of an emergency

program in the case of complex, noncommercial, or military-type items not previously produced; for such items both the selection of contractors and contract pricing

would have to be done by negotiation from

the very beginning. On the other hand, a

25

 IMP, 1933, pp. 2-3. 26

 Because of administrative difficulties, it was

proposed during the planning period to keep the

number of the Army's adjusted-compensation contracts, which required extensive cost accounting,

down to approximately one hundred. Capt Cheever,

AIC Lectures, 12:344. 27

 OASW Planning Br Rpt, General Procurement

Planning Conference, 1-2 December 1938, p. 43,

remarks of Maj Clarence C. Fenn, Legal Division.

The use of competitive bidding to control and check

contractors' cost estimates was urged in lectures to

future procurement officers throughout the interwar

period. For example: "What are the effective checks

upon costs? . . . First, competitive bidding, if w

can get it, is one of the most potent checks . . . 

not underestimate the reliance that may be placed

on competitive bidding when it generally exists."

Prof. Thomas H. Sanders, Harvard School of Business Administration, Cost Accounting, 26 Oct 39,

AIC Lectures, 16: 50 1/2. 28

 The term monopsony has become widely used

in economics textbooks since World War II to denote a market situation consisting of a single buyer

and a large number of competitive sellers. The

monopsonist (single buyer) is able to exploit competition on the supply side of a market in a manner

comparable to monopolistic exploitation of demand.
MAJOR ISSUES IN CONTRACT PLACEMENT 245

general shortage of capacity would not be

reached for some time after the launching

of an emergency program, depending on

the size and tempo of the program. In any

case, competitive bidding should continue

to be used for each item of procurement as

long as the existence of unused capacity provided genuine competition.29

Before any of these principles of contract

placement could be put to the test, it was

necessary to obtain clear authority allowing

freedom of negotiation. The basic statute

on government procurement, Revised Statute 3709, permitted direct purchases without advertising where immediate delivery

was required by "the public exigency." But

this provision had not been generally invoked for World War I until after war had

been declared, and it was difficult to get

agreement on what constituted an emergency sufficient to warrant administrative

adoption in peacetime of a fundamental

change of policy.30 This difficulty had been

dramatically indicated by the Foulois investigation concerning Army Air Corps procurement. As recently as 1934, a year after

Hitler's rise to power in Germany, Maj.

Gen. Benjamin D. Foulois—the Chief of

the Army Air Corps—had been violently

criticized for his aggressive use of the negotiated contract in attempting to build up

the U.S. air arm. A committee of Congress reported that General Foulois had

"willfully and deliberately violated existing

law in the purchase of airplane and aircraft

material" and recommended that he be

relieved from his position as Chief of the

Air Corps." Despite the fact that aircraft

procurement by negotiation was authorized

under a special statute and that the legality

of the purchases in question was subsequently upheld by the Comptroller General,

the investigating committee was able to report a number of months later that "we are

informed that Major General Foulois has

been stripped and shorn by the War Department of much of his power and authority."

 31

After the Foulois episode the purchase of

aircraft in quantity under negotiated contracts was discontinued in favor of standardized competitive bidding procedures.32

But by the summer of 1939, with war in

Europe imminent, Assistant Secretary of

War Louis Johnson felt that the time had

come to greatly speed up procedures for

aircraft procurement. On 10 July 1939, at a

Washington conference of aircraft manufacturers and War Department officials, Mr.

Johnson announced that a bill would shortly

be introduced before the House authorizing

"negotiation" as distinguished from existing

procedures of contract placement.33 No immediate action was taken by Congress; the

outbreak of war in Europe in September

was followed by the period of lethargy

known as the "phony" war which lasted

until the spring of 1940. But shortly after

29

 (1) Maj Minton, AIC Lectures, 14: 550, especially p. 600, remarks of Comdr Frank Dunham.

(2) Maj Scott B. Ritchie, Planning Br OASW, The

Allocation Division, 9 Dec 38, AIC Lectures, 15:

555. (3) Col MacMorland, AIC Lectures, 15: 589

1/2. (4) Col Hare, AIC Lectures, 17: 370-73. (5)

Capt Cheever, AIC Lectures, 12: 336. 30

 Ltr of SW Newton D. Baker, 12 Apr 17 (WD

GO 49, 1917), cited in Maj Ritchie, AIC Lectures,

15: 554 1/2.

31

 (1) Congressional Record, Vol. 79 (15 Jun

35), 9389. (2) The investigations were held by a

subcommittee of the House Committee on Military

Affairs. H. Rpt. 2060, 73d Cong., 2d Sess., 15 Jun

34. (3) This episode is recounted in some detail

in Holley, Buying Airpower, Chapter VI. 32

 Col John W. N. Schulz, CE, Dir Current Procurement OASW, The Current Procurement

Branch, OASW, 17 Feb 40, AIC Lectures, 16: 419

1/2.

33

 Zimmerman, Procurement in the United States

Air Forces, 1938-1948, pp. 65-66.
246 THE ARMY AND ECONOMIC MOBILIZATION

the fall of France in June 1940, the desired

provision was included as a major element

of the National Defense Expediting Act,

which authorized the Army to make all defense purchases "with or without advertising."

 34

The use of the negotiated contract for

World War II proceeded substantially according to the pattern envisaged by procurement planning. The Army, immediately making wide use of its new powers,

obligated the vast bulk of its procurement

funds during the defense period under contracts classified as "negotiated." The great

expansion of the aircraft industry, the construction of government-owned industrial

facilities, the camp and cantonment construction program, and major supply contracts for guns, tanks, ammunition, and

heavy equipment were undertaken almost

exclusively on the legal foundations and informal administrative procedures of the negotiated contract. All of the Army's CPFF

contracts and most of its large fixed-price

contracts were of the negotiated variety.

The term "negotiation," as applied to the

method of contract placement, was not used

in the enabling statutes but came to be widely used in administrative discussions and

regulations. It was defined early in 1943 in

Army Procurement Regulations as "any

method of contracting or purchasing, except

the formal advertising and sealed bid procedure prescribed by Section 3709, Revised

Statutes."

 35

 This definition did not preclude

the use of advertising or competitive bidding

where these were deemed desirable; it merely freed the agencies from the compulsory

use of advertising, and the compulsory

award of contracts to low bidders after advertising and bidding had been used. This

freedom of procuring agencies to pick and

choose among bidders after "informal" advertising was upheld by the Comptroller

General early in the defense period: "The

greater includes the lesser, and to the extent

that such contracts may be negotiated without advertising, they may be made on the

same conditions after advertising."

 36

Nevertheless, as anticipated in the planning period, there were many classes of procurement at the beginning of the emergency

for which the discontinuance of public advertising and award to low bidders was

neither desirable nor practicable. Since

there was an abundance of idle capacity and

vigorous competition at the beginning of

the defense period, solicitation of bids from

all potential suppliers promoted economy

and fairness in the placement of contracts.

Hence, in the procurement of most commercial and semicommercial items, the

Army's supply arms and services continued

to make use of existing channels of advertising and solicitation—although on a

streamlined basis—as long as effective competition remained. The following remarks,

made by an OASW official in the fall of

1940, reveal why the Quartermaster Corps

did not abandon competitive bidding at

that time:

Naturally with proper authority you can

negotiate, you can just go to a firm and negotiate . . . but the Quartermaster 

has been reluctant to do that because it hasn't

been necessary. They have done a swell job of

planning in that Corps and know where facilities are and what they want them to do and

they want them to go under competitive bidding. It is more healthy. The allocation system is based on plans for

a major military effort. This is not a major

military effort, except, you might say, in the 34

 54 Stat. 712, 2 Jul 40. For additional legislation, see above, pages 220-22. 35

 PR 203.1 (2-8-45). 36

 B-12733, 9 Oct. 40, 20 Comp. Gen. 194.
MAJOR ISSUES IN CONTRACT PLACEMENT 247

Air Corps. Probably in some parts of the Ordnance Department . . . The Quartermaster

Corps hasn't enough orders to place to interest facilities that it has allocated for its war

load. It is really almost pathetic. That is why

the Quartermaster Corps doesn't want to go

to negotiated contracts.37

Available statistics indicate that in the

first half of the defense period the bulk of

the Army's procurement program, as measured by dollar value, was launched under

contracts placed "without advertising." In

his testimony before the Truman Committee

in 1941, Under Secretary Patterson stated

that, in the period 1 July 1940 to 1 March

1941, the War Department had placed contracts totaling an estimated $6,062 million.

Of this total, approximately $4,447 million

had been placed by "negotiation", and

$1,615 million had been let to the lowest

responsible bidder pursuant to advertising.

Thus, in the first eight months of the defense

period—when purchases soared to nearly

ten times their value during the previous

twelve months—74 percent of the value of

War Department contracts had been placed

by negotiation and only 26 percent by advertising. This contrasts with the record for

the twelve months ending 30 June 1940, in

which over 87 percent of the War Department's total purchases of $776 million had

been made through advertising and invitations to bid. (See Table 26, page 218.)

On the other hand most small contracts—representing in number more than

99 percent of all contracts placed during the

first eight months of the defense period—

were the result of open competitive bidding. The figure of $1,615 million in awards

to low bidders after advertising represented

some 733,000 individual contracts; the

value figure of $4,447 million for negotiated

contracts represented less than 6,000 individual contracts.38

These figures were possible because of

the revolution in Army contract placement

procedures which took place during this period. The formalities and restrictions which

previously characterized public advertising

were streamlined and relaxed until advertising became one of the instruments of contract placement by negotiation.39

 For negotiated contracts many steps taken under

formal advertising were telescoped or discarded completely. Instead of resting upon

the highly legalistic and passive type of solicitation characterized by peacetime circularization, posting of bulletins, and periodical advertising, contracting officers

during the defense period aggressively solicited bids by telegram, telephone, and direct correspondence. For fairly sizable procurements, awards could even be made on

the strength of information received over

the telephone.40 Moreover, with the development of letters of intent and other preliminary contractual instruments, contractors could be selected and committed to a

project immediately; work could begin at

once while company engineers and con37

 Col Hare, AIC Lectures, 17: 370, 373.

38

 Figures for the first eight months of the defense period, as cited by Under Secretary Patterson, are taken from Truman Committee, Hearings,

1: 29. 39

 Thus, as early as the fall of 1939, the peacetime advertising period of sixty days for the Medical Department was reduced to fifteen days. Memo,

Lt Col Robert D. Harden for ASW, 26 Sep 39, SGO

400.12-1. Comparable streamlining of all steps in

the procurement process was done by the several

technical services to meet the requirements of

large-scale rearmament.

Equally significant was the freedom to reject the

low bidder after advertising, as indicated above,

page 246. 40

 For example, in the case of the Quartermaster

Corps, up to $5,000. At the end of 1941 this figure

was raised to $50,000. Yoshpe and Massen, QMC

Procurement Policies, pp. 61, 67.
248 THE ARMY AND ECONOMIC MOBILIZATION

tracting officers co-operated to develop

additional specifications and contract terms.

The taking of informal bids and the use

of price comparisons in making awards was

standard procedure in the placement of contracts by negotiation. But in a more general

sense the Army attempted to place all its

negotiated contracts on a competitive basis,

that is, on the basis of the ability of each

contractor most effectively to supply the

Army's procurement needs as represented by

each contract. The significant change in the

shift to negotiation was not abandonment of

competition but the abandonment of one

particular variable—lowness of formal bid

price—among a complex of important variables as the governing determinant in the

award of contracts. The following illustration, taken from the record of Medical Department procurement, indicates that the

role of competition under the negotiated

contract was significant, but that it was not

confined to considerations of price:

. . . the Medical Department promptly utilized its new power to negotiate contracts. In

August 1940, for example, a meeting was held

in the New York depot, attended by representatives of surgical dressings manufacturers.

Purchasing officers outlined the huge requirements of these items and emphasized the necessity of procuring them with all possible

speed. Representatives were urged to submit

bids promptly and were informed that contracts would be awarded on the basis of (1)

delivery time, (2) price, and (3) production

capacity of each firm. On the following day,

when the meeting was resumed, the requirements in surgical dressings were allocated on

a percentage basis to the firms represented.

Within two weeks contracts had been drawn

up and signed, and the mills began to produce

the great quantities needed.41

Despite its formal repudiation of low price

as the controlling factor in the placement of

contracts, negotiation became potentially

the best guarantor of low prices as the defense program matured, shortages appeared,

and competition declined in one sector of

the economy after another. Long before

Pearl Harbor the drying up of competition in

specific lines was reflected by artificially high

bids, the "step-laddering" of bid prices in

successive proposals, and the reluctance or

even refusal of firms to accept procurement

contracts.42 Under the flexible procedures of

contract negotiation, with the powers of

compulsory orders, requisitioning, and commandeering in the background, contracting

officers could deal directly with specific

firms in obtaining the placement of contracts at prices bearing a reasonable relationship to production costs. Nevertheless,

neither negotiation nor any other method of

contract placement could guarantee reasonable prices or successful procurement in the

absence of effective control over the distribution of raw materials, the general price

level, and other features of the economy as a

whole.

Controversy Over

Competitive Bidding

By the first quarter of 1942 the Army's

retention of competitive bidding on even a

partial and informal basis had come under

criticism in testimony before the Tolan Committee of the House and the Truman Committee of the Senate. Procurement delays,

the concentration of prime contracts among

large firms, the difficulties faced by small

business, the migration of labor to congested

areas, and other undesirable aspects of the

rearmament program mentioned in preced41

 Capt Richard E. Yates, The Procurement and

Distribution of Medical Supplies in the Zone of

the Interior during World War II (31 May 1946),

p. 32, copy in OCMH. 42

 Yoshpe, Production Control in the QMC, p. 60.
MAJOR ISSUES IN CONTRACT PLACEMENT 249

ing pages were attributed in varying degree

to the reluctance or failure of contracting

officers and their superiors to abandon completely the procedures of competitive bidding.43

 The publicity attending these statements, and their frequent repetition both

during and after the war, went far toward

establishing a standard version of events in

this area of the history of World War II.

According to this version, Army procurement officers were not alert to the necessity

for speed during the defense period; competitive bidding should have been abandoned from the outset; failure to do so

resulted from inertia, timidity, and other

generally insufficient reasons; and finally,

the Army was rescued from its self-imposed

predicament by the joint impact of Pearl

Harbor and pressure from civilian mobilization agencies. The following statements

illustrate the viewpoint in question and

indicate several distinct facets of the controversy over the Army's retention of competitive bidding:

The War and Navy Departments, accustomed to small-scale, meticulous, and slow

purchasing procedures, had to be shocked into

altering their practices to meet the necessities

of larger-scale operation. . . . Legislation

was required . . . to permit the negotiation

of contracts. Congress granted the necessary

authority in several acts, but it was not easy

for contracting officers, mindful of a reckoning to come for inevitable errors of judgment,

to shake off their habitual methods of slow

and careful action.44

Against these suggestions [to begin purchasing on a really big scale, and others] the

military put up surprising resistance. They

were reluctant to give up the old system of

competitive bidding, which protected each individual procurement officer against suspicion

of unwise or improper purchases.45

Formal advertising and competitive bidding

persisted, orders were placed without regard

to the "allocation boundaries" worked out for

the various services, and the whole system of

M-Day procurement based on "Schedules of

Production" signed by allocated facilities

within the districts became overlaid with a

conflicting pattern of current orders. . . . 

was obvious that its [OASW's] insistence on

the principle of competitive bidding and the

tight controls and checks and balances imposed to prevent abuse of the negotiation process had sealed the fate of the allocation system

from the start.

With the principle of contract negotiation

with allocated facilities unable to supplant the

existing practice of formal and informal advertising for bids, the basic structure of war

planning fell apart.46

Turning promptly to the fulfillment of its

mission, the WPB swept away the formal

advertising method.47

[WPB Directive No. 2] afforded contracting

officers the latitude which they needed to give

proper consideration to the attainment of

speed and quality of performance, the efficient use of materials, manpower and facilities, the distribution of orders among small

war plants, and avoidance of tight labor areas,

the maintenance of adequate labor standards,

and innumerable other desirable objectives in

contract placement.48

These statements all contain elements of

truth or correct representations of conditions obtaining at certain times for particular items or areas in the field of Army

43

 (1) H. Rpt. 1879, 77th Cong., 2d Sess., 9 Mar

42, especially pp. 9, 17, 18B, 23, 26-27, 34-37, 50,

55, 90. (2) Truman Committee, Hearings, 6: 1584,

1589, 1595, 1607. 44

 U.S. Bureau of the Budget, The United States

at War, p. 26.

45

 John Fischer, "The Army Takes Over," Harper's Magazine, Vol. 190 (May 1945), 484. 46

 AIC R56, Plans for Industrial Mobilization,

1920-1939, p. 76. 47

 Yoshpe and Massen, QMC Procurement Policies, p. 69. This refers to the issuance, on 3 March

1942, of WPB Directive No. 2 requiring the procuring agencies to place contracts by negotiation. 48

 ICAF, RP49, War Department Procurement

Program in World War II (August 1946), pp.

11-12, ICAF Library.
250 THE ARMY AND ECONOMIC MOBILIZATION

procurement. But they fail to reveal a number of important factors essential to a balanced view of the competitive-bidding

controversy as a whole. A brief examination

of several such factors sheds additional light

on the nature of the procurement process

and the administrative as well as substantive

difficulties faced by those responsible for

launching and conducting the procurement

program for World War II.

The retention of competitive bidding undoubtedly delayed the placement of individual contracts in particular instances. But

considerable study would be required in

each instance to determine the effects upon

the procurement program as a whole. In

many instances—especially for items of the

type for which competitive bidding was retained—the simplest and most expenditious

procedure for discovering qualified contractors was to use the channels of advertising and solicitation already in existence.

Under the deluge of procurement directives

which descended upon them during the defense period, procurement officers often

found it far more practical to advertise in

various ways and let potential suppliers seek

out the procuring agency. If this failed, negotiations with particular firms could then

be undertaken. In the meantime, while particular bid proposals were in the making, the

procurement program as a whole went forward. Harassed and overburdened procurement staff had little opportunity to "sit

back and wait"; they were fully occupied

with the placement and administration of

numerous other, often more important, contracts in all stages of development. Moreover, premature negotiations with particular

sources, without sampling currently available capacity, could lead to the selection of

less desirable contractors; this, in turn, could

more than nullify the advantages of prompt

contract placement.49

Most criticisms of the Army's limited retention of competitive bidding originated in

complaints by individual firms or communities which did not receive specific contracts

or the volume of procurement contracts to

which they thought they were entitled. Some

of the critics recognized that small firms

could not hope to produce as economically

as large corporations and that competitive

bidding automatically guaranteed the concentration of prime contracts among relatively few firms. As a result, considerable

sentiment arose to authorize, and require,

the procuring agencies to pay premium

prices to small plants and to firms located in

distressed areas. In the year after Pearl Harbor, legislation to this effect was passed.

During the pre-Pearl Harbor period, however, War Department officials felt that it

was both unwise and illegal to use the Army's

procurement program for purposes other

than equipping the nation's gravely undersupplied troops in time to meet a major

crisis. Hence, OASW's original administrative order, instructing the supply arms and

services on the use of the power of negotiation granted by the National Defense Ex49

 In July 1941 Mr. John D. Biggers, the OPM

director of Production, testified that the procuring

agencies had recently placed approximately $10

billion in defense contracts in a period of about

thirty days. Truman Committee, Hearings, 6:1615.

The tremendous pressure of deadlines and work

loads upon inadequate procurement staffs during

the defense period was seldom appreciated outside

the offices concerned. During the final weeks of

the fiscal year, when appropriations had to be spent

or be lost to the procuring agency, the pressure to

place contracts was enormous. Prospective contractors, well aware of this fact, often took full advantage of their bargaining position in the absence

of competitive bidding. Fortunately, a contract renegotiation law was passed early in 1942 to provide

a "backstop" against the pricing excesses of hasty

negotiation.
MAJOR ISSUES IN CONTRACT PLACEMENT 251

pediting Act, stated specifically that this

power was to be used only to expedite

the national defense program.50 This order

was interpreted as preventing the payment

of premium prices without a compensatory

benefit in terms of quality of production or

speed of delivery and as precluding the

placement of contracts with particular firms

merely in order to aid small business or distressed communities or at the sacrifice of

speed or quality of procurement.51 The only

substantive limitation placed by the OASW

directive upon the supply arms in their use

of negotiation was the following eminently

desirable provision:

In cases of procurement without advertising

care will be exercised to obtain such degree of

competition by informal inquiry as is practicable in the circumstances with a view to assuring economy and efficiency of procurement,

consistent with the essential need of expediting and assuring the accomplishment of the

defense program.52

Procedurally, the directive required submittal for clearance by OASW of all negotiated

contracts in excess of $500,000 and the filing

of a statement in the record for each negotiated contract "setting forth briefly the

necessity for making procurement without

advertising, comparative price and other

pertinent data, and a statement that the

price is fair and reasonable."

 53

 The 2 July

1940 instructions had been anticipated by a

lengthy letter on 12 June from the Assistant

Secretary announcing a "greatly augmented

and accelerated procurement program."

This communication put all supply chiefs on

notice that they were expected to take "the

necessary steps for putting this program into

operation without loss of time."

 54

Having thus emphasized the urgency of

the defense program and having authorized

the use of direct negotiation wherever necessary to the speedy accomplishment of this

program, OASW issued no further general

instructions on this aspect of contract placement until after Pearl Harbor. On 17 December 1941, Under Secretary Patterson

exempted all contracts under $5,000,000

from clearance by OASW and "directed"

the use of negotiation "in all cases where

that method of procurement will expedite

the accomplishment of the war effort."

 55

On the following day the First War Powers Act became law, removing all remaining statutory barriers to speedy procurement. Two and a half months later, in keeping with his decision to decentralize contract

clearance to the procuring agencies, Donald

Nelson issued War Production Board Directive No. 2. This directive ordered the use

of negotiation and standardized for all procuring agencies the criteria for contract

placement.56 Like the earlier OASW instructions, the WPB directive still permitted

the use of formal advertising where desirable and required contracting officers to ob50

 "The authority to purchase without advertising

will be resorted to only in cases where this method

of procurement is essential to expedite the accomplishment of the defense program." Memo, Col

Schulz for CofAC et al., 2 Jul 40, sub: Procurement Without Advertising, par. 3a, copy in Senate,

Small Business Hearings, 10: 1303. 51

 ". . . it is impossible to make an award to a

firm solely because it needs business or it is in a

locality which has not received substantial defense

contracts." Memo, TQMG for USW, 22 Mar 41,

cited in Harry B. Yoshpe, The Small Business Man

and Quartermaster Contracts, 1940-1942 (QMC

Historical Study 2, April 1943), p. 16. 52

 Par. 3b of Schulz memo cited above, note 50.

53

 Pars. 3f and 3g, Ibid. 54

 Ltr, Johnson, ASW, to CofAC et al., 12 Jun 40,

sub: 1941 Procurement Program, copy in Senate,

Small Business Hearings, 10: 1301. 55

 OUSW P&C Gen Dir 81, 17 Dec 41, sub: Decentralization of Procurement. 56

 See below, pages 263 ff.
252 THE ARMY AND ECONOMIC MOBILIZATION

tain informal bids whenever time permitted:

(a) Except as hereinafter provided, all

such departments and agencies shall place all

supply contracts relating to war procurement

by negotiation;

Provided, That where consistent with the

required speed of war procurement, notification of the proposed procurement shall be

given to qualified possible contractors and

quotations secured from them. The procedure

provided by section 3709 of the Revised Statutes (41 U.S.C. sec. 5) shall be used only upon

the specific authorization of the Director of

Purchases of the War Production Board, or of

such person or persons as he may designate.57

Whatever its implications for other procuring agencies, it is evident that paragraph

(a) of WPB Directive No. 2 did not, in

principle, change the War Department's

previously issued instructions governing

contract placement. The Under Secretary

of War had already directed the use of negotion wherever it would serve the war effort;

the WPB directive permitted departures

from negotiation where negotiation would

not serve the war effort. Both sets of instructions necessarily left the choice of methods in specific cases to individual contracting officers, subject to approval by higher

authority. Since "negotiation," by definition, represented freedom of action for contracting officers, the positive phraseology of

the WPB directive—making negotiation

the "order of the day"—was unquestionably

desirable under the new era symbolized by

the passage of the First War Powers Act

nearly three months before. Yet it may be

doubted that a general directive upon contracting officers, calling for the exercise of

previously granted freedom, represented a

genuine revolution in speeding contract

placement by staffs already faced with

heavy work loads, specific deadlines, and

direct orders by superiors in the chain of

command to discharge assignments with all

possible speed.

In any event the real issues in the controversy over negotiation versus competitive

bidding lay deeper than questions concerning the "inertia" of Army officers or their

"reluctance" to use new methods. A review

of these issues suggests that the complexities

of military procurement—especially during

the early and formative part of the World

War II program—were such that frustrating delays and compromises in contract

placement were inevitable despite the use

of the best available methods.

Competitive Bidding and Item Standardization—Standardization of military

items, and of the spare parts needed to

maintain them, was a major consideration

in appraising the relative merits of negotiation and competitive bidding. This is illustrated in the crucial area of automotive

transportation, more specifically in the procurement of military trucks. Trucks were

one of the most important items in the entire field of military procurement, since their

availability and adequacy were directly or

indirectly essential to all of the Army's logistical and strategic operations. It was in this

area that World War I had yielded one of

its most painful and significant object lessons and in which procurement planning

carried some of its most fruitful possibilities.

The continual breakdowns in Army truck

transportation in the theater of operations

in World War I had demonstrated conclusively that it was not enough to produce

thousands or millions of new vehicles for the

Army. Effective truck operations depended

upon satisfactory maintenance and repair,

57

 WPB Dir 2, 3 Mar 42, par. (a). The authority

to allow Army purchases by formal advertising was

later delegated to the director of the Purchases Division, ASF. See PR 240.2 (11-23-44).
MAJOR ISSUES IN CONTRACT PLACEMENT 253

a function vitally dependent upon simplification and standardization of parts. This in

turn required the adoption of a standardized

model for each weight category:

American troops in France used over 200

different makes, including some of French and

British manufacture, other of Spanish and

Italian design, and even a few captured German vehicles. As most parts were not interchangeable, this diversity of types created a

spare parts and maintenance problem that was

more than difficult—it was impossible. . . .

There were some who felt that the only thing

that saved motor transport from complete collapse was the Armistice that came on 11 November 1918.58

After World War I a long series of attempts

by the Quartermaster General to obtain

standardization of truck models was defeated by the requirement of competitive

bidding. Under the collective weight of

laws, regulations, decisions of the Comptroller General, and other pressures, the Quartermaster Corps was forbidden to issue detailed structural specifications for trucks—

largely on the ground that trucks were commercial items and that standardization by

the Army would eliminate competition. The

consequences were inevitable:

Each time the Army announced its intention of buying new trucks, scores of manufacturers submitted bids. Nearly every time a different company was the low bidder and got

the contract. As a result, the Army continued

to add new makes and models to its heterogeneous collection of trucks left over from the

World War.59

As one officer expressed it: "Vehicle types

and models that fully meet military requirements are not practicable of production in

quantity in time of war nor legally procurable in time of peace."

 60

 By 1936 the commanding officer of the Holabird Depot reported that the different vehicle models in

the Army involved "nearly a million items

of spare parts which neither the War Department nor any other authority can control."

 61

 In 1938 Assistant Secretary of War

Johnson, addressing a convention in Chicago, branded the situation "absurd" and

blamed the laws which required competitive

bidding and "compelled the Army to accept

the automotive vehicles of the lowest

bidder."

 62

On the eve of the launching of the Munitions Program of 30 June 1940, Quartermaster General Edmund B. Gregory took

steps to get out from under all the restrictions which had made standardized truck

procurement impossible in peacetime. On

19 June he addressed to the Assistant Secretary of War an impressive memorandum,

countersigned by the chiefs of four major

using arms—Infantry, Field Artillery, Cavalry, and Coast Artillery Corps. In this

memorandum he cited, with hearty approval, the following words of a representative of OASW concerning the emergency

procurement of trucks: "In time of war we

must be practical. We will take the best of

our types available and immediately go into

mass production."

 63

 General Gregory went

on to state that five principal truck chassis

types had been adopted by the Army as

standard and that requirements for three

58

 Thomson and Mayo, The Ordnance Department: Procurement and Supply of Munitions, Motor Transport Vehicles—the Prewar Era, pp. 9-10. 59

 Ibid., p. 13.

60

 Col Brainerd Taylor, "Military Motor Transport," Army Ordnance, XVII, No. 99 (NovemberDecember 1936), 156. 61

 Vernon Carstenson, Motor Transport Under

the Quartermaster General, 1903-1942 (1945), p.

59, Historical Sec. OQMG. 62

 Ibid., p. 69. 63

 Quoted from an address by Lt. Col. Edward E.

MacMorland, OASW, before the Society of Automotive Engineers at White Sulphur Springs, West

Virginia, 10 June 1940.
254 THE ARMY AND ECONOMIC MOBILIZATION

of these were most satisfactorily met by individual producers whose products had

been thoroughly tested over a period of several years. The manufacturers in question—

with whom The Quartermaster General

(TQMG) wished to negotiate contracts immediately—were Dodge (11⁄2-ton), General Motors (21⁄2-ton), and Mack (6-ton).

The Quartermaster General pointed to the

grave responsibility involved in the procurement of trucks and the dangers of retaining

competitive bidding in time of emergency.

He foresaw a breakdown in field transport

"due to difficulties of maintenance of varieties of vehicles" unless the desired degree of

standardization could be achieved. The

memorandum concluded:

This responsibility is now mine and I request the authority to proceed with negotiation of contracts, as indicated above, in order

to take advantage of the lessons of motor vehicle maintenance learned from our World

War experience. Legal authority for accomplishment will exist upon the enactment of

H.R. 9850.64

OASW's response to this request was approval of the principle of standardization as

well as the placement of contracts by negotiation, with two provisos:

The Assistant Secretary considers it necessary that quotations be obtained for comparative purposes and that no absolute action be

taken as to standardization . . . which would

give manufacturers a feeling of monopoly as

applied to any particular type of truck.

Subject to the foregoing, negotiations may

be entered into and recommendations as to

award made to this office. In making such recommendations, full consideration may be

given to the desirability of standardization and

to additional costs and difficulties that would

be entailed by non-standardization.65

Although the instructions of OASW

called for only informal quotations, OQMG

evidently found it simpler or otherwise desirable to obtain quotations through formal

solicitation:

In view of the restrictions imposed by the

Assistant Secretary of War, the following

method will be used in procuring the five (5)

types of vehicles in which the greatest degree

of standardization is essential:

21⁄2 ton Regular invitation (accompanied by specifications) will be issued July 9, 1940. Bids to

be opened July 25, 1940. This will be a price

test, and in case the low bid is not satisfactory

consideration will be given to negotiation.

Pilot model will be required after award.66

Despite its formal appearance, the streamlined bidding procedure adopted by

OQMG at this time for major vehicles allowed an average of only fifteen days between invitation and opening of bids and

permitted rejection of the low bid without

fear of successful challenge by the Comptroller General. This pragmatic and flexible

use of competitive bidding enabled it to be

properly classed as an instrument of negotiation.

The Quartermaster Corps continued to

use advertising in the placement of vehicle

contracts until February 1941, when

OASW ordered its discontinuance:

On February 4. 1941 this office received instruction from the Under Secretary of War to

suspend, until further notice, all public advertising for motor vehicle equipment for the 64

 Memo, Gen Gregory, TQMG, for ASW, 19

Jun 40, QM 451 T—M, Procurement FY 1941.

TQMG's proposal was personally approved by General Marshall. See Memo, Brig Gen Richard C.

Moore, ACofS G-4, for CofS, 3 Jul 40, sub: Procurement of Motor Vehicles by Negotiations

(signed: "Approved. Geo. Marshall"). Both memos

in OCMH.

65

 1st Ind, Col Schulz, Dir Current Procurement

OASW, 3 Jul 40, to Memo, TQMG for ASW, 19

Jun 40, copy in OHF. 66 Memo, Brig Gen Richard H. Jordan, OQMG

for TQMG, 6 Jul 40, sub: Motor Vehicle Procurement F. Y. 1941, OCMH.
MAJOR ISSUES IN CONTRACT PLACEMENT 255

defense program. Such procurement as has

been accomplished since this suspension has

been handled by securing informal quotations

from manufacturers who have previously furnished satisfactory equipment of the various

types involved.67

Whether and to what extent greater

standardization of military vehicles could or

should have been achieved is an open question. As compared with its predecessor,

World War II witnessed great strides in

standardization and reduction in the number of makes and models. Much of this was

attributable to the elimination of a multiplicity of producing firms in the course of

ordinary commercial competition, and to

co-operative efforts toward standardization

by the industry itself, during the interwar

period when the automobile came of age.

Offsetting these developments was the tremendous increase in the number and complexity of automotive items used to wage

technological warfare in World War II, and

the inevitable pressure for improved and special-purpose models as the war progressed.

Under these influences the Army's task

of repair and maintenance required the creation of an elaborate organization and complex procedures for the procurement, distribution, and storage of astronomical quantities and varieties of spare parts. As a result

the spare part difficulties of the Army

reached nightmare proportions and remained as one of the major unresolved logistical problems of World War II.68

 Yet it

is doubtful that the limited retention of

competitive bidding after 1 July 1940 played

more than a minor role in the creation of

this problem.

Competitive Bidding and Manufacturer's

Capacity—The view that the Army's partial

retention of competitive bidding was not

primarily the result of apathy or inertia, and

that it was not itself a basic issue, is reinforced by a detailed study of the development and procurement of the jeep.69

 This

study, made at the height of the procurement program in World War II, reveals

some of the many pressures and conflicts

of interest involved in the placement of

contracts for a major, well-known, semicommercial item. The jeep (1⁄4-ton truck)

was developed by the American Bantam

Company, a small firm which in the

judgment of the Office of The Quartermaster General lacked the productive capacity to satisfy the Army's quantitative needs

within the required period of time. Early in

the defense period, OQMG opposed the desire of Infantry, Field Artillery, and other

using arms to place a negotiated contract

immediately with American Bantam to fill

all the Army's current requirements. OQMG

preferred to use competitive bidding in order

to keep prices down and to open the field to

Willys and Ford. Neither of these firms had

shown great interest in producing 1⁄4-ton

trucks until American Bantam had pioneered a satisfactory model; nevertheless,

The Quartermaster General felt that the facilities of Ford and Willys would be badly

needed in the months to come. In the long

and controversial history of jeep negotiations—during which the American Bantam

Company lost out to its large competitors—

the several automobile producers, the 67

 Memo, Gen Gregory, TQMG, for USW, 1 Apr

41, sub: Procurement Circular 43 WD 1940,

OCMH. 68

 Thomson and Mayo, The Ordnance Department: Procurement and Supply of Munitions, Spare

Parts.

69

 Herbert R. Rifkind, The Jeep—Its Development and Procurement Under the Quartermaster

Corps, 1940-1942 (1943), Historical Sec OQMG.
256 THE ARMY AND ECONOMIC MOBILIZATION

Quartermaster Corps, the using arms, the

Chief of Staff, the Secretary and Under

Secretary of War, the NDAC, Congress,

newspapers, and the public, all contributed

to Army procurement policy. The significant

observation for present purposes is the fact

that although the jeep controversy, like a

number of others, was aired within the

framework of the controversy over the use

of competitive bidding, the real concerns

were the underlying substantive matters

which affected the various parties involved.70

For the Army the major issues were

standardization, model improvement, and

assurance of production and delivery in

quantity. For the popular press and general

public the chief concerns were the merits of

large versus small business and the Army's

seemingly inexplicable desire to award a

contract to a large corporation, then under

indictment for violation of the National

Labor Relations Act, in preference to the

small firm which, in co-operation with the

Army, had created the item to be produced

under the contract in question.71

In view of the foregoing as well as from

other indications, it would appear that the

controversy conventionally labeled as

"competitive bidding versus negotiation"

was really a complex array of separate issues. Each of these issues involved an element or criterion of contract placement

policy of special importance to particular

individuals or groups—usually those having

a tangible stake in the outcome. So far as the

present study is concerned no adequate evidence has come to light to indicate that the

Office of the Under Secretary of War imposed any serious or undesirable restrictions

upon the supply arms in their use of negotiation or that the supply arms were unduly

slow in utilizing their newly received powers.

After 1 July 1940, the real and controversial

issues were not so much the procedures as the

objectives and results of contract placement.

These involved such questions as: Who will

receive the many billions of dollars in military procurement contracts? How will the

distribution of contracts affect the future of

the American economy? Shall military procurement objectives prevail regardless of

other considerations? What is the proper

balance to be obtained among all the various

objectives and what methods shall be used

to achieve them?

70

 Truman Committee, Hearings, August 1941,

Pt. 7, especially material under caption Competitive Bidding and Awarding of Contract for Army

'Jeep' Cars, at pp. 1971ff., 1980ff., and 2067ff.,

and Procedure Followed in Allocating Defense Contracts, at pp. 2059ff. and 2074ff. 71

 Further details in the jeep story may be found

in: (1) Rifkind, The Jeep; (2) Truman Committee, Hearings, Pt. 7; (3) Thomson and Mayo, The

Ordnance Department: Procurement and Supply

of Munitions, Spare Parts.
CHAPTER XI

General Policies in

Contract Placement and Clearance

Selection of Contractors

Army Selection Policies

Use of Allocated Facilities—The selection of Army contractors at the beginning of

the emergency in 1940 was basically oriented by the facility allocation plans prepared during the interwar period. This was

especially true for the Ordnance Department but applied in varying degree to the

Air Corps and the other supply arms and

services. The Quartermaster Corps and the

Medical Department, whose procurement

responsibility involved a large proportion

of commercial-type items, were able to rely

heavily upon public advertising to elicit

current sources of supply when the emergency came. Yet even for these procuring

arms the selection of contractors for most

items was guided if not determined by the

facility surveys and allocation plans of the

previous decade.1

No comprehensive statistics are available

to indicate precisely the extent to which contract placement in the defense period conformed to the facility allocation plans and

accepted schedules of production of the preceding period. Nevertheless, the dominant

influence of the prewar plans is evident both

from such sample figures as are available

and from statements by participants in the

procurement program during the defense

and war years:

In placing our orders with industry, we are

following the "allocation system" whenever

possible and practicable. The "education order" programs of 1939 and 1940 and the "production study" program of 1940 have been of

great assistance. The net results of these programs will be a saving of funds from the 1940

appropriations, and, more important, a reduced time of delivery for a great many

items.2

When the burden of the present defense

program was placed on the Department, the

supply services immediately started operating

under the industrial mobilization plan. They

promptly placed orders for munitions with

plants previously allocated, using informal

competition whenever possible.3 1

 "As it actually turned out, the low bidders were

in most cases the plants that had in the past been

allocated to do the job . . . . they had the courage to bid the lowest. There were millions of

dollars in these first war orders and many manufacturers were afraid of the huge quantities involved. But the allocated plants were the ones

that knew what was wanted and how to deal with

the services courageously." Col Ray M. Hare, Survey and Allocation of Facilities, 29 Jan 46, ICAF

Lecture (L46-16).

2

 Maj Gen Charles M. Wesson, CofOrd, The

Current Procurement Situation in the Ordnance

Department, 2 Oct 40, AIC Lectures, 17: 345 1/2. 3

 Testimony of USW Patterson, 15 Apr 41, Truman Committee, Hearings, 1: 30. Mr. Patterson's

prepared statements cited in this and the following

footnote contains a wealth of factual information

on the launching of the War Department's emergency procurement program.
258 THE ARMY AND ECONOMIC MOBILIZATION

During the fiscal year 1941 to April 1 of this

year, about $2,000,000,000 was appropriated

for the use of the Ordnance Department for

equipment and ammunition, and an additional $600,000,000 for new facilities. You

may be interested to know that 98 percent by

amount and 90 percent by number of Ordnance Department awards over $50,000 have

been placed with companies which were allocated to the Ordnance Department under

the industrial mobilization plan.4

A sample study made by the Army Industrial College in the spring of 1945 for all

services except the Army Quartermaster

Corps and Medical Department estimated

that in four major industrial cities an average of 95 percent by value and 63 percent by

number of war contracts through February

1943 were awarded to preselected facilities

under the allocation plan.5 Similarly, a

Medical survey of contract placements in

the calendar year 1940 revealed that, of 253

facilities receiving awards, 172 or 68 percent

had previously been allocated to that

agency.6

The allocation system—like the Industrial Mobilization Plan as a whole—was

never invoked on a formal or mandatory

basis. By the end of 1940 many orders on

the books of manufacturers conflicted with

previously recorded interests and capacity

credits as registered in the allocation plans.

The conflict was especially evident in the

case of allocated firms who had received

British and French contracts, as well as

"Army" facilities accepting orders placed

by the Navy. In addition many adjustments

and deviations from plan had been made

by individual procuring arms within the

War and Navy Departments. All these

changes and the failure to place allocations

on a mandatory basis at the outset of the

emergency, led some observers to the erroneous conclusion that the allocation system had been scrapped in its entirety and

the fruits of twenty years of planning

"wasted."

Many factors entered into the decision of

OASW and ANMB against formal invocation of the allocation system, and most of

these had been anticipated in the planning

period. Perhaps the chief consideration was

the fact that compulsory application of the

system had not been considered essential

except in the event of a "maximum effort,"

and the Munitions Program of 30 June 1940

fell considerably short of such an effort.7 As

already indicated in the discussion of the development of the negotiated contract, the

planners foresaw that in the face of varying

degrees of idle plant capacity considerable

flexibility would be required to determine

which items and firms would best be handled

by allocation and which by competitive bidding. It was recognized, moreover, that facility allocation plans could never be complete or accurate, however conscientious the

procuring agencies might be. After mid1940 many firms who previously had not felt

4

 Ibid., 15 Jul 41, Truman Committee, Hearings,

6:1521. 5

 Memo, Clarence R. Niklason for Comdt AIC,

4, Apr 45, sub: Project XVII (24) AIC Plans-Use

of the Industrialization Plan in World War II, abstract in OCMH. These figures, while consistent

with other observations, were based on recorded

facility interests (allocations) as of December 1941

and do not afford a direct indication of the use of

previously allocated facilities during the defense

period. The use of allocations data as of the end of

1941 reflected the assumption that Pearl Harbor,

rather the launching of the Munitions Program, best

represented the M Day of procurement planning. 6

 Yates, Procurement and Distribution of Medical Supplies in the Zone of the Interior During

World War II, p. 30. Dollar figures for the awards

in question would no doubt have revealed a higher

concentration of procurement in allocated facilities.

7

 (1) Maj Ritchie, AIC Lectures, 15: 5541⁄2.

(2) Col Hare, AIC Lectures, 17: 369, 373. (3)

Col Hare, ICAF Lecture (L46-16), pp. 7-8.
CONTRACT PLACEMENT AND CLEARANCE 259

it feasible or worth-while to participate in

peacetime planning wished to share in the

emergency program, and both the Army

and Navy considered it desirable to place

orders with such firms although they were

outside the allocation system. Normally,

these firms were surveyed as soon as possible

and added to the list of allocated facilities,

with the result that the list of recorded interests grew from around ten thousand at the

beginning of the defense period to nearly

thirteen thousand at the time of Pearl Harbor.8

 (See Table 12, Page 58.) At the same

time many firms which had been found deficient were dropped from the list of allocated facilities. Business failures, the appearance of new firms, the development or

adoption of new items of procurement,

changes in quantitative requirements, the

recognition of Navy claims upon certain

facilities allocated by OASW, and other

factors all required changes in facility allocation plans. Under the circumstances the

several supply arms were permitted to make

as much or as little use of their allocation

plans as they found necessary to the accomplishment of their procurement

mission.9

During this period of informal utilization,

the allocation system was marked by vigorous efforts of all the supply arms and services to build up a complete and up-to-date

inventory of available industrial facilities for

each significant item of procurement. Conflicts of interest among the Army's supply

arms and services were, as before, resolved

by OASW. Interdepartmental conflicts, as

well as those occasioned by the procurement

activities of foreign purchasing missions

were resolved by various committees of the

Army and Navy Munitions Board in conjunction with the Department of the

Treasury. An important circumstance coinciding with the failure to place the facility

allocation system in operation on a mandatory basis was the development of the priorities system in a manner not anticipated

by the creators of the Industrial Mobilization Plan. This unexpected turn, recounted

in detail at a later point, was a ruling of

NDAC and OPM limiting the use of priorities to the placement, rather than the

implementation, of prime contracts.10 In

this capacity the priorities system tended to

assume the function originally contemplated

for the facility allocation system.11 Fortunately, by the beginning of the defense

period a basic pattern of facility selection

by the various procuring agencies had become well established under the allocation

plans. Where shortages of existing capacity

gave rise to potential interservice competition, there was a tendency for each procuring arm to negotiate with its own allocated

firms for immediate expansion of productive

capacity. This kept within bounds the

scramble by procuring agencies for primecontract facilities on the basis of unequally

distributed priority currency. At the same

time, in areas where excess productive capacity was available, the voluntary application of allocations provided needed flexibility and permitted the use of competitive

bidding within the framework of negotiation.

8

 Yoshpe and Massen, QMC Procurement Policies,

pp. 26-33. 9

 (1) Col Hare, AIC Lectures, 17: 369. (2) Page

30 of Yates MS cited above, Note 6. (3) Capt F.

A. Daubin, USN, The Position of the Navy in Procurement Planning, in OASW Planning Br. Rpt,

General Procurement Planning Conference, 1-2

December 1938, pp. 27-31.

10

 See below, Chapters XXII and XXIII. 11

 Yoshpe and Massen, QMC Procurement Policies, p. 35 and Note 60.
260 THE ARMY AND ECONOMIC MOBILIZATION

The allocation system had been designed

to achieve two principal objectives—speeding up of conversion to war production and

elimination of frantic competition among

procuring agencies for identical facilities.

In the opinion of Army officials most intimately concerned with the launching of the

World War II procurement program, the

system was successful in the attainment of

the stated objectives:

The industrial mobilization plan has worked

well in emergency. The 1917 spectacle of the

Army and Navy crowding each other in the

placing of orders and of the supply services of

the Army getting into one another's way in

the same plants has not been repeated. Months

of valuable time have been saved. That, in the

main, is the way contractors have been selected for the production of armament items.12

Nobody can deny that the industrial mobilization plan of the Ordnance Department,

which I know something about, was carried

out, because what Ray Hare has just told us

was what I did in Chicago, where I examined

personally twelve hundred plants from 1939

to 1940. When the order came in September

1940, I went to work with those plants that I

knew, that were allocated to the Ordnance

Department. So allocation does work.13

In view of the absence of compulsory allocation of facilities at the beginning of the

defense period, a fundamental question naturally arises: What saved the World War

II procurement program from the mad,

competitive scramble for facilities which is

reported to have all but wrecked the World

War I program? Part of the answer, as already suggested, is to be found in two basic

conditions which were not present for World

War I. These were first, the eighteen long

months between June 1940 and 7 December

1941, and second, the twenty years of prewar study, planning, and indoctrination in

the field of procurement and economic mobilization. During the eighteen months of

the defense period many mistakes, false

starts, and conflicts were experienced and

resolved which could not have been successfully hurdled in a much shorter period of

time. In the twenty years of prewar planning, the various procuring arms and

agencies had determined both a specific pattern of facility interests and the general

principles for resolving conflicts of such interests. Like a system of ethics whose successful operation depends basically upon a

knowledge of facts and consequences, the

whole history of the allocation system during

the interwar years provided the procuring

agencies with essential knowledge and the

will to co-operate. The self-restraint of the

procuring agencies in World War II owed

much to the enlightenment of the planning

period. In a very real sense the allocation

system succeeded without ever having been

placed in formal operation:

Once the war purchasing program began, there was no effort to confine the procuring

agencies to their allocated facilities or the

plants to their previously accepted schedules

of production although the various procuring

agencies did respect each other's early plans.

The allocation system had done its job. Actual

contracts replaced the theoretical loads that

had been placed to develop the capacity during the planning period.14

Other Factors in Contractor Selection—

The most important requirement of Army

contract placement policy throughout the

defense and war periods was the ability of

individual firms to produce munitions in

the desired quality, quantity, and speed. But

capacity to produce, in either the quantita12

 Testimony of USW Patterson, 15 Apr. 41,

Truman Committee, Hearings, 1: 30. 13

 Statement of Brig Gen Donald Armstrong,

Comdt AIC, 29 Jan 46, ICAF Lecture (L46-16),

p. 9. 14

 Col Hare, ICAF Lecture (L46-16), p. 12.
CONTRACT PLACEMENT AND CLEARANCE 261

tive or qualitative sense, was often an unknown and changing magnitude which, in

advance of performance, could only be estimated and typically had to be developed

and improved in the process of contract administration. Few if any manufacturing

firms at the beginning of the defense period

had the plant, equipment, and workers essential to the production and delivery of

munitions called for by the war contracts

which they ultimately received and fulfilled.

Under these circumstances, and after

least price ceased to be a legal requirement

of contract placement, many subsidiary

factors played a part in the selection of contractors. With the launching of the Munitions Program, OASW foresaw that the

sudden impact of large-scale procurement

would be likely to create congestion of labor

and serious overloading of such facilities as

power and communications in particular

areas. Supply arms and services were therefore instructed to consider these problems,

as well as the desirability of increasing national productive capacity, in the placement

of contracts.15 By the spring of 1941, it had

become apparent that performance ability

on the part of individual contractors was

becoming more and more dependent upon

the availability of materials, parts, supplies,

skilled labor, and other factors reflecting

the status of the economy as a whole. As

steadily rising requirements used up more

and more available productive capacity, it

was evident that large numbers of new and

untried firms would have to be brought into

the defense effort. Accordingly, the Army

gave increasing attention to the splitting of

awards among a number of producers,

avoiding dependence upon sole sources, and

financing the creation of new facilities in all

lines of production connected with the defense effort. By means of its authority to

certify the expansion of industrial facilities

under the tax amortization program, the

Army played a major role in developing a

broad and substantial foundation of productive capacity widely dispersed throughout

the national economy.16

By the fall of 1941, the rearmament program had brought about a number of undesirable consequences for the economy as a

whole. These included "priorities unemployment" (shutdowns resulting from material

shortages) in numerous industries and communities, undesirable migration and concentration of labor, shortages of housing,

transportation, and other community facilities, and drastic shortages of machine tools

and related equipment. From the standpoint of both national morale and efficient

production, it was necessary to modify contract placement policies to relieve these conditions so far as possible. In a directive to the

supply arms and services dated 5 September

1941, OASW established additional procedures and policies to intensify the extent

of subcontracting, to relieve distressed communities and industries, and to spread prime

contracts more widely among small firms.

In order to assist distressed industries and

communities unable to obtain contracts on

a competitive basis, price differentials up

to 15-percent above low bid prices were authorized in the placement of prime contracts,

and prime contractors could be reimbursed

for similar differentials paid to subcontractors. Subcontracting was further encouraged

by giving preference in the award of prime

contracts to firms who would make maximum use of subcontracting. All bid pro15

 Memo, Col Schulz, Dir Current Procurement

OASW, for CofAC et al., 2 Jul 40, sub: Procurement Without Advertising, copy in Senate, Small

Business Hearings, 10: 1303. 16

 See below, Chapter XX.
262 THE ARMY AND ECONOMIC MOBILIZATION

posals in excess of $50,000 had to carry a

statement of the percentage of intended subcontracting and this statement became a

part of the final contract. Requests upon

supply arms by the Defense Contract Service of OPM to confine bids to particular

regions in order to alleviate unemployment

were to be granted unless departures from

this policy were specifically approved. In

order to insure the maximum use of existing

machine tools, no new machine tool deliveries or priorities were to be given contractors, under either existing or new contracts, so long as qualified subcontracting

facilities were available.17

Ten days after Pearl Harbor additional

steps were taken to expedite selection of contractors and making of contract awards.

Additional emphasis was placed upon the

use of the negotiated contract, and supply

arms and services were ordered to decentralize as rapidly as possible their machinery for

contract placement. Contracts for new construction and machine tool installations were

to be kept to an absolute minimum.18 On 14

January 1942, OUSW issued a new directive stressing the importance of making the

best utilization of each productive facility.

To this end facilities capable of doing precision or other high-caliber work were to

be reserved for such purposes; manufacture

of simpler items and components was to be

assigned, so far as possible, to secondary facilities and subcontractors. Contracting

officers were reminded that increased prices

could be paid for additional subcontracting

needed to speed the defense program; they

were also urged to provide for maximum

subcontracting at the time of award, rather

than to assume that this could be arranged

after awards were made.19

Under the new urgency which confronted

the nation after Pearl Harbor, direct negotiation of contracts without even the informal bidding of the defense period was

used on a wide scale, and it became desirable for the central mobilization control

agency to establish a uniform set of contract placement policies which would reflect the new conditions and govern all the

procuring agencies. This was done in March

1942 by the War Production Board. As indicated in the following section, these policies underwent a number of modifications

throughout the remainder of the war to reflect the changing posture of economic mobilization.20

Criteria Established by Central Control

Agencies

At its first regular meeting on 21 June

1940, the National Defense Advisory Commission took steps to formulate a set of

broad principles to be observed by the procuring agencies in the placement of defense

contracts. Early in the meeting, Commissioner Hillman introduced a memorandum

17

 Memo, Brig Gen Harry K. Rutherford, Ex

OASW, for Chfs of Supply Arms and Services, 5

Sep 41, sub: Distribution of Defense Orders, and

4 incls, copy in Senate, Small Business Hearings,

10: 1311. 18

 OUSW P&C Gen Dir 81, 17 Dec 41, sub:

Decentralization of Procurement.

19

 OUSW P&C Gen Dir 8, 14 Jan 42, sub:

Selection of Contractors for War Production. 20

 Special criteria in the selection of contractors

for particular types or classes of procurement are

discussed in the various histories of the technical

services appearing in the series UNITED STATES

ARMY IN WORLD WAR II. One of the most

interesting and controversial areas of contractor

selection was the field of construction, especially for

Army camps and War Department-owned munitions plants. This subject is discussed in Jesse A.

Remington and Lenore Fine, The Corps of Engineers: Military Construction in the United States,

a volume in preparation for the series UNITED

STATES ARMY IN WORLD WAR II, MS, OCMH.
CONTRACT PLACEMENT AND CLEARANCE 263

setting forth the considerations which he

believed important in placing negotiated

contracts. In his statement, Hillman urged

that contracts be so placed as to put existing

idle equipment and labor to work, thereby

avoiding the delay and expense of constructing new facilities. He also stressed the effective utilization and conservation of various

labor skills, and the advantages to be realized from following the proposed policies.21

At its next meeting the Advisory Commission adopted the Hillman memorandum,

with minor changes, as a preliminary statement of commission policy to be used by the

Coordinator of Purchases in developing

purchase policy.22

On 28 August 1940 a three-man committee, under the chairmanship of Donald Nelson, was appointed to develop a comprehensive set of contract placement principles to

be used both by the procuring agencies and

by NDAC in exercising its clearance function. The policy statement prepared by this

committee was formally adopted by the

commission in its 6 September 1940 meeting

and was released to the press. This statement set forth the following twelve criteria

of contract placement:

1. speed of delivery;

2. quality of product;

3. price;

4. impact of defense program upon

consumers;

5. adequate consideration of labor;

6. geographic dispersion of orders;

7. financial responsibility of suppliers;

8. avoidance of congestion of transportation facilities;

9. adequacy of power facilities;

10. preference to firms experienced

under educational orders;

11. moral responsibility of suppliers;

12. use of negotiated contract whenever

necessary to obtain above objectives.

The NDAC declaration contained a brief

elaboration of each of these criteria and

closed with a statement of labor policy to be

observed in the placement of contracts. The

labor statement emphasized the importance

of conserving the humanitarian gains reflected by such legislation as the WalshHealey Act, the Fair Labor Standards Act,

the National Labor Relations Act, and

others.23

Although procurement policy was in a

state of ferment throughout the remainder of the defense period, the Office of

Production Management—successor to

NDAC—made no formal changes in the

contract placement principles adopted by

the Advisory Commission.24 But with the

revolution wrought by Pearl Harbor many

of the older criteria became obsolete. All of

the government's functions and agencies for

purchasing, contract clearance, and contract administration were reviewed and

overhauled. The War Production Board's

Directive No. 2 of 3 March 1942 not only

required all procuring agencies to place

their supply contracts by negotiation;

 25

 the

directive also set forth the several criteria, in

order of importance, to be observed in contract placement. At this time three criteria

were stated, in the following order: (1)

speed of delivery; (2) conserving of superior

facilities for the more difficult items of production; (3) placement of contracts with

firms needing the least amounts of addi- 21

 CPA, NDAC Minutes, mtg of 21 Jun 40, p. 2.

The Hillman memorandum became NDAC Document No. 1. 22

 Ibid., mtg of 28 Jun 40, p. 17.

23

 Ibid., pp. 82-83. 24

 CPA, Industrial Mobilization for War, p. 142. 25

 See above, page 249.
264 THE ARMY AND ECONOMIC MOBILIZATION

tional machinery and equipment.26 As indicated above, all these factors had been covered in previous War Department directives

although, except for the first, no order of

importance had been given.

Developments during the remainder of

1942 led to further modification of the general criteria for the selection of contractors.

The Small Business Act, passed in the summer of 1942, required that special efforts be

made in spreading war business among

small firms. Also, with the induction of more

and more men into the armed forces, serious

labor shortages began to develop in many

communities. Accordingly, on 10 October

1942, WPB Directive No. 2 was amended

to give both labor-shortage and small-plant

problems a place in the criteria of contract

placement. At the same time, lowest price

was added as a final criterion after all others

had been met. The order of importance of

the several factors was then as follows:

1. Speed of delivery.

2. Avoidance of new machinery requirements.

3. Avoidance of labor-shortage areas.

4. Conservation of special abilities.

5. Spreading production among as

many firms as possible.

6. Lowest price.27

At this time the procedures for applying

these criteria were in a rudimentary stage

of development, especially in the case of the

labor-shortage and small-plant problems.

During the following year the War Manpower Commission drew up a careful classification of labor-shortage areas, indicating

the relative degrees of labor shortage or surplus in various parts of the country. This

classification was changed from time to time

throughout the remainder of the war to

reflect changes in underlying conditions, and

procurement officers were required to place

contracts accordingly. Specific details governing the placement of contracts according

to labor-area classification were elaborated

and stated in the Army's Procurement Regulations.28

Intensification of labor shortages and increasing awareness of the necessity for

sound pricing led to a revaluation of the

factors in contract placement in the fall of

1943. At this time WPB Directive No. 2 was

again amended, reclassifying the priority of

placement factors as follows:

1. Prompt delivery;

2. Manpower considerations;

3. Five other factors to be evaluated

for individual contracts:

a. Cost and efficiency of production:

b. Small business concerns;

c. Conservation of special abilities;

d. Avoidance of creating new facilities;

e. Saving of transportation.29

Under this amendment additional contract commitments in the critical west coast

labor area were forbidden without prior approval of the War Production Board chairman or his designated representative. The

inclusion of cost and efficiency of production reflected the realization that loose pricing encouraged the wasteful use of real resources, not merely of dollars and cents.

Preference in the award of contracts was

26

 WPB Dir 2, 3 Mar 42. This directive was implemented within the War Department by Purchases Br SOS Gen Dir 34, 9 Apr 42, sub: Negotiated Purchases. 27

 WPB Dir 2, amended 10 Oct. 42.

28

 (1) PR 223.1-223.6 (2-8-45). (2) Byron

Fairchild and Jonathan P. Grossman, The Army

and Industrial Manpower, a volume in preparation for the series UNITED STATES ARMY IN

WORLD WAR II, MS, OCMH. 29

 WPB Dir 2, amended 18 Sep 43.
CONTRACT PLACEMENT AND CLEARANCE 265

therefore to be given to contractors who

were willing to adopt close initial prices

which would force a maximum of efficiency

during the life of each contract. The emphasis under this criterion was not so much

low procurement prices as efficiency in the

use of manpower, materials, and other

productive resources.

No formal changes in the September

1943 version of WPB Directive No. 2 were

made for nearly a year and a half. There

were, of course, many changes and refinements in the Army's application of the

criteria of contract placement. Thus, in the

case of labor-shortage areas, price premiums

up to 15-percent above lowest bid prices

could be made by contracting officers in

order to encourage the placement of contracts outside the two most critical (Groups

I and II) shortage areas. In the case of

small business, the allowable premium ran

to 15-percent above the average at which

the purchase could be made from large

firms. In both cases, the Purchases Division,

ASF, could approve premiums up to 25

percent, and differentials above 25 percent

could be authorized by the Commanding

General, ASF.30

The establishment of production urgency

committees in tight labor areas led to the

modification on 10 February 1945 of the

manpower criterion of WPB Directive No.

2. Under this amendment no new contracts

or supplements, with certain specified exceptions, could be placed in Group I labor

areas without the prior approval of the area

Production Urgency Committee.31

The last major revision of WPB Directive No. 2 took place on 12 May 1945. After

the collapse of Germany and the shift to a

one-front war, policies had to be revised to

retain and insure adequate war production

while making provision for the reconversion

of the national economy. In this revision the

criteria of contractor selection were as

follows:

1. Prompt delivery;

2. Manpower considerations;

3. Six other factors to be considered

when relevant:

a. Cost and efficiency;

b. Release of multiple purpose plants;

c. Avoidance of new facilities creation;

d. Saving of transportation;

e. Release of privately owned plants;

f. Preference to small firms.32

The details of this amendment allowed

wider discretion in the placement of contracts in manpower-shortage areas; thus renewal contracts could be placed in Group

I (acute shortage) areas under various

conditions so long as manpower ceilings for

particular firms were not exceeded. The

factors involving conservation of special

abilities and spreading the work among a

number of plants were eliminated. Release

of privately owned plants from war production and retention of production in government-owned plants enabled private firms to

get started in their individual tasks of reconversion. Also, preference in the placement of remaining war contracts was to be

given to plants specializing in the type of

work called for by the contract; multiple

purpose plants capable of producing a

variety of products were to be released for

civilian work or other lines of war production. Finally, the May 1945 amendment

pointed out that the factor of lower price

(covered by 3a Cost and efficiency) would 30

 (1) ASF, History of Purchases Division, p.

100-101. (2) PR 223.8 (10-5-44). 31

 (1) WPB Dir 2, amended 10 Feb 45. (2) PR

223.2-223.6 (2-8-45). 32

 WPB Dir 2, amended 12 May 45.
266 THE ARMY AND ECONOMIC MOBILIZATION

grow in importance as manpower, transportation, and other shortages were overcome.

The foregoing summary indicates that

the official policies governing placement of

contracts were steadily modified to meet

underlying changes in the war economy.

Needless to say, there was often a divergence

between announced policy and actual performance, and some policies were implemented more vigorously than others. For

example, many who were actually engaged

in the World War II procurement program

felt that the Army's small war plants procedures were considerably more successful

than those designed to prevent the placement of contracts in labor-shortage areas.

Whereas the small plants program was

represented by a specialized small war plants

officer in each procurement office, the policing of manpower regulations was divided

among the ASF Industrial Personnel, Purchases, and Production Divisions. More

significantly, local production urgency committees, whose task it was to deny contracts

to their particular areas, were composed

predominantly of local personnel who

found it extremely difficult to discharge this

unpleasant function.33

Contract Clearance

External Clearance

From the beginning of the defense period

until three months after Pearl Harbor, all

important War Department contracts were

subject to review and approval, prior to

actual placement, by the National Defense

Advisory Commission and its successor

agencies. As early as 6 June 1940, when

the basic functions of the newly established

Advisory Commission were undergoing definition, President Roosevelt announced that

all "important" contracts of the services

would be cleared by the NDAC commissioner for defense, Mr. Knudsen.34

 Some

two weeks later the NDAC's clearance authority was given a limited statutory basis

in the First Supplemental National Defense

Appropriations Act of 26 June 1940.35 Within a short time the clearance requirement

was administratively interpreted to cover all

contracts in excess of $500,000, as well as

all CPFF contracts and other important

cases.36

The purpose of contract clearance was

to insure that all major procurement contracts would be let in conformity with the

various criteria of contract placement formulated by the central mobilization control agency. As already indicated, the initial

criteria adopted by NDAC were more numerous and heterogeneous than those in the

streamlined list adopted by the War Production Board after Pearl Harbor. Because

of the number of issues raised by the NDAC

list, the limited time available for clearance,

and the fact that each NDAC commissioner

had a potential interest in the terms of each

contract, difficulties were inevitable. As a

matter of administrative necessity the

33

 ASF, History of Purchases Division, pp.

110-12. For additional material, including other

factors limiting the effectiveness of the urgency

committees, see CPA, Industrial Mobilization for

War, especially pp. 842-45, 854.

34

 CPA, Industrial Mobilization for War, p. 24. 35

 54 Stat. 602-03. This applied only to expenditures of the War Department's Expediting Funds.

In February 1941 the Attorney General ruled that

so far as the appropriation statutes were concerned

the NDAC's clearance functions were purely advisory. CPA, Industrial Mobilization for War, p. 25. 36

 (1) Memos, OASW for TQMG, 10 and 13

Jun 40, sub: Approval of Important Purchases by

the Advisory Commission to Council of National

Defense. (2) Memo, OASW for TQMG and

CofOrd, 14 Oct 40. All cited in Yoshpe and Massen,

QMC Procurement Policies, p. 64.
CONTRACT PLACEMENT AND CLEARANCE 267

NDAC soon centered the clearance function

in two individuals and their staffs—Mr.

Knudsen, who cleared all major "hard

goods" contracts (chiefly ordnance and aircraft), and Donald Nelson, who as Coordinator of Purchases was responsible for commercial-type items procured for the Army

mainly by the Quartermaster Corps.

The requirement of contract clearance by

the NDAC and its successors increasingly

became a thorn in the side of the Army's

supply arms and services, as well as the War

Department as a whole. Since the clearance

function could not be properly exercised

without providing information to NDAC

at numerous stages in the development of

the Army's constantly changing and expanding procurement plans, the necessary

procedures involved considerable duplication of effort and became excessively time

consuming. Coming on top of the War Department's own screening procedures, as

well as in a period when the procuring arms

were understaffed and trying to make up for

lost time, these requirements were certain

to cause irritation. Moreover, the contract

placement policies of the Advisory Commission differed in important respects from

those of the actual procuring agencies. The

primary concern of the Army and Navy—

in accordance with their statutory mission—

was the ability of prospective contractors to

deliver, on schedule, finished munitions of

adequate quantity and quality. The NDAC,

on the other hand, also endeavored to control the defense program in such a way as

to relieve unemployment of manpower and

plant facilities in depressed areas, to conserve the gains of recent social legislation,

to prevent profiteering in certain types of

war contract, and to strengthen and balance

the national economy for the long run.

Because of the great need for new manufacturing facilities for many kinds of munitions, one of the most important areas of the

NDAC's clearance activities lay in the field

of plant location approvals. Despite the

haste with which most of these projects had

to be pushed through, the NDAC made its

influence felt, both in locating individual

plants within a given area and in observing

a policy of spreading new industrial facilities throughout the southern and western

portions of the United States.37

One of the earliest issues in the area of

contract clearance was the question of

whether defense contracts should be placed

with firms in violation of the National Labor

Relations Act. This issue was brought to a

head by protests of labor organizations

against the award of contracts to the Ford

Motor Company and two smaller firms then

under indictment for labor law violations

unrelated to the defense program. As a result of these protests, President Roosevelt

sent a letter to the NDAC raising the question of clearance procedure in such cases.

Shortly thereafter when the commission

was reviewing the placement of an important aircraft engine contract, Commissioner

Hillman indicated that the labor problem

was more serious than the commission as a

whole realized.38 Nevertheless, since the

Ford Motor Company was the only suitable facility readily available, the contract

was awarded, although not without considerable irritation to all concerned.39

Another frequent issue in contract clearance was the question of whether prices in

37

 CPA, NDAC Minutes, pp. 34-35, 56, 147, and

Index entry, Plant Sites, p. 176. See below, pages

447-50. 38

 CPA, NDAC Minutes, pp. 117, 122. 39

 (1) CPA, Industrial Mobilization for War, p.

59. (2) ASF, History of Purchases Division, p. 45.

(3) Fairchild and Grossman, The Army and Industrial Manpower.
268 THE ARMY AND ECONOMIC MOBILIZATION

supply contracts included any element of

the cost of facilities for the items involved.40

The NDAC feared that contractors would

be reimbursed twice for the facility costs—

once in the price of the product, and separately through various special provisions.

Apart from the merits of this issue, it was

often impossible for Army contracting officers to state categorically that no charge

for facilities was included—either directly

or indirectly—in a proposed contract price.

Hence, applications for clearance accompanying contract proposals in many instances omitted any such statement. This

gave rise to considerable delay and controversy, especially in cases involving the tax

amortization feature.41

Soon after the establishment of OPM the

clearance of all Army and Navy contracts

was made the responsibility of the Purchases

Division, OPM, under the direction of

Donald Nelson.42 Within the limits imposed by time, available personnel, and administrative feasibility, the War Department attempted to comply with the necessary procedures. In order to avoid, so far as

possible, the presentation of clearance requests at the last minute, the Army supply

arms and services were directed to submit

to OPM advance statements of requirements and proposed purchases in excess of

$50,000. The statements ordinarily indicated the item, specifications, quantity,

estimated cost, proposed method of procurement, proposed dates for invitations of

bids or beginning of negotiations, delivery

schedules, and other pertinent information.43

 With such information, the director

of purchases for OPM could recommend,

in advance of actual negotiations, alternative purchase methods or sources of supply,

changes in specifications, or other modifications which he considered desirable. In

many cases, preliminary purchase plans

originated at depot or district offices remote

from Washington and these would have to

be sent to the technical service headquarters

and cleared with OPM and OUSW before

procurement directives could be sent to

the field.

When procurement plans reached the

stage of contract placement, the proposal

with an accompanying request for clearance was sent to the Contract Clearance Division, OPM. From there the proposal was

sent to the appropriate commodity branch

within OPM for review by commodity specialists. Price and cost data were checked by

the cost analysis section of the Contract

Clearance Branch, and the Contract Distribution Division of OPM was notified of

subcontracting possibilities. If new plant

construction was involved, the Plant Site

Board, OPM, was consulted.44

For a number of reasons the external

clearance of individual contracts was unsatisfactory to all concerned. From the

standpoint of OPM, there was rarely sufficient time for adequate scrutiny of all the

significant terms and implications of proposals undergoing review. With contract

placement policies still in a rudimentary

stage, it was difficult for OPM personnel to

know what tests to apply to proposals for

clearance purposes, and contracts could not

40

 CPA, Industrial Mobilization for War, p. 145. 41

 For discussion of this issue in greater detail, see

below, pages 469-71. 42

 Civilian Production Administration, Minutes

of the Council of the Office of Production Management, December 21, 1940, to January 14, 1942

(Washington: Government Printing Office, 1946)

(hereafter cited as OPM Minutes), mtg of 18 Feb

41, p. 7.

43

 (1) Yoshpe and Massen, QMC Procurement

Policies, p. 65. (2) CPA, Industrial Mobilization

for War, p. 144. 44

 Several other clearances were required for large

construction contracts. See below, page 315.
CONTRACT PLACEMENT AND CLEARANCE 269

be held up pending the establishment of

commonly accepted policy. Likewise, it was

frequently impossible for the armed services

to develop any realistic procurement proposals in advance of actual negotiations

with specific firms. The result in many cases

was the crystallization of an agreement

between the procuring agency and the contractor by the time a clearance request could

be developed and submitted to OPM. Thus

OPM was often presented with a fait accompli which could not be economically

disapproved. For their part, the procuring

agencies chafed under the additional paper

work and delays and felt that the clearance

requirements involved unnecessary duplication of organizations and activity, with the

necessity for the buyer to consult "the

buyer's brother" at every stage in the negotiations Last minute changes were often

necessary after formal clearance by OPM

and these were sometimes made without

OPM approval, to the understandable

annoyance of that agency.45 Under the circumstances the accomplishments of the

external clearance procedure did not appear

to warrant such delays, expense, and

irritation.

As the defense period drew to a close, the

increasing emphasis upon the speedy placement of contracts made necessary the

streamlining of contract clearance procedure.46

 With the advent of Pearl Harbor it

became evident that the existing cumbersome procedures could not be allowed to

continue. On 13 December 1941 Under

Secretary Patterson, observing that it normally took thirty days for a contract to be

cleared in Washington by the service headquarters and the OPM, proposed that field

officers of the Air Forces and the the Ordnance Department be permitted to award

all new contracts up to $5,000,000 without

the necessity of clearance in Washington.

He further proposed that OPM representatives be physically stationed in various offices

of the War Department to review the progress of procurement negotiations and emphasized that under such arrangements he

expected contracts in excess of $5,000,000

to be cleared by OPM within forty-eight

hours.47

For a brief time thereafter a compromise

arrangement was adopted whereunder the

OPM was to expedite its clearance procedures and confine its review to contracts in

excess of $1,000,000.48 This procedure was

short-lived. Soon after the formation of the

War Production Board, Donald Nelson reappraised the whole function of contract

clearance and concluded that the only satisfactory solution under the new emergency

conditions was to replace the existing duplicative machinery with an integrated procedure which would combine the contract

placement and clearance functions in a

single operation and agency. To this end he

ordered the discontinuance of separate contract review by WPB, transferred key WPB

purchase policy and contract clearance

specialists to the armed services, and

adopted measures to effect common standards of contract placement by all procuring agencies.49

45

 CPA, Industrial Mobilization for War, p. 145. 46

 CPA, OPM Minutes, p. 66.

47

 Ibid., pp. 80-81. 48

 Ibid., mtg of 19 Dec 41, p. 82. 49

 WPB contract clearance was discontinued on

3 March 1942 with the transfer of WPB personnel

under WPB, General Administrative Order 12. CPA,

Industrial Mobilization for War, p. 522. On the

same day WPB Directive No. 2 established common

criteria of contract placement for all procuring

agencies. Further integration of procurement policy

was indicated by the establishment of the Procurement Policy Committee, later to become the Procurement Policy Board, composed of representatives

of the Army, Navy, WPB, and other key agencies.
270 THE ARMY AND ECONOMIC MOBILIZATION

Internal Clearance

The abandonment of the requirement of

external contract review and clearance permitted the Army and Navy in the months

after Pearl Harbor to move rapidly in the

placement of contracts under the huge new

appropriations provided by Congress, and

to speed the conversion of industry to war

production. At the same time it placed upon

the procuring agencies responsibility for developing internal controls which would insure reasonable compliance with the requirements of sound contract placement

policies. These policies were still in the formative stage early in 1942 and the subsequent experience of the Purchases Division,

ASF, in reviewing all major contracts provided a fruitful basis for policy formation.

With the establishment of the Army

Service Forces on 9 March 1942, a Contract

Clearance Section was created within the

Purchases Branch. This section superseded

the separate Ordnance, Quartermaster,

Signal Corps, and similar sections of the

Purchases Branch, OUSW, which formerly

discharged the clearance function for that

office. The Contract Clearance Section

(which later became a branch when Purchases was made a division) had the responsibility of screening all individual contracts

in excess of $5 million submitted by each

technical service.50 During the early part

of 1942, the clearance procedure was necessarily perfunctory as compared with later

developments. Requests for clearance from

distant offices usually were sent with a onepage covering memorandum from technical

service headquarters stating the bare details

of the proposed transaction—name of manufacturer, item, quantity, unit price, total

cost of supplies, delivery dates, and the like.

Frequently the only material in support of

the award consisted of reference to the governing Expenditure Program and the statement: "These prices are considered fair and

reasonable."

 51

Gradually the procurement program

passed from the emergency, "production-atany-price" phase into a more orderly process supported by adequate organizations,

procedures, and criteria for contract review.

With the development of standard contract

forms to meet various conditions of purchase and production, problems of ascertaining the desirability and legal sufficiency

of individual contract clauses became less

difficult, and more attention could be given

to the fundamental problem of pricing in

negotiated contracts. Also, the development of an adequate pricing philosophy

made possible the refinement of procedures

and information required in contract negotiation.

50

 Historical Report of Office of Asst Director for

Pricing, Purchases Div, ASF, FY 1943, p. 10, file

319.1 Historical Reports, Purchases Div ASF.

51

 See copies of award approval requests in Office

Chief of Ordnance, Legal Division, History of Ordnance Pricing Policy, Exhibit 18. History of Ordnance Pricing Policy is the short name used

throughout the present volume to refer to a series of

four historical summaries of Ordnance Department

pricing policy prepared and maintained on file in

the Legal Division, OCofOrd. The two most important of these are: (1) Memo, James F. Oates,

Jr., Chf Purchase Policy Br, Legal Div OCofOrd,

for Maj. Gen Levin H. Campbell, Jr., OCofOrd, 28,

Jul 44, sub: Summary Report Respecting the Development of Ordnance Purchase Policy—January

1942-July 1944 (33pp.), with Exhibits 1-40; (2)

Memo, Lt Col Earl Kribben, Chf Pricing Policy Br,

Legal Div OCofOrd, for Maj Joseph P. McNamara,

Historian Legal Div OCofOrd, 24 Apr 45, sub:

History of Activities in Pricing Policy Branch—1

August 1944-1 April 1945 (26pp.), with Exhibits

41-87. Two shorter reports, with Exhibits 88-89,

carry the history to 30 September 1945. Unless

otherwise specified, references to page numbers refer to the original Oates report of 28 July 1944.
CONTRACT PLACEMENT AND CLEARANCE 271

The contract clearance procedures established by the Purchases Division, ASF, eventually became a major instrument for improving and refining the pricing operations

of the technical services and their district

procurement offices. Instructions for preparing justifications of proposed prices and

other terms of important awards were carried in Procurement Regulations and were

elaborated in great detail by separate instructions from technical service headquarters. Requests for deviation from standard contract forms and clauses had to

be supported by adequate justification. Information in support of proposed prices had

to include a brief narrative history of the

negotiations with the contractor, accompanied by data on comparative prices, components of price, and trends in both costs

and prices. Cost breakdowns and comparisons of estimated costs with those already

experienced by the contractor, as well as by

other suppliers, were required along with

much other information indicating that

effective efforts had been made to obtain

close prices.52 Contracting officers, district

award boards, and technical service headquarters became conscious of the fact that

the review procedure would include a

searching examination of all significant aspects of each important award and that the

results would have an important bearing

on the evaluation placed by Headquarters,

ASF, upon the general contracting policies

of each office concerned. By the beginning

of 1944, the documentation requirements

of major contract awards had grown to the

proportions of a sizable research project.53

An indication of the possible ramifications

of the Army's internal clearance procedure

is found in the following remarks:

A contract of over $5,000,000 was presented

to the Purchases Division several months ago

for clearance. A careful study was made, resulting in strong indications of a lack of pricing controls which raised inferences of a lack

of production control. With the concurrence

of the service which submitted the contract

and upon invitation of the contractor, one of

our men spent considerable time in the contractor's plant looking into the problems

which had been raised as a result of the analysis. Steps were taken to correct some of the

conditions discovered. Recently another contract with the same contractor was placed

with the same service, and I would like to call

attention to the changes in prices on a number

of important items. On one the old price was

$763, the new $711; on another the old price

was $123, the new $63; on another the old

price was $88, the new $36; on another the

old, $125, the new $97; on another the old, $161, the new $132; and on still another the

old price was $151, while the new one was

$135. In the presentation appeared the following statement: "Negotiations recently

completed resulted in overall reduction of approximately $30,000,000."

 54

No reliable statistics are available to show

the proportion which Army contracts subject

to clearance bore to total Army procurement, but it was substantial. The dollar

value of contracts cleared between 9 March

and 30 June 1942 was reported to have exceeded $7.5 billion.55

 Preliminary estimates

for the year ending 30 June 1943 cited the

clearance of 1,052 contracts with a total

commitment value of $35 billion, of which

$19 billion represented AAF contracts and

52

 (1) PR 305.4 (11-23-44). (2) Ord Procurement Cir 207-44, 24 Jul 44. 53

 History of Ordnance Pricing Policy, Exhibit

18-A.

54

 Summary of Talk Made at Meeting of Chiefs of

Technical Services, ASF, Held 1000, 18 January

1944, by Glen A. Lloyd, Asst Dir for Pricing, Purchases Div, Hq ASF, in History of Ordnance Pricing Policy, Exhibit 31, p. 21. 55

 ASF Annual Rpt, 1942, p. 21.
272 THE ARMY AND ECONOMIC MOBILIZATION

$11 billion, Ordnance.56 For the year ending

30 June 1945, 770 contracts with an aggregate value of $16.6 billion were reported as

having been cleared. In addition, by this

time the Purchases Division had undertaken

to develop measures looking to the review of

a representative sample of contracts under

$5 million from all major procurement

offices.57

Contract Clearance and Program Control

The system of internal contract clearance

developed by the ASF as an instrument of

purchase policy worked well and appeared

to be far more effective than any system of

external clearance could have been. It confined the objectives of contract clearance to

the improvement of the terms of individual

contracts, with predominant emphasis upon

sound pricing as a means of stimulating efficiency in the use of real resources. It made

contract review and clearance an integral

function of contract placement and the development of purchase policy. The decentralization of the clearance function to the

actual procurement agencies united the authority to procure with the responsibility for

procurement and permitted the refinement

of purchase policy as rapidly as possible

without sacrificing the basic procurement

objective.

Nevertheless, both during and after the

war, Donald Nelson was frequently criticized for his decision to abandon the external clearance requirements inherited from

NDAC and the OPM.58 In appraising such

criticisms it must be remembered that when

the system of external controls was abandoned there existed neither the policies nor

the machinery for effective contract clearance even within the procuring agencies, to

say nothing of external agencies remote

from the actual process of translating military requirements into deliveries of finished

munitions. The various divisions, branches,

and sections exercising clearance functions

in the civilian mobilization control agencies

had no clear or consistent conception of the

purpose of contract clearance. Some regarded it as an instrument of price and

profit control; others felt that it should control the distribution of contracts to geographical areas, to distressed communities,

or small business; still others thought that

it should be used as a device to implement

desirable labor policy or promote a balanced

postwar economy. In the welter of confusion over the many subsidiary objectives,

and with the proliferation of clearance

agencies and specific hurdles between submission and approval of award proposals,

the main objective was subordinated. Delays to contract placement, already considerable, threatened to reach proportions big

enough to defeat the wartime procurement

program. Moreover, a fundamental precondition of successful large-scale procurement—the decentralization of the bulk of

the task to the field—awaited the removal of

external restraints and controls. For all these

reasons the armed services felt that the removal of the objectionable controls was

indispensable to the war effort, and Donald

Nelson in his postwar account of the period

56

 History of Purchases Division, ASF, for Fiscal

Year 1943, p. 5, accompanying Memo, Capt Joseph

M. Howorth, Historian Purchases Div, for Dir Purchases Div, 30 Jul 43, sub: Historical Report for

Fiscal Year 1943, file 319.1 Historical Reports, Purchases Div ASF. 57

 Annual Report, Purchases Division, ASF Fiscal

Year 1944-45, p. 2, accompanying Memo, Col Foy,

Dir Purchases Div ASF, for Dir of Materiel, 15 Jun

45, sub: Annual Report of ASF for Fiscal Year

1945 in files of Purchases Div ASF.

58

 CPA, Industrial Mobilization for War, pp.

521-25.
CONTRACT PLACEMENT AND CLEARANCE 273

reaffirmed his conviction that his decision

under the circumstances was correct.59

More recently, the abandonment of the

War Production Board's contract clearance

function in 1942 has been deplored as the

surrender of WPB's power to achieve overall program control and to bring into balance the supply and effective demand for

critical materials and other real resources.

Discontinuance of the clearance function

by WPB was held to be a surrender of civilian authority over military procurement,

permitting the military procuring agencies

early in 1942 to place contracts far in excess

of the availability of real resources, with

resulting imbalance and dislocation of the

war production program. In this view the

contract clearance function is conceived as

the instrument for keeping total contract

placements within the realm of production

feasibility.60

As already indicated, the external, individual-contract review and clearance procedures in existence up to March 1942 were

not designed to accomplish any kind of

quantitative program control, and in the

nature of the circumstances they could not

have fulfilled this purpose. Adequate program control necessarily had to await the

development of information, organizations,

policies, and procedures which were virtually nonexistent early in 1942. In the dark

days following Pearl Harbor the urgency of

procurement was simply too great to await

the creation of an ideal blueprint for program control. In order to convert industry

to full wartime production and get munitions into the hands of troops without delay,

a bold program of contract placement was

indispensable. To have adopted a timid

policy at this time, despite the difficulties resulting from initial program imbalance,

might well have been to lose the war. Only

after the creation of the Controlled Materials Plan, or its equivalent, and the meshing of material allocations with contract

placement and administration, such as was

actually done after CMP was established,

could effective program control have been

obtained. A cardinal virtue of the Controlled

Materials Plan, in contrast to procedures for

contract clearance, was its decentralization

to the procuring agencies of the task of placing and administering their individual contracts within the broad material allocations

made by the War Production Board. After

this procedure was firmly established, program balance in World War II was achieved

with reasonable success and the external review of individual contracts was not an

issue.61

Evolution of Wartime Pricing Policy

The outstanding feature of the pricing of

military procurement in World War II was

the replacement, on an unprecedented scale,

of the traditional system of competitive or

"automatic" price determination by a system of "administrative" price determination

ultimately based upon elaborate techniques

of cost and price analysis. This fundamental

change in pricing methods had its beginnings in the defense period and by the end of

1943 constituted a major revolution in the

nature of economic transactions for an im59

 Nelson, Arsenal of Democracy, pp. 198ff. 60

 David Novick, Melvin Anshen, and W. C.

Truppner, Wartime Production Controls (New

York City: Columbia University Press, 1949), pp.

382ff. "The placement of contracts is the force

which sets the economic machine in motion . . .

the power to review and therefore to control military procurement . . . was given away by the

civilian group in a deliberate, conscious policy which

could have been formulated only as a result of the

failure to grasp the fundamental importance of

the power." Ibid., pp. 384, 386. 61

 See below, Part Six.
274 THE ARMY AND ECONOMIC MOBILIZATION

portant segment of the American industrial

system. As a consequence of this change and

because of the tremendous magnitude and

scope of its purchasing activities in World

War I, the Army was forced to come to grips

with numerous problems and to take a leading role in the formulation of a basic philosophy of wartime pricing and its associated

instruments of policy.

As already indicated, the Army's small

peacetime purchasing activities in a milieu

of competitive markets had required no such

formal basis as a pricing "policy." The basic

rule of contract placement in peacetime had

been the purchase of government supplies at

the lowest available price.62

For the bulk of Army procurement in the

prewar period, the competitive bidding

process had automatically and simultaneously resolved the two fundamental problems of contract placement—selection of

contractors and determination of price. The

launching of the great rearmament program

in the summer of 1940 was the beginning of

a series of developments which was to split

these two functions of contract placement

wide apart and create the necessity for a

conscious pricing policy on the part of procuring agencies. With competitive bidding

increasingly unable to perform its traditional

functions and with its displacement by direct

negotiation in more and more areas, the

selection of contractors came to be governed

by considerations other than price. But

whatever the criteria of contractor selection,

the problem of determining appropriate

prices remained.

The relative decline in "automatic" pricing for military procurement was only partly

caused by the decline of competition as the

rearmament program inexorably brought

about full employment of the bulk of the

nation's resources. A large and crucial segment of Army procurement consisted of

projects of a type and scale for which competition was largely irrelevant and for which

it could never furnish an appropriate pricing

mechanism. In the forefront of these projects

were the great aircraft, ammunition, tank,

and other heavy equipment programs under

individual contracts attaining the size, in

some cases, of nearly a quarter of the

national debt a dozen years previously. The

novelty, magnitude, technological complexity, and urgency of these projects all combined to render competition—even at a time

when a substantial percentage of the nation's

resources was unemployed—inadequate for

purposes either of contractor selection or

the determination of appropriate contract

prices.

The passage of time eventually revealed

that from the standpoint of basic wartime

pricing policy the Army was confronted with

three broad categories of procurement: (1)

complex projects or items of the type just

described which were at no time susceptible

of automatic, competitive pricing; (2) items

for which automatic pricing—available and

appropriate at the beginning of the defense program—gradually disappeared with

the decline of effective competition; (3)

items for which open, competitive capacity

remained throughout the war.

During the defense period and for some

time after Pearl Harbor, pricing for the

first category of items went largely by default. For a large percentage of projects in

62

 See above, Chapter IX. "Purchases, where

made. . . . all supplies for the use of the various departments and posts of the Army and of the

branches of the Army service . . . shall be purchased where the same can be purchased the cheapest, quality and cost of transportation and the

interests of the Government considered; . . . Act

June 30, 1902 (32 Stat. 514); 10 U.S.C. 1201;

M. L., 1939, sec. 1928." AR 5-100, 7 Aug 40 par. 8.
CONTRACT PLACEMENT AND CLEARANCE 275

this category, the problem of price determination was simply evaded by the adoption

of CPFF contracts. For the remainder of

this group—either because the pricing problem was less complicated or for other reasons—fixed prices were negotiated, albeit

on the basis of estimates and procedures

which later appeared crude.

For the second category, which included

the numerical majority of its contracts, the

Army continued to use competitive bidding

until it became evident that effective competition had declined to the point where satisfactory prices were no longer obtainable on

this basis. For some items this point was

reached fairly early in the defense period;

for others it was not reached until after Pearl

Harbor. In any case, both for this category

of procurement and the one just discussed,

there was an inevitable lag between the appearance of the need for sound pricing principles and the actual development and application of such principles.

The third category, small in total dollar

value as compared with the other two, consisted mainly of relatively simple items procured by Quartermaster, Engineer, Medical,

and other services. For many such items

sufficient available capacity among small

business firms continued to exist throughout the war, a fact eloquently proclaimed

by the existence and operation of the small

war plants program after Pearl Harbor. In

such circumstances competitive bidding

could often be retained as a major instrument of price determination.63

Despite efforts of the prewar planners,

the ultimate ramifications of a comprehensive wartime pricing policy were scarcely envisaged by the Army or the other procuring

agencies until some time after Pearl Harbor.

The sense of overriding urgency, which increased throughout the defense period and

reached its peak early in 1942, dictated the

immediate placement of contracts and the

launching of production "at any price." The

tasks of converting industry to war production, of obtaining the necessary expansion

of plant and equipment, and of devising a

satisfactory system for distributing scarce

materials to war suppliers, all took precedence over refinements of price. The inevitable result was the feverish placement

of contracts at prices which later turned out

to be far above actual costs of production.

Negotiated prices were hurriedly approved

on the basis of contractor estimates which

included allowances for almost every conceivable contingency. But pricing in contracts placed through competitive bidding

fared no better. By the end of 1941, effective competition for many classes of sellers

had disappeared and prices in competitivebid contracts were also based on generous

estimates of cost. By the spring of 1942, there

was substantial evidence of widespread

overpricing in war contracts.

This general development was regarded

in many circles as an unmixed evil. On the

other hand, there were some who realized

that overpricing in war contracts during the

early stages of industrial mobilization might

well represent the most desirable "policy"

under the circumstances. It provided a

powerful and undeniable stimulus toward

rapid industrial conversion and all-out war

production. At the same time it underwrote

the government's determination to place rearmament above all other objectives and

provided contractors with abundant finan63

 Thus, even where certain classes of procurement were earmarked for small firms, at premium

prices if necessary, competitive bidding within the

small-business area kept prices within reasonable

limits and promoted efficiency in the use of resources. See below, Chapter XVIII, especially page

425.
276 THE ARMY AND ECONOMIC MOBILIZATION

cial means to execute their many responsibilities without delay. In this view there was

little doubt that governmental largesse during the conversion period did much to break

down the leisurely, conservative, dollar-conscious behavior of the American public,

which during a decade of depression had

chosen to waste its time and its resources in

idleness rather than resort to the expenditure of dollars and cents.64

By the spring of 1942 circumstances had

drastically changed. The nation was now

at war and financial inducements to contractors were of secondary importance in

completing the process of conversion to war

production. The seriousness of the raw material problem in the face of tremendously

expanded requirements, together with the

rising tide of inflation, brought home to war

production leaders the fact that the shortage of real resources was the ultimate limitation upon war production and that the

nation was now faced with such a shortage.

Overpricing in war contracts, which had so

recently stimulated the full employment of

idle resources and promoted speedy conversion to war production, was now threatening basic productive efficiency. War contractors, who had become the custodians of

nearly half the nation's real resources, bore

a heavy responsibility to use these resources

efficiently. But with excessive financial

means at their disposal, individual contractors attempted to achieve their production

objectives by means of excessive money outlays rather than by strict economies of real

resources. The accumulation of excessive

inventories of materials and supplies, the

pirating and hoarding of labor, and the

lavish and wasteful use of materials both in

production and construction projects promoted the quick attainment of individualcontract objectives at the expense of the

war program as a whole.

Those who were responsible for the war

production effort realized that the improvement of direct controls was indispensable to

the effective wartime allocation of the nation's resources. But in the spring of 1942

direct controls over labor and materials

either were completely lacking or were in a

rudimentary and chaotic stage of development. Conservation and substitution measures were only beginning to be effective.

All these measures were faced with a slow,

uncertain, and piecemeal development,

whereas monetary inflation—proceeding

basically from expenditures under war contracts—was a current and all-pervasive

threat to efficiency. Whether operating

under the CPFF form of contract or under

loosely negotiated fixed-price contracts, war

suppliers behaved in much the same manner. The wartime tax structure, with marginal excess profits tax rates of 90 percent,

removed much of the power of the profit

motive to reduce costs. Lavish expenditures

by many fixed-price contractors cost them

only ten cents on the dollar, for all practical

purposes placing them in a cost-plus status.

It was within the framework of these conditions and subsequent developments in the

spring and summer of 1942 that War Department purchasing officials undertook to

64

 Governmental expenditures during the depression of the 1930's were paltry by comparison with

those in World War II. Nevertheless, by the time of

Pearl Harbor they had come to symbolize the ultimate in large-scale governmental spending. For instance, the following comment of Senator Harry S.

Truman upon General Somervell's aggressive prosecution of the Army's camp construction and procurement program: "I will say this for General

Somervell, he will get the stuff, but it is going to be

hell on the taxpayer. He has a WPA attitude on the

expenditure of money." S. Com. on Military Affairs,

77th Cong., 2d Sess., Hearings on S. 2092, Department of Defense Co-ordination and Control Bill, 6

Mar 42, p. 7.
CONTRACT PLACEMENT AND CLEARANCE 277

develop a basic pricing philosophy and began to forge the instruments of policy which

would restore to the pricing function its erstwhile power to compel efficiency in the use

of real resources. By the fall of 1942, after

intensive efforts in the development of renegotiation policy, extended discussions with

the Office of Price Administration, and

much additional experience in the placement and administration of procurement

contracts, key officials in the War Department were in a position to consolidate their

ideas and experience in the form of a policy

declaration which was to guide the Army's

pricing activities for the remainder of the

war. This declaration—subsequently known

as the Tryon Statement—was the product

of a three-day conference called by the director of the Purchases Division, ASF, and held

at Tryon, North Carolina.65

The basic objective of War Department

pricing policy, as expressed by the Tryon

Statement, was the promotion of efficiency

in the use of real resources—manpower, materials, and productive equipment. Instrumental to this objective was the basic principle of pricing policy—the attainment of

"close pricing" in all War Department purchase transactions. Close pricing meant

the adoption, in advance of production, of

prices close enough to costs to force contractors to produce efficiently if they were to

avoid losses and make a profit. The statement recognized that under wartime conditions the attainment of this objective required the use of administrative controls not

needed under normal competitive conditions. "Purchase control" over individual

contract prices, rather than the use of general formulas and regulations (such as

necessarily employed by the OPA), was considered to be the simplest and best method of

price control.

The best instrument of purchase control,

in the view of the Tryon Statement, was the

employment of fixed-price contracts, "well

negotiated on the basis of accurate cost experience and close estimates." The attainment of close prices in fixed-price contracts

was to be achieved through two major avenues of approach. The first concerned the

negotiation of initial contract prices. The attainment of close original prices required a

careful analysis of estimated costs as submitted by contractors in cost breakdowns accompanying their bid proposals.66

 A major

element in cost analysis was the segregation

and classification of the contractor's risks

under the proposed contract. All ordinary

risks of management in organizing production and making deliveries were to be compensated by a normal element of profit

included in the contract price. All other risks

were to be transferred to the government

and no cushions or specific elements to cover

these risks were to be included in the price.

The transfer of these risks was to be accom65

 Ten persons were listed as having composed the

conference, which met from 30 October to 1 November, 1942: Col. Albert J. Browning, Director, Purchases Division; Dr. Maurice Karker, Chairman,

War Department Price Adjustment Board; Dr. Melvin T. Copeland, School of Business Administration,

Harvard University; Mr. William L. Marbury,

Chief, Legal Branch, Purchases Division; Mr.

Howard C. Petersen, OUSW; Mr. E. T. Gushee,

Purchase Policy Section, Legal Branch, Ordnance

Department; Col. C. E. Dyson, AAF; Maj. Burton

E. Vaughn, Price Adjustment Branch, Purchases Division; Capt. Robert R. Bowie, Legal Branch, Purchases Division; Mr. Ernest Mahler, representing

industry. Col. Browning, Dir Purchases Div ASF,

Memorandum on Statement of Purchase Policies, 19

Nov 42, reproduced in Army Industrial College

R57, Contract Pricing—Principal Developments

(January 1946), p. 107, ICAF Library. This document also reproduces in full, at pp. 108-15, the

Tryon Statement of Purchase Policies, 19 Nov 42.

66

 The term "bid proposal" included all contractor

proposals or terms of offer in the negotiation of contracts, whether or not bidding was competitive.
278 THE ARMY AND ECONOMIC MOBILIZATION

plished wherever possible by specific contract clauses providing for government

reimbursement of the contractor for cost

increases sustained as a result of changes in

wage rates, availability of materials, and

other factors under the broad control of the

government. Adverse changes in costs or the

materialization of risks which were completely unforeseeable would be compensated

by appropriate price increases or other relief

under the First War Powers Act, which permitted the amendment of government contracts "without consideration" wherever

necessary for the prosecution of the war.

Adequate use was to be made of the War

Department's compulsory pricing powers

whenever a contractor was unwilling to

adopt close prices.

The other basic approach to close pricing

in fixed-price contracts was the advance provision for price adjustment, either periodically or otherwise, during the life of a

contract. This was a most important provision and one which became of steadily increasing importance. In the light of the

highly dynamic and fluid cost conditions of

war production, almost all the War Department's important contracts could be considered as "long term." Any notion that it

was possible to adopt a fixed and immutable

price in each and every contract under the

stated conditions was simply a contradiction

of experience in the real world of wartime

industrial economics. It was largely for this

reason that the use of CPFF contracts was

found necessary on so large a scale. On the

other hand, completely unrestricted use of

CPFF contracts would be tantamount to

abdication of all efforts to achieve close pricing in advance of production. Unless the

War Department were to abandon its efforts

to establish contract prices as a means of

continually exerting downward pressure

upon costs, it would have to discover a

method of pricing which would provide this

kind of pressure while still recognizing the

dynamic nature of costs. The solution was

found, both in principle and to a large extent in practice, in the form of progressive

price adjustment under modified fixed-price

contracts. These price adjustment features

were an outgrowth of various types of

"escalator" clauses providing for price increases on the basis of increases in wage and

material costs.67

The Tryon Statement enunciated other

War Department policies in the field of pricing. CPFF contracts were to be used only

where there was no alternative. In the case

of CPFF supply contracts, bonuses and penalty provisions were to be considered in order

to stimulate cost reduction, and agreements

were to be obtained for the conversion of

these contracts to a fixed-price basis as soon

as possible. Renegotiation was to be tied

more closely to pricing by shifting the emphasis from recapture of past profits to repricing for future periods and by delegating

the actual job of renegotiation to the services responsible for awarding contracts. Price

and cost analysis methods were to be improved at the level of both prime contracts

and subcontracts, and a broad program of

research and education was to be undertaken in order to equip all concerned with

the best possible tools of close pricing. This

included the education of contractors as well

as procurement agency personnel, and a

high degree of policy co-ordination was to

be obtained not only within the War Department, but interdepartmentally with the

Navy and other procuring agencies.68

67

 The nature of these price adjustment provisions,

and some of the problems on their administration,

are discussed below in Chapter XIII. 68

 Statement of Purchase Policies cited above, note

65.
CONTRACT PLACEMENT AND CLEARANCE 279

Thus by November 1942 the War Department had succeeded in formulating the

broad pricing principles and the elements

of a supporting program for the discharge

of its pricing responsibilities in World War

II. The Tryon recommendations became

established War Department policy on 26

March 1943 with the publication of Revision 14 to Procurement Regulations. This

revision announced the policies of the Tryon

Statement and included new contract

clauses which could be used by contracting

officers to permit modifications in prices during the life of a contract.69

 Immediately

thereafter, work was begun on a new pricing manual which would amplify War Department pricing policy and provide contracting officers with numerous suggestions

and techniques for the attainment of close

prices in the actual negotiation of contracts.

As a result, ASFM-601, Pricing in War

Contracts, was completed and published on

2 August 1943. This manual proved to be a

useful and highly popular document, and

by mid-1945 over ten thousand copies had

been distributed.

The many subsequent elaborations and

refinements of War Department pricing

policy rested squarely on the foundations

of the Tryon Statement. Nevertheless, many

of the objectives of the statement proved

difficult to attain. The conversion of CPFF

contracts to fixed-price contracts on a substantial scale was delayed until the final

year of the war. The hope that renegotiation could be shifted from an instrument of

profit recapture to one of forward pricing

was far from realized, but the end in view

was partially achieved by means of the company pricing program. The tools of price

and cost analysis were greatly elaborated

and refined, and substantial progress was

made in drafting contract clauses which

would achieve desirable results in the field

of progressive price adjustment. The compulsory pricing powers of the War Department were seldom specifically invoked but

exerted a substantial influence in obtaining

contractor co-operation in a sound pricing

program. The emphasis upon economy

of real resources continued throughout the

war, and progress was made in the troublesome task of distinguishing earned profits

from those resulting merely from overpricing. Increasing use of exemption from renegotiation was allowed to encourage efficient

contractors who were willing to adopt initial

close prices. Basic to the entire pricing program was the proposition that contract

prices and pricing policy should at all times

serve to implement the war production

program.70

69

 ASF, History of Purchases Division, p. 147.

70

 For other statements concerning War Department pricing policy in World War II, see: (1) ASF

M-601, Pricing in War Contracts, 2 Aug 43; (2)

ASF, History of Purchases Division, pp. 119-93;

(3) History of Ordnance Pricing Policy and exhibits thereto; (4) Glen A. Lloyd, "Pricing in War

Contracts," Law and Contemporary Problems

(Duke University School of Law), X, No. 2

(Autumn 1943), 235-61; (5) Miller, Pricing of

Military Procurements; (6) Yoshpe, Production

Control in the QMC, Ch. VI; (7) AIC R57, Contract Pricing—Principal Developments; (8) Industrial College of the Armed Forces R58, Contract

Pricing—Principal Developments (August 1946),

ICAF Library.
CHAPTER XII

The Cost-Plus-A-Fixed-Fee Contract

Background and Nature

One of the most controversial features of

procurement operations in World War II

was the widely used cost-plus-a-fixed-fee

form of contract.1 Army commitments under all types of CPFF contract for that war

exceeded $50 billion and amounted to

nearly one third of all Army purchases. The

nature and implications of the CPFF contract were widely misunderstood throughout the war, partly because of the complexities of the pricing problem and partly because of general ignorance of the many specific types of CPFF contract and the procedures set up for their administration and

control. A review of the War Department's

experience with CPFF contracts reveals the

heart of the problem of contracting and

pricing for wartime procurement and provides the foundation for an understanding

of all wartime pricing methods, renegotiation activities, contract administration, and

other facets of the total procurement

problem.

The CPFF form of contract had been

used in World War I but received far less

publicity than the cost-plus-a-percentageof-cost type of contract, which subsequently

became the target of much investigation and

criticism. World War I experience had revealed the extravagance and waste resulting

from CPPC contracts, which rewarded producers in direct proportion to the money

they spent in performing their contracts.

Moreover, all cost-plus forms of contract

came under heavy suspicion because they

failed to provide a firm ceiling upon costs or

expenditures. A fairly common sentiment

in Congress and elsewhere on the eve of

World War II might be summed up in the

words: "Why not make the contractor quote

a reasonable price and hold him to it?" Unfortunately, this prescription shed no light

on how its laudable objectives were to be obtained, and neither the Congress, the War

Department, nor any other authority was

able to provide a formula which could. Accordingly, although the CPPC form of contract was outlawed from the beginning of

the defense period, the CPFF contract

was—upon recommendation by the War

and Navy Departments—specifically authorized and permitted throughout the war.

There were many reasons why the Army

in the defense and war periods could not

have accomplished its procurement mission

in the absence of various types of "cost" contract. The equipment and supplies required

by the Army for World War II consisted

mainly of items which were either completely new or required drastic changes in

design and specifications in order to meet

the standards and possibilities of modern

technological warfare. This was true not

1

 CPFF contracts were often referred to simply as

"fixed-fee" contracts.
THE COST-PLUS-A-FIXED-FEE CONTRACT 281

only of such basic items of equipment as

planes, tanks, guns, ammunition, radio, and

radar, but applied throughout the whole

range of Quartermaster, Medical, Engineer,

Transportation, and other organizational

and personal equipment. Hardly a single

item—from uniforms and field rations on

up to electronic equipment and the atomic

bomb—was envisaged at the beginning of

the defense period in anything like its "final"

form at the end of World War II. In short,

it was impossible for the Army at the beginning of its rearmament program to specify

with any degree of stability what it wished to

buy.

By the same token it was difficult if not

impossible for contractors to determine future costs with any degree of accuracy. Even

if final specifications had been known, contractors could not have forecast the prices

of materials and labor for a period in the

future certain to be faced with a generally

rising price level, nor could they have been

assured that these and other essential resources would be available in sufficient

quantity to complete their contracts on

schedule. Indeed, the advance assurance of

adequate supplies of labor and materials at

stable wage rates and prices would have

been only a first step in permitting contractors to make reliable cost estimates. All

the manifold tasks of converting to war production—expanding basic facilities, acquiring new machinery and equipment, training

and allocating labor, organizing, co-ordinating, and refining production processes, discovering and contracting with hundreds of

underlying suppliers and subcontractors,

and so on—had to be accurately foreseen

and the measures for their resolution anticipated before costs could be prophesied with

any degree of reliability.

In view of these circumstances no reliable

businessman could contract to produce and

deliver a novel item of equipment at a guaranteed or fixed price, unless the price were

so high as to be almost certain to cover all

the unpredictable and changing costs likely

to arise under the contract. A slight margin

of error under a fixed-price contract many

times the size of a contractor's invested capital could easily force him into bankruptcy.

On the other hand, the common assumption

that the government's interests could be protected by the assignment of a fixed price to

each of its purchase contracts simply reflected ignorance of the entire problem of

economic mobilization and war procurement. Fixed prices too low to cover costs

would cripple war production and defeat

the whole procurement program. Prices

which were too high would result in widespread waste, inefficiency, and unjust enrichment. Faced with the basic problem of

getting production underway at the earliest

possible moment, neither the Army nor its

contractors could afford to take time out for

protracted negotiation and debate over

hypothetical future costs and "ideal" prices.

Both necessity and common sense dictated

the use of contracts which would provide a

clear guarantee of the recovery of all costs,

especially for such important and difficult

items as planes, tanks, ammunition, and related materiel. At the same time, under the

established policy and continuous pressure

to minimize the use of cost-plus contracts,

many contracts were hurriedly consummated at more or less arbitrary fixed prices,

with adverse results which became evident

during the hearings leading to the renegotiation act early in 1942.2

The essence of the CPFF contract was the

agreement by the government to defray all

2

 See below, Chapter XV.
282 THE ARMY AND ECONOMIC MOBILIZATION

costs essential to the execution of the contract. Allowable items of cost were broadly

defined by each contract, and important individual expenditures (for example, items

in excess of $2,000) usually had to be approved in advance by the contracting officer.

Many contracts, especially those of the Army

Air Forces, carried specific reference to

Treasury Decision 5000 for detailed interpretations of allowable costs. TD 5000 was

originally promulgated by the Department

of the Treasury as a collection of rules and

principles for defining costs preliminary to

the determination of excess profits under the

Vinson-Trammel act as amended. In the

absence of other comprehensive statements

it came to be widely used by contractors and

procuring agencies to define allowable costs

for CPFF contracts.3 Within this general

framework the contracting officer's determination of allowable costs was final, as between the Army and its contractors, in the

absence of the contractor's appeal within

thirty days to the Secretary of War or an

appeal board designated by him. All operations under CPFF contracts were subject to

audit and possible disallowance of items

claimed as costs, not only by War Department auditors but by the General Accounting Office (GAO) under the Comptroller

General.

The fixed fee under CPFF contracts

represented the contractor's compensation

for undertaking and performing the contract. Except for the possible deduction of

certain contingent items, consisting mainly

of cost disallowances by the Comptroller

General, it constituted a guaranteed clear

profit on the contractor's operations under

the contract. The fee was determined in advance of performance and was based on the

scope of the contract and the nature of the

contractor's responsibilities thereunder. In

general, for any given class or type of CPFF

contract, the magnitude of the contractor's

contribution was measured by the estimated

cost of the project at the time the contract

was negotiated, and the fee was determined

by the application of a standard or reasonable percentage figure to the estimated costs.

This percentage figure varied from one class

of contract to another and, in general, was

reduced for all classes as the war progressed.

In no case could the fee exceed the statutory

maximum (10 percent of estimated cost for

construction outside continental United

States; 6 percent for most construction

within the United States; 7 percent for all

other CPFF contracts). Since it was fixed

in advance of performance, the contractor's

fee offered no positive inducement to lavish

or wasteful expenditures as did the CPPC

form of contract, which geared the contractor's profits directly to the amount of

his expenditures in performing the contract.

Under the CPFF form of contract actual

costs for the completed contract might turn

out to be substantially above or below the

original estimates without affecting the fee.

Significant changes in the scope of the contract at any time prior to completion did,

however, call for appropriate increases or

reductions in the fee.

Thus all major risks under CPFF con3

 This use of TD 5000 was criticized by the Comptroller General, who took the position that cost

definitions for the purpose of defining excess profits

were necessarily too liberal for determining cost

reimbursement by the government. Largely because

of contractor resistance, attempts to replace TD

5000 with more suitable cost interpretations long

proved abortive. (1) ASF, History of Purchases

Division, p. 269. (2) Ltr, Comptroller General

Lindsay Warren to Hon. Robert R. Reynolds, Chmn

Senate Com on Military Affairs, 27 Jan 44, in

Subcom. of the S. Com. on Military Affairs, 78th

Cong., 2d Sess., Hearings on S. 1268, S. 1280, and

S. J. Res. 80, Problems of Contract Termination

(hereafter cited as Hearings on S. J. Res. 80), pp.

661-63.
THE COST-PLUS-A-FIXED-FEE CONTRACT 283

tracts were transferred to the government,

and the protection of the government's interest required careful control and auditing

of costs as well as dependable estimating

procedures to permit the advance determination of a reasonable fee. Advance cost

estimates for CPFF contracts were subject to

the same pitfalls as were faced in the prediction of costs under fixed-price contracts, but

by eliminating the contractor's risks there

was no necessity for the inclusion of large

contingent items to protect the contractor's

solvency against heavy, unforseen cost increases. If final costs turned out to be substantially less than the estimates, the government would benefit accordingly. This was

not true of fixed-price contracts, which

bound both parties to the price determined

in advance on the basis of cost estimates.4

In the case of CPFF contracts, the fee was

the only element of cost rigidly determined

in advance, and the fee was in all cases only

a small percentage of the total.

Classes and Coverage of Army CPFF

Contracts

With few exceptions the Army's CPFF

contracts in World War II fell into four

broad classes:

1. construction contracts;

2. experimental, research, and developmental contracts;

3. service and time-and-material contracts;

4. supply contracts for:

(a) aircraft;

(b) ordnance heavy equipment

(c) ordnance ammunition.

A brief discussion of the nature and coverage of each of these will help to clarify a

number of important issues in the Army's

purchasing policies in World War II.5

Construction Contracts

The CPFF construction contract was

widely used in the defense period and early

war years to permit rapid expansion of the

War Department's command and industrial

facilities. Many factors—including the

shortness of time for meeting deadlines,

frequent changes in plans and specifications,

unfavorable topographical features of

available sites, and the shortage of contractors with suitable experience—all combined

to make lump-sum contracts unsuitable for

most large construction projects: a fixed

price high enough to provide reasonable protection to the contractor was likely to be

exorbitant from the standpoint of the

government.6

The fees for CPFF construction contracts

were based primarily upon a graduated

schedule applicable to all projects in accordance with their estimated cost. Variations

from the schedule were made in order to reflect the relative complexity of the project,

the length of time required for construction,

the degree of subcontracting contemplated,

and other factors. Early in the defense period

4

 That is, prior to statutory contract renegotiation.

It was precisely because of the absurd results of

fixed prices in a milieu of widespread uncertainty

that the renegotiation law was adopted. See below,

Chapter XV.

5

 The following discussion refers primarily to formal contracts. Preliminary contractual instruments,

such as letter orders, letter purchase orders, and

letter contracts, were usually placed on a cost basis

pending the formal adoption of either a CPFF or

a fixed-price contract. In the interim, important

preliminary instruments on a cost basis were often

treated as CPFF contracts. Ltr, Brig Gen Hermon

F. Safford, OCofOrd, to CG ASF, 22 Mar 45, sub:

Cost-Plus-A-Fixed-Fee Contracts, file 161 CPFF,

Purchases Div ASF. 6

 Fixed-price contracts for construction projects

were referred to as lump-sum contracts. PR 304.1

(1-11-45).
284 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 27—MAXIMUM FIXED FEES FOR

CPFF CONSTRUCTION PROJECTS WITH

CORRESPONDING PERCENTAGES OF ESTIMATED COST a

a

 Selected levels from complete list of 4 August 1941.

Source: Memo, Dir P & C Br, OUSW, 4 Aug 41 (Ex. 42 of ASF,

History of Purchases Division).

all construction projects were divided into

three broad classes for purposes of fee determination: (1) simple construction

(camps, cantonments, general hospitals of

temporary construction); (2) semicomplex projects (small arms and ammunition

plants, storage depots); (3) complex projects (TNT, powder, complicated chemical

processing plants). Projects in the first group

were normally allowed the fees indicated in

the base schedule; those in the second and

third groups were allowed 110 and 120 percent, respectively, of the base-schedule

fees.7

Because of criticism of the base schedule

as a "minimum" schedule and on the basis

of accumulating experience, the OUSW

early in 1941 ordered a new "maximum"

fee schedule, which shortly underwent several revisions and refinements. (Table 27)

In utilizing the maximum schedules, contracting officers were directed to arrive at

fees in individual contracts by negotiation

and to see that such fees were equitable,

reasonable, and based on the contribution

actually required of the contractor. Fees

in excess of the maximum, if considered

essential to national defense, could be

authorized by the Under Secretary of War.8

Many of the conditions which prevented

the adoption of fixed prices in construction

contracts during the defense period also

complicated the execution and administration of CPFF construction contracts. The

urgency of deadlines, the shortages of qualified supervisory and control personnel in

the organizations of both the War Department and contractors, the prevalence in

statutes and regulations of outmoded, cumbersome, and inadequate accounting and

other procedures, together with general disturbances to the economy as a whole, all

added to the prevailing atmosphere of confusion. By the summer of 1941 the Truman

Committee had received numerous reports

of waste, inefficiency, and increased costs in

the Army's construction program.9

Much of the reported inefficiency and increased cost was attributed to the use of

the CPFF form of contract. In particular,

7

 Testimony of Mr. Harry W. Loving, Chmn WD

Contract Board, 25 Apr 41, in Truman Committee,

Hearings, 1: 348-49.

8

 See memorandum in Exhibit 42 to ASF, History

of Purchases Division. Fees in excess of the prescribed maxima were confined generally to construction performed outside the territorial limits of the

United States, where risks, performance difficulties,

and the time required for execution warranted and

required higher fees. Army Service Forces, Renegotiation Division, History of Renegotiation [circa

1951], Sec. IV, Pt. II, App. 2-A, Tab C, pp. 34-35,

copy in OCMH. This history of the War Department Price Adjustment Board is hereafter cited as

WDPAB History. 9

 S. Rpt. 480, Pt. 5, 77th Cong., 2d Sess., 15 Jan

42 (hereafter cited as Truman Committee, First

Annual Rpt), pp. 232-74.
THE COST-PLUS-A-FIXED-FEE CONTRACT 285

the Truman Committee felt that wasteful

purchasing methods by contractors, excessive equipment-rental charges, and inefficient use of labor and materials were inevitable results of CPFF contracting.10

Testimony and exhibits submitted by War

Department representatives indicated that

increases in the size and quality of construction projects, combined with faulty original

cost estimates, accounted for the bulk of the

alleged "cost" increases. Especially was this

true for camp construction projects—the

principal target of the early investigations—

which were expanded and improved in

countless ways between original conception

and final completion. Among the camp improvement features were the addition of

chapels, theaters, training facilities, utilities

and buildings of many kinds, wider paved

roads, greatly increased water supplies, individual rooms for noncommissioned officers,

and many other facilities nonexistent in the

camps of World War I, all reflecting the

general increase in the American standard

of living between the two wars. Because of

the need for constant revision and expansion

of plans, numerous supplements were added

to most construction contracts, increasing

their scope and estimated cost often to

double the original calculations.11

In view of these factors the arbitrary

classification of camp construction as

"simple" was deplored by those who were

intimately associated with the Army's construction program:

One of the misconceptions which unfortunately still exists, was the thought that the

design and construction of camps was not

difficult. Actually I found in many instances

that camp construction involved problems

more difficult than did that of munitions

plants. . . . Contractors, experienced 

recting construction of large buildings on a

reasonably small piece of ground, with ample

time for planning and good sources of competent labor, were utterly appalled by the

much greater volume of work, widely spread

out and the not too competent labor forces

which were so hastily thrown together. When

one considers that in general a camp had to

be ready in 120 days from the time the decision was reached to build a camp, until the

time that the first troops moved in in force

one realizes the problems involved.12

Whatever the conditions leading to increased construction expenditures during the

defense period, the original cost estimates—

based on projects of smaller scope—had

necessarily been hasty "guestimates" made

in a different cost-price milieu from that

prevailing at the time of project execution.

The estimating procedures and cost factors

used by the War Department, which came

under criticism by the Truman Committee,

tended to underestimate the costs of the

program. When compared with completed

or current project costs under rising prices,

these unsatisfactory advance estimates gave

a magnified impression of waste and inefficiency in the whole construction program.

Apart from the presence of unpredictable

factors, the inadequacy of the original estimates was attributable not so much to care10

 Ibid., pp. 248-61. 11

 See cost table in Truman Committee, Hearings,

1:373. Some idea of the monumental task of drafting a single construction contract may be inferred

from an examination of the terms of the Army's

contract for the construction of Fort Bragg at Fayetteville, North Carolina. The original contract of

1 September 1940, with several change orders and

supplements, is reproduced as Exhibit 92, ibid.,

6:1889-1912.

12

 Comments of Lt Gen Leslie R. Groves, accompanying Ltr, Groves to Gen Smith, Chf of

Military History, 22 Jul 55, reviewing draft of

History of Military Construction in the United

States. This letter and review, hereafter cited as

Groves Commentary, comprise 146 typed pages and

are filed in OCMH. The remarks just quoted appear on pages 11-12. Also, on page 18: "I do not

like the expression 'at simpler jobs.' None of the jobs

listed, outside of airfields, were really 'simpler.' "
286 THE ARMY AND ECONOMIC MOBILIZATION

lessness or incompetency as to the sheer lack

of time and personnel to do a thorough

job.13

Nevertheless, there was sufficient evidence

of waste and excessive expenditures under

CPFF construction contracts to result in

great pressure by the Truman Committee as

well as others to abandon fixed-fee contracting in favor of fixed-price contracts for all

new projects. In order to enlist the enthusiasm of contractors for the change-over, Congress exempted from renegotiation, for fiscal

years ending after 30 June 1943, profits

under fixed-price construction contracts

negotiated under competitive bidding. The

theory behind the exemption was that, with

most of the construction program nearing

completion, competition would insure contract prices close to reasonable cost and that

exemption from renegotiation would then

drive actual costs still lower. Competition

for profitable construction contracts would

thereafter force a progressive lowering of

prices, and the ultimate savings to the

government would be many times the increase in reward to contractors.

The exemption from renegotiation was

effective in promoting the greater use of

fixed-price contracts, but by 1944 the Truman Committee questioned the wisdom of

the blanket exemption from renegotiation,

especially in view of the practical limitations upon truly competitive bidding under

wartime conditions.14 Accumulating statistics revealed that profits under fixed-price

contracts were many times the fees earned

under CPFF contracts. For example, data

covering twenty-three competitive-bid fixedprice construction contracts renegotiated by

the Army Corps of Engineers for fiscal years

prior to 1 July 1943 revealed profits before

renegotiation of $21 million out of total

contract prices aggregating $139 million.

This indicated a ratio of job profits to job

costs of 18 percent before renegotiation—a

ratio which was reduced to some 10 percent

by recaptures of nearly $9 million in renegotiation.15

 Job profits before renegotiation for

approximately six hundred competitive

fixed-price construction contracts coming

under the Navy Price Adjustment Board

averaged 31 percent of job costs and in

individual cases ran as high as 66 percent.16

On the other hand, contractors' profit

(fees) under CPFF construction contracts

averaged less than 2 percent of job costs. In

April 1941 General Somervell testified that

the ratio of construction fees to total construction costs actually experienced up to

that time averaged only 1.7 percent, with

architect-engineer fees for the same projects

averaging 0.4 percent.17 By January 1943

the average fee contained in Engineer construction contracts "had declined to 1.89

percent of the estimated cost, and this result

seems to have been maintained thereafter."

 18

Perhaps the most comprehensive statistics on construction profit ratios were those

supplied by renegotiation. Army Engineer

Corps figures covering renegotiation of

construction contracts for fiscal years 1942

through 1946 reveal the following comparisons: (1) while 1 out of every 5 fixedprice construction contracts was found to

have earned excessive profits, this was true

13

 Groves Commentary, pp. 50-52, 135. 14

 S. Rpt. 10, Pt. 16, 78th Cong., 2d Sess., 4 Mar

44 (hereafter cited as Truman Committee, Third

Annual Rpt), pp. 58-59.

15

 Ibid., App. IX, p. 195. 16

 Ibid., App. X, p. 196. 17

 Truman Committee, Hearings, 1:319. This result was partly attributable to the substantial excess

of actual cost over the estimates upon which fees

were based. 18

 ASF, History of Purchases Division, p. 260.
THE COST-PLUS-A-FIXED-FEE CONTRACT 287

for only 1 out of every 100 CPFF contracts;

(2) for contracts undergoing profit recapture, profit-cost ratios before and after recapture averaged 14.47 and 9.63 percent,

respectively, for fixed-price contracts but

only 2.15 and 1.80 percent, respectively, for

CPFF contracts; (3) the average profitcost ratio for fixed-price "clearance cases"

was 5.65 percent; for CPFF clearances, 1.76

percent.19

The size of profit margins was not the

major factor in weighing the comparative

desirability of CPFF and fixed-price construction contracts. On the one hand, excessive or wasteful expenditures under CPFF

contracts might increase total costs to the

government by many times the amount of

profits under fixed-price contracts. On the

other hand, there was no guarantee that by

adopting the lump-sum form of contract the

government would actually receive—in the

form of an economical price—the cost savings for which it was presumably paying in

the form of higher contractor profits. Lt.

Gen. Leslie R. Groves, in reviewing the

Army's construction experience in World

War II, was emphatic in his preference for

the CPFF form of contract as the most economical for the government in a milieu of

unstable prices, high taxes, and general economic uncertainty:

It is very interesting to note that on the

big lump sum jobs entered into in 1941 that

the contractors did not appear to be vitally

interested in holding down wages. . . . their

bids were extremely high. In the average case

they were far above what the work would

have cost under fixed fee. The reason for this

was that to avoid the risk of financial disaster

they had to provide for every possible

contingency.20

There is no question in my mind but what

these fixed price jobs were more expensive in

many instances than would have been fixed

fee work. Many disadvantages of the fixed

price work are not easily apparent to those

who were not responsible for performance.. . 

was the fact that in such a bid there was no

limit to the losses a contractor might suffer.

There was however a definite limit as to the

profits he might make. . . . suppos

job cost him $20,000,000 and his profit was

$1,800,000, by re-negotiation this would probably be reduced to $1,200,000, and his net

profit after taxes would then be $108,000.

. . . On the other hand, if his bid was not

high enough he could easily be faced with a

loss running as high as $3,000,000. . . . 

this reason the average contractor included

in his bid items for every possible contingency.

These included too hot weather, too cold

weather, rainy weather, dry weather, and

everything else on a similar basis. It was an

impossible situation and resulted in bids for

as much as $34,000,000, where fair estimate

where the tax situation was not controlling

would have been about $25,000,000. I found

it impossible however to convince the proponents of lump sum bids as to the facts of

life. They insisted on closing their eyes to this

phase of the problem with the rather idiotic

philosophy that anyone who earned enough to

pay a 91% tax ought not to worry about his

financial status.21

Fixed fee work is used by many very successful corporations. It has many advantages,

including not only the ability to change plans

but the securing of a higher quality of workmanship. Experience has shown that nothing

is more costly to an owner than a contractor

who is losing money. I do not like to see propaganda by the political opponents of fixed fee

work being given a seal of approval.22

19

 WDPAB History, Sec. IV, Pt. II, App. 2-A,

Tab C, pp. 52-53. 20

 Groves Commentary, p. 74.

21

 Ibid., pp. 105-07. 22

 Ibid., p. 108. On the other hand, General

Groves was highly in favor of the use of "fixed-unitprice" contracts for fairly standardized components

(earth moving, concrete placing) of otherwise difficult construction projects. The remainder of such

projects would be on a CPFF basis. Ibid., pp. 100,

105.
288 THE ARMY AND ECONOMIC MOBILIZATION

Whatever the merits of fixed-price contracts for the projects of known difficulty in

a milieu of stable prices, it would be difficult

to demonstrate their desirability under the

conditions obtaining from 1940 to 1942.

The larger and more difficult camp construction projects undertaken during this

period and involving unforeseen drainage,

utility, transportation, and other costs could

not have awaited the careful negotiation of

fixed prices. These projects had to be undertaken and completed without delay, and the

same guarantee of cost-reimbursement

which permitted wasteful expenditures also

conferred the necessary power upon contractors, in a period long before material

and manpower controls could be perfected,

to pre-empt the resources necessary for

timely completion of the projects.

Experimental, Research,

and Developmental Contracts

Many contracts devoted to research, developmental, and experimental work were

of the CPFF variety. Much specialized research, such as the exploration of alternative

design possibilities and experimental work

in connection with production processes, was

carried on during the war under prime contracts for the production of various end

items of equipment. But the conduct of basic

research, the development of pilot models of

new equipment, and numerous smaller projects were covered by separate contracts

which recognized the explorative or trialand-error nature of the bulk of the work.

In order to be successful these projects could

not be bound in advance to specific procedures or narrow budgetary limitations. On

the other hand, by loosely defining the scope

of research projects, contracting officers

could use the fixed-price form of contract

while in effect retaining the CPFF principle:

they could let a succession of fixed-price contracts until the desired results had been

achieved. The Signal Corps was said to have

placed all its research and development contracts for World War II on a fixed-price

basis, and by the end of the war an increasing number of Ordnance research and development contracts were of the fixed-price

variety.23 In terms of dollar value, all CPFF

contracts for research and development,

even including the costs of the atomic bomb,

probably did not exceed 10 percent of the

Army's total CPFF expenditures.

Service and Time-and-Material

Contracts

Of smaller magnitude were the service

and time-and-material contracts used by the

Army under particular circumstances and

conditions. An important class of service

contracts were those which launched and

governed the Army Specialized Training

Program (ASTP), administered by the

Purchases Division, ASF, and conducted by

colleges and universities throughout the

United States. ASTP contracts covered all

costs of operation and maintenance and included a fee for use of buildings and plant

facilities; the fee was based on prewar book

values or cost of buildings subject to a specified maximum per cubic foot for the best

facilities used on a capacity basis. Except for

costs of activation, all fees and costs were

determined in advance at a specified rate

23

 (1) Memo, Col Joseph G. Bent, Jr., ICAF,

for Dr. Kent Roberts Greenfield, Chf Historian,

OCMH, 22 Mar 55, OCMH. (2) History of Ordnance Pricing Policy, supplement of 24 Apr 45,

p. 19.
THE COST-PLUS-A-FIXED-FEE CONTRACT 289

of payment per month during the period of

training.24

Time-and-material contracts were another form of cost contract not strictly of

the CPFF variety since they contained no

fixed fee but provided reimbursement for

materials at cost and direct labor at rates per

hour which included profit and overhead.

These were used where no practicable alternative existed and were in keeping with

commercial practice. Typical illustrations

included the repair of vessels and equipment, salvage operations, and minor service

requirements at miscellaneous installations.

This form of contract was approved by the

Comptroller General as not in violation of

the statutory prohibition of the CPPC form

of contract.25 Some service and repair contracts were, however, of the straight CPFF

variety. Thus the only significant Quartermaster CPFF contract in effect in the spring

of 1943 covered the sterilization and rebuilding of used shoes on a mass-production

basis. Since the project was still on an experimental basis and the shoes varied so widely

in condition, the setting of a fixed price was

deemed impossible.26

Cost-Plus-A-Fixed-Fee

Supply Contracts

By far the most important class of CPFF

contracts used by the Army in World War II

was the group of huge supply contracts

under which a large portion of the Army's

aircraft, heavy ordnance equipment, and

ammunition were produced. CPFF supply

contracts for sums over $10,000,000 accounted for nearly 30 percent of the value of

all Army supply contracts placed throughout World War II. The greatest use of these

contracts was made during the defense

period and the six months following Pearl

Harbor. (Table 28) But despite the increasing pressure against the employment of

this type of purchasing, the CPFF contract

continued to be used on an only slightly

diminished scale until the last half of 1944,

by which time the bulk of the Army's contract placements for World War II was

over.

A fundamental feature of CPFF supply

contracts, which set them apart from construction and other types of CPFF contract,

was the nature of the fee. This had important implications in view of the repetitive

type of operations involved under production contracts as opposed to construction

and similar activities. The fixed fee in the

case of supply contracts was something of a

misnomer; it was not a lump-sum profit for

the entire contract but was computed and

stated as a guaranteed profit per unit of

output. Unit fees were determined by the

application of an accepted percentage

figure—subject to the statutory maximum

of 7 percent—to the estimated unit costs of

the product. The total profit for the entire

contract thus represented the multiplication

of the unit fee by the total volume produced.

With the production of astronomical quantities of output under assembly-line methods,

especially in the field of small arms ammunition, small unit fees or variations therein resulted in extremely large total-profit figures.

Inasmuch as unit fees were originally set at

levels which were high in the light of even24

 ASF M-102, Training Unit Contract Instructions—ASTP and AAF College Training Program,

1 Dec 43. 25

 (1) B-38322, 8 Dec 43, 23 Comp. Gen. 410.

(2) ASF, History of Purchases Division, p. 284. 26

 2d Ind, Gen Clay, ACofS for Materiel ASF, for

CofS ASF, 24 Apr 43, to Memo, Maj Gen Thomas

J. Hayes, Actg CofOrd, for Hq ASF, 22 Apr 43, sub:

Report of Steps Taken To Convert Ordnance CPFF

Contracts to Fixed-Price Contracts, file 161 Fixed

Fee, Purchases Div ASF.
290 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 28—WAR DEPARTMENT SUPPLY CONTRACTS PLACED IN WORLD WAR II: RELATIVE

USE OF FIXED PRICE AND CPFF SUPPLY CONTRACTS a

[Dollars in Millions]

a

 Excludes contracts under $50,000 and contracts for subsistence, construction and facilities.

Source: Compiled from WPB, Bur of Program and Statistics, Mil Div, Cost-Plus Supply Contracts in the War Program of $10 Million

and Over, Jun 40-Dec 44, 8 Mar 45.
THE COST-PLUS-A-FIXED-FEE CONTRACT 291

TABLE 29—ARMY AIR FORCES AND ORDNANCE CPFF CONTRACTS: ADVANCE ESTIMATE OF

COSTS IN INDIVIDUAL CONTRACTS OVER $10,000,000

[Dollars in millions]

Source: Compiled from War Production Board, Bureau of Program and Statistics, Military Division, "Cost-Plus Supply Contracts in

the War Program of $10 Million and Over, June 1940-December 1944," 8 March 1945.

tual economies of large-scale production,

profits usually soared as production got

under way, indicating the need for successive reductions in unit fees. It was this high

level of realized profits which led the War

Department to conclude that all CPFF contracts, as well as fixed-price contracts, should

be subject to renegotiation.27

Aircraft and Related Contracts—The

greatest use of CPFF supply contracts, in

both relative and absolute terms, was made

by the Army Air Forces. In the four-andone-half-year period from June 1940 to the

end of 1944, the Air Forces placed nearly

$25 billion in CPFF supply contracts, accounting for over 55 percent of all its individual contracts in excess of $10 million.

The total dollar value of Air Forces contracts in this category overshadowed the

comparable Ordnance figure by a ratio of

nearly 3 to 1.28 (Table 29) CPFF supply

contracts of the remaining Army technical

services were negligible, amounting only to

slightly more than $18 million.

27

 See below, pages 367-368.

28

 War Production Board statistics understate the

volume of CPFF contracts originally placed by Ordnance. See below, Tables 32 and 33, pages 295 and

296. It is probable that the WPB figures represent

estimates made subsequent to terminations or reconversion of a number of CPFF contracts to the

fixed-price basis.
292 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 30—UNIT COSTS AND FIXED FEES UNDER CPFF AIRCRAFT CONTRACTS FOR

INDIVIDUAL CONTRACTS PLACED AT SPECIFIED DATES

a

 Excludes cost of assemblies furnished by government.

Source: Tab C of Memo, Maj Gen O. P. Echols, ACofAS, for Brig Gen A. J. Browning, Asst Dir for Mat, ASF, 15 Dec 44: Sub:

Inspector General's Report on Fixed Fee.
THE COST-PLUS-A-FIXED-FEE CONTRACT 293

A study of unit fees in the aircraft industry reveals that percentage profit margins

were successively reduced as new contracts

were placed. (Table 30) In general, fees in

aircraft contracts let at the beginning of the

emergency had amounted to 7 percent of

estimated cost. This was reduced to 6 percent in the latter part of the defense period,

5 percent during 1942, and 4 percent in

1943 and thereafter. The great volume of

awards during the defense period had converted aircraft contractors almost literally

from pygmies into giants, and fees of even 5

percent on unfilled orders provided contractors with profits huge in proportion to their

net worth.29 The reduction in fees from previous levels to 5 percent met with relatively

little opposition from contractors, but they

stoutly resisted the Under Secretary of War's

decision in September 1942, to limit fees to

4 percent. On 4 November 1942, the Under

Secretary served notice on the Douglas Aircraft Corporation that unless it voluntarily

accepted a 4-percent fee in its new contracts,

the Army would issue mandatory orders under Section 9 of the Selective Training and

Service Act. Thereafter all aircraft firms fell

into line and no large contracts provided

fees in excess of 4 percent. The 4-percent

rate became fairly well standardized, operating both as a minimum and a maximum, so

that differences in contractors' contributions

could not be substantially compensated by

rate adjustments. Important differences in

the contributions of contractors were, however, recognized in at least three distinct

ways: in the determination of excessive

profits under renegotiation; in basing contract fees on estimated costs minus the value

of government-furnished materials; and in

the greater percentage return upon investment automatically accruing to producers

who turned out larger quantities in a given

period of time. It was the Under Secretary's

opinion near the end of the war that the

adoption of the 4-percent rate had "benefited the government more than would have

been the case if we had had a rule permitting a higher rate, and greater variation

between different contracts."

 30

It should not be overlooked that nearly

half of Army procurement from the aircraft

industry was obtained through fixed-price

contracts. Except for firms whose fixed-price

business was relatively inconsequential by

comparison, the profit levels under fixedprice contracts were about double those under CPFF contracts. (Table 31) For reasons already indicated in the discussion of

CPFF construction contracts, no final conclusions as to the relative merits of the two

forms of contract can be drawn from a comparison of profit margins.

Ordnance Equipment Contracts—The

CPFF contracts of the Ordnance Department fell into two major classes. The first

class consisted of contracts placed with private firms for production in private plants

and covered heavy or difficult-to-produce

items of equipment such as tanks, heavy gun

carriages, machine guns, rifles, and miscellaneous metal components of ammunition.

The total number of this group of contracts

was never large, probably not exceeding

sixty-five at any time, and declined steadily

after the spring of 1943. The sums involved

in individual contracts were, however, enor- 29

 By early 1944, Boeing, Bell, Lockheed, and Republic had multiplied their output over one hundred

times since 1938, and the net worth of the four

companies combined amounted to about 1 percent

of their unfilled orders. ASF, History of Purchases

Division, p. 260.

30

 Ibid., p. 261. The 4-percent rate was adopted

jointly by the Army and Navy in dealing with the

entire aircraft industry.
294 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 31—SALES AND PROFIT MARGINS UNDER CPFF AND FIXED-PRICE CONTRACTS:

MAJOR AIRCRAFT FIRMS ASSIGNED TO AAF FOR RENEGOTIATION, 1943a

[Dollars In Thousands]

a

 Figures apply to renegotiable sales for fiscal year of each firm. b

 Numbers are used in lieu of firm names. c

 After state income taxes.

Source: Tab C of Memo, Gen Echols, for Gen Browning, 15 Dec 44, sub: Inspector General's Report on Fixed Fee.

mous. (Table 32) The larger contracts

covered almost every conceivable type of

industrial activity, including research and

development, construction and conversion

of buildings, provision of machinery and

equipment, all activities associated with production, the furnishing of many millions of

dollars' worth of spare parts, complicated

packing and marking operations, and countless unspecified operations. The fees for these

contracts were subject to the statutory maximum of 7 percent; in practice they ran between 5 percent and 6 percent of estimated

cost.31 A number of these contracts were

eventually terminated in various stages of

completion; others were converted to fixedprice contracts after production got under

way and operations could be reduced to

a fairly well standardized and repetitive

basis.32

Ordnance GOCO Contracts—The second class of Ordnance CPFF contracts

covered the operation of the War Department's far-flung empire of governmentowned contractor-operated (GOCO) industrial facilities. These were the huge

chemical and manufacturing plants which

provided the bulk of the ammunition used

by the armed forces of the United States and

its allies under lend-lease. Under these con- 31

 Amounts of individual fees were reported for

five of the twenty-five major contracts listed in

Table 32. In all five cases, the fee came within the

range of 5.3 percent to 5.8 percent of estimated cost. 32

 Clay indorsement cited above, note 26.
THE COST-PLUS-A-FIXED-FEE CONTRACT 295

TABLE 32—ORDNANCE CPFF HEAVY EQUIPMENT AND SUPPLY CONTRACTS: As OF

15 APRIL 1943

Source: Compiled from Ord Dept, Report on CPFF Contracts, 15 Apr 43.

tracts private operators, utilizing government-furnished materials and facilities,

turned out the billions of rounds of small

arms and artillery ammunition without

which all other equipment and preparations

for battle would be superfluous. Some idea

of the magnitude of Ordnance operations

under "management fee" contracts is conveyed by a view of cost estimates in individual operating contracts in excess of

$100,000,000. (Table 33) The predominance of small arms ammunition contracts

in the Ordnance Department's management-fee arrangements resulted from concentration of production in large, integrated,

government-owned establishments. Artillery

ammunition metal components were supplied on a large scale by private firms under

either CPFF or fixed-price contracts; propellant powder and high explosives were

produced in separate government-owned

plants; and the shell-loading and bag-load-
296 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 33—ORDNANCE CPFF MANAGEMENT CONTRACTS: As OF

31 MAY 1943

Source: Compiled from Ord Dept., Monthly Report of CPFF Contracts at Ordnance Exempt Stations, 31 May 43.

ing operations were, because of the great

safety hazards associated with the production of artillery ammunition, completed in a

number of widely dispersed government

establishments.

As in the large aircraft CPFF contracts,

the fees for operation of GOCO facilities

were a specified amount per unit of output,

determined in advance of production on the

basis of estimated costs. In the case of small

arms ammunition, initial contracts placed

throughout 1942 generally used the same

cost estimate and the same fees for all plants.

As large-scale production got under way,

the trend of costs was generally downward

and sufficient cost data were obtained to

permit the downward negotiation of fees.

In a number of cases, especially for .30-

caliber ammunition, actual costs turned out

to be generally in excess of estimates.33 A

comparison of costs and fees for the six prin33

 More prewar production experience was available for .30-caliber than for .50-caliber ammunition,

and the Ordnance Department insisted on holding

the .30-caliber estimates to relatively lower levels.

Memo, Capt Gustav Seidler, AUS, for Maj

Vaughan, 1 Mar 43, sub: CPFF Contracts in Small

Arms Ammunition Procurement, file 161 Cost-PlusA-Fixed-Fee, Renegotiation files ASF.
THE COST-PLUS-A-FIXED-FEE CONTRACT 297

TABLE 34—COSTS AND FEES FOR SMALL ARMS AMMUNITION AT SIX ORDNANCE PLANTS AS

OF 1 MARCH 1943: COST PER THOUSAND ROUNDS OF COMPLETE CARTRIDGES

a

 Negotiations for downward revision were in process on 1 March 1943.

Source: Memo, Capt Seidler for Maj Vaughan, 1 Mar 43, sub: CPFF Contracts in Small Arms Ammunition Procurement.

cipal small arms ammunition plants as of 1

March 1943 indicates that interplant differentials were not, in general, large. (Table

34)

Fees for the production of powder and

high explosives were, percentagewise,

among the lowest for all contracting operations in World War II. (Table 35) The

highest fees in this group were those allowed

for the more novel, complex, and hazardous

operations, running to 6.2 percent of actual

costs in the case of smokeless powder. For

shell-loading plants, which performed final

operations on an assembly-line basis, fees

averaged only 2.3 percent of total cost consisting predominantly of the cost of components from other GOCO plants.34

Administrative Control of Fixed-Fee

Contracts

The preceding pages have indicated the

extent to which the CPFF contract was used

by the Army in World War II, the classes of

procurement involved, and representative

34

 The Ordnance Department furnished most of

the know-how for the planning and operation of

shell-loading plants. By contrast, the new ammonia

plants of World War II, whose operations showed

a 6.5-percent ratio of fees to costs, were operated

under processes developed by contractors. Conversation, author with Dr. Robert O. Bengis, Industrial

Div OCofOrd, 7 Feb 57.
298 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 35—OPERATIONS UNDER CPFF CONTRACTS FOR HEAVY AMMUNITION: CUMULATIVE

COSTS AND FEES TO 30 SEPTEMBER 1944

[Dollars in Thousands]

Source: Price Liaison Section, Purchases Division ASF.

data on costs and fees. As part of the record

it is desirable to summarize some of the administrative controls established, the protracted efforts to convert CPFF contracts to

fixed-price contracts, and some general

conclusions.

Administration of CPFF contracts improved substantially between the time the

early construction contracts were let during

the defense period and the last year or two of

the war. Noteworthy improvements included the expansion and refinement of policies, procedures, and organizations for the

advance estimating of costs, setting and revising fees, defining allowable elements of

cost, and auditing contract operations.

Numerous matters of policy and procedure

involving the General Accounting Office

were clarified, and, at a more basic level, organizations and procedures were developed

for cost analysis and production control, resulting in substantial savings in material and

manpower and increased efficiency of operations.

A fundamental requirement for CPFF

contracts, which was nonexistent for fixedprice contracts, was the necessity for government audit and approval of all accrued costs

under the contract. As far back as Pearl

Harbor, it was evident that greater uniformity in defining allowable costs under CPFF

contracts was needed throughout all the

technical services and their field establishments. Existing regulations and practice

were at once insufficient and overly elaborate to enable contracting and disbursing

officers to make decisions on the allowability

of many cost items. The novel conditions

of war production gave rise to numerous

problems and questions not covered by previous regulations. For example, what should

be the policy concerning specific reimbursement by the government of such costs as

employee bonuses, overtime and shift premiums, vacation pay, retirement programs,

and various welfare activities? Should the

fees of professional accountants and attorneys be included as operating costs, payable
THE COST-PLUS-A-FIXED-FEE CONTRACT 299

by the government, even when the services

of such personnel were devoted to litigation

against the government? What limitations

should be placed upon advertising expenditures and what types of advertising should

be considered as part of the company's

normal operations? Should newspaper and

radio advertising be placed on a par with

conventional advertising in trade or technical journals? How about entertainment,

charitable contributions, compensation and

travel expenses of directors, the cost of plant

newspapers, and the expenses of setting up

an office with twenty-five people to administer payroll deductions for War Bond purchases? Who should defray the expenses of a

truckload of Hollywood "cheesecake" imported to put on a War Bond drive or boost

morale in the plant?

 35

 And what of ten

thousand other more mundane questions—

answered either unsatisfactorily or not at all

by TD 5000—concerning the determination

and allocation of overhead items of cost to

specific contracts with firms holding dozens

of contracts of many sizes in both the CPFF

and fixed-price categories? Until definite

answers to these questions were found, all

cost reimbursement paid to contractors were

purely conditional. The Comptroller General of the United States had the power to

audit all CPFF contracts, to disallow specific

cost items, and to "suspend" specific payments made by disbursing officers of procuring agencies. The procuring agencies were

then required to recover all such payments

by offsets or any other legal means.

At the same time that dependable answers

to these questions in their many ramifications were lacking, the traditional peacetime

method of detailed checking and auditing of

government expenditures to the last penny

before a contractor could be reimbursed put

an impossible burden upon the War Department's struggling and often inadequate wartime fiscal and accounting organization.

Rigid observance of detailed auditing requirements resulted in the expenditure of as

much time and effort on small inconsequential items as on large and important ones.

Contractors with relatively complete and

efficient accounting systems were subject to

the same procedures as those with inadequate and unsatisfactory systems. As a result

of these conditions, contractors dealing with

different technical services were subjected

to different treatment for identical items,

numerous disallowances were made by the

Comptroller General, payments to contractors were slowed down, war production was

hindered, and contracting and disbursing

officers were obliged to look to the War Department for closer guidance.36

On 27 May 1942, two months after the

War Department reorganization, the newly

appointed director of the Fiscal Division,

ASF, addressed an elaborate memorandum

to all technical services, the AAF, all corps

areas, and other major components of

the War Department. This memorandum,

which was countersigned by the Commanding General, ASF, and the Under Secretary

of War, announced a new policy of selective

and flexible audit procedures for work under

CPFF contracts. The new procedures were

designed to minimize routine checking,

35

 This is not a facetious or far-fetched illustration. Contracting officers, auditors, and the staff of

the Comptroller General faced this issue and hundreds of similar specific problems in the course of

the war.

36

 (1) ASF, History of Purchases Division, pp.

269-70. (2) Memo, Brig Gen Arthur H. Carter,

Dir Fiscal Div SOS, for CofCWS et al., 27 May 42,

sub: Administrative Audit of CPFF Contracts, reproduced in WD Manual for Administrative Audit

of Cost-Plus-A-Fixed-Fee Supply Contracts, 14 Aug

42, Exhibit 44 in above cited history.
300 THE ARMY AND ECONOMIC MOBILIZATION

eliminate duplication of audit activities, and

expedite payments to contractors. At the

same time they were to improve and

standardize cost allowance policies, insure

adequate documentation of expenses, and

provide more effective over-all accounting

control. The basic philosophy underlying

the new approach was the development

within the contractor's own accounting

organization of a system of internal controls,

or cheeks and balances, which would automatically reveal irregularities and enable

trained government auditors using selective

audit techniques to protect the interests of

the government. By August 1942 detailed

regulations to achieve these purposes were

embodied in two separately published manuals governing the auditing of CPFF contracts, one for supply contracts and the other

for construction contracts.37 Successive revisions of these manuals and the frequent

publication of official cost interpretations,

together with an augmented staff of trained

accountants, steadily improved the auditing

techniques of the War Department and

adapted them to the exigencies of wartime

cost control.38

At the end of 1943 the War Department

employed approximately 6,400 auditors,

many of them in minor grades, most of

whom were devoted to the auditing of

CPFF contracts. Considering also the

greatly increased number of persons needed

by contractors to meet the requirements of

CPFF accounting, to say nothing of the associated expansion of the General Accounting Office, the costs of CPFF administration

and the desire in many quarters to shift to

fixed-price contracts can be easily understood.39

The refinement of auditing controls was

an important element in protecting the government against improper charges and

wasteful expenditures under CPFF contracts. But the War Department was equally

concerned with the fostering of cost-reducing techniques in the basic processes of production. In this respect operations under

important classes of the War Department's

CPFF supply contracts were perhaps among

the outstanding models of production and

cost control in World War II.

The most closely knit and perhaps the

most successful arrangement for the improvement of efficiency and the control of

costs in a single munitions industry was the

Ordnance Department's organization for

the administration of its CPFF ammunition

contracts. This arrangement was characterized by two developments—the establishment of specialized field co-ordinating agencies of the Ordnance Department, and the

use of industry integration committees for

the exchange of operational ideas and information.

In the summer of 1942, the Ordnance Department established two field control-agencies to govern its ammunition program—

the Field Director of Ammunition Plants

(FDAP) at St. Louis, and the Small Arms

Ammunition (SAA) Suboffice at Philadelphia. The FDAP at St. Louis co-ordinated

the activities of the artillery ammunition industry (calibers 20-mm. and higher) as well

as the basic chemical components for all

37

 WD, Manual for Administrative Audit of CostPlus-A-Fixed-Fee Supply Contracts, 14 Aug 42

(later superseded by WD TM 14-1000 series); and

WD CE Manual for Administrative Audit of CPFF

Construction Contracts, 29 Aug 42. 38

 For additional information in this area, see the

interim historical manuscript, History of Fiscal

Services, 1940-1945 (3 May 1946), MS, OCMH.

39

 During World War II the General Accounting

Office established 225 offices throughout the United

States, each with a staff and contingent of field

auditors, to expedite the audit of CPFF contracts.

Hearing on S. J. Res 80, pp. 663, 694.
THE COST-PLUS-A-FIXED-FEE CONTRACT 301

Ordnance ammunition, while the SAA Suboffice was responsible for smaller calibers.40

The original purpose of the establishment of the FDAP was to transfer the contract placement and administration activities of the Ordnance Department for this

class of procurement out of Washington to

a point in the field which would be closer

to the operating plants. Of the total of seventy-three huge GOCO ammunition plants

operating under Ordnance CPFF contracts,

sixty-one were controlled by the FDAP at

St. Louis. These consisted of several major

categories—chemical, propellant powder,

high explosive, and assembly (bag-, shell-,

and bomb-loading) plants, as well as ammunition container plants. The FDAP became the "home office" for all these plants,

co-ordinating their activities with those of

the privately owned and operated industrial plants supplying metal components for

the ammunition industry.41

Shortly after his appointment the first

director of FDAP and his superiors in Washington decided to adopt standard procedures for the measurements and control of

costs. The private operators of the GOCO

plants, as previously indicated, received

management fees established on a per-unitof-output basis. These fees from the outset

provided adequate incentive for rapid and

high-quality production consistent with

maximum safety requirements, but they

exercised no positive inducement toward the

reduction of costs. It was the belief of the

FDAP that the regular publication and

analysis of production costs on a plant-byplant basis would stimulate competition

among the various plants. With every plant

manager as well as all employees anxious

to make a good showing, the competitive

spirit could be harnessed to pride and patriotism in lieu of the profit motive.42

 Also,

with the accumulation of performance data

the fees themselves, as well as renegotiation

determinations, could be adjusted to reward low-cost operation. Accordingly, detailed reports of actual operations were required on a monthly basis for each plant,

showing quantities of labor and materials

consumed per unit of output for the various

processes, trends in yields and rates of output, and dollar costs per unit. Analysis of

these figures enabled the FDAP and the

individual plants to detect the causes of

weak spots as well as outstanding performance and to improve efficiency all along

the line. The data were also invaluable for

contracting officers and others in revising

fees, in renegotiation proceedings, and for

other purposes. Similar procedures were

undertaken by the Small Arms Ammunition

Suboffice at Philadelphia for the twelve

GOCO plants under its jurisdiction producing 90 percent of all small arms ammunition.43

40

 Small arms ammunition produced by Ordnance

for both the United States and foreign nations included calibers .30, .303, 7.92-mm., 9-mm., .38, .45,

.50, and .60. Thomson and Mayo, The Ordnance

Department: Procurement and Supply of Munitions, Ch. 8, Small Arms Ammunition, p. 2. The

heavy calibers included 20, 37, 40, 57, 60 (mortar),

75, 76, 81 (mortar), 90, 105, 120, 155, and 240

millimeters, as well as 3-inch and 8-inch calibers.

The FDAP was also responsible for the production

of bombs, mines, grenades, and other ammunition.

Ibid., Ch. 7, Artillery Ammunition, p. 4. 41

 Rpt of Ord Dept, Administration of Cost-PlusA-Fixed-Fee Contracts for Operation of Government-Owned Contractor-Operated Ammunition

Plants (65 printed pages with maps and illustrations), 13 Oct 43, copy in OCMH.

42

 Thomson and Mayo, The Ordnance Department: Procurement and Supply of Munitions, Ch.

7, p. 42. 43

 (1) Seidler memo cited above, note 33. (2)

ASF, History of Purchases Division, p. 277. (3) Rpt

of Representative Albert J. Engel, Congressional

Record, Vol. 90 (22 Jun 44), 6521.
302 THE ARMY AND ECONOMIC MOBILIZATION

Working in close co-operation with the

FDAP and the SAA Suboffice were the appropriate industry integration committees

established by the Ordnance Department to

pool knowledge of production methods

which would lead to increased output and

reduced costs. Of a maximum of 131 committees in existence at one time, 75 were

concerned with ammunition.44 The efforts

of the industry integration committees—

combined with those of the ammunition field

offices and the staff of both the Ordnance

Department and the contractor at individual plants—resulted in an enviable

record of cost reduction, increased output,

and technical improvements in both end

products and production processes. Thus,

in World War I the price of TNT had

ranged from 26 cents to 55 cents per pound;

in World War II the cost of TNT produced

in GOCO plants dropped from 29 cents to

7 cents per pound. In April 1941, 7.61 gallons of alcohol were required for each one

hundred pounds of smokeless powder; by

1944 the figure had dropped to 1.9 gallons,

saving an estimated 50 million gallons of

alcohol for this one purpose alone. Numerous statistics in this area provide a substantial case for the efficiency of operations at

the Army's ammunition plants under CPFF

contracts.45

With all the various influences making for

improvement of efficiency under the CPFF

ammunition contracts, it would be difficult

to demonstrate that this form of contract was

less satisfactory for its purposes than the

fixed-price variety. On the strength of the

record, the Ordnance Department was able

to convince Headquarters, ASF, as well as

the Under Secretary of War and Congress,

that abandonment of the CPFF procedure

in the ammunition procurement program

would result in grave damage without compensating benefits. Unit costs of ammunition were highly sensitive to changes in

volume, and unpredictable fluctuations in

ammunition requirements right on up to the

end of the war rendered the use of fixed

prices unsatisfactory. Furthermore, because

of the great safety hazards involved, it was

desirable to eliminate profit-motivated pressures upon cost. Throughout all the efforts

of the War Department to convert its CPFF

contracts to a fixed-price basis, the Ord"

nance Department's GOCO contracts were

exempted. Somewhat parallel administrative efforts were made for the control of

operations under AAF CPFF contracts, but

the size and complexity of aircraft procurement rendered impracticable the same degree of cost control.46

The Conversion of CPFF Contracts

Despite Congressional sanction of the

CPFF form of contract at the beginning

of the defense period, hostility toward this

instrument remained throughout World

War II. By the time of Pearl Harbor committees and individual members of Congress

had received many reports of extravagant

expenditures, pirating and hoarding of

44

 Lt. Gen. Levin H. Campbell, Jr., The IndustryOrdnance Team (Whittlesey House, New York:

McGraw-Hill Book Company, Inc., 1946), p. 118.

This book, whose author was the Army's Chief of

Ordnance during World War II, is replete with

practical information on the Ordnance task in all

its ramifications. Committees were composed of

Ordnance personnel and management representatives from each plant. 45

 Rpt of Representative Albert J. Engel, Congressional Record, Vol. 90 (22 Jun 44), 6519-25.

46

 For a brief summary of AAF administrative controls over CPFF contracts, see ASF, History of Purchases Division, p. 278.
THE COST-PLUS-A-FIXED-FEE CONTRACT 303

labor, bidding up of the prices of materials

and supplies, and the outright waste or destruction of scarce materials by CPFF contractors. Bills to prohibit or limit the use

of CPFF contracts were regularly introduced in Congress both before and after

Pearl Harbor, and the War Department was

constantly on the defensive in explaining the

necessity for CPFF contracting and the

shortcomings of administration thereunder.

Operations under CPFF construction

contracts came in for especially heavy criticism. A common complaint against fixed-fee

construction contractors was their wasteful

disposition of left overs at various stages of

project completion. Thus, charges were

made that many thousands of board feet of

usable lumber were burned to avoid the

trouble and expense of systematic collection

and resale, that high-grade steel was plowed

underground by bulldozers, and that expensive tools were sold at "give away" prices.

Even more serious were complaints from

workers, chambers of commerce, patriotic

observers, and others of the damage to

morale and the war production effort resulting from on-the-job idleness of thousands

of workers with insufficient tasks to keep

them occupied. Some of the most serious

complaints emanated from critical laborshortage areas in which excessive quantities

of labor had been recruited under CPFF

contracts at higher than prevailing wages

and long in advance of actual need. These

reports were not confined to the "tooling

up" period early in the war but continued

on into 1945. It began to be generally felt—

especially in the case of the construction,

shipbuilding, and aircraft industries—that

only the pressure upon costs resulting from

the existence of closely negotiated fixed

prices could compel contractors to exercise

minimum standards of efficiency. Even

loosely negotiated fixed prices, in the light

of renegotiation and other factors, were

thought to be preferable to a continuation

of CPFF contracting.47

From the outset the War Department's

directives and procurement instructions had

stated the official policy of keeping the number of CPFF contracts to a minimum consistent with timely procurement.48

 On 1 July

1942 the WPB Purchases Policy Committee,

on which the War Department had a leading position, proposed the transformation of

CPFF to fixed-price contracts wherever

possible.49 On September 1942 the Under

Secretary of War addressed a lengthy memorandum to the Army Air Forces stating the

official policy of the War Department to

discontinue the use of CPFF contracts for

new procurement except where absolutely

necessary and to take steps to convert existing CPFF contracts to the fixed-price variety whenever possible. Likewise, the Tryon

Statement of War Department purchase

policy, issued on 19 November 1942, called

for the minimum use of CPFF contracts and

their conversion to fixed-price agreements

wherever feasible. Thereafter until the end

of the war, the Army was engaged in an

almost continuous effort to convert its out47

 In addition to the types referred to above,

numerous examples of waste under CPFF contracts

may be found in the hearings and reports of the

Truman Committee, the House and Senate Military and Naval Affairs Committees, the appropriation committees, and others. See also Hearings on

S. J. Res. 80. Many of these charges—notably the

one concerning the burial of high-grade steel—collapsed upon investigation. Groves Commentary,

pp. 110-11. 48

 These directives are so numerous as to preclude

a detailed recital at this juncture. For important

examples, see ASF, History of Purchases Division,

pp. 234-58. 49

 Testimony of Donald Nelson, 2 Mar 44, in

Hearings on S. J. Res. 80, p. 615.
304 THE ARMY AND ECONOMIC MOBILIZATION

standing CPFF contracts, with certain notable exceptions, to a fixed-price basis.50

Until the final year of the war the effort

to convert CPFF contracts to a fixed-price

basis was largely a failure. Although neither

the AAF nor the Ordnance Department was

eager to convert, the greatest barrier was

the stubborn resistance of contractors. Faced

with production problems of the first magnitude and still plagued with many of the

identical pricing difficulties which made

CPFF contracting necessary at the outset,

the majority of aircraft and ordnance heavy

equipment producers in 1943 and 1944

were unwilling to consider conversion. Few

of them were willing to undergo the major

financial and accounting operation required

to effect the conversion process, and protracted negotiations with the General Accounting Office indicated that no conversion would be final until approved by the

Comptroller General. Some contractors,

moreover, felt that they had no legal or

moral obligation to convert since they

would not have accepted the original contract on a fixed-price basis. Still others believed it would be impossible to operate on

a fixed-price basis.

The reluctance of contractors to convert

is well illustrated by this verbal exchange

between a leading aircraft engine producer

(K) and the chief of the Production Division, Air Transport Service Command, at

Wright Field (W):

K. Say, K. B. What's the matter with that

contract of ours over there?

W. We have a directive from Under Secretary Patterson.

K. How would you like a directive from

me now?

W. That's all right. We have lots of bosses.

K. Now, we have the plant going. It will

be up to schedule this month. Why don't you

turn it over to Wright and combine it with

their Lockland operation and make it all one

job. I will take Coppert and Newburgh out

of there, and a few of our men and bring them

back to Detroit. We've established the thing

now. The job is of no interest to us.

W. I don't agree with you.

K. We don't seem to be able to get along

satisfactorily with you fellows. . . . W

write contracts that go through. We're not

going to go through another mess of writing

another contract. We have men all over the

country. The labor situation is getting tough

anyway. . . . There is no interest, no desire

our part to undertake the job of writing the

contract, or to shoulder the many changes

that are involved.

W. What do you suggest that I tell them?

K. Tell them that we're not interested at

all in continuing the operation of the Chicago

plant under any other contract than what we

have, and that we worked hard on that job

and we'll have it up to full production this

month, and if somebody can be enthused and

interested in doing the job the other way, we

will be perfectly willing to step out.51

The more important specific reasons

underlying the opposition to conversion may

be summarized as follows:

1. Many new contracts, such as for the

B-29, still lacked sufficient cost experience 50

 The principal exceptions were research and

development contracts (see above, page 288) and

those covering Ordnance GOCO plants under the

ammunition program. The latter were considered

to be efficiently run under the special administrative procedures already described and to be subject

to special considerations making fixed prices undesirable (see above, pages 294, 302). (1) Hayes memo

cited above, note 26. (2) Rpt of Ord Dept, Administration of Cost-Plus-A-Fixed-Fee Contracts for

Operation of Government-Owned ContractorOperated Ammunition Plants.

51

 Excerpts from memorandum, Telephone Conversation between General [Kenneth B.] Wolfe and

Mr. K. T. Keller, Chrysler Corporation, Detroit,

Michigan, 14 March 1945, copy in OCMH. This

concerned the proposed conversion, to a fixed-price

basis of the contract covering the operation of the

mammoth $175 million Chrysler aircraft motor

plant at Chicago, Illinois. See first entry, Table 52,

page 496.
THE COST-PLUS-A-FIXED-FEE CONTRACT 305

upon which to base a mutually acceptable

price.

2. Constant changes in specifications,

under both old and new contracts for heavy

and complex equipment, were necessary

either for production reasons or to meet the

needs of the using arms. Many of these

changes would unsettle any fixed price as

soon as it was established. Neither contractors nor procuring agencies had the time to

debate the proper price adjustment called

for by each change; this would be taken

care of automatically under CPFF contracts.52

3. If conversions were prospective only

(to cover the uncompleted portion of contracts ), production shutdowns would be required in order to take inventories of all

parts, supplies, materials, and goods in

process. This would result in chaos and

drastic curtailment of output.53

4. Retroactive conversions to the beginning of the contract required revisions of the

contractor's accounting system, separate

costing of government-furnished equipment,

complete adjustments for fixed-fee subcontractors simultaneously working under

numerous prime contracts, and other complications.54

5. It was feared by contractors and many

officers of the War Department that all conversions would have to receive the approval

of the Comptroller General. Recent rulings

of the Comptroller General (B-34484 and

B-34503) had indicated that he would require a full accounting of expenditures

under the conversion and would overrule

conversions where the fixed price was in

excess of the amount payable under the original contract. Binding decisions between

contractors and procurement agencies could

not be made, and elaborate cost-accounting

operations, the elimination of which was a

basic reason for conversion, would continue

thereafter.55

52

 Between two hundred and four hundred

changes per month were reported to have been made

on M4 and M4A1 tanks. For M5A1 tanks, the number of engineering changes was said to have been

even greater. Incl 2 to Safford ltr cited above, note 5. 53

 Many contractors had not taken a physical inventory since the beginning of the war and, by

1944, individually held many millions of dollars

worth of government-owned materials, parts, supplies, and subassemblies. In the spring of 1945 the

Ford Motor Company indicated that the taking of

a physical inventory for the conversion of one of its

tank contracts would cause at least a three-week

shutdown, with resulting loss of employees and objections from labor groups, as well as the shutdown

of the Fisher (General Motors) and Chrysler plants

which depended on Ford for tank engines. Ordnance

Department Program—Conversion of CPFF Contracts, 18 Apr 45, attached to Memo Routing Slip,

Col Harold Shepherd, OCofOrd, to Lt Col Frank S.

Rowley, Chf Legal Br, Dir of Materiel ASF, 19

Apr 45, file 161 CPFF, Purchases Div ASF.

54

 In order for a fixed price to be adopted in a

prime contract, it was necessary to obtain firm

prices in important subcontracts, but this could not

be done when the subcontractor was producing

jointly for a number of primes under various contract conditions. The unraveling of the many practical and legal complexities involved might well

run long after the end of the war. In March of 1945

it was estimated that under the most optimistic time

schedule the conversion of Douglas Aircraft Company contracts could not be effected prior to 1 May

1946. Incl 2 to Memo, Maj Gen Oliver P. Echols,

ACofAS Hq AAF, for USW, 2 Apr 45, sub: Conversion of CPFF Contracts to Fixed Price Basis,

file 161 CPFF, Purchases Div ASF. 55

 Although the War Department officially took

the position that conversions could be made without

consulting the Comptroller General, failure to do

so would leave contractors "holding the bag," since

cost disallowances and suspensions by the comptroller still had to be reckoned with. For this reason

some contractors insisted that their adoption of a

conversion agreement would be made only with the

written, advance approval of the Comptroller General. (1) Memo, Brig Gen Aaron E. Jones,

OACofAS AAF, for Special Representative of USW,

12 Sep 44, Sub: Proposal of Lockheed Aircraft

Corporation To Convert CPFF B-17 Contracts to

Fixed Price. (2) Memo of Conf With the Under

Secretary of War (unsigned), 28 Sep 44. (3) William C. Foster, Memo of Conf Held in Judge Pat-
306 THE ARMY AND ECONOMIC MOBILIZATION

By early 1944 only three aircraft contracts

and eight ordnance CPFF equipment contracts of significant size had been converted.56

 At this time the whole conversion

problem was highlighted by the introduction

in Congress, by Senator Homer Ferguson, of

Senate Joint Resolution 80 prohibiting the

further use of CPFF contracts except when

specifically authorized by the departmental

secretary and calling for compulsory conversion of existing CPFF agreements within

ninety days after the passage of the proposed

legislation. Senator Ferguson introduced

into the hearings on this resolution his own

testimony and a report which cited flagrant

examples of waste, inefficiency, contractor

indifference, in-plant idleness of workers in

critical labor areas, and other abuses under

CPFF operations. During the extensive

hearings, testimony was given by most

of the war production leaders, including

Donald Nelson and the Under Secretaries

of the War and Navy Departments.57

As in previous hearings both before

and during the war, the War and Navy

Departments defended the necessity for

CPFF contracting under various conditions

and made strong representations that compulsory conversion, especially under a drastic time limitation, would play havoc with

vitally needed war production.58 As a result

the legislative proposal was abandoned, and

the War Contracts Subcommittee of the

Senate Committee on Military Affairs made

the following statement:

We soon came to the conclusion that the

form of contract is not the decisive factor in

determining the efficiency or inefficiency with

which manpower, materials, and machinery

are put to use in war production. In fact, we

have found many situations where highly

effective operations were being conducted

under cost-plus-fixed-fee contracts and where

any other form of contract would have contributed to inefficiency.59

Although the threat of legislative compulsion to convert all CPFF contracts was

once more removed, the net result of the

hearings just described was increased pressure by the War Department for conversion by contractors in nonexempted categories. At the same time, rumors that the

expiring renegotiation law would not be

extended beyond 1944 led a number of

aircraft contractors to look favorably upon

conversion of certain of their contracts, some

of them nearing completion, to a fixed-price

basis. This about-face was looked upon with

considerable skepticism in certain quarters

of the War Department, where it was felt

that conversion with probable higher profit

margins would not be an unmixed blessing

for the government.60 Nevertheless, Under

Secretary Patterson was firm in his view that

terson's Office, 28 Sep 44, sub: Conversion of CPFF in the long run conversion would be econom- Contracts to Fixed-Price Contracts and Continuation of Renegotiation During 1945. (4) Memo (unsigned), 6 Oct 44, sub: Discussion Relationships

With the Comptroller General. All in file 161 CPFF,

Purchases Div ASF. 56

 Testimony of Under Secretary Patterson, 7 Mar

44, in Hearings on S. J. Res. 80, p. 673. 57

 Hearings on S. J. Res. 80, pp. 591-764, covering the period 2-8 March 1944. 58

 The insuperable obstacles posed by the pending legislation are well described in: (1) Memo,

Col Irving A. Duffy, OCofOrd, for Chf Legal Br,

Dir of Materiel Hq ASF, 10 Jun 44, sub: Senate

Military Affairs Committee Revision of S. J. Res.

80 Dated 15 May 1944; (2) Teletype, Carroll, Materiel Command Wright Field, to Chf Legal Br,

Procurement Div ACofAS AAF, 6 Jun 44; (3)

Memo (unsigned), 7 Jun 44, sub: Proposed Substitute for S. J. Res. 80. All under Tab C to Notes

on the Settlement of Terminated Cost-Plus-A-FixedFee Supply Contracts, 12 Oct 44, in file 161 CPFF,

Purchases Div ASF. 59

 78th Cong., 2d Sess., Year-End Report of the

War Contracts Subcommittee to the Committee on

Military Affairs Pursuant to S. Res. 198, 18 Dec

44, p. 1. 60

 Teletype cited above, note 58(2).
THE COST-PLUS-A-FIXED-FEE CONTRACT 307

ical and in the public interest from other

standpoints. He saw no difficulty in obtaining an extension of statutory renegotiation

through 1945 and looked to renegotiation as

a method of protecting the government

against any major mistakes in pricing under

conversion agreements.61

Despite persistent efforts throughout 1944

only a handful of conversions were effected.

Early in 1945, however, a development occurred which undoubtedly helped to crystallize the Under Secretary of War's determination to insist upon the conversion of all

CPFF contracts except those in the

exempted classes. On 19 February 1945,

there was officially transmitted to the Under

Secretary a collection of reports and recommendations made by the War Department

Inspector General following a special inspection in the summer of 1944 of contracts,

operations, and earnings in a number of

aircraft plants under War Department contracts. The Inspector General's findings

were almost uniformly a recital of excessive

fees and profits under CPFF contracts, resulting from substantial overestimates of

costs at the time contracts were let. In addition, The Inspector General made frequent

criticisms of waste and inefficiency, as well

as of loose pricing in the case of fixed-price

contracts. For almost every individual plant,

The Inspector General recommended that

fees be reduced or contracts converted to

the fixed-price basis.

As one example, The Inspector General

pointed to an initial contract calling for two

thousand planes for a fee of $10.4 million,

based on an estimated cost of $208.6 million. Despite heavy starting-load costs, the

total cost of the planes turned out to be only

$147 million. Nevertheless, a second lot of

two thousand planes from the same plant

was contracted for at a fee of $7.2 million,

representing a fee of 4 percent upon a calculated cost of $179.2 million. Since the heavy

initial costs had already been paid for under

the first contract, The Inspector General felt

that the new arrangement was merely a device to allow excessive fees while specifying

a nominal 4-percent profit rate. The Inspector General further noted that the fees at this

plant (only one of several under the same

operator) amounted to several times the

outstanding capitalization ($6 million) of

the entire firm.62

In the case of an aircraft engine manufacturer, The Inspector General noted that

under the contract a fixed fee of 6 percent

was allowed for the initial ten thousand engines, based on estimated costs of $25,315

per engine despite the fact that another firm

was supplying a similar engine at the fixed

price of $21,020. The Inspector General

stated that the CPFF contractor in estimating his own costs had added over $4,000

per engine to the fixed price of his competitor for tooling costs, starting load, labor inefficiency, abnormal scrap, and similar

items, resulting in additional fee costs to the

government of $2.4 million under the contract. The Inspector General's further remarks in this case are typical of those in his

report covering some twenty-one plants in

the aircraft industry:

It is not believed a contractor should receive

a fee based on inefficiency. The total fixed fee . . . to be paid the contractor is 

168.70. In this case the contractor assumes

no risk except that some unrelated expendi61

 Foster memo cited above, note 55(3).

62

 IG, 29 July 1944, comment by The Inspector

General in Special Inspection of the Administration

of War Department Contracts . . . , Tab A, I

to Memo, Gen Echols, ACofAS Materiel and Services, Hq AAF, for Brig Gen Albert J. Browning, Asst

Dir of Matériel ASF, 15 Dec 44, file 161 Cost-PlusA-Fixed-Fee, Renegotiation files ASF.
308 THE ARMY AND ECONOMIC MOBILIZATION

ture made by him may not be allowable

under the contract, as the contracting officer

and/or the General Accounting Office may

determine, which is on the whole a very small

amount. In this case the Government has

built the contractor a large expensive plant,

has furnished him the machinery and equipment, and has advanced him funds with

which to operate. He is now permitted to

rehabilitate and to use some of his other plants

to manufacture parts for the engine. He is reimbursed for salaries paid to all the executive

officers and all other employees at this plant,

and further he is reimbursed for a proportion

of the overhead of the Detroit home office.

Under the foregoing circumstances, it is believed that the present fixed fee is exorbitant

and should be substantially reduced.63

By the time the official file was transmitted to Under Secretary Patterson, The

Inspector General's report had been subjected to elaborate refutation and comment

by the Air inspector and the director of Procurement, Air Technical Service Command,

at Wright Field, the AAF Materiel Command in Washington, and the Under Secrechase policy.64

 Since The Inspector General

had challenged the basic philosophy underlying the CPFF form of contract, indicating that established percentage fees ought to

be applied to figures in the neighborhood of

actual costs when these consistently fell below the advance estimates, a full-dress review was made of the nature and effects of

CPFF contracting. The special representative of the Under Secretary pointed to the

fact that The Inspector General's report

really called for a return to the outlawed

CPPC form of contracting, that the reduction of actual costs below the advance estimates was precisely what the government

hoped for in its CPFF contracts, and that

the government had no more claim to a

downward revision of the fee after contract

completion than the contractor would for

an upward revision if the circumstances

were reversed.

Furthermore, the fees allowed by the AAF

compared favorably with those of the Maritime Commission for shipbuilding and for

the more complex production activities at

Ordnance GOCO plants. The aeronautical

industry was currently turning out 30 times

the dollar value, as well as from 30 to 50

times the physical volume, of its production

before the war but was only earning 15 times

as much before taxes and 3 times as much

after taxes. Renegotiation boards, with few

exceptions, had found earnings in the aircraft industry reasonable, and the several

reductions over the previous three years from

7 to 4 percent of estimated costs were

thought to have carried fees as low as they

could go without serious impairment of incentives. Finally, the special representative

pointed to a basic difference between the

American system for operating governmentowned plants as contrasted with that of the

British. The British engaged management

on a fixed annual fee. The U.S. Government, on the other hand, in the case of both

ordnance and aircraft plants provided fees

on a per-unit-of-output basis. This rewarded management in proportion to its

productivity, providing a powerful incentive

to increased output:

In a discussion with British production officials within the last two weeks Brigadier General Albert J. Browning discussed the

apparent greatly increased production in

Government-owned plants in this country as

63

 IG, 2 August 1944, ibid. 64 (1) Reply by Air inspector on each individual

comment of TIG. (2) Memo, Brig Gen Orval R.

Cook, Chf Procurement Div, Wright Field, for CG

AAF, 11 Nov 44, sub: Inspector General's Report

on Fixed Fees. (3) Memo, Gen Jones, Chf Procurement Div, ACofAS Materiel and Services, for Col

Foy, Special Representative of USW, 15 Feb 45,

sub: Army Air Forces CPFF Contracts Reply of

The Inspector General. All in file 161 Cost-PlusA-Fixed-Fee, Renegotiation files ASF.
THE COST-PLUS-A-FIXED-FEE CONTRACT 309

compared with Government-owned plants in

Great Britain. The British officials expressed

amazement at the greater rates of production

here. Since technical designs and equipment

are roughly similar, the major difference

appears to be in the manner of setting

the compensation.65

In a separate memorandum the Under

Secretary's representative stated his conclusion that the existing methods of setting fees

were satisfactory and that The Inspector

General had agreed that no further comments would be made on these points in

future reports if the Under Secretary concurred in this conclusion.66

The basic impetus to conversion of CPFF

contracts was not, however, a concern with

excessive contractor earnings or the adequacy of incentives to output. Fundamentally, the objective was to obtain an acrossthe-board reduction in costs, expressed in

terms both of dollars and real resources. The

overwhelmingly preponderant element in

total contract charges was not contractor

fees or profits but costs. A small percentage

reduction in costs would compensate many

times for a much larger percentage increase

in contractor earnings. The challenging

problem facing the War Department was

how to make cost expenditures painful to

contractors without inhibiting their operations. This could not be achieved by an

elaborate system of auditing and related

controls as required in the case of CPFF

contracts. Nor, as the hearings leading to

the adoption of renegotiation in 1942 had so

abundantly demonstrated, could it be accomplished merely by the adoption of generous figures in the simple fixed-price form

of contract. Fixed prices based on artificially

high advance estimates of cost, with no subsequent provision for cost re-examination,

could be far more dangerous than fixed fees

based on the same estimates. Ever since 1942

the War Department had been working on

the seemingly insoluble riddle of how to

establish, in advance of production, fixed

prices which would be close to actual costs

and at the same time encourage production

efficiencies which would result in final costs

far below the original estimates. By 1945

the Under Secretary believed that sufficient

answers to this question had been found to

warrant the discontinuance of the CPFF

contract.67

Accordingly, on 8 March 1945 Patterson

addressed a memorandum to the Commanding Generals, ASF and AAF, ordering

the conversion, by the earliest possible date,

of all War Department CPFF contracts not

in exempted categories. The two commands

were directed to submit, no later than 1

April 1945, a plan which listed each outstanding CPFF contract and the date when

conversion was expected. The plan was to

proceed on the assumption that contracts

not so converted would be terminated and

replaced by mandatory orders under the

Selective Service Act and related legislation.

Recently developed pricing articles in Procurement Regulations, as well as a new incentive-type contract introduced by the

Navy, were available for establishing the

new terms of the converted contracts.68

This decision marked the launching of a

concerted drive at numerous echelons of the

War Department to accomplish the huge

task of conversion. Exploratory field trips

65

 Memo, Col Foy for USW, 19 Feb 45, sub: Fees

on AAF CPFF Contracts, file 161 Cost-Plus-AFixed-Fee, Renegotiation files ASF. 66

 Memo, Col Foy, for USW, 19 Feb 45, sub:

Recommendation as to Method of Setting Fees on

Air Forces CPFF Contracts, file 161 Cost-Plus-AFixed-Fee, Renegotiation files ASF.

67

 See below, pages 330-32. 68

 Memo, USW Patterson for CG ASF and CG

AAF, 8 Mar 45, file 161 CPFF, Purchases Div ASF.
310 THE ARMY AND ECONOMIC MOBILIZATION

were made by officers in the Purchases Division to apprise contractors of the decision

and to hold preliminary discussions of the

numerous problems involved. Leading

CPFF contractors were called to Washington to attend a meeting in the Under Secretary's office, at which time they were

informed that there was no turning back.

A committee was established to draw up

detailed procedures and devise means to

circumvent the problem of physical inventories with their accompanying plant

shutdowns. The Under Secretary and a

delegation of high-ranking officials met with

the Comptroller General and obtained his

approval of the broad plans for conversion.

Training classes were established in the field

for negotiators, contract administrators,

auditors, price analysts, lawyers, and others

involved in the conversion program. The

Army Air Forces and the Ordnance Department submitted comprehensive conversion

plans in response to the 1 April deadline.

These were found not to be sufficiently expeditious and revised schedules were called

for, to be submitted not later than 1 June.

By mid-1945 the conversion program was

making substantial progress and the outstanding value of CPFF commitments had

been considerably reduced by terminations,

completions, and conversions. With the advent of mass terminations signalized by V-J

Day, the complexities of conversion were

superseded by the complexities of contract

settlement.69

69

 See below, Part Seven. Principal documents in

support of the above paragraph include: (1) Memo,

Harry E. Howell to Foster, 14 Mar 45, sub: Problem of Inventories in Converting CPFF Contracts;

(2) Safford ltr and incls cited above, note 5; (3)

Memo, Col Foy for Foster and Howell, 31 Mar 45;

(4) Ltr, Gen Safford to CG ASF, 31 Mar. 45, sub:

Plan for Converting CPFF Supply Contracts; (5)

Echols memo (cited above, note 54) with incls,

Plan for Conversion, with Exhibit A, and Copy of

teletype, dated 3 Mar 45; (6) Ltr, William L. Marbury, Legal Asst to Dir of Materiel ASF, to Col

D. C. Swatland, Materiel Command Wright Field,

4 Apr 45 (detailed summary of meeting of WD

officials with the Comptroller General of the United

States, 2 Apr 45) and attached outline of conversion, plan; (7) Memo, Foster for CG AAF, 28

Apr 45, sub: Conversion of CPFF Contracts to

Fixed-Price Basis (eight pages of detailed procedures and problems). All in file 161 CPFF, Purchases Div ASF; (8) ASF, History of Purchases

Division, pp. 254-58.
CHAPTER XIII

Pricing in Fixed-Price Contracts

The administration of its fixed-price contracts for World War II forced the Army to

come to grips most completely with the basic

issues of wartime pricing policy. As the nation moved rapidly through the defense

period into a wartime economy, many of the

functions of the traditional price system were

supplanted to an unprecedented degree by

direct controls. The allocation of basic industrial materials, to facilitate both the

creation of industrial capacity and the production of finished munitions, was accomplished increasingly by administrative decisions and procedures stemming directly

from the character of national war production objectives. The maintenance of the

general price level for civilian-type products

as well as for materials and supplies entering

jointly into civilian and war goods was accomplished chiefly by controls set up and

administered by the Office of Price Administration. The organization of production

and the application and modification of

technology within productive establishments were determined increasingly by criteria of engineering efficiency and feasibility,

the necessities of conservation and substitution, the rapidity of invention resulting from

the forced draft of scientific research and

development, and other factors directing the

use of real resources independently of considerations of price.

This independence of basic economic decisions from price considerations was, however, only partial, and it varied in degree

from sector to sector of the total economy

depending upon the necessity and practicability of alternative methods of control.

After Pearl Harbor, when the supreme mandate upon the procuring agencies was the

provision of adequate munitions in time to

win the war, the role of price in placing most

prime contracts was seemingly relegated to

a minor position. But there was one pricing

consideration so fundamental and all-pervasive for all military procurement that it

was simply taken for granted. This was the

requirement that prices in military contracts

be adequate at all times to cover costs and

permit the effective prosecution of the war

production program. It was this requirement, rather than the "greed of munitions

makers" or an unexplainable accumulation

of one-directional errors, which resulted in

the development of widespread overpricing

in the year following America's entry into

the war.

The CPFF contract may be regarded in

this context as a device to outflank the

formal problem of advance price determination while guaranteeing the coverage of all

costs. Loosely negotiated fixed-price contracts achieved a substantially similar guarantee while at the same time observing the

formality of advance agreement upon price.

But neither the evasion nor the purely nominal discharge of the traditional requirement

that contract prices be determined in ad-
312 THE ARMY AND ECONOMIC MOBILIZATION

vance could avoid the consequences of the

failure to price correctly. Correct pricing required the minimization as well as the coverage of costs if economy of real resources

and the proper control of profits, inflation,

and the expenditure of public funds were

to be achieved.

In order to attain these ends in the absence of competitive pressure upon costs, it

became necessary for the procuring agencies

to enter a field of operations completely foreign to traditional, peacetime procurement

activities. This field was the examination

and analysis of the costs of individual firms

engaged in production under war contracts.

Under normal business conditions the costs

of a low-bid, fixed-price contractor were of

no interest to the government and might

even be said to constitute legitimate "trade

secrets" properly confined to the management of the firm involved. In time of war,

however, when the success of the procurement program and even the outcome of the

war itself depended upon the most efficient

utilization of all resources, the costs of each

producing firm became a matter of concern

to the nation as a whole. Accordingly, the

Second War Powers Act, under Title XIII,

gave the government the power to inspect

and audit any books, records, documents,

or physical evidence pertaining to war contracts, subcontracts, or orders in furtherance of war production.1

The use of this power, as well as the conduct of many other facets of the total procurement program, required a revolution

in previously existing legal concepts, business practices, governmental procedures,

and basic attitudes. The relationship between the government and its contractors

was gradually transformed from an "arm's

length" relationship between two more or

less equal parties in a business transaction

into an undefined but intimate relationship

—partly business, partly fiduciary, and

partly unilateral—in which the financial,

contractual, statutory, and other instruments

and assumptions of economic activity were

reshaped to meet the ultimate requirements

of victory in war.

Under the new conditions, contracts

ceased to be completely binding: fixed prices

in contracts often became only tentative

and provisional prices; excessive profits received by contractors were recoverable by

the government; and potential losses resulting from many causes—including errors,

poor judgment, and performance failures

on the part of contractors—were averted

by modification and amendment of contracts, with or without legal "consideration," whenever required by the exigencies

of the war effort. These new conditions were

bewildering and often disturbing to those

with conventional attitudes, but in the main

both business and government showed remarkable flexibility in adapting their behavior to practical necessity. In the absence

of such adaptation the nation's heroic industrial accomplishments in World War II

could not have been achieved.

The foregoing is not meant to suggest that

the law of contracts was scrapped or that

procurement activities in World War II proceeded in a legal vacuum. On the contrary,

every effort was made to assure the legal

sufficiency of all contracts at all times. The

focal point of the legal revolution lay in the

progressive modification of the law, first by

Congress, next by the executive arm of the

government culminating in opinions of the

Attorney General, and eventually through

ratification by the courts. The cardinal

1

 56 Stat. 176, 27 Mar 42, Second War Powers Act.
PRICING IN FIXED-PRICE CONTRACTS 313

principle underlying all these changes was

the furtherance of the war effort.2

It was within this novel legal and institutional framework that the Army's basic policies and procedures in the pricing of war

contracts were developed. Only in such a

milieu of freedom of action and experimentation was it possible for the Army to forge

and maintain the instruments of purchase

policy which would be suitable for the complex, dynamic, and unprecedented needs of

total economic mobilization.3

Price Analysis

The wide assortment of pricing techniques which eventually became known in

the Army Service Forces as "price analysis"

had its beginnings in the defense period.

Many large contracts for aircraft, heavy

ordnance, and other equipment were placed

at this time on a fixed-price basis through

negotiations with firms which were for all

practical purposes "sole sources." In the absence of competitive-bid prices it was necessary to obtain cost estimates from each contractor in support of his price proposals.

Because of the many uncertainties involved—including future prices and availability of labor and materials, the necessity

for expansion of the contractor's plant,

equipment, and organization, the lack of

adequate accounting systems, and many

other factors associated with conversion to

war production—these cost estimates were

often very crude. Nevertheless, because of

the pressure to confine the use of CPFF contracts to cases where the problem of advance

pricing was virtually hopeless, it was War

Department policy to make maximum use

of fixed-price contracts despite the unsatisfactory basis for many of the prices actually

adopted.

In other areas of procurement, competition was initially available and contracts

could be let to low bidders. As the rearmament program absorbed more and more of

the nation's remaining productive capacity,

it became necessary to make wide use of less

efficient firms and to pay differential prices

which would cover the increased costs of

marginal firms. In negotiating prices under

these conditions, informal bidding procedures provided data for price comparisons

which could be used with varying degrees

of effectiveness in persuading contractors to

keep their prices in line. But with the disappearance of available capacity from more

and more industries, each individual firm

tended to become a monopoly or "sole

source" for additional quantities and items

of required procurement. Under these circumstances price comparisons would have

to be supplemented by cost analysis on a

wider and wider scale in order to insure reasonable prices and prevent the process of

contract negotiation from degenerating into

2

 The classic example of the application of this

doctrine was the opinion of the Attorney General

(40 Op. Atty. Gen. 225, 29 August 1942), permitting the exercise and delegation of almost unlimited

contracting powers by the Secretary of War under

Executive Order 9001 of 27 December 1941. Executive Order 9001 was the detailed Presidential

order delegating the sweeping powers the President

had received under the First War Powers Act. These

powers permitted the setting aside of the law of contracts wherever deemed essential to the war effort

and in large measure resulted in the substitution of

administrative law for previously existing statutory

and common law. Under the Attorney General's

opinion, redelegation of these powers without limit

was permitted so long as this was essential to the

prosecution of the war; otherwise they would

amount merely to "dead powers." 3

 For a survey of numerous legal problems involved in procurement pricing in World War II,

see David Fain and Richard F. Watt, "War Procurement—A New Pattern in Contracts," Columbia

Law Review, Vol. 44, No. 2 (March 1944), 127-

215.
314 THE ARMY AND ECONOMIC MOBILIZATION

a haggle over hypothetical claims with little

foundation in reality.

These were the conditions existing shortly

after Pearl Harbor when Congressional

hearings gave wide publicity to the charge

of profiteering in war contracts.4 War Department procurement officials were well

aware at this time of the necessity for closer

pricing and that this would require more

intensive use of cost analysis prior to the

adoption of fixed prices in contracts. But

they were also aware of what was not generally understood or appreciated by the

public at large—the almost insurmountable

difficulties associated with the task of developing the machinery and procedures for effective cost analysis on the scale required by

the gigantic procurement program of World

War II. For the larger part of 1942 the total

procurement organization of the War Department was strained to the limit in determining requirements, translating requirements into contracts, developing new and

improved weapons and equipment, refining

specifications, searching out additional productive capacity, creating new capacity,

participating in the development, launching, and operation of new material control

systems, scheduling and expediting production, and discharging numerous other responsibilities. All these functions had to be

performed while the Army was in the throes

of the complete reorganization and expansion of its own far-flung establishment.

Apart from the quantitative demands upon

the time and energies of procurement personnel, the achievement of effective cost

analysis depended upon the progress of the

procurement program to reasonable maturity and stabilization, the development of

established working procedures and relations with contractors, the creation or refinement by contractors of their own cost accounting systems, and the education of all

concerned in the fundamentals of wartime

pricing policy.

Instruments of Price Analysis

Notwithstanding these difficulties, considerable advance in developing the instruments of price analysis was made in 1942.

A primary instrument was the contractor's

proposal form, adopted or improved in 1942

by all the technical services. This form covered all important aspects of proposed contracts but was predominantly concerned

with details of cost and price. It required the

contractor's written statement of estimated

costs in support of his proposal to undertake a given contract. With the refinement

and standardization of proposal forms the

required cost breakdowns became increasingly specific so that negotiators could more

easily discover questionable inclusions in

cost.5

A second instrument to facilitate price

analysis was the negotiator's check list,

which listed all significant considerations to

be identified and weighed by negotiators in

their evaluation of the propriety of proposed

prices and other contract terms. The check

list pointed to a wide variety of specific considerations under a dozen or more main

headings such as item description, contract

placement procedure used (formal competition, competitive negotiation, or sole-source

negotiation), type of contract involved

(fixed-price, modified fixed-price, or

CPFF), comparisons of past prices and fac4

 See below, Chapter XV.

5

 By mid-1942 the Chicago Ordnance District

had developed a standard eighteen-page proposal

form for all important awards. History of Ordnance

Pricing Policy, Exhibits 1, 13.
PRICING IN FIXED-PRICE CONTRACTS 315

tors affecting their significance, basis for

CPFF fees, individual categories of cost, effect of government-furnished tools and

equipment upon price, effects of subcontracting upon pyramiding of taxes, profit,

and so on, and the implications of proposed

acquisitions of land, buildings, machine

tools, and other equipment.6

A third instrument of price analysis

developed in 1942 was the negotiation

summary sheet, or its equivalent, used in

procurement offices to provide a permanent

record in each contract file of the significant considerations underlying each award.

The details of the summary sheet varied

from contract to contract since the basic

purpose was to record important elements

of the particular negotiation concerned.

The summary sheets were invaluable both

for providing important pricing information for use in future negotiations and for

defending the terms of the contract should

the occasion therefor arise.7

Still another tool of price analysis was

available in the data prepared in support

of contract clearance requests. Because contracts subject to the clearance requirement

were larger and more important than others,

negotiations were more complex and contracts had to be drawn with greater care.

In order to provide adequate justification

of contract terms reviewable by higher

authority, clearance applications had to

contain much more information on comparative prices, costs, and other factors than

did the ordinary negotiation summary

sheets for smaller contracts. For all these

reasons the detailed clearance applications

provided a fertile source of information on

many types of pricing situation.8

By 1943 the progress of the procurement

program as a whole had reached the point

where the War Department was able to

devote a major effort to the task of war

contract pricing in all its ramifications. In

the spring of 1943, beginning with the

definite adoption and publication in Procurement Regulations of the policies enunciated in the Tryon Statement, a thoroughgoing revision and consolidation of organizations, procedures, and instruments for

improved pricing was undertaken. Within

the Purchases Division, ASF, the office of

Assistant Director for Pricing was created

to concentrate under one head the supervision of all functions relating to price

analysis, negotiation aids, contract clearance, renegotiation, price research, and

liaison with the Office of Price Administration. Each technical service was made

responsible for establishing at its headquarters level, one or more offices or agencies for the discharge of these functions, and

every district or field procurement office was

to install a price and cost analysis unit,

staffed with competent personnel, to assume

the many tasks required by the new closepricing program. Elaborate liaison machinery was developed so that War Department pricing policy could be rapidly and

efficiently transmitted and implemented

throughout the Army's entire nationwide

procurement organization. Close liaison

permitted a two-way exchange of ideas and

facilitated the prompt modification of procedures to reflect the realities faced by

6

 Price Negotiation Check List, accompanying

Memo, Col Alfred B. Quinton, Jr., Asst to Chf Industrial Service OCofOrd, for Manufacturing Arsenals, Ord District Offices, and Operating Divs of

Industrial Service, 22 Apr 42, sub: Contract Negotiations and Clearance of Awards, History of Ordnance Pricing Policy, Exhibit 2-A. 7

 See par. 2 of memo cited above, note 6.

8

 History of Ordnance Pricing Policy, Exhibit

18-A.
316 THE ARMY AND ECONOMIC MOBILIZATION

contracting officers in the front lines of

procurement.9

One of the first steps taken under the

new intensified pricing program consisted of

measures to refine, simplify, and standardize

the numerous contractor proposal forms in

use by the technical services. By the end of

1943 twenty-one different proposal forms

had been consolidated into two: War Department Procurement Form 1 (request for

proposal), and Form 2 (contractor's proposal ). As already noted, these forms were

devised to elicit the cost and price data necessary for adequate analysis and negotiation

of prices for all types of procurement. In order to minimize burdens upon industry, the

forms were provided with "built-in" flexibility. They required individual contractors

to supply only information pertinent to the

particular negotiation and permitted a maximum of data to be filled in by the procuring

agency. Even these revised forms underwent

modification, and alternative forms were

permitted for types of procurement peculiar

to particular services.10

In addition to improving existing instruments of price analysis, the War Department

undertook the development and refinement

of many new sources of information. By the

fall of 1943, the results of renegotiation for

the first fiscal year under the program became available. The Purchases Division,

ASF, maintained a central file of renegotiation data, including copies of all renegotiation agreements with forward pricing provisions, for the use of all interested

agencies.11

A special series of cost analysis reports for

purposes of renegotiation was required of

cost analysis sections in the technical services,

and these reports were available to contracting officers for pricing purposes.12

 Some

services, such as Ordnance, prepared a

weekly digest of the basic terms of all significant purchase actions by the service's procurement offices throughout the country.

The digest was circulated to all contracting

officers as a guide to the latest contract prices

and revisions thereof; additional data could

be obtained by contracting officers upon

request.13

Of more general significance was the

index of contract price changes for all major

categories of War Department procurement prepared by each of the technical

services and published in consolidated form

by the Purchases Division, ASF. The Army's

price index series was initially undertaken

in accordance with the Henderson-Patterson-Forrestal agreement to furnish OPA

with information on the trend of prices for

military procurement. It was generally

recognized that statistics of price changes

in the field of military goods, in the absence

of information as to cost and profit margins,

would hardly reveal the effectiveness of

procurement pricing policy.14 The Army's

9

 See PR 2, Sec. III, Contract Price Policies, Sec.

IV, Negotiation of Contracts, and Sec. V, Price

Supervision. An informative discussion of the

operation of the price analysis program at technical

service headquarters and depot levels is found

in Yoshpe, Production Control in the QMC,

Chapter VI. 10

 (1) ASF, History of Purchases Division, pp.

174-76. (2) History of Ordnance Pricing Policy.

Exhibit 15.

11

 ASF, History of Purchases Division, p. 181. 12

 Memo and incls, Gen Browning, Dir Purchases

Div ASF, for CG ASF et al., 14 Aug 43, sub: Cost

Analysis Report for Renegotiation, ASF, History

of Purchases Division, Exhibit 28. 13

 History of Ordnance Pricing Policy, Exhibits 22

and 22-A. 14

 This point was clearly and explicitly made in

the very first issue as well as subsequent issues, of

the Army's published price index series. ASF Purchases Div, Indexes of War Department Contract

Price Changes, issue of 15 Jan 44, p. 1. For further

discussion of this matter, see Thomas B. Worsley,

Wartime Economic Stabilization and the Efficiency
PRICING IN FIXED-PRICE CONTRACTS 317

price index was therefore used chiefly as an

instrument of purchase policy in facilitating the discovery of prices which were out

of line and which therefore required the

prompt application of cost analysis and

related procedures. The indexes were prepared with the technical assistance of the

Bureau of Labor Statistics (BLS), which

lent some of its key personnel to both the

Army and the Navy for this purpose.15

The use of the foregoing instruments of

price analysis, and of others which followed,

was guided in considerable detail by the

pricing principles described in the ASF

manual, Pricing in War Contracts. This

manual, which represented a distillation of

the War Department's pricing experiences

up to the time of its appearance, was a

unique experiment in the diffusion of information and policy. The manual consisted

of ideas and suggestions, rather than mandates and regulations which would tie the

hands of procurement officers. It described

the objectives of War Department pricing

policy and the avenues to their attainment.

Its fundamental theme was that sound

pricing was essential to efficiency of production and the success of the procurement

program, and that prices which were either

too high or too low would discourage productive efficiency. It recognized the necessity of fair and reasonable profits as an

inducement to efficient performance as well

as the legitimacy of such profits as a reward

for achievement. Finally, it stressed the use

of broad and informed business judgment

rather than the application of detailed

formulas in arriving at sound prices, at the

same time cautioning that "judgment can

be no better than the facts upon which it is

based." Thus the Army's purchasing policy

looked to the systematic accumulation of

knowledge, in terms of both facts and principles, as the foundation for the whole

pricing program.16 As conceived under this

program, price analysis embraced two basic

procedures—price comparisons and cost

analysis.17

Price Comparisons

Price comparisons involved the study and

comparison of prices for the same or similar

products in order to determine the extent to

which particular prices or price proposals

were out of line. If an item under consideration had been previously produced by the

same company, the history of the company's

past prices was reviewed. By the time the

of Government Procurement (Washington: National Security Resources Board, 1949), pp. 191-

208.

15

 The first published Army-wide index appeared

on 15 January 1944, and thereafter appeared as

Section 1-D of the ASF Monthly Progress Report.

See Memo, Gen Browning, Dir Purchases Div ASF,

for USW, 15 Jan 44, sub: Indexes of War Department Contract Price Changes (accompanying ASF

Purchases Div, Indexes of War Department Contract Price Changes, issue of 15 Jan 44).

For testimony as to the usefulness of the indexes,

see: (1) Worsley, Wartime Economic Stabilization, p. 202; (2) Remarks of Lester Kellogg in

Verbatim Official Report, Price Analysis Meeting,

Ordnance Department, 2 and 3 August 1943,

Cleveland, Ohio, copy in files of Purchases Div

ASF, pp. 49-61. Mr. Kellogg was one of the experts

assigned by the Bureau of Labor Statistics to the

War Department to guide the construction of the

Army price indexes.

16

 ASF M-601, Pricing in War Contracts, to Aug

43, pp. 1-4. 17

 The following summary of War Department

techniques of price analysis is based primarily upon:

(1) ASF M-601, Pricing in War Contracts, 2 Aug

43; (2) ASF, History of Purchases Division, Pricing,

pp. 119-93; (3) History of Ordnance Pricing

Policy; (4) PR 2, General Purchase Policies, especially Sec. V, Price Supervision; (5) Lloyd, "Pricing

in War Contracts," pp. 235-61; (6) Verbatim

Official Report, Price Analysis Meeting, Ordnance

Department, 2 and 3 August 1943, Cleveland,

Ohio; (7) Yoshpe, Production Control in the

QMC, Ch. VI.
318 THE ARMY AND ECONOMIC MOBILIZATION

price analysis program had been launched,

most items were procured from more than

one source of supply; hence, it was usually

possible to obtain a spread of past and current prices for all firms producing the item

in question. The particular virtue of price

comparisons lay in the fact that they provided immediate clues to irregularities in the

price under consideration. Significant differences in comparative prices called for explanation, and this explanation could then

be developed by an analysis of underlying

costs, supplemented by other information.

In making price comparisons it was frequently of greater importance to study price

trends than to compare existing prices. The

analysis of comparative price trends could

often lead to the detection of difficulties

which could not be revealed by cost-analysis

procedures applied to the accounts of the

individual contractor. If the price trend

was steadily downward for one or more producers of a particular item, the failure of the

remaining producers to reduce prices indicated either the padding of costs or basic

inefficiencies of production. Careful analysis of an individual contractor's cost accounts and costing procedures might reveal

the padding of costs but could easily fail to

indicate shortcomings in basic productive

efficiency. Irregularities revealed by comparative price trends frequently led to engineering surveys which resulted in improved

efficiency, actual cost reductions, and rectification of out-of-line prices. Moreover, the

use of price trends did not require strict

comparability of the procurement items involved. In a milieu of generally declining

prices for a whole category of items, a presumption existed that the price of any item

in the class should also decline. Hence, the

test of competitive efficiency among producers was applied even when direct price

competition was not available as the basis

for selection of contractors.

Use of price comparisons as an initial

screening device to identify items which required further study was a corollary of the

Army's price indexing work. Data gathered

by the technical services in support of their

price indexes existed in far greater detail

than the data appearing in the series published for general distribution, which were

of necessity confined to major items and

classes of items.18 Price indexes were not as

revealing as indexes of trends in costs, but

difficulties of preparing cost indexes on a

wide scale were insurmountable. The use of

price comparisons made it possible for the

technical services to utilize their limited

staffs of trained cost analysts for problem

items and special cost studies.

The actual task of making specific price

comparisons was far more complex than

that implied by the simple term "price comparison." In order to determine in the first

instance whether a given price was "really"

higher than another, it was necessary to ascertain the comparability of the items involved. This required much time-consuming investigation and study to identify and

evaluate differences in manufacturing tolerances, general specifications, packaging

requirements, terms of shipment, quantities,

delivery schedules, types of financing, facilities used, royalties, extent of subcontracting,

and many other factors. For example, under some conditions a higher price might be

justified under a delivery schedule extending over an eighteen-month period than for

a contract calling for all deliveries within six

months. This would be true where long-term

18

 The general indexes in the published series were

based on individual-item indexes comprising some

50 percent of all War Department procurement.

ASF, Monthly Progress Report, Section 1-D, Contract Price Changes, 31 Jan 45, p. 1.
PRICING IN FIXED-PRICE CONTRACTS 319

commitments were undesirable because of

rising costs, or for other reasons. In some

cases a high proposal-price for a large quantity might indicate that a particular plant

was not equipped to produce the required

amount efficiently; in such cases the procurement officer might obtain lower prices

by seeking out additional facilities and making split awards. Or again, two products

with substantially similar general specifications might be differentiated on the basis of

certain detailed tolerances; a required tolerance of one thousandth of an inch might

increase component costs very heavily over

a tolerance of one hundredth of an inch. The

various elements entering into item comparability were known as price factors, and

careful consideration of these was essential

to an understanding of any specific purchase. In some cases preliminary analysis of

price factors could obviate the need for a

detailed cost study; in other cases it laid the

necessary foundation for such a study.19

Cost Analysis

Cost analysis, the other main branch of

price analysis, was designed to provide contracting officers with dependable information on the actual components or elements

of which procurement prices were made up.

Only with such information could contracting officers, in the absence of competitive

pricing, apply a rigorous test to the propriety of any particular price. The findings of

cost analysis not only supplied answers to

questions raised by price comparisons, when

these were available, but suggested many

new questions to be raised in negotiating

for new contracts or in revision of prices in

existing contracts. The officially stated purposes of cost analysis were to evaluate price

differentials attributable to variation in

price factors among different producers of

the same or similar items, to uncover hidden profits and unsegregated contingency

charges, and to analyze profit elements in

such a way as to permit the setting of prices

and profits at levels which would maximize

productive efficiency.20

The starting point in cost analysis was examination of the contractor's advance estimate of costs submitted with his basic contract proposal. The contractor's classification of costs and methods of exhibiting cost

breakdowns were accepted and used wherever possible. Cost analysis was necessarily

centered upon the major components of

price. Meticulous accuracy was not attempted, both because of the lack of time

and because of the inherent impossibility of

accurate cost prediction. Attention was

therefore focused upon items which were

large, were easily overestimated, or afforded

significant opportunities for padding. When

preliminary analysis by a negotiator revealed the desirability of a more intensive

cost investigation, or if technical accounting

problems arose, the services of a cost analyst

from the appropriate Cost Analysis Section

or Fiscal Branch could be enlisted. In general, cost analysts were to be called in when

the contractor could not explain his cost estimate, when his explanation of cost

changes was inadequate, when he needed

assistance in developing cost estimates, or

when cost determinations were required for

administering price adjustment articles.21

Four general approaches, or combinations thereof, were available in varying degree in applying cost analysis: (1) the contractor's cost figures could be tested for in19

 ASF M-601, Pricing in War Contracts, 2 Aug

43, pp. 7-13, and A-1 to A-15.

20

 Ibid., p. 19, Components of Price. 21

 Ibid, p. 21.
320 THE ARMY AND ECONOMIC MOBILIZATION

ternal consistency and for propriety of

particular items without reference to experience under other war contracts; (2) the

estimates could be compared with the contractor's own current and prior cost experience under specific contracts for similar

items; (3) cost estimates for major categories could be compared with the distribution of costs under the contractor's recent

operating statements; and (4) comparison

could be made with the costs of other firms

producing similar items. The degree to

which any or all of these were used depended upon their relative availability, the

financial amounts involved, and other factors.

Propriety and Consistency of Costs—The

first approach was applicable to all cost estimates and, early in the procurement program when no comparative data were available, was often the only one at hand. Under

this approach costs were scrutinized and

tested for propriety along lines somewhat

similar to tests for the general allowability

of costs under CPFF contracts. Important

raw material and parts prices, wage rates,

freight rates, and other item costs were ascertained from reliable sources. Raw material requirements, scrap allowances, estimated labor requirements, and other important quantitative magnitudes were reviewed

and cost extensions and tabulations checked

for general accuracy. Both the actual allowances for and the allocations of indirect

costs such as factory overhead, selling expense, and general and administrative expense were examined. When improprieties

or discrepancies were revealed, they were

challenged, and in the process of negotiation

estimates were often scaled down and proposals revised. Many of the activities under

this heading were of the kind dictated by

common sense and generally observed by

private industry under comparable circumstances as essential to sound purchase practice.

Contractor's Prior Cost Experience—The

second approach, comparison with the contractor's past costs experienced for the same

or similar items, became available on a wide

scale as the war production program went

into high gear and repeat orders accounted

for a substantial portion of all new procurement. Under these conditions it was possible

to compare the new cost estimates with recent cost experience as well as with the original estimates underlying the previous contract. This permitted the ascertainment of

cost trends and the deviation in realized

costs from previous advance estimates. Cost

trends were typically of greater significance

in predicting future costs than average realized costs over the life of prior contracts. If

new cost estimates were out of line with recently experienced costs, searching questions

could be asked in the process of negotiation.

It was not uncommon for contractors to

submit new contract proposals calling for

prices which were the same as, or even

higher than, those in previous contracts, despite the fact that downward trends in costs

had been experienced. The following unitcost and price figures, taken from an actual

case, illustrate some of the issues:
PRICING IN FIXED-PRICE CONTRACTS 321

In this case the contractor had submitted a

proposal for a repeat order at a unit price of

$1,048 with a cost breakdown as indicated

in the first column. Upon request for cost

data covering prior production, the company submitted the figures shown in the second column. Examination revealed that estimated future costs exceeded past costs by

$9 per unit for materials, $21 for labor, and

$36 for factory expense. Concentrating upon the latter two elements, the price analyst

ascertained that the increase in estimated

labor cost was due to the inclusion of an allowance for a possible increase in wage rates.

Investigation revealed no reliable evidence

of a pending increase. Moreover, past experience in developing labor efficiency indicated that future labor costs per unit would

probably actually decline. Inquiry as to the

contractor's costing methods revealed that

factory expense was applied on the basis of

direct labor dollars: for each dollar of increase in labor costs the company added another $1.71 in overhead charges. The $36

increase in factory expense had thus been

based on the $21 labor cost contingency allowance. Further investigation revealed a

probable increase in total volume of operations, so that factory expense per unit should

actually decline. Under the circumstances,

the contractor was asked to resubmit his bid.

The negotiated final price, together with

its breakdown, is indicated in the third

column.22

Contractor's Operating Statements—A

third approach in the application of cost

analysis was the comparison of a contractor's

proposal with past costs as revealed by his

general operating statement rather than by

cost allocations to specific contracts. One of

the commonest experiences of procurement

officers was the negotiation of contracts at

apparently close prices only to discover later

that realized costs turned out to be far less

than the estimates. The usual reason for this

was the drastic reduction of various indirect

or overhead costs per unit as the contractor's

general volume of business expanded. At the

time each contract was placed, overhead

costs were apportioned to the contract on

the basis of past ratios. Even when the increase in volume under the new contract was

taken into account, there was no guarantee

of the future propriety of a given overhead

allowance. Subsequent increases in civilian

business, or additional war contracts later

placed by other procuring agencies, tended

to reduce costs for contracts already in existence. Nor did this process cease when firms

reached "capacity" operations. Increases in

efficiency with the accumulation of experience tended to release capacity for still further orders; by completing contracts ahead

of schedule, the contractor could take on additional orders before the end of the year,

thereby reducing overhead costs still further.

Notwithstanding this general tendency

during the greater part of the war, contractors continued to use past ratios in preparing

bid proposals and it was necessary for negotiators to obtain copies of contractors' most

recent operating statements in order to evaluate the estimates. If a contractor's general

business was comparable to the item under

consideration, the ratios between various

cost categories in the operating statement

could be compared directly with those in the

bid proposal. The following figures illustrate

the kinds of comparison which often proved

fruitful: 22

 Ibid., pp. 23-25.
322 THE ARMY AND ECONOMIC MOBILIZATION

Analysis of the above figures reveals a

number of differences between past and

proposed cost ratios which called for explanation. The negotiator could show that

the contractor proposed to load a total of

$420,000 (for 280,000 units) in factory

expense upon the new contract, despite the

fact that in the previous year a total of

$516,000 in factory expense sufficed for

$4,000,000 worth of business. He could

show that under the proposal the new contract would carry $210,000 in general

expense, as against total general expense

for 1942 of only $108,000. Since both these

categories represented fixed costs and since

the estimated volume for 1943 exceeded

1942 volume by a significant margin, fixed

costs per dollar of output should decline.

Moreover, the 45-percent profit realized in

1942 would cast serious doubts on the contractor's general pricing policy. Presentation of the issues in this light "often produced lower prices in a short time and

without controversy."

 23

Costs of Other Contractors—The fourth

major approach to cost analysis involved

the comparison of costs of different producers making comparable items. This

was the most complex and time-consuming

approach of all and necessarily had to be

used with skill. On the other hand, when

successfully used it accomplished results

beyond those of ordinary close-pricing techniques. By laying bare the specific reasons

for greater or less efficiency, it stimulated the

adoption of superior production methods

by all firms engaged in the production of

common items.

Intercompany cost comparisons were

made either on the basis of cost data submitted in regular contract proposals or upon

the basis of special cost studies during the

course of actual production. In both cases

great care had to be exercised to insure basic

comparability of the figures involved. The

23

 Ibid., p. 33. This kind of analysis and discussion represented the heart of contract negotiation

and took place throughout the entire war period.

Even with constant refinement in the techniques and

instruments of negotiation there was no substitute

for hard work, a mastery of facts, and dedication on

the part of individual negotiators.
PRICING IN FIXED-PRICE CONTRACTS 323

cost-comparison technique did not assume

that cost figures for different producers

should necessarily be the same; rather, it

insisted on adequate explanation of cost

differences. Genuine cost differences proceeded from differences in item comparability

 24

 and differences in production

methods. Nominal cost differences proceeded from differences in costing methods

and accounting classifications. After all

these differences had been ascertained, it

was possible to distinguish between bonafide cost differentials which should be

allowed in setting prices and unwarranted

inclusion of contingency allowances and

other forms of cost padding. From the standpoint of purchase policy, intercompany cost

comparisons thus provided information for

(1) a closer check upon the accuracy of the

costs of each firm; (2) incentive pricing and

the reward of superior productive efficiency;

(3) selection of contractors for future

orders.25

Special cost studies were undertaken for

important items in order to stimulate cost

control, to provide information for subsequent negotiations and price adjustment,

and to test the general quality of price analysis activities. In the summer of 1943 the

Purchases Division, ASF, requested each

technical service to make and submit comprehensive price analysis studies for at least

two important items. The most notable response to this request was the study made by

Ordnance of the .50-caliber basic aircraft

machine gun. The aircraft machine gun was

one of the most important weapons used in

World War II, and its procurement program over the war period ran to over half a

billion dollars. In 1943 six producers, with

substantial differences in plant and equipment, production methods, wage rates, and

other cost factors, were engaged in production of the aircraft gun. The first cost study,

completed in September 1943, revealed a

wide range of unit costs, with a 1 January

1943 range of prices running from $316 to

$598 per unit including spare parts. Continued study and systematic efforts to narrow the range as well as to obtain a general

reduction of costs succeeded in saving an

estimated $25 million in the procurement of

this item for fiscal year 1944.26 In the fall of

1944 cumulative cost and price studies for

four different dates revealed the following

low and high contract prices in effect:27

At different times during this twenty-month

period both the low-price and high-price

positions were held by different firms.28

Even prior to the request of the Purchases

Division, the Quartermaster Corps had un24

 Price factors as described above in the discussion of price comparisons, page 319. 25

 Ibid., App. B-11.

26

 OCofOrd Industrial Div, Small Arms Br, Annual Report for FY 1944. 27

 Profit data available only for the 1 September

date show a profit of $27.42 or 9.66 percent on the

low price and $27.80 or 6.99 percent on the high

price. 28

 OCofOrd Small Arms Br, Price Analysis of

Browning Machine Gun, Caliber .50, M2, Aircraft,

Basic, ASF, History of Purchases Division, Exhibit

29. The following observation was elsewhere made

concerning the machine gun cost study: "The Small

Arms Division, as revealed by this study, has successfully operated through the District Offices with the

several contractors involved, with the result that

the prices of the item have been continually reduced

and the productive efficiency of the several contractors increased. It is understood that comparable

studies will soon be completed covering all of the

items procured by the Small Arms Division." History of Ordnance Pricing Policy, p. 19. See also,

ASF, History of Purchases Division, p. 166.
324 THE ARMY AND ECONOMIC MOBILIZATION

dertaken a number of "yardstick" cost studies to be used in evaluating bid proposals and

negotiating closer prices. Thus, on the basis

of factory visits and studies of accounting

and production methods, unit cost data of

several producers of cotton cloth were obtained for each stage in the productive process. Data from these studies not only were

useful in facilitating close pricing for the

particular firms involved, but also permitted

cost comparisons of integrated with nonintegrated producers. Since the initial yardstick

studies of the Quartermaster Corps were undertaken before general pressure for closer

pricing had developed, they were met with

considerable resistance by contractors and

others who felt that they interfered with

production.29

Allowance for Profit—In addition to its

concern with the analysis of costs as ordinarily defined, price analysis necessarily had

to consider profit as an integral component

of price. Under the competitive-bidding procedure of the prewar period, contracting

officers had been unconcerned with the level

of profits; whatever profit the low bidder

could make under his contract was considered to be the appropriate reward of management. This view coincided with that of

traditional economic theory, under which

the services of the entrepreneur were considered as one of the basic factors of production. Competitively determined profits

thus represented the normal cost of recruiting the services of the entrepreneur.

In wartime, competitive bidding for universally scarce resources—including the services of entrepreneurs—tended to convert ordinary profit-making into profiteering. For

this reason among others, as already explained, negotiation was adopted as the basic

procedure for contract placement, and it

was the responsibility of negotiators to see

that the contract price included an amount,

over and above "other costs," representing

a reasonable profit. If profit allowances in

contract prices were too high, close pricing

would be defeated, with resultant losses in

efficiency; if they were too low, incentives to

assume war contracts and ability to meet

costs would be impaired. In determining the

appropriate profit allowance many factors

were considered, including the firm's own

prewar profits history, comparative profits

throughout the particular industry, and the

various criteria for proper profits as developed in renegotiation.30

Because of the complexity of the nation's

industrial economy no single profit rate

could be established for all firms and all industries which could satisfy the requirements of equity, incentive, and other essential considerations. At least two generalizations may, however, be made concerning

profit allowances in the Army's fixed-price

contracts for World War II. First of all, the

stated profit allowance used for pricing purposes was rarely equal to the final realized

profit under a given contract. Realized profits were typically much higher, a fact abundantly demonstrated in renegotiation proceedings throughout World War II. High

realized profits during the war were thus not

the result of generous profit allowances in

contracts; rather they were the result of failure to pare down advance cost estimates,

that is, to price closely. Secondly, profits

were a relatively small percentage of price.

The really significant savings to the government depended upon reductions in costs,

rather than profits. The true industrial "pa- 29

 (1) ASF M-601, Pricing in War Contracts,

2 Aug 43, pp. 28-29, and App. B-1. (2) Yoshpe,

Production Control in the QMC, pp. 61-63.

30

 ASF M-601, Pricing in War Contracts, 2 Aug

43, pp. 35-37. See below, Chapter XVI.
PRICING IN FIXED-PRICE CONTRACTS 325

triot" was therefore not the entrepreneur

who emerged with the lowest profit, but the

one who succeeded in producing at the lowest cost.31

Price Adjustment Under Contractual

Articles

Escalator Clauses

Price adjustment under fixed-price contracts was first attempted in the form of

price "escalation" based upon changes in

wage rates and material costs occurring

within the life of individual contracts. At

the very beginning of the defense period,

hastily drafted escalator clauses were incorporated in a number of the Army's major,

long-term, supply contracts. Thus the Ordnance Department's tank contract placed

with the Chrysler Corporation in August

1940 provided for a flat increase in the delivered price per tank for each one-cent increase in Chrysler's average hourly wage

payments, and for each five-cent increase

per one hundred pounds in specified raw

material prices. Downward escalation was

provided for decreases in the indicated

costs, and provision was made to revise

the formula in the event of specification

changes.32

In September 1940 two types of escalator

clause were approved by OASW for general

use in Army contracts. The first of these permitted upward or downward price revisions

in the event of changes in the contractor's

wage scales resulting from the adoption of

new legislation, regulations, or interpretations of law, or because of "any marked

change in the economic situation over which

the contractor has no control." Upward or

downward price revision was also permitted

if the actual cost of material and equipment

purchased by the contractor within ninety

days after placement of the contract rose or

fell by more than 10 percent. Certified copies of the contractor's wage schedules and

estimated material costs at the time of contract placement had to be filed with the War

Department within thirty days thereafter.

At the time of contract completion, actual

wage and material costs were compared

with the initial schedule to determine the

amount, if any, of contract price adjustment

to be made.33 In operation this form of

clause gave the contractor carte blanche to

bid up labor and material prices to whatever level he found necessary for the prompt

acquisition of resources. Because of the general, as well as the specific, inflationary effects of this clause, it was little used and soon

abandoned.34

The second type of escalator clause approved at this time provided for price adjustments, not on the basis of changes in the

contractor's own costs but upon broad price

indexes unaffected by the contractor's own

behavior. Price adjustments because of labor-cost changes were based upon changes

in national average hourly earnings in durable goods manufacture, as compiled by the

U.S. Bureau of Labor Statistics; in the case

31

 The various issues in connection with profits

under war contracts are dealt with more extensively

in the discussion of contract renegotiation in Chapter XVI, below. 32

 W-Ord-461. This contract and its provision

for escalation were still alive in January 1945, having been perpetuated by some three hundred supplemental agreements. Only one adjustment,

amounting to about $570,000, had been made under

the escalator clause by this time. Army Service

Forces, Purchases Division, Pricing Policies and

Methods [circa 1945], p. 11, OCMH.

33

 Draft of escalator clause, approved 12 September 1940 by OASW, Exhibit 1 in History of the

Escalator Clause (1 May 1945), by Leon Malman,

Legal Div OCofOrd. 34

 Ibid., p. 1.
326 THE ARMY AND ECONOMIC MOBILIZATION

of materials, the BLS monthly wholesaleprice index for the appropriate group of

commodities (for example, metals and

metal products) was used. Thus if direct labor costs at the time of contract placement

were estimated as 40 percent of the unit

price of the product, a 5-percent increase in

hourly wage rates for a given month over

the base month would result in an increase

of 2 percent in the product price for all units

scheduled for delivery in the given month.

Price adjustment for material-cost changes

was made only once, based on increases in

the wholesale-price index occurring early in

the life of the contract.35 The War Department reserved the right to substitute any

other index for labor or material costs if in

its judgment the specified indexes failed to

reflect satisfactorily the increases or decreases in costs of material or labor under

the contract. This provision permitted equitable price adjustment when the contractor's actual costs were considerably out of

line with national averages, without providing the degree of cost-plus pricing offered by the first escalator clause.

With the increasing upward pressure on

the nation's price structure during the defense period, the use of escalator clauses

increased in popularity and many variants

were in use by the supply arms and services.

In the spring of 1941 the task of framing a

standard escalator clause for the entire War

Department was given to the committee

then engaged in the development of a uniform War Department supply contract.

This committee made an extensive study of

the problem and after preparing numerous

drafts succeeded by September 1941 in producing a form of clause which was approved

by OUSW as mandatory whenever an escalator clause was used. As indicated by the

following resume of the governing directive,

the general principles applicable to the use

of this clause clearly foreshadowed the philosophy underlying the later price adjustment articles:

1. The inclusion of an escalator clause

should result in a lower contract price than

if such a clause is not included. Before con- senting to the use of the clause, the contracting officer should assure himself that all

contingent elements in price to cover prob- able increased direct labor or material costs

have been removed. 2. Escalator clauses should be used only in

long-term contracts, generally involving a

performance period in excess of 6 months. 3. The contract should be sufficiently large

to justify the costs of administering the escalator clause; contracts for less than $100,000

generally will not warrant the adoption of

escalation.36

The new uniform escalator clause was a

clear but comprehensive statement, running

to four, single-spaced, typewritten pages

and covering numerous substantive and

procedural aspects of price escalation. It

consolidated the fruits of a year's experience

with escalation under the expanding procurement program and represented a

marked advance over its predecessors. It

permitted either increases or decreases in the

contract price, based on broad monthly indexes of price and wage movements as published by the Bureau of Labor Statistics.

The use of broad indexes rather than the

contractor's own costs served two purposes:

it encouraged prudent purchasing on the

part of contractors and protected them

against demands for wage increases based

on the ability of contractors to pass the increased costs on to the government. Both

of these purposes were ancillary to the

larger objective of preventing widespread

35

 Ibid., Exhibit 2, draft dated 11 Sep 40.

36

 OUSW P&C Gen Dir 48, 17 Sep 41, sub: Price

Adjustment Clause.
PRICING IN FIXED-PRICE CONTRACTS 327

inflation throughout the economy. The uniform clause also limited price increases or

decreases to the difference between estimated and actual costs, thus providing a

powerful incentive for accurate initial cost

estimates. High initial estimates reduced the

amount of possible escalation; low estimates

resulted in correspondingly low profits, since

profit allowances for pricing purposes were

based on initial estimates of cost.37 Provision was made for special adjustments in the

event of contract termination, important

changes in production methods, or other

unusual developments rendering the original estimates unsuitable as a basis for escalation. An amendment to the clause also

permitted adjustments to take account of

newly adopted payroll taxes as well as

indirect labor and material costs.38

The uniform article did much to clarify

and improve the standards of price escalation and was used in many large contracts.

Nevertheless, there was increasing dissatisfaction with escalation under any formula,

however devised. When applied to the contractor's own costs, the formula encouraged

cost-plus operations; when applied to national averages it often unjustly rewarded

or penalized the contractor when the averages had little relevance to his own cost conditions. Under the compromise formula in

the uniform clause, price adjustments based

on national averages were limited to changes

in actual costs. This required the determination, after contract completion, of the contractor's actual direct labor and material

costs and not only involved a postaudit by

the War Department but opened the door

to audit verification by the Comptroller General on much the same lines as required for

CPFF contracts. This was fatal to prompt

price adjustment and gave rise to red tape,

delay, and three-way controversies over the

propriety of numerous individual cost allocations and allowances. Because of the heavy

administrative burden of applying escalator

clauses, relatively few of them were actually

invoked despite their presence in many contracts.39

After Pearl Harbor the growing evidence

of widespread overpricing brought home the

fact that escalation was only a partial approach to the problem of general price revision. Increases in wage rates and material

prices were often more than offset by spreading of overhead under multiple contracts

and by improvements in efficiency so that

labor and material costs per unit of product

were lower than before. It was clearly poor

policy to provide price adjustment only for

certain contingencies and not for others. If

prices for Army procurement were to be fair

and equitable and still provide adequate incentives to efficiency, all elements of cost

and price would have to be considered. Under the pressure to improve its entire pricing

procedure without delaying the placement

of new contracts, the Army early in 1942

adopted the first of a series of price-adjustment articles which were to render the uniform escalator clause obsolete.40

37

 Ltr, Col H. R. Kutz, Legal Sec Fiscal Div

OCofOrd, to All Contracting and Purchasing

Officers of the Ord Dept, 19 Sep 41, sub: Price

Adjustment Clause (Escalator Clause), par. 7, in

Malman manuscript cited above, note 33. 38

 OUSW P&C Gen Dir 86, 17 Dec 41.

39

 See James F. Oates, Jr., Periodic Pricing and

Price Adjustment (AIC Lecture, 10 April 1944),

p. 7, reproduced as Exhibit 28 to History of Ordnance Pricing Policy. 40

 The uniform escalator clause was officially discontinued for new contracts on 26 March 1943 with

the publication of Revision 14 to Procurement Regulations. In addition to administrative reasons the

escalator clause was abandoned because of the

greater stability of wages and material prices following the adoption of price controls and other

stabilization measures. See PR 1232.1 (8-31-44).

Subsequently escalation was permitted in specific
328 THE ARMY AND ECONOMIC MOBILIZATION

The Redetermination or Ceiling Article

The first of the new price-adjustment articles was the redetermination or "ceiling

price" article adopted on 13 March 1942

and widely used thereafter.41 This article

was designed for use in contracts covering

the production of items for which the contractor had no prior experience and could

produce no reliable cost estimates. Under

the article a tentative ceiling price, as well

as an associated schedule of estimated costs,

was established in the contract. The ceiling

price, which typically included generous allowances for contingencies, was subject to

downward redetermination on the basis of

a formula after a specified percentage of

total contract quantities had been completed. This percentage figure was divided

into two parts: an initial "preliminary run,"

during which starting and development costs

would be high, and a subsequent "test run,"

during which costs would presumably be

normal and equivalent to those for the remainder of the contract. At the end of the

test run the contractor submitted his actual

costs of operation for the two runs, together

with an estimate of the cost for the remainder of the contract, prorated on the basis of

the test-run experience. If the new estimate

of total contract cost was lower than the

original estimate, the price would be reduced proportionately by an amendment to

the contract. This had the effect of allowing

the contractor the same profit percentage on

the newly estimated costs as he was allowed

on the original estimate.42

The redetermination article was highly

popular but not conducive to close pricing.

It was a convenient tool for hard-pressed

contracting officers since it permitted rapid

placement of contracts with little advance

effort to obtain close prices on the theory

that this would automatically be done later.

Subsequent developments would almost certainly show price "reductions" which would

"look good" for the record. From the standpoint of contractors, the redetermination article usually permitted a comfortably high

ceiling price which would insure a profit

even if efforts to achieve efficiency fell considerably short of the maximum. Under the

original form of the clause, moreover, it was

to the contractor's advantage to have high

costs even for the test run: cost reductions

prior to redetermination constituted a price

reduction for the government, whereas cost

reductions thereafter constituted profit for

the contractor. Difficulties in administration

constituted an even greater objection to the

article's use. It frequently developed that the

contractor's accounting system, despite an

initial survey, was totally inadequate for the

purpose, that he had taken no inventory or

even a running inventory record, and that he

could make no satisfactory segregation of

costs applicable to the contract. In such cases

it was necessary to abandon the use of the

clause and seek a negotiated price by amendment to the contract under the First War

Powers Act. In other cases administration

of the clause was delayed until after contract cases where government-fixed material prices—such

as for rubber, gasoline, and lumber—were changed

or other costs were measurably affected by governmental decisions. PR 351 (6-29-44). 41

 Purchases Br SOS Gen Dir 31, 13 Mar 42, sub:

Use of Price Renegotiation Clause in Fixed Price

Contracts. With the publication of Procurement

Regulations the redetermination article became

known as PR 341.1.

42

 For purposes of illustration, suppose that an

original contract price of $12,000 had been established on the basis of estimated costs of $10,000 and

a profit allowance of $2,000. If the test run indicated

that total costs under the contract would fall by

20 percent to $8,000, then the price as redetermined

would be $9,600, with a profit of $1,600.
PRICING IN FIXED-PRICE CONTRACTS 329

completion, a failing which defeated the

entire pricing operation and raised serious

questions as to the legality of the contract

on the ground that it had been converted

to a cost-plus-a-percentage-of-cost basis.43

Finally, the use of any pricing formula which

relied upon the determination of "actual

costs" inevitably led to detailed audits and

myopic concentration upon past costs. This

robbed the fixed-price contract of much of

its raison d'être and substituted rigid formality for the flexibility essential to wartime

contract negotiation:

Since cost data was required to administer

each of the early price adjustment articles

(Redetermination and Price Revision) an accountant participated and in general contributed his judgment and his skill. He also

colored the transaction by his background of

training and experience, a background where

disapproval exists unless and until facts are

known in detail and exactly analyzed. This

tendency to exactitude and precision tended

to eliminate any vestige of negotiation and

the parties drifted more and more to audits

on the stream that ends only with the Comptroller General.44

Despite its shortcomings, the ceiling article was the most practicable form of priceadjustment article available during the

period of heavy new procurement in 1942.

It continued to be used in modified form

throughout the war for new items for which

only rough estimates of cost could be made

in advance of production. In its revised

form, the ceiling article was made more

flexible by permitting other factors than

test-run costs to be considered in the redetermination of price. Also, an important

incentive feature was introduced by allowing the dollar profit contemplated under

the original price to remain after redetermination.45

 Unfortunately, this feature rewarded the contractor equally whether his

cost reduction was the result of efficiency

or whether it represented merely the scaling

down of a highly inflated initial cost estimate. As a result, the clause made it possible

for contractors to retain profits which were

much too high in relation to specific tasks

performed.46

The Price-Revision Article

In order to overcome the disadvantages

of the redetermination article, the Purchases

Division attempted to popularize a companion article known as price revision, and

often referred to as PR 341.2. The pricerevision article was originally known as the

renegotiation article, under which name it

had been published on 13 March 1942 as an

alternative to the redetermination article.47

After the enactment of statutory renegotiation and the assignment of a specialized

meaning to the term "renegotiation," the

article was renamed and underwent a series

of refinements as indicated in Procurement

Regulations. In its developed form, PR

341.2 permitted either upward or downward revision of the entire price on the basis

of negotiation rather than through applica43

 History of Ordnance Pricing Policy, p. 6. Contractors were required to maintain adequate

accounting systems as a prerequisite to the use of

price-adjustment articles. But in the early stages of

the war, production considerations were relatively

more important than bookkeeping, and it was often

impossible for contracting officers to appraise, in

advance, the adequacy of the accounting systems

of all the firms under their procurement jurisdiction. 44

 Ibid. See the comparable problems of contract

settlement by formula, as discussed below, pages

619-20.

45

 PR 341.1 (3-26-43). 46

 ASF, History of Purchases Division, p. 148. 47

 See below, page 353.
330 THE ARMY AND ECONOMIC MOBILIZATION

tion of a formula. The negotiations for revision were undertaken following a "trial

run," covering not more than 40 percent

nor less than 20 percent of total quantities

under the contract. The costs experienced

under the trial run were compared with

the original cost estimates and were used as

evidence of the contractor's efficiency. Negotiations could be flexible and permitted the

award of higher profit margins for reduced

costs. Failure to reach agreement resulted

in retention of the original contract price.

It was hoped that this article, by permitting

upward as well as downward price revisions,

would induce contractors to eliminate contingency allowances in price and accept

closer initial prices.

Throughout 1942, however, contractors

were still in the habit of dealing "at arm's

length" with the government and were

dubious of their prospects for a subsequent

price increase in the event their actual cost

experience proved unfavorable. Hence they

preferred the safety of the ceiling article,

and the price-revision article was relatively

little used. This was true even after further

refinements in the article were made in 1943

and 1944.48 Also, contracting officers themselves were reluctant to use the price-revision article, especially at first. Many contracting officers reasoned that their procurement record would look better with a history

of successive price reductions, such as would

take place under the ceiling article, and they

wished to avoid requests for price increases

and the consequent burden of negotiations

under the revision article.49

The Development of Progressive Pricing

Developments in the latter part of

1942 laid the foundation for one of the most

significant advances in both the theory and

the practice of procurement pricing to be

achieved in World War II. These developments included the increasing stabilization

of the procurement program as a whole,

some lessons learned from statutory renegotiation, and the crystallization of pricing policy in the Tryon Statement. By the fall of

1942, most contractors had overcome their

initial production problems and had acquired considerable experience in producing

items of military equipment. Many of them

had accumulated a substantial body of cost

information. More and more contracts now

represented repeat orders or new orders for

items similar to those already produced; in

either case sufficient cost data could be made

available early in the life of the contract to

permit close pricing. The need for close pricing had already become abundantly evident

in the War Department's experience with

statutory renegotiation.50 The fundamental

lesson of renegotiation—to be hammered

home repeatedly throughout the World War

II procurement program—was that renegotiation could recapture excessive dollar

profits but could never recapture the lost

man-hours and materials associated with

loose contract pricing. The crucial task of the

contract-pricing process was the creation of

effective downward pressure upon costs

throughout the life of the contract. Only

such pressure could induce or compel the

contractor, in the absence of competition, to

48

 Oates, Periodic Pricing and Price Adjustment,

p. 9. In order to avoid CPPC pricing, the instructions governing the use and modification of this article made the following statement: "[The article]

will never be changed to obligate the Government

to increase the price on the basis of costs or any

other formula, or to do more than negotiate in good

faith to revise the price." PR 1224.1 (4-28-44).

This provision undoubtedly scared many contractors away from the use of the article.

49

 History of Ordnance Pricing Policy, pp. 5-6. 50

 See below, Chapters XV and XVI.
PRICING IN FIXED-PRICE CONTRACTS 331

achieve maximum efficiency and continual

improvement in his methods of total organization and production. Sound pricing thus

meant not only pricing close to cost, but

close pricing in advance of production.

Recognition of advance close pricing as

the key to basic efficiency and cost control

became the cornerstone of the Army's matured pricing philosophy in World War II.

Directives, regulations, and statements of

War Department procurement officials gave

expression to this concept in many different

ways. Thus:

. . . it is vitally necessary to obtain sound

contract prices reasonably close to costs, since

recapture of profits for past periods on renegotiation will not operate to control costs

or inflationary tendencies.51

. . . you will never get a right price by a mere

profit analysis. . . . The logical result of that

is "waste all of the manpower you want, waste

all the materials and machinery you want, do

an inefficient manufacturing job and come

out with a small profit and you are a patriot."

There has been too much thinking of that

kind . . .

The influence upon cost and efficiency in

the plant by the price you fix is many times

more important than the particular profit a

contractor makes. The profit is a small element in total price, very often . . . The savings . . . don't come out of the profits, by

and large; they come out of costs.52

. . . prices should always be specifically

agreed upon in advance of production . . . .

This alone is "pricing." It establishes a reward

for efficiency and good management and a

penalty for inefficiency.53

Unfortunately, a major difficulty loomed

as a barrier to the determination of sound

prices in advance of production for many

of the Army's most important contracts.

This was the long-term nature of almost any

contract for large and complex items procured by Ordnance, the Air Forces, the Signal Corps, and other technical services.54

Many of the Army's contracts ran to a year,

a year-and-a-half, two years, or longer. Even

with relatively stable and ascertainable costs

as a basis for initial close pricing it was

impossible to determine in advance that

wage rates, material prices, availability of

resources, and other factors would not

change adversely to the contractor's interests

long before the contract could be completed.

But—assuming that external cost elements

could be stabilized or separately dealt with—

there was almost always a reasonable certainty that the contractor could, by hard

work and efficiency under the pressure of

close pricing, further reduce his unit costs

of production. Under these circumstances an

initial "close" price in a long-term contract

would not long remain close to cost in the

face of the very increases in efficiency which

it had helped to bring about. Procurement

officers were thus faced with a double paradox: sound prices, in order to achieve their

purpose, had to remain close to cost; yet the

whole purpose and effect of close pricing

was to widen the gap between price and cost.

Furthermore, a close price had to be ascertained in advance of production; but it was

impossible to determine, in advance of production, what would constitute a close price

by the time the contract was completed.

The resolution of this complex dilemma

was accomplished by the abandonment of

51

 PR 231.1 (1-11-45). 52

 Remarks of Glen Lloyd, Asst Dir for Pricing,

Purchases Div ASF, in Verbatim Official Report,

Price Analysis Meeting, Ordnance Department, 2

and 3 August 1943, Cleveland, Ohio, p. 40. 53

 ASF M-609, Company Pricing, May 1945,

p. 15.

54

 In addition to complex items requiring a

lengthy production period, many simpler items

were procured under long-term contracts because of

the necessity—under the Controlled Materials Plan

or for other reasons—for long-term, advance scheduling of materials, production, subcontracting, and

deliveries.
332 THE ARMY AND ECONOMIC MOBILIZATION

the concept of a single correct or "ideal"

price for each and every fixed-price contract,

in favor of the adoption of the principle of

progressive pricing at appropriate stages in

the life of a contract. The Chicago Ordnance

District had developed several experimental

drafts of periodic repricing articles by the

fall of 1942, and the principle of short-term

pricing was incorporated as one of the elements of policy declared in the Tryon Statement. As a result, the War Department announced—on 2 January 1943— its pioneer

contract clauses for the periodic adjustment

of prices under long-term contracts.55

Early Periodic Pricing Articles—The

basic features of progressive pricing were

fairly simple. Unlike the earlier redetermination article, the periodic price-adjustment

articles contemplated close pricing at the

outset or very early in the life of the contract.

Accordingly, their application was limited to

cases where production costs were stable

and fairly accurately known on the basis of

past or current experience. For purposes of

price adjustment, performance under the

contract was divided into a number of specified periods, each running from three to six

months. Because of the shortness of each period and in return for advantages under the

contract, contingency allowances in price to

cover external cost changes were to be substantially eliminated. Only contractors with

satisfactory accounting systems, approved in

advance, were eligible to use the articles. At

the time of contract placement a firm estimate of costs was stated in the contract.

Toward the end of each pricing period the

contractor was required to submit a record

of his experienced costs under the contract,

and an adjusted price was then negotiated

to cover production for the succeeding period. The adjusted price, which could be

either higher or lower than the previous

price, was to reflect the contractor's previous-period cost experience together with all

other relevant factors. Negotiations were to

be flexible and detailed audits avoided.

Failure to reach agreement on a price adjustment left the previous price in effect, but unwarranted delays in negotiations or refusal

on the part of a contractor to agree to a reasonable price adjustment subjected him to

possible termination, compulsory orders, or

other action. If the contractor succeeded, by

skillful management, careful buying, or efficient production, in reducing costs for a particular period and if he made an appropriate

reduction in price for the following period,

he was to be allowed a higher margin of

profit for the new period. Finally, in their

fully developed role, the periodic articles

contemplated the exemption of the entire

contract, or appropriate portions thereof,

from profit recapture under statutory renegotiation. This guaranteed in advance the

retention of earned profits and protected the

integrity of the incentive system under close

pricing.

Two periodic price-adjustment articles

were introduced at the beginning of 1943:

Form I (PR 360.1) and Form II (PR

360.2). Form I was to be used for repeat

orders or other contracts where costs were

already known and close prices could be

adopted at the time of contract placement.

Under Form I, the contractor automatically received exemption from statutory renegotiation for the first period and could be

exempted for succeeding periods at the contracting officer's discretion. Form II applied

55

 (1) WD SOS Memo S5-1043, 2 Jan 43, sub:

Contract Clauses Providing for Periodic Adjustment of Price With Power of Exemption From

Statutory Renegotiation. (2) Statement of Purchase

Policies, 19 Nov 42, par. I, B, 5, in AIC R57, Contract Pricing—Principal Developments, pp. 108-15.

(3) History of Ordnance Pricing Policy, p. 16.
PRICING IN FIXED-PRICE CONTRACTS 333

to cases where costs were not immediately

known but could be determined with reasonable accuracy by the end of the first period. At this time an adjusted first-period

price was established along with a price adjustment to cover the succeeding period.

Exemption from renegotiation for any period under Form II contracts lay at the discretion of the contracting officer. Throughout 1943 the use of the new articles was

subject to specific approval by the Purchases

Division, ASF.

Like the earlier price-revision article,

which had also contemplated close pricing

at the time of contract placement, the new

periodic price-adjustment articles were resisted by both contractors and contracting

officers. Contracting officers were fearful of

the consequences of exempting contractors

from statutory renegotiation as contemplated by the new price-adjustment articles.

Some contracting officers felt that the appearance of higher-than-average profits

after price adjustment was ipso facto proof

of loose pricing. Others, although they understood the relationship between higher

profits and increased efficiency, felt that they

might have difficulty in convincing a later

investigating committee of this relationship,

or of the fact that their decision to exempt a

particular contractor was not the result of

collusion. Still others could not understand

why it was necessary to take the trouble to

achieve close pricing in the first place as long

as the renegotiation law provided a "backstop" in the form of recapture of excessive

profits. Finally, because of the novelty and

implications of the authority to exempt from

renegotiation, substantial restrictions on the

use of this power were imposed by Headquarters, ASF: all contracts and amendments specifying the exemption had to have

the prior approval of the Purchases Division. This was an added deterrent to extensive use of the new powers. In addition to the

difficulties concerning exemption from renegotiation, contracting officers tended to

rely too heavily upon detailed cost accounting as the basis for price adjustment. This

slowed down negotiations and discouraged

wide use of the articles.56

For their part, contractors were slow to

appreciate the advantages of the periodic

articles. The greatest single barrier to contractor acceptance was the simple reluctance

to forgo the comfortable protection of high

initial prices which would provide a cushion

against all possible contingencies.57 Contractors in general reasoned that any excessive

profits would be recaptured by the government in renegotiation; conversely, if losses

were experienced it would be difficult to

persuade contracting officers to make upward adjustments in price. Many felt that

the amount of bookkeeping and the time required for periodic negotiations would seriously interfere with production. A discouragingly large number of contractors professed no interest in exemption from statutory renegotiation, as contemplated by the

periodic articles, on the ground that the remainder of their war contracts were subject

to renegotiation and they wished to maintain their automatic hedge against losses on

an over-all basis. Normally, losses on particular contracts could be used to offset

profits on others, thus minimizing renegotiation refunds. Losses on exempted contracts could not be so used, and—despite the

possibility of retaining greater profits under

56

 (1) PR 1205 (1-11-45). (2) Remarks of Gen

Browning, Dir Purchases Div ASF, in Verbatim

Official Report, Price Analysis Meeting, Ordnance

Department, 2 and 3 August 1943, Cleveland, Ohio,

pp. 77-90. (3) History of Ordnance Pricing Policy,

pp. 14-17. 57

 History of Ordnance Pricing Policy, p. 17.
334 THE ARMY AND ECONOMIC MOBILIZATION

exemption—a majority of contractors preferred to "play it safe." This reaction was

not only a formidable obstacle to the use of

the periodic articles but threatened to undercut the Army's whole close-pricing program.

So long as this philosophy pervaded the

thinking of contractors it would be impossible to adopt close pricing in individual contracts, and efficiency throughout the war

production program would be substantially

paralyzed by the insidious virus of cost-plus

operations. Furthermore the possibility of

setting off profits against losses gave rise to

a significant amount of "unfair competition" by high-profit contractors who could

afford to underbid other contractors not so

situated under over-all renegotiation. For

the foregoing and other reasons the periodic

pricing articles and the power to exempt

from renegotiation were relatively little used

throughout 1943.58

Optional Periodic Pricing—Early in

1944, with indications that Congress might

terminate the renegotiation law at the end

of the year, the War Department redoubled

its efforts to spread the gospel of close pricing. Great stress was laid upon the improvement of price analysis methods and a

new "company pricing" program was

launched.59 Wider use of the periodic pricing articles was urged along with bolder use

of the power to exempt closely priced contracts from statutory renegotiation. At the

same time the increasing volume of terminations was leading to greater interest in

close pricing on the part of contractors; as

open capacity became available, competition for government contracts and repeat

orders increased. This was accompanied by

requests for the reinstatement of price-escalation clauses in contracts to cover wage and

material cost increases which could no

longer be offset by extra earnings from overabsorption of overhead costs under numerous contracts and capacity operations. The

periodic pricing articles already in existence

were unwieldy, since they called for price

adjustment at stated intervals which did not

coincide with underlying changes in costs.

To meet these conditions the Purchases

Division, ASF, issued Revision 37 of the

Procurement Regulations, effective 25 May

1944, making numerous changes. The most

important innovation was the introduction

of new optional periodic pricing articles—

PR 360-A and PR 360-A.1. The distinctive feature of these articles was the fact that

no price adjustment was required until a

specific demand was served by either the

contractor or the government. PR 360-A

provided for prospective price adjustment

only; PR 360-A.1 differed only by permitting retroactive price adjustment for the first

period if the initial demand was made prior

to delivery of 30 percent of the items. The

optional feature freed all concerned from

the administrative burden of periodic negotiations regardless of the underlying necessity therefor.60

 Specific limitations were imposed on the frequency of demands for

price adjustment and informal cost reviews

were adopted to protect the government's

interests. To meet the special case of retroactive wage increases ordered by the War

Labor Board, a special article (PR 360-B)

was included. This permitted special adjustments not possible under articles providing only for forward price adjustments.

58

 (1) Ibid., pp. 14-17. (2) Oates, Periodic Pricing and Price Adjustment, p. 13. (3) ASF, History

of Purchases Division, pp. 180-82. 59

 See below, Chapter XIV.

60

 The term "periodic" continued to be officially

used to describe all progressive pricing articles even

after the optional feature eliminated the necessity

for revision at stated periods. The terms are used

interchangeably hereinafter.
PRICING IN FIXED-PRICE CONTRACTS 335

TABLE 36—USE OF PERIODIC PRICING ARTICLES: BY ORDNANCE DEPARTMENT

1 APRIL 1943-1 OCTOBER 1944

[Dollars in millions]

Source: History of Ordnance Pricing Policy, Exhibit 51, Ordnance Districts Periodic Price Adjustment Operation, 1 Apr 43-1 Oct 44, 30 Oct 44.

After the publication of the new optional

articles, the principle of progressive price

adjustment became accepted on a fairly

wide scale. Contractors were apparently

more willing to price closely in original contracts and to make successive reductions in

subsequent negotiations. Not only did progressive pricing become increasingly popular

in new contracts; many large contracts

already in existence were individually

amended to include one of the periodic articles. Demands for the reinstatement of

general price-escalation clauses subsided

although the special-purpose escalator

clauses already mentioned continued to be

used. The new articles were revised from

time to time and still additional articles were

developed before the war's end to meet new

conditions. The technical service making the

greatest use of the periodic articles was the

Ordnance Department, which had taken a

leading role in their development. On 30

October 1944 the Ordnance Department

reported the results of eighteen months'

experience with progressive pricing. (Table

36.)

As indicated by this report, nearly $21⁄2

billion in Ordnance contracts were subject

to progressive pricing by the fall of 1944.

At that time the new optional articles were

only about four months old and the original

periodic articles (PR 360.1 and PR 360.2)

predominated. The number of upward adjustments was slightly more than a third

of the number of price reductions, but their

dollar value was negligible. Although only

a third of the contracts were beyond the

first period, price adjustments had already

resulted in estimated savings of some $80

million. Final savings under these contracts

by the time of completion or termination

were presumably several times this figure.61

61

 The author has been unable to discover detailed

statistics for progressive pricing subsequent to those

shown in Table 36.
336 THE ARMY AND ECONOMIC MOBILIZATION

The greatest use of the periodic articles

was to come during the next few months.

The greatly intensified expenditures of Ordnance equipment in the European Theater

of Operations in the fall of 1944 and in the

Battle of the Bulge in December created a

crisis in Ordnance procurement which was

to last until the spring of 1945. During this

period the rapid expansion in Ordnance

procurement operations resembled the hectic conditions in the months after Pearl

Harbor. Sharp increases in the demand for

heavy artillery, tanks, heavy transport vehicles, and the larger sizes of ammunition

led to the placing of tremendous additional

awards and the utilization of many new facilities without prior experience. This precipitated a pricing problem, since many inexperienced and marginal operators were in no

position to quote prices comparable to those

of experienced producers. The value of the

periodic articles in meeting this situation is

indicated by the following remarks, included

in a report made in April 1945:

In this connection, it should be observed

that the use of the periodic pricing articles

was of inestimable benefit to the Ordnance

Department in securing fair and reasonable

prices under these extraordinary conditions;

the earlier campaigns for the more extensive

employment of these articles bore fruit far

beyond any previous estimates. At this writing, well in excess of $5,000,000,000 of Ordnance contracts, many of them with its most

important contractors, are or have been covered by such articles. Price reductions secured

have far exceeded price increases granted.

The General Motors Corporation currently

has over $1,000,000,000 of such contracts with

Detroit Ordnance District alone.62

Other indications of the usefulness of

price-adjustment articles appeared in a

number of sources. The Signal Corps, in

a study of savings from price reductions between April 1942 and November 1945 attributed savings amounting to $583 million

to "price reductions made under price revision articles, negotiated forward price reductions and voluntary refunds."

 63

 Many illustrations of price reductions for specific

items likewise gave testimony to the value of

the periodic articles in conjunction with the

Army's general program for close pricing.

Thus:

Another example is that of a company

manufacturing machine guns . . . In 

they had $50,000,000 in sales. After recapture

they had profits of 20% plus on adjusted sales.

The price before recapture could be calculated to be in the neighborhood of seven or

eight hundred dollars a gun. After recapture

it was four to five hundred dollars a gun.

We put in the Periodic Price Adjustment

Article and the price for the last quarter of

1943 was $260 and the first quarter of 1944

was $253 a gun. The contract clause wasn't

responsible for all of that, but it played its

part.

The contractor felt no need to charge a

high price to protect himself because he was

currently protected by the fact that the price

could be negotiated either up or down every

three months, and he had the incentive

through exemption to go after his costs, which

he did in a big way.64

Exemption from statutory renegotiation, a

feature of the above illustration, was never

widely used by the War Department in

World War II, either separately or in conjunction with progressive pricing. This was

true even after the Purchases Division, ASF,

delegated to the technical services the power

62

 History of Ordnance Pricing Policy, supplement

of 24 Apr 45, p. 2.

63

 Memo, Lt Gen LeRoy Lutes, CG ASF, for

USW, 27 May 46, sub: Continuation of Present

Price Analysis Set-Up, Exhibit B. 64

 Oates, Periodic Pricing and Price Adjustment,

p. 12. See also, ASF Annual Rpt, 1944, p. 117.
PRICING IN FIXED-PRICE CONTRACTS 337

TABLE 37—INCENTIVE ARTICLE UNDER ARMY PROCUREMENT REGULATIONS

a

 Maximum (ceiling) price. b

 War Department estimated cost, without contingencies. c

 Target price.

Source: PR 378.4 (5-24-45).

to exempt, without higher approval and

with authority for redelegation.65

The Incentive Article; Other Changes

Late in the spring of 1945 the various sections of Procurement Regulations concerned

with price adjustment articles were completely revised and consolidated for more

convenient and extensive use. At this time

all the older articles were revised and

renumbered, and several new articles made

their appearance. Of most interest was a

new "incentive article," which provided a

sharing of cost savings between the government and the contractor.66

 The essence of

the incentive article was its provision, at the

time of contract placement, of a range of

prices—based on a corresponding range of

estimated costs—above and below a "fair

and reasonable price" known as the target

price. A maximum or ceiling price was established, representing the lowest firm price

acceptable to the contractor with the inclusion of all estimated contingencies. The target price represented the ceiling price

stripped of all contingent allowances, and

included only a "normal" rate of profit. The

final contract price was established after

contract completion on the basis of a review

of the actual costs of performance, including realized contingencies. Such costs were

known as "negotiated costs," indicating that

they would be determined by reasonable

accounting and other evidence as approved

by the contracting officer, rather than by detailed audits subject to review by the Comptroller General. The lower the final cost, as

negotiated after contract completion, the

lower would be the final price to the government, but the contractor would receive a

correspondingly higher profit. (Table 37)

65

 "The number of cases in which exemptions have

been granted is relatively small." ASF, History of

Purchases Division, p. 182. The reasons given were

those already adduced above, pages 333-34. Also

see above, Table 36, page 335. 66

 PR 378 (5-24-45). It should be observed that most of the earlier price adjustment articles were

also "incentive" articles. The novelty of the new

article was not that it introduced the incentive

principle but rather that it spelled out the specific

nature of the incentive in advance and in considerable detail.
338 THE ARMY AND ECONOMIC MOBILIZATION

The specific profit percentages and ranges

of costs and prices were, of course, established by negotiation for each contract.67

The widespread revisions made in May

1945 represented the culmination of nearly

five years of experimentation and experience

with price-adjustment articles, beginning

with the early escalator clauses used in the

summer of 1940. Although some of the

innovations came too late to be widely used

in World War II, the accumulated heritage

of experience with price adjustment was to

bear abundant fruit in the extensive procurement operations of the Korean period

and the longer period of the "Cold War."

 68

67

 PR 378.4 and 378.5 (5-24-45). By 30 June

1945 only one contract had been prepared by the

War Department for use of the "incentive" clause.

See ASF, History of Purchases Division, p. 156.

68

 During fiscal year 1952, contracts containing

price-adjustment articles accounted for nearly three

fourths of all contract placements by Army Ordnance, with CPFF contracts running a poor second

and firm fixed-price contracts running to comparatively negligible figures. See Table II, accompanying Office Memo, Joseph C. Cruden, Asst Ord

Comptroller—Pricing, ORDGC, for Chf Industrial

Div, ORDIX, 27 Feb 53, copy in OCMH.
CHAPTER XIV

Multiple-Contract Pricing Review: The

Company Pricing Program

Inadequacies of Individual

Contract Pricing

In devising techniques for the negotiation of sound prices in its procurement contracts for World War II, the War Department quite logically placed primary emphasis upon its individual contracts. The

development of price and cost analysis, the

provisions of various contractual articles to

facilitate close pricing, and even the formulation of broad pricing principles were basically geared to the negotiation and administration of particular contracts. By the fall

of 1943, however, procurement officials realized that reliance upon attempts to obtain

correct pricing in each individual contract

was not sufficient to attain the fundamental

objectives of War Department pricing

policy. The shortcomings of the individual contract approach led to developments which culminated in the company

pricing program adopted in 1944 and continued until the end of the war. This program was essentially a procedure for the review and correction of out-of-line prices and

pricing practices of important war contractors, without waiting for the after-the-fact,

profit-recapture technique of renegotiation.

A number of influences contributed to

the development of company pricing. The

most important of these was experience under the renegotiation law. The Renegotiation Act of 1942 had been adopted as an

instrument both for recovering past excessive profits and developing sound forward

prices which would prevent excessive profits

in the future. As indicated hereafter, it was

found totally impracticable to administer

the renegotiation law on a contract-bycontract basis, and from the outset statutory

renegotiation was applied to a company's

total renegotiable sales for each past fiscal

year.1 This over-all approach to a company's war business revealed many defects

in both the theory and practice of pricing

on an individual contract basis. For a

number of reasons, however, the renegotiation function became increasingly devoted

to the recapture of past profits, and the

majority of renegotiation agreements confined their treatment of current and future

prices to the familiar "Boy Scout Pledge,"

under which the contractor promised generally to adopt a closer pricing policy in the

future. Although the treatment of past

profits under renegotiation created a favorable environment in which contracting

officers could apply close pricing techniques

in negotiating new contracts, it was clear

that a major gap existed between renegotiation and forward pricing.2

A second influence leading to the company pricing movement was the discovery,

both in renegotiation and from a wide array

1

 See below, pages 361-62. 2

 See below, pages 382 ff.
340 THE ARMY AND ECONOMIC MOBILIZATION

of independent sources, of the highly unsatisfactory status of prices in subcontracts.

Roughly 50 percent of all Army procurement expenditures was transferred to subcontractors and suppliers, yet the War Department up to 1944 exercised relatively

little control over subcontract prices. Under its fixed-price contracts the War Department was obliged to rely almost completely

upon the integrity and ability of its prime

contractors to insure payment of only reasonable subcontract prices. In the rapid

tempo of wartime operations and under the

compulsion of obtaining scarce, critical supplies and equipment, prime contractors

often showed little resistance to high subcontract prices. Even under CPFF contracts, where the approval of Army contracting officers was specifically required for each

purchase over $2,000 (or other specified

figure), the opportunities for overcharging

the government were numerous. Thus,

one Ordnance subcontractor furnishing

machine services and assemblies for CPFF

producers of .50-caliber ammunition earned

a profit of 67.83 percent on his 1942 renegotiable sales and was obliged to refund

$1,634,000 in excessive profits. Another,

supplying cartridge dies to Ordnance ammunition prime contractors, earned 56.25

percent and refunded more than $1,800,-

000. Still another, supplying armor-plated

body assemblies, earned 40.3 percent on a

much larger volume and was required to

refund approximately $10 million in excessive profits for his 1942 fiscal year.3

Notwithstanding the many examples of

high profits received by first-tier subcontractors, Ordnance purchase policy officials

noted that in general "the further down the

subcontract line an individual war contractor is found, the higher the profits and the

more excessive the price."

 4 Profits of industries at the very base of the productive

economy, that is, raw materials, could not

be touched by renegotiation: agricultural

interests, steel companies, the chemical industry, and others had succeeded in obtaining the statutory "raw material" exemption.5

 But renegotiation proceedings in industries above the raw material cutoff level

had conclusively demonstrated the widespread existence of excessive profits among

subcontractors and vendors. This was especially true for producers of standard commercial articles, many of which were subject to OPA price ceilings. Ceiling prices

often tended to become minimum—as well

as maximum—prices in an industry, and the

more efficient producers were able to live

quite handsomely under established ceilings. In many cases the tremendous expansion of output under conditions of declining

unit costs enabled producers of standard

commercial items to realize huge profits

under prices which were little, if any, higher

than prewar prices.6 On the other hand, reports of the War Department Inspector

General revealed substantial increases as

well as unjustifiable differences in the prices

paid by prime contractors and others for

common parts and components such as

spark plugs, generators, and bearings. Thus,

while the Studebaker Corporation was able

to purchase spark plugs for $.075, another

War Department prime contractor was

paying $.15; at the same time the govern3

 These are among cases cited in Memo, Oates,

Chf Purchase Policy Br, Legal Div OCofOrd, for

Gen Campbell, CofOrd, 13 Jan 44, sub: The Control of Subcontract Prices, History of Ordnance

Pricing Policy, Exhibit 29.

4

 Ibid., p. 4. 5

 See below, pages 376 ff. 6

 Producers of standard commercial articles tried

valiantly to gain mandatory exemption from renegotiation but were not as persuasive as the advocates of the raw material exemption. See below,

pages 377-78, and sources cited therein.
MULTIPLE-CONTRACT PRICING REVIEW 341

ment was buying spark plugs directly as

spare parts at prices ranging from $.24 to

$.65.7

The accumulating evidence of excessive

prices and profits at all subcontractor levels

indicated that the War Department's program for close pricing in individual prime

contracts was in danger of substantial nullification. An excessive subcontract price—

especially at several stages removed from

the prime contract, normally resulted in a

much greater increase in the ultimate prime

contract price than the amount of the original excess. This was the result of costing

and pricing practices throughout industry,

which provided a significant mark-up on the

cost of parts and materials with each successive transaction in the vertical journey

from raw material to ultimate end product.

When high mark-ups were applied at each

stage to already inflated prices for underlying subcontractors, the cumulative effect

was a substantial mushrooming of component costs in final end-product prices.

Moreover, profit recaptures by the government through renegotiation and excessprofits taxation could never offset the increase in end-product prices resulting from

pyramided costs.8 Of greater importance,

they could never recapture the lost manhours and wasted materials resulting from

the corrosion of efficiency inevitably associated with widespread loose pricing.

A common barrier to reduction of unit

prices for standard commercial articles,

especially in subcontracts, was the unwillingness of producers to disturb their established price structure. Manufacturers of

proprietary or standard items typically had

developed over the years, at considerable

advertising expense, conventional selling

prices widely known and accepted by consumers. In many cases there were also

long-established differentials to jobbers,

distributors, and retailers whose services

were indispensable to the marketing of the

product. Manufacturers had found that

frequent price fluctuations were highly unsettling, not only to the consumer market

but to the entire structure of price differentials upon which their product distribution was based. Hence they had preferred,

so far as possible, to maintain stable consumer prices and to absorb fluctuations in

unit costs resulting from changes in material and labor costs, variations in overhead,

and other influences, within the basic factory price. Although such manufacturers

were most reluctant to reduce their product

price to prime contractors or other purchasers—many of whom would continue to

be customers after the war—they often proclaimed their willingness to surrender excessive profits through renegotiation refunds and excess-profits taxation and

felt that this was all that should be required

of them. But this procedure was not satisfactory to the War Department because of

the pyramiding effect upon procurement

costs and the waste of real resources already

described.9

7

 Excerpt from Report of Inspector General on

Tank-Automotive Center, dated 5 April 1943, cited

in History of Ordnance Pricing Policy, Exhibit 29,

p. 12. 8

 This was demonstrated in an ingenious tabulation incorporated in Ordnance Department, Legal

Division, Purchase Policy Branch, Research and

Inquiry Unit, Research Bulletin 6, The Importance

of Close Pricing, History of Ordnance Pricing

Policy, Exhibit 40.

9

 Joseph M. Dodge, Renegotiation Div, ASF,

Controlling Profits from Prices on Standard Commercial Articles, 19 Jan 44, and accompanying tabulation, "Samples of Standard Product Companies"

(profit margins before and after renegotiation for

representative manufacturers of perishable tools, cotton and woolen textiles, bearings, and crystals), in

History of Ordnance Pricing Policy, Exhibit 31,

pp. 16-19; also in same history, Agenda for Regional

Company Pricing Discussion, Exhibit 68, pp. 21-27.
342 THE ARMY AND ECONOMIC MOBILIZATION

For the above and many other reasons,

War Department officials concerned with

purchase policy concluded that it was necessary to supplement their efforts in the pricing

of individual contracts with an over-all or

"company" forward pricing program, administratively modeled along the lines of

renegotiation, which would take up where

renegotiation left off. First of all, a program was needed which could reach any

war contractor, whether a prime contractor

or remote subcontractor far beyond the

reach of the War Department in its ordinary

contractual relationships.10 Also, apart from

the question of accessibility of subcontractors, the over-all approach would overcome

a number of other serious defects of individual contract pricing. The first of these

was the frequent impossibility of adequate

cost analysis based on cost statements submitted with bids or estimates in the process

of individual contract negotiation. Time

and again Army contracting officers had the

experience of negotiating apparently close

prices in each of a manufacturer's individual

contracts — scrutinizing cost estimates,

checking wage rates, material costs, and departmental, factory, and other overhead

items, pruning all visible contingency allowances, and making awards at profit rates of

perhaps 10 percent—only to discover later

via renegotiation that profits actually realized ran to 20 percent, 30 percent, or even

50 percent. Manufacturers themselves

often professed to be mystified by the results and to be anxious to co-operate in

rectifying the situation. Investigation soon

revealed that padding of individual cost

estimates, whether deliberate or otherwise,

in many cases could not be detected by contracting officers without a general knowledge of all the contracts of the firms involved. In other cases, the close-pricing

efforts of a given contracting officer were

nullified by loose contracting practices of

others, perhaps in different procuring agencies. Eventually those responsible for purchase policy realized that the costs which

were common to two or more contracts

formed a much larger proportion of total

contract costs than was ordinarily understood. This was true not only of conventional overhead items, but of many items

classified as direct costs.

The problem of correct allocation of costs

to particular contracts was difficult enough

at the time an individual contract was negotiated. The gravest difficulty of all, however, was the fact that changes in the manufacturer's over-all volume of business soon

rendered obsolete the best cost estimates and

allocations made at any particular time.

This fact was of paramount importance in

the case of large corporations with dozens

or perhaps hundreds of contracts, both

prime and sub, in various stages of completion, revision, termination, or renewal. To

attempt to deal with this situation on a contract-by-contract basis would involve individual contracting officers in an endless

maze of cost analysis without providing a

satisfactory solution. On the other hand,

a periodic review of a contractor's over-all

business by a team of company pricing experts could control the general pricing practices of a contractor and correct as well as

remove much of the detail ordinarily associated with individual contract negotiations.

10

 Renegotiation could reach all war contractors,

whether prime or sub, except those exempted by

statute. No such limitation existed for company

pricing, which rested ultimately upon the pricing

powers of departmental secretaries under Title

VIII of the Revenue Act of 1943.
MULTIPLE-CONTRACT PRICING REVIEW 343

Adoption of the Company Pricing Program

Company pricing had its specific origins

in the fall of 1943 when the Renegotiation

and Purchases Divisions of ASF worked out

a basis for joint action by procurement officers and renegotiation boards to deal with

the pricing policies of a limited number of

selected contractors.11 At the same time, the

Purchase Policy Branch of the Ordnance

Department was at work on a positive program to improve advance pricing and obtain better control of prices in subcontracts.

On 1 January 1944, ASF officials completed an elaborate draft of a Proposed

Forward Pricing Program and circulated it

among various echelons in the Ordnance

Department. This proposal spelled out in

considerable detail the objectives of the

program, and the steps to be taken by Headquarters, ASF, the various renegotiation

agencies, and all relevant offices of the Ordnance Department and other technical

services. On 15 January the program was

formally transmitted to General Clay, Director of Materiel, ASF.12

The resulting decision to inaugurate a

company pricing program was fortified by

Congressional hearings and discussions

leading to the passage of the Renegotiation

Act of 1943. Many observers, both in and

out of Congress, had come to feel that contractors and procuring agencies had acquired sufficient experience to be able to

achieve close prices in all future contracts,

thereby making renegotiation unnecessary.

As finally passed, on 25 February 1944, the

new renegotiation law was slated to expire—in the absence of a six-month extension by the President—on 31 December

1944. At the same time, the procuring agencies were given the power, under Title VIII

of the governing revenue act, to set mandatory fair prices on both prime contracts and

subcontracts in cases where this objective

could not be accomplished by voluntary

negotiation.

On 18 January 1944, while this legislation was still pending, General Somervell

called a meeting of chiefs of the technical

services and ASF officials for a general review of War Department pricing policy,

especially in view of the prospective expiration of renegotiation. At this meeting, Brig.

Gen. Albert J. Browning announced plans

for the intensification of War Department

close-pricing endeavors along two lines: refinement of cost and price analysis in connection with individual contract negotiations, and the launching of forward pricing

discussions on an over-all basis with contractors and subcontractors making excessive profits. Both programs would be

fortified by a more liberal use of the power

to exempt particular contracts from renegotiation in exchange for close prices and

by the mandatory pricing power provided

by Congress. The new approach to forward

pricing was summed up by the Assistant Director for Pricing, Purchases Division, ASF,

as consisting essentially of "a simple, integrated and effective business use of accounting, engineering, legal and statistical techniques without permitting any one [of

11

 Summary of Talk Made at Meeting of Chiefs

of Technical Services, ASF, held 1000, 18 January

1944, by Glen Lloyd, Asst Dir for Pricing, Purchases

Div, Hq ASF, in History of Ordnance Pricing

Policy, Exhibit 31, p. 3. 12

 (1) Memo, Oates, for Col Duffy, Chf Legal Br

OCofOrd, 4 Jan 44, sub: Forward Pricing Program, and incl, Proposed Forward Pricing Program—Submitted 1 January 1944 (32 pp. and 8

appendixes). (2) Memo, Col Duffy, ACofOrd, for

Gen Clay, Dir of Materiel ASF, 15 Jan 44, sub:

Forward Pricing Program. Both in History of Ordnance Pricing Policy, Exhibit 30.
344 THE ARMY AND ECONOMIC MOBILIZATION

these] to dominate beyond usefulness . . .

on a business and production problem."

 13

Within the following two months, the

procedures and objectives of company pricing were developed in considerable detail

and on 29 March 1944 the program was

launched on an experimental basis with a

limited number of companies to be selected

by each technical service.14 On 5 July 1944

the program was made permanent and established on a broader basis.15

 With the

decision to make the company pricing procedure permanent, the Army undertook

continuous efforts to create the necessary

staff and organization, to educate contractors as well as procurement personnel, and

to improve and refine the governing policies

and procedures. Company pricing co-ordinators, responsible for the administration

of the program, were appointed in the headquarters of each technical service and in

each field procurement office having company pricing responsibilities. A steady

stream of instructions and information concerning the program was distributed by

each of the technical service headquarters,

as well as by Headquarters, ASF, to appropriate offices throughout the country. Early

in 1945 a series of seven regional meetings,

sponsored by ASF, was held in order to consolidate experience under the program and

further to educate workers in the field.16

During the same period War Department

purchasing officials made numerous

speeches before trade associations, meetings

of contractors, and other business groups.

News releases and articles by such officials

on the nature of the company pricing program were published in newspapers, trade

journals, and other media. These public

relations activities were important not only

for conveying information on policies and

13

 Summary of Talk Made at Meeting of Chiefs of

Technical Services, ASF, Held 1000, 18 January

1944, by Glen Lloyd, Asst Dir for Pricing, Purchases

Div, Hq ASF, in History of Ordnance Pricing Policy,

Exhibit 31, p. 2. Other documents in this same

exhibit recording the discussions at the 18 January

meeting include: (1) Memo, Oates for Gen Campbell, 18 Jan 44, sub: Conference on Improved Pricing 18 January 1944; (2) Memo, Gen Somervell

for Chfs of the Technical Services, 21 Jan 44, sub:

War Department Contracting and Pricing Policy;

(3) Summary of Talk Made at Meeting of Chiefs

of Technical Services, ASF, Held 1000, 18 January

1944, by Gen Browning, Dir Purchases Div ASF;

(4) Joseph M. Dodge, Dir Renegotiation Div ASF,

Outline of Repricing Problems Created by the

Eventual Elimination of Renegotiation, 19 Jan

44; (5) Dodge, Controlling Profits From Prices on

Standard Commercial Articles, 19 Jan 44; (6)

Memo, Gen Somervell for USW, 20 Jan 44,

sub: War Department Policy for the Purchase of

Supplies. 14

 Memo, Gen Clay, Dir of Materiel ASF, for

CofOrd, 29 Mar 44, sub: Experimental Program

for Review of Prices and Pricing Policies of Certain

Selected Companies, and attached memorandum

of procedures, War Department Experimental Program for Review of Company Pricing, 27 Mar 44

(21 pp. and appendix), History of Ordnance Pricing Policy, Exhibit 32. 15

 ASF Cir 207, 5 Jul 44, Pt. Three, Review of

Company Prices and Price Policies. By this time the

designation "company pricing" had become fairly

well established in Army circles. In the Navy, which

had launched a companion program in April 1944,

the terms "forward pricing" and "price revision"

continued to be used to describe the program.

Connery, The Navy and the Industrial Mobilization,

Ch. XII.

16

 The Ordnance Department was host to five

regional meetings—Chicago, San Francisco, St.

Louis, Boston, and Detroit. The Quartermaster

Corps was host to the Philadelphia meeting, while

arrangements for the New York meeting were

handled by the Eastern Procurement District, Army

Air Forces. The documents recording the discussions

at these meetings provide unusual insight into the

nature and practical operations of the company

pricing program. See: (1) Regional Company Pricing Meeting, Philadelphia, Pennsylvania, 2-3 April

1945 (40 pp.), ASF, History of Purchases Division,

Exhibit 381⁄2; (2) Regional Company Pricing Discussion, Chicago, Illinois, 12-13 March 1945 (93

pp.), Exhibit 71; (3) Company Pricing Demonstration (35 pp.), accompanying A Typical Agendum

for a Regional Meeting, Exhibit 68. Last two in

History of Ordnance Pricing Policy.
MULTIPLE-CONTRACT PRICING REVIEW 345

procedures, but in overcoming the fears of

many businessmen and their spokesmen that

the new program would involve the widespread use of mandatory pricing powers or

other undesirable features. Finally, through

a series of ASF circulars, manuals, and

changes in procurement regulations, all

significant elements of the purposes and

procedures of company pricing were elaborated in detail.17

Procedures and Results of Company Pricing

The basic procedures under the company

pricing program involved the selection of

contractors, preparation of data, negotiation, reaching agreement, and publication

of the terms of agreements. The criteria for

selection of contractors were high prices or

costs, a record of excessive profits in renegotiation, or request by individual firms

for special consideration of their pricing

problems. Selections were made chiefly on

the basis of renegotiation data, and priority

was given to the more important cases. Responsibility for conducting negotiations fell

to company pricing teams in the technical

service having responsibility for renegotiation of the firm in question; assignments

were ordinarily made by the chief of the

technical service but additional assignments

could be made by the Purchases Division,

ASF. Company pricing teams consisted

basically of a procurement specialist, a renegotiator, and a price analyst, acting under

a chairman; in appropriate cases additional

representatives of other services or procuring agencies were included in the team.

Prior to negotiations the pricing team

obtained all relevant data concerning the

firm's activities from War Department and

other sources. Copies of current contracts

and their supporting cost breakdowns were

obtained from procurement offices; renegotiation agreements, reports, financial spread

sheets, and other data were available from

price adjustment offices; price analysis sections could furnish comparative prices and

costs, as well as occasional independent cost

studies; fiscal sections provided audit reports

and V-Loan reports; production scheduling

sections furnished performance records and

estimates of future volume.

The company pricing team analyzed the

assembled data to ascertain the extent and

causes of high prices, costs, and profits. Particularly scrutinized were allocations of

common costs, prospective changes in

manufacturing volume, subcontract prices,

propriety of particular cost items, and differences in costs between the firm's civilian

and war business. Having located so far as

possible the weaknesses or objectionable features of a firm's cost and price policy, the

team developed a specific plan looking to

the correction of these defects. Basic agreement upon the plan by all government representatives was required in a final meeting

before approaching the company. Also,

complete co-ordination with other interested

services and departments was sought in advance of negotiations. Co-ordination in17

 The original instructions on basic policies and

procedures for the permanent company pricing program (ASF Circular 207, 5 July 1944) were superseded and amplified by ASF Circular 303, 13

September 1944, which in turn was superseded by

ASF Circular 165, 8 May 1945. These basic policy

and procedural instructions were eventually incorporated in Procurement Regulations (PR 3). On

30 October 1944, the Army issued its first manual

on company pricing (ASF M-609). This manual

was completely reissued, after a series of draft

revisions, in May 1945. ASF M-609 was devoted

to the art of negotiating successful company pricing agreements and contained a number of cases

illustrating differences in contractors' cost conditions, price structure, profit situation, and other

considerations calling for different types of agreement.
346 THE ARMY AND ECONOMIC MOBILIZATION

eluded (1) informing all interested contracting agencies that company pricing

negotiations were being undertaken; (2)

obtaining from each agency an agreement

as to its participation or representation in

the negotiations. Coordination made it

possible to discuss all of a contractor's war

business as a whole and to reach agreements

which would be binding upon all interested

agencies.

Company pricing negotiations could take

place either in conjunction with statutory

renegotiation (Class A procedure) or independently of renegotiation (Class B procedure), whichever was more convenient.18

As in the case of renegotiation, an agenda

for the meeting with company officials was

carefully prepared and the successfulness of

the negotiations depended in large part on

the adequacy of total preparations. The

meeting typically included an explanation

of War Department price policies, the function of the company pricing program, a

discussion of the issues brought out by the

analysis of company data, a presentation by

the company of its pricing problems, and

the negotiation—so far as possible—of a

proper pricing agreement.

Accumulated experience under the company pricing program revealed some halfdozen major problems or issues which most

frequently arose in negotiations. These

were (1) effects upon unit costs of future

changes in volume of production; (2) discovery and elimination of contingent elements of cost; (3) determination and reduction of excessive subcontract prices; (4)

determination of allowable profit margins

in estimating proper prices; (5) provision

for specific adjustment of current prices, or

cost elements entering future price negotiations; (6) voluntary retroactive refunds.19

Various types of agreement were developed to meet each of these problems. Thus,

contractors were generally reluctant to enter

into forward pricing agreements in the face

of pending cutbacks in production schedules

or in the general volume of war business.

This reluctance was frequently overcome by

an agreement upon short-term price reductions with a definite time limit, or reductions

contingent upon the maintenance of a specified or graduated volume of sales. Many

contingent items of cost, such as reserves for

increases in cost of labor and materials resulting from OPA or War Labor Board

decisions, were eliminated on the strength of

inclusion of appropriate protective contract clauses in all of a company's relevant

contracts.20

The problem of excessive subcontract

prices was handled largely by direct War

Department negotiations with a prime contractor's principal subcontractors. Whereever possible, specific price reductions were

obtained from subcontractors, to be passed

along to the prime. In the case of major

components of end products, pricing teams

endeavored to see that subcontract price

reductions were passed along to the government and reflected in an appropriate reduction in the prime contract price. Where the

number of subcontract price reductions was

too voluminous to warrant corresponding

reductions in the prime contract, the prime

contractor would frequently agree to

establish a "subcontract price reductions"

account and to make a lump-sum refund to 18ASF M-609, Company Pricing, May 1945, pp.

4-8. Ordnance Department Class A agreements

numbered about one fifth of Class B agreements.

Ord Dept, Monthly Company Pricing Report—

1945, 31 Mar 45, copy in History of Ordnance

Pricing Policy, Exhibit 73.

19

 ASF M-609, Company Pricing, May 1945, par.

22, pp. 10-17. 20

 For example, PR 360-A (5-25-44).
MULTIPLE-CONTRACT PRICING REVIEW 347

the government at the end of a specified

period. In these cases the contractor added

his normal mark-up to the aggregate dollar

value of subcontract price reductions in

computing his lump-sum refund. In still

other cases, a special discount arrangement

for the benefit of the government was agreed

to by manufacturers of standard articles.

Each invoice covering sales to the government or to war suppliers carried a special

stamped notation specifying the size and

purpose of the discount. This device helped

to protect the manufacturer's established

price structure and served notice on customers that the reduction was to be passed

on to the government. As a last resort, in

the case of subcontractors whose long-established, competitive price structure would be

seriously disturbed by price reductions or

discounts, a rebate arrangement was permitted. Rebates to the government were

made periodically to cover all renegotiable

sales (war business) for the period.21 Rebates were also used where a manufacturer's

war business could not be identified as such

at the time of sale. The War Department

considered rebates as the least desirable

form of price adjustment since they failed

to eliminate pyramiding of costs upon an

inflated base through successive echelons of

contractors and suppliers.

In dealing with the question of profits

and profit margins, the basic consideration

was the avoidance of any disguised or undisguised cost-plus-a-percentage-of-cost arrangement. While all pricing arrangements

had to allow a reasonable rate of profit upon

legitimate costs, no arrangement was to permit any advance guarantee of profit or to

result in basing profits upon actual uncontrolled costs. It was in this connection that

the War Department's basic pricing philosophy was recapitulated:

A positive statement of this principle is,

"prices should always be specifically agreed

upon in advance of production." These prices

will normally include a reasonable, estimated

profit—but realization of the profit will depend on the contractor's performance. If the

contractor fails to perform as anticipated, he

will sacrifice profit. Whether the technique

of pricing is to set dollars-and-cents prices, or

specific discounts from specific prices, or

specific rates of rebate from specific prices,

the prices should be firmly fixed in advance of

production. This alone is "pricing." It establishes a reward for efficiency and good management and a penalty for inefficiency.22

The principle of advance pricing was

applied in connection with the acceptance

of voluntary retroactive refunds under company pricing agreements. Recapture of excessive profits already received was the

exclusive province of renegotiation. But

there was usually a lag of many months

before renegotiation agreements were concluded for a particular fiscal year. In the

meantime, excessive profits under loose

forward prices would often accumulate. If a

contractor wished to avoid a penalty in his

next renegotiation for loose pricing throughout the current fiscal year, he was permitted

to make a voluntary refund, retroactive to

the beginning of the year, at the time of

company pricing. In this manner he could

restore himself to a current risk position,

thereby forcing himself to live within the

earnings provided by current prices. In the

absence of such a refund an undue accumulation of profits prior to company pricing would remove much of the pressure to

improve efficiency under a close-pricing

agreement for the remainder of the year. On

the other hand, retroactive refunds were

21

 For methods of determining renegotiable sales,

see below, page 366.

22

 ASF M-609, Company Pricing, May 1945,

p. 15.
348 THE ARMY AND ECONOMIC MOBILIZATION

recognized as a kind of rebate; like all rebates, they indicated the existence of pyramided costs at successive contractor echelons during the period covered by the rebate.

For reporting and other purposes, company pricing agreements were classified into

one or more of five main types: (1) specific

price changes; (2) discounts; (3) rebates;

(4) understandings; (5) clearances. Specific price changes took many forms; they

required the amendment of prime contracts

as listed in the agreement or, in the case

of subcontractors, reductions of price on

standard or other articles as specified. In

addition to effecting price reductions, company pricing agreements permitted price

increases in appropriate cases where prices

were too low for profitable operations. It

was War Department policy to require, so

far as possible, that each contract stand on

its own feet. There was a notable tendency

on the part of some contractors to underbid

at break-even or loss levels in order to get

additional business which would offset excessive prices and profits in other contracts.

By thus diluting its over-all rate of profit

realization, a firm could reduce profit recaptures under renegotiation and perpetuate excessive prices on important categories

of its business. The requirement that each

contract stand on its own feet was intended

to discourage this practice.

Discounts and rebates have been briefly

discussed above.23 "Understandings" were

agreements specifically correcting or improving various aspects of a company's pricing practices which had an important bearing upon future contract prices. Under this

category were agreements to eliminate contingency provisions, revise accounting methods, refine cost-estimating procedures,

and improve various purchasing practices.

Understandings often resulted in greater

long-run savings than specific price reductions; they also simplified future contract

negotiations for the contractor as well as for

all procuring agencies.

A clearance, as the term implies, indicated that after review the contractor had

demonstrated that his prices were fair and

reasonable and that excessive profits were

not being earned. Many firms selected for

company pricing because of excessive profits

in the previous fiscal year had subsequently

experienced reductions in sales or other

changes in circumstances, and by the time

of the company pricing review their costprice structure was considered to be satisfactory. Clearances were normally given for

no more than ninety days and were subject

to periodic review. Cases for which no company pricing action was necessary were considered administratively "canceled" and

were not included as "clearances" in reports

of company pricing agreements.

In order for the fruits of a company pricing agreement to be fully realized, it was

necessary that knowledge of the terms of the

agreement be disseminated to all procurement offices likely to be affected. This was

a perplexing administrative problem and

gave rise to many debates on the methods,

form, and scope of the distribution of company pricing agreements. Some of the agreements on standard commercial articles

potentially affected every procuring office in

the country. Others, originally thought to

apply only to Ordnance, or perhaps Air

Forces offices, often turned out to be of

interest to other services. In the case of complex agreements, certain portions of each

would be of interest to one service and not

to others, and most of them were originally

not in a form to be quickly digested by busy

23

 See above, pages 346 ff. contracting officials. In order to convey a
MULTIPLE-CONTRACT PRICING REVIEW 349

maximum of pertinent information, ASF

headquarters devised a standard reporting

form, maintained central files of information, and permitted direct distribution of

reports to interested agencies. It also published and gave wide distribution to a

cumulative, alphabetical list of company

pricing agreements currently in effect. The

list, which was kept up to date by weekly

supplements, indicated the name of the

company, the procurement service and district making the agreement, the type of

agreement, and the expiration date. With

the aid of the list all procurement offices

could immediately ascertain the existence of

a company pricing agreement and could

obtain copies thereof on short notice from

the originating office. Although substantial

improvement of reporting and dissemination procedures was made during the life

of the program, the various issues were

never resolved to the satisfaction of all

concerned.24

Because of its late introduction into procurement operations in World War II, the

company pricing program did not exert the

influence which it otherwise might have.

Furthermore, during at least the first half

of the program its administration tended to

lose sight of the basic purpose of cost reduction and to concentrate excessively upon

profit elimination:

Judged in the light of its original concept as

an aid to the pricing of individual contracts,

company pricing has not been a success since

it was made permanent on 5 July 1944. Instead of concentrating on prices and improvements in companies' costing and estimating

methods and practices, company pricing has

tended to revert to that which predominated

in 1942 and early in 1943, viz., has the contractor been making, or will he make, excessive

profits? . . . The prices and the 

which led to the excessive profits may or may

not be considered; the important matter is

that the Government gets back some money.25

As the main objectives of the program are

the conservation of critical materials and

manpower rather than the savings of money,

per se, company pricing personnel must continually be reminded that emphasis must be

placed upon elimination of cushions in price

rather than on the contractor's profit margins,

as only in this way can close prices which offer

an incentive to lower costs be obtained.26

The complete revision of ASF M-609 in

May 1945 did much to restore the desired

emphasis.27 By 30 June 1945, some 2,146

companies had been selected for company

pricing review since the inception of the program, and 424 companies had concluded

agreements with the War Department.28

These agreements resulted in cost and price

reductions in many thousands of war contracts and purchase transactions. In the

nature of the case no statistics are available

to show the savings—either in dollars or in

real resources—accomplished by the agreements. That they were substantial is indicated by the following observation, made at

the time the program was established on a

permanent basis: "As a result of the com- 24

 (1) ASF M-609, Company Pricing, May 1945,

Ch. 4. (2) ASF Cir 165, 8 May 45, p. 10. (3)

Regional Company Pricing Discussion, Chicago,

Illinois, 12-13 March 1945, History of Ordnance

Pricing Policy, Exhibit 71, pp. 25-55. (4) Regional

Company Pricing Meeting, Philadelphia, Pennsylvania, 2-3 April 1945, ASF, History of Purchases

Division, Exhibit 381⁄2, pp. 18-35, passim. (5) WD

Hq ASF, Purchases Div, Company Pricing Agreements Currently in Effect, 31 Mar 45, copy in History of Ordnance Pricing Policy, Exhibit 72.

25

 ASF Purchases Div, Pricing Policies and

Methods, p. 54. 26

 History of Ordnance Pricing Policy, supplement

of 24 Apr 45, pp. 13-14. 27

 This undertaking was already in process at the

time of the criticisms quoted above. See ASF Purchases Div, Pricing Policies and Methods, p. 55. 28

 ASF Annual Rpt, 1945, p. 213.
350 THE ARMY AND ECONOMIC MOBILIZATION

pany pricing program one large contractor

holding over one billion dollars of war contracts modified his pricing policies, with a

resulting reduction equivalent to 15 percent of the cost of his War Department

contracts."

 29

The entire life of the program was less

than eighteen months. On 4 September

1945, all negotiations looking to new company pricing agreements were ordered to

cease immediately and existing agreements

were not to be extended beyond the expiration of their current period.30

 By this time

the contract settlement activities of the War

Department were at flood tide and the valuable skills of company pricing teams were

badly needed to cope with the complexities

of negotiated settlements.

29

 ASF Annual Rpt, 1944, p. 118. 30 ASF Cir 332, 4 Sep 45, Sec. VIII.
CHAPTER XV

Contract Renegotiation: Origins and

Basic Procedures

The Background of Statutory Renegotiation

Statutory renegotiation of government

contracts, introduced early in World War

II, was the culmination of numerous efforts

over a period of many years to enact legislation for the control of war profiteering. Such

control had been notoriously ineffective for

World War I, which was reputed to have

created some twenty-three thousand new

millionaires. From the armistice in 1918 to

Pearl Harbor, sentiment against war profiteering was high, and approximately two

hundred bills and resolutions were introduced in Congress to prevent or limit wartime profits.1

 These proposals ran the gamut

from graduated excess profits taxes to plans

for the outright "conscription" of capital

and the complete confiscation of wartime

profits. Few of these plans merited serious

attention as practical measures but several

were enacted into law. The Vinson-Trammel act of 1934 and the Merchant Marine

Act of 1936 limited aircraft manufacturers

and shipbuilders to a flat percentage rate of

profit. In October 1940, at the beginning of

the defense period, these partial measures

were suspended and a steeply graduated excess profits tax was enacted. This legislation

was the first to deal generally with the problem of profits arising out of World War II.2

By the fall of 1941 defense production

had progressed to the point where unit costs

for many contractors had fallen far below

contract prices. In some cases it was clear

that the original contract prices had been set

much too high. But even when contract

prices were originally close to cost, rapid

improvements in organization, labor efficiency, and productive equipment effected

substantial reductions in unit costs. Under

the tremendously increased quantities called

for by wartime contracts and supplements

thereto, the spreading of overhead over

larger volume caused fixed costs per unit to

decline drastically.

The resulting high profit levels for many

war contractors began to attract widespread

attention. A series of investigations by the

House Naval Affairs Committee, culminating in the celebrated Jack and Heintz case,3

demonstrated that neither excess profits

taxation nor the avoidance of the cost-plus

form of contract could prevent profiteering

1

 H. Struve Hensel and Lt. Richard G. McClung,

USNR, "Profit Limitation Controls Prior to the

Present War," Law and Contemporary Problems

(Duke University School of Law), X, No. 2

(Autumn 1943), 199.

2

 Ibid., pp. 202-05. The excess profits tax, of

course, had as a major purpose the raising of revenue to help finance defense expenditures. 3

 H. Com. on Naval Affairs, 77th Cong., 2d Sess.,

Hearings on H. Res. 162, Investigation of the Naval

Defense Program. The Jack and Heintz case is

covered by Part 1, 23 and 25 March, and 13 April

1942.
352 THE ARMY AND ECONOMIC MOBILIZATION

and wasteful expenditures by war contractors.

Jack and Heintz, Inc., an Ohio firm

organized in 1940 and capitalized at

$100,000, was under contract to the War

and Navy Departments for the manufacture of aircraft starters. Between late 1940

and early 1942 the firm had received fixedprice contracts aggregating some $58 million. With the aid of a $3 million government loan for plant expansion and payments

in advance of production running to several millions, Jack and Heintz had established by the end of 1941 a remarkable record for both production and profits. Attention became focused on the company

because of lavish bonuses to executives and

key employees, as well as widespread sharing

of profits throughout the company.4 Employees worked in twelve-hour shifts, receiving time-and-a-half for work in excess

of eight hours, besides the usual double time

for Sundays and holidays. Free lunches, vacations in Florida, monthly Saturday night

banquets, and a variety of other employee

services and benefits—including paid-up insurance policies and the distribution of

Christmas baskets and watches costing over

$39,000 for 1941—were some of the high

lights of the employees' welfare program.

A Navy audit indicated a unit cost of $272

for starters priced to the Navy at $600. At

the same time the Army paid $750 for a

model costing $292 to produce. Testimony

revealed that the Navy Department had requested price reductions three times during

the summer of 1941 but had been refused.5

The disclosures in the Jack and Heintz

case, together with revelations of substantial profit-making elsewhere in the field of

military procurement,6 led to demands for

immediate legislative action. The matter

was quickly brought to a head by the Case

amendment to the pending appropriation

bill passed by the House on 28 March 1942.

This provision called for a 6-percent profit

maximum on all procurement covered by

the appropriation bill.

Both the War and Navy Departments

were opposed to any flat-rate profit limitation. Experience with thousands of contractors differing widely in capitalization,

volume of war business, rate of turnover,

complexity of production problems, and

many other respects had convinced the departments of the inequity of any flat-rate

provision. More important, they held that

such a limitation would be useless for keeping costs low and would impair incentives

in many instances to the point where both

the placement and execution of contracts

would be considerably slowed down. On the

other hand, both departments recognized

that excessive profits were a threat to procurement efficiency as well as to national

morale and hoped for legislation which

would eliminate these evils without giving

rise to greater ones.

In presenting the War Department's position to the Senate Appropriations Subcommittee, General Somervell forcefully stated

the difficulties of satisfactorily pricing military procurement in advance of actual

production:

We are asking contractors to produce articles which have never been produced before.

4

 The payment of almost $40,000 in 1941 to the

private secretary of Mr. Jack was perhaps the outstanding news item in the case. 5

 Hearings, 1:71-72, 143, cited above, note 3.

Immediately after the investigation Jack and Heintz

made drastic price reductions and agreed to renegotiate further in the event that its profits exceeded

6 percent of selling price.

6

 H. Rpt. 1634, 77th Cong., 2d Sess., 20 Jan 42.

This report of the House Naval Affairs Committee

contains over four hundred pages of information and

statistics on the profits of individual firms.
CONTRACT RENEGOTIATION 353

We are asking other contractors to produce

articles which they have never produced before. We are asking still other contractors,

who have produced articles in small quantities, to produce them in vastly larger quantities. The result of all this is that neither the

contractors nor the contracting officers can

make an accurate forecast of the cost of

performance.

Both parties know that there will be a

period of adjustment during which costs will

be high. Facilities must be converted, new

facilities obtained, new personnel employed

and trained to new methods, and new sources

of supply developed. How long this adjustment period will last is a matter of uncertainty.

On the other hand, assuming that the contractor is able to master the problem and to

get into production, a time will come when

costs will suddenly drop. When this time will

come, or how far the drop will extend, it is

virtually impossible to foresee. Furthermore,

even when costs appear to have reached a

definite level, there is no assurance of stability.

Changes in military strategy may cause

changes in priority regulations which will

effect the flow of supplies, with the result that

costs will rise again. Changes in economic

policy may result in increased costs of labor

and materials.

The plain fact of the matter is that in many

cases it is impossible to tell, until completion

of the contract, whether the contractor suffers

a heavy loss, or makes a large profit.7

General Somervell went on to describe

measures recently adopted by the War Department to ascertain production costs,

effect closer pricing, and recover excessive

payments. These consisted of redetermination and renegotiation articles to be included

in contracts where mutually satisfactory

prices could not be initially determined.8

Under the renegotiation article, after a certain percentage of the items called for by the

contract had been completed, the contractor's actual costs would become the basis for

voluntary renegotiation and modification of

the price. Such modification could be either

upward or downward and provided for additional reimbursements or recovery by the

government for items already delivered. It

is thus clear that renegotiation, as originally

developed by the War Department, was

conceived as a technique of pricing. Congress, on the other hand, took it up eagerly

as an instrument of profit limitation,

The Senate subcommittee was highly

sympathetic to General Somervell's presentation and indicated a willingness to support

an alternative to the Case flat-rate limitation. Chairman Kenneth McKellar requested that the War Department prepare

a draft proposal of such an alternative. Two

days later Somervell reappeared before the

committee with a draft of a proposed joint

resolution which would require contract renegotiation in cases where the appropriate

department head found excessive profits.

This draft, which was an amplification of

the renegotiation article already mentioned,

became the basis for the original renegotiation act. Changes made on the floor of the

Senate and later in the joint conference

made the bill substantially stronger than the

War Department's hastily drafted proposal.9

7

 Subcom. of the S. Com. on Appropriations, 77th

Cong., 2d Sess., Hearings on H. R. 6868, Sixth Supplemental National Defense Appropriation Bill,

1942, 31 Mar 42, p. 24. 8

 These articles are reproduced in their entirety

in hearings cited above, note 7. They have been

briefly discussed above, pages 329-30.

9

 The War Department draft may be found on

pages 84-85 of the hearings cited above in note 7.

The draft referred only to "renegotiation of the

contract price," whereas the act also specifically

provided for withholding payments or recovery of

sums already paid. Moreover, the wording of the

act gave the department head the power to make

unilateral determinations. Under Secretary Patterson and his legal assistant, Mr. William L. Marbury,

interpreted the War Department proposal as merely

requiring the contractor to engage in renegotiation

proceedings on a bargaining basis, with no power

of unilateral determination. Mr. Patterson sub-
354 THE ARMY AND ECONOMIC MOBILIZATION

The resulting enactment—Section 403 of

the Sixth Supplemental National Defense

Appropriation Act—was approved on 28

April and became known as the Renegotiation Act of 1942.10

Basic Provisions of the Renegotiation Law

The 1942 Act and Amendments

The renegotiation act required the insertion of a renegotiation clause in all future

prime contracts in excess of $100,000 made

for Army, Navy, or Maritime procurement.

The renegotiation clause provided for price

reductions on future deliveries and refunds

on past deliveries whenever profits under the

contract were determined by the appropriate departmental secretary to be "excessive."

 11

 Likewise, prime contractors were

required to insert a similar clause in their

subcontracts exceeding $100,000. The authority of the secretary to renegotiate was

not, however, confined to contracts in excess

of $100,000 or to those containing a renegotiation clause. Subsection (c) of the act

provided that any contract or subcontract

was renegotiable where, in the opinion of

the secretary, excessive profits were involved,

regardless of whether such contracts contained a renegotiation clause. In determining the excessiveness of profits the departments were to disallow compensation of officers and employees in excessive amounts,

as well as unduly large reserves and any

other costs deemed to be unreasonable. The

secretary of each department was clothed

with the powers necessary for the implementation of the act, as well as with authority to delegate or redelegate such

powers. The law was to remain in force

until three years after the termination of

the war. Also, it was retroactive to the extent

that it covered contracts which had not been

finally settled prior to the date of its enactment.

In the summer and early fall of 1942, pressures developed from a number of sources to

amend the renegotiation act. During the

hearings before the Senate Committee on

Finance on the 1942 revenue bill, spokesmen

for industry denounced renegotiation as unconstitutional, arbitrary, inequitable, unnecessary, provocative of confusion, and in

general a detriment to rapid and efficient

production.12 The procuring agencies also

desired amendments, largely of a clarifying

nature, but they were reluctant to initiate

any changes, fearing that the proposals

would get out of hand and that the act

would be emasculated or replaced by one

of the ubiquitous flat-rate profit limitation

proposals. Nevertheless, when it became evident that changes would be made they submitted their proposals and their representatives participated as witnesses in the

sequently conceded the wisdom of the stronger provisions of the act, (1) Testimony before Subcom.

of the S. Com. on Finance, 77th Cong., 2d Sess.,

Hearings on Section 403 of Public Law 528, Renegotiation of Contracts, 29 and 30 Sep 42. (2)

William L. Marbury and Robert R. Bowie, "Renegotiation and Procurement," Law and Contemporary Problems (Duke University School of Law),

X, No. 2 (Autumn 1943), 223. 10

 Detailed documentation of the various steps

in the adoption of the renegotiation act, as well,

as discussions of alternative proposals by the House

Naval Affairs and Ways and Means Committees,

may be found in WDPAB History, Sec. I, The First

Act.

11

 The head of each government renegotiating

agency was designated as a departmental secretary

for the purposes of the act.

12

 S. Com. on Finance, 77th Cong., 2d Sess.,

Hearings on H.R. 7378, Revenue Act of 1942, 23

Jul to 14 Aug 42. A detailed summary of charges

made by industry against renegotiation at this

time, as well as the War Department's position and

the step-by-step development of the October amendments, is found in WDPAB History, Sec. I, Pt. I.
CONTRACT RENEGOTIATION 355

hearings.13 On 21 October the Revenue Act

of 1942 was finally approved and Title

VIII, Section 601, amended the renegotiation act in a number of respects, retroactive

to 28 April 1942, the date of its original

enactment.

The October amendments consisted of a

number of substantive changes as well as

clarifying statements supporting the policies already adopted by the War Department. Among the latter were a definition

of the term "subcontract" to include subcontractors and vendors at any tier, and

specific provision to permit either over-all

or individual contract renegotiation, to

make agreements final and conclusive for

given periods, and to allow credit for excess profits taxes already paid by contractors. Likewise, the renegotiating departments were relieved of any implication—

under the original provision calling for

payment into the Treasury of recoveries

under renegotiation—that price reductions

on future deliveries were chargeable to their

appropriations. Similarly, contractors and

subcontractors were relieved of liability to

the United States for excessive profits not

actually received by them or for price reductions not passed along to the United

States by intermediate contractors.14

The most important substantive changes

were provisions for exemptions from renegotiation. Mandatory exemption was accorded to all firms with renegotiable sales of

less than $100,000 for a fiscal year, as well

as to all contracts and subcontracts "for the

product of a mine, oil or gas well, or other

mineral or natural deposit, or timber, which

has not been processed, refined, or treated

beyond the first form or state suitable for

industrial use." Permissive exemptions, at

the discretion of the departmental secretary,

were allowable to contracts performed outside the United States, to the purchase of

real property, perishable goods, and commodities priced by regulatory bodies, to

agreements for personal services, leases, and

licensing arrangements, and to agreements

to be performed within thirty days. The

principal purpose of the permissive exemptions was to reduce the administrative burden of handling thousands of cases for

which profits either could be controlled at

the source or for other reasons were not

likely to be excessive.

The other major amendment at this time

was the provision authorizing departmental

secretaries to provide "that renegotiation

shall apply only to a portion of the contract

or a subcontract or shall not apply during a

specified period or periods." This permitted

the establishment after actual cost experience had been ascertained, of firm forward

prices not subject to further renegotiation.

This left the departments free to include

incentive features in contracts looking to

cost reductions, the benefits of which could

be shared by efficient contractors.15

On 1 July 1943, Section 403 was further

amended to bring under renegotiation the

13

 (1) S. Com. on Finance, 77th Cong., 2d Sess.,

Hearings on Section 403 of Public Law 528, Renegotiation of Contracts, 22 and 23 Sep 42. (2)

Hearings cited above, note 9(1). Under Secretary

Patterson's testimony of 29 September is a valuable

summary of the purposes, philosophy, and general

background of contract renegotiation. A substantially complete collection of Under Secretary Patterson's statements on renegotiation before various

Congressional committees during the war years is

available in ICAF R58, Contract Pricing—Principal

Developments, App. C, pp. 173-317. 14

 Memo, Charles O. Pengra, Counsel for

WDPAB, for the Board and Staff, 28 Oct 42,

sub: Amendments to the Renegotiation Act,

WDPAB History, Sec. I, Pt. I, App. Exhibit 4.

15

 Subsections (b), (c)(4), and (i)(2)(iii). See

"Price Adjustment Under Contractual Articles,"

in Chapter XIII, above.
356 THE ARMY AND ECONOMIC MOBILIZATION

four wartime procurement subsidiaries of

the Reconstruction Finance Corporation

(RFC). The most prominent of these—the

Defense Plant Corporation (DPC)—was

active in constructing ordnance and aircraft plants for the War Department. DPC

had entered numerous contracts for construction and equipment, as well as for

machine tools under the "pool order" system. The War Department held that these

were not subcontracts of the War Department but prime contracts of the Defense

Plant Corporation, an agency not named in

the renegotiation act. The Navy Department, on the other hand, took the position

that the DPC was merely a financing medium for the plant expansion program of

the armed forces and that the plant construction contracts were renegotiable. Counsel for DPC pointed out that the treatment

of its contracts as subcontracts would probably result in subjecting them to audit by

the General Accounting Office, a time-consuming feature that would have seriously

impaired the serviceability of DPC-type financing. Shortly thereafter the Judge Advocate General of the War Department rendered an opinion that the DPC contracts

were not renegotiable.16 The War Department Price Adjustment Board, however,

directed the technical services and the various price adjustment sections to submit information on profits under DPC contracts

not included in renegotiation. As evidence

of substantial profit making by DPC contractors continued to pile up, Under Secretary Patterson indicated in Congressional

hearings that the War Department would

have no objection to extension of the statute

to include the DPC.17

Two weeks after the "DPC amendment"

Congress passed the so-called broker amendment, bringing all fees and commissions on

war contracts in excess of $25,000 under the

renegotiation law. Earlier proposals in Congress to outlaw the payment of contingent

fees were shelved when various industries

indicated that this would upset long-established buying and distributing arrangements. Likewise, after study, the Army and

Navy found that their procurement of such

items as food and textiles might be substantially impaired by the prohibition. Nevertheless, it was clear that excessive fees and

commissions were being paid in connection

with war contracts, and both the War and

Navy Departments supported the bill which

became law on 14 July 1943. Since most of

the difficulties had involved Navy contracts,

the administration of the amendment, with

certain exceptions, was turned over to Sales

and Service, Renegotiation Section, Navy

Department.18

The Renegotiation Act of 1943

The major wartime change in the renegotiation law was made by the passage on

16

 Memo, Col Ernest M. Brannon, Chf Contracts

Div JAGD, for JAG, 5 Feb 43, sub: Application of

Section 403 of the Sixth Supplemental National

Defense Appropriation Act, 1942, as Amended by

Section 801 of the Revenue Act of 1942, to Contracts With DPC, approved by JAG, 5 Feb 43, in

JAG files.

17

 Subcom. of the H. Com. on Appropriations,

78th Cong., 1st Sess., Hearings on H. R. 2996,

Military Establishment Appropriation Bill for 1944,

26 May to 10 Jun 43. 18

 An illuminating discussion of the issues leading

to the brokers amendment is found in W. John

Kenney, "Coverage and Exemptions," section on

"Brokers' and Representatives' Fees," Law and

Contemporary Problems (Duke University School

of Law), X, No. 2 (Autumn 1943), 268-71. This

article, prepared by an official in the Office of the

Under Secretary of the Navy, contains reference to

numerous court decisions, legislative hearings, and

other basic sources.
CONTRACT RENEGOTIATION 357

25 February 1944 of the Renegotiation Act

of 1943. So called because was it part of the

Revenue Act of 1943, this act was a complete revision of the former renegotiation act

and applied to all war business for fiscal

years ending after 30 June 1943. The principal changes effected by the act were (1)

increase in the mandatory exemption from

$100,000 to $500,000, of renegotiable sales

for any fiscal year; (2) establishment of an

interdepartmental board—the War Contracts Pric e Adjustmen t Board

(WCPAB)—as the policy-making body

and final administrative arbiter in renegotiation matters; (3) conferral of compulsory

pricing powers upon the several procuring

agencies; (4) specific provision for appeal

of unilateral determinations to the U.S. Tax

Court; (5) termination of renegotiation at

the end of 1944, or six months later or

earlier, at the discretion of the President.

Other important changes included compulsory filing of financial data by contractors

whose volume of business brought them

within the scope of the act, clarification of

the raw material exemptions, the addition

of new exemptions, provision that cost allowances of the kind allowed by the Bureau

of Internal Revenue for income tax purposes be allowed in renegotiation, and provision for renegotiation rebates in cases of

shortening of the tax amortization period.19

The factors to be used in evaluating the

"excessiveness" of profits—largely a restatement of the principles already in use by

price adjustment boards—were specifically

listed in the act, with provision for the use

of such other factors as the War Contracts

Price Adjustment Board might deem necessary. Numerous other changes clarified the

administrative features and ratified the previous practices of the departments.20

The 1943 act was the product of

protracted hearings before several Congressional committees in which business spokesmen as well as representatives of the renegotiation agencies testified at great length.

The objections of business to renegotiation

were as numerous as its spokesmen were

vociferous, and for a time it appeared that

the original act might be repealed entirely,

or that crippling amendments would be

made. But the representatives of the armed

forces, and particularly Under Secretary of

War Patterson, carefully and painstakingly

went over all the issues, revealed the fallacies of many of the charges by business

spokesmen, and stressed the necessity of retaining intact the renegotiation principle in

the interests of economical procurement, the

control of inflation, public morale, and the

postwar reputation of business itself. Although the act which emerged was a compromise, it was for the most part satisfactory

to the procuring agencies. The testimony

at the hearings unquestionably did much to

sell responsible business leaders and the

community as a whole on the underlying

soundness of the renegotiation principle.

The 1943 act stood without significant

amendment until the end of the war.21

19

 See below, pages 373-75.

20

 The Renegotiation Act of 1943 was enacted as

Section 701(b) of the Revenue Act of 1943, Public

Law 235, 25 Feb 44, 78th Cong., 2d Sess. Title

VIII of the revenue act carries separate provisions

for the mandatory repricing of war contracts. 21

 The life of the act was extended by the President (Presidential Proclamation 2631, dated 14

November 1944) to 30 June 1945, and by Congress

(Public Law 104, 30 June 1945, 79th Congress,

1st Session) to 31 December 1945. A detailed

record of the steps in the passage of the Renegotiation Act of 1943 is contained in WDPAB History,

Sec. I, Pts. III and IV. The story of the many

attempts to emasculate or repeal renegotiation during this period is a valuable case study in the
358 THE ARMY AND ECONOMIC MOBILIZATION

Organization for Renegotiation

The passage of the first renegotiation act

soon after Pearl Harbor placed a substantial

administrative burden on the three major

procurement agencies, already struggling

to keep abreast of their enormous purchasing and production problems. The burden

of the War Department was especially

heavy; not only did it have proportionately

the largest share of renegotiation responsibilities but it was still in the throes of the

major reorganization undertaken on 9

March 1942. Nevertheless, while the act

was still awaiting the President's signature,

the War and Navy Departments, the Maritime Commission, and the War Production

Board issued a joint memorandum agreeing

to the establishment of a price adjustment

board within each of the three procuring

agencies. WPB representation was to be provided on each of the three boards.22

The basic organizational structure

adopted by the War Department for contract renegotiation was the familiar decentralized, three-level hierarchy—a War

Department Price Adjustment Board to

conduct top-level administration and policy,

separate price adjustment sections in the

headquarters of each of the technical services at Washington, and local boards established by the technical services in their field

offices throughout the United States. After

September 1943 two superboards were imposed upon this structure for the purpose of

co-ordinating all governmental renegotiation activities. The first such board—the

Joint Price Adjustment Board—was established administratively under the delegated

powers of the several departmental secretaries to co-ordinate the handling of all cases

under the 1942 act. The joint board continued to function throughout the war with

respect to renegotiable business for fiscal

years ending prior to 1 July 1943. The second superboard—the War Contracts Price

Adjustment Board—was, as already noted,

established by Congress under the Renegotiation Act of 1943. The WCPAB supervised the renegotiation of all cases for

corporate fiscal years ending after 30 June

1943.

The first War Department board was the

Price Adjustment Board, Army Service

Forces, appointed by General Somervell on

25 April 1942.23 The mission of the board

was "to advise and assist the Chief of the

Purchases Branch [later division]...in

securing adjustments and refunds in cases

where it is thought that costs or profits of

War Department contractors are or may be

excessive." Placement of the board under

the supervision of the chief of the Purchases

legislative process. The revised bill reported out by

a majority of the Senate Committee on Finance

would have granted extensive additional exemptions

discriminating in favor of certain industries, even

to the extent of refunding to them excessive profits

already recovered. The preservation of renegotiation in a reasonably equitable and workable form

owes much to the widely circulated minority report

(S. Rpt. 627, Pt. 2, 78th Cong., 1st Sess., 6 Jan

44), prepared by Senators Walsh, Connally, LaFollette, and Lucas. 22

 Jt Memo, signed by Donald Nelson, Under

Secretaries Patterson and Forrestal, and Chmn

Land, 23 Apr 42, copy in WDPAB History, Sec.

II, Pt. I, App. Exhibit A-4. This memorandum was

partly a response to the pending renegotiation legislation and partly the result of the passage of the

Second War Powers Act of 27 March 1942. Title

XIII of this act authorized the President to order

inspection of books of all war contractors, under

penalty for refusal. The President delegated this

power, which was intended to facilitate closer pricing, to the secretaries of the procuring agencies by

Executive Order 9127 of 10 April 1942.

23

 Memo, Gen Somervell for Dirs of All Staff Divs

SOS et al., 25 Apr 42, sub: Price Adjustment

Board, SOS, copy in WDPAB History, Sec. II, Pt.

I, App. Exhibit A-5.
CONTRACT RENEGOTIATION 359

Division was clear indication that renegotiation was originally considered to be an instrument of pricing and purchase policy. By

the end of June the implications of the

statute as well as problems of internal organization were more clearly understood.

The Price Adjustment Board, ASF, was

then reconstituted as the War Department

Price Adjustment Board and made responsible to the Under Secretary, instead of the

chief of the Purchases Division ASF.24 The

Commanding Generals, ASF, and Materiel

Command, AAF, were directed to establish

price adjustment sections within their commands, under the direction of WDPAB.

This was done on the third and eighth of

July, respectively, by the ASF and Materiel

Command; shortly thereafter, the technical

services undertook to establish renegotiation

field offices throughout the country, as

needed.25

Functionally, the activities of the various

War Department renegotiation units corresponded to their place in the organizational

structure. Principals, policies, and procedures were developed by the War Department Price Adjustment Board. WDPAB not

only developed broad principles but prescribed detailed procedures; it planned the

general organizational framework, approved the establishment of field offices, set

standards for renegotiation personnel, conducted training and indoctrination programs, arranged and conducted regional

conferences, and represented the War Department in contracts with other governmental agencies and with Congress. A major

task during the first year or two of its existence was the development and conduct of

a broad program of public relations designed to educate contractors and the general community in the purposes of renegotiation and in the procedures required for its

implementation. In addition, the board

made all renegotiation assignments, first for

the services within the War Department,

later for all governmental agencies, reviewed all renegotiation agreements, and

actually conducted the more important renegotiation cases. The board's chief administrative functions were carried on by four

principal sections—executive, assignment,

negotiation, and review—which persisted

with certain changes until the summer of

1943.26

On 1 September 1943 the board and its

administrative functions were absorbed by

the newly established Renegotiation Division, ASF. This division was created primarily to speed up the processing and completion of agreements. Relatively few agreements had been reached by the beginning of

24

 Memo, USW for CG SOS and CG Materiel

Command AAF, 30 Jun 42, sub: War Department

Price Adjustment Board, copy in WDPAB History,

Sec. II, Pt. I, App. Exhibit A-8. The Army Air

Forces, established by the 9 March 1942 reorganization on a co-ordinate level with the Army Service

Forces, was reluctant to "take orders" from General

Somervell's ASF. The amenities were preserved by

designating the chief of the Purchases Division,

ASF, as the Special Representative of the Under

Secretary of War when supervising Air Forces renegotiation activities. For this purpose separate

stationery was used. 25

 (1) Memo, Col Howard A. Malin, Ex Admin

Br, Hq SOS, for Dirs and Chfs, Staff Divs Hq SOS

et al., 3 Jul 42, sub: Price Adjustment Sections,

copy in WDPAB History, Sec. II, Pt. I, App. Exhibit A-9. (2) Memo, Brig Gen Bennett E. Meyers,

CG Materiel Command AAF, for CG Materiel

Center AAF, 8 Jul 42, sub: Contract Price Renegotiation, copy in WDPAB History, Sec. II, Pt. I,

App. Exhibit A-10. (3) Teleg. CofOrd to All District Officers, 16 Jul 42, directing establishment of

district price adjustment boards, reproduced in

WDPAB History, Sec. IV, Pt. II, App. 2-A, Tab E,

p. 1.

26

 (1) WDPAB History, Secs. II and III. (2)

Transcript of Proceedings Regional Conference,

WDPAB, on The Renegotiation of War Contracts at

the Waldorf Astoria, New York City, 16 and 17

March 1944, in files of Purchases Div ASF.
360 THE ARMY AND ECONOMIC MOBILIZATION

1943, and by June of that year the backlog

of unsettled cases, measured against current

rates of progress, was alarmingly high. In

order to centralize authority and expedite

administrative decisions, the new director of

the Renegotiation Division was made chairman of the War Department Price Adjustment Board and was vested with the full

authority formerly belonging to the board

as a whole. At this time the technical services

ments had been reached by the Beginning of

all 1942 cases by the end of 1943. Intensified

efforts by all concerned, coupled with the

new administrative machinery and the delegation of authority to the field to settle all

cases under $5 million in renegotiable sales,

resulted in substantial achievement of the

objective.27

With the establishment of the renegotiation superboards, already indicated, the Renegotiation Division and WDPAB no

longer determined top-level policy and principles. They continued, nevertheless, to review agreements reached by the technical

services and field offices, to conduct "impasse" cases and other important renegotiations, to assign cases to all renegotiation

agencies, and to refine and improve administrative procedures. An important work of

the division was the publication of the War

Department renegotiation manuals, which

contained complete interpretations of the

law and procedural instructions for all War

Department agencies.28

The price adjustment sections in the

headquarters of the several technical services occupied an intermediate position between the War Department board and the

field. They co-ordinated and supervised the

activities of the renegotiation units under

their jurisdiction, reviewed agreements

reached by such units, and conducted the

more important cases in their procurement

areas. They were responsible for the progress of the field offices, transmitted current

information and developments from the

field to higher echelons, and—on the basis

of their experience and special study—made

recommendations in all renegotiation matters. The price adjustment sections assumed

an important role in expediting the completion of cases when the Under Secretary—

27

 WDPAB History, Sec. II, Pt. II, p. 63. The

slow progress in the completion of cases during a

large part of 1943 was in part due to a marked

tendency on the part of contractors to delay renegotiation in the hope of repeal or extensive "watering

down" of the provisions of the statute. In an attempt to secure contractor compliance with the law

the Under Secretaries of War and Navy issued a

press release on 23 July 1943, stating that they

would assume final jurisdiction and determination

of cases in which there was unreasonable delay.

This action to implement the law was criticized by

opponents of renegotiation. Ibid., p. 62.

28

 After the passage of the Renegotiation Act of

1943 there were two such manuals—Army Renegotiation Manual, Part I and Army Renegotiation

Manual, Part II. Part I applied to fiscal years prior

to 1 July 1943; Part II governed cases under the

Renegotiation Act of 1943, for fiscal years after 30

June 1943. The first manual to be issued was the

War Department Manual for Renegotiation, approved 15 August 1943, for internal use of the

War Department. Distribution was withheld because of the pending establishment of the Joint

Price Adjustment Board which was expected to issue its own manual covering general policy for all

renegotiating agencies. The joint board, however,

approved the use of the War Department manual

until the appearance of its own regulation. The

ensuing Joint Renegotiation Manual, which appeared simultaneously with the Army's Part I (27

January 1944), likewise covered cases for fiscal

years ending prior to 1 July 1943. The official

manual of WCPAB, originally issued 24 March

1944 to cover all cases under the 1943 act, was

entitled Renegotiation Regulations and was published in the Federal Register. The Army's Part II

did not appear until 19 May 1944. All of these were

issued in loose-leaf form and were frequently revised. Copies of these, available in the Pentagon

Army Library, are an excellent source of information on contract renegotiation in World War II.
CONTRACT RENEGOTIATION 361

in May 1943—delegated to them the authority for final settlement of all cases involving less than $10 million in renegotiable

sales.29

The renegotiation field offices of the several technical services varied in number and

location. Ordnance, following its long-established policy of decentralization, established

a field office in each of its thirteen procurement districts. At the other extreme, the

newly established Transportation Corps

conducted all renegotiation activity from its

Washington headquarters. In general, the

services established field organizations as

needed, consolidating or liquidating them

as the peak load of activity was passed or

as it became possible to make a more accurate appraisal of geographical needs. At one

time or another there were authorized some

forty-seven separate renegotiation field offices under the several technical services.30

The organization of the field offices

varied, depending largely on whether they

were independently established or integrated

into a regular procurement district office.

Usually there was a local board, which reviewed and passed upon all proposed agreements. The key operating personnel, regardless of organization, were the renegotiators

and the financial analysts. Financial analysts

had the task of collecting and examining

financial statements and other records of

contractors. They made recommendations

on such technical matters as methods of

segregating renegotiable sales, allocation of

costs and profits, disallowance of cost items,

and so on, and assisted the renegotiator in

meetings with company officials. The renegotiators were responsible for the conduct

of proceedings with contractors and made

original recommendations of the existence

and amount of excessive profits.

The Renegotiation Process

Principal Features of Renegotiation

At the same time that it was involved in

building an organization for renegotiation,

the War Department was wrestling with

basic problems of procedure and policy.

The number, variety, and complexity of

problems connected with the administration of renegotiation can barely be suggested by a brief treatment of the subject.

In renegotiation, as in all areas of public

administration, procedure and policy were

inextricably related, and any separation of

the two necessarily presents an artificial

view. Furthermore, the whole concept of renegotiation was a pioneer endeavor in 1942

when the War Department began its explorations toward a desirable body of renegotiation doctrine. The issues involved were

both extremely difficult and extremely delicate. In view of the almost unlimited authority of the departmental secretaries, business

had genuine fears of renegotiation as a

"100-percent surtax" on all earnings which

the secretaries might choose to define as

"excessive."

These fears must have been considerably

allayed by the first official expression of the

War Department's basic approach to renegotiation. This was a widely circulated

memorandum from the special representa29

 As already implied, price adjustment sections of

the technical services were authorized to redelegate

to field offices final settlement authority for cases of

less than $5 million. The extent to which this authority was exercised is indicated in the histories of

the technical service price adjustment sections in

WDPAB History, Sec. IV, Pt. II, App. 2-A. 30

 The actual count of established field offices was

as follows: Air Forces 8, Chemical Warfare Service

0, Corps of Engineers 9, Medical Department 2,

Ordnance 13, Quartermaster Corps 5, Signal Corps

2, and Transportation Corps 0, for a total of 39.

Ltr, William H. Coulson, Deputy Chf. Renegotiation Affairs Br, OASA, to author, 10 Jun 52.
362 THE ARMY AND ECONOMIC MOBILIZATION

tive of the Under Secretary to the chairman

of the War Department Price Adjustment

Board, outlining basic principles and procedures.31

 The board was instructed to base

its recommendations primarily on a study of

a company's over-all profits from its war

contracts for an entire year, rather than on

an analysis of individual contracts. This approach enormously simplified administration and enabled contractors to offset profits

on some contracts with losses on others.32

Furthermore, the board was to reach agreements as quickly as possible and not attempt

detailed audits of a company's books except

in cases where it felt that information was

inadequate, incorrect, or misleading. Because of the numerous uncertainties and

government controls over war production,

the board was not to attempt to recover "the

last increment of possible excess profit," but

to "take a practical and realistic view in

arriving at an agreement." The attitude of

renegotiators was to be firm but friendly,

and renegotiation was to be conducted in a

spirit of co-operation that would require a

minimum of time and inconvenience for

business executives. In the exercise of its

statutory responsibilities, the board would

make a positive contribution to the welfare

of business by helping it reduce expenditures, increase efficiency, avoid the stigma

of profiteering, and place itself in a sound

competitive condition to meet the adjustments which would be required in postwar

markets. This memorandum, as well as

other statements of policy and procedure,

was transmitted to all renegotiation offices

when the program of actual operations began in the summer of 1942.33

The first task in the renegotiation process

was the discovery of contractors likely to

have excessive profits and therefore subject

to renegotiation. This was no small problem

for the War Department which had many

thousands of subcontractors and vendors

of whom it had no direct information. Numerous products and components ultimately ending in military procurement were

sold and distributed through regular commercial channels and might pass through

many tiers or stages before reaching a prime

military contractor.

Various means were adopted for identifying renegotiable contractors. Procurement officers in the several technical services and in the field were requested to submit lists of manufacturers who appeared to

31

 Memo, Col Albert J. Browning, Special Representative of USW, for Maurice Karker, Chmn

WDPAB, 8 Aug 42, sub: Policy, copy in WDPAB

History, Sec. II, Pt. II, App. Exhibit 1. 32

 Contractors were properly entitled to offsets of

profits by losses, but this would be difficult to accomplish on an individual contract basis. In addition to this advantage, over-all renegotiation had

numerous administrative ones. It eliminated much

duplicate treatment of many specific matters and

minimized the baffling problems of allocation of

fixed and other general costs common to many contracts. Firms could base their renegotiation reports

largely upon their regular annual financial statements. They were allowed to use their regular fiscal

year, which in most cases was identical with the

calendar year.

33

 Other major statements of policy during the

summer and fall of 1942 were: (1) WDPAB, Notes

on Renegotiation, for Conf With Chfs of Supply

Services and Materiel Command, AAF, 9 Jul 42.

This 18-page document was prepared by Mr.

Pengra, counsel for WDPAB. (2) WDPAB, Principles, Policies, and Procedures To Be Followed in

Renegotiation, 10 Aug 42 (23 pp.). (3) Ibid., revision of 20 Nov 42 (29 pp.). (4) Questions and

Answers With Reference to Renegotiation of War

Contracts (16 pp.), by Maurice Karker, Chmn

WDPAB. (5) Minutes of Indoctrination Meetings.

WDPAB, for meetings 1-5 (27 Aug-13 Nov 42).

Transcripts of these minutes, together with Items

(1)-(4), above, and much other early material on

the development of renegotiation policy, are bound

together in Renegotiation of Contracts, file 161,

Purchases Div ASF.
CONTRACT RENEGOTIATION 363

have substantial amounts of war business.

Information also came from the War Production Board and other governmental

agencies, and occasionally from Congressional committees. Eventually, the Bureau

of Internal Revenue made available copies

of tax returns, and these became a major

source of information. The Renegotiation

Act of 1943 went far toward resolving the

problem by requiring all firms with over

$500,000 in war business to file special reports with the War Contracts Price Adjustment Board at the end of each year.

Closely related to the problem of identification was the question of which department and which subordinate service should

conduct renegotiation with a firm having

contracts with two or more agencies or services. Most of the firms involved had contracts

with several services, and sound administration required that renegotiation of a particular contractor be conducted by a single

service. In general, assignment was made to

the agency and service having the largest

share of a contractor's business, with representatives of other interested departments or

services assisting if desired. This "predominant interest" basis of assignment was modified in cases where another agency conducted renegotiation for the majority of

firms in the industry. The need for comparable treatment of competing firms made

it desirable for a single service to handle all

such firms. Ultimately a highly systematic

assignment procedure was developed and

its administration centralized in a single

agency. Because it held the vast majority of

all renegotiable contracts, the War Department undertook this task for all government

departments, and all assignments were then

made by the Assignments and Statistics

Branch, Renegotiation Division, ASF, acting under a delegation of authority from the

War Contracts Price Adjustment Board.34

The details of renegotiation procedure

necessarily varied with the accumulation of

experience, changes in the statute, and the

special requirements of local and other offices.35

 In its developed form by the end of

the war, renegotiation had incorporated

many of the mechanics of federal income tax

procedure. All contractors subject to renegotiation were required under the statute to

file with the appropriate price adjustment

board a return of their fiscal year's business

within three months after the end of the

year. The official form for this purpose—

the Contractor's Information and Work

Sheet for Renegotiation—was developed by

the top-level price adjustment boards with

the assistance of leading industrial and trade

associations. The information and schedules

called for by the work sheet gave a comprehensive picture of the contractor's business

and included not only the necessary financial data but narrative descriptions of all

considerations relevant to renegotiation. In

addition to Exhibits 1 and 1a (special financial statements for renegotiation purposes),

the following principal categories of information were required:

A. Annual Statements (certified copies

of regular statements)

B. Ownership and Affiliations

C. Business of Contractor

34

 The complexities of assignment procedure are

ably discussed in an address by Maj. Howard Dilks,

Jr., Chief, Assignments and Statistics Branch, at the

New York conference on 16 March 1944. This address is reproduced at pages 29-40 of the transcript

cited above, in note 26(2). 35

 An authoritative, contemporary account of renegotiation procedure is found in Lt. Col. Paul B.

Boyd, "Administrative Machinery and Procedures

for Renegotiation," Law and Contemporary Problems (Duke University School of Law), X, No. 2

(Autumn 1943), 309-40.
364 THE ARMY AND ECONOMIC MOBILIZATION

D. Price Record

E. Government and Other Assistance

F. Plant Facilities

G. Income Account

H. Segregation (sales and costs)

J. Salaries (total compensation to each

principal employee)

K. Reserves

L. CPFF Contracts

M. Terminated Contracts

N. Income Tax Data

O. Statement of actors (performance

record)

P. Miscellaneous (royalties paid or received, revaluation of assets, types

of escalator and redetermination

clauses in contracts and action taken

thereon and so on)

The mandatory filing of this information

automatically furnished renegotiators with

the bulk of information required and virtually eliminated the earlier problem of

discovery and identification of renegotiable

contractors. It not only saved many manhours of research and fact gathering by government analysts but it reduced the number

of meetings with contractors and speeded

the completion of cases.36

Before assignment of a case to the field,

intensive screening and other preliminary

work took place in the Renegotiation Division, ASF. The Assignments and Statistics

Branch carefully reviewed contractor's renegotiation returns, transcripts of income

tax returns, and other data to determine

whether a case warranted assignment. If a

contractor's renegotiable sales fell below the

statutory minimum, if his margin of profit

was clearly not excessive, if his total profit

was such that a recapture of less than $ 10,-

000 was possible, or if other circumstances

so indicated, the case was closed as "File-No

Action." By confining actual assignments

to cases where a reasonable possibility of

excessive profits existed, thousands of manhours for both government and industry

were saved and the work load kept to manageable proportions.37

After the screening process the Renegotiation Division assigned each case and forwarded the contractor's return to the appropriate renegotiation agency. The local office

receiving the assignment formally notified

the contractor of his assignment and arranged for an initial meeting—usually held

at the offices of the local board.38

The renegotiation process consisted essentially of two steps: (1) determination of

the amount of renegotiable profit actually

earned by a contractor for the fiscal period

under review; (2) determination of the

extent to which such profit was deemed "excessive." The former was primarily the responsibility of the financial analyst assigned

to the case. In preparing for the initial

meeting, the analyst reviewed the contractor's report and made recommendations

concerning segregation of renegotiable from

nonrenegotiable sales, disallowance of excessive compensation and other unwarranted

costs, and similar technical matters required

by renegotiation policy. The renegotiator, in

turn, reviewed the reports of the contractor

and the financial analyst, studied available

data for comparable firms, and attempted to

36

 Copies of the Contractor's Information and

Work Sheet for Renegotiation (Budget Bureau No.

49-R173.3) and related forms may be found in

WDPAB History, Sec. III, Pt. V, App. Exhibit 1.

37

 WDPAB History, Sec. III, Pt. I, App. Exhibit 3. 38

 Formal notification of a contractor constituted

the official commencement of renegotiation proceedings for purposes of the statute of limitations. Subsection (c) (3) of the 1943 renegotiation act removed all liability for the return of excessive

profits by a contractor if renegotiation proceedings

were not begun within one year after his filing of his

renegotiation return with the WCPAB.
CONTRACT RENEGOTIATION 365

familiarize himself with all important

aspects of the contractor's operations.

At the initial meeting with the contractor—especially in case of the contractor's

first experience with renegotiation—the

purposes and philosophy of the renegotiation law were briefly explained, together

with the major administrative principles

and procedures. This was followed by a detailed review of cost disallowances and a

discussion of the various elements in the contractor's performance record. When the substance of an agreement had been reached,

the renegotiator prepared a formal agreement in writing, stating the amount of renegotiable sales involved, profits earned,

and determination of excessive profits. The

terms of settlement were set forth, including

dates and amounts of refunds and (under

the 1942 act) contract price adjustments on

unfilled orders. The settlement agreement

was then reviewed and signed by the authorized representatives of the renegotiating

agency and the contractor.39 In case of an

impasse, the local board reported the matter

to the War Department Price Adjustments

Board. This board held de novo proceedings

and then made a unilateral determination

if it failed to secure a voluntary agreement.

For each agreement the renegotiator prepared for the record and for review by

higher authority a detailed case history,

describing the nature of the contractor's

business, his production problems, and his

performance record. All relevant financial

data were included as well as the basis for

all major decisions reached in the settlement

or determination. This record, together with

the written agreement, was forwarded to the

governing technical service price adjustment section for review—and for approval

if approval by higher authority was required. Cases involving renegotiable sales in

excess of $10 million were reforwarded to

the War Department Price Adjustment

Board for review and approval. Finally, unilateral determination by the War Contracts

Price Adjustment Board could be appealed

to the U.S. Tax Court, which confined its

review to issues disclosed by the record. Experience revealed that relatively few unilateral determinations were made and that

of these only a few were appealed to the

Tax Court.40

Once a renegotiation agreement had

been approved by proper authority it was

made final for the fiscal year covered, and

no further review—except in case of

fraud—was possible. This was qualified

under the early operation of the 1942 act

by the requirement of an end-of-year adjustment made in cases of agreements concluded before the end of the year. The 1942

act placed responsibility for repricing as well

as profit recapture upon renegotiating agencies. Hence, it was desirable to conclude

agreements without waiting for the end of

the year, in order to take advantage of lower

forward prices reached under the agreement. This end-of-year review and adjustment procedure proved to be time-consum39

 The authority to sign renegotiation agreements

for the War Department rested on written delegations from the WDPAB. A specific resolution of the

board of directors was usually required to authorize

an officer of a private corporation to sign a renegotiation agreement.

40

 The War Department Price Adjustment Board

issued a total of 944 unilateral determinations out

of 75,818 assignments for the five years 1942-46.

Of these, 698 unilateral orders under the Renegotiation Act of 1943 were subject to review by the War

Contracts Price Adjustment Board. After review by

WCPAB, 96 were cleared, canceled, or resulted in

bilateral agreement. Of the remaining 602 unilateral determinations, only an unknown fraction were

appealed to the U.S. Tax Court. WCPAB Final

Report, Table IV, in WDPAB History, Sec. IV,

Pt. III, App. 3-A.
366 THE ARMY AND ECONOMIC MOBILIZATION

ing and otherwise unsatisfactory and the

procedure was abandoned. The Renegotiation Act of 1943, which separated the repricing from the recapture functions, removed any further occasion for early agreements and "post-mortem" adjustments.

An important element of renegotiation

procedure was the provision for cancellation

or clearance of assigned cases which indicated no excessive profits and therefore no

necessity for refund. Cancellation was made

in all cases where preliminary investigation

by field offices indicated no significant possibility of excessive profits. Cancellations

represented the largest single method of disposing of cases, accounting for over 37 percent of all those originally assigned during

the five-year period of renegotiation, 1942-

46. Clearance cases, as distinct from cancellations, were those which revealed no excessive profits after renegotiation meetings and

after full investigation of performance and

other factors. Clearances amounted to 25

percent of all assignments for the five-year

period.41

Identification of Renegotiable Sales

Innumerable problems of policy constantly arose to call for changes or adjustments in renegotiation procedure. Two of

these are discussed briefly to suggest the

scope and complexity of the renegotiation

process. The first of these concerns the segregation of a firm's renegotiable sales from its

regular commercial business not subject to

renegotiation. In the early days before clarifying amendments to the original act, this

task was perhaps the most difficult in the entire administrative procedure of renegotiation. Prime contracts with military agencies

posed no problem as they were readily identifiable and by definition constituted renegotiable sales. Likewise, subcontracts for parts

and components peculiar to military end

items were clearly renegotiable. But how

should the War Department treat vendors

supplying commercially standard materials,

tools, and services to prime contractors or

their subs, sometimes many tiers below the

prime? Apart from questions concerning the

legal renegotiability of purchase orders for

standard items, there were complex problems of identification and allocation of sales.

How was it possible to identify as war production a portion of the total sales of a producer of screws or nails to dozens of commercial distributors who might in turn, directly or indirectly contribute to the completion of a prime military contract?

The problem of legal renegotiability was

resolved by the October 1942 amendments,

which ratified the service's definition of the

term "subcontract," and by administrative

interpretations of the statute. The technical

problem of proper segregation of renegotiable sales was handled—at least by the War

Department—by accepting any reasonable

basis used by the contractor for such segregation. The division between renegotiable and

nonrenegotiable business was usually determined on the basis of spot-checks and sampling techniques applied to successive echelons in the chain of vendors and subcontractors. For various industries where the

problem of segregation was troublesome,

this method was frequently supplemented

by identification of priority ratings or CMP

allotment numbers and special studies by

the War Production Board on national

averages. The War Department took the

position that no firm should be required to

devote an unreasonable amount of research

to the problem. By 1944, when a number of

procedures and considerable data on segre- 41

 WDPAB History, Sec. IV, Pt. III, App. 3-A.
CONTRACT RENEGOTIATION 367

gation had been developed, the problem appears to have subsided to a level of secondary

importance.42

Renegotiation of CPFF Contracts

A second important issue in renegotiation

procedure was the treatment of CPFF contracts. At first, CPFF contracts were believed to be nonrenegotiable, on the ground

that the profit (fixed fee) was controlled in

advance and was covered by separate legislation limiting fees.43

 But it soon became

clear that excessive profits were being earned

by both primes and subcontractors under

CPFF arrangements. This was particularly

true of a class of contracts which called for

a fixed fee per unit of output, as in the case

of aircraft motor and frame production,

various ammunition contracts, and others.

Although these contracts were designed as

CPFF, they were somewhat of a hybrid

type, possessing both fixed-price and costplus elements. For purposes of risk elimination and cost recovery by contractors they

were clearly cost-plus, since the government

promised full reimbursement of all relevant costs. For purposes of profit determination they partook of the fixed-price type of

contract inasmuch as profit per unit, determined in advance, was based on an estimated cost which included numerous contingencies of a kind which would disappear

as volume production got under way. The

CPFF supply contract thus had substantially different implications from the CPFF

construction contract, which was not subject to highly repetitive operations and

hence to the probability of highly increasing

efficiency of production within the life of

the contract. An oft-stated ideal of procurement policy was to convert all CPFF contracts to definite commitments—to fixed

price or annual management fee for supply

contracts, and to lump sum for construction contracts. Conversion of CPFF contracts was difficult, however, primarily because of strong contractor resistance to the

change-over.44

By the end of 1942 the War Department

had definitely decided that its CPFF contracts would be negotiated. Provision was

made in all renegotiation proceedings for

the segregation by a contractor of his fixedprice from his fixed-fee business. The fixedfee business was separately renegotiated in

accordance with criteria specially developed

to meet the different problems obtaining for

this type of contract. All construction contracts were assigned to the Corps of Engineers, which was from the beginning given

authority to make final settlements. Other

CPFF contracts were subject to standard

assignment procedure but all proposed settlements thereof required review and approval by a special CPFF Committee of the

War Department Price Adjustment Board.

The board's CPFF Committee made a va42

 "About a year ago the question of segregation

of sales and allocation of expenses was the number

one trouble spot. But most offices have now mastered

that difficult problem." Statement of Lt Col E. D.

Scruggs, Chf Financial Review Sec. Renegotiation

Div, 16 Mar 44, in transcript cited above in note

26 (2). Further data on the problem of segregation

may be found in WDPAB History, Sec. IV, Pt. II,

App. 2-A, Tab E. pp. 13-14. 43

 The First War Powers Act (Public Law 354,

18 Dec 41, 77th Congress, 1st Session) permitted

the use of CPFF contracts subject to a maximum

fee of 7 percent of estimated cost. On 16 May 1942,

the Judge Advocate General submitted an opinion

that CPFF contracts were nonrenegotiable. In addition to the reasons cited above, he stated that renegotiation of CPFF contracts might create a tendency on the part of contractors to allow their

costs to rise. Memo, JAG for Chf Legal Div, Office

Dir of Procurement and Distribution, SOS, 16 May

42, in JAG files.

44

 See above, Chapter XII. Also see ASF, History

of Purchases Division, pp. 235-58.
368 THE ARMY AND ECONOMIC MOBILIZATION

riety of industry studies and obtained reliable data on efficiency standards in the

ammunition, shell-loading, small arms, and

aircraft industries, which accounted for the

bulk of CPFF production contracts. Since

the committee which made the studies also

reviewed the renegotiation settlements, a

high degree of co-ordination and application of information was achieved.45

In 1945, the WCPAB appointed a factfinding committee to report on CPFF contract renegotiation. The committee reported

a wide divergence in the nature and complexity of contractor operations in different

industries, a divergence which rendered

percentage profit-margins meaningless for

interindustry comparisons. Likewise, there

was wide diversity in the amount of value

added by contractors in the different fields,

making total cost or billing figures highly

deceptive. The degree of supervision over

subcontractors ranged from simple purchase

operations at one extreme to extensive responsibility and control amounting to outright management at the other. In each case,

all these factors had to be evaluated and

appropriate adjustment made in determining excessive profits.46

In general, the percentage of profit (ratio

of fixed fee to total allowable costs plus fixed

fee) for CPFF contracts was substantially

lower than profit margins on fixed price

business.47 This differential was mainly a reflection of the relatively low degree of risk

associated with CPFF contracts. There was,

however, always the risk that specific expenditures in the performance of a contract

would be disallowed by the Comptroller

General, who audited expenditures under

all CPFF contracts. In such cases the contractor was not reimbursed for his expenditures but the disallowance was subtracted,

for renegotiation purposes, from the fixed

fee before determining its excessiveness. It

was thus possible for the entire fee to be

eaten up by disallowances. To protect the

contractor from relatively unprofitable

CPFF contracts, WDPAB made appropriate allowances in renegotiating his fixedprice business. Although the renegotiation

of CPFF contracts was highly important

from an administrative point of view (some

30 to 40 percent of all War Department

contracts over $10 million were of the CPFF

variety), recaptures thereunder were small

compared with those under fixed-price contracts. Total War Department recoveries

from corporations (with minor exclusions),

which accounted for 89 percent of all War

Department recaptures under renegotiation,

amounted to $6.6 billion. Of this amount

only $54 million, or less than 1 percent, were

recovered under CPFF contracts.48

Despite the efforts of government agencies

to minimize the inconvenience and expense

of renegotiation for contractors, the prep45

 Maj Robert W. Fort, Industry Studies, and Maj

Gerson D. Lublin, Renegotiation of Cost-Plus-aFixed-Fee Contracts in WDPAB History Sec. III,

Pt. VI, pp. 81-100, 113-14. 46

 WDPAB History, Sec. III, Pt. VI, pp. 84ff. 47

 Thus of 438 CPFF contracts assigned to the

Corps of Engineers, only 5 were found to yield excessive profits. These profits, which represented 2.15

percent of aggregate contract costs before renegotiation, were reduced by recoveries to 1.80 percent.

Profits on the 433 contracts found not to be excessive averaged 1.76 percent. These figures compare

with corresponding profit margins on lump-sum

construction contracts of 14.47 percent before, and

9.63 percent after, renegotiation of 1187 contracts.

On 4889 lump-sum contracts, profits averaging 5.65

percent were considered to be not excessive.

WDPAB History, Sec. IV, Pt. II, App. 2-A, Tab C,

pp. 52-53. Average profits on CPFF supply contracts for the War Department were 4.5 percent and

4.3 percent respectively, before and after renegotiation. WCPAB Final Report, Table III-C. 48

 (1) WCPAB Final Report, Tables III-A and

III-C. (2) WDPAB History, Sec. IV, Pt. II, App.

2-A, Tab C, Exhibit C.
CONTRACT RENEGOTIATION 369

aration of the returns and the subsequent

administrative burdens of renegotiation

were unquestionably costly and time consuming for many firms. The larger corporations, with well-established accounting and

record systems and large staffs of full-time

legal and accounting personnel, felt the

burden proportionately less than others. On

the other hand, any concern subject to renegotiation—especially in view of the $500,-

000 exemption and additional screening

procedures—could hardly be considered as

"small," and the money costs of administration were passed on to the government as

allowable costs of operation.49 In any case,

the combined outlays of both industry and

government to support the administrative

costs of renegotiation were only a small fraction of the excessive profits recaptured, to

say nothing of increased industrial efficiency

and other benefits of renegotiation.50

49

 Many firms took pride in the presentation of

their performance record to the price adjustment

boards and went far beyond "the call of duty" in

assembling and submitting materials to supplement

the formal report called for by the statute. The files

of the War Department Price Adjustment Board are

replete with brochures, folios, scrapbooks, documentary histories, and bound volumes telling the

detailed story of the war production effort of hundreds of American corporations. Many of the volumes, handsomely printed and bound, with charts,

tables, diagrams, photographs, and extended narrative description, provide extensive insight into the

nature of twentieth century American industrial

civilization. 50

 The final report of the War Contracts Price Adjustment Board (22 May 1951) indicates the total

administrative cost of renegotiation to the government of nearly $41.5 million for the period 28 April

1942 to 30 June 1950. This cost, which consisted

of $36 million in salaries and $5.5 million for rent,

office supplies, travel, and so forth, does not include the time of procurement personnel, officials,

and others who devoted much effort to renegotiation

matters while officially serving in other capacities.

No estimate of the comparable costs to industry has

been made, but even if it were several times the

cost to the government the total combined administrative costs would still be small as compared with

the amount of excessive profits recovered.
CHAPTER XVI

Renegotiation: Principles and Policy

The broad principles of contract renegotiation as developed by the War Department

fell into two categories: (1) principles used

in determining—for purposes of renegotiation—the amount of profit earned by each

contractor; (2) criteria for determining

how much of this profit was "excessive" and

therefore recoverable by the government.

Since policies in both categories had a direct

bearing upon the amount of profit ultimately retained by business, both were the

subject of continuous and spirited controversy. The technicalities of renegotiation

were so complex that the precise issues

rarely received adequate treatment in the

press or in public discussion generally.1

Definition and Measurement of Renegotiable Profits

In general, profit for purposes of renegotiation was determined in accordance

with standard accounting practice as

adapted by the Bureau of Internal Revenue

for tax purposes. In a number of specific

matters, however, differences between the

basic purposes of renegotiation and those of

taxation compelled a difference in treatment. The most controversial issues in defining renegotiable profits were treatment of

income taxes, reserves for reconversion, tax

amortization allowances, and various exemptions from renegotiation. The first three

concerned, in principle, the task of distinguishing between cost and profit for purposes of renegotiation. The last was a problem of distinguishing between two classes of

profit—profit which was subject to renegotiation and that which was not.

Income and Profit Taxes

Throughout the life of renegotiation,

industry spokesmen urged that corporation

income and profit taxes were part of the

costs of doing business and that only profits

remaining "after taxes" should be subject to

renegotiation. It was their contention that

after reduction by wartime taxes at unprecedented rates profits in most cases would

clearly not be excessive and that, in any

case, profits before taxes gave a grossly exaggerated view of true earnings available for

retention or distribution to stockholders.

Virtually every representative of industry

who testified before Congressional committees on renegotiation strenuously urged the

"after taxes" basis.2 1

 The reader interested in renegotiation principles

omitted from this discussion, as well as in greater

elaboration of the step-by-step development of all

matters of renegotiation policy, may find much

additional information in the various documents

and sources cited in the previous chapter, especially

those referred to above in notes 28 and 33, pages

360 and 362.

2

 The most extensive collection of the views of

industry in this matter is found in the 1,100-page

document Renegotiation of War Contracts, H. Com.

on Ways and Means, 78th Cong., 1st Sess., Hearings on H. R. 2324, H. R. 2698, and H. R. 3015
RENEGOTIATION: PRINCIPLES AND POLICY 371

The official position of the War Department from the beginning was that the original existence of abnormally high profits was

attributable to overpricing, whether intentional or unintentional. Hence, it was the

task of renegotiation to determine the level

of profits which would have existed had

prices throughout the life of contracts been

reasonable. By eliminating excessive profits

first, and then applying the statutory tax

rates to the remainder, both the contractor

and the government would be left in the

position which would have existed had war

products been correctly priced throughout

the production period.3

Representatives of the War Department

denied that income and excess profits taxes

were part of the costs of production since

any firm not receiving profits did not have

to pay such taxes. In his testimony before

the House Ways and Means Committee,

Under Secretary Patterson pointed out that

the proposal advocated by business would,

in effect, require the procuring agencies to

pay different prices to different contractors

making an identical item because of their

widely differing tax burdens.4 This would

amount to governmental assumption of a

substantial portion of the contractor's rightful wartime tax responsibility and would be

a nullification by an administrative agency

of the tax policy declared by Congress. Also,

it would defeat the basic anti-inflationary

purposes of renegotiation by permitting lavish original expenditures costing contractors

only ten cents on the dollar under the excess

profits tax formula. Despite the repeated

efforts of industry spokesmen to place renegotiation on an "after taxes" basis, Congress

corroborated the position of the War Department and the other government agencies by the Renegotiation Act of 1943.

The treatment of state income taxes was

also a matter of considerable debate. Industry insisted that state taxes be deducted

before consideration of renegotiation recoveries. One prominent manufacturer buttressed this argument with the claim that

"millions of dollars of state corporation income taxes are being seized by renegotiation boards and given to the United States

Treasury."

 5 Again, the War Department's

position was that the original excessive earnings should never have existed and that income taxes, whether federal or state, should

be based on earnings properly determined

as contemplated by the renegotiation statute. Otherwise, the federal government

would be paying artificially increased state

taxes in the form of exorbitant prices for

military procurement. The policy of the

War Department Price Adjustment Board

did, however, take into consideration the

amount of state income taxes paid by a contractor in determining the existence and

amount of excessive profits. This policy was

likewise reaffirmed in the Renegotiation

Act of 1943.6

(hereafter cited as W&MC, Renegotiation of War

Contracts). 3

 (1) Ibid., pp. 41-43. (2) Truman Committee,

3d annual Rpt, pp. 60-61. 4

 Statement of USW Patterson, in W&MC, Renegotiation of War Contracts, especially pp. 816-17.

5

 Telg, John B. Hawley, President Northern Pump

Company, Minneapolis, Minnesota, to All State

Treasurers, 15 Sep 42, copy in OCMH. 6

 Some state treasurers suffered administrative embarrassment in connection with the refund of state

corporation income taxes when income was reduced

by renegotiation. There was also some discriminatory effect among states because of differing state

laws on the permissibility of such refunds. It should

be noted, however, that the over-all effect of federal expenditures upon state revenues was decidedly

favorable. Corporations undergoing renegotiation

were protected by the U.S. Treasury and War Department Price Adjustment Board policy from any

loss due to state failure to make refunds. See

W&MC, Renegotiation of War Contracts, testimony

of Hon. Rollin Browne, President New York State
372 THE ARMY AND ECONOMIC MOBILIZATION

Reconversion Reserves

Perhaps the most controversial item in the

early debates on renegotiation policy was

industry's claim that reconversion reserves

set aside out of profits during the war should

be treated as part of the expenses of producing war goods. Charging such reserves to the

cost of wartime procurement would have

reduced the profit figure used for renegotiation purposes and therefore the amount of

recovery through renegotiation. The position of industry, in brief, was that renegotiation made it impossible to build up financial reserves adequate to meet the costs and

uncertainties of postwar readjustment.7

While sympathetic to the proposition that

no industry should be penalized for having

converted to war production, the War Department held that the problem of reconversion would have to be treated in its entirety by appropriate reconversion policies

applied at the end of the war. The proposal

to create reconversion reserves out of excessive profits would be grossly discriminatory

between firms, would defeat the close-pricing policy of the procurement agencies, and

in practice would have no direct relevance

to bona fide reconversion needs. The War

Department's position was well expressed

in a letter by the chief of the Purchases

Division, ASF:

The problem of the cost of post-war reconversion is one which concerns everyone. It

must be recognized that the war will involve

tremendous problems of post-war readjustment not only to firms engaged in fulfilling

war contracts but also to most other economic

groups. Firms now engaged in civilian business may face competition from products developed as a result of the war which will make

their existing plant obsolete. Many economic

groups such as the automobile dealers, the

filling station operators, the owners of resort

hotels and tourist camps are faced with a

curtailment and in some instances a complete

cessation of their normal business. Shall a

government subsidy be provided in each case

to reimburse owners of such businesses for

losses incurred because of the war? The difficulty of computing accurately the extent of

such losses and the dubious feasibility, from

an economic point of view, of attempting to

rehabilitate industries which may have become obsolescent because of advancing technology offer serious objections to any such

proposal. Surely these same arguments apply

to a firm which has been fortunate enough to

continue profitable operations during the war

by conversion to the production of war goods.

The proposal for a repeal of the statute plus

a provision (in the Revenue Act) for a carry

back of losses against excess profits taxes paid

from 1940 to the end of the war for the five

years after the close of hostilities would, in my

judgment, lead to more inequities than it

would alleviate. Corporations which made excessive profits could use Government money

in the post-war period on marketing campaigns, development, research, etc. Firms

could use the tax credit to develop products

which they had not produced during the prewar years. Certain of the munitions companies

would find themselves in a position to start out

in a new industry and develop a market with

Government money. At the same time, those

firms which patriotically attempted to eliminate excessive profits by reduced prices and

voluntary refunds would find themselves in

the post-war period without any comparable

subsidy which might be employed to cover

the cost of post-war conversion. That is to

say, the availability of post-war credit and

the size of that credit would depend upon

the existence of excessive profits during the

war years. This in effect, would amount to

Tax Commission, pp. 778-90, and Joseph J. O'Connel, Jr., Asst Gen Counsel, U.S. Treasury, pp.

1017-26. 7

 Like the question of taxes, the issues of reconversion reserves was, almost without exception, dealt

with by every industry witness. Two interesting and

opposing viewpoints, which throw considerable light

on the question of the propriety of charging reconversion reserves to war production, were specially

expressed by Congressmen Charles S. Dewey (Illinois) and Melvin J. Maas (Minnesota). Ibid., pp.

180-84 and 999-1017.
RENEGOTIATION: PRINCIPLES AND POLICY 373

rewarding those companies which earned ex- cessive profits while penalizing those which

recognized their responsibility to their country

in the matter of excessive profits.8

Although industry spokesmen repeatedly

proposed the outright repeal of renegotiation, or failing this, the deduction of reconversion reserves from profits, the War Department adhered to its basic position. Not

only was this in harmony with the official

position of the War Production Board; it

was in keeping with the broad principle that

reconversion costs and problems should be

dealt with directly and uniformly by a nationwide program for demobilization and

reconversion, rather than haphazardly and

inequitably through the medium of wartime

profiteering.9

Tax Amortization and Renegotiation

Rebates

The proper treatment in renegotiation of

allowances for "tax amortization" posed one

of the most difficult and important problems

of renegotiation policy. The tax amortization law, in effect, exempted from taxation

the profits of contractors set aside during

the war to pay for essential new capital facilities.10

 Underlying the amortization allowance was the premise that plant facilities

created to produce munitions would be

worthless after the war and accordingly

should be paid for out of contractors' wartime earnings. This could not be done if such

earnings were either taxed away or removed

by renegotiation before the new facilities

were completely paid for. Thus, on the surface it appeared that amortization deductions should be allowed as costs in computing profits subject to renegotiation just as

they were in computing profits subject to

taxation. This was the position taken by

the War Department Price Adjustment

Board in the summer of 1942.11

This stand was reinforced by the October 1942 amendments to the Renegotiation Act of 1942. Section (c) (3) of the

amended act provided that the same deductions and exclusions allowed for tax purposes in the Internal Revenue Code should

also be allowed in renegotiation. The logic

of this position required full recognition in

renegotiation of all amortization allowances

for tax purposes, including accelerated

amortization permitting 100-percent writeoff in less than five years if war production

should terminate before the expiration of the

five-year period. Steps were taken to make

this explicit in the renegotiation law and

the Renegotiation Act of 1943 did so by providing for "renegotiation rebates."

 12

Meanwhile, during the development of

renegotiation policy in the fall and winter of

1942-43, the Department of the Treasury

8

 Ltr, Col Browning to Mr. Paul W. Ellis, Div of

Industrial Economics, The Conference Board, New

York, New York, 24 Dec 42, OCMH. 9

 Even before the passage of the first renegotiation

act, the chairman of the War Production Board had

ruled that reconversion costs were not to be charged

against war production. Ltr, Nelson to USW, 6 Mar

42, reproduced in WDPAB Instructions, PAB-7,

26 Jan 43. See also testimony of Col (later Brig

Gen) Maurice Hirsch before the House of Representatives Select Committee on Small Business on

14 January 1945, in Congressional Record, Vol. 91,

Pt. V (14 Jan 45), 6145-49. 10

 For a more detailed discussion of the nature and

administration of tax amortization law, see below,

Chapter XX.

11

 WDPAB History, Sec. I, Pt. III, p. 5. 12

 Section 403 (a) (4) (D) of Renegotiation

Act of 1943, approved 25 February 1944. A renegotiation rebate was a repayment to the contractor of money previously collected from him as

excessive profits but no longer considered excessive

in view of the recomputation upward of the amortization deduction on the basis of a less-than-five

year write-off. The provision for renegotiation rebates was made retroactive to the beginning of renegotiation.
374 THE ARMY AND ECONOMIC MOBILIZATION

had been strongly opposed to the unqualified

allowance of amortization in renegotiation.

Treasury spokesmen pointed to the original

provision (Subsection (i)) in the tax amortization law which gave the government an

interest in the residual value of amortized

facilities if these should not, in fact, become

worthless with the cessation of war production. This provision had turned out to be

administratively unworkable and was repealed in February 1942 upon representations of the procuring agencies that they

would protect the government's interest by

the adoption of adequate, over-all pricing

policies. For reasons already indicated, close

pricing early in 1942 was an unrealizable

ideal and, two months after the abandonment of Subsection (i), renegotiation was

adopted for the specific purpose of counteracting the failure to price closely. In the view

of the Department of the Treasury, renegotiation authorities had a special obligation

in connection with tax amortization allowances—one which could not be discharged

by the taxing authorities. This was the obligation not to treat amortization as an unconditional allowance in renegotiation but to

modify it in accordance with a reasonable

estimate of residual value.13

The chairman of the War Department

Price Adjustment Board was opposed to any

consideration of residual value on the

ground that it would have an adverse effect

on industry and was contrary to the intent

of Congress. After a number of conferences

the following statement was adopted in the

spring of 1943 by the procuring agencies

and the Treasury:

. . . amortization . . . will be deducted from

such profits and not considered as representing excessive profits for purposes of renegotiation. In determining whether and the extent

to which profits remaining after deducting the

amount of such amortization are excessive,

consideration will be given to the extent that it

appears that the contractor or subcontractor

will have residual value in the amortized

facilities so far as it may be reasonably

ascertained.14

Although the chairman of WDPAB termed

this statement a compromise, it represented

abandonment of the Treasury position since

it permitted the unqualified deduction of the

full amortization allowance, regardless of

residual value. The subsequent adoption of

the statutory provision for renegotiation rebates confirmed this policy.15

The amount of residual value in a contractor's war-created facilities was not, of

course, susceptible of precise measurement

at any time and in many cases could not be

even roughly determined until the war's end.

Thus the real burden of reclaiming excessive profits obtained in the form of residual

value of amortized facilities was left to renegotiation at the end of the war. Unfortunately, the end-of-the-war period provided

far from ideal circumstances under which

to compute residual value. The rapid demobilization of the armed services after V-J

Day stripped the procuring agencies of many

of their experienced renegotiators when they

were most urgently needed. Wholesale termination of war contracts placed well-nigh

insuperable burdens of termination and settlement upon available personnel. Removal

13

 WDPAB History, Sec. I, Pt. III, pp. 5-6.

14

 Jt Statement by the War, Navy, and Treasury

Depts and the Maritime Comm, dated 31 Mar 43.

cited in WDPAB History, Sec. I, Pt. III, p. 6. 15

 The chief of the Legal Branch, Purchases Division, ASF, pointed out that consideration of residual value after full allowance of amortization was

not really a "concession to the Treasury" since this

would normally be done by renegotiators as part of

their general mandate. WDPAB History, pp. 7-8.

citing Memo, Marbury for Amberg, (Special Asst

to USW), 22 Jan 43, sub: Possible Amendment of

Section 403 of Public Law 528, as amended.
RENEGOTIATION: PRINCIPLES AND POLICY 375

of all wartime controls and rapid conversion

to peacetime pursuits became the nation's

first preoccupation and political watchword.

Fears and predictions of mass unemployment militated against the determination of any but minimum residual value in

war-created facilities.

As a result of all these factors, the Truman

Committee concluded that the tax amortization feature was a major loophole in renegotiation and that "legal profiteering resulted from certificates of necessity."

 16

 The

committee went on to state that this was

especially true in the case of firms able to

obtain renegotiation rebates under the provision for shortened amortization. The committee cited the case of twenty large oil companies whose excessive profits were computed at $65 million and who were obliged

to refund only $6 million after receiving tax

amortization credits in the sum of $59 million.17

 The rebate provision was also criticized by renegotiation authorities, in Truman Committee hearings and elsewhere, for

its discriminatory results. Since rebates could

be obtained only by contractors who had

previously been required to refund excessive

profits, the provision discriminated against

contractors who had priced closely. Also, by

placing a premium on the earning of excessive profits, the rebate provision tended to

tear down the efforts of procuring agencies

to obtain close original prices in new

contracts.18

Although the rebate provision was a convenient and legitimate target for criticism,

it was only partly responsible for the results

indicated. Renegotiation rebates were justified, and indeed indispensable to the complete recovery by the contractor of his facility costs, if the facilities became worthless

at the war's end. The basic source of discrimination under tax amortization was the

application of the same rate of write-off to

different types of facility having widely different degrees of economically useful value

remaining at the end of the war.19

Exemptions From Renegotiation

Two classes of exemption were provided

by the renegotiation law: mandatory exemptions required by the statute, and discretionary exemptions to be made by the

departmental secretaries and later by the

War Contracts Price Adjustment Board.

Among the mandatory exemptions the two

creating most controversy were the blanket

exemption of all firms with less than $500,-

000 in renegotiable sales and the so-called

"raw material" exemption.

The raising of the blanket exemption to

$500,000 by the Renegotiation Act of 1943

(formerly $100,000 under the October 1942

amendment) was done by Congress with

the support of the War Department.20 At

the time of the hearings in September 1943,

the renegotiating agencies were far behind

in reaching settlements and genuine concern

was felt over the possible failure of the en16

 S. Rpt. 440, Pt. 6, 80th Cong., 2d Sess., 28

Apr 48 (hereafter cited as Truman Committee,

Final Rpt), p. 233. 17

 Ibid., p. 234. 18

 (1) Truman Committee, Hearings, 42:25552.

(2) Norman C. Parkin, "Control of War Contract

Profits," Harvard Business Review, XXVI (March

1948), 247.

19

 See below, Chapter XX. 20

 Testimony of Under Secretary Patterson, 20

Sep 43, W&MC, Renegotiation of War Contracts,

p. 810. A year earlier, during the Senate hearings

leading to the October 1942 amendments, Mr. Patterson had suggested a $250,000 floor. By 1943,

when the administration of renegotiation seemed

to have bogged down, even the Truman Committee

recommended raising the floor to $500,000. S.

Rpt. 10, Pt. 5, 78th Cong., 1st Sess., 30 Mar 43,

Recommendation No. 3.
376 THE ARMY AND ECONOMIC MOBILIZATION

tire program. It was thought that exclusion of all cases under $500,000 would aid

substantially in reducing the unsettled backlog without seriously impairing the program.

By February 1944, however, when the increased exemption was finally adopted, the

agencies had made substantial progress and

could have handled the case load under the

lower figure. From 1943 to the end of the

war, all firms with less than a half million

dollars in war business were untouched by

renegotiation. Many of these firms realized annual profits of several times their

net worth. In order to preserve their exemption, firms approaching $500,000 in

war business in the course of the year tended

to refuse additional war orders and in some

cases the procuring agencies found it difficult to place contracts. Likewise, there

was a tendency for firms to organize new

companies so each could receive the full

exemption. Although affiliated companies

were treated as a unit for renegotiation purposes, it was sometimes difficult to identify

such relationships. The chief defect of the

$500,000 exemption, however, was its discriminatory effect, and considerable ill feeling resulted in various communities where

exempted concerns were known to be making excessive profits.

In order to reduce the discrimination

against firms exceeding the $500,000 figure,

WCPAB adopted the policy of limiting recoveries to a figure which would keep adjusted sales after renegotiation above

$500,000. Thus, a firm with renegotiable

sales of $611,000 and profits of some

$411,000 was required to refund only

$111,000. This still left a profit of $300,000,

or some 295 percent of the firm's net worth

of $102,000. This administrative decision

to give firms above the $500,000 floor a

partial exemption was censored by the Truman Committee after the war. The renegotiation agencies were in agreement by the

end of the war that the exemption should

be put back to the $100,000 figure in any

future renegotiation law.21

The "raw material" exemption was

added to the renegotiation law by Congress

in the October 1942 amendments. No adequate explanation of the economic basis for

the exemption appears in the hearings leading to its adoption.22

 Since it was not sponsored by the War Department or the other

renegotiating agencies, the War Department's concern with the exemption was limited to the many administrative problems

which arose. A parallel exemption for agricultural products in their raw or natural

state was made mandatory by the Renegotiation Act of 1943. The administrative difficulties created by these exemptions centered

on two considerations: (1) the determination of a specific list of commodities to which

the exemptions applied; (2) the closely re21

 For illustrative case cited, see Truman Committee, Hearings, 42:25513-14. In explaining the

administrative decision for partial exemption of contracts above the $500,000 floor, the Navy spokesman stated: "We tried to be fair and equitable.

We did not think it would be fair and equitable if

a man did $501,000 worth of business to take

$100,000 away from him, and another man who

may even have had a higher margin of profit but

only did $499,000 worth of business, leave him scot

free." Ibid., 42:25544. 22

 See: (1) Subcom. of the S. Com. on Finance,

77th Cong., 2d Sess., Hearings on Section 403 of

Public Law 528, Renegotiation of Contracts, 29 and

30 Sep 42; (2) S. Com. on Finance, 77th Cong.,

2d Sess., Hearings on H. R. 7378, Revenue Act of

1942, 23 Jul to 14 Aug 42. The War Department

was anxious to avoid the administrative problem of

renegotiating suppliers of raw materials (WDPAB

History, Sec. I, Pt. I, pp. 13-14), but the form of

the exemption actually adopted probably gave rise

to more administrative difficulties than would have

existed in the absence of any special treatment.

Yoshpe, Production Control in the QMC, p. 77,

Complications Resulting From Revisions in Renegotiation Act.
RENEGOTIATION: PRINCIPLES AND POLICY 377

lated problem of deciding for each commodity the stage in the production process

at which the exemption ceased.

The task of formulating a "horizontal"

list of exempted items was the easier of the

two, although considerable research was

necessary in many industries, such as chemicals, to decide how extensive the inclusions

should be. The list as formulated became a

part of the official regulations on procurement and renegotiation, and was used in

preparing contract terms as well as in the renegotiation procedure.23

The problem of determining the "vertical" cutoff point of the exemption ran into

greater difficulty and controversy. It was decided that aluminum and copper ingots

were produced in advance of general distribution of these metals throughout industry and they were added to the exempted

list. Because of differences in the organization and integration of the steel industry,

the cutoff point in that industry was established below the ingot level, with only pig

iron and lower levels exempted. There was

some concern that even the inclusion of pig

iron would be subject to criticism, in view of

the high profitability of steel industry operations through the pig iron stage:

. . . in renegotiation we have occasion to give

clearance to companies whose profits from, let

us say, the forum of public opinion, might be

considered excessive, but because of very

effective well established lobbies in Washington, they secured raw material exemptions.

For example, the steel companies and the

lumber companies . . . have earned as high

as 15 to 20 percent, and have received clearances in renegotiation.24

The pig iron exemption and the ingot

exemptions for nonferrous metals were retained throughout the life of renegotiation.

The Department of the Treasury originally

took the strict position that the vertical cutoff point should extend no higher than the

point where the special tax allowance for

depletion ceased. The Treasury withdrew

from this position in face of opposition by

the War and Navy Departments and Maritime Commission, who pointed to the wording of the statute.25

 Later, on 15 July 1943,

the Attorney General in a memorandum to

the President indicated that the renegotiating agencies had exceeded their authority

by including certain materials in the

exempted list. The inclusion of aluminum

ingots as a "raw" material was specifically

questioned in view of the dispersal of aluminum to industry, at a lower level, in the

form of bauxite. Nevertheless, the position

of the renegotiating agencies was upheld on

16 November 1943 by the Joint Price Adjustment Board, with the implied approval

of the White House and the Office of

War Mobilization and Reconversion

(OWMR).26

An additional administrative burden imposed by the raw material and agricultural

exemptions was a further provision in the

act to protect windfall profits resulting from

increases in value of excessive inventories.

The act provided for the exclusion from renegotiation of profits on inventories of

exempted items held in excess of normal re23

 PR 1204.2 (6-7-44) and PR 1290.2 (8-31-

44). PR 1290.2 contains a list of exempted raw

materials and agricultural commodities. 24

 Regional Company Pricing Discussion, Chicago,

Illinois, 12-13 March 1945, p. 85, remarks of Lt

Esmond H. Coleman, in Exhibit 71 to History of

Ordnance Pricing Policy. In exempting steel industry profits through the pig iron stage, renegotiation

officials determined the value of pig iron as the

nearest basing-point price minus freight and handling charges from the point of production.

WDPAB History, Sec. II, Pt. III, p. 3. 25

 WDPAB History, Sec. II, Pt. III, pp. 1-2. 26

 (1) Ibid., p. 5. (2) WDPAB Minutes, 11 Jul

43, Renegotiation of Contracts, file 161, Purchases

Div ASF.
378 THE ARMY AND ECONOMIC MOBILIZATION

quirements for war production. A purchaser or user of exempted metals, for example, might realize a speculative profit on

inventory holdings resulting from price increases allowed by the OPA. Despite the

widespread material shortages and official

regulations calling for elimination of excess

inventories throughout the war, speculative

profits on excess raw material and agricultural inventories were shielded from renegotiation. Not only did this apply to future

renegotiations, but the act required—upon

application by contractors within ninety

days—a refund of such profits already recaptured from the beginning of renegotiation. The task of determining such refunds

was a formidable one, involving virtually

insoluble accounting problems and placing

a substantial burden upon renegotiation

personnel.27

In addition to the exemptions just described, the Renegotiation Act of 1943

made mandatory the exemption of contracts

with other governmental agencies; contracts

and subcontracts with religious, charitable,

and educational organizations; construction

contracts awarded as a result of competitive

bidding; and subcontracts under exempted

contracts.28 The act also gave the War Contracts Price Adjustment Board discretionary

authority to exempt individual contracts or

certain classes of contracts. These included

contracts to be performed outside the United

States, contracts for standard commercial

articles if competitive conditions protected

the government from excessive prices, and

others. All these exemptions gave rise to

problems of administration, although some

were little used.

It was generally conceded by the renegotiating agencies at the end of the war that

few, if any, of the exemptions, whether mandatory or permissive, were economically or

morally justified. The net result for practically all types was inequitable discrimination in favor of special groups as well as

additional administrative effort in defining

and applying the exemptions. The official

History of Navy Department Renegotiation

recommended—either directly or by implication—the restoration of the $100,000

floor, the elimination of the raw material,

agricultural, and competitive-bid construction exemptions and all permissive exemptions, summing up the case as follows:

1. The Government should, on moral

grounds, have been entitled to recover excessive profits on exempted contracts;

2. if a contract was exempt and excessive

profits were not made, renegotiation would

not have affected the contractor adversely;

3. if a contract was not exempt and less

than reasonable profits were earned thereon,

the contractor would have benefited through

over-all renegotiation;

4. because of the additional administrative

work involved in the consideration of contractors' requests for exemptions, it is doubtful if there was a sufficient reduction in the

administrative burden during World War II

to have justified permissive exemptions.29

The Determination of Excessive Profits

Development of Criteria Under

the 1942 Act

The most urgent and delicate problem

facing the War Department with the passage of the Renegotiation Act in April 1942

27

 Yoshpe, Production Control in the QMC,

pp. 77-78. 28

 PR 1204 (6-7-44).

29

 Office of the Under Secretary of Navy, History

of Navy Department Renegotiation, 3 vols. (1947),

I, 251-52, JAG Library, Navy Dept. The Truman

Committee, after postwar hearings with the principal renegotiation agencies, made recommendations closely paralleling those above. Truman Committee, Final Rpt, pp. 229ff.
RENEGOTIATION: PRINCIPLES AND POLICY 379

was the establishment of criteria for the determination of the existence and amount of

"excessive" profits. The only suggestion contained in the statute was the directive that

"excessive" and "unreasonable" costs, reserves, and compensation to employees

should be disallowed by departmental secretaries in renegotiation proceedings. While

this injunction was useful in attacking the

problem of excessive costs, it shed no light on

what might be considered excessive profits

after all appropriate costs had been charged

to income.

Numerous meetings on the subject were

held in the spring and summer of 1942 by

members and staff of the ASF Price Adjustment Board and representatives of the

Under Secretary of War.30 The first concrete

statement announcing the factors to be used

in evaluating the excessiveness of profits was

the Notes on Renegotiation, issued by the

board on 9 July 1942. In this statement the

board made clear a fundamental premise

underlying renegotiation:

In the present emergency the existence of

excessive profit is no indication that a company has taken undue advantage of the

Government or that the contracting officers

have failed to exercise their best judgment

under all the circumstances where companies

have been asked to produce war materials

with which neither they nor others have had

any previous experience.

As a vehicle which would conveniently express the relative magnitude of profits for

all types of contract, the board adopted the

term "profit margin." This was defined as

the ratio of profit (before taxes) to sales or

(for CPFF contracts) to adjusted costs. In

determining a fair margin, consideration

would be given to corresponding profits in

prewar years for the firm and the industry,

with the understanding that under war conditions a company would not need as great

a margin as under normal competitive conditions. Comparison would be made with the

current margins of other firms in the industry operating under similar conditions.

Downward adjustment would be made, on

a graduated scale, for increasing volume of

output. Upward adjustment would be made

for a large ratio of labor to material costs,

on the premise that, other things equal, a

company doing most of the actual production to meet its contracts required and

merited a greater profit margin than one

which subcontracted most of its work.

Further upward or downward adjustments would be made on the basis of six

performance factors: (1) quality of production; (2) rate of delivery and turnover; (3)

inventive contribution; (4) co-operation

with other manufacturers; (5) efficiency in

use of raw materials; (6) efficiency in reducing costs. Additional adjustments would

be made in a contractor's favor for assuming

risks under fixed-price contracts, including

risk of increase in cost of materials, possible

wage increases, inexperience in new types of

production, complexity of manufacturing

technique, and delays from inability to

obtain materials. Finally, in the case of contractors with substantial capital devoted to

war production, the allowable profit tentatively determined would be checked against

net worth to assure a fair return on investment. Net worth would be analyzed to determine to what extent it included accumulated

profits from war business.

A basic element in the thinking of the

War Department Price Adjustment Board

was that its function was not to determine

what profits should be, but what they ought

not to be. While this might appear to be

30 For the record of early discussions and policy

developments of profit recovery criteria, see documents cited above in note 33, page 362.
380 THE ARMY AND ECONOMIC MOBILIZATION

merely a play upon words, it indicated that

in the board's eyes no precise measure of

the "proper" amount of profit was possible.

Rather, it assumed that in any particular

case there would be a twilight zone of uncertain size within which reasonable men

might disagree but beyond which profits

would clearly be regarded as excessive.

Thus, early in its deliberations, the WDPAB

established the position that no simple or

final formula could be developed which

could satisfactorily be applied to all of its

heterogeneous thousands of contractors and

subcontractors.31

Factors Listed in the 1943 Act

Throughout the remainder of 1942 and

1943 the conduct of actual renegotiation

resulted in the refinement and addition of

criteria for determining the excessiveness

of profits. In response to the widespread

feeling that the factors to be used in determining excessive profits should be expressly

stated in the law, the criteria developed by

the renegotiation agencies were incorporated into Section 403 (a) (4) of the Renegotiation Act of 1943:

In determining excessive profits there

shall be taken into consideration the following

factors:

(i) efficiency of contractor, with particular regard to attainment of quantity and quality of production, reduction of costs and economy in the use of materials, facilities, and

manpower;

(ii) reasonableness of costs and profits,

with particular regard to volume of production, normal pre-war earnings, and comparison of war and peacetime products;

(iii) amount and source of public and

private capital employed and net worth;

(iv) extent of risk assumed, including

the risk incident to reasonable pricing

policies;

(v) nature and extent of contribution to

the war effort, including inventive and developmental contribution and cooperation

with the Government and other contractors in

supplying technical assistance;

(vi) character of business, including

complexity of manufacturing technique,

character and extent of subcontracting, and

rate of turnover;

(vii) such other factors the consideration

of which the public interest and fair and

equitable dealing may require, which factors

shall be published in the regulations in the

Board from time to time as adopted.

Application of the Factors

The heart of the problem of renegotiation

was not the selection of the proper factors

but their actual application to particular

cases. The task of evaluating a given contractor's performance in terms of each of the

factors listed, of combining all the findings

into an over-all judgment expressed in dollars, and of assuring comparable treatment

of all firms in an industry and of one industry against another, was one which literally

called for omniscience. The following brief

discussion attempts to describe a few of the

31

 (1) WDPAB, Notes on Renegotiation, p. 16.

(2) Price Adjustment Meeting in Cleveland, 18

November 1942, address of Mr. Karker, Chmn

WDPAB, pp. 11-13, Tab 33. Both in Renegotiation of Contracts, file 161, Purchases Div ASF.

Proposals to adopt a precise formula for profit

recovery under renegotiation cropped up repeatedly

throughout the war. Members of Congress as well

as representatives of industry constantly deplored

the vagueness of the statute and the wide latitude

allowed administrators. Under Secretary Patterson testified that the best minds in the War Department had tried again and again to develop such

a formula but could not do so. (1) W&MC, Renegotiation of War Contracts, pp. 826, 844, 850, 873,

882, 894. (2) Testimony of Brig Gen Maurice

Hirsch, Chmn WCPAB, in Truman Committee,

Hearings, 39:23258. The whole purpose of renegotiation was to avoid the rigidity and inequity of

a simple formula, the prototype of which was the

flat-rate percentage limitation on profits originally

discarded in favor of renegotiation.
RENEGOTIATION: PRINCIPLES AND POLICY 381

major problems arising and some of the principal policy conclusions reached by the War

Department and the other renegotiating

agencies.

Base-Period Comparisons—A relatively

simple type of case for renegotiation was

that of a competitive manufacturer whose

war products were identical with his peacetime products (for example, chewing gum,

standard electric motors). In such cases prewar earnings, with the 1936-39 period as

a base, were a point of departure in measuring the excessiveness of wartime profits. In

an early statement of policy, the Under Secretaries of War and Navy ruled that "in general the margin of profit which a company

makes on its expanded war sales may be

limited to one half or one third of the margin

of profit on peacetime sales."

 32

 Thus a firm

which had realized a $2 million profit on $10

million of sales in peacetime might be allowed in wartime $2 million profit on its first

$10 million of renegotiable sales, $1 million

on the second $10 million, and $2/3 million

on the third $10 million. This would result

in a wartime profit margin on sales of some

12 percent compared with the prewar margin of 20 percent on the lower volume.33

In actual practice, most contractors produced different products for war, had undergone substantial plant conversion, had unrepresentative base periods, or for other

reasons were allowed substantially higher

margins than they had experienced in the

base period. Thus, one official survey indicated that the wartime profit margin on sales

after renegotiation was more than 30 percent higher than the base period margin for

the largest firms and more than 130 percent

higher for the smallest firms. (Compare lines

3 and 11, Table 43, page 395.) Probably

the chief function of base-period analysis in

renegotiation was its use as a floor below

which wartime profits were not allowed to

fall.34

Contractor's Efficiency and Quality of

Production—Because of the inadequacy of

dollar-value figures for measuring a contractors' contribution to war production, efforts were made to gauge contractor performance in terms of physical or engineering

standards. Very early in renegotiation it became evident that there were no absolute

standards of performance or efficiency. This

was as true for engineering standards as it

was for economic or administrative standards. Most war production consisted of new

products produced with new equipment,

new technology, and new or different materials. To complicate matters still further,

neither the products nor the equipment, materials, and processes remained constant for

very long. The only possible way of rating

a contractor's performance was on a relative basis, comparing one contractor's performance with that of others engaged in similar production and making allowance for

differences in individual circumstances. To

accomplish this it was necessary to develop

comparative tests for each of the various factors enumerated in the statute.

In most cases evaluation of the quality of

the product was not a major problem in renegotiation. Established inspection requirements and procedures determined the basic

acceptability to the Army of the contractor's

32

 Jt Statement of the Under Secretaries of War

and Navy, 9 Feb 43, cited in WDPAB History, Sec.

III, Pt. VI, p. 66. 33

 The allowance of a decreasing rate of profit on

additional increments of sales above base-period

averages was known as the incremental method.

For its significance and other aspects of base-period

analysis, see J. J. Lynch, Consideration To Be Given

Base Period Results, paper read at Seminar on

Renegotiation, Holabird, Maryland, April 1945, in

WDPAB History, Sec. III, Pt. VI, pp. 66-72. 34

 Ibid., p. 70.
382 THE ARMY AND ECONOMIC MOBILIZATION

output. The far more difficult problem was

how to determine the relative importance of

quality and quantity of production—for

example, how much to penalize contractors

for failure to meet delivery schedules in

order to attain quality standards, or for

failure to meet precise specifications in order

that troops might receive needed equipment at the earliest possible date. Conversely, the tasks of rewarding superior performance were equally difficult. For some

services, such as the Signal Corps, it was

very difficult for renegotiators to know how

to distinguish superior from ordinary performance in a milieu of complex and delicate manufacturing processes familiar only

to highly trained engineering specialists. In

the collection of recommendations submitted by the technical services for the improvement of renegotiation procedure, it

was proposed that qualified engineers be

assigned to renegotiation on a full-time

basis.35

Value Added—An important development in renegotiation technique in the latter

part of the war was increasing reliance on

the "value added" concept. This technique

was especially useful became of its wide applicability to all types of industry and product. Rather than looking to a contractor's

gross billings or sales as an indication of his

productive contribution, it confined attention to the net value of the processing actually done by the contractor. As defined by

War Department renegotiators, "value

added" meant "the amount of costs and expenses incurred by a contractor in the course

of his renegotiable operations during a fiscal

period, apart from the cost of subcontracting

and material purchased."

 36

Companies with a high degree of integration, whose purchases of parts and materials

were a small percentage of the value of their

finished product, performed a greater service than nonintegrated firms whose ratio of

material costs to final costs was high. Not

only did the integrated firm typically perform a more extensive and complex productive task; it eliminated the several layers of

profit normal to a series of subcontractor

operations. The War Department thus allowed a greater retention of profits per

dollar of sales for a large ratio of value

added. In using the value-added technique,

costs had to be carefully scrutinized to insure that increments in value did not consist of excessive costs. Even where higher

costs were beyond the control of the contractor, such as high wages in a labor-shortage area, it was essential to make an adjustment to avoid rewarding a contractor with

a greater amount of profit than his lower cost

competitor.37

Contractor's Risks and Pricing Policy—

The pricing aspects of renegotiation policy

were developed in conjunction with procurement policy as a whole. War Department negotiators as well as contractors had

to be trained and educated in the principles

of sound pricing as soon as these had been

discovered and formulated. As already

shown, contractors tended to resist close

35

 Ibid., Sec. IV, Pt. II, App. 2-A, Tab G, p. 11,

and App. 2-B, Recommendation 17, Visits to Contractors' Plants. 36

 Ibid., Sec. III, Pt. VI, p. 50.

37

 Ibid., pp. 54-55. The Army's value-added technique was developed largely by Ordnance, which

made numerous contributions to the theory and

practice of renegotiation. A Research and Inquiry

Unit for developing statistical data and techniques

of renegotiation was established in the Purchase

Policy Branch, Legal Division, OCofOrd. Results

of analyses by this unit were published as Research

Bulletins. The value-added approach was developed

in Research Bulletins Nos. 1, 2, 3, and 7. Research

Bulletin No. 7 consolidated the whole approach,

and its recommendations were widely adopted

throughout all renegotiation agencies. Ibid., Sec.

IV, Pt. II, App. 2-A, Tab E, p. 16.
RENEGOTIATION: PRINCIPLES AND POLICY 383

TABLE 38—REWARD FOR FAIR PRICES: HYPOTHETICAL RENEGOTIATION OF THREE FIRMS

WITH IDENTICAL COSTSa

a

 It is assumed that Companies A, B, and C produce the same number of identical items but sell them to the Government at different prices.

Source: Illustration reproduced from Page 48, Exhibit 30, History of Ordnance Pricing Policy.

pricing, both out of fear of loss and in hope

of higher profits. At the time of contract

negotiation they typically argued that the

establishment of high initial prices was the

only safe procedure for both parties: contractors would thereby receive the necessary protection, and renegotiation would

subsequently return to the government any

excessive profits. When the time for renegotiation came around they would often

shift the argument: contractors were entitled to retain their high profits since these

represented the appropriate reward for riskbearing as well as for other contributions.

In attempting to overcome contractor resistance to close pricing, War Department

renegotiators pointed to two basic aspects

of the problem of financial risk in war production. The first of these concerned the effects of close pricing upon the contractor's

own activities. A contractor who accepted

an initial price close to cost demonstrated

his willingness to accept in advance his responsibility to produce efficiently. If he was

able by efficient methods to reduce costs, he

would be allowed to retain a greater proportion of the resulting profit than if he had

insisted on a high initial price to be followed

by price reductions or retroactive refunds.

Ideally, differential profit recoveries in accordance with the principle of close pricing

would appear somewhat as in the accompanying illustration. (Table 38) In this case

Company C would have assumed a real

pricing risk; Companies B and A, little or

none whatever. Contractors with a genuine

pricing risk would exert greater pressure on

their organizations to attain efficiency and

reduce costs. Collectively, they would require lower governmental appropriations,
384 THE ARMY AND ECONOMIC MOBILIZATION

create less need for high taxes and federal

borrowing, and exert less inflationary pressure on the economy as a whole. In this respect renegotiation differed fundamentally

from an excess profits tax, which encouraged

lavish cost expenditures in the face of the

inexorable recapture, without distinction as

to merit, of excess profits from whatever

source.38

A second aspect of the problem of risk

was the degree to which this element, for

contractors in general, changed between

1940 and the peak of the war effort. Early

in the defense period the risks attending the

assumption of a military procurement contract were in most respects far greater than

they were after the nation had settled down

to a full-fledged war. In 1940 and 1941

the expenses of conversion, the loss of regular peacetime business to competitors, the

complete novelty of munitions production,

and the great uncertainty over the future of

the rearmament program were for many

firms a tremendous hazard that could be

voluntarily shouldered in peacetime only

when covered by substantial inducements

in the form of safe prices based on ample

allowances for various contingencies. Such

allowances might take the form of generous

estimates of the costs of conversion, the

quantity and cost of labor and equipment

needed, and the amount and cost of raw

materials required per unit of output. After

Pearl Harbor not only was the whole peacetime psychology perforce thrown overboard,

but the government provided substantial

stability for many elements of cost previously

unpredictable. Wages and prices were

brought under control, raw materials were

channeled into war production, plant and

equipment made available to war producers,

government financing for both fixed and

working capital was provided, and numerous other measures adopted—all calculated

to eliminate or minimize the contractor's

risks or transfer them to the government.

These fundamental changes were slow to

receive understanding or recognition by contractors. Many of the practices and attitudes cultivated by industry during the uncertainties of the defense period tended to

persist on into the war. While the impact

of Pearl Harbor and of the Jack and Heintz

revelations guaranteed the easy passage of

the first renegotiation law early in 1942,

during the next two years it was difficult

both to keep the statute alive and to achieve

the desired results in administration. Renegotiators were faced with a task impossible

of adequate fulfillment from either a qualitative or a quantitative point of view. Not

only did each case call for omniscience but

the size of the total case load, in the face of

inadequate time and facilities, made a satisfactory performance impossible. To this

was added the separation between the renegotiation and pricing activities of the procuring agencies, coupled with perennial contractor resistance to both close original pricing and renegotiation. As a result, especially

for the first year (fiscal year 1942), renegotiation not only left much to be desired in

its influence on pricing but failed to effect

profit recoveries in accordance with the criteria which had been developed. Sample

statistics indicated that instead of providing

a skillful excision of profits on the basis of

merit, renegotiation was simply scaling

down the profits of all contractors on a graduated basis. (Table 39) Those contractors

38

 Long before World War II, Bernard Baruch

had conclusively demonstrated in a memorandum

to the War Policies Commission the inevitable "costplus" pressures exerted by an excess profits tax.

"The excess profits tax is not a substitute for price

stabilization." See memo reproduced in Baruch,

American Industry in the War, pp. 414-17.
RENEGOTIATION: PRINCIPLES AND POLICY 385

TABLE 39—RATIO OF NET PROFITS TO SALES: BEFORE AND AFTER CONTRACTORS' 1942

RENEGOTIATION WITH BASE PERIOD COMPARISON

a

 Classified by initial profit ratio-FY 1942 with twenty contractors selected at random from each percentage class.

Source: Contractors' 1942 Schedule A's, summarized on Page 47, Exhibit 30, History of Ordnance Pricing Policy.

who profited most before renegotiation were

in general the ones who were left with the

highest profits after renegotiation.

Because of the lengthy time lag between

earnings and renegotiation, as well as the

dispersion of contractors' fiscal years

throughout the calendar year, these discouraging figures did not appear before the

end of 1943. But already contractors had

begun to "compare notes," and it became

evident that the close-pricing efforts of the

services were being jeopardized by the evident correlation between high initial and

high retained profits. Increased awareness

of this situation was a primary factor behind

the intensified pricing activities of the ASF

and the launching of the company pricing

program early in 1944.39

As revealed by the statistical record, profit

margins before renegotiation for War Department contractors fell substantially and

continuously after 1942. (See Table 42,

page 392.) This indicated a notable improvement as the war progressed. Nevertheless, contractor resistance to close pricing

persisted to the end of the war, and responsibilities of contracting officers, negotiators,

and renegotiators were not easily discharged.

One of the barriers to close pricing was the

number of change orders issued by the procuring agencies. In spite of the merits of

design stability for purposes of maximizing

production, the Army could not be content

with inferior planes, tanks, guns, and ammunition when the possibilities of improvement were obvious. Consequently, a common experience for many manufacturers

was to get barely tooled up and ready for

mass production only to be ordered to retool their production lines and retrain their

employees to meet a change order. Such

changes were costly and as often as not took

place before the cost of the original setup

had been amortized. Even where no change

in design was involved a change order re39

 (1) History of Ordnance Pricing Policy, Exhibits 29 through 32. (2) ASF, History of Purchases Division, Exhibit 34.
386 THE ARMY AND ECONOMIC MOBILIZATION

quiring additional quantities or accelerated

delivery had much the same effect. The contractor would have to acquire additional

equipment, revamp his production lines, obtain additional priority assistance, and so

on, all adding to his cost for the year in

question. After many such experiences contractors were reluctant to accept close initial

prices, or to reduce their prices before completion of long production runs. The effects

of change orders, like many other genuine

obstacles to close pricing, had to be carefully

considered in renegotiation determinations.40

Contractor's Net Worth—One of the

most controversial elements in the statutory

list of factors was the item of net worth. In

postwar hearings on renegotiation, the price

adjustment boards were criticized for inadequate attention to this element, and a number of examples were given of firms receiving an annual return after renegotiation of

several times their net worth. It was intimated that the use of the ratio of profits to

sales (instead of profits to net worth) as the

vehicle for expressing profit margins tended

to conceal the true rate of return and led to

the retention of excessive profits.41

Actually, as representatives of the renegotiating agencies explained on frequent occasions, both the return on net worth and

the return on sales were considered in each

case as a matter of standard procedure. But

these were just two of the many relevant

considerations in renegotiation and were

therefore not controlling. The ratio-to-sales

margin had long been used by the business

community for measuring the return on the

volume of output, a more accurate reflection

of a firm's contribution than net worth. But

just as gross sales gave a misleading picture

of the contribution of firms with widely

divergent ratios of value added, so did net

worth present a distorted view of the true

return upon invested capital. Firms with

equivalent plant and equipment often had

widely different ratios of equity to debt financing, and there were many types of ownership and creditor instruments—including

common and preferred stocks, debentures,

and bonds—shading imperceptibly into

each other. Moreover, in precisely the area

where the return on net worth showed the

greatest extremes, that is, small business, the

element of compensation in the form of

salaries, bonuses, and similar payments was

most significant in measuring the total return to the owners of the business.42

 (Compare lines 13 and 19, Table 43, page 395.)

The War Department Price Adjustment

Board was well aware of the many problems

associated with the treatment of net worth.

Various methods were used to allocate each

firm's total net worth between its renegotiable and nonrenegotiable business in order

to reflect that portion of total net worth devoted to war business. Where specific items

of plant, equipment, and working capital

were devoted to war business, these were directly allocated to renegotiable sales. In

most cases, however, renegotiable and exempt business were performed in the same

plant and the allocation was made on the

basis of renegotiable to total costs. Still other

bases were used, such as ratios of value

40

 WDPAB History, Sec. III, Pt. VI, pp. 42-43. 41

 (1) Truman Committee, Hearings, 42:25506-

18. (2) Truman Committee, Final Rpt, pp. 228-29;

also, p. 234, Recommendation No. 4.

42

 For 150 companies with renegotiable sales under

$500,000 for fiscal years ending between 1 January

and 1 July 1943, the average ratio of executive

compensation to net worth was 80.1 percent; for

sales between $500,000 and $1 million, 45.9 percent; and for sales between $1 and $2 million, 22.4

percent. Congressional Record, Vol. 91, Pt. V (14

Jan 45), 6148, Table II.
RENEGOTIATION: PRINCIPLES AND POLICY 387

added or charges for labor and burden,

where the character of war and exempt

business was dissimilar. Complications were

added by the presence of government loans

of working capital as well as governmentfurnished materials, machinery, and additions to plant. Excess working capital or investment assets, foreign plants, real estate,

and other items not used in the manufacturing business subject to the allocation had

to be deducted to provide a proper allocation base. Long-term debt advanced by

owners or shareholders, especially in a

closely held company, was treated as a portion of net worth when circumstances warranted. Long-term debt to outsiders, except

in unusual instances, was considered as debt

rather than net worth.43

Wherever comparisons among firms in a

given industry showed wide differences in

return to allocated net worth, careful

scrutiny was given to all the relevant circumstances. In general, a 10-percent return

on net worth before taxes was treated as a

floor for purposes of profit recovery but no

specific ceiling was recognized. A return of

over 50 percent was considered questionable

but allowable if justified by other factors.44

In considering the legitimacy of a given

level of return upon allocated net worth, the

price adjustment boards gave attention to

the size and character of the business, and

to peacetime patterns of capital turnover

and return to net worth. A public utility

concern with a low capital turnover might

have a high profit-to-sales margin and a low

return on net worth. A nationwide grocery

chain, on the other hand, might typically

exhibit a low profit-to-sales margin and a

high return on net worth. Small business, in

peacetime as well as in war, exhibited a

much wider range of percentage rates of

return upon net worth than did industry as

a whole.

The most exaggerated cases of high return to net worth during World War II involved firms whose renegotiable sales were

less than $500,000 and were therefore exempt from renegotiation. Next came those

with renegotiable sales slightly in excess of

$500,000, who were not required to refund

an amount greater than the figure which

would reduce their adjusted sales to the

$500,000 floor. (See line 15, Table 43, page

395.). 45 There is no doubt that small business fared relatively better in renegotiation

than large business. On the other hand, because excessive-compensation disallowances

and renegotiation recoveries fell more intimately on the owners of small rather than

large businesses, many of the most vociferous

complaints against renegotiation came from

the small business sector.

Consideration of the net worth factor

sheds light on the criticism, frequently made

of renegotiation for World War II, that the

spread or range of profit margins allowed

after renegotiation was too narrow to reward efficiency adequately. This criticism

is considerably weakened by the fact that

the range of returns on net worth was several times the range of profit margins on

renegotiable sales, the item subjected to criticism. Since it was the rate of return on net

worth, rather than on sales, which provided

43

 Maj Clifford W. Michel, Return on Allocated

Net Worth, paper read at Seminar on Renegotiation, Holabird, Maryland, April 1945, in WDPAB

History, Sec. III, Pt. VI, pp. 73-80. 44

 Ibid., pp. 77-78.

45

 The corresponding percentages for corporations

classified in the same brackets by 1943 renegotiable

sales volume were 89.8 percent, 72.9, 55.6, 46.7,

41.0, and 33.1 percent. Congressional Record, Vol.

91, Pt. V (14 Jan 45), 6148, Table II. The significance of these figures must be interpreted in the

light of all the qualifications necessarily surrounding the definition and measurement of net worth.
388 THE ARMY AND ECONOMIC MOBILIZATION

the greatest contractor incentive, the validity

of the criticism in question is considerably

weakened.

The foregoing discussion of items considered in the determination of excessive

profits indicates in general the magnitude

and scope of renegotiation policy. It is not

possible in a brief treatment to consider the

many intangible items—the complexity of

the contractor's business, his inventive and

developmental contribution, the extent to

which he supervised subcontractors and rendered them technical assistance, his cooperation with the government and other

manufacturers in sharing trade secrets and

forgoing royalties, and numerous other detains—which were considered by renegotiation boards in making determinations. The

complexities of even the simpler cases were

such that final determinations could not be

made with unimpeachable accuracy. For

the more difficult cases the decisions could

only be made on the basis of broad and informed judgment.

Renegotiation Statistics

The predominant role of the War Department in the field of contract renegotiation is revealed by the statistical record. An

indication of the size of the administrative

task is found in the total number of renegotiation assignments and the manner of their

disposition by major departments and by

years from 1942 through 1946.46 (Table 40)

Of the grand total of 118,181 assignments

for all five departments, the War Department received 715,818 or nearly 65 percent.

This was virtually double the combined volume handled by the other four departments.

Each renegotiation assignment concerned

a firm's war business for its own fiscal year.

Thus most of the 20,416 assignments to the

War Department for 1942 business were

not made until 1943, and many were not

settled until 1944 or later. The trend of assignments, reaching a peak for 1943, tended

to parallel the general trend of procurement

activity, but was modified by the effects of

improved organization and screening procedure, gradually narrowing profit margins,

and other factors.

In total number of assignments the Corps

of Engineers led all War Department agencies, followed in turn by the Quartermaster

Corps, Ordnance, and Air Forces. (Table

41) Within the technical services and the

Air Forces, the distribution to various field

offices throughout the country varied with

the type of field organization, the volume

of procurement done by the various districts, and so forth.

Of greater significance are the financial

data on renegotiation. (Table 42) Out of

total renegotiable sales of $223 billion, profits before renegotiation amounted to $28

billion, or 12.7 percent of sales. Recoveries

of nearly $10 billion reduced this profit to

about $18.5 billion, or 8.7 percent of adjusted sales.47

The gradual decline from 1942 to 1946

in profit margins before renegotiation indicates the broad effects of renegotiation and

closer pricing. Average profit margins for

all departments before renegotiation fell

from 16.2 percent of sales in 1942 to 9.4 percent in 1946. Initial profit margins were

thus, on an average, 72 percent higher at

the beginning of the program than at the

end. Measured simply by the level of per- 46

 Statistics for 1946 were included by the War

Contracts Price Adjustment Board in its final report. They are reproduced herein as part of the

total record of renegotiation for World War II.

47

 Renegotiable sales were reduced by the amount

of profit recovered to reflect the value of such sales

at proper prices.
RENEGOTIATION: PRINCIPLES AND POLICY 389

TABLE 40—DISPOSITION OF RENEGOTIATION ASSIGNMENTS: 1942-1946

a

 Includes Navy PAB and Navy Services and Sales Renegotiation Section. b

 RFC subsidiaries named in Renegotiation Act of 1943. c

 Includes Maritime Ship operations, formerly War Shipping Administration.

Source: Adapted from Table I-A, WCPAB, Final Report, 22 May 51.

centage profit margins and the rate of their

reduction by 1946, the War Department

record is somewhat poorer than the average.

This is in part accounted for by the distortion in 1946 figures resulting from the effects

of a few cases on the low total for the year.

Another way of viewing the progress of

renegotiation from 1942 to 1946 is to compare the percentage of initial profit actually

recaptured from year to year. For its 1942

war business, American industry was required to surrender through renegotiation
390 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 41—WAR DEPARTMENT PRICE ADJUSTMENT BOARD ASSIGNMENTS: As OF

6 FEBRUARY 1948

Source: WDPAB History V, Pt. II, App. 2A, Tab A, Exhibit VI-D.

an average of 48.5 percent of its initial

profit. Because of more reasonable prices

this percentage fell to 39 percent for 1943.

For 1944 it fell to 27.3 percent, and for 1945

the total recovery was only 18.8 percent of

initial profit. Over the same five-year period the average profit retention for all departments fell from 9.0 percent to 7.5 percent of adjusted sales. Renegotiation, together with related pricing techniques, had

made substantial progress in effecting

closer pricing by the end of the war.

An important area of analysis for which

War Department statistics are lacking pertains to the spread or range of percentage

profit margins after renegotiation. In the

absence of such statistics, Chart 3, based on

a large sample of Navy Department cases,

may be taken as suggesting the situation

prevailing for the War Department.48 The

chart reveals that nearly 60 percent of the

2,500 cases analyzed fell within the 10.0-

percent to 12.9-percent bracket. This high

concentration of cases around the average

has given rise to the frequent charge that

renegotiation failed to permit adequate rewards to the more efficient contractors.49

As already indicated in the discussion of net

worth, statistics of profit margins based on

gross sales do not reveal either the full

spread or the true significance of contractor

earnings, either before or after renegotiation.

48

 Taken from History of Navy Department Renegotiation, Vol. III, Renegotiation Statistics.

The author of this volume was Mr. Norman C.

Parkin, who was active in renegotiation matters

during and after World War II. In a conversation

with the author, Mr. Parkin stated his opinion that

the pattern of profit margins for the Army after

renegotiation would closely approximate that of

the Navy. Profit margins after renegotiation represent profits before taxes and thus do not indicate

finally retained profits. 49

 See Miller, Pricing of Military Procurements,

pages 181 ff., for a discussion of this issue and its

implications. Profit margins for the 2,500 fixedprice cases cited above are notably higher than the

over-all figures contained in Table 42. A substantial portion of the difference is attributable to the

inclusion of CPFF contracts in Table 42.

392 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 42—RENEGOTIABLE SALES, PROFITS AND PROFIT MARGINS, AND AMOUNT RECOVEREDa

[Dollars in Millions]

a

 Corporation Refund and Clearance Cases Only. Excluding brokers, agents, sales engineers, construction contractors, shipping contractors under charters, and contractors renegotiated on a completed contract basis. Data included represent cases accounting for approximately 89 percent of all recoveries. b

 Totals include figures for smaller renegotiating agencies not specifically shown.

Source: Adapted from WCPAB Final Report Table III-A.

Concluding Observations

The military agencies, and in particular

the War Department, exercised a dominant

role in both the enactment and the administration of contract renegotiation for World

War II. Army officials provided Congress

with the prototype of the renegotiation law

and assumed the major burden of assigning

and processing renegotiation cases. The

broad achievements and failures of renegotiation thus constitute a part of the Army's

record of economic mobilization for World

War II.50

The most obvious achievement of wartime renegotiation was the actual recapture

of which War Department recoveries

of excessive profits, totaling over $11 billion,

amounted to nearly $7.5 billion. Much has

50

 The broad generalizations of this section do not

purport to be a comprehensive evaluation of renegotiation. For additional observation and references, see: (1) Worsley, Wartime Economic Stabilization, Chs. 22 and 23; (2) Parkin, "Control of

War Contract Profits," pp. 230-50.
RENEGOTIATION: PRINCIPLES AND POLICY 393

been written about the implications of these

figures, especially in the light of estimates

that excess profits taxation in the absence

of renegotiation would have recovered all

but $3 billion to $4 billion of the $11 billion

actually recaptured. One reaction has been

that $3 billion to $4 billion—or even the

entire $11 billion—was a relatively insignificant amount when compared with the

$300 billion of total expenditures for military procurement for World War II, and

that minor changes in excess profits tax legislation could have been substituted for the

cumbersome and expensive process of renegotiation.

The War Department, the other procurement agencies, and the War Contracts Price

Adjustment Board consistently rejected this

interpretation on the ground that it overlooked both the major purpose and the practical results of renegotiation. The existence

of the renegotiation statute was probably

the most compelling single influence behind

the close-pricing efforts of the procuring

agencies. Both in its day-to-day administrative requirements and in its constant presence in the background, renegotiation was a

perpetual reminder to contracting officers,

to officials in charge of procurement policy,

and to wartime contractors of the importance and necessity of close pricing. Although the War Department was able to

show—over and above the $7.5 billion of

actual recoveries—savings. of some

$4.5 billion on future deliveries under existing contracts as a result of renegotiation,

the largest saving may easily have been the

closer pricing of all new procurement under

contracts made after the passage of the first

renegotiation act in April 1942.51

It is manifestly impossible to determine

what the total dollar recapture under the

excess profits tax would have been in the

absence of renegotiation. Without the restraints upon price increases imposed both

directly and indirectly by renegotiation, the

dollar magnitude of total renegotiable sales

and total profits before taxes would have

been substantially higher—with the relative

increase in profits outrunning the relative

increase in prices and renegotiable sales. In

a regime of rampant inflation and in the

absence of renegotiation, total recapture via

the excess profits tax might easily have been

several times the number of dollars actually

recaptured by renegotiation. But by the same

token unrecaptured profits would have

grown as rapidly as recaptured profits, thus

defeating the whole program of price and

inflation control. The recapture of dollars

representing substantial inflation in the

prices of government procurement was

simply a partial and belated recovery of

additional government funds which should

never have been spent. As pointed out repeatedly by Mr. Baruch as well as by the

procuring agencies during the pre-World

War II era, the innate cost-plus-features of

the excess profits tax rendered it worthless

as a means of controlling either prices or

profits. In the absence of renegotiation or

direct price controls, firms could have insured their retention of a high level of profits

after taxes merely by pricing their output

high enough to yield the desired net return.

The essential character of the renegotiation program was thus the opposite of that

for an excess profits tax. The ultimate objective of renegotiation was to "write its own

death warrant" by effecting progressive reductions in excessive profits before, rather

than after, recapture. Measured by this test,

renegotiation in World War II was re51

 Ltr and Attachments, John R. Paull, Chmn

WDPAB, to William P. Rogers, Com Counsel, 19

Sep 47, reproduced in Truman Committee, Hearings, 42:25887.
394 THE ARMY AND ECONOMIC MOBILIZATION

markably successful. As indicated at an

earlier point, the ratio of profits to sales before renegotiation for all agencies fell from

16.2 percent for 1942 to 9.4 percent for

1946.52 If the original profits ratio of 16.2

percent had persisted throughout the war,

initial profits on the more than $200 billion

of renegotiable sales actually experienced

from 1943 to 1946 would have been some

$33 billion rather than $22 billion. But the

cumulative inflationary pressure under

looser pricing would have driven all dollar

figures upward by unknown amounts.

The contribution of renegotiation to close

pricing and inflation control cannot, of

course, be accurately measured. By postwar

standards the record of price and inflation

control for World War II was outstanding.

Much of the credit belongs to the OPA

which resolutely controlled prices in the

civilian goods and basic production sectors

of the economy. But the OPA was obliged

by administrative necessity no less than by

the representations of the armed forces to

rely upon the procuring agencies for control

of the prices of war goods. The services, in

turn, relied heavily on renegotiation in the

absence of adequate knowledge of costs at

the time contracts were let. It was largely

the development of renegotiation procedures

during the summer of 1942 which led to the

Henderson-Patterson-Forrestal agreement

exempting military goods from OPA ceiling-price control. It was also the recognition

of the inadequacy of blanket price control

as an instrument of profit control which led

the services to recommend against mandatory exemption from renegotiation of standard commercial articles and similar products—an exemption proposed on the

ground that these were subject to OPA

controls.

To the extent that it fostered close pricing

and avoidance of inflation, renegotiation

thereby promoted efficiency in the use of

real resources, the ultimate wartime scarcity.

Over and above efficiency resulting directly

from closer pricing, the constant emphasis

in renegotiation proceedings on productive

contribution and efficiency undoubtedly

added to the general wartime stimuli and

pressures in this direction. Although renegotiation was often criticized as a positive deterrent to efficiency, no convincing evidence

has been adduced. The alleged narrowness

in profit differentials allowed to contractors

of differing efficiency might well disappear

of such margins were calculated on the basis

of net worth rather than on total renegotiable sales. Moreover, each case must be reviewed on the basis of all the elements involved, in order to understand the results;

no single statistical figure affords the basis

for a meaningful comparison. In any event,

contractor complaints during the actual

course of their war production effort were

directed not at the narrowness of the profit

range (which was then unknown) but

against renegotiation in principle as a deterrent to efficiency. Despite the impossibility of accurate appraisal of relative efficiency

by renegotiators, it is probable that contractors were in no better position to make

such an appraisal. The presumption is that

renegotiators with a broad background of

business and financial experience, with an

abundance of information on numerous

factors for all firms in an industry, and without a financial stake in the settlements, could

make a more impartial and equitable appraisal.

In the eyes of Congress and the public at

large, the chief purpose of renegotiation was

to prevent a repetition of the debacle of

World War I, which yielded widespread ex- 52

 See above, page 388.
RENEGOTIATION: PRINCIPLES AND POLICY 395

TABLE 43—EFFECT OF RENEGOTIATION ON CORPORATIONS GROUPED BY VOLUME OF SALES,

1936-1939: 3,178 REFUND CASES RENEGOTIATED BY ALL DEPARTMENTS FOR FISCAL

YEAR 1943

[Average Dollar Amounts or Percentage per Case. Dollars in Thousands]

Source: Adapted from Table I, Congressional Record, Vol. 91, Pt. V, p. 6148.
396 THE ARMY AND ECONOMIC MOBILIZATION

orbitant profits and resulted in a protracted

era of resentment and controversy throughout the interwar period. Profiteering in

World War I gave color to the naive identification of war profits with the causes of

war and facilitated the short-sighted policy

of disarmament which left the United States

woefully unprepared when the rest of the

world was in flames. In terms of curbing unconscionable profits, renegotiation for

World War II will undoubtedly be recorded

as successful. Renegotiation recaptured one

third of all initial profits on military production. In individual cases the percentage of

recovery was much higher. In ten years of

postwar discussion there have been no

charges of general and unconscionable profiteering during World War II, and it is

doubtful that such charges will hereafter

arise.

On the other hand, it is patent that World

War II was highly profitable for American

industry despite the existence of both renegotiation and taxes. One study of the general order of the magnitude of profits finally

retained indicates that profits retained after

both renegotiation and taxes averaged some

15 percent of net worth for the largest firms

and 30 percent for the smallest. (Line 17,

Table 43.) When classified according to actual renegotiable sales in 1943, the final return on net worth after taxes ranged from

22.4 percent for the largest firms covered by

the study to 48.9 percent for firms with sales

between $100,000 and $500,000.53 While

there are some who would object to this general level of retained profits as too high, it

would appear to have been appropriate to

the restoration of a vigorous and dynamic

industrial economy after a decade of depression and stagnation.

Perhaps the chief defect of renegotiation

for World War II was the establishment,

under the statute, of two classes of business—that which was subject to renegotiation and that which was not. The exemption

of high profits on "nonwar" business at a

time when the country was at war, and when

high profits anywhere were primarily attributable to the war, was a poor way to reward all-out conversion to war production.

As already indicated, the specific exemptions

for selected industrial groups—whether

mandatory or permissive—were unjustifiable. In the absence of the general exemption for nonwar business, it is doubtful that

the numerous pressures for specific exemptions would have succeeded.

53

 Congressional Record, Vol. 91, Pt. V (14 Jan

45), 6148, Table II.
CHAPTER XVII

The Army and OPA Price Control

Background and Nature of OPA Price

Control

Direct control over prices, as contemplated by the Industrial Mobilization Plan,1

became the responsibility of the Office of

Price Administration in World War II. As

in the case of material controls, the development of the principles and machinery of

price controls was a gradual process.

Throughout 1940 and the early part of

1941, the NDAC Price Stabilization Division relied upon voluntary controls to keep

prices of basic materials and commodities

in line.2 On 11 April 1941, in response to

increasing upward pressure upon prices, the

President ordered the creation of the Office

of Price Administration and Civilian Supply.3

 During the remainder of 1941 a number of specific price controls were adopted,

but these were confined principally to raw

and semifabricated materials and exercised

relatively little direct effect upon the placement of prime military contracts. The absence of specific legislation authorizing price

controls and providing definite powers and

methods of enforcement was a considerable

handicap throughout the defense period.

Under these conditions, Army contracting

officers were forbidden to purchase items

containing materials bought at over-ceiling

prices without the prior written approval

of the Under Secretary of War.4 Complete

observance of this requirement would have

placed insuperable burdens of detection and

enforcement upon contracting officers, and

it has been suggested that price ceilings were

widely disregarded by contractors for military procurement during this period.5

With the advent of Pearl Harbor and the

introduction of comprehensive price control

legislation in Congress, the stage was set for

controversy over application of formal price

controls to military procurement.6 On 19

December 1941 the Secretary of War and

the Secretary of the Navy, after unsuccessfully appealing to the Senate Banking and

Currency Committee, addressed a joint letter to the President requesting inclusion in

the pending bill of a blanket exemption of

1

 See above, pages 93 and 229. 2

 (1) CPA, Industrial Mobilization for War, p.

33. (2) Worsley, Wartime Economic Stabilization,

pp. 25-26. 3

 Executive Order 8734. OPACS became OPA in

August 1941 with the transfer of Civilian Supply to

the Office of Production Management. Leon Henderson, the NDAC commissioner for price stabilization, was the head of OPACS and of OPA until

1943.

4

 (1) OUSW Memo, 9 Jul 41, sub: Price Stabilization. (2) OQMG Cir Ltr 156, 16 Jul 41. 5

 Worsley, Wartime Economic Stabilization, p.

136, citing T. J. Kinsella, War Procurement and

OPA (an unpublished manuscript in OPA Historical files). 6

 (1) H. Com. on Banking and Currency, 77th

Cong., 1st Sess., Hearings on H. R. 5479, Price

Control Bill, Pts. 1 and 2, August to October 1941.

Under Secretary of War Patterson testified strongly

in favor of vigorous price control legislation.

2:1519-52. (2) S. Com. on Banking and Currency,

77th Cong., 1st Sess., Hearings on H. R. 5990,

Emergency Price Control Act, 9-17 December 1941.
398 THE ARMY AND ECONOMIC MOBILIZATION

all Army and Navy purchases from control

by the Price Administrator. The Secretaries

also requested the power specifically to

exempt all materials, parts, and components

ultimately entering into military items by

certifying to OPA—either in advance or

after sale—that such exemption was essential to the defense of the United States.7

The reasons underlying this request have already been stated. They were, briefly, the

impossibility of setting—in advance of production—appropriate price ceilings on

novel, complex, military items having no

previous price or production history, and the

inevitable delays in contract placement and

execution if producers of such items were

squeezed between unpredictable costs and

arbitrary price ceilings.

Although the President was sympathetic

to the substantive arguments advanced by

the Secretaries, he was not in favor of their

proposal. On the following day he denied

their request, stating his reasons:

It is absolutely imperative that final authority be vested in one person, and the Army and

Navy must conform as well as everybody else.

. . . The price Control Administrator . . .

I am certain, will approve whatever exemptions are necessary. In the final analysis, if

the Army and Navy are turned down by the

Price Administrator, appeal always lies to

the President.8

The Emergency Price Control Act passed

on 30 January 1942 ratified all existing price

schedules, gave the Price Administrator the

power to issue maximum price regulations,

and declared purchases above authorized

prices to be illegal.9 No exemption was provided for war materials. The OUSW immediately advised the supply arms and services of the necessity for adherence to price

schedules and requested reports of all instances in which the negotiation of contracts

or the prosecution of war production was delayed by either the substance or the procedures of price control.10

The General Maximum

Price Regulation

On 28 April 1942 the OPA issued its

General Maximum Price Regulation freezing all prices, not specifically exempted or

otherwise controlled, at the highest figure

charged by each individual seller during

March 1942. In cases where individual

manufacturers, wholesalers, or retailers had

engaged in no transactions for a given item

during March, the ceiling price was to be

the highest price charged during that month

by the most closely competitive seller of the

same or similar items. Sections 9 and 10 of

GMPR provided that commodities and

services procured by the U.S. Government

would be exempt to the extent later specified

by individual price regulations. The effective date of the regulation was 11 May 1942

for manufacturers and wholesalers and 18

May 1942 for retailers.11

7

 Suggested addition of Section 208 to Emergency

Price Control Act, reproduced in ASF, History of

Purchases Division, p. 194. 8

 ASF, History of Purchases Division, p. 195. This

episode is described in greater detail in Connery,

The Navy and the Industrial Mobilization, pp. 227-

29.

9

 56 Stat. 23, 30 Jan 42. 10

 OUSW Memos, 31 Jan 42, sub: Price Control

Information, and 13 Feb 42, sub: Exceptions to

Maximum Prices. 11

 OPA GMPR Bull 1, 28 Apr. 42. The circumstances surrounding the issuance of GMPR are

well summarized as follows: "In the spring of 1942

prices were rising steadily and neither the Treasury

nor Congress were contemplating taxation or other

fiscal controls on a scale that seemed sufficient to

check the advance. Partly to gain time, partly as a

tactical move to force action by the Treasury and

Congress, and partly because it was the only available answer to an insistent demand for action, the
THE ARMY AND OPA PRICE CONTROL 399

The difficulties of devising suitable

exemptions to permit military procurement

to proceed without delay soon became apparent. Eleven days after the issuance of

GMPR, OPA announced postponement of

its effective date to 1 July 1942 with respect

to contracts of the War and Navy Departments.12

 During the "breathing spell" thus

provided, the OPA and the services entered

into intensive discussions in an attempt to

ease the impact of the new regulation upon

military procurement while protecting the

basic purposes of price control.

Early in May, Headquarters, ASF, with

the aid of the several technical services, prepared a long list of strictly military items,

including subassemblies, components, and

spare parts, for which it sought complete

exemption from OPA price controls. In addition to specific items, the list proposed to

exempt "all other equipment and supplies

purchased by the military forces or any

agencies thereof and for which there is no

standard commercial counterpart."

 13

 The

chief items remaining under price control

would be Quartermaster items of commercial or closely similar design.

The Quartermaster General (TQMG)

reacted violently to this proposal, which

would provide relatively complete exemption for the other technical services while

leaving his office saddled with all the substantive disadvantages and procedural red

tape associated with price control. He was

heartily in favor of general price controls

and the stabilizing effects they would have

upon the prices of military items as well as

upon the economy as a whole. Accordingly,

he opposed exemption of military items as

a class and suggested a provision enabling

the War Department, on its own authority,

to negotiate specific prices above the maxima in cases where essential to prompt procurement. A blanket exemption, he thought,

would be "something akin to burning down

the forest to remove a few dead trees" and

would subject War Department procurement officials to "the myriad forms of pressure that can and will be exercised once all

restrictions are removed."

 14

Implicit in TQMG's response was the

generally unsatisfactory position of Quartermaster items in the assignment of material priorities. If in addition to the disadvantages of lower material priorities the

Quartermaster Corps would also be subject

to discriminatory price controls, resources

in general would shift even further to the

production of noncontrolled items and procurement of Quartermaster items would be

more difficult than ever. Nevertheless, sensing that his basic recommendations would

not be acceptable, The Quartermaster General specified four major categories of items

to be included in any general exemption of

military items. These were vehicles, individual and organization equipment for troops,

General Maximum Price Regulation was issued."

J. K. Galbraith, "The Disequilibrium System,"

American Economic Review, XXXVII (June

1947), 290. Dr. Galbraith, who was Deputy Administrator of OPA, indicated the consequences if

prices under GMPR and other schedules had been

maintained without change: "It meant that all

kinds of accidental and often bizarre cost-price relationships would be perpetuated indefinitely."

Ibid., p. 295. 12

 OPA Supplementary Regulation 2 to GMPR,

9 May 42. This merely exempted deliveries prior to

1 July 1942. Since most contracts under negotiation during this period called for deliveries after

this date, the chief virtue of the postponement was

its indication that appropriate exemptions for war

goods would be adopted in the interim. 13

 Memo, Hq SOS for Dale Maxwell, 7 May 42,

sub: Price Regulation, and incl, cited in Yoshpe,

Production Control in the QMC, p. 67.

14

 Memo, TQMG for Deputy Dir for Procurement and Distribution, Hq SOS, 13 May 42, cited

in Yoshpe, Production Control in the QMC, p. 68.
400 THE ARMY AND ECONOMIC MOBILIZATION

special field equipment, and noncommercial-type subsistence supplies. In addition,

TQMG insisted upon the necessity for War

Department authority to negotiate individual prices above prescribed ceilings without

prior OPA approval.15

This proposal of The Quartermaster

General came too late for immediate adoption, since Headquarters, ASF, had already

reached an agreement with OPA. On 13

May 1942, OPA issued its Supplementary

Regulation 4, which exempted a long list of

military items and their specialized components from GMPR. In general, OPA retained control of all basic materials and intermediate parts of a commercial nature,

even when these entered into military end

items. This was done to minimize pressure

on price ceilings of goods entering civilian

consumption, as well as to prevent undue

diversion of production away from civilian

channels. These consequences would almost

certainly follow if military purchases of the

same goods were generally permitted at

prices above the ceiling for civilians. The

supplemental regulation also exempted developmental and secret contracts as well as

emergency purchases of less than one

thousand dollars.16

Supplementary Regulation 4 provided

exemptions only from the General Maximum Price Regulation. It left in effect all

the existing price regulations covering individual items and classes of items and likewise left the way open for new specific regulations, which might include any or all

military items previously exempted from

GMPR. Since there were in effect, as of 1

April 1942, 112 OPA price schedules on

items making up some 40 percent of the

Bureau of Labor Statistics wholesale-price

index, a substantial portion of military procurement was actually under price control.17

 The most heavily controlled sector

of Army purchases was Quartermaster procurement, with its large array of commercial-type items. Many Quartermaster items

were controlled by specific price schedules;

but more important, virtually no quartermaster items were exempted from GMPR

by the new supplementary regulation.

As a result of the sudden impact of

GMPR, the Quartermaster procurement

program was substantially slowed down.

Ten days after his earlier memorandum

eloquently pleading for retention of general price control over all War Department

procurement, TQMG addressed a communication to the Commanding General, ASF,

complaining of the paralysis of Quartermaster procurement and stating his inability to accomplish his mission "because of

this General Maximum Price Regulation."

 18

 Under the existing regulations,

QMC contracting officers could not compensate contractors for increased costs for

overtime and multiple shift operations;

hence their efforts to expedite delivery of

badly needed items were often in vain. Nor

could they make needed changes in design

and specifications for many Quartermaster

items, since such changes entailed increases

in costs which could not legally be covered

by price increases. Contractors endeavoring to live up to conservation and substitution measures promulgated by the War Production Board could not recoup their addi15

 Ibid. 16

 PR 1132.6.

17

 ASF, History of Purchases Division, p. 196.

An OPA survey in the summer of 1942 revealed

that "a surprisingly large number of war goods

remained under GMPR despite exemptions."

Worsley, Wartime Economic Stabilization, p. 144. 18

 Memo, TQMG for CG SOS, 23 May 42, sub:

Unsatisfactory Current Status of Procurement,

cited in Yoshpe, Production Control in the QMC,

p. 68.
THE ARMY AND OPA PRICE CONTROL 401

tional costs incurred in revamping production lines or purchasing higher priced substitute materials. The placement of many

new or renewal contracts was delayed as

contractors refused to accept March 1942

prices, which in many cases had reflected

the availability of inventories or deliveries

of materials and supplies under prior contracts negotiated with their own suppliers

months before at low prices. Moreover, the

procedural complexities required in order

merely to observe the legally established

price ceilings, to say nothing of processing

appeals for relief, were alone a formidable

barrier to rapid placement and execution

of contracts.19

Many of these difficulties were soon overcome as OQMG and the Purchases Branch,

ASF, negotiated with OPA to rectify the

inevitable shortcomings of a necessarily arbitrary, pioneer measure hastily adopted to

meet emergency conditions. A major improvement in the position of OQMG was

obtained on 3 June 1942, with the issuance

of Maximum Price Regulation (MPR)

157, covering a wide array of apparel and

related articles for military purposes. This

regulation allowed price increases to meet

increased material prices and wage rates, as

well as increased costs resulting from

changes in specifications and shortened delivery schedules.20

 Six days later, the OPA

granted complete exemptions from price

control to ski troop equipment, field stoves

and ranges, canteens, helmet liners, wire

cutters, identification tags, metal insignia

for enlisted men, paratroop knives, certain

field rations, and related items.21 Field jackets were exempted from GMPR on 27 May

1942. Highly important exemptions were

obtained in a series of revisions of Supplementary Regulation 4, beginning on 1 July

1942. These included automobiles, trucks,

trailers, and amphibians sold for military

purposes, their spare parts and components,

additional field rations, certain categories of

canned meats, and specified dried and dehydrated fruits and vegetables sold to the

armed forces. With the addition of these

exemptions OQMG's request of 13 May

1942 was substantially fulfilled.22

In addition to relief for specific items,

mostly in the area of Quartermaster procurement, the Army also soon obtained a

number of important general modifications

in OPA regulations. On 23 June 1942 the

crippling limitation of the existing one thousand dollar maximum upon emergency purchases was removed from GMPR.23

 On 11

July 1942 contracting and finance officers

of procuring agencies were relieved of all

criminal and civil penalties imposed by the

Emergency Price Control Act. This action

freed contracting officers from the necessity

of ascertaining that all prices in their procurement contracts conformed to OPA ceiling limitations; it did not, however, relieve

sellers of their liability for failure to observe

ceiling prices in war contracts.24 Later in

the year all sales and deliveries of commodities or services by the War Department

19

 Paralysis of QM Procurement Under Impact

of GMPR, in Yoshpe, Production Control in the

QMG, p. 68; also p. 71. 20

 Ibid., p. 69. 21

 Amendment 2 to Supplementary Regulation

4 to GMPR, 9 Jun 42.

22

 Yoshpe, Production Control in the QMC, p.

69.

23

 Amendment 5 to Supplementary Regulation 4

to GMPR, 23 Jun 42. Maximum Price Regulation 157 was similarly amended by its Amendment 3, 6 July 1942. Many other, but not all,

MPR's eventually carried the same provision. PR

1132.5 (8-31-44). 24

 (1) OPA Supplementary Order 7, 11 Jul 42.

(2) PR 1132.7 (8-31-44). Further details are

recounted in Worsley, Wartime Economic Stabilization, pp. 141-42.
402 THE ARMY AND ECONOMIC MOBILIZATION

through its canteens, commissaries, post exchanges, and other sales stores were exempted from OPA price regulations.25

One of the most significant features of

the entire structure of OPA price controls

as related to military procurement was

adopted on 3 June 1942, when a formal

procedure was established to allow individual firms to seek relief from price ceilings affecting specific war contracts and

subcontracts.26 Under this arrangement

contracts and subcontracts "essential to the

war program" could be awarded at higher

than ceiling prices provided the seller within

five days filed an application for adjustment with the OPA. Originally, the regulation permitted payment, as well as negotiation, of the over-ceiling contract price,

subject to possible refund by the seller if

his appeal were denied by OPA. This was

subsequently changed to permit payment

only up to the ceiling price until a positive

ruling was made by OPA granting the

over-ceiling price. The role and experience

of the War Department in this procedure

will be discussed briefly at a later point.27

Specific Price Regulations

Affecting Procurement

The foregoing modifications and exemptions eased the impact upon military procurement of the burgeoning new price controls which came into being in the first

half of 1942. But no sooner had major relief

from GMPR been obtained than specific

price regulations were drafted by OPA

which proposed to retract major exemptions

and threatened serious interference with

procurement of military items. On 1 July

1942, OPA revised its machinery regulation (MPR 136), bringing a number of

new items under control. The amended

regulation, which became effective on 22

July 1942, imposed price controls on many

important items procured by the armed

forces, such as gasoline-, steam-, and dieselengines, pumps and compressors, construction equipment, and even radio and radar

equipment, as well as accessories and services necessary to the manufacture and maintenance of the items concerned. Inasmuch

as an earlier version of MPR 136 had been

issued without consulting them in advance,

the Army and Navy were particularly sensitive on the subject.28

More serious than the machinery regulation were steps taken by OPA to place two of

the Army's key combat items—aircraft and

tanks—under price control. For some time

the OPA had been concerned over

the inflationary effects—upon wage rates,

uncontrolled materials, and "wage goods"

(consumer goods attracting heavy expenditures by wage earners)—of the tremendous

expenditures of the aircraft industry operating largely under cost-plus-a-fixed-fee contracts. Accordingly, the OPA drafted a

proposed aircraft regulation which would

establish ceiling prices under a formula using

wage rates, materials costs, and other factors

in existence on 31 March 1942. Meetings

25

 OPA Supplementary Order 27, 14 Nov 42.

The OPA retained the right to impose price controls oh such sales whenever it deemed necessary.

PR 1134.2 (2-8-45). 26

 OPA Procedural Regulation 6. PR 6 procedure—the name popularly given to the use of this

regulation—was in addition to standard provisions

of the Price Control Act for relief from ceilings.

Standard provisions for relief included protests

against regulations within sixty days after issuance, petitions for amendments or adjustments,

and requests for OPA interpretation of regulations.

Worsley, Wartime Economic Stabilization, p. 142. 27

 See below, pages 409-10.

28

 (1) Connery, The Navy and the Industrial

Mobilization, p. 229. (2) Worsley, Wartime Economic Stabilization, p. 143. (3) ASF, History of

Purchases Division, pp. 198-99.
THE ARMY AND OPA PRICE CONTROL 403

were held with representatives of the aircraft

industry to discuss the proposed schedules,

and preliminary negotiations for a similar

schedule were also made with the tank

industry.29

General Exemption of Military Items From

OPA Controls

These major moves to reverse the policy of

exempting strictly military items from price

control alarmed both the Army and Navy,

to say nothing of the affected industries. The

aircraft industry protested vigorously that

it could not operate under the proposed

schedule, especially under wage rates retroactively reduced to March 1942 levels.30

In view of the urgency of the matter, the

War and Navy Departments, acting jointly

through their Under Secretaries, took

prompt steps to obtain a binding decision

that strictly military items would thenceforth

be exempted, and kept exempt, from OPA

price control.

On 23 July the Under Secretaries addressed a lengthy memorandum to Leon

Henderson, the price administrator, requesting such a decision and stating in great detail

the reasons therefor. The Under Secretaries

emphasized the paramount importance of

obtaining munitions on time, the special

difficulties of military production (the creation of new facilities, acquiring and training labor, learning how to produce novel

and complex equipment), and other considerations precluding the establishment of

firm prices in advance of production. They

indicated the crippling effects of both the

substantive and procedural requirements of

price controls under these conditions. The

memorandum also indicated that the price

of military items was only indirectly related

to general inflation; the government alone

purchased military items and their prices did

not enter into the cost of living. Nor did

the prices of military items determine the

underlying raw material and commercial

component prices; these were subject to

price control by the OPA, to which control

the War and Navy Departments subscribed

even though they made many purchases of

these and other civilian-type goods. The only

contribution of the prices of military items

to inflation was through the distribution of

excessive wages and profits. High profits

would be recouped through renegotiation

and the excess profits tax; inflationary wages

could only be satisfactorily prevented by

adequate wage stabilization measures,

which would have to be adopted in any case

if price ceilings were to be maintained.

Finally, the memorandum indicated that

the services were making steady and substantial progress in developing organizations, procedures, and policies for the sound

pricing of military procurement. With the

gradual stabilization of costs, the systematic acquisition of cost data by contracting

agencies, and the development of new pricing techniques, the services would be able

to perform a far more satisfactory job of

pricing than could be accomplished by

price ceilings of either the dollars-and-cents

or formula variety. If OPA controls were

to be imposed on war goods, the task of

military procurement would be hopelessly

divided, with the OPA supplanting the War

and Navy Departments in actual negotiation of contracts.31

29

 Galbraith, "The Disequilibrium System." p. 299.

30

 Connery, The Navy and the Industrial Mobilization, p. 229.

31

 Memo, Patterson and Forrestal for Henderson,

23 Jul 42, sub: Maximum Price Regulation of

Military Equipment. The full text of this important memorandum is reproduced in ASF, History

of Purchases Division, pp. 199-206.
404 THE ARMY AND ECONOMIC MOBILIZATION

The effect of the Under Secretaries'

memorandum, combined with other developments, led to OPA acceptance of the

basic principle of exempting all specifically

military items from maximum price controls. On 16 September 1942, Mr. Henderson replied at length, agreeing "to refrain, at this time, from further extension

of maximum price control in the area of

strictly military goods." Although he did

not see eye to eye with the Under Secretaries on all their arguments, Mr. Henderson was not concerned with "who does the

job of preventing inflation in the military

goods area as long as it is done effectively."

His agreement to the general exemption was

conditioned upon adequate assurances from

the War and Navy Departments that they

would use all their powers to control both

prices and profits as effectively as possible,

and that they would furnish OPA with sufficient information on prices and procedures

in the military-goods area to appraise the

effectiveness of the services' pricing operations. At the same time, Henderson expressed assurance that the OPA would "expeditiously grant upward adjustments in

maximum prices established for goods

which remain under price control and

which are purchased by the Services or by

prime or subcontractors if such adjustments

are necessary to cover costs and permit reasonable overall profits for the applicant

concerned."

 32

For several weeks thereafter representatives of the OPA and of the services conferred on how to define the line of demarcation separating "strictly military goods"

from all others. Mr. Henderson's letter of

16 September had referred to the exempted

area as:

. . . commodities which are in such form 

they will be used only for military purposes,

except the sale made by the manufacturer

who is the first to put the commodity in such

form. Drawing the line above, as it were,

rather than below the first emergence of the

article in such form is necessary in order to

avoid anomalous situations such as exemption

of some rough castings while others, also

destined for military use, remain under such

control.

The services were concerned that this division, if literally adhered to, would mean

OPA regulation of the prices of each finished military article. The OPA representatives made clear that such was not the

intention:

By this statement we meant, in general, to

cover only the first stage of processing, counting from the raw material up toward the

finished product, where the article emerges

in a form useful only for incorporation into

a military item. Ordinarily, where the first

stage and one or more subsequent stages of

processing are performed by an integrated

producer, the sale of his product at the second

or later stage will be exempt.33

Agreement was reached on this basis,

with the understanding that the details in

particular cases would be determined later

on their merits by mutual agreement. Having thus established the general line of demarcation, both the OPA and the services

agreed that they would not seek to disturb

existing regulations, whether above or below the line of demarcation, unless these

gave rise to practical difficulties in either

price control or procurement. The general

32

 Ltr, Henderson to Patterson, 16 Sep 42. This

letter is reproduced in full in ASF, History of Purchases Division, pp. 207-12.

33

 Ltr, Donald H. Wallace, Dir Industrial Manufacturing Price Div OPA, to Maj Vaughan, Chf

Price Administration [Adjustment] Br Hq SOS, 29

Oct 42, copy in History of Ordnance Pricing Policy, Exhibit 5.
THE ARMY AND OPA PRICE CONTROL 405

agreement, embodied in several major documents including the correspondence already cited, became known as the Henderson-Patterson-Forrestal agreement, and was

summarized and announced in a joint press

release on 12 November 1942.34

This agreement between the OPA and

the services remained intact for the remainder of the war. It has been estimated that

approximately 35 percent by dollar value

of Army purchases was left under OPA control from mid-1942 to V-J Day.35

 After

the adoption of the Henderson-PattersonForrestal agreement the OPA made no major, formal criticism of the services' pricing

policies for exempted goods, and the task

of developing and applying such policies

rested completely upon the services. This

reflected the growing acceptance throughout the OPA of the Army-Navy view that

maximum price controls for purely military

items were unnecessary:

For war goods, i.e., end products, capital

goods, components or materials monopolized

or largely monopolized by military employment, price control is, in principle, unnecessary. The monopsony of the procurement

authority, especially when supplemented by

actual or moral power to requisition, is an

adequate substitute for price control.36

Also:

During the course of that summer the

Under Secretaries of War and Navy sought

to have all war goods "without a civilian

counterpart" excluded from price control.

Partly because of this pressure and partly because wage stabilization came into being, the

OPA abandoned the field. By present standards this was a happy withdrawal; it saved

the agency from a complex and unrewarding

task and one that in principle, was unnecessary.37

Procurement Problems Arising From Price

Ceilings

Despite the exemption of some two thirds

of Army procurement from OPA control,

the Army's problems resulting from the application of price ceilings remained substantial. The majority of these problems

centered upon Quartermaster items, especially food and apparel; but ceilings on lumber for Engineer construction projects, machinery and metals for Ordnance items,

insecticides and other Medical Department

purchases, as well as on general items such

as packing and packaging, gave rise to continual difficulties and the necessity for relief.38

 A detailed study of the effects of price

control upon Army procurement is outside

the scope of the present volume; a few illustrations may serve, however, to indicate

the seemingly endless complexities of price

control which harassed the Army, the OPA,

other governmental agencies, and contractors in the affected programs.

An Industry Case Study: Canned Meats

One of the most difficult areas of price

control was that of meat and meat products.

34

 See documents in History of Ordnance Pricing Policy, Exhibit 5. 35

 ASF, History of Purchases Division, p. 215.

Elsewhere it was stated that "approximately 62

percent of the value of all War Department contracts agreed on by the Under Secretary of War

and the Price Administrator in September, 1942

continued to be exempt from OPA price control."

ASF Annual Rpt, 1944, p. 119. 36

 Galbraith, "The Disequilibrium System," pp.

296-97. For definition of the term monopsony, see

above, page 244, note 28.

37

 Ibid., p. 299. In a footnote on the same page

Dr. Galbraith states: "I also had begun to doubt

that control in this field had any close bearing on

the problem of inflation. Mr. Henderson, although

formally committed to the use of price controls

in this area, had, I believe, more than passing sympathy for this view." 38

 Worsley, Wartime Economic Stabilization,

Ch. 15.
406 THE ARMY AND ECONOMIC MOBILIZATION

The Army's experience with regulations

covering canned meats indicates the practical difficulties in the way of establishing a

balanced array of price ceilings for all vertical and lateral segments of a complex industry. The principal price controls affecting canned meats were the GMPR and

various editions of three Maximum Price

Regulations, all in effect by the middle of

July 1942. The first of these (MPR 148),

issued on 21 May 1942, covered a variety

of pork products, including luncheon meat,

sausage, ham, bacon, and pork and gravy.

A second regulation (MPR 156), issued on

2 June 1942, covered nine canned items procured by the Army—including corned beef,

meat and vegetables, and other items of beef

and pork. The third specific regulation

(MPR 169), effective 13 July 1942,

covered beef carcasses and cuts suitable for canning.39

A major difficulty under these regulations

was the so-called squeeze experienced by

processors of canned meats whose own products were subject to price ceilings but who

were faced with uncontrolled and rising

prices of their raw materials. Under these

circumstances meat canners refused to submit bids in response to Quartermaster solicitations. Thus in the spring of 1942 the

Chicago Quartermaster Depot was faced

with the responsibility of procuring for the

various components of the armed forces

some 10 million C rations and 15 million

dozen units of other canned items covered

by MPR 156. Of ten canners solicited all but

one declined to bid, and after two months

less than a million of the C rations and 22

percent of the other items had been purchased. Potential contractors uniformly replied that the high cost of boneless beef precluded their supplying products at ceiling

prices under MPR 156 without experiencing a substantial loss.40

Various proposals were made to break the

bottleneck, including blanket allocations of

meat to the armed forces, Army purchases of

meat for canners, and arrangements for the

Chicago Quartermaster Depot to act as a

clearinghouse in reporting available meat

supplies. None of these suggestions was

adopted. Instead, the OPA on 24 July temporarily removed from ceiling-price control

seven of the nine items covered by MPR

156.41 These exemptions were to last only

until the end of the year. Although the situation was temporarily eased, it was not long

before contractors under long-term contracts had to ascertain what the future policy

would be. The Chicago Quartermaster

Depot was particularly anxious that ceilings

not be re-established, on grounds that they

would result in both higher prices and additional barriers to procurement:

. . . if new ceilings should be establishe

a rather low level we know that some of our

biggest suppliers will automatically be eliminated, on the other hand, if a ceiling at a

middle or high level should be established,

there will be a tendency for all contractors

who have been selling at prices below the

ceiling to raise their bids and in the long run

this will cost the Government money.42

This tendency of specific dollars-and-cents

ceiling prices to curtail badly needed sup39 plies, or to operate as highly profitable Massen, Canned Meats Procurement for the

Armed Forces During World War II. This monograph supplied the material for the discussion in

the following pages of Army experience under OPA

meat price controls. Documents cited in notes 40 to

51, below, are quoted more extensively (at pages

181-95) in the study by Miss Massen.

40

 Memo, Brig Gen Joseph E. Barzynski, CQMD,

for TQMG, 4 Jul 42. 41

 Amendment 1 to MPR 156, 24 Jul 42. 42

 Memo, Lt Col J. W. Fraser, CQMD, for Brig

Gen Carl A. Hardigg, OQMG, 14 Nov 42.
THE ARMY AND OPA PRICE CONTROL 407

"bulk-line" prices for an industry composed

of many firms with widely differing unit

costs, was a common barrier to efficient procurement.43

 The output of marginal and

inefficient producers was needed to fulfill

the Army's procurement program, but procurement officials preferred to negotiate differential prices close to the costs of individual

producers rather than to pay a single price

high enough to cover the costs of all producers. The following statement indicates

the faith of procurement officers in their

ability to avoid paying inflationary prices:

If the Office of Price Administration will

leave it to our judgment we feel justified in

assuring them that we will not pay inflationary prices for canned meats.44

A similar observation points to the inflationary possibilities of ceiling prices themselves:

. . . if any price ceilings were affixed they

must recognize a spread of at least 8 to 10

percent between the relatively low cost of

large efficient canners and the higher cost of

either small or inefficient canners; and that

the ceilings would tend to become the bid

price in all cases, thus depriving the Army

of its present ability to keep prices down

through competition.45

Numerous discussions throughout the remainder of 1942 led finally to a "midnight

hour" extension, on 31 December 1942, of

the exemption until 1 April 1943. The same

cycle of events was repeated in the early

months of 1943, and on 1 April 1943 the

expiring exemption was indefinitely extended.46

The above-mentioned exemptions on finished beef products permitted contractors

to bid up the price of beef suitable for canning purposes, and added to the increasing

demand for basic price controls over livestock and intermediate products. Although

carcasses and cuts of beef were subject to

dollars-and-cents ceilings by the fall of

1942, slaughtering canners were not affected by controls at the carcass or cut level

and "tended to bid low-grade cattle up to

inordinately high prices, since they were

exempt from price regulation on canned

goods until January 1, 1943, and thus

could pass the higher finished costs on to

the Army."

 47

 At the same time, nonslaughtering canners found it virtually impossible to obtain meat supplies which

would enable them to accept or fulfill Army

contracts:

We have contacted all the packers here

anywhere from one to three times per day

to purchase boned canners and cutters for

our contract and each day it tightens up more

and more. The packers here are shying away

from this type of meat, as they can not break

even on the price they have to pay for cattle.

With no ceiling on live cattle, they all shy

away from the business . . . .48

Nor was the absence of balanced price controls throughout the meat industry to blame

for all of the shortage. By February 1943

substantial black market operations were

43

 The term "bulk line" gained currency during

the price administration activities of World War I.

It referred to the establishment of a price high

enough to cover the costs of firms producing the

bulk of the output required from a given industry.

Bulk-line prices inevitably yielded substantial profits

for the more efficient firms while failing to cover

the costs of marginal firms. 44

 Fraser memo cited above, note 42. 45

 Ltr, Gen Hardigg, OQMG, to OPA, (Attn:

Dr. Phillip Wernette), 21 Nov 42.

46

 Massen, Canned Meats Procurement for the

Armed Forces During World War II, pp. 182-86. 47

 Ibid., p. 191. 48

 Ltr, M. L. Sandier, Vernon Canning Company, Los Angeles, California, to CQMD (Attn:

Mr. John E. Staren), 17 Feb 43.
408 THE ARMY AND ECONOMIC MOBILIZATION

diverting badly needed supplies from the

Army and its sister services:

. . . after scouring the market for meat as far

south as Baltimore, Md., and north to Cortland, N. Y., we are unable to find a slaughterer

who is willing to sell us meat at established

ceiling prices. Upon inquiring as to the reason

for their refusal, the majority of the people

contacted, told us that Black Market operators

bid up the price of live stock to where the

legitimate buyers cannot buy these cattle,

slaughter, dress and bone them, and sell the

meat at ceiling prices.49

On the same day a Texas canner reported

that black market conditions in his part of

the country had reached such proportions

that his own purchases had been cut from

one thousand live animals per day to less

than one hundred: "The entire supply of

livestock has been taken by the operators . . .

we know are not operating within their

Restriction Order or within the correct

OPA structure."

 50

Difficulty was experienced, in the meantime, with canned items which had not been

exempted. In the case of commercial-quality corned beef, a $32 price per dozen

6-pound cans had been set by OPA on the

assumption that beef trimmings, selling at

14 to 15 cents per pound, would be used

in preparing the finished product. Army

specifications demanded a higher quality of

meat, but the OPA nevertheless applied

its regulation, based on the presumed use

of inferior trimmings, to Army purchases.51

Fortunately, about this time an important ideological bottleneck was broken and

high-grade South American beef, which

had long been denied access to markets in

the United States, was allowed to ease the

general meat shortage.52 In the case of pork

products, ceilings were continuing to

squeeze processors and to hinder Army procurement. One manufacturer of luncheon

meat stated that even with the latest machinery and efficient production lines he

could net only one-half cent per pound under the existing ceiling, a margin too small

to make production worth while.53

The squeeze which took place under price

ceilings occasionally resulted in absolute

unprofitability; that is, prices were insufficient to cover costs. In most cases, however,

there was no question of actual losses. Relief from price ceilings was generally sought

because of the presence of an opportunity

to earn a greater profit by producing items

other than the ones under the ceilings in

question.54 Under these circumstances the

use of the words "squeeze," "substantial

losses," and similar terms was of doubtful

49

 Ltr, Mr. Albert Menner, Menner Packing

Company, Newark, New Jersey, to Staren, CQMD,

4 Feb 43. 50

 Ltr, G. L. Childress, General Manager Houston

Packing Company, to John J. Madigan, Chf Meat

Br OPA, 4 Feb 43. 51

 This type of situation occasionally forced the

Army to make liberal interpretations of its authority to award "developmental" contracts. These

were exempt from price controls until costs could

be ascertained as a basis for appropriate ceilings.

All such contracts were regularly reported to OPA,

with relevant information, and OPA had the right

to terminate the developmental period at any time.

(1) Massen, Canned Meats Procurement for the

Armed Forces During World War II, pp. 187-88.

(2) PR 1132.4 (8-31-44). (3) Worsley, Wartime

Economic Stabilization, p. 206, citing an OPA

official who felt that the services "occasionally

abused" their exemption privilege for developmental and secret contracts. 52

 Massen, Canned Meats Procurement for the

Armed Forces During World War II, pp. 150-58,

183.

53

 Ibid., p. 184. 54

 The term "opportunity cost" is used in economics to describe the cost of surrendering a more

desirable or profitable alternative. It is measured

by the difference in return, or profit, between the

most desirable alternative and the one actually selected.
THE ARMY AND OPA PRICE CONTROL 409

propriety, particularly for a nation at war

in which the "opportunity costs" facing

soldiers in the front lines were also rather

high. Nevertheless, the Army as well as the

OPA was forced to reckon with the vitality

of the profit motive, and perhaps the major

part of the practical, day-to-day administrative activities under price control consisted of continual adjustments designed to

equalize the returns from all legitimate operations. Only by minimizing the existence

of undesirable opportunity costs could production, in so far as it was determined by

price considerations, be kept in the channels

most effective in promoting the war effort.55

Relief of Individual Contracts

From Price Control

The foregoing discussion illustrates a few

of the procurement problems associated

with the establishment of ceiling prices for

a given industry or product line. Also important in the Army's experience under

OPA price control was the problem of obtaining relief from ceilings for particular

contracts essential to the procurement program. This involved the submission to the

OPA, by individual firms, of applications

for approval of over-ceiling prices under

Procedural Regulation 6. Under this procedure contracts would be negotiated and

production undertaken at over-ceiling prices

but final payment of the excess over the

ceiling could not be made by the procuring

agency unless and until approval was

granted by OPA.

The two major issues under the PR-6

procedure were the criteria used by the

OPA in allowing over-ceiling prices, and

the procedural delays and complexities involved. The publicly announced standards

established by OPA permitted price increases under PR 6 only if they were necessary to cover the costs of the item concerned, unless the firm's over-all earnings

were less than its base-period (1936-39)

average. In the latter case, a sufficient profit

was allowable so that the seller could reasonably be expected to undertake production of the item in question. If the firm was

currently earning between 100 and 115 percent of its base-period average, the allowable price under PR 6 could not exceed

total unit costs. If earnings exceeded 115

percent of the base-period average, only

manufacturing costs were allowed.56

Since the over-all profit position of the

vast majority of firms was considerably in

excess of 115 percent of the base-period

average, the official PR-6 criteria offered

no incentive to most contractors to undertake production of the items involved. The

War Department's official position, in contrast to that of the OPA, was that each contract should offer an incentive for its own

placement and execution, and that excessive over-all profits should and could be

handled by renegotiation and other means.

It was the general experience of the War

Department that lack of a specific incentive

was often a serious deterrent to procurement, "particularly when new facilities are

55

 Worsley, in reviewing the World War II experience, pointed to the administrative impossibility of achieving practical price equality in all

areas. In view of this he recommended, for similar

circumstances in the future, the fullest use of mandatory orders, requisitions, set-asides, and other allocations to force acceptance of reasonable profit

allowances, regardless of higher profit opportunities elsewhere. Wartime Economic Stabilization, pp.

211, 215. 56

 OPA Field Price Instruction 5.
410 THE ARMY AND ECONOMIC MOBILIZATION

required or an unprofitable item must go

back in production."

 57

Although the OPA officially never retreated from its position that a firm's overall profits should govern individual price

decisions, many of its branches and field offices were actually making use of much

more generous criteria. This divergence between precept and practice resulted in

widespread lack of uniformity and was subject to much criticism. Contractors were reluctant to accept orders and embark upon

production if the most they could hope for

was to break even on their new contract.

The preparation of applications under PR

6 required the assembly of detailed cost information, statements of earnings during

base-period years, and other time-consuming details. The OPA was often slow in

reaching decisions—an inevitable result of

the nature of the task and the perennial lack

of a sufficient, trained staff to do the work.

Moreover, many officials within OPA were

extremely skeptical of the significance and

accuracy of unit-cost data, and therefore

of the validity of any judgments based

thereon. The following statement by a high

OPA accounting official highlights a problem which permeated all procurement pricing throughout the entire war:

No form calling for unit-cost information

will produce particularly reliable results. This

ought to be recognized by all those dealing

with such matters. In general, unit-cost information derived by this method should be

used, unchecked, only in the most trifling

cases, where a little information can make no

great difference. There is a strong tendency,

even among our most sophisticated economists and business specialists, to attach

entirely too much weight to these computations. They look impressive; they add up;

but our experience in field checking them

in many branches is that they overstate

actual costs 10 to 50 percent. This does

not mean that those who submit them are

dishonest; or even that their accounting

records are bad. It means only that any

statement of unit costs is subject to the

exercise of large doses of judgment. Obviously

the judgment will always be exercised in the

direction of liberality. . . . in all cases of 

importance a field examination should be

made by a member of the accounting staff.58

The War Department's role in the PR-6

procedure for obtaining relief from ceiling

prices was that of an interested party, since

any government agency could appear as a

party in the case of any application. The

nature and principal details of the procedure were described in Army Procurement Regulations, and contracting officers

could at the time of contract negotiation

give preliminary advice to contractors on

the merits of their case and the extent to

which the War Department would support

it. Applications involving contracts exceeding $5,000,000 had to be filed with the OPA

in Washington, D. C.; for smaller contracts

they could be filed with an OPA regional

office.59 At the policy level, the Purchases

Division, ASF, attempted to prevail upon

OPA to modify its general criteria in granting relief. Although the Army was not officially successful in PR-6 cases, it succeeded

in obtaining more liberal criteria under

similar procedures specially established under separate regulations.60

57

 ASF, History of Purchases Division, pp. 218-

19.

58

 Memo, H. F. Taggart, Chf Accounting Div

OPA, for Wernette, 3 May 43, sub: Revision of

Form OPA-6PR1, cited in Worsley Wartime Economic Stabilization, p. 187. 59

 PR 1131.6 (8-31-44). 60

 Notably, in the case of important textile items

which were "squeezed" as a result of the Bankhead

amendment to the Emergency Price Control Act

in 1944. (1) ASF, History of Purchases Division,

pp. 215-17. (2) OPA Supplementary Order 107,

9 Mar 45.
THE ARMY AND OPA PRICE CONTROL 411

Concluding Observations

Despite the many administrative and substantive problems faced by the War Department as a result of OPA price controls,

Army procurement officials were well aware

of the importance of the price stabilization

program—both to the economy as a whole

and to the Army's own procurement program. The remarkable success of the United

States in preventing widespread inflation

throughout World War II—an achievement largely attributable to the tireless efforts and firm leadership of OPA—permitted the conduct of an orderly procurement program which would otherwise have

been impossible. The effects upon Army

procurement of OPA price control, as seen

by those who participated in the World War

II procurement program, have been summarized as follows:

Probably the most significant effects have

been as a result of the stabilization of the general price level. The negotiating of firm prices,

which in so many instances in World War I

was impossible because of the instability of raw

material costs, has in this war been possible as

a result of the stabilization of the general price

level.

In addition to the usual business advantages resulting from a stabilized level of prices,

tremendous savings accrued to the benefit of

the War Department in its vast procurement

program, particularly at the lower level of

the industrial processes where prices are beyond the control of the War Department.61

For its part the Army went to a great deal

of effort to fulfill its basic agreement with

OPA. As indicated in previous chapters, a

major division of War Department procurement policy and activity was the closepricing program for military goods. To keep

OPA informed of the results of these efforts,

the Army developed a series of index numbers reflecting the trend of prices in all principal categories of Army procurement.

These index numbers were prepared on a

monthly basis for the period 1 January 1942

to mid-1945. (Table 44)

The items included in the Army's price

indexes comprised some 50 percent of all

War Department purchases and were

broadly representative of all War Department procurement. In preparing the indexes

all new contract prices as well as price revisions under existing contracts were utilized, with allowance for specification

changes, packaging, freight, and other factors necessary to maintain comparability in

the various time-segments of the series. Except for Army Air Forces contracts, no

CPFF contracts were included in the indexes; likewise, items produced in GOCO

plants were excluded. Price changes resulting from lump-sum refunds that could not

be allocated to specific contracts were not

included; hence, the index numbers do not

reflect the full downward price movement.

Appropriate weights were applied in combining index numbers of different items,

item groups, and technical services.62

Except for Quartermaster procurement,

which was heavily weighted with civilian

and civilian-type goods, the Army's price

indexes revealed a continuous decline in unit

prices from 1942 to the end of the war. Although they could not, in the nature of the

case, indicate that prices were uniformly

held close to cost or that costs themselves had

been adequately controlled, the indexes provided substantial evidence of a wholesome

trend in the prices of military goods. This

61

 ASF, History of Purchases Division, pp. 219-

20.

62

 Tables of monthly price changes in ASF,

Monthly Progress Report, Section 1-D, Contract

Price Changes, 30 Jun 45, pp. 7, 18.
412 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 44—QUARTERLY INDEX OF CONTRACT PRICE CHANGES: 1942-1945 FOR WAR

DEPARTMENT AND COMPONENT AGENCIES

[October 1942 = 100]

Source: Tables of monthly price changes in ASF, Monthly Progress Report, Section 1-D,"Contract Price Changes, 30 Jun 45, pp. 7, 18.

conclusion is reinforced by comparison with

the trend of prices for commercial and

civilian-type goods, which showed moderate

increases over the period in question.

The Office of Price Administration was

skeptical of the significance of the Army's

price series because of the inability of endproduct price series to reveal the trend of

costs and profits margins. But the task of

obtaining throughout the war accurate and

detailed cost estimates on an item-by-item

basis, especially for the output of multiproduct firms, was beyond the practical

capacity of any agency. Indeed, the OPA

itself measured its own success in holding the

line against inflation by using Bureau of

Labor Statistics price series subject to the

same defects and in areas where profits on

commercial business were even greater than

those in war goods.63

63

 Worsley, Wartime Economic Stabilization, pp.

204-05.
CHAPTER XVIII

The Army and Small Business

One of the most difficult and controversial tasks in the whole field of economic

mobilization for World War II was that of

properly harnessing small business in the

military procurement program. The Army's

experience with small business from 1940 to

the war's end went through three distinguishable phases. The first phase extended

from the summer of 1940 to the summer of

1942, when the problem of small business

emerged and received nationwide attention.

The second phase, from the summer of 1942

to the end of 1943, was a period of transition

during which legislation, organizations, and

procedures were developed to provide a systematic solution of the small plants problem.

The final phase, from early 1944 to the end

of the war, witnessed the operation of the

small war plants program in high gear and

the successful attainment of its basic objectives.

Emergence of the Small Business Problem

Early Attitudes and Efforts

of the War Department

In attempting to build a huge new Army

from scratch, procurement officials proceeded with a basic purpose in mind. This

was to obtain the desperately needed munitions in adequate quantity and quality with

a minimum of delay. Under the circumstances the Army's purchasing policy was

comparable to that of a rational individual

or private corporation: it concentrated on

its major objectives and responsibilities,

placing its procurement contracts with

those firms which, all factors considered,

appeared to be most capable of providing

satisfactory delivery.

In the early months of the defense period

this policy received little or no criticism.

Many small firms received defense contracts, many more became subcontractors,

and all sectors of business prospered under

the stimulus of the rearmament program

following ten years of depression. By the

spring of 1941, however, two developments

began to appear. First, the growing shortage of materials made it difficult or impossible for an increasing number of firms

to continue operations. The chief sufferers

were small firms without defense contracts

and hence without benefit of priority status.

Secondly, accumulating statistics on contract placement revealed a high concentration of prime contracts among the largest

corporations. In July 1941, OPM released

statistics indicating that prime contracts of

the Army and Navy with fifty-six companies accounted for three fourths of the dollar value of all prime contracts; six corporations held over $3 billion, or 31.3

percent of the total; and Bethlehem Steel

alone had contracts of $927 million out of

$9.8 billion.1 This concentration, together

1

 CPA, Industrial Mobilization for War, p. 147.

Later statistics showed that of more than $11 billion in prime defense contracts awarded in the
414 THE ARMY AND ECONOMIC MOBILIZATION

with the development of actual hardship in

the case of many small firms and local communities, led to criticism of the Army's contract placement policies. These criticisms

ran the gamut from inertia and neglect on

the part of procurement officials to positive

discrimination against small business under

influence and pressures brought to bear by

large corporations.2

There were many reasons why the bulk

of Army orders during the defense and early

war periods went to the larger firms. The

principal and most compelling reason was

the greater suitability and dependability of

large firms for most production of the kind

required by the Army. The predominant

portion of the rearmament program, in

terms of both dollar value and importance

to the Army's fighting power, consisted of

critical items of equipment—complex difficult-to-produce items requiring under the

most favorable circumstances a lengthy

period of production. The delivery of these

items in time to meet the crisis—especially

problematical in view of the eleventh-hour

beginnings of the rearmament program—

was dependent on the availability of large

firms already equipped with abundant

plant and machinery, specially skilled and

trained workers, managerial know-how, financial stability, and established contacts

with a wide array of suppliers. Many if not

most of the urgently needed items of procurement were still in the developmental

stage, making it imperative that selected

contractors have ample research and engineering staffs and smoothly functioning interdepartmental operations. In addition to

the size and complexity of individual requirement items, the large quantities needed

and the necessity for uniform specifications

dictated the use of carefully controlled

mass-production techniques most likely to

be found in large-scale enterprises. In short,

the very economic and technological advantages which had made American industry the envy of the rest of the world, and

upon which the Allied Nations chiefly relied

to win the war, were those most completely

identified with big business.

This situation was summed up by Under

Secretary of War Patterson early in 1941

at the opening session of the Truman Committee:

We had to take industrial America as we

found it. For steel we went to the established

steel mills. For automobiles we went to Detroit. So does the general public. Take airplanes: We place orders with concerns that

can manufacture them, and contracts must

be placed in line with the manufacturing facilities, existing and potential, of the particular

company. The manufacturers are sharing a

great amount of their work by subcontracting

with other concerns. The Lockheed Co., for

instance, has 350 subcontractors; the Boeing

Co. has 325. The situation in ordnance procurement is

the same. Speed is of the essence, and speed

made it necessary that orders be placed with

concerns with whom preliminary arrangements for production of munitions had been

made under the industrial mobilization plan

in the years preceding the emergency. We

needed medium tanks in large numbers, of

uniform design, and we needed them quickly. We made contracts for them with Chrysler, Baldwin Locomotive, and American Locomotive. It would have been folly to have

ignored the great productive facilities of these

last seven months of 1940, 60 percent went to 20

firms and 86.4 percent to 100 companies. Ibid.,

p. 63. 2

 See: (1) Senate, Small Business Hearings; (2)

Select H. Com. To Investigate the National Defense Program in Its Relation to Small Business,

77th Cong., 2d Sess., Hearings on H. Res. 294,

Study and Investigation of the National Defense

Program in Its Relation to Small Business, 1942:

(3) Truman Committee, Hearings, especially Pt.

6; Yoshpe, The Small Business Man and Quartermaster Contracts, 1940-1942.
THE ARMY AND SMALL BUSINESS 415

concerns and to have placed our business with

companies that could not produce quickly.3

From the very beginning, the Under Secretary well knew that it would be impossible

to avoid criticism in the handling of the military procurement program. But one criticism which he hoped never to face was that

he had failed to provide the Army with the

munitions it needed to achieve victory. This

was emphasized by Leon Henderson in his

testimony before the Truman Committee in

the summer of 1941:

I sat with Secretary Patterson, incidentally, in the early days when there was a question

of giving a contract on powder to somebody

else, and I knew he gave earnest considera- tion to that matter, and he felt that if he made

a mistake and there was a shortage of powder

in this country he would be blamed, and he

thought he ought to take the rap on picking a

manufacturer known to be able to produce

powder, and that he could handle that better

than he could a shortage of powder.4

In addition to the issue of adequate productive capacity there were compelling administrative reasons for concentration of

orders in large firms in launching the rearmament program. For any particular item

the award of a few contracts with carefully

selected firms minimized the rapidly multiplying tasks of contract placement and administration which stretched the capacities

of overburdened and understaffed procurement officers to the limit. The problems of

contractor selection, negotiation of prices

and other terms, providing financial aid, obtaining priority assistance, issuing change

orders, expediting production, auditing,

making payments, and conducting continuous inspection of processes and products,

and all other aspects of contract administration which descended like locusts upon the

procuring agencies as the national economy

approached a wartime footing, would have

been multiplied many times by splitting up

large contracts into numerous smaller ones.

Anyone familiar with the hectic atmosphere

of procurement offices during this period

could understand the reluctance of contracting officers further to complicate and slow

down their work. This reluctance was increased by the fact that many small-business

proposals were apparently unrelated to, and

likely to frustrate, the attainment of fundamental procurement objectives.

Popular misunderstanding of the reasons

for prime-contract concentration was paralleled by misunderstanding of the implications and effects thereof. The average

layman was not aware that a substantial

portion of total prime-contract expenditures

would be transferred to small business under

lucrative subcontracts and orders often executed under more attractive terms and conditions than direct government contracts.

Nor did the layman stop to consider that the

concentration of government contracts was

merely an extension of the basic pattern

voluntarily initiated by the American housewife, the general public, and the business

community, including small business itself.

It is interesting to note that the Army's distribution of prime contracts to small business

during the period of rearmament was considerably more generous (approximately

three fourths as against less than one half)

than the redistribution—in the form of subcontracts—of war business by the business

community itself. (Table 45) While these

figures shed no light on dollar-value magnitudes, they suggest the vital and indispen3

 Truman Committee, Hearings, 16 Apr 41, 1:61-

62.

4

 Ibid., 23 Jul 41, 6:1640.
416 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 45—WAR DEPARTMENT PRIME CONTRACTS AND SUBCONTRACTS a

[Total Number in Effect at Specified Dates]

a

 Except Army Air Forces. b

 Firms of 500 employees or less.

Source: Senate, Small Business Hearings, pp. 1177-91.

sable role played by large companies, not

only as subcontractors in the war production

program but as the most effective suppliers

of major classes of goods and services.

Further indication of the extent to which

prime-contract expenditures were transferred to small business is found in a sample

study of subcontracting made by the ASF

in the spring of 1943:

. . . analysis of 2,987 supply contracts

awarded by the Army Service Forces during

the period March 5 to April 15, representing

a cross section of contracts placed during this

period, disclosed that 25.2% of the dollar

value of these primes was passed on to concerns with under 500 wage earners in the form

of first-tier subcontracts.5

Obviously, first-tier subcontracts accounted

for only part of re-expenditures under wartime procurement. Expenditures at lower

echelons likewise benefited small business,

and these low-echelon expenditures often

took place long before government disbursements to prime contractors were

completed.

Although the Army placed its procurement objectives and responsibilities above

the goal of aid to small business as such,

it took steps from the very beginning of the

rearmament program to widen the distribution of contracts. From the Army's point

of view these measures were designed primarily to broaden the production base and

speed the mobilization program, but they

had the effect of helping small business.

Beginning with Assistant Secretary Louis

Johnson's directive of 12 June 1940, which

anticipated the launching of the Munitions

Program, right on up to Pearl Harbor the

War Department issued a steady stream of

instructions and directives to the supply

arms and services bringing pressure upon

them to split awards among a large number

of firms, obtain additional subcontracting,

5

 Ltr, Maj Robert D. Holbrook, Actg Chf SWPB,

Purchases Div ASF, to Mr. William Weinfeld,

SWPC, 14 Aug 43, folder IV. (See supporting note

in author's file, OCMH. It was impractical, especially under emergency and wartime pressures,

to attempt to obtain more than sample statistics

of dollar-value expenditures under subcontracts.

For example, "To get the subcontractors on that

basis we would have had to have prime contractors

go through their files and pull out every order they

had, and figure out how much was unshipped."

Statement of Col Browning, Senate, Small Business

Hearings, 10: 1181.
THE ARMY AND SMALL BUSINESS 417

and bring new prime contractors into the

program as rapidly as possible.6

Small Business Policies

of NDAC and OPM

The NDAC recognized the desirability

of bringing small business into the defense

program as rapidly and fully as possible.

Both Donald Nelson and Leon Henderson

believed that this was necessary in order to

help prepare the economy to shoulder the

tremendous load of wartime production

which would almost certainly be required

in the future. At the same time, apart from

the objectives of rearmament, they felt it

necessary to utilize the procurement program to relieve current hardship and to

preserve a balanced economy for the postwar era.7

 On 25 October 1940 the NDAC

created the Office of Small Business Activities, with Donald Nelson as director.

Nelson worked closely with the Army, especially the Quartermaster Corps, and

readily obtained important changes in purchasing methods which provided small firms

with a larger share of business. These included the shift from purchasing f.o.b.

Army depots to f.o.b. plant and limitation

of the share of awards going to any one

firm. Limitation of awards not only forced

a wider distribution of contracts among

firms of all sizes but also reduced the size

of individual awards to quantities which

could be handled by smaller firms.8

After the NDAC was supplanted by

OPM, the Office of Small Business Activities was replaced by the Defense Contract

Service, headed by Robert L. Mehornay,

in the Production Division, OPM. The Defense Contract Service, organized in co-operation with the Federal Reserve System,

established field offices throughout the

country in thirty-six Federal Reserve district and branch banks. The function of

these offices, which were staffed with businessmen, engineers, and lawyers, was to facilitate a greater degree of subcontracting

as well as to guide qualified small firms to

district procurement officers for possible

prime contracts. On 17 February 1941, Un6

 For example: (1) Ltr, ASW Johnson to CofAC

et al., 12 Jun 40, sub: 1941 Procurement Program;

(2) Memo, Col Schulz, Dir Current Procurement

OASW, for CofAC et al., 2 Jul 40, sub: Procurement Without Advertising; (3) Ltr, ASW Patterson, to Chfs of Supply Arms and Services, 20 Dec

40, sub: Use of Subcontractors in Defense Program; (4) Memo, USW Patterson, for Chfs of

All Supply Arms and Services, 17 Feb 41, sub:

Cooperation with Defense Contract Service in Facilitating Subcontracting; (5) Ltr, SW Stimson

to CofOrd et al., 19 Feb 41, sub: Ordnance Production Under the National Defense Program; (6)

Memo, USW Patterson for Chfs of Supply Arms

and Services, 20 May 41, sub: Subcontracting of

Prime Defense Orders; (7) Memo, USW Patterson for CofAC et al., 29 May 41; (8) Memo, USW

Patterson for CofAC et al., 30 Jun 41, sub: Distribution of Defense Orders Among a Greater Number of Contractors; (9) Memo, Gen Rutherford,

Ex OUSW for Chfs of Supply Arms and Services,

5 Sep 41, sub: Distribution of Defense Orders;

(10) OUSW Office Order 11-B-1, 19 Aug 41,

announcing creation of Army Contract Distribution Division, OUSW; (11) Memo, Rutherford

for Chfs of Supply Arms and Services, 13 Sep 41,

sub: Plans for Current Procurement; (12) Memo,

Rutherford for Chfs of Supply Arms and Services,

26 Sep 41, sub: Clearance of Contracts Requiring

Substantial New Construction or Extensive New

Equipment; (13) Memo, Lt Col Frank W. Bullock, Purchases and Contracts Div, OUSW, for

CofAC et al., 19 Nov 41, sub: Special Purchasing

Procedure [for distressed communities and industries]. All of the above are reproduced in Senate,

Small Business Hearings, 10:1301-34.

7

 Truman Committee, Hearings, 5 Jun 41,

5:1338, 1340-41; 23 Jul 41, 6:1634. 8

 For example, in the case of shoes, no one firm

was permitted to bid on more than 15 percent of

the entire award. Testimony of Donald Nelson in

Truman Committee, Hearings, 5 Jun 41, 1336-37.
418 THE ARMY AND ECONOMIC MOBILIZATION

der Secretary Patterson addressed a lengthy

memorandum to the chiefs of all the Army's

supply arms describing in detail the contemplated organization and functions of the

Defense Contract Service. While indicating

that the determination of subcontractors

was still the responsibility of prime contractors, Patterson urged "an intent and spirit

of full cooperation with respect to the

'farming-out' program" and indicated that

the program as outlined in his memorandum was "intended to be of real service in

the prosecution of the defense program."

 9

Many commentators on procurement

policies during the defense period did not

appreciate that both legally and practically

a prime contract had to allow contractors

powers commensurate with their responsibilities. These powers necessarily included

the authority to determine the extent to

which subcontracting was practicable, as

well as authority to determine the selection

of particular subcontractors. After the nation was fully at war, and under the aegis of

the First War Powers Act, procuring agencies could of course compel prime contractors to follow instructions. But even after

Pearl Harbor the Army normally sought,

and usually obtained, contractor action on

the basis of persuasion and mutual discussion of the problems involved.

In August 1941, to combat the effects of

growing material shortages and migration

of labor, the War Department established

the Army Contract Distribution Division,

OUSW.10 This office was given the responsibility for channeling defense orders for the

relief of distressed industries and communities.11

 Two weeks later the President replaced OPM's Defense Contract Service

with the Contract Distribution Division in

the Production Division, OPM. Mr. Floyd

B. Odlum, the head of the new division,

was like his predecessor vitally interested in

the welfare of small business and proceeded

vigorously to expand the program. But as

the emergency deepened no amount of redistribution of defense contracts could save

all firms, and in the aftermath of Pearl Harbor thousands of additional small firms

were forced to curtail or suspend operations.

Many small firms ceased because of the departure of owners or key employees into the

armed services or to positions in vitally

needed defense production elsewhere.

Others, such as automobile agencies, service stations, and hotel and tourist facilities

in vulnerable areas, could find little or no

place in the production of essential items.

Still others could not be converted to defense production at all or before an indispensable period of exploration and adjustment. By the spring of 1942 both the House

and Senate had established small business

committees, conducted extensive hearings,

and developed legislative proposals to deal

firmly with the problem. The result was the

Small Business Act of 11 June 1942.12

9

 Patterson memo, especially par. 10, cited above,

note 6(4). The official history of the War Production Board states that in this memorandum "the

War Department grudgingly recognized the existence of the Defense Contract Service" and compares it unfavorably with a Navy Department memorandum issued some ten days later which proclaimed "complete" (rather than "full") cooperation. CPA, Industrial Mobilization for War, p.

146.

10

 See above, pages 237, 261. 11

 OUSW Office Order 11-B-1, 19 Aug 41. 12

 56 Stat. 351, often referred to as the Smaller

War Plants Act. The small business committee of

the Senate was established on 8 October 1940, that

of the House on 4 December 1941.
THE ARMY AND SMALL BUSINESS 419

The Small War Plants Program in

Transition

Slow Beginnings Under

the Small Business Act

The passage of the Small Business Act

marked the beginning of a new stage in the

integration of small business into the wartime economy. The act required the chairman of the War Production Board, through

a deputy to be appointed by him, "to mobilize aggressively the productive capacity

of all small business concerns." It authorized

the formation of pools of small firms exempt

from the provisions of antitrust laws. It

specifically recognized the likelihood of

higher costs and prices in procurement from

small business. It gave the WPB chairman

wide powers to carry out the purposes of the

act, including the authority to certify to

procuring agencies the capacity and credit

of individual small firms. Procurement officers were not compelled to let contracts to

certified plants but were authorized to do

so without the imposition of further requirements as to capacity or credit. The act also

created a Smaller War Plants Corporation,

with a capital stock of $150,000,000, to

make loans or advances on whatever terms

were deemed necessary to provide small

firms with plant, equipment, materials, and

working capital to be used for war or essential civilian purposes. It also empowered the

Smaller War Plants Corporation to contract

directly with procuring agencies to furnish

these agencies with articles, equipment,

supplies, and materials. Moreover, in a provision which was to raise considerable controversy, it required procuring agencies to

place such prime contracts with the Smaller

War Plants Corporation whenever the

chairman of the War Production Board

certified that SWPC was competent to fill

particular procurement requirements. The

SWPC would then subcontract the work to

small business concerns or others for actual

performance.13 The chairman of the board

of SWPC was to be appointed by the chairman of the WPB and was therefore

responsible to him.

Ten days after the passage of the Small

Business Act the Army's Chief of Ordnance

issued instructions to Ordnance district offices and operating branches, inclosing a digest of the act, putting all concerned on

notice of their impending responsibilities,

and indicating the firm intention of the Ordnance Department to co-operate fully with

the purposes of the act.14 Nevertheless, in

the eyes of its sponsors, execution of the

Small Business Act was slow. The official

WPB order creating the Smaller War Plants

Division, WPB, did not appear until 8 September 1942, some three months after the

passage of the act.15 In keeping with a WPB

request, the Army did not set up its own organization and begin functioning until the

WPB program had been laid out.16 One

week after the WPB order, the Director of

Procurement, ASF, issued a directive to the

technical services requesting the appointment of a small-business representative in

each service headquarters and announcing

the War Department policy of making every

effort to award contracts, "both prime and

sub," to small firms without waiting for certification by WPB or contract action by the

Smaller War Plants Corporation. A detailed

report from each service, indicating the con13

 56 Stat 351, Sec. 4 (f) (5). (2) CPA, Industrial Mobilization for War, pp. 527-32. 14

 Ltr, Gen Campbell, CofOrd, 22 July 42, sub:

Small Business Act, copy in Senate, Small Business

Hearings, 10:1331. 15

 CPA, Industrial Mobilization for War, p. 529. 16

 Senate, Small Business Hearings, 10:1203.
420 THE ARMY AND ECONOMIC MOBILIZATION

tract actions achieved as a result of this directive, was requested by 15 October.17

 Two

weeks after this directive, the creation of the

Small War Plants Branch, Purchases Division, ASF was announced. This branch

was to be responsible for general War Department policy and operations in the small

war plants program.18 Finally, on 30 October 1942, a basic procedure was established

for screening Army requirements and allocating procurement to small plants recommended by the War Production Board.19

Meanwhile the respective chairmen of

the Senate and House small business committees had become highly dissatisfied with

the delays in the execution of the provisions

of the Small Business Act. In a series of animated hearings before the Senate committee in October and December, the principal

civilian and military officials in charge of

the program were given a thorough grilling. The Army was criticized for creating

large ammunition and other big plants

throughout the country while many small

businesses were failing; for "earmarking"

at technical service headquarters, procurement for specific firms—thus limiting the

ability of the district offices to spread work

among small firms; and in general for the

failure to accomplish "anything" under the

small war plants program. England and

Germany were held up as models in the

utilization of small plants, the statement

being made of Germany that "there is not

an idle plant in the whole country."

 20

It is interesting to note that while one

Senate committee was citing England as a

model in small plant utilization, another

Senate committee was warning that "the

United States should avoid the bitter experience of England, where 20,000 manufacturing plants were shut down almost overnight when a complete shift from what may

be called a business-as-usual program to an

all-out war effort was attempted."

 21

 In any

case, Mr. Lou E. Holland, director of

SWPC and head of the WPB Smaller War

Plants Division, came in for especially

heavy criticism by Representative Wright

Patman, who had been invited to participate in the Senate hearings. When Mr.

Holland testified that the Smaller War

Plants Corporation thus far had not taken

a single prime contract, or purchased any

machinery for installation in small plants,

Mr. Patman described the SWPC under

Mr. Holland as "a complete flop" in discharging functions which were "the main

reason for the passing of this law."

 22

 Despite the great difficulties and mitigating

circumstances, Mr. Holland's days as director of SWPC were numbered, and shortly

after the first of the year he joined his

predecessors—Messrs. Mehornay and Odlum—as a former administrator of the small

business program. He was succeeded by

Col. (later Brig. Gen.) Robert Wood 17

 Ltr, Brig Gen W. H. Harrison, Dir of Procurement, SOS, to CofCWS et al., 15 Sep 42, sub: Additional Work for Smaller War Plants, copy in Senate, Small Business Hearings, 10:1330. 18

 Memo, TAG for Chfs of Supply Services, 1 Oct

42, sub: Additional Work for Small War Plants,

copy in Senate, Small Business Hearings, 10:1333. 19

 Memo, Gen Somervell, CG SOS, for Chfs of

Supply Services, 30 Oct 42, sub: Procedure on Relationship With Smaller War Plants Division, War

Production Board, folder VI.

20

 Senate, Small Business Hearings, 15 Oct 42,

10:1209, also 1204-20, passim. 21

 Truman Committee, First Annual Rpt, p. 198. 22

 Senate, Small Business Hearings, 15 Dec 42,

12:1658. At this time Mr. Patman felt that the

taking of prime contracts by SWPC was indispensable to the program. Later, when he became

aware of the difficulties and implications of such

action, he abandoned this position. See below, page

428, note 39.
THE ARMY AND SMALL BUSINESS 421

Johnson, who had recently been chief of

the New York Ordnance District.23

The Formative Period of Army-SWPC

Relations

The Congressional hearings and their

attendant publicity brought heavy pressure

upon the War Production Board, the War

Department, and the other procurement

agencies to intensify their efforts on behalf

of small business. Between November 1942

and the end of 1943, a basic organization

and procedure was developed for systematically channeling a maximum of prime

contracts to small firms and for extending

the degree of subcontracting under large

prime contracts. It was during this period

that the major substantive problems under

the program were revealed and gradually

overcome.

Within the War Department an Army

"small war plants officer" was assigned to

each procurement office in the field, as well

as to each of the technical service headquarters. Similarly, the Smaller War Plants

Corporation—which was soon made organizationally independent of the War

Production Board—assigned its own procurement specialists to each technical service

and to regional district offices.24 The original

machinery for channeling War Department

procurement to small business was heavily

concentrated in each technical service headquarters. SWPC procurement specialists in

technical service headquarters reviewed

each edition of the Army Supply Program to

ascertain what items were suitable for production by small firms. An agreement was

then reached with the technical service procurement staff as to the proportion of total

procurement of each suitable item which

would be allocated or allotted to SWPC. In

some cases this allotment would be a specified percentage of the total procurement of

each selected item; in other cases it was a

specific quantity determined on the basis of

all relevant considerations.25 After receiving

an allocation at technical service headquarters, the SWPC indicated the geographical distribution of its allotment and

instructed its field representatives in each

region to designate specific plants to be considered by local contracting officers in filling

allocations. During the early stages of the

program, however, a substantial portion of

all designations was made at SWPC headquarters in Washington. Although SWPC

allotments normally had to be filled by contracts to firms on the SWPC designated list,

the selection of individual firms for actual

award was made by the military procuring

agencies.26

Many problems immediately arose in the

administration of the program. The Small

23

 CPA, Industrial Mobilization for War, pp.

531-32. General Johnson, a Reserve officer, was

chairman of the board of Johnson and Johnson.

His experience with the small war plants program

has been sketched in his thought-provoking little

book, "But, General Johnson—" (Princeton:

Princeton University Press, 1944). General Johnson resigned his position in the fall of 1943 because

of ill health. He was succeeded early in 1944 by

former Representative Maury Maverick. 24

 The Smaller War Plants Division, WPB, was

transferred to SWPC on 18 March 1943. The SWPC

chairman was, however, retained as the WPB

deputy chairman for Smaller War Plants. CPA,

Industrial Mobilization for War, p. 573.

25

 For example, in November 1942 the Quartermaster Corps decided to allot 10 per cent of all

major procurement to the Smaller War Plants

Division, WPB, which then designated specific

firms for consideration by local contracting officers.

Yoshpe and Massen, QMC Procurement Policies, p.

134.

26

 Memo and incl, Maj Alvin E. Hewitt, Chf

SWPB Purchases Div ASF, for Dir of Materiel ASF,

16 Jun 43, sub: Review of War Department Policy

Relating to Utilization of Small War Plants, folder I.
422 THE ARMY AND ECONOMIC MOBILIZATION

Business Act had deliberately omitted any

definition of a "small" business, and the

Army established its definition as any independent firm employing less than five

hundred wage earners.27 Army officials were

well aware that in some cases large plants—

such as power plants or other plants with

highly mechanized or automatic equipment—might have less than five hundred

employees. Conversely, in some industries

plants with well over five hundred employees might be relatively small in relation to

the leaders of the industry. The 1939 Census

of Manufacturers had indicated that 98.9

percent of the total of 184,230 manufacturing establishments in the country employed

less than five hundred workers. But 72.4

percent of the total, or 133,260 plants, had

employed less than twenty workers. Only a

tiny percentage of these smallest firms could

reasonably be expected to be capable of

handling prime contracts. The Army's definition was later ratified by SWPC, which

added in its official definition an exception

permitting the certification of a larger plant

if it was one of the smaller plants in the industry or was doing a relatively small portion of the business of the industry.28

A basic problem faced by the Army as

well as by the SWPC was the fundamental

ambiguity of purpose in the Small Business

Act. Although the act was nominally dedicated to the furtherance of war production

through the mobilization of small business,

its raison d'être was the preservation of

American small business. The sponsors of

the act deeply resented any implication that

it was "a relief measure"; yet the constant

references throughout the hearings to small

business hardships and failures made it quite

clear that the major purpose of the act was,

in fact, the relief of small business. In view

of this obvious reality as well as for reasons

of administrative necessity, SWPC by the

beginning of 1943 had decided to concentrate its initial efforts on plants which were

in actual or prospective "distress." A "distressed" plant was defined as one whose current operations and unfilled orders for 1943

were less than two thirds of the plant's capacity. "Capacity" was defined as the

plant's average level of operations for the

five-year period ending in 1941, or the 1941

level if no history existed for the longer

period. Under this definition a study revealed that, of 165,000 small plants in the

country, only 3,500 were considered in actual distress.29

 Some small business advocates

objected to the base-period definition of capacity as "limiting" the participation of

small business in the war program to a previous level of operations. These spokesmen

insisted that small business be given "a full

meal" rather than "crumbs" and that all

small business—not merely distressed

firms—be taken into the war production

program. The SWPC policy did not, of

course, contemplate any limitation upon

small business. It merely established a working priority designed to prevent "starvation"

by some firms before attempting to provide

a "full meal," with dessert, for all firms.

Concerns operating at levels from two-thirds

to full "capacity" were labeled "need

work"; concerns operating at above this

range but with still additional capacity were

27

 PR 225.4(b) (11-23-44). 28

 SWPC Field Ltr 57, 30 Jun 43. For statistical

purposes the Army reported small plant contracts

in two categories: plants with less than 100 employees, and plants with from 100 to 500 employees.

For a discussion of the problems of definition and

reasons why such a definition was omitted from the

act, see Senate, Small Business Hearings, 11:

1605-07. 29

 Johnson, "But, General Johnson —", p. 33.
THE ARMY AND SMALL BUSINESS 423

labeled "open capacity." All these groups

were designated for suitable procurement.30

Studies by the Army as well as by SWPC

revealed that many small firms were already

well occupied with war contracts, subcontracts, or essential civilian business. An intensive study and analysis of distressed manufacturing plants in the Greater New York

area was conducted by the Small War

Plants Branch, ASF, in the spring of 1943.

This survey was undertaken to facilitate cooperation with SWPC in eliminating distress in the New York area, a project which

had received considerable attention in the

Senate hearings on small business. The study

indicated that the actual degree of distress

was much lower than generally assumed,

including less than 21⁄2 percent of all small

industrial establishments in the area. It revealed many considerations which had an

important bearing on the determination of

actual distress. For example, backlogs of unfilled orders were highly inconclusive in determining distress since advance orders were

not customary in many lines; production

and shipment were largely conducted on an

inventory basis. Also, many firms were operating at distress rates because of the loss

of skilled labor rather than lack of potential

orders. Moreover, profits were often maintained or even increased under distress rates

of operation because of curtailment of overhead and other cost items; firms formerly

furnishing both labor and materials now

furnished only labor under profitable subcontracts.31

The small firms which fared well under

the war program were generally the more

aggressive, efficient, and well-organized

firms, in lines of activity most suited to the

needs of war production. Conversely, distressed plants were likely to be those least

qualified to undertake military contracts.

For this reason SWPC was in a difficult position. If it were to "certify" dubious or incompetent firms as capable of performing

specific procurements, production failures

would redound to the discredit of SWPC

and jeopardize the small business program

as well as actual procurement deliveries.

Hence, the SWPC ordinarily preferred

merely to "designate" firms which it

thought capable and to leave final selections to the military procurement agencies

with established organizations, procedures,

and trained personnel for making facility

surveys and evaluating all factors preliminary to the award of contracts. For its part,

the Army—which was ultimately responsible for procurement deliveries—preferred to

forestall the use of SWPC "certification" by

providing a maximum of allocations to be

filled by contracts to firms designated by

SWPC.32

30

 SWPC Field Ltr 57, 30 Jun 43. 31

 See Memo, Maj Irving Salomon, Chf Special

Problems Sec, SWPB Purchases Div ASF, for Maj

Hewitt, Chf SWPB Purchases Div, 14 Jul 43, sub:

Report on the Procedure, Results to Date, and

Findings in the Special Project To Assist Smaller

War Plants Corporation's List of So-called Distressed Plants in the New York Area, OCMH. A

somewhat similar study was made of the role of

small business in the Chicago procurement area.

Ltr, Saloman to Hewitt, 15 Sep 43, folder IV. 32

 In May 1943 the SWPC Board of Directors

resolved that all formal "certifications" under the

Small Business Act could be made only upon express authorization by the board itself. At the same

time the SWPC board defined "designation" as

meaning that SWPC had investigated the facilities

of the concerns designated and believed they were

competent to perform the contracts for which they

were designated. (1) Memo, C. W. Fowler, Ex

Secy SWPC, for SWPC staff in Washington and

field offices, procurement officers, and others concerned, 29 May 43, sub: Policy of SWPC Relating to Designations and Certifications; (2) Memo,

Col Browning, Dir Purchases Div ASF, for CofCWS

et al., 10 Jun 43, sub: Resolution Adopted by

SWPC Board of Directors. Both in folder I.
424 THE ARMY AND ECONOMIC MOBILIZATION

During the first year of operations,

SWPC designations proved to be widely

unsatisfactory to Army contracting officers.

Many specific examples were cited by Army

procurement specialists of designees who

were incompetent, too busy to bid, or otherwise not interested in the contract for which

they had been designated. Frequently too

many or too few designations were made for

the size of the SWPC allotment. If too many

designations were made, administrative

burdens upon contracting officers were

greatly increased; in some instances, moreover, firms informed that they had been designated "to receive contracts" could not be

given contracts, became embittered, and

complained to their Congressmen. If designations were insufficient, procurement officers often had to make last-minute efforts

to locate suitable sources and were denied

the opportunity to obtain adequate competitive comparisons. In numerous instances

the major portion, or sometimes all, of

SWPC designations for a particular procurement consisted of firms already on the

Army's list of current sources; this meant

that the allocation to SWPC was in effect

gratuitous since the designated firms would

have received consideration or actual contracts anyway. In some cases, rather than

turn back an unfilled portion of their allocation to the procuring agency, SWPC procurement specialists would designate large

corporations, firms in tight labor areas, or

brokers who subcontracted the entire job—

at a profit—to firms already producing for

the Army. Contracting officers frequently

complained that designees attempted to

abuse the Small Business Act by insisting on

premium prices not justified by actual costs

and that firms were encouraged in this practice by SWPC personnel. In other cases,

actual distress was created for existing Army

contractors, both in small and intermediate

sizes, who could not be given repeat or continuation orders because of allotments to

SWPC. District procurement offices found

that relatively little effort was made by

SWPC personnel to obtain subcontracts or

essential civilian business for small firms,

and that many SWPC designees for prime

contracts were only suitable for subcontracting operations or nonmilitary business.33

Under the circumstances many designations were rejected by contracting officers

in the early months of SWPC operations.

While this tended to minimize procurement

failures and contract delinquencies, it also

created a certain amount of friction with

SWPC officials and laid the Army open to

charges that it was not "co-operating" with

the program. Consequently, although relationships with SWPC personnel were on

the whole harmonious, occasionally tempers

flared and harsh words were spoken. An illustration is found in the handling of the

Army's barge-building program in the

spring of 1943, which serves to illuminate

both the emotional cross-currents and the

practical difficulties complicating military

procurement in time of war.

Early in 1943 the Army Signal Corps

had called the attention of Headquarters,

ASF, to some unfortunate wording in an

SWPC form for the notification of designated facilities. This form contained the

words "it is hereby directed the following

firms be considered as qualified SWPC33

 See data in folders I-VI. In order to eliminate

undesirable practices, the Army's Small War Plants

Branch in the summer of 1943 compiled a list of

such practices, with representative examples under

each heading, which had taken place at both the

headquarters and field level of SWPC operations.

Memo, Maj Holbrook, Chf SWPB Purchases Div

ASF, for Col Foy, 22 Sep 43, sub: Examples of

SWPC Activities, Incl 1: Field Activities, SWPC,

and Incl 2: Hdqrs Activities, SWPC, folder IV.
THE ARMY AND SMALL BUSINESS 425

WPB designees, and to receive the above

procurement." This wording, as well as certain practices of SWPC personnel, implied

that all designees would automatically receive contracts, and gave rise to high hopes

and false expectations on the part of designated firms. On 2 April 1943, the chief of

the Army's Small War Plants Branch wrote

to SWPC headquarters requesting a change

of wording in any manner which would

overcome the difficulty. No answer was

given to this letter, and the request was repeated on 17 June.34

In the meantime, during the month of

May, the Army Transportation Corps made

two large allotments to SWPC, consisting of

2,000 wooden barges and 350 steel barges.

After the geographical allocation had been

made to SWPC regional offices, numerous

designations were made. It was, of course,

standard procedure within the procurement

offices concerned for designations to be

made of more firms than would actually

receive awards, since this was the only way

in which a satisfactory identification, comparison, and evaluation of available facilities and bid proposals could be achieved.35

Because of an apparent lack of restraint by

SWPC field personnel, most of the designees

came to believe or were led to believe that

they would automatically share in a "huge

boat-building program." Many of those who

failed to receive contracts became very

much disgruntled and their complaints reverberated throughout the country. In the

wooden barge program, one firm in Maryland submitted a bid of $5,183 per unit. The

average price on contracts awarded was

$3,675. When its bid was rejected this firm

notified its Congressman who "brought pressure to bear upon the contracting officer."

A Virginia firm which lost out to lower bidders equally in need of contracts carried its

complaint to the Under Secretary of War;

a rejected New York firm took the matter to

Headquarters, ASF. From Florida to California the complaints of disappointed boatbuilders embarrassed the Transportation

Corps.36

Since the Transportation Corps had

prided itself on this relatively large effort to

maximize small business opportunities, the

resulting complications and ill-will came as

something of a shock. No doubt this experience sheds some light on the contents of

a letter only shortly thereafter to the Chief

of the Transportation Corps by the chairman of SWPC:

My dear Sir:

On reflection, our conference of yesterday

would seem to be rather unsatisfactory. First,

34

 Ltrs, Maj Hewitt, Chf SWPB Purchases Div

ASF, to O. S. McPherson, SWPC, 2 Apr 43, 17

Jun 43, both in folder I. 35 The availability of suitable facilities varied

widely from one technical service to another. The

QMC was often faced with far more designations

than it could possibly use. The Medical Department

reported one case of thirty-four SWPC designations

for a small award that could be split at most into

two contracts. On the other hand, the Signal Corps

found it necessary to request that designations "will

if possible, be at least twice the number needed for

the allocated portion of the procurement." Memo,

Maj Gen W. H. Harrison, Chf Procurement and

Distribution Sec, OCSigO, for Dir Purchases Div

ASF, 17 Nov 43, sub: Application of Signal Corps

for Permission To Establish Special Smaller War

Plant Procedure at Variance With Procurement

Regulations, folder IV.

36

 Memo, Col Omar J. Ruch, Chf Procurement

Div TC, for Dir Purchases Div ASF, 18 Jun 43,

sub: Handling of Procurement Allocations by

SWPC, folder I. In this memorandum Colonel Ruch

paid high tribute to the SWPC procurement specialist assigned to the Transportation Corps in Washington: "The Liaison Specialist from SWPC to this

division . . . handled the whole transaction 

consummate skill; . . . It was due only t

skillful and untiring efforts of Mr. Mehen that

the discontent and disappointment among small

wood-working plants throughout the country was

not more widespread."
426 THE ARMY AND ECONOMIC MOBILIZATION

you had not read the report by Mr. Ferris, and

you spent some time disclosing your resentment to what you termed "interference by

Government civilian agencies."

Let us make it clear that the Smaller War

Plants Corporation is operating under a legal

mandate from Congress, and it is my duty to

carry out the will of Congress as expressed by

the Smaller War Plants Act.

This country is not and will not be under

the direction of a military junta. . . .

All of this leads me to re-affirm my position, which is that both the Smaller War

Plants Corporation and the Transportation

Corps could well afford to review our execution, as I feel confident a better job could be

done.37

Many of the foregoing difficulties were

more or less inevitable in the formative

stages of the program and could be corrected

with the accumulation of experience, the

steady improvement of organizations, and

the refinement of policy. But there was one

feature of the Small Business Act which

Army procurement officials considered

above all others to be gratuitous and positively dangerous to the success of the procurement program. This was the provision

for the SWPC to take prime contracts for

military procurement following certification

by the WPB chairman. To Army procurement officials this appeared as a device to set

up a dual procurement agency and to take

the procurement function out of the hands

of the War Department.

At the time of the passage of the Small

Business Act, it appeared to some observers

that the plight of small business was due to

deliberate discrimination or neglect by the

procurement agencies and that it could be

cured by giving another agency the power to

take over procurement in behalf of small

business. Others, no doubt, believed that the

threat or imminent possibility of such action

would be sufficient to bring the established

procurement agencies into line and to obtain

a wider distribution of contracts through

ordinary contractual procedures. In any

case, the prime contract provision was included in the Small Business Act, and by the

fall of 1942 members of Congress were urging upon SWPC the widespread use of this

power. Donald Nelson, who firmly believed

that the taking of prime contracts by SWPC

should be done only in extreme cases and

after thorough review, had made only a

handful of certifications by mid-1943.

Hence, a movement had developed to

amend the act to give SWPC the power to

take prime contracts directly on its own

initiative. This move was stoutly resisted, not

only by the procuring agencies, but by the

WPB Procurement Policy Board, and the

proposal was never adopted. Army procurement personnel believed that the adoption

of such an expedient would open a whole

Pandora's box of procurement troubles

without helping the cause of small business.

In the eyes of the War Department, the

placement of a prime contract with SWPC

was of an undesirable species entirely different from contracts placed by the Army

directly with its own suppliers. The ordinary prime contract gave the Army direct

control over the selection of the actual manufacturers of its equipment. It permitted

37

 Ltr, Robert W. Johnson, Vice Chmn WPB and

Chmn SWPC, to Maj Gen Charles P. Gross, CofTrans, 17 Aug 43, folder IV. General Johnson's attitude, as expressed in this letter, had in turn been

influenced by a letter from General Somervell to

Donald Nelson, criticizing a statement made by

Genera] Johnson at a recent press conference. In

this letter General Somervell had stated: "It is, of

course, extremely inadvisable for an officer in uniform to be reflecting views which are at variance

with the expressed views of the War Department."

Ltr, General Somervell, CG ASF, to Nelson, Chmn

WPB, 14 Jun 43, folder I. See also, Johnson, "But,

General Johnson—", p. 47.
THE ARMY AND SMALL BUSINESS 427

the Army to negotiate directly all the numerous terms of the contract—specifications, price, delivery schedules, packing,

shipping, and storage requirements, royalty

and patent provisions, and so on. It also

permitted the immediate and continuous

use of all the established and integrated machinery for contract administration and

production control which had been developed at great effort over a period of three

years. This included regular procedures for

the making and liquidation of advance and

progress payments, granting of priorities,

allotment of controlled materials, adjustment of delivery schedules to changes in

requirements and related portions of the

procurement program, application of complex inspection procedures, direct issuance

of shipping instructions, and many other

features. Under wartime conditions the negotiation and signing of a contract was an

indispensable but only a first step in the

procurement process. The entire procurement process from the beginning to end

required an intimate and continuous relationship between the actual suppliers of

equipment and the agency responsible for

delivery of finished munitions to troops in

the field.

The placement of a prime contract with

SWPC broke into this intimate relationship

and turned over to another agency the task

of selecting contractors, negotiating terms,

and maintaining face-to-face relations with

the actual fabricators of military equipment. Even if SWPC had acted only as a

intermediary or interpreter of Army needs,

the interposition of a third party—through

which must be funneled all instructions,

change orders, and continual communication with suppliers necessary under the high

pressure and rapid tempo of wartime procurement—would create impossible frustration and delay. But, in assuming prime

contracts, the SWPC was not merely an

interpreter of Army needs and policies; it

was a policy-making intermediary with its

own statutory responsibilities and objectives

which frequently ran counter to those of

the Army. Even when portions of the contract administration process—such as responsibility for inspection—remained with

the Army, the basic integrity of the process

would be destroyed: problems of jurisdiction would constantly arise and decisions

made at early stages in the process would

inevitably effect operations at later stages.

All in all, officials responsible for military

procurement felt that the prime contract

provision of the Small Business Act was an

unfortunate inclusion, and that its actual

use should be discouraged whenever

possible.38

As events turned out, the Army and the

other procurement agencies were able to

demonstrate that the exercise of the prime

contract power by SWPC was unnecessary

for accomplishing the basic purposes of the

Small Business Act. By the end of 1943, the

broad task of organizing the nation's economy for war production had been achieved.

The expansion of productive facilities, the

general conversion of industry, the successful operation of the Controlled Materials

Plan, and the settlement of major inter38

 See: (1) Draft of War Department's Comment

on Amendments to Public Law 603 Proposed by

Senate Committee on Small Business (8 pp.); (2)

Statement of Procurement Policy Board, WPB, on

Smaller War Plants Corporation's Assumption of

Prime Contracts (2 pp.); (3) Prime Contracts Between SWPC and the War Department, Tabs A

through I. All accompanying Memo, Lt Col Robert D. Holbrook, Chf SWPB, for Col Foy, Asst Dir

Purchases Div ASF, 19 Feb 44, sub: Amendments

to Public Law 603 (Smaller War Plants Act) Under Consideration by the Senate Committee on

Small Business, folder II.
428 THE ARMY AND ECONOMIC MOBILIZATION

agency controversies over organization and

policy were now largely a matter of history. With munitions production at peak

levels, and the programs for heavy and complex equipment well in hand, it was now

possible for the Army to give the small

business program a high priority. Improvements in the procedure for making allocations and designations facilitated the direct

award of contracts to SWPC designees

without the need for resort to the awkward

and cumbersome device of SWPC prime

contracts. By the end of 1943, even Representative Patman—who had earlier castigated Lou Holland for his failure to invoke

SWPC's prime contract powers—was now

out of sympathy with the use of that instrument.39

 As a result, the move to augment

the prime contract power of SWPC was

defeated and the actual use of the power

was confined to a handful of relatively unimportant contracts. The new SWPC-War

Department agreement of April 1944, establishing revised procedures, made no

mention of SWPC prime contracts. By 1

April 1945, the SWPC had taken a total

of only twelve prime contracts, amounting

to some $32 million, and only half of these

were for the War Department.40

The actual experience of the War Department with some half-dozen prime contracts with SWPC was insufficient to determine the consequences of large-scale use

of this instrument. Most of these were taken

by SWPC in 1943 when it was under great

pressure to make use of the prime contract

power and was not fully prepared to do so.

New procedures and contract terms had to

be developed, suitable subcontractors located, and special arrangements made to

obtain controlled materials. Apart from

their general lack of sympathy for SWPC

prime contracts, Army procurement officials felt that in at least half of the cases

the particular procurements selected for the

purpose were unfortunate. In one case the

Army had already agreed to give the award

to SWPC designees so that the exercise of

the prime contract power was gratuitous so

far as the cause of small business was concerned. In this case, specifications were incomplete and the Army wished to maintain

its direct relationship with the contractor

in order to supervise work on the project.

In another case SWPC took the prime contract in order to pay a premium price to

a large corporation whose bid was considered by the Army to be grossly excessive

in terms both of cost analysis and comparative bid prices by all other firms, both large

and small, involved in the bidding and

award. In a third case SWPC spent three

months, after certification by WPB, in an

attempt to locate suitable subcontractors

and obtain material allocations. SWPC finally placed a subcontract covering the entire procurement with a firm which had

previously held an Army contract for the

same item. On the other hand, while there

were various delays in certification and contract placement, the record does not reveal

any significant delays in procurement de39

 "Chairman Patman of the House Committee

on Small Business, in a letter dated November 1,

1943 to the Chairman of the Smaller War Plants

Corporation, stated that he saw little justification

for Smaller War Plants Corporation insistence on

taking a prime contract when an agency expressed

a willingness to award business to one or more of

a group of firms designated by Smaller War Plants

Corporation as competent to do the work." Ltr,

Brig Gen Albert J. Browning, Dir Purchases Div

ASF, to Donald Nelson, Chmn WPB, 11 Dec 43,

folder IV. 40

 History of Smaller War Plants Corporation

(unpublished monograph, 1945), Pt. III, National

Archives. Most of the prime contracts taken by

SWPC in World War II are listed in SWPC, Fourteenth Report, p. 27, reproduced in S. Doc. 246,

78th Cong., 2d Sess., 2 Nov 44.
THE ARMY AND SMALL BUSINESS 429

liveries under SWPC prime contracts once

the necessary subcontracts had been let.41

The Small War Plants Program in High

Gear

By the beginning of 1944 the combined

experience of SWPC and the Army, together with successive improvements in organization and procedures, had reached the

point where definitive working arrangements could be established to govern the

small war plants program for the duration

of the war. Early in 1944 former Representative Maury Maverick, a vigorous exponent of small business, was appointed chairman and general manager of SWPC. Mr.

Maverick immediately took steps to consolidate the fruits of eighteen months' experience into a written agreement between

SWPC and the War Department. On 21

April 1944 such an agreement was signed

jointly by Mr. Maverick and Under Secretary Patterson. In addition, during the following months subsidiary agreements with

each of the technical services and the Army

Air Forces were established, reflecting the

variations in circumstances of the several

services and the special procedures required

in order to insure from each the greatest possible number of awards to small business

consistent with the necessities of military

procurement.42

The procedural goals of the new agreements were to provide a maximum of decentralization, flexibility, and teamwork in the

administration of the small war plants program. To attain these ends virtually all decisions as to selection of suitable items, size

of allocations to SWPC, designation of individual firms, and award of contracts to

small firms were made at contracting offices

in the field. SWPC specialists and Army

small war plants officers assigned to technical service headquarters confined their

activities largely to policy matters and the

general guidance of the program within the

technical service concerned. Basic policy

matters continued to be handled by the

Small War Plants Branch in the Purchases

Division, ASF, together with SWPC headquarters in Washington. Full opportunity

was granted the SWPC specialist in the

headquarters of each technical service to

review the Army Supply Program and all

procurement directives. When the SWPC

specialist indicated an interest in further

action by SWPC, this interest was noted on

the procurement directive sent to the local

contracting office. At each contracting office all procurement directives except for

secret and confidential items, regardless of

notations at higher echelons of probable

SWPC interest, were jointly reviewed by

the local SWPC specialist and the contracting officer. A joint decision was then reached

as to:

1. Whether a particular procurement was

suitable for manufacture by small concerns.

2. The minimum portions of suitable

procurements which the contracting office

would endeavor to place with SWPC designees.

41

 See above, note 38 (3). 42

 (1) Revised Working Relations Between War

Department and SWPC, 21 Apr 44, reproduced as

App. A to Twelfth Bimonthly Report of SWPC, in

S. Doc. 223, 78th Cong., 2d Sess., 22 Jun 44. (2)

Procedural Agreement Between the Air Technical

Service Command, AAF, and the Smaller War

Plants Corporation, 19 Oct 44 (superseding agreements of 9 Jun 44 and 25 Jul 44. (3) Ltr, Brig

Gen Burton O. Lewis, ACofTrans ASF, to Mr. Jesse

French, III, Chf Opns Bureau SWPC, 29 Jun 44

(countersigned by Jesse French III). Last two in

folder II.
430 THE ARMY AND ECONOMIC MOBILIZATION

3. The number of SWPC designations to

be sought, their allocation by SWPC regions, and the deadline for submitting

designations to the contracting office.

At least one set of drawings, specifications,

and prints for each procurement was to be

made available to the SWPC specialist, and

as much additional descriptive information

as required. In order to maximize the opportunities for small firms, the contracting officer was to make available to the SWPC

specialist, for inclusion in the total list of

SWPC designations, the name of all small

plant sources known to the Army to be suitable for the procurement in question. The

SWPC was required to include all such

sources in its designations or furnish reasons

for any exclusions. Likewise, all SWPC

designees were to be given an opportunity

to bid or negotiate, except for exclusions

satisfactorily explained by the contracting

office. During negotiations the SWPC specialist was to provide the contracting office

with all data obtained from the relevant

SWPC regional offices concerning the small

plants from which bids had been received;

this information covered such matters as distress status of the firm in question and any

other factors bearing on the suitability of

the firm for the particular procurement involved. After negotiations had been completed or final bid prices received, but before

choice of contract placement was made, the

SWPC specialist was provided with abstracts

of all bids and an opportunity to make representations in behalf of concerns designated

by SWPC. The actual placement of awards

was to be governed by the terms of WPB

Directive No. 2, as amplified by War Department Procurement Regulations, stating in order of priority the several criteria of

contract placement.43 Subject to these general criteria, the contracting officer was to

make every effort to fill, and if possible exceed, the percentage allotment for SWPC

designees. Any disagreement between the

SWPC specialist and the contracting officer

was to be resolved by the chief of procurement for the contracting office concerned.44

The foregoing digest of procedures suggests, in part at least, the painstaking efforts

eventually made to insure for small business

a fair share of the military procurement program. Every Army contracting office was

required to observe these procedures, and

each office had its own small war plants officer, as well as its assigned SWPC specialist, to implement the program and represent

the interests of small business. Under the

various influences at work, the dollar value

of Army contract awards to small business

flourished beyond all expectations of the

sponsors of the small business program.

Statistics of prime contract placement reveal the month-by-month progress of the

War Department's small business program

from the beginning of formal operating relationships with SWPC until the end of

1945. (Table 46) During the twelve-month

period from June 1944 through May 1945,

Army prime contract awards in excess of

$10,000 each to firms with fewer than five

hundred wage earners amounted to a total

of over $6,546,000,000. This figure was the

equivalent of a $65,000 prime contract

during the course of the year to each of

100,000 firms. In order to suggest the full

effect of Army procurement upon small

business during the year in question, there

must be added to this total an unknown

43

 See above, Chapter XI. 44

 PR 225.
THE ARMY AND SMALL BUSINESS 431

TABLE 46—WAR DEPARTMENT PRIME CONTRACT AWARDS BY SIZE OF FIRM: MONTHLY

PLACEMENT OF SUPPLY CONTRACTS IN EXCESS OF $10,000 EACH, NOVEMBER 1943-

December 1943
432 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 46—WAR DEPARTMENT PRIME CONTRACT AWARDS BY SIZE OF FIRM: MONTHLY

PLACEMENT OF SUPPLY CONTRACTS IN EXCESS OF $10,000 EACH, NOVEMBER 1943-

DECEMBER 1943—Continued

Source: (1) Smaller War Plants Corp., Bi-Monthly Rpts to Chairman, WPB. (2) Small War Plants Branch, Purchases Div., ASF,

Monthly Rpts to SWPC.

volume of subcontracts under the $21 billion in prime contracts to large firms during

the same period, as well as prime contracts

and purchase orders under $10,000 each to

small suppliers.

Not only did the absolute value of Army

awards to small business increase during

the latter half of the war. The relative share

of small business in total Army procurement also experienced a remarkable increase. For the calendar year 1943—the

first full year for which statistics are available—small business received 12.6 percent

of the total value of War Department prime

contracts. For 1944 the figure rose to 20.0

percent; and for calendar 1945 it jumped

to 27.4 percent, more than double the 1943

share.

Additional results of the Army's small

business program are revealed by statistics

of contract placement by separate categories

of small business. These figures indicate that

the relative share of Army procurement going to the smallest firms in the small business category (firms with less than 100 wage

earners) increased from 3.5 percent for

1943 to 8.6 percent, or two and one-half

times its earlier share, for 1945.45 This was

a greater rate of increase than that for small

business as a whole, defined as including all

firms with up to five hundred wage earners.

Further statistics indicate that prime contracts placed with small business by the

45

 Small War Plants Br, Purchases Div ASF,

Monthly Rpts to the Smaller War Plants Corporation.
THE ARMY AND SMALL BUSINESS 433

TABLE 47—AWARD OF PRIME CONTRACTS BY SIZE OF FIRM: ANNUAL PLACEMENT OF

SUPPLY CONTRACTS IN EXCESS OF $10,000 EACH, BY MAJOR WAR DEPARTMENT AGENCIES,

1943-1945.

a

 Quartermaster Corps figures for 1943 include prime contracts in excess of $1,000; for 1944 and 1945 include all awards in excess of $1,000

with exception of Management and Engineering, Service Utilities, and shelf stocks from retailers and distributors. Percentages rounded

as in source.

Source: (1) Small War Plants Br, Purchases Div ASF, Monthly Rpts to SWPC. (2) Yoshpe and Massen, QMC Procurement

Policies in World War II, p. 141.

Army Air Forces amounted to less than 10

percent of the value of such contracts placed

by the ASF (Table 47). This was an inescapable consequence of the nature of AAF

procurement, the bulk of which consisted of

huge orders for aircraft and complex items

of equipment in general not susceptible of

production by small firms except on a subcontract basis. The Quartermaster Corps,

on the other hand, because of the relatively

simple and commercial nature of most of

its procurement items, was able to deal directly with small firms on a wide scale.

QMC awards to firms with less than five

hundred wage earners amounted to more

than 50 percent by value of all Quartermaster contracts and accounted for nearly

45 percent of total War Department business with small firms.

On the basis of the record as indicated

in the preceding pages it would appear that

the Army made a reasonable and ultimately

a successful effort to insure small business

a fair share of war business. It is doubtful

that the same results could have been

achieved much sooner, given the country's

initial state of unpreparedness and the

Army's basic mission and responsibility to-
434 THE ARMY AND ECONOMIC MOBILIZATION

ward the nation as a whole. On the other

hand it is also doubtful that the same results would have been achieved either as

soon, or at all, in the absence of the specific

pressures and measures taken by the Congress of the United States. In any case, many

firms which in 1940 were either nonexistent

or small by any definition became largescale enterprises by the end of the war and

emerged to take an important and permanent place on the American industrial

scene.
PART FIVE

EXPANSION OF FACILITIES FOR THE ARMY

CHAPTER XIX

General Aspects of Facilities Expansion

Prewar Planning and the Crisis of 1940

Historians of America's total military and

logistic effort in World War II may well

agree that the eighteen months of preparation before Pearl Harbor played a crucial

if not a decisive part in the outcome of the

war. During this period the Military Establishment of the United States was rehabilitated and the foundation laid for

America's tremendous war production

achievement. The greatest barrier to military preparedness at the time of the crisis

of 1940 was the lack of capital facilities, and

these required from several months to two

years or even longer to create. To have delayed the construction of such facilities until

the United States was actually involved in

battle might have lost the war before it

began.

The facilities problem faced by the War

Department in the summer of 1940 was

twofold. In order to expand, train, and

support its ground and air armies, the War

Department had to construct a countless

number of receiving stations, camps, and

cantonments, airfields, air bases, all their accessories, training and maneuvering areas,

general storage and ammunition depots,

staging and embarkation facilities, and a

host of other establishments too numerous

to mention. Facilities of this nature, designed for use in the actual maintenance

and operation of the Army, rather than for

purposes of procurement, were known as

command facilities.

An equally important but vastly more

complex problem facing the War Department was the development, in co-operation

with industry and the central mobilization

control agencies, of industrial facilities for

producing munitions of war unprecedented

in quantity and complexity. In the spring of

1940 the United States possessed a tremendous industrial potential: it had an abundance of raw materials, a large reserve of

unemployed manpower, and the best assemblage of general industrial equipment

and technical skills of any country in the

world. Yet it lacked the specific equipment

for turning out munitions of war.

The desperate and potentially tragic situation facing the United States in mid1940 was understood by only a few. Speaking early in 1943, when the ultimate victory of the United States began to be safely

predictable, Secretary of War Stimson disclosed our vulnerability at the beginning of

the defense period: "We didn't have

enough powder in the whole United States

to last the men we now have overseas for

anything like a day's fighting. And, what

is worse, we didn't have powder plants or

facilities to make it; they had all been destroyed after the last war."

 l The situation

1

 Henry L. Stimson, "America is Ready," Army

Ordnance Magazine, XXIV, No. 137 (MarchApril 1943), 275.
438 THE ARMY AND ECONOMIC MOBILIZATION

in powder was duplicated throughout the

whole category of munitions. There were

not enough semiautomatic rifles in existence to equip even the skeleton Army of

1940, and existing facilities were capable

of producing only two hundred per day;

at this rate it would have taken more than

fifty years to fill the requirements of World

War II. As for major items, such as tanks,

guns, and completed ammunition, specific

plant capacity was virtually nonexistent.

When viewed in the light of all the Army's

other direct procurement requirements, and

its manifold indirect requirements for raw

and fabricated materials, commercial parts

and supplies, components and subassemblies—to say nothing of Navy, Maritime,

and other war requirements—these shortages of productive capacity indicated that

nothing less than an industrial revolution

would suffice to produce the needed output.

The magnitude of the industrial revolution

which was required, and which was actually

to take place within the next three years,

was only dimly perceived in the summer of

1940.

In the two decades after World War I,

Army planning to meet wartime facility

needs was an integral part of general mobilization planning. Requirements for both

command and industrial facilities in time

of emergency or war would be derived from

the scale and phasing of troop mobilization,

training, and deployment under the basic

mobilization plans. The General Staff was

responsible for determining the basic mobilization plan, and all Army agencies were

responsible for computing their facility requirements under the basic plan. These requirements were screened and approved by

OASW or the General Staff. New construction would be required to make up the difference between total facility requirements

and the quantity of facilities already available.

The general plans and procedures for obtaining construction of new facilities of all

types were announced and kept current

by the Construction Division, Planning

Branch, OASW, as part of the Industrial

Mobilization Plan. In the late 1930's,

OASW planning divided all War Department construction into three types: A, B,

and C. Type A comprised all command

construction, responsibility for which was

divided between The Quartermaster General and corps area commanders throughout the United States. Corps area commanders were each required to establish

a construction organization which would

"make contact with capable contractors,

negotiate contracts, inspect operations, and

make payment for all construction required

for mobilization of Corps Area Commands." The Construction Section,

OQMG, would be similarly responsible for

all remaining Type A, as well as for all

Type B, construction.2

Type B, "supply arm and service construction," included all munitions plants

which would, because of their specialized

nature, have to be built and owned by the

War Department. Among these were Ordnance and Chemical Warfare arsenals,

powder plants, ammunition loading plants,

facilities for producing heavy artillery, and

the like. The detailed planning and sponsorship of these plants was the responsibility

of the appropriate supply arm or service,

subject to the approval of OASW. As in the

case of command construction, these projects would be actually constructed by pri2

 War Construction Plan of the Construction Division, OASW, p. 7. A copy of this document, made

8 December 1937 by the Army Industrial College,

is on file in the ICAF Library.
GENERAL ASPECTS OF FACILITIES EXPANSION 439

vate firms, under contract with the War

Department. Construction would be supervised by OQMG and—depending on their

type—the completed plants would be operated either by War Department officers

and employees or by private managers as

GOCO facilities.

Type C, "construction by an industrial

facility," represented manufacturing plant

and equipment to be constructed or installed

by War Department prime contractors as

needed for the completion of their regular

supply contracts. Supply contracts would be

of either the fixed-price or evaluated-fee

variety, and contractors would make their

own arrangements for facility expansion.

Under fixed-price contracts the contractor

would initially finance the necessary plant

expansion but would be reimbursed over the

life of a supply contract by the inclusion of

plant amortization costs in the prices of the

end products. In the event of early contract

termination, the War Department would

make equitable compensation to the contractor for any unamortized plant costs. As

in ordinary business practice, facilities acquired under fixed-price contracts would be

retained as the private property of the contractor. Evaluated-fee supply contracts required the War Department to defray the

specific costs of all facilities essential to the

completion of the contracts. These facilities

would become government property and

their construction was subject to governmental inspection, time keeping, and cost

accounting procedure. Each supply arm or

service would be responsible for the planning and supervision of its Type C facilities,

which would be tied in with factory plans

and accepted schedules of production under

the allocated-facilities program envisaged by

the Industrial Mobilization Plan. Approval

of OASW was required for all projects costing over five thousand dollars.3

The procedures actually used during

World War II to provide the necessary

facility expansion departed substantially

from the prewar plans. Nevertheless, these

plans furnished the starting point for operations as well as the basis for analysis and

policy formation by the National Defense

Advisory Commission when it was created

in 1940 to supervise the economic mobilization program. The evaluated-fee contract

became the cost-plus-a-fixed-fee contract,

legalized by statute on 2 July 1940. As already indicated, the CPFF feature was

widely used in contracts for the construction

of both command and industrial facilities.4

It was also used in Defense Plant Corporation construction contracts in behalf of the

War Department, as well as in supply contracts for governing the management of

War department GOCO facilities. The biggest departure from the plans of the interwar period occurred in connection with private industrial expansion originally classified as Type C. The complexities attending

the expansion of this class of facilities for

World War II are recounted hereafter.5

The prewar plans for new construction

were intended to cover all needed industrial

expansion, whether in conformity with or

in addition to existing facility allocation

plans. In view of the impossibility of determining, for a unknown future war, the total

eventual requirements for either command

or industrial facilities, the War Department

3

 (1) OASW Planning Br Cir 3, 15 Oct 36 (draft

copy), supplementing Cir 3, 28 Jan 35, sub: Emergency Construction. (2) War Construction Plan of

the Construction Division, OASW, especially pp.

14-17. 4

 See above, Chapter XII. 5

 See below, Chapter XX.
440 THE ARMY AND ECONOMIC MOBILIZATION

adopted general plans for obtaining its

needed facilities as rapidly as possible when

specific goals could be formulated. These

plans included the adoption and steady improvement of types and specifications for

camps, cantonments, arsenals, proving

grounds, munitions plants, and other facilities; the advance preparation of the construction industry to meet the problems of

wartime construction; the establishment of

commodity committees and plans for the

procurement and conservation of construction materials in time of shortage; and

studies and recommendations to meet many

other facets of the wartime facilities problem.

As the War Department and the NDAC

came to grips with the actual implementation of the plant expansion program in the

summer of 1940 they were beset by many

difficulties. The hypotheses and options of

the planning period now had to be replaced

by definite answers to specific questions.

How much new plant capacity should be

created? What products and what industries

required such expansion? What firms should

receive contracts to build plants and what

firms should operate them? Where should

the new plants be built? What contract

terms would be adequate to stimulate defense construction and still protect the public interest? How could undesirable postwar

effects upon the economy as well as postwar

charges of graft and incompetence be

avoided? What new legislation was needed

to implement the program? How large a

staff and what kind of organization would

be needed in the War Department and other

agencies to administer the program? Where

could people with the necessary drive and

know-how be found? Each of these questions

and many more ramified into a thousand

subsidiary questions, each of which in turn

required serious attention. Above all was

the compelling necessity for speed. Hitler

would not wait for these questions to be

answered with precision and unimpeachable accuracy.

Many of the methods used by the government in solving these problems were unorthodox. Their conception and development required a combination of boldness

and patient persistence on the part of those

who planned and engineered the program.

Numerous barriers of a political, economic,

and legal nature had to be removed or surmounted at every stage in the undertaking.

It was soon found that private capital was

unable to finance the expansion on the scale

and with the speed originally hoped and

planned. The government thus had to assume financial responsibility as well as

general leadership for the undertaking. The

ultimate success of the program is attested

by the tremendous volume of munitions production achieved by the end of 1943 and by

the fact that war plant expansion in the

three years ending with 1943 was equal to

half the investment in manufacturing facilities during the preceding two decades.

As the defense program developed, four

major classes of industrial expansion

emerged, based upon the methods of financing used: (1) private financing with the

aid of tax amortization; (2) government

reimbursement of private capital outlays

(the Emergency Plant Facilities (EPF)

contract); (3) government ownership with

private purchase option (Defense Plant

Corporation financing); and (4) outright

government ownership. The War Department performed a major role in the development and administration of each of these.
GENERAL ASPECTS OF FACILITIES EXPANSION 441

Land Acquisition by the War Department

In order to carry out its vast expansion of

both command and industrial facilities, the

War Department had to acquire unprecedented quantities of land. On 30 June 1940,

total land holdings of the War Department

amounted to 2,116,862 acres. By 1946 it

had acquired nearly 44 million additional,

for a total of 45,870,901 acres.6 This aggregate of nearly 72,000 square miles was seven

times the holdings of the Navy Department

and greater than the combined areas of all

six New England states. Most of the increase represented temporary acquisitions

for the duration of the emergency—transfers by the President from the public domain and other federal agencies and leases

from individuals and state and local governments. Nevertheless, outright purchases by

the War Department amounted to 5,728,-

876 acres, an area substantially larger than

the state of Massachusetts. This land cost

the War Department approximately $360,-

000,000. In addition, annual rents paid for

leased lands averaged some $50 million

from the beginning of 1943 to the end of

the war.7

Approximately 47 percent of the War

Department's land holdings was devoted to

military camps and stations, 25 percent to

bombing and artillery ranges, 17 percent to

ordnance plants and storage facilities, and

the remainder to airfield, urban, and miscellaneous uses.8

 Army airfields typically required 160 acres for auxiliary landing fields

and up to 2,500 or more acres for main fields

containing facilities and personnel complements. Ordnance plants and storage areas

usually ran from 5,000 to 20,000 acres;

army camps and artillery ranges from

25,000 to 100,000 acres; and large maneuvering areas for both Ground and Air

Forces far in excess of 100,000 acres.

The largest individual sites—running to

more than 1,000,000 acres apiece—were

acquired for aerial bombing and gunnery

ranges. The Alamogordo (New Mexico)

Army Air Base contained 1,262,000 acres;

the Yuma (Arizona) AAF General Bombing Range, 1,603,000; and Wendover

Field, Utah, 1,836,000 acres. The most gigantic of all—the Central Nevada AAF

Bombing and Gunnery Range based at

Tonopah, Nevada—embraced 3,313,000

acres, an area of over 5,000 square miles or

more than four times the size of the state

of Rhode Island. The three largest facilities

of the Ground Forces were the Fort Bliss,

New Mexico, antiaircraft firing range;

Camp Irwin at Barstow, California; and

the Desert Training Center, Indio, California. These contained 436,000, 639,000,

and 781,000 acres, respectively.9

Although the probable difficulties of land

acquisition played a part in the final selection of particular sites, they were usually

not controlling, and the real work of acquisition began after sites had been determined.10

6

 U.S. Department of Agriculture, Bureau of

Agricultural Economics, Acquisition and Use of

Land for Military and War Production Purposes,

World War II (War Records Monograph 5, August

1947), p. 5, Table 1. Much of the following discussion is based on this monograph, which in turn

drew heavily from unpublished monographs of the

War Department. 7

 Compiled from: (1) War Department, Quarterly Inventory of Owned, Sponsored, and Leased

Facilities, 30 Jun 45; (2) Control Division, ASF,

Statistical Review, World War II [1946], p. 88.

8

 U.S. Dept of Agriculture, Acquisition and Use

of Land, pp. 4-5. 9

 WD, Quarterly Inventory of Owned, Sponsored,

and Leased Facilities, 30 Jun 45. 10

 The problems involved in selecting sites for

War Department facilities are discussed in detail

elsewhere. See chapter on Site Selection in Remington and Fine, The Corps of Engineers: Military Construction in the United States.
442 THE ARMY AND ECONOMIC MOBILIZATION

At the beginning of the emergency the

War Department contracted with private

real estate brokers to make appraisals, conduct negotiations, obtain options, gain title

clearance, and effect final settlement. This

arrangement proved unsatisfactory and was

subject to criticism in later investigations;

the payment of normal commissions for

transactions in which both buyer and seller

had already been determined, the tendency

of land prices to become inflated under

what amounted to the discredited cost-plusa-percentage-of-cost contracting procedure,

and some of the methods used by brokers,

all came under fire.11

Late in 1940, the War Department arranged to use the staffs of the Soil Conservation Service and the Forest Service on a

reimbursable basis. This gave the War Department the benefit of a decentralized

organization as well as experienced personnel. Finally, in May 1941, the War Department established its own Real Estate Branch

in the Construction Division, OQMG,

which later became the Construction Division, Corps of Engineers. Standard policies

and procedures were adopted and disseminated by Washington headquarters: the

actual process of acquisition was performed

in the field in order to minimize duplication

and waste of effort.12

The emergency acquisition of land was

accompanied by hardship and confusion not

ordinarily experienced in peacetime. Although the War Department utilized marginal cropland and wasteland wherever

feasible, much of its land requirements—

especially for ordnance plants and airfields—was necessarily valuable farmland

close to established towns and cities. Because

of the urgency many areas had to be cleared

and evacuated without delay. Owners,

tenants, and temporary sharecroppers alike

were suddenly required to vacate, often

without prospect of a new location. The

poorer individuals and families were frequently without sufficient funds to defray

moving or storage expenses for themselves,

their livestock and other belongings. Long

established owners, elderly people, and

others with unique property interests often

suffered more from the loss of sentimental

attachments and the frustrations of forced

removal than from actual pecuniary damage. Farmers typically experienced the loss

of a year's crop because of the inevitable

time lag between notice of evacuation and

final relocation. Since land for military

establishments usually had to be acquired

en bloc, retention by former occupants of

particularly valuable or desirable tracts

within the sites was impracticable.

The dislocations resulting from land acquisitions were not confined to individuals.

Established communities were often dismembered, and occasionally entirely obliterated. Community facilities such as schools,

roads, power lines, general utilities and even

cemeteries were either lost or relocated. Not

infrequently occupants of adjacent areas

voluntarily chose to move rather than remain under the changed conditions. Local

governmental taxing units—counties, townships, school districts, and the like—were

faced with the disappearance of sizable

portions of their tax base as buildings were

moved or destroyed and title to the land

transferred to the nontaxpaying federal

government. This was particularly em11

 (1) H Com. on Military Affairs, 77 Cong.,

1st Sess., Hearings on Inquiry as to National Defense Construction, April 1941. (2) Truman Committee, Hearings, 1:55ff. 12

 For greater detail, see Narrative Outline and

Source Material for Historical Monograph of the

War Department Real Estate Program [circa 1948]

in Engineer Historical Div, OCofEngrs.
GENERAL ASPECTS OF FACILITIES EXPANSION 443

barrassing where local expenditures were not

reduced by the evacuation, as in the case of

outstanding bond issues and other fixed

costs.13

Within the framework of its statutory

powers the War Department developed a

number of measures to reduce the hardships

created by its land acquisition program. Unlike the Navy, whose land requirements

were smaller and more highly specialized,

the War Department attempted to obtain

its privately purchased land by direct negotiation rather than by general condemnation proceedings. Wherever time permitted,

extensive preparations and careful appraisals were made prior to negotiation.

Appraisers' estimates were based on a composite of cost, capitalized income value, and

comparative sale price of similar properties.

In cases where negotiation failed to obtain

settlement or where immediate use of the

land was necessary, the condemnation procedure was used and final settlement prices

were decided by the courts.

The War Department avoided acquisition of private lands wherever possible, preferring to take advantage of public land

made available by other federal agencies.

Early in the program, at the request of land

owners, it shifted from a policy of leasing

to outright purchase of private land for

camps and ordnance plants. Rental income

ordinarily was too small to be of much help

in relocation of displaced persons and the

impracticality of postponing permanent relocation was soon realized as the emergency

deepened. Tenant farmers were compensated for the loss of their lease-hold interest,

which consisted for the most part of the

loss of crops already seeded.

A feature of the land program which became of increasing importance by the end

of the war was the War Department policy

of outleasing land for agricultural purposes

when such use did not interfere with military purposes. The chief source of such land

use was the abundant acreage of top-grade

farm land in the extended safety belts surrounding ordnance manufacturing and

storage establishments. One such establishment—the Wabash River Ordnance Works

in Vermillion County, Indiana—in 1945

succeeded in outleasing 16,009 of its total

of 21,960 acres for rentals amounting to

$97,589. During the previous year, when

total acreage outleased was 14,506, the estimated crop production on this site was as

follows: corn, 269,700 bushels; soybeans,

58,120 bushels; oats and wheat, 44,850

bushels; hay, 23 tons; grazing of 400

animal-units for six months. By 1946, nearly

a million and a quarter acres in forty-two

states were outleased by the War Depart13

 An unpublished study by the Army Engineers

gives an indication of the degree of loss in the tax

base for counties, townships, and school districts

resulting from War Department land acquisition.

A survey of sixteen command facilities (forts and

camps) indicated an average loss in assessed valuation of 1.0 percent for entire counties, 3.3 percent

for townships, and 13.2 percent for school districts.

The respective figures for the project causing the

highest loss were 21.6 percent, 87.5 percent and 100

percent. For ordnance plants (fifteen projects) the

average loss for townships and school districts was

substantially higher:

It is apparent that individual townships, and especially school districts, experienced a crippling reduction in their sources of income. See study

reproduced in U.S. Dept of Agriculture, Acquisition and Use of Land, p. 63, Table 8.
444 THE ARMY AND ECONOMIC MOBILIZATION

ment for agricultural and grazing purposes.14

The major burden of resolving the problems created by War Department land acquisitions fell to other agencies. Local governmental units, county agricultural agents,

and, in urgent cases, the Red Cross did

much to relieve the immediate problems of

enforced migration. The Farm Security Administration and the Federal Public Housing Authority sponsored and financed emergency housing projects. Under the Lanham

Act, the Federal Works Agency spent nearly

$500 million in aid of local taxing units for

schools, hospitals, water and sewers, recreation, and related community facilities. These

expenditures in many instances afforded

substantial compensation for loss of revenue

to local tax units caused by War Department withdrawals of land.15

War Department Command Facilities

A brief review of the War Department's

achievement in the provision of command

facilities for the Army in World War II is

essential to an understanding of the total

task of economic mobilization. Command

construction competed with the construction of industrial facilities—as well as with

the procurement of finished munitions—

for scarce materials, equipment, manpower,

and managerial know-how. At all stages of

their development—from planning through

contract negotiation and administration to

project completion—command installations

presented numerous problems common to

industrial facility expansion and end-item

procurement. Army officials responsible for

the development of command facilities were

faced with a multiplicity of duties with respect to site selection and project approval,

contract placement and clearance, land acquisition, priorities and other material controls, pricing and renegotiation, and ultimately demobilization and property

disposition.

Some idea of the scope of the Army's farflung empire of command installations in

World War II may be inferred from the

following partial list of establishments within the zone of interior alone: Army posts,

camps, stations, forts, training and maneuvering areas, artillery and other ranges for

for the Ground Forces; airfields, air bases

and stations, bombing and gunnery ranges

for the Army Air Forces; storage facilities—

from remote ammunition depots to metropolitan warehouses—for all branches of the

Army; repair and maintenance stations for

all types of equipment; hospitals, convalescent and recreation centers; military police

camps, Japanese relocation centers, prisoner of war camps; a network of harbor defenses and other installations throughout the

entire country for defense against enemy attack; holding and reconsignment centers,

ports of embarkation, staging areas, and

related facilities to mount the tremendous

overseas expeditions of troops and supplies;

local induction centers, radio stations, laundries, market centers, special schools and

offices (including the $78 million Pentagon

building); and, not to be overlooked, research laboratories, proving grounds, testing centers, and supersecret installations

symbolized most completely by the atomic

bomb.

The command facilities most urgently

needed by the War Department at the beginning of the mobilization period were

camps and cantonments to accommodate

the expanding Army. The increase in the

authorized strength of the Army from

14

 Ibid., pp. 81, 115. 15

 Ibid, p. 65.
GENERAL ASPECTS OF FACILITIES EXPANSION 445

THE PENTAGON, WASHINGTON, D. C. Picture taken in 1949. Note complex

network of roadways surrounding Pentagon. Visible in upper portion of photograph is part

of South Post area, Fort Myer, Virginia.

174,000 to 375,000 during the fiscal year

ending 30 June 1940 represented a major

expansion in terms of the skeleton status of

the Army for almost two previous decades.

But this was miniscule when compared with

the sudden upsurge made possible by the

passage of the Selective Service Act on 16

September 1940. This legislation authorized

the expansion of the Army to a total of

1,400,000, consisting of 630,000 selectees,

500,000 Regular Army, and 270,000 National Guard. Unfortunately, until the actual passage of the Selective Service Act,

the Army did not possess either the funds

or the authority for the wholesale camp

construction program needed to accommodate the new recruits. Construction, which

ideally should have been undertaken on a

large scale throughout the summer, was delayed until bad weather contributed heavily

to increased costs as well as soldier

discomfort.16

At the beginning of the defense period

the responsibility for constructing command facilities was lodged in the Construction Division of the Quartermaster Corps.

The division's peacetime organization, designed largely for the maintenance and

16

 Biennial Report of the Chief of Staff of the

United States Army, 1 July 1939 to 30 June 1941,

to the Secretary of War (Washington 1941), pp.

1-8.
446 THE ARMY AND ECONOMIC MOBILIZATION

servicing of existing Army posts, was inadequate to the task suddenly thrust upon it.

By heroic efforts, coupled with rapid expansion and successive reorganizations, The

Quartermaster General's construction

agency had made an impressive record in

the creation of both command and industrial facilities by the end of 1941.17

The Army's construction organization

and activities were gradually transferred to

the Corps of Engineers. The Engineers had

long been responsible for overseas construction, as well as for river and harbor work

with the United States. In November 1940,

construction of Army air bases and other

Air Corps projects was transferred from

The Quartermaster General to the Chief of

Engineers. In December 1941 all remaining

construction activity was transferred to the

Engineers, freeing the Quartermaster Corps

for its numerous procurement and other activities which had grown to unprecedented

magnitudes.18

The Army's Construction Division, under both The Quartermaster General and

the Chief of Engineers, had the responsibility for letting and supervising contracts

for private construction firms who performed the actual work. The contractual

arrangements for large projects typically

involved an architect-engineer contract and

a construction contract with separate firms.

The architect-engineer contract called for

the furnishing of all plans and engineering

drawings as well as for day-to-day supervision of the construction contractor to insure

that actual construction fulfilled the specifications. The construction contract was

either a fixed-price or CPFF agreement,

both of which permitted and relied upon

extensive subcontracting.19

The camps provided by the Army for

World War II were vastly superior to those

of World War I. Heating, plumbing, lighting, recreational, and other facilities were

more elaborate, more costly, and of more

enduring construction. The large size of

individual establishments, the great number of projects simultaneously under construction, and the pressure of urgent deadlines posed complex administrative problems, strained capacity to the limit, and

added heavily to costs. In rapid succession,

sites had to be selected, land condemned

and cleared, areas evacuated, access roads

17

 See observations of the Truman Committee in

S. Rpt. 480, Pt. 2, 77th Cong., 1st Sess., 14 Aug

41, Camp and Cantonment Investigation, p. 34.

Also War Department, OQMG, Construction Division, Report on the Activities of the Construction

Division, July 1, 1940 to November 1, 1941. The

accomplishments of the QMC Construction Division during this period owed much to the energy

and organizing genius of its chief, Colonel Somervell, who in less than a year and a half rose to the

position of Lieutenant General in command of the

Army Services Forces. Substantial insight into General Somervell's qualities as a leader is afforded

by the eight-page Plan of Organization of the Construction Division, OQMG, accompanying OQMG

Construction Div Ltr 361, 22 Jul 41. Part VII of

this document, The Functioning of an Organization, is a forceful exposition of the psychological

and spiritual elements essential to the successful

operation of any organization. For an informative

summary of the War Department's construction

problems and activities during the defense period,

see WD OQMG, Construction Div, Report on the

Activities of the Construction Division, July 1,

1940 to November, 1941. This document contains

nearly 300 pages of text, statistical tables, and

other material.

18

 (1) 54 Stat. 875, 9 Sep 40. (2) AG Memo for

CofEngrs, 20 Nov 40, sub: Air Field Construction. (3) 55 Stat. 787, 1 Dec 41. (4) Ltr, TAG

to TQMG, 3 Dec 41, sub: Transfer of Construction Activities from the QMC to CofEngrs, AG

600.12 (11-10-4-1) MO-D. 19

 See above, pages 283-88; also copy of the voluminous construction contract for Fort Bragg, at

Fayetteville, North Carolina, reproduced in Truman Committee, Hearings, 6:1889-1912.
GENERAL ASPECTS OF FACILITIES EXPANSION 447

and spur tracks built, drainage and other

utilities installed, and building construction expedited. The Army's problem was

complicated by local shortages of established architect-engineers, construction

firms, materials, and skilled labor. At every

stage in the program numerous pressures

were brought to bear to locate camps at

sites favorable to special interests, to employ or purchase material from certain concerns, and to favor particular labor organizations. Intangible but important barriers

of legislative and governmental administrative practice at local, state, and national

levels had to be overcome.20

Total command construction for the

Army in World War II, including overseas construction, exceeded in dollar value

the construction of all War Department

owned, sponsored, and leased industrial

facilities.21 As of 30 June 1945 the War Department had spent some $7.2 billion for

command installations within the zone of

interior. Estimated expenditures for overseas construction amounted to approximately $1.8 billion. Against this total of $9

billion, comparative expenditures for industrial facilities (War Department-owned

plus War Department-sponsored DPC and

EPF facilities) were only $8 billion, comprising $7 billion for complete establishments and an additional $ 1 billion for government-furnished equipment to privately

owned plants.22 The achievements of the

War Department in providing command

facilities for the World War II effort are

indicated in part by the statistical record

(Tables 48 and 49).

Facility Clearance Procedures

The problem of central co-ordination and

control over the expansion of facilities was

one which seriously concerned the War Department as well as the central mobilization

control agencies. The War Department's

primary interest and responsibility was to

insure the creation of sufficient facilities of

both the command and industrial variety

to enable it to fulfill its basic mission. The

central mobilization control agencies, from

the NDAC to the War Production Board,

felt keenly their responsibility for controlling the expansion program in such a way

as to satisfy a number of broad economic

and social objectives. These objectives were

in many respects similar to those underlying

the criteria for clearance of regular procurement contracts. They included wide geographical dispersion of new facilities, avoidance of tight labor areas, prevention of

duplication and overexpansion, and conservation of materials and other resources

by limiting both the type and volume of

expansions. The control procedures established to attain these objectives often conflicted with the requirements of rapid

prosecution of the defense and war program,

20

 For a detailed treatment of Army construction in World War II, see the several volumes under preparation by the Corps of Engineers for the

series UNITED STATES ARMY IN WORLD

WAR II, especially Remington and Fine, The

Corps of Engineers: Military Construction in the

United States. 21

 War Department "sponsored" facilities as the

term was applied in World War II, include EPF

and DPC facilities but not private expansions under War Department-approved certificates of

necessity.

22

 (1) WD, Quarterly Inventory of Owned,

Sponsored, and Leased Facilities, 30 Jun 45. (2)

Control Div, ASF, Statistical Review, World War

II.
448 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 48—WAR DEPARTMENT COMMAND FACILITIES: SUMMARY BY MAJOR TYPES

[Cost and Acres in Thousands]

Source: WD, Quarterly Inventory of Owned, Sponsored and Leased Facilities, 30 Sep 45.

thus giving rise to considerable controversy

among all concerned.23

Because of the strictly military and often

confidential nature of the War Department's command facilities, relatively little

external control was exercised over their

creation. The chief controls in this area were

effected through material control systems

and joint agreements to pare all types of

construction to the bone.24

Industrial facility expansions, on the

other hand, involved not only the broad social and economic considerations mentioned

above, but intimately related questions of

financing, competition among private firms,

and the extent of control by military agen23

 For a more detailed study of facility clearance

problems and procedures, especially from the

standpoint of the central mobilization control agencies, see: (1) Reginald C. McGrane, The Facilities

and Construction Program of the War Production

Board and Predecessor Agencies, May 1940 to May

1945, (CPA, Historical Reports on War Administration, Special Study 19, 5 April 1946); (2)

CPA Industrial Mobilization for War, pp. 77-81,

160-63, 385-409, 652-59; (3) Industrial College

of the Armed Forces R83, Construction of New

Facilities (January 1947), ICAF Library.

24

 (1) Jt Dir of the WPB and the War and Navy

Depts on Wartime Construction, 20 May 42. (2)

Dir, TAG to CG AAF, CGs All Depts and Corps

Areas, Chfs of All Technical Services, and COs

of Exempted Stations, 1 Jun 42, sub: Directive for

War-Time Construction. McGrane, Facilities and

Construction Program, discussion at pp. 82-83.

For War Department internal procedures for programing and control of command construction, see

historical monograph, Staff Supervision of the Construction Program (1946), prepared by Command

Installation Branch Mobilization Division, ASF.
GENERAL ASPECTS OF FACILITIES EXPANSION 449

TABLE 49—WAR DEPARTMENT COMMAND FACILITIES: COST OF 50 LARGEST INSTALLATIONS

(1 JULY 1940-30 SEPTEMBER 1945)

Source: WD Quarterly Inventory of Owned, Sponsored and Leased Facilities, 30 Sep 45.

cies over the development of the economy.

For all these reasons, Congress in establishing the first War Department Expediting Funds for the creation of munitions

plant capacity, had made their expenditure

subject to the recommendations of the

NDAC and the approval of the President.25

Pending the adoption of the Munitions

Program of 30 June 1940, Assistant Secretary of War Johnson appointed a committee to prepare and submit a general program of industrial facilities expansion. On

24 June this committee submitted recommendations for the creation of new facilities

aggregating nearly one and a half billion

dollars:

25

 54 Stat. 602-03, 26 Jun 40.
450 THE ARMY AND ECONOMIC MOBILIZATION

These recommendations, based upon earlier

War Department studies as well as current

proposals of the relevant supply arms, indicated the types of plant to be constructed,

without specifying locations.26

On the following day Mr. Johnson, by

then the Acting Secretary of War, designated a six-man committee of officers—

eventually known as the Site Location

Board—to make recommendations for the

general location of the plants to be constructed under the foregoing program. The

Secretary stated a number of factors to be

considered. These included the strategic

grouping of related manufacturing facilities into self-sufficient areas (in order to

minimize the effect of the loss of one or more

areas), the prevention and avoidance of

congested areas, and the availability of productive resources and transportation.27

After submitting its initial general report,

the new Site Location Board remained in

existence as the War Department agency

for the screening of major facility proposals

of the various supply arms. Procedures were

informal and the recommendations of the

board had to receive the approval of the

Assistant Secretary, the NDAC, and the

President before specific projects could be

undertaken.28

During the life of the NDAC, the War

Department's new facility proposals were

approved by the commission as a whole in

regular meeting. The unwieldiness of the

NDAC, composed of seven commissioners of

co-ordinate authority but operating in separate fields, was nowhere more apparent than

in the clearance of facility proposals.

Projects which had been screened and approved by the staff of the commissioner for

production would be presented for clearance

at the full meeting of the commission, only

to receive the objection that the commissioner for labor, or for transportation, or for

consumer protection had an interest in the

projects but had not previously seen the proposals. In view of the urgency, most of the

objections were waived and eventually a procedure was established under which the coordinator for purchases was responsible for

processing proposals through all interested

commissioners.29

With the replacement of NDAC by OPM

it became apparent that more systematic

procedures for facility clearance were necessary. At an early meeting of the OPM council, Mr. Knudsen indicated that he was

satisfied with the War Department's control

over its Ordnance expansion projects, but

there appeared to be some question over the

control of Air Corps expansions. Together

with recognition within OUSW of the need

for tighter controls, this led to the establishment on 13 March 1941 of a new War

Department Facilities Board.30 This was

26

 (1) Memo, Col Harry K. Rutherford, Chmn,

et al., for ASW, 24 Jun 40, sub: Proposed War

Department Program for Increasing Productive

Capacity for Munitions. (2) Memo, Col James H.

Burns, EX OASW, for ASW, 11 Jul 40, sub:

Procedure on Munitions Plant Construction Program, the Awarding of Contracts and Supervision

of Performance Thereunder, approved same date

by ASW and distributed to supply arms, NDAC,

et al.

27

 Ltr Orders, Louis Johnson, Actg SW, 25 Jun

40, in Office Chief of Ordnance, War Department

Policy Concerning Sites for New Ordnance Depots

(hereafter cited as OCofOrd, Policy re Sites),

Exhibit 33. 28

 (1) Memo, Col Rutherford, Chmn, et al., for

ASW, 8 Jul 40, sub: Locations for Plants in War

Department Program for New Productive Capacity

for Munitions. (2) Procedure in Selecting Contractors and Placing Contracts for Government

Construction, in Brig Gen John W. N. Schulz, Dir

of Purchases and Contracts, OUSW, 30 Jun 41,

Report of the P&C Branch for FY 1941. 29 CPA, NDAC Minutes, pp. 21, 22-23, 29, 34-

35, 38-39, 55-56, and passim. 30

 (1) CPA, OPM Minutes, p. 2. (2) ICAF R83,

Construction of New Facilities, p. 19.
GENERAL ASPECTS OF FACILITIES EXPANSION 451

followed by directives to all the supply arms

specifying in detail new War Department

procedures in the programing and clearing

of all industrial facility projects. Under the

new arrangements, each facility proposal

submitted by a supply arm had to be supported by a detailed statement covering the

nature, purpose, capacity, and location of

the new project, its requirements for labor,

the availability at the proposed site of adequate labor, power, transportation, water,

fuel, housing, and other utilities, sources and

amounts of principal raw materials, destination of principal products, the consideration

of alternate locations, and other information. This information was to be used by the

War Department Facilities Board in its deliberations and in its presentation of the

project to OPM.31

On 17 March 1941 the OPM, successfully forestalling a movement in Congress

to create a plant site board subject to rigid

legislative requirements, established its own

Plant Site Committee. On 6 May 1941 this

body was formally designated the Plant Site

Board and various clearance criteria were

developed. The basic policy was one of

broad geographical decentralization and full

employment of available labor. This was

supplemented by the principles of denying

new facilities as long as existing capacity was

available, and disapproving locations where

the supply of labor, power, utilities, and

housing was inadequate. Attempts were

made to participate in the initial planning

of War and Navy Department projects and

to co-ordinate the work of supply contract

clearance with facility clearances.32

Despite the board's good intentions, its

practical control over new facility projects

was limited and confined principally to the

veto power. The War and Navy Departments felt that their own internal screening

procedures were adequate, that they were

applying the same general standards as the

board, and that the compelling need for

getting the defense program under way precluded duplication of effort and lengthy negotiations after their own determinations

had been made. For its part, the OPM

board was reluctant to veto arrangements

which had progressed too far to be economically abandoned, especially since the relative merits of alternative possibilities frequently could not be easily appraised or

defended. Moreover, as a result of the proliferation of agencies which acquired an

interest in and authority over facility expansions, the over-all process of formal

clearance and approval was becoming unmanageable. For some projects initiated by

the services approvals were necessary by

OPM, the Defense Plant Corporation, the

Lend-Lease Administration, the Bureau of

the Budget, and the White House. To add

to the paper work and delay, double clearance within the OPM was required—the

Plant Site Board's conditional approval of

the construction project, and separate approval by the Contract Distribution Division. It is small wonder that the initiating

supply arms and services often lost patience

with the procedure.33

31

 (1) Memo, USW Patterson, for CofOrd et al.,

5 Apr 41, sub: Revised Procedure on Munitions

Plant Construction Program, the Awarding of Contracts and Supervision Thereunder. (2) Memo,

Gen Rutherford, Chmn War Department Facilities

Board, for Chfs of Supply Arms and Services and

War Department Facilities Board, 23 Apr 41, same

sub.

32

 (1) CPA, OPM Minutes, p. 10. (2) McGrane,

Facilities and Construction Program, pp. 40-42. 33

 (1) Ltr, USW Patterson to William S. Knudsen, 15 Oct 41. (2) Memo, Gen Rutherford for

Chfs of Supply Arms and Services and Members

of the War Department Facilities Board, 17 Oct 41,

sub: Clearance of War Department Projects by the
452 THE ARMY AND ECONOMIC MOBILIZATION

With the advent of Pearl Harbor these

cumbersome arrangements were for the

most part thrown overboard. On 10 December 1941 the President gave the Secretary of War a blanket approval obviating

the need for White House clearance of

facility expansions.34 On 13 December,

Under Secretary Patterson proposed to Mr.

Knudsen that only facility projects and supply contracts involving more than $5,000,-

000 be cleared either by his own office or

by OPM, leaving all smaller projects to the

discretion of the chiefs of the services. He

further proposed that OPM representatives

be stationed in the offices of War Department supply arms in Washington, at Wright

Field, and in the various procurement districts, where they could be fully informed

of all projects from their conception. Under

these conditions Mr. Patterson would expect clearance of all projects by OPM

within forty-eight hours.35

The Under Secretary's proposals were

adopted in part by the OPM council in its

meetings of 15 and 19 December 1941. It

was agreed that OPM representatives would

be stationed throughout the War Department as suggested and that facility projects

and supply contracts under $1,000,000

would not require formal clearance by

OPM. Awards over this amount, either for

new construction or for end items of procurement, would be cleared by OPM's Director of Purchases. This avoided the duplication and delay resulting from the

requirement of double clearance within

OPM.36 On 29 December 1941 the War

Department Facilities Board was abolished,

leaving the chiefs of the services responsible

for projects under $1,000,000, and the

Under Secretary's office for those over that

amount.37

In the weeks after Pearl Harbor the nation's industry was deluged with new procurement contracts of almost every conceivable variety. As early as 7 January 1942,

Mr. Knudsen, in one of OPM's last council meetings, noted that some fifty-five new

munitions plants were being proposed and

stressed the need for additional review procedures prior to the letting of contracts.38

Three months after the establishment of

the War Production Board the WPB Plant

Site Board was created. This was an unwieldy body of fifteen members, only two

of whom represented the armed forces,

despite the fact that the vast majority of

projects under consideration were those of

the Army and Navy. It was the belief of

the Army Representative that little was

accomplished by this group.39

The expanded production goals of the

services, combined with the mammoth

Presidential Objectives established in January 1942, soon came under challenge on

the ground of feasibility.40 All previous

criteria of facilities control—spreading of

contracts to provide full employment,

Office of Production Management. These considerations are discussed in McGrane, Facilities and

Construction Program, pp. 56-62. 34

 President Roosevelt to SW, 10 Dec 41. 35

 Ltr, USW Patterson to Knudsen, Dir Gen

OPM, 13 Dec 41. 36

 CPA, OPM Minutes, pp. 80-82.

37

 Memo For Each Officer, 17 Jan 42, in Facilities files, USW, Facilities Procedure, June 1940-

August 1942. 38

 CPA, OPM Minutes, p. 84. 39

 Memo, Col Hugh A. Murrill, Chf Facilities

Resources Div for Lt Col Edgar Lewis, OUSW,

24 Aug 42. The WPB Plant Site Board was established on 16 April 1942 by WPB General Administrative Order 2-31. Except to note its abolishment in the fall of 1942, neither the official history

of the War Production Board nor the special study

by McGrane, makes mention of this body. (1) Facilities and Construction Program, p. 100. (2) CPA,

Industrial Mobilization for War, p. 400. 40

 See Chapter VII, above.
GENERAL ASPECTS OF FACILITIES EXPANSION 453

avoidance of congested areas, the prevention of excessive postwar capacity, and

others—were dwarfed by the new discovery

that the total national production program

was so great that available materials were

inadequate to permit both the completion

of planned facilities and the production of

needed end items of procurement at the

same time. Projected facilities of all kinds

amounted to something like a third of the

entire production program for 1942. The

need for a systematic review of the entire

war program became evident, and proposals

for the drastic limitation of new authorizations or even the stoppage of projects already under way received increasing attention. In March 1942, Col. J. L. Phillips

and Comdr. H. G. Sickel, the respective

Army and Navy heads of the Priorities Division, ANMB, forcefully indicated to the

ANMB Executive Committee, the probable

consequences of a failure to curtail further

expansion:

If we continue as at present, we shall have

plants standing useless for lack of equipment

or raw materials, or other things. Other plants

will be turning scarce materials into items

which cannot be used to oppose the enemy

because of the lack of other things which

should have been made instead. We shall have

guns without gun sights, tanks without guns,

planes without bomb sights, ships held up for lack of steel plates, planes which we cannot

get to the field of battle because of lack of

merchant bottoms.41

In a subsequent memorandum they recommended that machinery be established to

provide firm estimates of material requirements for all procurement programs, centralized screening and programing of all

new facility projects, and the review of

projects already authorized to ascertain

whether existing priority ratings were justified in terms of military necessity.42

At about the same time, WPB's Planning

Committee under the chairmanship of

Robert Nathan had completed a provisional

study of the entire War Munitions Program

and concluded that it was impossible of attainment. Among the recommendations of

the committee was the drastic curtailment

of construction objectives by nearly 50 percent.43

 The mutual concern of the ANMB

Priorities Committee and the WPB Planning Committee over the imbalance in facilities planning led to the formation of an interdepartmental Committee on Industrial

Facilities and Construction. The committee was composed of Nathan as chairman,

and Colonel Phillips and Commander

Sickel as the Army and Navy Representatives. The aims of the three-man committee

were to develop and recommend measures

for curtailing relatively unnecessary construction. After nearly a month the committee submitted its report. The general

findings of the report were that materials

were becoming increasingly scarce, there

were many idle and unconverted facilities,

new construction should be minimized to

avoid postwar excess capacity, and consumption of scarce materials in existing construction programs could be substantially

reduced by simplification of design and

specifications.

The committee specifically recommended

the creation of a full-time facility review

board, with adequate powers and representation, to review and limit all facility

programs. The existing WPB Plant Site

41

 Memo, Col J. L. Phillips and Comdr H. G.

Sickel for Ex Com ANMB, 13 Mar 42.

42

 Memo, Phillips for Sickel, 26 Mar 42. 43

 Memo, WPB Planning Com and Statistics Div

for Donald Nelson, 17 Mar 42 (Planning Committee Doc. 35), cited in McGrane, Facilities and Construction Program, p. 90.
454 THE ARMY AND ECONOMIC MOBILIZATION

Board would be replaced by the new board.

Distribution of curtailments affecting the

military services would be made through

the Army and Navy Munitions Board.

Throughout the committee's report ran the

basic proposition that the diversion of scarce

materials to further facilities expansion

would deprive the nation's already expanded plant capacity of raw materials essential to the turning out of finished

munitions.44

Despite the consensus among the three

members of the committee, the War Department was not ready to surrender control

of its facilities program and Colonel Phillips

was directed to file a dissenting report. The

minority report stated among other things

that any moratorium on construction would

delay the war effort, that the War Department was responsible to the President and

Congress and therefore its decisions should

not be reviewed by an outside agency, and

that the War Department was capable of

knowing how to conserve materials and objected to review of its designs and specifications.45

The War Department's unwillingness to

come to grips with the feasibility issue is

attributable to a number of factors. In the

spring of 1942 both the War Department

and the War Production Board were undergoing widespread organizational changes

and improvements. Neither agency was certain of the ultimate scope of its authority

over the myriad facets of economic mobilization and procurement. There was considerable mutual suspicion and the stated feasibility limitations were not accepted as reliable by the War Department. By mid-September, however, many of the issues were

becoming clear to all concerned. With the

refinement of the organization of the Army

Service Forces, the acceptance of substantial

cuts in the Army Supply Program, the

agreement to adopt the Controlled Materials Plan, and the appointment of Ferdinand Eberstadt as Vice Chairman of the

War Production Board, the stage was set for

agreement on the basic procedures for facility clearance. On 21 September a preliminary agreement was reached by the War

and Navy Departments, the Maritime

Commission, and the War Production

Board for the establishment of a Facility

Clearance Board within the War Production Board. This arrangement was elaborated on 17 October by a formal WPB

administrative order. The Facility Clearance Board was composed of two representatives each of the War and Navy

Departments, one from the Maritime Commission, and two from the War Production

Board. Final decisions of the board were

vested in its chairman—Mr. Ferdinand

Eberstadt, WPB's newly appointed Program

Vice Chairman. The new board replaced

the War Department's existing Special

Committee on Facilities, ANMB's Facilities

Clearance Committee, WPB's Plant Site

Board and two other WPB committees.46 44

 (1) Ibid., pp. 91-92. (2) CPA, Industrial

Mobilization for War, pp. 389-91. 45

 (1) McGrane, Facilities and Construction Program, p. 92. (2) Senate, Small Business Hearings,

11: 1520 ff. (3) An excellent summary of the general facilities problem in 1942 may be found in

Statement of Fred Searls, Jr., Director, Facilities

Bureau, WPB, ibid., 12: 1711-14.

46

 (1) Directive for Facility Clearance Board,

signed 21 September 1942 by Patterson, Forrestal,

Land, and Nelson, (2) Memo, Maj Gen Wilhelm

D. Styer, CofS SOS, for ACofS for Materiel SOS,

21 Sep 42, sub: Facility Clearance Board, (3) WPB

Gen Admin Order 2-61, 17 Oct 42. The War De-
GENERAL ASPECTS OF FACILITIES EXPANSION 455

The purpose of the Facility Clearance

Board was to provide a single comprehensive review and clearance of each industrial

expansion project or program costing $500,-

000 or more, exclusive of machine tools and

production equipment. The review was to

cover necessity, location, method of construction, use of critical materials, manpower, and services. A subordinate body,

the Facilities Clearance Committee, was to

review all new projects from $100,000 to

$500,000, as well as previously authorized

projects regardless of size. Within the War

Department, established organizations and

procedures had been developed for originating, screening, and clearing new projects:

Each technical service and the Materiel

Command, AAF, had its own facility planning section which was required to present

new proposals to the Facilities Branch, ASF.

Although there were variations and changes

in procedures, in general the Facilities

Branch had the responsibility of presenting

War Department projects to the appropriate body within WPB.47

These new arrangements created for the

first time an integrated procedure for the

review and approval of all significant industrial expansion projects, regardless of

origin. Authorization of projects was tied

in with the allotment of materials under

the Controlled Materials Plan, so that official clearance resulted in the grant of

positive, as well as permissive, aid for all

project undertakings. With successive reorganizations of the War Production Board

and the creation of the WPB Facilities

Bureau, the Facility Clearance Board and

its subordinate committee gave way to successor organizations, although the general

procedures remained much the same. By

the end of 1943, with the virtual completion

of the nation's facilities expansion program

for World War II, the problem of facility

clearance had subsided to relatively small

proportions.

partment Special Committee on Facilities had been

created on 8 May 1942 to deal with the WPB Plant

Site Board. The ANMB Facilities Clearance Committee had been formally established on 21 February 1942, primarily for the purpose of allocating the

capacity of existing plants among Army and Navy

supply arms. Col Ray M. Hare, Chf, Facilities Div

ANMB, Weekly Progress Report, 25 Feb 42.

47

 Col Joseph N. Dalton, Chf Admin Br, Hq

SOS, to Chfs of Supply Services SOS, 17 Jun 42,

sub: Responsibility for Planning New Facilities,

Plant Expansion, and Conversion, SPAD 600.12

(6-16-42). For later procedures, see PR 10, Plant

Facilities Expansions, Sec. III, Procedure for Obtaining Clearance and Approval of Industrial

Facility Expansions.
CHAPTER XX

Private Industrial Expansion Under

Tax Amortization

Background of the Amortization Law

Few if any Army contractors at the beginning of the defense period had the plant,

equipment, and workers essential to the

production and delivery of munitions called

for by the war contracts ultimately received

and fulfilled. By the spring of 1941, with

the progressive expansion of Army, Navy,

and Maritime requirements and the United

States' assumption of the role of arsenal of

democracy under the Lend-Lease Act, it

was evident that the cumulative new requirements far exceeded the productive

capacity envisaged in the peacetime facility

allocation plans. Tremendous additions to

the nation's total plant capacity, as well as

greater utilization of existing plants, were

found essential to the expanded procurement program.

Most of the additional productive capacity eventually developed by Army contractors was financed directly or indirectly by

the War Department. The conversion and

expansion of existing plants, the creation of

new facilities—including machinery and

equipment—and the augmentation and

training of labor forces were accomplished

with funds provided by the War Department, or by government lending agencies

and the nation's banking system under War

Department sponsorship. The bulk of these

funds was made available to contractors

under contract terms and collateral arrangements which covered all costs of production,

including facility costs. All labor, management, and material costs were covered by

lump-sum or unit prices in the case of fixedprice contracts, and by authorized costs and

fees under cost-plus-a-fixed-fee contracts.

Facility costs were covered either by special

loans or grants or by estimated amortization

allowances in contract prices for end items—

depending on whether the facilities were

government owned or under private ownership.

At the beginning of the defense period

there were many reasons for attempting to

obtain a maximum of the needed industrial

expansion through private financing. In

mid-1940 the Army did not have unlimited

funds for investment in plant expansion.

The War Department's newly acquired Expediting Funds were inadequate even to construct the specialized facilities needed for

producing powder and ammunition. Much

of the required new industrial plant and

equipment would be of a general and heterogeneous nature similar to existing privately

owned capacity, and in any case would have

to be operated by private firms. Realism

suggested that the best way to obtain the

widespread expansion needed in all sectors

of the economy was to enlist the initiative

and know-how of private enterprise. This

could be done with a minimum of govern-
PRIVATE INDUSTRIAL EXPANSION 457

ment supervision by harnessing the profit

motive within the general framework of the

existing economic and industrial system.

Apart from reasoning devoted especially

to achieving munitions production as

quickly as possible there were secondary

motives arguing for private investment in

defense plants. Many individuals and

groups felt that the Roosevelt administration

was bent on "socializing" the nation's economy and that it would use the defense program to further this objective. Others, less

concerned with such long-run implications,

saw in government ownership of war plants

a specific threat to their own profits, either

in the operation or in the financing of various segments of the program. Also, if plants

were generally built and operated by the

government for the "duration," there would

be complicated and controversial problems

of plant disposition at the end of the emergency.1

Despite the widely expressed viewpoint

that private capital should undertake the

financing of plant expansion for national

defense, private enterprise showed considerable reluctance to begin the task. Painful

memories of a decade of depression could

be summed up for many businessmen as a

nightmare of excess capacity—plant and

equipment built in the lush years of the

1920's only to stand idle at tremendous

investment cost in the 1930's. No one knew

how long the emergency would last or what

percentage of new investment costs would

be recouped during this period. Furthermore, in the face of abundant foreign and

commercial orders not subject to statutory

profit limitations, many firms were loath to

undertake the construction of additional

capacity in order to receive government

contracts.

It was not, however, the prospect of inadequate earnings under government contracts or even of future excess capacity

which furnished the greatest discouragement to business in undertaking the necessary expansion. The major deterrent was the

existing structure of federal tax laws and

regulations combined with the prospect of

greatly increased rates of taxation. As early.

as June 1940, it was clear that Congress

would soon enact an excess profits tax as

well as increases in existing taxes on corporate incomes. These measures were needed

to meet both the rising costs of rearmament

and the pressure to take the profits out of

war. Even further increases would be inevitable if the United States actually became involved in war.2

1

 A revealing description of the political and

economic atmosphere as it affected the expansion of

emergency facilities at the beginning of the defense

period is found in Ethan P. Allen, Policies Governing Private Financing of Emergency Facilities, May

1940 to June 1942 (CPA History Reports on War

Administration, Special Study 12, 15 March 1946)

(hereafter cited as CPA, Policies). The background,

provisions, and philosophy of the tax amortization

law are intimately discussed in David Ginsburg,

The Tax Amortization Deduction, an address delivered before the Practicing Law Institute, New

York, 24 March 1941. This was reproduced in

mimeographed form (88 pp.) by the Office for

Emergency Management and distributed as OEM

Press Release, PM 252, 24 Mar 41. The War Department's role in the tax amortization program is

well summarized in A Report to the Secretary of

War on the Administration of Section 124 of the

Internal Revenue Law Relating to the Issue of

Necessity Certificates (15 February 1945, 20 pages

including introduction). This report, signed by

Under Secretary Patterson, was prepared by Col.

George H. Foster, chief of the Tax Amortization

Section during the greater part of its existence. It is

hereafter cited as Foster Rpt.

2

 As passed by the 8 October 1940 revenue act,

federal corporate income taxes consisted of a 24-

percent "normal" tax plus an excess profits tax with

rates varying from 25-percent for the first $25,000

to 50-percent for excess profits beyond $500,000.

These rates were increased after Pearl Harbor to the
458 THE ARMY AND ECONOMIC MOBILIZATION

Taxes on corporate net income, no matter

how high, would not prevent capital expansion if all capital costs could be deducted in the computation of net income.

It was at this point that a long-standing

regulation of the Bureau of Internal Revenue became crucial to the facilities problem.

This was the provision that annual capital

costs beyond estimated physical depreciation could not be treated as deductible costs

for tax purposes. In practice this meant that

charges to business expense in any one year

for the loss in useful value of buildings and

machinery were limited roughly to 5 and

10 percent, respectively, of their original

cost.3

The businessman was thus in an anomalous position. He was, in effect, asked by

the procuring agencies of the government

to incur heavy indebtedness for new plant

and equipment, and was told by another

arm of government that for tax purposes

only a small fraction of his annual investment costs would be considered a legitimate

cost of doing business with the procuring

agencies. During the emergency he would

be permitted neither to charge all of his

emergency investment costs against income

nor to accumulate out of earnings a sufficient surplus to absorb unamortized facility

costs remaining when the emergency ended.

After the emergency was over, when the

facilities might well be worthless, he would

have the dubious privilege of continuing

to deduct normal depreciation costs from

meager or nonexistent earnings. To add to

his discomfiture, tax rates in peacetime

would almost certainly be reduced, thus

further reducing the value of any postwar

deduction for depreciation.

A still further complication stood in the

way of expansion where it was most desperately needed—in the aircraft industry. By

the terms of the Vinson-Trammel act,

profits on government contracts for naval

shipbuilding and for Army and Navy aircraft had been restricted to 10 and 12 percent, respectively, of contract price. On 28

June 1940, just when large-scale rearmament was about to be undertaken, these percentages were reduced to 8 percent.4

 While

a true net profit figure of 8 percent might be

more than ample in many cases, the big

issue—as in the case of the excess profits

tax—turned on the question "how shall

profits be estimated?" If no more than

ordinary depreciation could be deducted

from gross income during the emergency,

the true level of costs might be greatly underestimated, profits overestimated, and taxes

increased. The consequence of thus defining

business costs as taxable profits would have

been even more severe for many contractors

under the Vinson-Trammel 8-percent limitation than under the excess profits tax. This

presented an impossible situation in an industry which had to be built virtually from

the ground up in order to meet defense

needs, and which after a short time was

point where the excess profits tax took as high as

90-percent of marginal corporate income. 3

 These were standard rates of depreciation

allowable under Bureau of Internal Revenue regulations. A much larger percentage was allowed for

small hand tools and other minor capital items.

Under Section 23(e) of the Internal Revenue

Code, "loss of useful value" resulting from adverse

business conditions could be charged off when

plant and equipment were permanently discarded.

Since this could be done only for the year in which

the loss was actually realized, the provision was

worthless as a means of enabling facilities to pay

for themselves when earnings were high.

4

 54 Stat. 677, 28 Jun 40, Sec. 2. The original

Vinson-Trammel act (48 Stat. 505, 27 Mar 34, Sec.

3) applied only to naval shipbuilding and aircraft.

In 1939 Army aircraft were included for purposes

of equalization (53 Stat. 560, 3 Apr 39, Sec. 14).
PRIVATE INDUSTRIAL EXPANSION 459

expected to shrink to a fraction of its size

at the peak of the emergency.5

The solution to the problem thus appeared to lie in legislation specifically allowing defense contractors to write off their

entire emergency capital costs during the

period of the emergency. A similar provision

had been used belatedly for World War I,

and it was thought that the inadequacies of

the earlier law could be avoided by the careful drafting of new legislation. In any case,

the prime consideration was the commencement of plant construction without delay;

the problem of unjust enrichment could be

dealt with systematically at a later date.6

The first public statement preparing the

way for tax amortization legislation was

made by President Roosevelt in his Fireside

Chat of 26 May 1940, in which he stated

that industry could not be expected to bear

all the risks of the expansion program.

Four days later the NDAC was established

and immediately went to work on the problem. Shortly thereafter, the House Ways

and Means Committee reported favorably

upon the tax amortization deduction if

buttressed by adequate excess profits tax

legislation.7 In his 10 July press conference,

the President indicated that tax amortization, excess profits taxes, and suspension of

profits limitation under the Vinson-Trammel act should all be considered simultaneously. Congressional hearings began as

early as 9 August, but it was not until 8

October, over three months after the initial

publicity attending the proposal, that the

tax amortization feature—along with tax

increases and suspension of the VinsonTrammel act—was enacted into law.8

 How

much effect this delay had in slowing down

the defense program is uncertain, as considerable planning was required in any case

before actual construction could begin. But

once the proposal had received currency,

contractors postponed the making of firm

commitments until the actual passage of the

desired legislation.

The amortization law permitted business

firms, for purposes of computing income

and excess profits taxes, to deduct from gross

income 20 percent annually, for a period of

five years, of the cost of all facilities created

or acquired for national defense. This deduction was optional, and if elected, was to

be in lieu of the normal deduction for de5

 Both the Army and Navy were steadfastly opposed to flat-rate profit limitations of any kind and

sought the repeal or suspension of the VinsonTrammel act regardless of the amortization problem. Apart from major inequities created by such

legislation, the profit limitation made subcontracting practically impossible in the aviation industry.

Also, the administration of the act consumed valuable time which could not be spared during the

emergency. (1) Wesley Frank Craven and James

Lea Cate, eds., The Army Air Forces in World

War II, Vol. VI, Men and Planes (Chicago: The

University of Chicago Press, 1955), pp. 306-08.

(2) Holley, Buying Airpower. 6

 The Revenue Act of 1918, Sections 124(a) (9)

and 234(2) (8) permitted a "reasonable" deduction from income to amortize the cost of war production facilities completed or acquired after 6

April 1917. Both the statute and the administrative

provisions were loosely drawn, and the act was

widely criticized. Final settlement with contractors

was slow and litigation continued on into World

War II. Investigation by the Couzens Committee

of the Senate in 1926 revealed widespread abuses.

The committee estimated that $210 million of a

total of $597 million in amortization allowances was

improper. E. Cary Brown and Gardner Patterson,

"Accelerated Depreciation: A Neglected Chapter

in War Taxation," Quarterly Journal of Economics,

LVII (1943), 632-36, citing Sen Rpt. 27, 69th

Cong., 1st Sess., Jan-Feb 1926.

7

 H. Com. on Ways and Means Rpt 2491, 76th

Cong., 3d Sess., 10 Jun 40. 8

 54 Stat. 974, 8 Oct 40, Second Revenue Act of

1940. The tax amortization features were contained

in Title III (54 Stat. 998). The heart of the

amortization provisions are found in Sec. 302, which

added a new Section 124 to the Internal Revenue

Code.
460 THE ARMY AND ECONOMIC MOBILIZATION

preciation and obsolescence. If the emergency were terminated or if individual

facilities were declared by the War or Navy

Department to be no longer necessary before the expiration of five years, complete

amortization would be allowed over the

shorter period. Each new facility receiving

the amortization privilege had to be certified

as necessary to national defense jointly by

the NDAC and the War or Navy Department. The act also specified, in the controversial Section (i), that amortization was

not allowable if the firm had been reimbursed by the government for more than

normal depreciation of the facility, unless

the government's interest in the facility were

properly protected. Accordingly, specific

certification of the fact of "nonreimbursement" (NR), or alternatively of "government protection" (GP), was required in

addition to the basic certification of "necessity." This was likewise to be done jointly

by the NDAC and the War or Navy Department. Only facilities constructed or

acquired after 10 June 1940 (the date of

the House report) were eligible.9 Amortization was applicable only to that portion

of a given facility considered to be necessary

to defense needs, a provision susceptible of

several interpretations and raising important questions of policy.10

Administration of the Tax Amortization

Program

Organization and Procedures

The War Department took prompt action

to discharge its responsibilities under the

new law. On 15 September 1940 the Secretary of War delegated all responsibility for

tax amortization matters to the Assistant

Secretary, whose office became that of

Under Secretary three months later. In November a Tax Amortization Section was

established in the Purchases and Contracts

Branch OASW, new personnel with legal

background were brought into the organization, and an initial set of instructions for

administering the law was issued.11 After

the War Department reorganization of 9

March 1942, the Tax Amortization Section

was successively attached to the Fiscal, Resources, Purchases, Production, and Readjustment Divisions of ASF. Throughout its

existence, however, it was responsible to

the Under Secretary and handled amortization matters for both the ASF and the AAF.

In April 1941, the Under Secretary appointed an Advisory Board on Tax Amortization. The members of the board, drawn

from prominent positions in civil life, were

able to give competent and disinterested

assistance in formulating policy as well as in

processing the more difficult cases. The

board's particular specialty was the handling of nonreimbursement and government

protection cases. In January 1942 the law

was amended, eliminating the need for NR

and GP certification, and most of the

board's functions ceased. Thereafter individual members were consulted from time to

time, and a working committee of three

members made regular trips to Washington

in an advisory capacity.12

9

 The beginning date was later moved back to

1 January 1940 by House Joint Resolution 235

(77th Congress, 1st Session) of 30 October 1941. 10

 See below, pages 463-66.

11

 WD Procurement Cir 38, 9 Nov 40. The first

chief of the Tax Amortization Section was Mr.

Samuel Duryee, appointed in December 1940. He

was succeeded in March 1941 by Lt. Col. (later

Brig. Gen.) Edward S. Greenbaum who remained

as acting chief until January 1942. Lt. Col. (later

Col.) George H. Foster was chief from that time

until the section ceased its functions in 1944. All

three men had been attorneys with wide experience. 12

 Foster Rpt, p. 9.
PRIVATE INDUSTRIAL EXPANSION 461

ADVISORY BOARD ON TAX AMORTIZATION, 18 April 1941. Seated at

desk, left to right: James Hall, Fred H. Hurdman, Under Secretary of War Patterson, James

M. Landis, and Charles H. Murchison. Standing: Samuel S. Duryee, Dave H. Morris, Jr.,

George S. Olive, Bernard Knollenberg, James P. Baxter, and William L. Marbury.

The basis for the War Department's

grant of the amortization privilege was the

filing of an application by a contractor, subcontractor, or supplier of materials, products, or services ultimately contributing to

national defense. Each applicant for a necessity certificate was required to file a standard application, within specified time limits,

sworn as to truthfulness in all respects. An

important part of the application was the

standard "Appendix A," containing a complete listing of the required facilities—land,

buildings, machinery, equipment, and miscellaneous items—their estimated cost, and

beginning dates of construction and operation. The applicant's statement of need for

additional facilities had to be supported by

data on his existing capacity, rate of output, number of shifts worked, and other

matters, as well as similar prospective data

after expansion. He was to furnish his estimate of industry-wide capacity and justify

his own expansion if excess capacity existed

elsewhere. Likewise, he had to show defense

orders or inquiries for his product—from the

procuring agencies, if a prime contractor,

and from other defense suppliers if a subcontractor.

Upon receipt in the War Department

each application was docketed and assigned

for investigation to an examiner in the Tax

Amortization Section. The examiner's report was the primary basis for certification

or denial. To verify and supplement the in-
462 THE ARMY AND ECONOMIC MOBILIZATION

formation in the application the examiner

in the Tax Amortization Section could draw

upon the knowledge of industry specialists

and consultants in the Resources Branch of

the OUSW, the technical services, the

NDAC or its successor agencies, and other

offices of the government. Many of the proposals for plant expansion had been

originally sponsored by local contracting officers in search of a source of supply; in such

cases there was prima-facie evidence of

need. The examiner's written report and

recommendations were usually adopted and

the certificate signed by the Under Secretary; in large cases or those involving new

matters of policy the examiner's report was

subject to review by the Advisory Board or

key individuals in OUSW. In all cases—

until this requirement was eliminated by

statute—separate approval by the NDAC

was required before the certificate could be

accepted by the Collector of Internal

Revenue.

On the basis of experience, the War Department Tax Amortization Section gradually built up a body of amortization "case

law" which served as a guide to examiners

in their handling of cases. At first transmitted in the form of individual memoranda, established precedents and principles

were eventually codified into a Necessity

Certificate Primer which was kept up to

date for a time by supplements.13 On 22

May 1942 the President approved a joint

Army-Navy-WPB draft of regulations covering the more general policies and procedures to be observed. To the extent of

their coverage these regulations became the

official policy guide and resulted in greater

uniformity in the application of the law.14

General War Department policies on tax

amortization, as well as the details of eligibility and procedure in filing applications,

were eventually made available to the technical services and field establishments as a

part of Procurement Regulations.15

Criteria of Necessity

In determining whether a proposed new

facility was entitled to a necessity certificate

the Army developed two basic criteria of

necessity: (1) essentiality of the product

for which the facilities were required; and

(2) shortage of capacity within the industry producing it. At first the bulk of the

applications and approvals was fairly well

confined to projects for the more important

military end items and obvious components.

Facilities for the supply and fabrication of

basic materials in the production of planes,

tanks, guns, and ammunition thus received

first attention. Subsequently the shortages

spread both vertically and horizontally

throughout the entire economy until the

Army found itself presented with applications more and more removed from its direct

interests: ". . . for tanks, we needed steel;

for steel we needed coke; for coke we needed

coal; for coal we needed transportation.

New facilities were needed to produce an

enormous variety of items. . . ranging

13 Necessity Certificate Primer, compiled by Professor Garrard Glen and Stanley Gewirtz (17

February 1942, 61 pages) (hereafter cited as

Primer), bound copy in files of Tax Amortization

Sec, Production Div ASF.

14

 Regulations Prescribed by the Secretary of

War and the Secretary of the Navy, with the Approval of the President, Governing the Issuance of

Necessity Certificates Under Section 124 (f) of the

Internal Revenue Code (11 pp., legal size) (hereafter cited as Regulations), copy in files of Tax

Amortization Sec, Production Div ASF. 15

 PR 10, Sec. IV, Amortization Deduction and

Certificates of Necessity.
PRIVATE INDUSTRIAL EXPANSION 463

from alpha protein to fish oils, from igloos to

synthetic rubber, from V-mail to yeast."

 16

"Shortage of capacity" was defined as

either actual or prospective, and as relative

to the industry as a whole rather than

merely to the facilities of the individual

applicant. Normally, the Army would deny

certification for expansion if surplus capacity existed either in the plant of the applicant or elsewhere in the industry. Surplus

capacity was deemed to exist where facilities were used for not more than one shift

daily.17 There were several exceptions to the

industry-concept of shortage. Regional and

local shortages were considered to justify

individual plant expansion in an industry

having surplus capacity elsewhere when

(1) transportation costs were excessive;

(2) available transport facilities were

needed for other products; or (3) insuring

of a regional supply was desirable. Expansion of an individual firm was authorized

without reference to industry capacity when

desirable in order to utilize special qualifications of individual manufacturers.18

 The

issuance of certificates to meet prospective

rather than existing shortages was based on

logically anticipated consequences of known

programs.19

Stemming from the two broad criteria of

essentiality and shortage there were a number of subsidiary policies in the Army's issuance of necessity certificates. In general, certification of the following types of application was denied:

1. acquisition of second-hand facilities;

2. normal capital replacements;

3. luxury items and facilities only remotely related to the defense effort.

Each of these classes posed numerous

problems, and numerous exceptions were

required by offsetting factors. Denial of

second-hand facilities rested upon the

theory that only new construction constituted a net addition to capacity as a whole.

But many applicants demonstrated that

their purchase of facilities previously idle or

engaged in nondefense production resulted

in an actual addition to capacity in a defense

industry. Moreover, land costs were specifically included in the statute as amortizable;

the cost of land was an integral part of total

facility costs and influenced expansion decisions in the same manner as building and

equipment costs. By parallel reasoning, acquisition costs of existing facilities were considered amortizable, and certification for

valid cases was granted.20

The policy of denying certification for

normal replacement was intended to prevent improper exploitation of the amortization privilege. It was not the purpose of the

law to grant substantial tax reductions to

firms merely for doing what they normally

would have done in the absence of the law—

namely, replacing worn-out and obsolete

equipment as such replacement came due.

Furthermore, the granting of amortization

for this purpose would stimulate replace16

 Foster Rpt, p. 1 of Introduction. 17

 Primer, pp. 36ff. 18

 Regulations, pp. 4-5. 19

 For example, storage facilities were authorized

in advance of actual need. See following applications for necessity certificate: Updike Grain

Corporation, WD-N-1413; Central Sugar Company, WD-N-2327; Valley Compress Company, WD-N-2065.

20

 Regulations, pp. 5-6, permitted certification

of the acquisition of a going concern only if a substantial increase in defense production could be

reasonably expected. Converted, as distinct from

acquired, facilities were certifiable only to the extent of conversion expenditures. Intercompany

transfers of locomotives, freight cars, ships, and

barges were denied certification, as were transfers

of facilities between firms with common ownership

or ownership by related persons. Foster Rpt, p. 12.

It should be noted that Section 124(f) (1) of the

statute specifically included acquisitions as eligible

when deemed essential.
464 THE ARMY AND ECONOMIC MOBILIZATION

ment far beyond normal levels, resulting in

further tax reductions, inflation, and the

consumption of additional scarce materials.

In practice the Army found it impossible, in

perhaps a majority of cases, to distinguish

between "normal" replacement and replacement because of rapid deterioration under

intensive wartime use or because of sudden

"wartime obsolescence" characterized by

the inability of existing equipment to meet

wartime demands.21

Nevertheless, a number of applications

were rejected on the ground that replacement rather than expansion of facilities was

contemplated. An interesting case was the

application of the Texas and New Orleans

Railroad for certification of a new $1,400,-

000 bridge over the Pecos River on the main

line of the road near the Mexican border.

Construction was approved by the War Production Board and began in the summer of

1943; application for a necessity certificate

was filed in due time. The applicant contended that high wartime loads had resulted

in considerable fatigue of the existing structure, which was approximately fifty years

old. Repairs were needed with increasing

frequency and the structure of the old bridge

lent itself to easy sabotage (an Army guard

had been maintained over the bridge from

the beginning of the emergency). Failure

of the old bridge would result in lengthy and

time-consuming detours: traffic from San

Antonio to El Paso would have to be rerouted via Fort Worth and Dallas, thence

westward via another road. Investigation by

the Tax Amortization Section disclosed that

the old bridge was carried on the books of

the railroad under the "retirement" system

of accounting used by most railroads for

road and structures. Under this system no

annual depreciation was taken; the entire

cost of the old bridge would be charged off

in the year of retirement. The "retirement"

system thus granted the railroad wide latitude to take lump-sum depreciation in years

of high earnings. Certification of the new

bridge would have enabled the road to

charge off the full cost of both bridges within

a period of five years or even less. Certification was denied on the ground that the age

of the old bridge indicated that it was due

for normal retirement.22

The issue of nonessentiality or luxury

arose in two types of application: (1) Those

covering facilities for the production of end

items classifiable as nonessential; (2) those

covering obviously essential facilities which

included components classifiable as nonessential. Some items were ruled out as a class

on the ground of nonessentiality; others

were considered essential when devoted to

certain uses but not to others; still others 21

 This observation is based on Memo, Lt Donald

T. Rosenfeld for Col Greenbaum, 26 Aug 41, sub:

Certification of Facilities Employed for Replacement Purposes, copy in OCMH. This memorandum

systematically analyzed the replacement problem

and concluded that clear-cut cases of simple replacement were largely confined to restorations after

outright destruction, such as by sabotage, fire, explosion, or other unusual causes. All other classes

of replacement typically involved increases in capacity by the adoption of equipment technologically

superior to the equipment replaced. Thus the test

of certification was thrown back upon the two basic

criteria: Is the product of the facilities essential?

Is there a shortage of capacity in the industry?

22

 Texas and New Orleans Railroad Company,

WD-N-30552, especially Memo, Col Foster for

USW, 14 Jul 44, sub: Application for Necessity

Certificate, T&NO RR. See also similar denial in

Yazoo and Mississippi Valley R. R., WD-N-27885.

On the other hand, in Timken Roller Bearing

Company, WD-N-1844, a new boiler plant was

certified "due to the age and reduced usefulness of

an old boiler plant," even though the old plant

together with outside facilities was adequate to meet

current needs. "It was felt that it is a better idea

to certify new facilities and allow old ones to be

used as standby in the case of an emergency."

Primer, p. 48.
PRIVATE INDUSTRIAL EXPANSION 465

were considered—partly on principle and

partly for administrative reasons—as too

remotely connected with the defense effort

to justify certification.

Among the denials on the ground of endproduct nonessentiality were facilities for

producing pies and soft drinks in the United

States. Capital items, whether or not a component of essential facilities, were denied

certification in the case of vending machines,

electric signs, pool and ping-pong tables, and

soda fountains. A flagpole, however, was

certifiable. Air conditioning to provide

ordinary comfort was denied but was approved when considered essential to precision work and other special purposes.

Couches were ordinarily denied but approved for the use of female labor and for

first aid purposes. City office buildings, retail

facilities in general, and associated construction for community facilities were denied.23

A potentially complex issue which might

have been a major administrative problem

was the question of partial certification.

Section 124 (f) (1) of the statute stated:

There shall be included [in the determination of amortizable cost] only so much of the

amount. . . as is properly attributable to

such construction . . . as the Advisory Commission to the Council of National Defense

and either the Secretary of War and the Secretary of the Navy have certified . . . as necessary in the interest of national defense during

the emergency period.

This was construed by the War Department to mean that facilities which were

built for the express purpose of supplying

nondefense as well as defense orders should

receive only partial certification. Section

5 (e) of the standard application for a

necessity certificate called for the applicant's

"estimate of percentage of increase in productive capacity which will be directly or

indirectly absorbed in the Defense program." Most applications claimed 100-

percent utilization for defense purposes and

the War Department was not disposed to

dispute reasonable claims. With few exceptions, such applications received 100-percent certification if the application as a

whole was well supported. When the applicant showed a prospective division of output between defense and nondefense purpose, partial certification was granted; thus

a 50-percent certification was made for

facilities devoted half to defense purposes.24

With the approach of the end of the war

and the transfer of the certification function

to WPB, a new interpretation of partial

certification arose. The War Production

Board proposed the granting of certificates

for only a fraction of the total cost of facilities—even when completely devoted to war

purposes for the duration—on the ground

that facilities then authorized would far outlast the war and would retain a high percentage of useful value for peacetime pur23

 (1) Foster Rpt, p. 11. (2) Primer, pp. 28-30.

24

 In The Davidson Transfer and Storage Company, WD-N-7026, a certificate was issued covering 65 percent of the facilities acquired, based upon

applicant's estimate that 65 percent of its transportation activities were for defense. In White Cap

Company, WD-N-3121, a 50-percent certificate

was granted as a reasonable solution of a complex

problem. The applicant acquired facilities to increase the output of metal closures for glass containers. Encouragement of glass packaging for foods

was considered highly desirable to save scarce supplies of tin. On the other hand, the rubber gaskets

required would consume equally scarce supplies of

rubber. After consultation with WPB commodity

specialists, a 50-percent certification was decided

as "entirely arbitrary but not improper" in view of

all the factors. Primer, p. 7. Foster Report, p. 17,

cites a 30-percent certification of a building erected

to produce 70-percent peacetime products and 30-

percent war products. When the building was later

devoted 100 percent to war production without

extra costs, the owner's request for 100-percent

certification was denied.
466 THE ARMY AND ECONOMIC MOBILIZATION

pose. This was particularly true of railroad

equipment. WPB felt that a 35-percent

certification would be a liberal allowance,

adequate to induce the private construction

of facilities still needed for the duration.25

Although the War Department had no

objections to such a policy, particularly

since its facility expansion program was

largely completed, it felt that the WPB

position challenged the basic philosophy of

the statute. Inasmuch as the issue is central

to an appraisal of both the wisdom of the

statute and the War Department's role in its

administration, the following statement by

the chief of the Tax Amortization Division

is pertinent:

Usefulness or non-usefulness of the facility

after the war has not heretofore been considered as a proper factor to be considered

in deciding whether a facility should be

certified.

Inability to ascertain length of useful life

was one of the primary considerations in the

passage of the Act, and certainly neither the

Act, our Regulations nor the practice from the

first has required that consideration be given

to this factor.

Of course, as the War Department decided

that amortization was no longer essential to

the War Department's activities, we should

not complain of the restrictiveness of such a

policy. However, adoption of such a policy by

the War Production Board might later be

used as the basis for a contention that the

War Department had for three years indulged

a wrong policy. It should be noted that this

policy is not being written into the Regulations approved by the President, but is apparently being adopted solely as policy, based on

the language of the Act.

I suggest that we advise the War Production

Board that we do not agree that such a policy

is required under the law and that if such a

policy is to be followed . . . it be predicated

upon the special circumstances surrounding

expansions at this time when the major requirements of the emergency can be met without additional facilities.26

The issue posed by the apparently conflicting positions was basically one of timing. The fundamental purpose of the tax

amortization law, in the view of the War

Department, was to obtain rapid expansion

of facilities at a time when speed was of the

essence and when practicable alternatives

were not available. The intention of the act

was to eliminate a major element of uncertainty over the ability of private industry to

pay for the new facilities out of earnings.

The guarantee of a five-year write-off of essential facilities for tax purposes, regardless

of future considerations, was the instrument

devised for the purpose. The War Department's application of this policy during the

first three years of the program fulfilled the

basic purpose of the law and obtained the

necessary facilities in time to win the war.

By the time of WPB administration the underlying situation had changed. To grant

100-percent write-off in the short period

remaining would have amounted to the

obvious grant of a wartime exemption for

predominantly peacetime purposes. The

War Department view was that if partial

certification as undertaken by WPB could

obtain additional facilities still required, well

and good. If not, the alternative of government financing was preferable to 100-

percent certification.27

25

 CPA, Industrial Mobilization for War, pp.

656-67.

26

 Excerpt from Memo, Col Foster to Brig Gen

Edward S. Greenbaum, 15 Mar 44, sub: Tax

Amortization. 27

 The War Department's interpretation of the

general purpose and philosophy of the tax amortization law is lucidly expressed in the Foster Report.

By mid-1943 the War Department tended to favor

government financing (DPC or War Departmentowned facilities) in cases where the probable losses

on resale of plants would be less than Treasury

losses on amortization within a period of two years

or less.
PRIVATE INDUSTRIAL EXPANSION 467

Nonreimbursement and Government

Protection

A major barrier to the successful use of

the tax amortization feature during the first

year and a half of its existence was the administration of the controversial Section (i)

of the statute.28 As indicated earlier, this

section required the issuance, both by the

NDAC and the War or Navy Department,

of a certificate of "nonreimbursement"

(NR) or alternatively "government protection" (GP) before the basic certificate of

necessity could be honored by the Treasury.29

This requirement was introduced into the

statute as a compromise measure to replace

earlier proposals of an even more unsatisfactory nature in the original House bill.

Many members of Congress, as well as individuals in the Department of the Treasury

and the NDAC, were apprehensive that industry would "make a killing" out of the defense program. In particular they were fearful that, under various contractual arrangements with the procurement agencies, industry would be presented with a gift of new

plant and equipment paid for by the government. This had happened to a considerable

extent during World War I and officials in

NDAC concerned with procurement policy

were determined to prevent its recurrence.

Section (i) was designed not only to protect the financial interests of the government

vis-à-vis those of industry but also to provide equality of treatment of contractors.

Certain types of arrangement, such as the

Emergency Plant Facilities contract, provided for the strict separation of the cost of

plant facilities from the costs of end-item

production by the same facilities. Under

EPF, a separate contract was drawn to provide reimbursement of the contractor in full

for his plant facility expenditures with the

specification that the unit price of finished

items of procurement would contain no element of the cost of the facilities. In this

manner the government was assured against

double reimbursement of the contractor for

his facility costs.

Those who worked on the draft of the tax

amortization law though they saw an analogous problem of double reimbursement

in the allowance of accelerated amortization. Would not the inclusion of facility costs

in a supply contract involving the use of

tax-amortized facilities amount to double

reimbursement of the contractor—once in

the form of the tax amortization allowance,

and again in the price of the finished product?

 30

 And, regardless of the double reimbursement theorem, was it not well understood that many tax-amortized facilities

would in fact possess a substantial value at

the end of the emergency? In order to attack both these problems, Section (i) was

included in the amortization law. This section stipulated that facility costs in excess

of normal depreciation must be excluded

from unit prices in supply contracts in order

for the contractor to receive an NR certificate and get the tax amortization benefit

without further question. If the contractor

could not obtain an NR certificate, he could

receive the amortization allowance only by

obtaining a GP certificate indicating satisfactory protection of the government's interest in the facilities acquired under the

28 contracts in question. The precise measures Section (i), as it was generally called during

World War II, was in reality subsection (i) of

Section 124 of the statute. 29

 See above, p. 460.

30

 S. Rpt. 480, Pt. 2, 77th Cong., 2d Sess, 14 Aug

41, p. 41.
468 THE ARMY AND ECONOMIC MOBILIZATION

required of the contractor to satisfy the requirements of "government protection"

were left to the NDAC and the War and

Navy Departments.

As a part of its general purchasing policy

the War Department adopted general

measures to insure adequate protection of

its facility interests. These measures were

employed in all appropriate procurement

contracts whether or not the satisfaction of

the tax amortization statute was involved.

They included all of the following, with

specific omissions allowable, when appropriate, upon approval of the director of the

Purchases Division, ASF: (1) maintenance

of the facilities in good condition at contractor expense beyond the life of the existing supply contract for a period provided

in the contract; (2) contractor retention of

title to the facilities without encumbrance;

(3) contractor not to alter the facilities without consent of the contracting officer; (4)

contractor to give priority to government

orders; (5) no further facility charges to

the government in procurement contracts

after full amortization of the original cost

of the facilities; (6) release of contractor

from all above obligations by payment to

the government of a negotiated sum agreed

upon as constituting fair and just return to

the government for its prior payment for the

facilities.31

It was evident to the procurement agencies from the outset that the implementation

of Section (i) would present grave difficulties of administration. Under the law all

government contracts and purchase orders

for the products of tax-amortized facilities—even when placed long after the facilities had been completed and used for earlier

supply contracts—would have to be subjected to the test of "nonreimbursement."

In its endeavor to carry out the law, the

Army was obliged to embark upon innumerable research projects covering thousands

of supply contracts in order to ascertain the

relationship of supply prices to facilities reimbursement. Some idea of the heavy work

load imposed on contractors as well as on

the Army is indicated by the following excerpt from a letter to an Army supplier:

The information desired should, in the case

of each contract which may now be certified,

state the number of units of each item to be

supplied, the unit prices, and total contract

price, prices at which the same or similar items

were sold to the Government or to other purchasers prior, preferably to January 1, 1940,

with a notation of discounts ordinarily applied, cost breakdowns of various items, comparisons with your catalogue or list prices

which date back prior to the emergency, or

any other evidence which would in your

opinion indicate to the satisfaction of this

office that the prices charged in your contracts

with the Government do not include any return of cost greater than normal wear, tear,

and exhaustion of emergency facilities.32

Even if every contractor had been in a

position to submit convincing proof of "nonreimbursement," the paper work alone

would have been a considerable barrier to

the smooth administration of Section (i).

But the task of determining statutory nonreimbursement in fixed-price contracts

could not be disposed of simply by examining the contract price or even the wording

of contracts. Even though the contractor

and the contracting officer after elaborate

negotiations had reached agreement on a

contract of mutual advantage to the government and the contractor, and had excluded

"excessive" facility costs from the contract,

31

 PR 1007.

32

 Ltr, Col Greenbaum, Actg Chf Tax Amortization Sec, to Joseph F. Taylor, Treasurer Bausch &

Lomb, 24 Nov 41.
PRIVATE INDUSTRIAL EXPANSION 469

this fact could not be readily apparent to a

third party. As envisaged by the NDAC,

adequate proof of nonreimbursement required the submission by the contractor of

detailed cost analysis data. In the dark

days after Dunkerque, the fall of France,

and the attack on the Soviet Union, this

appeared to the Army to be a waste of

precious time and a gratuitous annoyance

to contractors. Accurate prediction of costs

was impossible in the fluid cost-price conditions of the defense period, especially for

contractors with joint costs and those embarking on an entire new line of output.

The crux of the matter was that the search

for proof of nonreimbursement was the pursuit of a will-o'-the-wisp. Any representation of "normal" reimbursement of facility

costs, whether by words or by figures, would

be meaningless when appearing in conjunction with necessarily generous or flexible estimates for future material, labor,

overhead, contingencies, and other cost

items making up the contract price for the

end item in question. Any advantage resulting from the exclusion of one type of cost

labeled as "facility" cost could be canceled

many times over by the padding or inaccurate prediction of other types of cost.

Clearly, what was vaguely and unsuccessfully sought by Section (i) was some assurance of the achievement of sound pricing

policies by the procurement agencies. But

this was a task far beyond the scope of a

tax amortization law and could not be accomplished by single-minded concentration

upon the facilities aspects of supply

contracts.

In view of all the difficulties, it is not

surprising that the number of NR certificates issued by the Army fell far behind

applications and below the number of basic

necessity certificates issued. An even more

serious bottleneck was clearance by the

NDAC, which had to issue separate certifications based on its own investigations. In

its desire to provide a thorough scrutiny of

all the evidence, and handicapped by lack

of first-hand knowledge and records, the

NDAC delayed action and made frequent

rejections, most of which were later cleared

upon further review. Considerable friction

developed between the Army and NDAC

over the latter's insistence upon exhaustive

and minute research into seemingly irrelevant issues. In one such case, in which the

NDAC became concerned over the existence of monopoly profits acquired long before the defense period, a leading member

of the Army's Advisory Board on Tax

Amortization became more outspoken than

usual:

Subordinate personnel of the Advisory

Commission, however well-intentioned, have

no justification for asking for data that may

be of interest for entirely different purposes

but that are unnecessary for a decent disposition of the case in hand . . . . It is tr

investigation of the rate of profit may be

desirable in order to promote better procurement policies or for other social purposes but

. . . it seems wrong to harry applican

cause examiners may have some purpose to

serve other than the administration of Section 124 (i).33

By the summer of 1941, the volume of

complaints voiced by contractors and

echoed by newspapers reached major proportions. Contractors without NR certificates were left in grave doubt as to the

validity of their basic necessity certificates

and the plant expansion program was

noticeably retarded. As a result of the

mounting dissatisfaction, the NDAC was

33

 Memo, James M. Landis, Advisory Board on

Tax Amortization, for Under Secretary Patterson,

15 Aug 41, sub: WD-NR-1138.
470 THE ARMY AND ECONOMIC MOBILIZATION

relieved of all its certifying authority on 30

October 1941 by a Congressional resolution. In the same legislation, Congress also

attempted to ease the burden on the remaining certifying agencies by clarifying the

requirements for NR certification.34

No amount of clarification could remove

the basic defects of Section (i) The

nominal exclusion of facility costs from supply prices without limitation of all other

elements of price was a pointless proceeding. Moreover, if Section (i) had succeeded

in its apparent purpose, it is doubtful that

the amortization law as a whole could have

achieved its avowed objective. This objective was to encourage facility expansion by

enabling the contractor to retain earnings

to meet his emergency capital costs. But tax

relief, no matter how complete, was no

guarantee of gross income sufficient to cover

new capital costs. The only possible way for

a contractor to defray capital costs out of

earnings during the emergency was to receive prices in supply contracts sufficiently in

excess of all other costs to return the entire

capital investment within the emergency

period. This not only would permit but also

would compel reimbursement in excess of

normal rates of depreciation. In addition,

the tax amortization benefit was required

in order to prevent such reimbursement of

capital from being labeled as income and

taxed away at high wartime rates.

Nowhere in the debates and testimony

over the repeal of Section (i) was there

clear and explicit recognition of the double

requirement of "excessive reimbursement"

and accelerated tax amortization if the contractor's capital outlays were to be fully recovered by the end of the emergency period.

The following note, however, appears in an

unsigned memorandum, dated 9 January

1942, in War Department files: "If the

Government does not pay for the facilities

and the contractor is not 'reimbursed' under

the contract or otherwise, how is he to pay

for it? The facilities are presumably worthless to him at the end of 5 years." Yet when

Senator Robert M. La Follette, Jr., who

finally voted against repeal of Section (i),

challenged the repeal proposal on the

ground that double reimbursement was involved, War Department representatives

failed to clarify the issue.35

On the other hand, complete reimbursement of the contractor plus the tax amortization benefit would be equitable both to

the government and the contractor only on

the assumption that the facilities became

completely worthless at the end of the

emergency. This was, of course, an unlikely

probability for most facilities of the kind

selected for private financing and ownership.

Some plants would have a high residual

value at the end of the war while others

would be relatively worthless. The ratio of

34

 House Joint Resolution 235. An important

feature of the resolution was elimination of NR

certification of contracts of less than $15,000. It

should be noted that NDAC was only a skeleton

organization by the fall of 1941, having been superseded by OPM early in the year in all but the certification function. This factor was influential in

the decision to eliminate NDAC's certification authority. See: (1) Arthur Krock, "The Stymie Over

Amortization of Plants," in New York Times, 30

Apr 41, p. 2; (2) New York Herald Tribune, 9 Aug

41, "Policy on Plant Amortization Is Called Failure"; (3) Wall Street Journal, 5 Aug 41, p. 1, "Defense Plants—Provisions for Their Amortization

May Be Liberalized Shortly."; (4) Washington

Times Herald, 3 Aug 41, "Washington Daily

Merry-Go-Round," by Drew Pearson and Robert S.

Allen.

35

 (1) S. Com. on Finance, 77th Cong., 2d Sess.,

Hearings on H. J. Res. 257, Nonreimbursement Certificates, 22 Jan 42, pp. 9-10. (2) Unsigned memo,

9 Jan 42, in folder H. J. 257, Tax Amortization files,

Purchases Div ASF.
PRIVATE INDUSTRIAL EXPANSION 471

residual value to original cost would not

only exhibit wide variation from plant to

plant and industry to industry, but for all

plants would fluctuate from time to time.

Many plants would be worth more five or

ten years after the war than on the day the

war ended. Clearly, the blanket treatment of all facilities of all contractors by a

single yardstick would reward some contractors handsomely while conceivably failing to cover the costs of others. But the yardstick in question was not a matter of administrative selection; it was the statutory fiveyear period adopted as the basic foundation

of the tax amortization law.

It was partly in order to achieve greater

equity through individual contract provisions tailored to the circumstances of each

supplier that the War Department, in company with the Navy, petitioned Congress to

revoke Section (i). The chief concern, however, was to eliminate the enormous administrative burden of probing thousands of

procurement contracts in order to ascertain

something which in essence was not ascertainable, namely, that each contract viewed

as a whole provided no more than "normal"

reimbursement of the cost of facilities. By

the end of 1941, two months after the termination of NDAC's certification activities,

the War Department had issued only 278

NR certificates for 3,120 applications. Corresponding figures for GP certification were

30 certificates for 219 applications. On 5

February 1942 Congress repealed Section

(i) ab initio. Thus Section (i), after causing many months of frustration, delay, and

expense to all concerned, was deemed never

to have been enacted, leaving only necessity

certificates as the prerequisite to the tax

amortization deduction.36

The repeal of Section (i) removed all

doubt as to the contractor's receipt of the

tax amortization benefit once he had received a necessity certificate. But it did not

relieve the procuring agencies of their responsibility for protecting the government's

legitimate interest in facilities. This task still

remained in the hands of those charged with

the development of procurement policy and

the actual negotiation of individual contracts.37

Transfer of the Certification Function

With the repeal of the requirement for

NR and GP certification, the implementation of the tax amortization program proceeded smoothly despite the flood of new

applications after Pearl Harbor. By late

1943 the War Department's facilities program was practically complete; at the same

time the scope of applications had grown

successively wider, extending far into the

area of the civilian economy. In an effort

to get out from under the necessity for further excursions into the field of raw materials production, transportation, food production and processing, and the like, the

Army on 25 June 1943 petitioned the newly

established Office of War Mobilization for

relief. As a result an Executive order was

issued on 5 October 1943, limiting the scope

of the program. Thereafter, certification

was to be limited to facilities needed for

military production for the Army and Navy.

Approval of facilities for tax amortization

would be disallowed unless application was

made prior to construction. Government

36

 (1) H. J. Res. 257, 77th Cong., 2d Sess, approved 6 Feb 42. (2) Foster Rpt, p. 7.

37

 On this point, see testimony of Lt. Col. George

H. Foster before House Ways and Means Committee, 2 January 1942, regarding House Joint

Resolution 257, copyright in folder H. J. 257, Tax

Amortization files, Purchases Div ASF. See also

drafts of Patterson testimony before appropriate

Senate and House committee, in folder H. J. 257.
472 THE ARMY AND ECONOMIC MOBILIZATION

financing was to be used wherever possible

for additional facilities still needed.

This stiffened policy gave rise to many

complaints as numerous applications were

denied on the ground that they were nonessential to military needs. The railroads

and the Office of Defense Transportation

brought considerable pressure to bear upon

the War Department for continued certification of railroad facilities. Largely because

of such pressure the Army and Navy requested that their responsibility for further

certification be terminated. This request

was granted on 17 December 1943 and,

except for cases on hand, all certification

thereafter was done by WPB.38

By the summer of 1944, the remarkable

progress of Allied operations in the European theater forced intensive consideration

of the problem of contract termination and

settlement. Under Section 124 (e) of the

basic law, taxpayers were permitted to

shorten the amortization period if the facilities ceased to be essential before the end of

the full five-year period. This enabled contractors to compress their entire five-year

amortization deduction into the shorter

period. Shortening of the amortization

period could be done only if the President

issued a proclamation permitting such action or if the Secretary of War or Navy,

under regulations, certified the nonnecessity of particular facilities. It was the view

of the War Department that the issuance

of nonnecessity certificates should be done

by the procurement agencies themselves

since these agencies bore the responsibility

for contract settlement and the payment of

termination claims. Under standard termination procedure, the procurement agencies

would be obliged to pay contractors for loss

of useful value of emergency facilities not

otherwise compensated.39 If nonnecessity

certificates could be issued at the time of

settlement, termination claims could be reduced and settlement expedited. The War

Department's position was overruled, however, on 30 September 1944, and the War

Production Board was made the certifying

authority for nonnecessity certificates.40

The Record of Plant Expansion Under Tax

Amortization

In the three-year period from the passage

of the tax amortization law to the transfer

of certification authority to WPB, the War

Department received a total of 31,047 applications for necessity certificates. On the

basis of these, the department issued 26,775

certificates of necessity for all or a part of

the facilities covered by the applications.

The remaining 4,272 cases were denied,

withdrawn, or otherwise disposed of.

The total dollar value of applications certified by the War Department came to

$4,955,813,760.16. This represents some 70

percent of the value of all certifications issued throughout the war with Navy and

WPB accounting for approximately 20 and

10 percent, respectively.41 An indication of

the wide array of industries affected by War

Department certifications, and the relative

importance of the tax amortization privilege

to each, is found in a broad statistical summary (Table 50). This tabulation reveals

38

 (1) Executive Order 9406. (2) Foster Rpt,

pp. 13-15.

39

 Memo, Foster, Chf Tax Amortization Br, for

USW, 2 Aug 44, sub: Termination of Amortization

Period for Emergency Facilities. 40

 Executive Order 9486. The general regulations

governing the issuance of nonnecessity certificates

were prescribed by the President in a companion

order—Executive Order 9487, 30 September 1944. 41

 (1) Foster Rpt, p. 15. (2) The percentage

breakdown appears in Army Industrial College

R41, Financial Aids to Contractors (December

1945), Table 5, ICAF Library.
PRIVATE INDUSTRIAL EXPANSION 473

TABLE 50—WAR DEPARTMENT CERTIFICATIONS FOR TAX AMORTIZATION a

8 OCTOBER 1940-15 FEBRUARY 1945

a

 Omits certifications of less than $25,000 made after April 1943.

Source: Foster Rept., p. 16.
474 THE ARMY AND ECONOMIC MOBILIZATION

the railroad industry at the head of the list,

with over a billion dollars in certifications,

representing nearly a fourth of the entire

War Department tax amortization program. Petroleum (aviation gasoline) and

aircraft followed with $438 million and

$366 million, respectively.

The tax amortization law and its administration will long be a subject of controversy. Early in the administration of the law

the War and Navy Departments were

charged with undue liberality, inadequate

investigation of costs and necessity, and discrimination against small firms.42

 The War

Department's position was that a bold program of plant expansion was essential, that

current expansion efforts were unlikely to

be adequate for total war, and that further

elaborate investigation of costs and necessity

would stifle the program without achieving

any significantly desirable result. The unfavorable position of small business, to the

extent that it existed, was not peculiar to

the administration of tax amortization but

was inherent in the larger problem of discovering the most effective role of small

business in the industrial mobilization

process.43

A careful appraisal of the War Department's administration of tax amortization

for World War II would require a long and

intensive period of research and analysis.

Viewed from the perspective of the present

survey, it would appear that the department's handling of the certification function

was as satisfactory as could be expected,

given the urgency of the circumstances, the

complexities of the task, and the objectives

of the amortization statute. As pointed out

by the Truman Committee, mistakes and

inconsistencies occurred; yet in view of the

desperate need, both before and after Pearl

Harbor, for expansion of productive capacity in all sectors of the war economy, it is

doubtful that many of the projects actually

certified could be seriously criticized on the

ground of lack of usefulness to the war

effort. The early provisions of the law requiring elaborate investigation to determine

"nonreimbursement" and "government protection" were administratively unworkable,

and, in the light of subsequent developments, unnecessary in principle. The assorted instruments of careful contracting,

continuous close pricing, and especially renegotiation, provided potentially adequate

safeguards against unjust enrichment and

needless dissipation of government funds.

As already indicated, the application of

these instruments was less than completely

successful in preventing or recouping high

profits realized through the use of the taxamortization privilege.44

The more fundamental question of the

basic wisdom of the amortization statute

goes deep into the realm of social theory

and philosophy. It is clear that the amortization law for World War II was abundantly successful in providing badly needed

capacity for war production. It succeeded

not only because it offered protection

against losses but because it also made a

frank appeal to the profit motive. The fram42

 Truman Committee, First Annual Rpt, pp. 39ff. 43

 For War Department reply to Truman Committee charges in 1942, see Memo, sub: Truman

Committee Report on Tax Amortization, 19 Jan 42,

in Truman Committee folder, Readjustment Div

files, ASF. In evaluating charges of inadequate investigation of costs it should be noted that it was

the responsibility of the Department of the Treasury, after project completion, to determine the

actual cost of defense installations subject to the

amortization deduction. Thus the War Department

certified figure represented the maximum allowable

cost. 44

 See above, pages 373-75.
PRIVATE INDUSTRIAL EXPANSION 475

ers of the amortization law were well advised in coupling its enactment with the passage of the excess profits tax and related

increases in income taxation. The strongest

practical feature of the rapid write-off privilege was the fact that, for purposes of facilities expansion, it converted high tax rates

from a liability into an asset. The higher the

rate of corporate income and excess profits

taxes, the greater was the positive inducement to business to retain its earnings in the

form of expanded plant and equipment.

The strength of this inducement was multiplied by the advantages to be had at the end

of the war in disposing of plants under capital gains and loss features of the income tax

laws. The operation of the amortization

feature thus shattered conventional beliefs

that high tax rates would inevitably lead

to the "drying up" of capital and the prevention of capital formation. By the adoption of appropriate administrative provisions in the tax laws, the effects of the rate

component of taxation could be radically

changed. With tax rates at their peak, the

American economy in World War II exhibited the greatest capital expansion in its

history—an expansion which went far toward guaranteeing the successful outcome

of the war.

It would not be difficult to demonstrate

that some firms and industries fared much

better than others under the rapid write-off

privilege. The favored firms were those

whose newly created facilities possessed the

greatest economically useful life after the

war. The extent to which such economic

longevity could be foreseen at the time of

certification varied widely from firm to firm

and from industry to industry, in much the

same way as did the prediction of the life

expectancy of individuals and units in various branches of the armed forces in World

War II. What was not fully understood at

the time of the launching of amortization

was the extent to which governmental

spending for years to come would invalidate

many of the traditional assumptions underlying the operation of the private-enterprise

economy.
CHAPTER XXI

Government Financed and Owned

Industrial Facilities

The Emergency Plant Facilities Contract

In the summer and fall of 1940, when

major segments of the defense program

were temporarily stalled over the problem

of facility expansion, the NDAC sought a

method of reimbursing contractors for their

emergency capital outlays which would

guarantee, in advance of expenditure, the

complete recovery of all capital costs. Such

a guarantee was particularly needed in the

aircraft industry, which had to be built

virtually from the ground up in order to fill

military requirements under the defense

program. The large quantities of plant and

equipment to be constructed during the

emergency would in many respects be suitable for the peacetime production of commercial aircraft, but they were expected to

be of little actual value at the end of the

emergency because of shrunken markets.

Moreover, in view of the uncertain volume

of production to be undertaken or completed

during the emergency, inclusion of plant

costs in the unit price of the product afforded

a far from dependable method of insuring

complete cost reimbursement. Under these

circumstances the stimulus of the tax amortization privilege would be insufficient to

induce the necessary expansion; tax abatement alone would not guarantee the recovery, either during the emergency or

thereafter, of extensive capital costs. To

meet this situation the NDAC developed a

pioneer measure known as the Emergency

Plant Facilities contract.

Briefly summarized, EPF was a method

of financing which provided specific and

complete reimbursement, over a period of

five years, of facility costs incurred in the

performance of supply contracts under the

defense program. The usual EPF contract

was awarded in conjunction with, or subsequent to, the award of a supply contract,

and covered the construction or conversion

of buildings, plus, if desired, the purchases

and installation of machinery and equipment. The contractor made his own arrangements for expansion and provided

initial financing—typically with funds borrowed from banks—and was to be reimbursed by the government in sixty equal

monthly installments. In turn, facility

costs were rigorously excluded from supply

prices of all items produced from EPF establishments. Title to the new facilities was

initially vested in the contractor but passed

to the government when reimbursement was

complete. Upon completion of the contract,

the contractor had an option to retain the

facilities by payment to the government of

cost less depreciation or a lower negotiated

price. If the contractor failed to exercise his
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 477

option or if no agreement on terms could be

reached, the facilities would revert to the

government. In the case of "scrambled

facilities" (government installations added

to facilities already owned by contractors)

the government was obliged to remove its

property from the contractor's premises, restoring the latter to their previous condition.

The government in any case pledged itself

not to operate the facilities commercially

and to give the contractor "first refusal" before sale to a third party.

The original proposals leading to the EPF

type of contract were of a quite different

nature from the final result. As early as 14

June 1940, Mr. Knudsen had proposed that

such plants be financed by the Reconstruction Finance Corporation under its new

lending powers.1 Under the Knudsen plan,

the RFC was to put up the entire capital for

plant expansion and would also supply the

necessary working capital. The facilities

would be titled to the manufacturer, who

would pay 3-percent interest on the loan

covering the cost of the plant; working capital was to be supplied interest free. The

plant and equipment were to be the sole

security for the loan, which would be repaid

out of earnings during the emergency. This

would be guaranteed by loading the mortgage amortization payments into the unit

price of each completed engine, or other

product, on a prorata basis. Thus a $10,-

000,000 plant built to turn out 10,000 aircraft engines would be paid for by including

in the price of each engine an element of

$1,000 representing capital costs. When the

RFC loan had been paid off, the plant and

equipment would belong to the contractor.2

The adoption of this proposal would provide a powerful incentive to industry to create and operate additional facilities since

contractors would have much to gain and

nothing to lose. But the proposal fell

through, chiefly because of Congressional

and other objections to the treatment of the

government's interest in the facilities, but

also because of objections to the "exclusion

of private capital" from the program.3 Accordingly, the NDAC staff set about drafting a new type of facilities contract which

would more adequately protect the government's interest and at the same time permit the American banking system to provide

the funds.

The first draft of the EPF contract received in the War Department was dated

1

 (1) CPA, Policies, pp. 26-27. (2) Clifford J.

Durr, The Early History of Defense Plant Corporation (Washington: Committee on Public Administration Cases, 1950) (hereafter cited as Durr,

History of DPC), pp. 9ff.

2

 To avoid the necessity of paying a gift or income tax for the cost-free receipt of the facilities,

the contractor would build the plant on government-owned land and would amortize the facilities

over the life of the loan. This could be done under

an established Bureau of Internal Revenue ruling

that a building constructed on leased land may be

amortized for tax purposes over the period of the

lease. Under a purchase option to buy the land

after the expiration of the lease, the contractor

would then acquire clear title to both land and

facilities. Durr. History of DPC, p. 13. 3

 Ginsburg, The Tax Amortization Problem, p.

12. For banker attitudes toward government financing, see Gerald T. White, "Financing Industrial

Expansion for War: The Origin of the Defense

Plant Corporation Leases," The Journal of Economic History, IX No. 2 (November 1949), 177-79.

The attitude of certain members of Congress toward

the early proposals is indicated by Clifford Durr,

who was Assistant General Counsel for DPC in

1940: "About a week later Mr. Hotchkiss came by

my office and stated that the deal approved on the

7th was all off. I asked him why, and he replied

that some people on the 'Hill', meaning members

of Congress, had heard about it and called Knudsen

'raising hell' about giving away plants paid for by

the Government." Durr, History of DPC, p. 16.
478 THE ARMY AND ECONOMIC MOBILIZATION

2 August 1940.4 This draft, in brief, provided that the contractor would construct

the facilities with his own or borrowed

funds and would be reimbursed over a

period of five years in five equal installments. Thus the cost of the facilities would

be separately established and reimbursed.

No provision was made, however, for excluding the cost of facilities from the supply

price of the product.

A prominent feature of this draft was the

proposed basis for disposing of the facilities

upon termination of the supply contract.

This feature called for sale to the contractor

at what was known as the fair value of the

facilities. If the contractor desired to purchase the plant, he was to request an appraisal within thirty days after termination.

Appraisal was to be made jointly by a representative of the contractor and a representative of the procuring agency. If they

could not agree, a third appraiser would be

appointed by the senior judge of the U.S.

Circuit Court of Appeals of the circuit in

which the facilities were located. The appraisers were directed to determine the fair

value, which was defined as "the value

which the Emergency Plant Facilities have

to the Contractor without regard to their

original cost and considering only the prospective earning power which they will add

to the Contractor's plant under conditions

then existing, making due allowance for the

expense which the Contractor must incur if

they are to be adapted to [his] normal

peacetime activities." It was stipulated,

however, that if the appraisers found a

higher value in the open market, the facilities "may" be valued at such open market

value. If the contractor was unwilling to

buy the entire facilities at the appraised

value, he could still "skim the cream" by

purchasing any part of the facilities as individually appraised. All items not purchased were to be removed by the government, which agreed not to use the facilities

in competition with the contractor except

during war or national emergency.

This draft was subject to considerable

criticism within the War Department.5

But the NDAC was under great pressure

from all sides to complete an acceptable

form of the contract so that the defense program could get under way. Although a

number of changes were made, others were

obviously desirable when the NDAC announced the new contract to the press on

23 August. The wording of the press release

was calculated to promote wide enthusiasm

for the contract:

This plan represents striking progress in

the evolution of Government procurement

methods. It was prepared by the Commission

and adopted after consultation with the War

and Navy Departments and the Comptroller

General. In substance, it offers what might be

described as a bankable contract, one which

will permit contractors to finance the expanded facilities through use of their own

funds or the granting of credit from private

sources.

Specifically, it has two purposes: First, to

expedite signing of supplies contracts by assuring the contractor against loss on construction undertaken for military purposes; second,

it safeguards the Government's interest in such

facilities on termination or completion of the

4

 Memo, Lt Col Franklin T. Hammond, Jr., Legal

Div OUSW, for USW, 12 Jan 44, sub: History of

the Emergency Plant Facilities Contract (hereafter cited as Hammond History), and Exhibit 1, in USW 004.03.

5

 Memo, Col Hugh C. Smith (Ret.), Legal Sec

Purchases and Contracts Br OUSW, for Col Schulz,

6 Aug 40, in Hammond History. Among many other

criticisms Colonel Smith summarized the purchases

option feature with the words: "These rules for

appraisal seem to be all in the interest of the

contractor."
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 479

contract. The Government's residual interest

upon such termination is to be evaluated by

the usual board of three appraisers, one appointed by the Government, one by the contractor and the third by the Senior Judge of

the Circuit Court of Appeals of the Circuit

wherein the facilities are located.6

Despite the declared acceptability of the

newly announced contract, some officials

within the NDAC, and elsewhere, were not

convinced that the government's interest in

the emergency facilities was being adequately protected. The issue was brought

into the open by a memorandum of 4 September 1940, relating primarily to machinery and equipment, written by Mr. Henderson's legal assistant, David Ginsburg:

The essential fact, as I see it, is that the

Government will pay for every cent of the cost

of such facilities, and will assume every element of risk on the construction contract.

Yet . . . we propose to require the Government to sell its interest in such facilities for

whatever they may be worth to the contractor,

or whatever they would bring on the market.

What would such facilities bring on the

market? Unquestionably, the answer is little

or nothing, as World War experience plainly

shows. Thus, although we have labored to sift

the cost of the machinery and equipment out

of the price of supplies and have at least illuminated the fact that the Government has

an interest in the facilities financed through

an increase in the cost of supplies, we propose

to demand the sale of the Government's interest, so belatedly recognized, at a price set

in the trough of a glutted market. To regard

this as 'striking progress in the evolution of

Government procurement' is to confuse form

with substance. In my opinion, we would still

be giving away plant and equipment.

Of one thing, I am reasonably certain: that

fairness to the contractor does not require, in

addition to—

(1) a reasonable profit;

(2) a bankable contract; and

(3) assurance against risk of loss on new

construction, a capital subsidy to the contractor in the form of free machinery and equipment. . . . Unless this formula is 

. . . our work will have been substant

fruitless.7

As a result of these and similar criticisms,

the proposed appraisal feature was dropped

and the cost-less-depreciation formula—

previously mentioned—was adopted, with

the alternative of negotiation for a lower

price. The annual depreciation rates for the

purchase option were stated in an appendix

to each contract, and generally amounted to

5 percent for buildings, 12 percent for heavy

machinery and equipment, and 50 percent

for portable tools. Thus the contractor could

be certain of purchasing the facilities at the

end of the five-year period for 75 percent

of building costs and 40 percent of cost for

heavy machinery, with light tools thrown

in.8

The effects of this change in policy were

duly noted by the business community:

It is now obvious that this recapture

figure—cost less depreciation—will run higher

than it would have under the original plan

6

 NDAC Press Release, PR 80, 23 Aug 40, Hammond History, Exhibit 6.

7

 CPA, Policies, pp. 34-35. 8

 Considerable discussion and effort went into

the establishment of the rates of depreciation. The

NDAC Committee on Taxation and Finance on

30 November 1940 recommended rates substantially

higher than those allowed by Treasury for income

tax purposes. With some changes these were recommended to the War Department on 21 January

1941 and approved by the NDAC on 5 February.

(1) Ibid., p. 40. (2) Ltr, Donald Nelson, Dir of

Purchases OPM, to ASW, 21 Jan 41, in USW files,

General, Emergency Plant Facilities folder (hereafter cited as EPF folder). The War Department

allowed higher than the recommended rates in

early cases; eventually the rates were simplified and

standardized for all types of facilities contract.

Ltr, USW to Wayne Coy, Secy NDAC, 23 Aug 41,

EPF folder, protesting denial of necessity certificate for EPF projects because of unexplained, excessive rates allowed by War Department.
480 THE ARMY AND ECONOMIC MOBILIZATION

to give the contractor a dominant option to

buy the plant at its residual value as determined by arbitration. . . . This method

was adopted to avoid the criticism that the

government was giving the plants away. The

Defense Commission is thinking not only

about the popular outcry but also about the

beefing by a contractor's competitors who

don't get the benefit of the useful value left

in a war plant.9

In addition to the revised basis for plant

disposition, improved protection of the government's interest was sought by the provision of all EPF contracts that no part of the

facility costs should be included in the supply price of the product. This provision

would of course be subject to the same difficulties of administration which confronted

procuring agencies in determining nonreimbursement under the tax-amortization program. In fact, developments soon required

that all EPF contractors apply for, and

secure, necessity certificates entitling them

to the tax-amortization privilege. This resulted from a surprise ruling by the Treasury

that reimbursement payments—by their

nature a capital, not an income, transaction—were to be treated for tax purpose

as gross income.10 The same ruling, however, permitted the application of accelerated amortization to such facilities, thus

"washing out" any income tax liability on

the part of the contractor for reimbursement.11

 While EPF construction projects, by

virtue of their War or Navy Department

sponsorship, were automatically granted

necessity certificates, supply contracts for

these facilities received the normal scrutiny

before the issuance of nonreimbursement

certificates.

The problem of making the EPF contract

acceptable to bankers as a basis for construction loans ultimately led to contractual

arrangements which played a significant

part in the early obsolescence of this type of

contract. Although the banks were outspoken in their antipathy toward government financing, they were unprepared to

advance loans in the absence of elaborate

arrangements for the guarantee of full repayment. The NDAC, working through the

Federal Reserve System, had ascertained in

September that the nation's banks were in

a position to lend more than $3 billion for

defense plant expansion.12 Concurrently,

the NDAC sponsored in Congress the Assignment of Claims Act, which became law

on 9 October 1940.13 This permitted contractors to assign to lending institutions

their claims to reimbursement under government contracts, and each EPF contract

contained a clause permitting such assignment. But the banks were not satisfied with

a claim against the government to the full

9

 Business Week, No. 578 (September 28,

1940), 7. 10

 TD 5016, Sec. 19.126-6, effective 8 Oct 40.

This ruling was doubly surprising in view of a

confidential ruling two weeks earlier that reimbursement payments were not to be treated as income.

See mimeographed copy of the Bureau of Internal

Revenue ruling dated 25 Sep 40, Sec. 19.22 (a) 1,

marked as Exhibit 8, Hammond History. 11

 This arrangement later turned out to be less

than a perfect washing transaction. Reimbursement

did not begin until the final cost certificate had been

approved, whereas tax amortization was subject to

commencement as individual portions of the facilities were completed and placed in operation. Since

large amounts were involved, this failure to match

could result in substantial changes in tax liability.

Unsigned copy of Memo, emanating from Audit

and Accounting Section, 24 Sep 41, sub: Federal

and State Income Taxes under EPF Contracts, in

EPF folder. 12

 Ltr, Chester Morrill, Secy, to Donald Nelson,

Chmn WPB, 11 Jan 44, in Exhibit 13, Hammond

History. The "forty-eight hour test mobilization of

bank credit" is described succinctly in NDAC Press

Release, PR 126, 25 Sep 40. 13

 Public Law 811, effective 9 Oct 40, 76th Cong.,

3d Sess.
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 481

value of the facilities. They were fearful

that the emergency might suddenly end and

that Congress would fail to make appropriations to the procuring agencies for complete discharge of their EPF obligations.

Consequently, there was written into the

EPF contract a provision that the entire

unpaid balance of the cost of the facilities

would become due to the contractor (and

hence to the bank as assignee) in the absence of full appropriation and obligation

of funds ninety days before the end of each

fiscal year during the life of the contract.14

In order to meet these terms, the War Department was obliged to hold perpetually

idle out of its appropriations the full balance on all EPF facilities. The end result

was a bad bargain for the War Department. It had to provide the funds for full

financing, only to hold them idle as guaranty against the bank loans, while the banks

collected 21⁄2-percent to 4-percent interest.

To add to its discomfiture, the War Department was obliged to pay this interest, since

interest charges were an authorized component of the final certified cost of the facilities; and this was at a time when funds were

available from DPC for 11⁄2 percent.15

The numerous difficulties which arose in

drafting the EPF contact were exceeded

only by the problems which arose in its implementation. First of all were the delays

in getting EPF arrangements under way.

Before the contractor could safely sign a

contract, he had to be sure that adequate

financing would be forthcoming from the

banks. But the banks were reluctant to make

a commitment prior to the existence of a

contract or at least a detailed "Appendix

A"—the supporting schedule of land, buildings, machinery, and equipment which

eventually documented all facilities contracts. Moreover, some of the contracts were

so large that a single bank could not advance the necessary funds without exceeding

the statutory limits to a single borrower.

Conversely, some contractors feared banker

control of their facilities when 100-percent

financed by banks. Frequently banks would

be unwilling to finance more than 50 percent of the cost of facilities in view of their

high rate of depreciation and obsolescence;

for many defense contractors 50-percent

financing was no better than no financing.

Thus, at a time when the contractor should

have been ordering equipment and initiating construction, he was occupied in negotiating for credit.16

As these difficulties were resolved others

took their place. Douglas Aircraft at Long

Beach learned to its chagrin that the governor of California had vetoed the state taxamortization bill. At the same time the

14

 See below, pages 483-84. 15

 Under the contract for the Ford Dearborn

plant, the War Department paid 4-percent interest

where bank funds were used, 2 percent for Ford's

own funds. See draft of contract amendment in

EPF folder. War Department interest payments

under Air Corps EPF contracts to date of final

cost certificates were estimated at $1,266,000. Interest on outstanding loans after final cost certification was paid by the War Department by the

terms of supply contracts. After estimating that its

total payments under such provisions would amount

to $81⁄2 million, the War Department arranged for

immediate, complete reimbursement by amendment

to all EPF contracts. (1) Memo, Maj Franklin T.

Hammond, Jr., for USW, 30 Jun 42, sub: Interest

Charges in Connection with Emergency Plant Facilities Contracts. (2) Ltr, Hammond to Lt Col Reginald C. Harmon, JAGD USAAF, Wright Field,

9 Jul 42, discussing reliance upon First War Powers

Act to secure modification of EPF contracts. Both

in EPF folder. 16

 An excellent summary of these and other difficulties associated with EPF is found in the testimony

of Under Secretary Patterson before a meeting of

members of the Senate and House Appropriations

Committee. See memo of testimony in USW files,

DPC (Gen.) No. 1.
482 THE ARMY AND ECONOMIC MOBILIZATION

state of California followed the U.S.

Treasury in counting plant reimbursement

as income, and Douglas was faced with an

additional tax liability of $800,000. One

observer, commented: "This ruling may

well be the means of terminating the EPF

form of contract not only in California,

but in other states where a similar situation

prevails."

 17

 The Douglas plant was thereafter taken over by the War Department as

a government-owned facility.18

A perplexing matter under several EPF

contracts was the problem of scrambled

facilities. In the case of Glenn L. Martin,

some $6 million in buildings were constructed on land belonging to the contractor.

The War Department soon recognized that

such an arrangement represented poor contracting since the obligation of the government to remove the buildings—if no

agreement on price was reached at termination—reduced the government's bargaining position to nil. Accordingly, the War

Department sought to take out a twentyfive-year lease on the land which was located

in the heart of the Martin establishment.

Martin was agreeable to the lease proposal,

provided the government would not directly

or indirectly use the leasehold to produce

planes in competition with Martin. Although the War Department was quite willing so to restrict the lease, the Treasury

Department felt that the Martin company

would "derive income" from such restriction and would be subject to substantial income and excess profits taxes on such

constructive income. Col. George H. Foster,

head of the Army's Tax Amortization Unit,

summed up this and similar negotiations

involving EPF contracts: "The result appears to be that an opportunity to place the

Government in a more favorable position

with regard to these buildings is being

thwarted by Treasury. . . . We a

in a horrible mess with these EPF contracts,

and I think we should attack the issue, washing them out as bad rubbish."

 19

Another shortcoming of the EPF contract

was its inadequacy for the financing of subcontractors and vendors, often in basic industries, producing ultimately for the War

Department. The products of these firms

were vitally essential to prime contractors

producing planes, ordnance equipment, and

other items. The plant facilities of such suppliers would retain a high percentage of

their value for peacetime purposes and it

was undesirable, in fairness to privately

financed competitors, to provide full governmental reimbursement for their construction. Yet plant expansion for these was

vital to the defense program. A modification

of the EPF contract was made for such cases

whereby the government would deduct,

from its periodic reimbursement payment,

an amount equivalent to depreciation rental

as allowed for corresponding facilities under

DPC lease agreements. But this meant that

the bank which financed the contractor

under an assignment of the claim to reimbursement would be covered only to the

extent of the reduced claim, in some cases

17

 See memo cited above, note 11. 18

 (1) WD, Quarterly Inventory of Owned, Sponsored, and Leased Facilities, 30 Jun 45, p. 233. (2)

Supplement to (1), 30 Sep 45, p. 1.

19

 Memo, Foster for Col Greenbaum, 26 Dec 42,

sub: EPF Contracts, in USW files, General, Memos

to Greenbaum folder. The unkind words for the

EPF contract were numerous: "Although one or

two of those who worked with the problem were

inclined to take a mildly hopeful—or perhaps not

entirely hopeless—view of the Emergency Plant

Facilities Contract, others in the office considered

it an abortion and justifiable only because nothing

else was then available." Anderson, Introduction to

the History of the Under Secretary of War's Office,

Ch. V p. 162.
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 483

as low as 50 percent of total cost. This was

a factor underlying the frequent inability of

contractors to secure more than partial

financing from banks.20

The first EPF contract entered by the

War Department was consummated on 8

October 1940 with Boeing Aircraft for the

construction of a B-29 airplane plant at

Seattle, Washington. By April 1941, the

Army Air Corps had entered a total of eleven

EPF contracts, with a commitment value

totaling some $133 million. By this time the

superiority of the new DPC type of contract

had been demonstrated and no further EPF

contracts were entered by the Air Corps.

Ordnance likewise found EPF of little use

after the spring of 1941, entering only four

such contracts after June of that year. Total

Ordnance EPF contracts numbered twentyseven, with a commitment value of some

$561⁄2 million. The only other branch of

the Army to use EPF was the Quartermaster Corps, which entered three such

contracts of an authorized value of a half

million dollars; these were later taken over

and administered by the Corps of Engineers.

Thus the War Department as a whole

entered a total of forty-one EPF contracts,

amounting to some $190 million. A number of these were later converted, for one

reason or another, to straight War Department-owned facilities. As of 30 September

1945, the accumulated construction expenditures on all facilities then remaining

in EPF status amounted to less than $110

million; of this figure, $75 million was represented by two plants—Ford at Dearborn,

Michigan, and Glenn L. Martin at Middle

River, Maryland.21

The practical causes for the failure of

EPF were—as already mentioned—higher

interest rates, the absurdity of double provision of funds (once by the banks, again by

War Department earmarked appropriations), the inadequacy of 50-percent financing for subcontractors and vendors, red

tape and delays in getting projects started,

controversy with the Treasury and state tax

bodies, the complexities of scrambled facilities, and so on. Underlying these difficulties

was the haphazard manner in which the

EPF contract came into being. It was, first

of all, a pioneer measure subject to all the

vicissitudes of trial and error. It was conceived in an atmosphere of political uncertainty, confusion, and haste. Its initial sponsors, anxious to get the defense program

under way, were too much inclined to neglect the government's interest, and considerable patchwork on the contract was

necessary in order to redeem it. More patchwork was required to deal with tax problems

and Treasury regulations, and still more to

satisfy the banks. By the time the contract

had reached final form it was hardly recognizable and perhaps even less understandable. The following sentence, appreciated

most when read aloud, typifies the problems

of both form and substance in the conception and administration of the EPF contract:

In the event that, on the date 90 days pre- ceding the close of each of fiscal years which

shall be wholly or in part included in the

20

 (1) Patterson testimony cited above, note 16.

(2) Memo for Files, Warren S. Ege, 7 Apr 41, sub:

Rental Arrangements under Defense Plant Corporation Lease Agreements and EPF Contracts, in

USW files, DPC (Gen.) No. 1.

21

 Supplement cited above, note 18 (2), Previous figures on the number and value of EPF contracts by technical services are found in Memo,

Maj S. K. Bradley, Chf Liaison Br, Purchases Div

ASF, for Col Park Holland, 9 Sep 44, sub: Emergency Plant Facilities Contracts, in EPF folder.
484 THE ARMY AND ECONOMIC MOBILIZATION

period between the date of this contract and

the date of full payment by the Government

of the Government Reimbursement for Plant

Costs hereunder, there shall not have been

theretofore made available either by appropriation or contract authorization by the

Congress and validly obligated by the Government to the performance of this contract

funds, the appropriation and obligation of

which will not lapse and which will not revert

to the Treasury or be carried to the surplus

fund prior to the close of the next succeeding

fiscal year, in an amount sufficient to provide

for the payment when due of the balance of

Government Reimbursement for Plant Costs

then remaining unpaid, or, if the acquisition

and construction or installation shall not have

been completed, the maximum amount of the

Government Reimbursement for Plant Costs

hereunder provided in Section 4 of Article II,

this contract shall terminate and the amount

of such balance shall on said date become due

and shall, promptly after said date and before

the close of the fiscal year then current, be

paid by the Government to the Contractor out

of the appropriations or contract authorizations originally or thereafter specified in connection with this contract.22

Defense Plant Corporation Facilities

Origins of DPC Financing

The EPF contract proved to be so cumbersome and otherwise unsatisfactory that it

rapidly gave way to a superior type of arrangement. This new arrangement was

found in the Defense Plant Corporation contract, which came to be used for the general

expansion of such basic industries as aircraft, aluminum, magnesium, synthetic rubber, and steel. DPC financing also provided

machinery and equipment for military contractors independently of building construction or expansion.23

Authority for the creation of the Defense

Plant Corporation was provided by the 25

June 1940 amendment to the Reconstruction Finance Corporation act.24

 Under this

amendment the RFC was authorized to

create corporations with power "to purchase and lease land, to purchase, lease,

build, and expand plants, and to purchase

and produce equipment, supplies, and

machinery for the manufacture of arms,

ammunition, and implements of war."

Facilities thus created by DPC could be

leased to private firms for actual operation.

While the amendment was still under consideration by Congress, RFC officials set

about the task of devising satisfactory contractual arrangements. The terms would

have to be sufficiently attractive to encourage private industry to utilize DPC

financing and to operate defense plants

22

 Emergency Plant Facilities Contract (WF-12-

26-40-500 (4)), Article II, Section 2. This provision, introduced for the benefit of the banks, turned

out to be a boomerang, as banks and contractors

alike found themselves with lucrative contracts subject to automatic cancellation as the end of the

fiscal year approached. This feature was later

amended in all EPF contracts to make cancellation

optional with the contractor under the stated conditions. See: (1) copy of ltr, Chase National Bank

to participants in Vultee Aircraft loan, 8 May 41;

(2) Memo, USW for CofAC, 3 May 41, sub:

Article II, Section 2, EPF Contracts, enclosing proposed amendment. Both in EPF folder.

23

 An informative treatment of the origin and

early operation of DPC is to be found in White,

"Financing Industrial Expansion for War," pp.

156-83. See also: (1) Hans A. Klagsbrunn, "Some

Aspects of War Plant Financing," American Economic Review, (Papers and Proceedings of the

55th Annual Meeting of the American Economic

Association), XXXIII (Supplement, March 1943),

119-27; (2) Durr, History of DPC, pp. vii, 43. All

three of these authors were formally connected with

DPC: Mr. White as historian, Mr. Durr as General Counsel, and Mr. Klagsbrunn as Executive

Vice President. 24

 54 Stat. 572, 25 Jun 40, Sec. 5. For background

of the act, see U.S. Congress, Senate, Committee on

Banking and Currency, Hearings on S. 3938 (76th

Cong., 3d Sess.).
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 485

thereunder. Also, arrangements for the disposition of the facilities at the end of the

emergency would have to be provided in a

manner which would at once be fair to the

government, attractive to the prospective

operator, and advantageous to the economy

as a whole.

During the early stages of the development of the Defense Plant Corporation, considerable opposition to "government ownership" was expressed. Business was frankly

concerned lest government-owned plants

would continue to be operated in peacetime,

in competition with private industry.25 Also,

the banks did not favor the use of government funds for the expansion of industry.26

Within the RFC there was some reluctance

to adopt a bold plan of financing: Mr. Jesse

H. Jones—who held the purse strings of

RFC—was known to be conservative and

some of his subordinates feared that he

would not be willing to commit RFC funds

to a venture which might result in substantial loss.27

 Even the War Department at first

frowned upon DPC in preferring the betterknown EPF-type contract.28

Despite the obstacles and opposition from

various quarters, the Defense Plant Corporation was chartered on 22 August 1940.

Discussion and negotiation with various

firms, mostly in the aircraft industry, led to

a clarification of the issues and the development of satisfactory arrangements for all

concerned. On 3 September 1940, the first

DPC contract was signed with the Packard

Motor Car Company for the creation of an

aircraft engine plant. As other firms reviewed the Packard arrangements, they

quickly saw the advantages and by the

spring of 1941 the DPC type of financing

came generally to be preferred to EPF.

Basic Terms of DPC Contracts

The DPC form of contract was a gradual

development and individual contracts

varied with the type of facility concerned.

The typical terms and procedures were as

follows:

 29

 The Army (or other procuring

25

 Among the vigorous opponents of government

ownership at the beginning of the defense period

was Mr. William S. Knudsen, NDAC commissioner

for production. (1) Durr, History of DPC, pp. 11,

12, 19, 21, 26. (2) White, "Financing Industrial

Expansion for War," p. 180. 26

 (1) Durr, History of DPC, p. 23. (2) White,

"Financing Industrial Expansion for War," pp.

177-79. White quotes the following from a speech

in February 1941 by Mr. B. D. Houston, president

of the American Bankers Association: "The American Bankers Association is well aware of the fact

that the future independence of business may depend upon the extent to which bankers finance

defense orders. If business is going to the government for the bulk of its credit now, it will be

dependent on the government in the future." Although government financing came to be preferred

by industry over private financing, it was not the

policy of either DPC or the War Department to

replace specific EPF contracts with DPC contracts

in the absence of explicit consent of the banks concerned. Telg, Winthrop W. Aldrich, Chase National

Bank, to Robert Patterson, and reply, 1 and 3 July

41, in USW files, DPC (Gen.) No. 1. Nevertheless

a large proportion of Air Forces EPF contracts were

converted to DPC financing at the specific request

of the contractors.

27

 Durr, History of DPC, p. 8. 28

 Under Secretary Patterson's initial reaction to

DPC was one of hostility. He had not been informed

of the nature of the DPC contract and feared that

DPC proposals would delay the expansion of facilities by upsetting the proposed EPF arrangements.

At that time the EPF contract was being widely

heralded by NDAC and the press as the key to rapid

defense plant expansion. Mr. Patterson's hostility

was short-lived. (1) Ibid., pp. 36-37. (2) Anderson,

Introduction to the History of the Under Secretary

of War's Office, Ch. V, pp. 168-69. 29

 DPC contracts were known as Plancors, from

the name of the lending agency, and each contract

was assigned a Plancor number. There were two

general types: (1) Complete Plancors, each covering an entire industrial facility—land, buildings,

and equipment; (2) "M&E Plancors," covering

only machinery and equipment purchased by DPC
486 THE ARMY AND ECONOMIC MOBILIZATION

agency), in negotiating a supply contract

with a private contractor, would determine

the need for additional facilities. The contractor would prepare approximate specifications for the plant, including land and

equipment, and the interested supply arm

of the Army would act as the sponsoring

agency. The DPC would then enter a contract with the private firm, agreeing to put

up the money, as needed, for site acquisition and plant construction. The contractor

(known as the lessee) would let contracts

for the construction of the plant and the

purchase of equipment. All contracts and

equipment purchase orders of the lessee

were subject to the approval of DPC, which

maintained a supervising engineer at major

construction sites. Title to the plant was

vested in DPC, and upon completion the

lessee would operate the plant in the production of defense supplies for the Army,

Navy, or other defense supplier. The lessee

typically paid a rental for the plant during

the life of the contract. At the end of the

emergency the operator-lessee had a ninetyday option to purchase the entire facility.30

Lessee's Purchase Option—Of primary

importance in enlisting the interest of potential contractors in plant expansion in 1940

and 1941 were the terms under which the

plants would be disposed of at the end of the

emergency. While many contractors were

fearful of the possibility of government

ownership and operation after the war,

they were even more concerned that defense

plants—with their up-to-date equipment

and built-in know-how—might fall into the

hands of competitors. It was thus desirable

as a matter of both incentive and equity to

give contractors an option to buy the plant

at the termination of the contract. Moreover, the most advantageous location for

new defense plants was frequently at the site

of the defense contractor's existing plant, on

land held by him for future expansion. This

was desirable for reasons of both speed and

economy; the contractor could supervise

construction as well as management of the

new plant with maximum convenience. An

additional reason for the option privilege

was the decision of DPC officials to keep

new plant costs down; since the option price

was tied to cost it was to the contractor's

advantage to build well and efficiently.

Nevertheless, in the early negotiations at

the beginning of the defense program,

private industry did not appear to be greatly

attracted by terms which would adequately

protect the government's interest. Some of

the early proposals leading up to both the

EPF and DPC contracts would have resulted in the government practically giving

away expensive plant and equipment to

contractors who had built and operated

them.31 Although a number of such proand rented to manufacturers for use in their own

plants. While the first type is the primary concern

of this discussion, many of the problems and procedures were common to both. 30

 An excellent summary of representative DPC

lease arrangements is found in the four-page Memorandum for File, prepared by Sturgis Warner, 10

Jul 43, sub: Functions of the Defense Plant Corporation in Relation to the War Department

Facilities Program (copy in OCMH).

31

 With a curious "dog-in-the-manger" attitude

some contractors, in order to prevent plants from

falling into the hands of competitors, were not satisfied with an option to buy. They wished to be

given title virtually cost-free so that they could dispose of the plant as they saw fit. One aircraft

manufacturer, when asked what he would do with

such a plant at the end of the emergency if he

found it excess to his needs, made the remark: "We

will pull the roof off and let the rain come in."

Durr, History of DPC, pp. 12-13. For additional

discussion of some of the early proposals, see (1)

White, "Financing Industrial Expansion for War,"

pp. 164-68; (2) Klagsbrunn, "Some Aspects of

War Plant Financing," pp. 124-25.
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 487

posals had been tentatively approved, resistance by individuals in DPC and NDAC

as well as by members of Congress resulted

in a definite clarification of the government's interest and the adoption of measures

to protect this interest. The firm option price

to DPC lessees thus became cost less depreciation or cost less rental payments,

whichever was higher.

In exercising his purchase option, the

lessee was not permitted to "skim the cream"

from the facilities by buying only strategic

or especially desirable portions. The firm

option price, at which the facilities would be

sold to the lessee without further negotiation,

was the higher of two figures: (1) cost,

plus 4 percent interest, less rentals paid in;

(2) cost less depreciation, subject to a minimum residual figure of 15 percent of cost.

Depreciation rates were standard: 5 percent

for buildings and similar installations; 12

percent for machinery and equipment; 25

percent for portable durable tools and automotive equipment. For "no-rental" facilities, described below, only the cost-lessdepreciation formula was used. During the

ninety-day period following termination of

the contract, the lessee was free to negotiate

with DPC and the sponsoring agency for a

lower price. If the lessee failed to reach an

agreement with DPC as to the price, he had

"first refusal" rights for an additional

ninety-day period. This meant that he had

superior purchase rights over all outsiders

at a price equal to the best offer. About a

fourth of DPC projects did not include a

purchase option, either because of lack of

interest on the part of the contractor, or

because the postwar distribution of the facilities involved broad issues of social policy.32

Rental Provisions—Rental arrangements

for DPC facilities fell into three general

categories:

(1) No rental ($1 per year—customarily referred to as "nominal" rental), used for

noncompetitive, specialized facilities for direct suppliers to the government. Under this

contract, no part of the facilities cost could

be included in the supply price of the

product. No-rental facilities in some cases

were privately operated for a management

fee similar to War Department-owned

establishments.33

(2) Depreciation rental, a figure roughly

equivalent to the actual deterioration of the

plant during the life of the contract. This

was designed for competitive-type facilities

completely devoted to production for the

government. The payments were calculated

to place DPC lessees on a competitive basis

with private contractors using their own

equipment and thus obliged to recoup their

plant depreciation costs in the supply price

of their products. For purposes of administrative simplicity, the rental was usually expressed in terms of a percentage of net product sales calculated to yield the equivalent

of the depreciation formula.34

32

 White, "Financing Industrial Expansion for

War," p. 182, especially note 92. Nonoption facilities included in the Geneva Steel Plant and aluminum, magnesium, synthetic rubber, and other

plants. For a revealing treatment of these issues, see

G. Herbert Stein, The Disposal of the Aluminum

Plants (Washington: Committee on Public Administration Cases, 1948). 33

 The large aircraft plants (frames, engines, propellers, assembly) were no-rental facilities. In this

class also were subcontractors for items ordinarily

produced by no-rental primes in their own plant.

See Ege Memo, cited above in note 20 (2). For

summary description of various rental arrangements,

see also Memo for File, F. H. Otto, 17 Oct 44, sub:

DPC Lease Agreements . . ., in USW files, D

(Gen.) No. 4. 34

 The depreciation rates for rental purposes were

identical with those used in connection with the

purchases option. Contracts calling for depreciation

rental specified that there could be no facilities

charges in supply contracts beyond rental payments,

maintenance, taxes, and insurance.
488 THE ARMY AND ECONOMIC MOBILIZATION

(3) Full rental, a figure calculated to

discharge full plant costs over a five-year

period (the conventional expectation of the

duration of the emergency). Full-rental

leases contemplated the use of facilities for

commercial as well as defense production.35

Facilities in the full-rental category included three subtypes: (1) so-called stepchildren—facilities not sponsored by any

particular supply arm but in which the

Army as a whole had the preponderant

interest by virtue of the ultimate destination

of the products; (2) basic industries—for

example, aluminum and steel forgings, and

other metal products—whose supply contracts were at least two steps away from the

finished product purchased by the Army,

and whose product prices were not subject

to scrutiny; (3) plants producing both for

defense and commercial purposes. In 1941

a number of expansions were authorized,

especially by Ordnance, in order to provide

capacity to meet anticipated requirements

in excess of current needs. Such excess

capacity could be used for commercial purposes without prejudice to the government's

interest, especially in view of the full-rental provision.36

A further feature of DPC rentals was the

frequent gearing of rental payments to plant

costs by the application of a rough sliding

scale. Thus, a manufacturer planning to

build a $50 million plant might be charged

a rental equivalent to 4 percent of plant

cost, with the stipulation that the rate would

go up to 8 percent if actual costs reached

$100 million. Such an arrangement put

pressure upon the contractor to keep his

plant costs down. The majority of rental

arrangements were, however, eventually

placed on a percentage of sales basis. This

eased the lessee's burden by co-ordinating

rental payments with income. A sliding scale

for this purpose was often adopted, calculated to produce the desired rate of cost

amortization.37

War Department Take-Out

Arrangements

In the evolution of the DPC contract and

its accompanying arrangements, several

steps are of particular interest with regard

to the role of the War Department in the

program. The first of these relates to the

extent of War Department financial obligation under DPC contracts. Originally, the

DPC staff had envisaged for all contracts a

substantial rental payment to protect the

solvency of its investment. The War Department, however, insisted upon rent-free arrangements for aircraft and similar large

prime contractors engaged exclusively in

turning out major items for national defense. The payment of rent would have

forced up supply prices and dissipated War

Department appropriations. Moreover,

under prompting by NDAC—which was

fearful of double payment to contractors for

facilities costs—the War Department

wanted a clear separation between the cost

of facilities and the cost of completed munitions. In all cases where public funds were

granted specifically to finance the expansion

of facilities, steps were to be taken to insure

35

 Ege Memo, cited above in note 20 (2). 36

 (1) Ibid. (2) Memo, Franklin T. Hammond,

Jr., Special Asst to USW, for USW, 18 Feb 42, in

USW files, DPC (Gen.) No. 2.

37

 For example, in one particular contract involving a plant cost authorized at approximately

$2.2 million, the DPC lease provided for annual

rental payments of 4 percent of net sales in excess

of $10 million. If procurement contracts were insufficient during the life of the DPC contract to

yield any rental, the DPC would, in effect, retain

complete equity in the plant.
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 489

that no part of facilities costs would be

loaded into the unit price of the products.

The no-rental stand taken by the War

Department put the DPC in an embarrassing position when it set out in 1940 to make

funds available for plant expansion. In

the absence of a substantial rental payment,

the DPC would be left at the end of the

contract with nothing to show for its investment except title to a plant which was both

physically depreciated and potentially without a market for its products. This would

have violated the basic principles of sound

financing upon which the RFC had been

organized. On the other hand, the War Department was hardly in a position to finance

the entire plant expansion program. Until

after Pearl Harbor, its special Expediting

Funds for plant construction were limited;

by the time appropriations were available in

superabundance, the DPC had already assumed a significant and useful role in the

defense program.

The solution was found in the so-called

take-out letter. The take-out letter was a

letter contract between the Army and DPC

under which the Army agreed to reimburse

DPC, out of current appropriations, for a

substantial portion of the cost of the facilities. In the case of no-rental facilities the

Army would typically pay DPC two fifths

of the cost when the facilities were ready for

operation. In addition, the Army agreed,

upon termination of the lease, to request

appropriations from Congress to reimburse

DPC for any remaining unrecovered costs.

Upon such reimbursement, title would pass

in effect to the War Department; in any

case, the DPC could not dispose of the facility without War Department approval.

In depreciation-rental contracts the Army

also provided take-out arrangements except

that the cash payment was limited to 40 percent of cost less estimated rental returns over

a five-year period. Thus for a $2 million

plant renting for $150,000 per year, the

Army would pay 40 percent of $1,250,000

or $500,000 in cash, covering any remaining DPC deficits by the contingent request

upon Congress.

For full-rental contracts the Army provided no cash take-out since it was presumed

that DPC would be adequately reimbursed

over the life of the contract; the provision

for contingency request upon Congress was

made, however, to protect DPC against any

possibility of less than full reimbursement.38

The take-out letter, originally proposed

by the DPC, was drawn from two precedents: The EPF contract, which required

the Army or Navy to earmark out of current

appropriations 100 percent of plant costs;

and the earlier loans of RFC to state and

local governments for relief purposes. These

loans had never been repaid and Congress

eventually passed legislation permitting

RFC to write them off. By agreeing to a

partial cash take-out, the DPC was able to

multiply the effectiveness of War Department funds while providing at the same

time a substantial cushion to protect its own

investment. If the contingency request upon

Congress eventually became necessary, the

onus would be upon the War Department

rather than upon DPC. This arrangement

38

 In 1942 the provision for contingency request

was dropped for full-rental projects except in those

cases where the War Department wished to retain

an interest in the facility after the emergency. Ege

Memo, cited above in note 20(2). A concise summary of War Department take-out arrangements

is furnished in Memo for File, Sturgis Warner, 3

Aug 44, sub: Calculation of War Department Firm

Commitment on DPC Projects, in USW files, DPC

(Gen.) No. 4.
490 THE ARMY AND ECONOMIC MOBILIZATION

was agreeable to Under Secretary Patterson, who obtained a careful opinion from

the Judge Advocate General upholding its

legality.39

As plant expansion got under way, various changes were made in the arrangements.

The initial DPC proposal was a 60-percent

take-out, but at War Department request

this figure was shortly reduced to 40 percent.40

 In a number of important cases this

was raised to 50 percent; in others it was as

low as 16 percent.41 In May 1945, the contingent request upon Congress was made

applicable only in case of formal request by

DPC, and then not before 1 July 1946.42

By this date, as part of the national policy

of readjustment and postwar reconversion,

DPC had relieved the War Department of

any obligation under the contingency

feature.43

Operation and Administration

The implementation of the DPC contract, despite its relative flexibility, was

beset with inevitable difficulties. A chronic

problem was the treatment of "unrecoverable costs"—expenditures associated chiefly

with alterations and conversions of existing

plants to new uses. These expenditures

might be essential to war production but

would add little or nothing to the long-term

value of the facility. They covered a multitude of purposes and took place throughout

the life of the contract as well as at the time

of original construction or conversion: also,

particularly for M&E Plancors, they would

often run to a substantial percentage of the

total cost of the contracts. Typical items

were the cost of transfer, storage, and installation of machinery, the provision and

alteration of wiring and lighting fixtures,

grading, cement work, raising of ceilings

and roofs, and miscellaneous carpentry,

electrical, and plumbing work. Such expenses were ordinarily provided for in direct

government supply contracts; the difficulty

lay primarily with subcontractors sponsored

by the War Department and financed by

DPC. The DPC was reluctant to make

capital outlays for items of this nature, and

the War Department felt that many of them

should be absorbed by the contractor. If

an overly liberal attitude were taken, it

would result in a substantial windfall to

manufacturers, enabling them to modernize

their plant or otherwise profit at government

expense; an overly stringent position would

create inequities as well as impede production. Many negotiations were held between

the War Department, the DPC, and private

contractors but no fixed policy was ever

reached. In some cases the DPC agreed to

allow up to 10 percent of total cost for un39

 (1) Memo, ASW for JAG, 29 Oct 40, and 1st

Ind, JAG for ASW 12 Nov 40, file Contracts, JAG

161. (2) The take-out letter was first suggested by

Mr. Hans Klagsbrunn, then assistant counsel and

later executive vice president of DPC. Durr, History of DPC, pp. 39-40. 40

 Ltr, Jesse Jones, Federal Loan Administrator,

to ASW, 12 Dec 40, in USW files, DPC (Gen.)

No. 1. 41

 Memo for Record, Maj F. H. Otto, 8 Aug 45,

sub: Facilities Expansions Recommended for DPC

Financing November 1940 to February 1942, in

USW files, DPC (Gen.) No. 5. The $175 million

Chrysler plant in Chicago was covered by a 50

percent War Department take-out. 42 Ltr, USW to DPC, 22 May 45, approved by

Frank R. Roney, Vice President, DPC, in USW

files, DPC (Gen.) No. 5. 43

 On 30 June 1945 Congress dissolved the Defense Plant Corporation and all other corporate

subsidiaries of RFC, which took over all liabilities

of its erstwhile subsidiaries. 59 Stat. 310, 30 Jun 45.

Three years later Congress authorized the Secretary of the Treasury to cancel RFC notes in the

amount of over $9.3 billion, representing unrecovered costs of national defense, war, and reconversion activities. 62 Stat. 1187-88, 30 Jun 48.
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 491

recoverables; in other cases the manufacturer would pay full rental or would charge

such items to overhead; in still others the

War Department would provide DPC with

100-percent cash take-out. The wide variety

and constantly changing nature of unrecoverable costs required flexibility of policy

on the part of all concerned.44

An important feature of DPC financing

was the development of "rentra" agreements, under which machinery and equipment could be readily subleased and transferred from one plant to another with fluctuations in demand. Since all DPC equipment was government-owned and physically

so identified, it could be moved across state

lines without any of the barriers common to

equipment covered by ordinary chattel

mortgages in private financing. Each DPC

lease contained a clause permitting the sublease of machinery to another supplier of the

government upon written approval of DPC

and the sponsoring military agency. This

clause was designed primarily to permit the

lessee to redistribute machinery to subcontractors in order to expedite production for

his own defense contracts. Originally it had

been proposed to provide the prime contractor with a pool of machine tools which

he could assign, without government approval, to his various subcontractors as

necessary in order to permit completion of

the prime contract. It was felt, however,

that this would place the subcontractors too

completely in the power of the prime. Accordingly, the subleasing clause was devised

as a compromise arrangement allowing the

transfer of the prime contractor's regular

machinery to his subs in specific instances,

with proper government approval. Later

the clause permitted the Army and Navy

generally to redistribute idle machinery to

plants where it was most needed. Thus machinery and equipment under complete

Plancors as well as under M&E Plancors

were transferable from an original lessee or

sublessee to any defense supplier. This feature was most important during the period

of drastic tool shortages.45

Closely associated with rentra agreements

was the development by the DPC of "equipment pool" orders, which began as early as

1940.46 In order to assure itself—as well as

all other qualified purchasers—of the availability of machinery and other equipment

by the time its plants were ready, the DPC

placed blanket orders for various types of

machinery well in advance of knowledge of

its ultimate requirements. This guaranteed

the machine tool industry a steady volume

of orders, enabling it to operate at capacity

at a time when private industry was not in

a position to provide a steady market. Under

the pool system the equipment makers

agreed to reduce the basic government pool

44

 Detailed memoranda and correspondence on

the treatment of unrecoverables may be found in

USW files, DPC (Gen.) Nos. 2 and 3.

45

 The operational details and problems associated

with rentra agreements are too complex to be described here. The chief problems were twofold:

(1) allocation of costs of dismantling, shipment,

installation, and the like. (These were closely related to the problems of unrecoverable costs previously discussed.); (2) development of a sensitive,

decentralized organization for detecting and disseminating information on the existence and nature

of idle equipment. For a summary of War Department redistribution procedure at the height of the

war production program, see: (1) WD Memo W5-

44, 25 Jan 44, sub: Redistribution of Industrial

Facilities Owned by Defense Plant Corporation

Under War Department Sponsorship; (2) Memo

and attachments, USW Patterson for CGs AAF

and ASF, 26 Jan 44, sub: Transfer by "Rentra

Lease" of Machinery Owned by Defense Plant

Corporation—revised policy and procedures. 46

 See Klagsbrunn, "Some Aspects of War Plant

Financing," pp. 126-27, for a concise description

of the DPC equipment pool.
492 THE ARMY AND ECONOMIC MOBILIZATION

order by the amount of all subsequent firm

orders for specific purposes, whether governmental or private. The administration of

the pool system, like rentra agreements, involved many problems of organization, record keeping, and contract interpretation,

but without this and the other devices the

critical shortage of machine tools in the late

defense and early war periods would have

been far more serious.

Advantages of DPC Financing

The advantages of the DPC contract

were numerous. Its flexibility and freedom

from red tape permitted a maximum of

speed. The project could be approved, plant

sites acquired, and construction begun while

many of the details of cost and specifications

were still unknown. If subsequent additions

were necessary or cost had been underestimated, an amendatory agreement could

be made authorizing additional advances

by DPC.47 No protracted advance negotiations with private bankers were necessary

and the contractor knew that full financing

would be provided by DPC. The tax

amortization problem, so burdensome under

EPF because of the necessity for obtaining

NR certificates with each and every supply

contract, was completely outflanked by the

existence of government title to the facilities. Also, since the DPC was a corporation

and not a government agency its expenditures were not subject to audit and disapproval by the Comptroller General, a

well-known barrier to the bold expenditure

of government funds necessary in time of

emergency.48

From the Army's standpoint, there were

a number of other considerations which

made DPC financing attractive. The alternative in many cases would have been full

financing out of the War Department's

limited expediting funds. Under DPC a

40-percent take-out meant that a given appropriation could be spread two and a half

times as far; under complete contingency

arrangements, which ultimately represented

nearly a fourth of the total, no Army funds

were needed. Also, the Army had to pay

only 11⁄2-percent interest to DPC during its

period of nonreimbursement as contrasted

with 21⁄2 to 4 percent under EPF contracts.

Under the latter type of financing, the

Army was placed in the anomalous position

of having in effect to pay interest on its own

earmarked appropriations; under DPC it

could escape interest charges by cash payment at any time.49

47

 All DPC contracts contained a clause limiting

total construction expenditures to a specified figure,

based on current estimates. Few, if any, projects

were completed within the original cost authorization, and leases had to be amended many times.

For example, the contract for the Ford Willow Run

project was amended seventeen times, raising the

authorization from $47,620,171 (25 June 1941)

to $96,487,067 (16 November 1943); the Chrysler

Chicago engine plant authorization was increased

in four amendments from $99,304,681 (16 April

1942) to $181,857,236 (5 September 1944). See

USW files, DPC Plancor folders, alphabetical file.

In all such cases the Army's take-out was increased

proportionately.

48

 Under postwar legislation, government corporations have become subject to audit by the Comptroller General. 59 Stat. 597, 6 Dec 45, Government

Corporation Control Act. 49

 The Army, rather than the contractor, paid

interest on DPC loans for no-rental facilities since

these belonged nominally to the War Department.

By agreement with DPC the Army paid interest

only on DPC advancements up to the amount of

the take-out. Interest on the remainder of outstanding funds was treated in the same manner as

the principal, that is, the remaining principal and

interest thereon was payable only at the end of the

emergency and only if Congress made appropriations therefor. Ltr, USW to DPC, 22 Apr 42,

approved 24 Apr 42 by John W. Snyder, Executive

Vice President, DPC, in USW files, DPC (Gen.)

No. 2, also filed with individual Plancors. The
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 493

The DPC contract also provided substantial administrative economies and advantages for the Army. DPC had its own

resident engineers at every construction site

to pass upon all routine problems, thus freeing the Army's thinly spread and overworked Construction Division for the

building of posts, camps, stations, arsenals,

and other military projects. Moreover, the

bulk of the legal and administrative burden

in implementing the program was assumed

by DPC at a time when qualified personnel

in the OUSW and technical services were at

a premium. Working relationships between

DPC and War Department personnel were

among the best in Washington.50

Another basic advantage associated with

DPC as it eventually developed was the concentration in a single agency of a wide array

of functions and responsibilities attending

the national program of plant expansion.

This feature had several distinct facets. First

of all it simplified the problem of multiple

military demand for common components

and end products. Thus Army Ordnance,

the Air Forces, and the Navy might each be

interested in facilities capable of producing a

given item. Traditionally each agency would

sponsor its own separate facility expansion,

with consequent duplication and inefficiency. DPC was often able to consolidate

such requirements into one facility whose

productive capacity would be allocated by

WPB with the assistance of ANMB and the

several military agencies.

A second feature of centralized responsibility for facilities expansion was superior

provision for the supply of "bits and

pieces"—the countless variety of materials

and components ultimately essential to military end items but produced by thousands

of establishments many tiers below the level

of military prime contractors and their immediate subs. The Army was vitally interested in the flow of such materials but to

assume sponsorship of all these establishments would carry it far afield of its primary

responsibilities. Especially in the later stages

of the war, the DPC provided both financial

and administrative support for thousands of

smaller but indispensable plant expansions

throughout the wartime economy.

Finally, it was unquestionably to the

Army's advantage in dealing with contractors to have a buffer in the form of an agency

with control over expenditures but without

an immediate interest in procurement. Too

often Army procurement officers were faced

with the proposition, "Do you want this now

or a year from now? If you want it now, it

will have to be done this way." The desire

to speed procurement, as well as to maintain

harmonious relationships essential to smooth

and expeditious day-to-day operations,

made contracting officers vulnerable to such

demands. The DPC, relatively aloof from

such pressures and with the experience of

dealing with thousands of contractors for

all procuring agencies on plant construction

matters common to them all, was often in a

better bargaining position.51

11⁄2-percent rate represented a concession by DPC

in favor of government agencies; Mr. Jesse Jones

originally insisted upon a 4-percent rate. See Ltr,

Emil Schram, Chmn RFC, to ASW, 13 Dec 40,

and related papers, in USW files, DPC (Gen.)

No. 1. Under the letter agreement of 22 April 1942

the Army further reduced its interest payment by

paying the full cash take-out at the time each lease

was signed rather than at the time of completion of

the facilities. 50

 Anderson, Introduction to the History of the

Under Secretary of War's Office, Ch. V, p. 168.

51

 Some indication of the scope of DPC activities

and the necessity for "driving a hard bargain" is

found in Jesse H. Jones and Edward Angly, Fifty

Billion Dollars; Thirteen Years With the RFC,

1932-1945 (New York: The Macmillan Company,

1951), Chapter 22.
494 THE ARMY AND ECONOMIC MOBILIZATION

The Results of DPC Financing

Once the basic terms, take-out provisions,

and administrative procedures for implementing the DPC program had been established, the execution of contracts sponsored

by the War Department went forward

rapidly. By 30 June 1941—the end of the

first fiscal year of operations—101 agreements had been executed involving plant

construction of a contractual value of $525

million. By the time of Pearl Harbor commitments had passed the billion dollar

mark, and on 30 June 1942 the record stood

at 648 agreements totaling slightly more

than $2.5 billion.52 Relatively few construction projects were initiated after mid-1942

but by the war's end the War Department

had sponsored some 935 Plancors of all

types with a commitment value in excess of

$3 billion. A majority of the new Plancors

after 1942 were of the M&E variety; nevertheless, the authorized value of complete

Plancors rose steadily with successive

amendments revising the permissible ceiling.53

The outlay of DPC funds for War Department facility construction, as estimated

by the War Department for 30 September

1945, totaled nearly $3 billion (Table 51).

Of this grand total, Air Forces facilities

alone accounted for 82.6 percent, with

Ordnance running a poor second at 13.9

percent. By type of expenditure, machinery

and equipment accounted for 61 percent of

the total, while buildings and related installations ran to 36 percent; land and miscellaneous costs together amounted to only

3 percent. A fourth of all expansions were

financed on a purely contingent basis, that

is, no War Department funds were required.

Assuming a 40 percent average take-out

for the remaining three fourths, the use of

DPC funds in effect extended War Department facilities appropriations to more than

three times their original size.

The extent to which DPC plant facilities

were concentrated in large industrial establishments is shown in the fact that the largest

twenty-six Plancors account for over half

the cost of the entire War Department DPC

program (Table 52). Although a few of

these include one or more subsidiary plants,

most of them represent large single establishments sponsored by the Army Air Forces.

Two of these—the huge Chrysler engine

plant at Chicago and the Basic Magnesium

plant at Las Vegas—represent a fifth of the

cost of all twenty-six. There was also a high

degree of concentration of Defense Plant

facilities in the northeastern part of the

United States; twenty of the twenty-six facilities were located in the area north of the

Ohio and east of the Mississippi Rivers.

52

 Fiscal year figures from Table, "Defense Plant

Corporation Agreements Executed for Army," supplied by Aircraft and Equipment Division, Management Control Office, AAF, 4 Aug 42, in USW files,

DPC (Gen.) No. 3. Also see: (1) OPM, Bureau of

Research and Statistics, Government Financed Defense Industrial Facilities (2 December 1941);

(2) AIC R41, Financial Aids to Contractors, Table

2, p. 17. 53

 See above, note 47. The reason for these increases varied widely from one Plancor to another

but fell into two principal categories: (1) increases

in unit costs of labor and materials, due to wage and

price increases, overtime and multiple shift operations, use of substitute labor and materials, and so

forth; (2) increases in the scope of the contracts,

that is, in the authorized quantity of machinery,

building installations, and services because of new

developments or previous underestimates of need.

Thus Amendment 4 to the Ford Willow Run lease

allowed an additional $367,000 to permit construction of a new standby water main; the influx

of population into Ypsilanti and the creation of a

new military installation adjacent to Willow Run

severely taxed existing water resources, threatening

a shutdown of the Willow Run plant in the event

of emergency.
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 495

TABLE 51—COST OF DPC PLANT EXPANSIONS SPONSORED BY WAR DEPARTMENT;

 a

1 JULY 1940-1 OCTOBER 1945

[In Thousands]

a

 Complete plants or structural additions thereto only are included. For this reason, and because total authorizations exceeded actual

expenditures, the figure of $2,862 million is somewhat less than total authorizations for War Department sponsored Plancors of all types.

Source: Compiled from WD Quarterly Inventory-Supplement, Special Rpt. of WD Owned, Sponsored and Leased Industrial Facilities,

30 Sep 45.

Less obvious than the statistical record of

DPC plant expansion is the amount of intensive planning and effort which was brought

to the program by those who were primarily

responsible for its conception and execution.

Within the War Department these were

chiefly a handful of lawyers in the office of

the Under Secretary and key personnel in

the Army Air Forces in Washington and at

Wright Field. The officers and staff of DPC

worked with their opposites in the War Department as a team, probably more intimately and harmoniously than separate

branches within most single organizations.

But behind the principal figures in the

drama was an army of contractors, engineers, construction workers, government

personnel, and others, all indispensable to

the program. As for other segments of the

nation's plant expansion program, DPC

projects had to be cleared and expedited by

the War Production Board and predecessor

agencies, priority assistance obtained, administrative organizations established, records maintained, and countless other

problems resolved. Above all, the program

had to be geared and kept responsive to the

changing needs of defense and war. Cut-
496 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 52—MAJOR DPC FACILITIES SPONSORED BY WAR DEPARTMENT a

a

 Each project represents a complete plant or major addition to an existing establishment. Nos. 15, 21, and 26 sponsored by Ordnance;

all others by Army Air Forces. Nos. 2, 11, 12 and 13 involved only a contingent liability of War Department; all others required cashtake-out.

Source: WD, Quarterly Inventory-Supplement Special Rpt of WD Owned, Sponsored and Leased Industrial Facilities, 30 Dec 45.

backs and cancellations had to be ruthlessly

and quickly made, no less than expansions,

conversions, and restorations. It was the

flexibility and even informality of the DPC

program which gave it the necessary speed

and adaptability to successfully carry out the

purposes for which it had been created.

War Department Owned Facilities

The largest and most important class of

plants constructed for Army procurement

were those directly financed and owned by

the War Department. This class accounted

for 60 percent of the value of all War Department owned, sponsored, and leased industrial facilities by the end of the war.54

 In

this group were the greatest single establishments in terms of both cost and size. The

Sunflower Ordnance Plant at Lawrence,

Kansas—the largest in value terms of all

facilities built for the War Department in

54

 Quarterly Inventory-Owned Sponsored, and

Leased Facilities, 30 Sep 45.
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 497

World War II—represented a capital investment of more than $180,000,000.

Industrial facilities owned by the War

Department consisted chiefly of the large

Ordnance plants designed to turn out the

unprecedented quantities of ammunition

and related products required for World

War II. They also included plants built for

the Chemical Warfare Service for similar

purposes, as well as the big bomber assembly

plants and related modification centers of

the Army Air Forces. In addition, there

were numerous smaller facilities—chiefly

for Ordnance—comprising warehouses,

machinery and tools furnished to private

contractors, and land and buildings adjacent to and operated by established private firms. Financed from War Department

Expediting Funds, supplemented by Defense Aid, Presidential Expediting Funds,

and regular appropriations for supplies,

War Department-owned facilities were built

by private construction firms under CPFF

contracts and operated by prime contractors

for a management fee. Hence, they became

familiarly known as GOCO plants. Their

erection was supervised by the Construction

Division of the Quartermaster Corps until

18 December 1941 when all War Department construction activity was turned over

to the Corps of Engineers.55

There were two basic reasons for War

Department ownership of certain types of

facility. The most compelling was that the

highly specialized nature of many plants

left no alternative to War Department ownership. During peacetime there was no demand for tremendous quantities of powder,

high explosives, ordnance chemicals, special

shell forgings, loaded shell, bombs, and

other ammunition. Machinery and equipment required to produce these were frequently so highly specialized as to be worthless for other purposes. Even buildings were

of such specifications, layout, and location

that private industry at the end of the

emergency would be unwilling to acquire

them except in unusual instances and at a

fraction of their original cost. In the case

of major aircraft assembly plants, any conceivable commercial demand would be too

small to warrant the investment of private

capital. The War Department was therefore

faced with the necessity for outright ownership of the facilities if it hoped to get them

built.56

A second important but somewhat less

urgent reason for government ownership

was the obvious desirability of avoiding a

repetition of the post-World War I experience which saw the complete scrapping of

munitions plants and the nation's utter lack

of preparedness to fight a major war when

Europe went down in defeat before Hitler.

In a world still fraught with international

tension and the threat of war, common sense

dictated the retention and maintenance of

the nation's important munitions producing

establishments. Outright government ownership would furnish the best guarantee that

specialized munitions capacity would actually be preserved in appropriate stand-by

condition.57

General plans for the construction of new

arsenals and ammunition plants for both

55

 See above, pages 484-85.

56

 Campbell, The Industry-Ordnance Team, especially Ch. 7. 57

 The War Department Site Location Board in

July of 1940 recommended that new munitions

plants be "of permanent construction" since they

"will have to remain in reserve status for many

years." Memo, Col Harry K. Rutherford (Chmn)

et al. for ASW, 8 Jul 40, sub: Locations of Plants

in War Department Program for New Productive

Capacity for Munitions, Exhibit 34 in OCofOrd,

Policy re Sites.
498 THE ARMY AND ECONOMIC MOBILIZATION

Ordnance and Chemical Warfare Service

had been under way for a number of years

before the crisis of 1940. During the interwar period the art of munitions manufacture was barely kept alive in the United

States by six manufacturing arsenals of the

Ordnance Department and one of the

Chemical Warfare Service.58 The peak

capacity of these arsenals, however, was less

than 10 percent of total requirements for

a major war. Moreover, they were all concentrated in the northeastern part of the

United States. This made them strategically

vulnerable to attack as well as to numerous

other evils of narrow geographic concentration.59

Disturbed by this condition, G-4 in 1936

directed the Chief of Ordnance to appoint

a board of officers to study the situation and

recommend "an ideal set-up for Ordnance

manufacturing and storage facilities in the

United States." The board was directed to

take into consideration five factors: strategic

location, proximity to raw materials,

proximity to probable theaters of operations,

economy of operation, and climate.60

On 15 April 1937, the five-man board

submitted its report. The board on its own

initiative had added a number of additional

criteria for desirable location—proximity to

major industrial areas, labor, service industries, and over-all transportation considerations. The board concluded that all the existing facilities were poorly located from the

strategic point of view. Without recommending the disestablishment of the existing

arsenals, the board stated that from the

standpoint of both peacetime economy and

wartime security it was desirable to create

two principal arsenals—an ammunition

arsenal to be located somewhere in the

Indianapolis-Cincinnati-Dayton area, and

an armament arsenal at Rock Island, Illinois. The strategically safe area of the

United States was defined as excluding the

eastern seaboard east of the Appalachians

and the western seaboard west of the Sierra

Nevada-Cascade range.61

By the summer of 1940, the magnitude

of the Munitions Program as well as changes

in technology and other factors called for an

expansion and revision of earlier plans. On

8 July 1940, the War Department Site Location Board submitted a report defining

the strategic area within which plants might

be located. This area was inclosed by a

boundary line, approved with minor adjustments by General Marshal, some 200 to 250

miles within the national boundaries of the

United States. Within the strategic area five

internal areas were designated, each of

which was to be roughly self-contained in

terms of providing a balanced output of

munitions. The specific locations of individual plants were to be selected by the supply

branches concerned, in accordance with the

general principles laid down by the board.62

For economic and other reasons, exceptions to these policy declarations were later

58

 The six Ordnance manufacturing establishments were the Frankford Arsenal, Philadelphia,

Pennsylvania, Picatinny Arsenal, Dover, New

Jersey, Rock Island Arsenal, Rock Island, Illinois,

the Springfield Armory, Springfield, Massachusetts,

the Watertown Arsenal, Watertown, Massachusetts,

and the Watervliet Arsenal, Watervliet, New York.

The chemical arsenal was located at Edgewood,

Maryland near Baltimore. 59

 Maj Gen Charles M. Wesson, CofOrd, The

Ordnance Department, 9 May 41, AIC Lectures,

19:53. 60

 Memo, Brig Gen George R. Spalding, ACofS

G-4, for CofS, 8 Dec 36, sub: Location of Government Manufacturing Plants, G-4/28403-4.

61

 OCofOrd, Report of Board of Officers To Prepare Secret Plan Embodying an Ideal Set-up for

Ordnance Manufacturing and Storage Facilities in

the United States (15 April 1937, 37 pp.) Exhibit

20 in OCofOrd, Policy re Sites. 62

 See above, note 57.
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 499

made.63 Under the pressure of time and

successive increases in requirements, both

the number and size of individual plants

were increased over previous plans. Construction of new plants was frequently

quicker and more economical than attempts

to convert existing privately owned plants;

in the case of some types of facility, such as

those for the production of ammonia, no

convertible plants existed. Moreover, the

trend toward larger caliber guns and increased muzzle velocities made the hazards

of ammunition loading, handling, and

storage much greater. To provide an adequate safety factor the distance between

loading lines in a single plant was increased

from 400 to 1,800 feet. This required

greater land areas per plant, and even the

4,500 to 6,000 acres recommended in 1940

gave way in practice to sites running from

10,000 to 20,000 acres. This increased the

problems of land acquisition and the cost of

plants, but the new plants turned out to be

far more productive than indicated by their

design capacities.64

By early 1941 the War Department's construction program, launched in the summer

of 1940, was well along. A report on the

status of the program as of 28 February

1941 indicates that contracts and other commitments had been made for 154 industrial

projects totaling over a billion dollars in

estimated cost. More than half this amount

was devoted to Ordnance projects (Table

53), nearly a third to the Air Corps, and

the remainder to Chemical Warfare, Engineer, and Quartermaster facilities. Most of

the projected facilities were to be completed

and in operation sometime in 1941. A few,

however, including certain of the big smokeless powder and ammonia plants, as well as

plants for small arms and heavy artillery,

were not to be in full operation until the

summer or fall of 1942—two years after the

program was launched. The projects under

construction at the beginning of 1941 were

the nucleus of the great Ordnance industrial

expansion program which by the end of the

war was to embrace 216 Ordnance-owned

establishments costing in excess of $31⁄2

billion.65

The passage on 11 March 1941 of the

Lend-Lease Act, under which the United

States was to supply munitions in unprecedented quantities to its allies in World

War II, required a second wave of munitions plant construction. The third and last

great wave of facilities expansion followed

in the wake of Pearl Harbor. Of the several

classes of plant expansion undertaken exclusively or predominantly for Army procurement in World War II, GOCO plants

involved the greatest investment. By 30 September 1945, the cost of War Departmentowned industrial facilities actually put in

place exceeded $4.3 billion. This was 50

percent greater than the $2.9 billion invested in War Department-sponsored DPC

facilities, and 40 times the $108 million invested in EPF facilities. Although it was

somewhat less than the $4.6 billion in necessity certificates authorized by the War Department for private expansion under tax

amortization, the latter covered a multitude

of expansions throughout the general economy (such as for railroads) which often 63

 The Detroit Tank Arsenal, chemical plants in

the Niagara Falls area, the Baytown Ordnance

Works, and the San Jacinto Ordnance Depot near

Houston, Texas, are examples of important installations located outside the strategic boundary.

See ICAF R83, Construction of New Facilities, p. 8. 64

 Ibid., pp. 5-6.

65

 Memo, Lt Col Theron D. Weaver for Dir Production Br OUSW, 5 Mar 41, sub: Summary of

Construction Activities Under "Expediting Production" Funds, and incl, Summary of Construction

Program for Manufacturing Facilities, Revised as

of February 28, 1941.
500 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 53—NUCLEUS OF ORDNANCE FACILITIES EXPANSION FOR WORLD WAR II:

ORDNANCE PROJECTS UNDER CONSTRUCTION AS OF 28 FEBRUARY 1941

a

 Not given in source document.

Source: Production Branch, OUSW, "Summary of Construction Program for Manufacturing Facilities, Revised as of 28 February 1941."

could not be specifically related to Army

contracts.

Some idea of the magnitude of the War

Department's industrial construction program, as well as of the size of individual

establishments, may be had from a summary showing the total cost (land, buildings, equipment, and miscellaneous items)

through 30 September 1945 of each of the

fifty largest War Department-owned establishments (Table 54). In the case of those

installations—such as arsenals—already in

existence at the beginning of the defense

period, the cost figure represents expenditures after 30 June 1940. The construction

of many of these establishments was equivalent to the creation of a sizable new city—

complete with streets and access roads, railroad lines, power plants, water and sewage

systems, extensive housing projects, and

numerous other community facilities. Each

of these establishments has its own unique

and complex history, from its conception

and early planning stages through initial

construction activity, completion, wartime

operation, and disposition at the end of the

war.66

66

 Under the interim historical program ordered

by President Roosevelt early in the war, virtually

every establishment of the War Department prepared historical monographs describing its origin,

growth, and wartime activities. Many of these are

on file in the historical offices of the several technical services, and some with the Office of Military

History. It would take a lifetime to read all of

these carefully. The history of Chemical Warfare's

Rocky Mountain Arsenal, for example, is composed

of sixteen volumes of manuscript and documents

aggregating more than a yard in thickness; yet it

by no means tells the "whole story" of the Rocky

Mountain Arsenal.
GOVERNMENT FINANCED INDUSTRIAL FACILITIES 501

TABLE 54—INDUSTRIAL FACILITIES OWNED BY WAR DEPARTMENT: COST OF 50 LEADING

ESTABLISHMENTS, 1 JULY 1940-30 SEPTEMBER 1945

Source: WD Quarterly Inventory-Supplement, 30 Sep 45. Special Rpt. of WD Owned, Sponsored and Leased Industrial Facilities.
502 THE ARMY AND ECONOMIC MOBILIZATION

Manifestly it was impossible, especially in

the hectic days of the defense period, to implement an undertaking as large as the War

Department's construction program without an appreciable margin of error, waste,

and other irregularities amounting in some

cases to outright scandal. The Truman

Committee, in its investigations of a number

of specific projects, received numerous reports and allegations of extravagance, waste,

padding of costs, kickbacks, "shakedowns"

by union organizations, nepotism by both

contractors and Army officers, and an assortment of other malpractices. Many of these

charges were disproved by the War Department, and those which were valid were attributable for the most part to the lack of

time to devise sound procedures, the shortage of experienced personnel, and the absence of adequate control organizations.

Competition for labor, management, and

materials, the novelty and magnitude of the

tasks involved, the necessity for improvisation and overtime work, as well as for work

under adverse weather conditions, all resulted in an increase in waste, mistakes, and

dollar costs substantially above normal

levels. The investigations of the Truman

Committee, as well as information furnished

by government auditors, private individuals,

newspapers, and other sources, all assisted

the War Department in reducing such irregularities to a minimum.67

67

 Truman Committee, Hearings, Pt. 1 (April

1941), Progress of the National Defense Program;

Pt. 6 (July-August 1941), Army and Navy Rental

of Equipment; Pt. 9 (November-December 1941),

Wolf Creek Ordnance Plant; Pt. 20 (April-August

1943), Sunflower Ordnance Plant; also, for command construction problems of similar nature, Pt. 2

(April-May 1941), Camp Construction, Fort

George Meade; Pt. 4 (May 1941), Construction of

Camp Blanding; Pt. 7 (August-September 1941),

Camp Construction. For typical findings of the committee, see Truman Committee, First Annual Rpt.

For another viewpoint, forcefully expressed by one

of the Army's leading construction engineers, see

Groves Commentary (cited above, p. 285, n. 12),

especially pp. 51-53, 61, 110-11. Greater detail in

this whole area can be found in Remington and

Fine, The Corps of Engineers: Military Construction in the United States.
PART SIX

PRODUCTION AND MATERIAL CONTROLS

CHAPTER XXII

Establishment of the Priorities System

Introduction

The expansion of productive facilities, as

just described, was the most urgent problem

faced by the Army at the beginning of the

defense period. But long before the facilities

problem had been resolved, it was overshadowed by a more fundamental problem—the task of organizing production

throughout the economy to meet the requirements of a huge rearmament program, unprecedented in both urgency and magnitude. Very early in the program it became

evident that the basic ingredient of production control was the channeling of productive activity at all levels of the economy into

the output of the materials, parts, and finished products needed for the nation's defense. Although the measures adopted to

achieve this result were often referred to as

"material controls," they were also "production controls." Materials, like finished

products, had to be produced, and most of

them had to be produced within the United

States. Moreover, under certain control

systems—particularly the priorities system—

the term "material" came to be all-embracing, including even end products.1

Scarcely had the Army's Munitions Program been launched in the summer of 1940

when the first material shortages made their

appearance. Among the more noticeable

early shortages were such items as cotton,

flannel, and linen for uniforms, clothing and

bedding; cotton duck and webbing needed

for tentage, tarpaulins, and the numerous

other canvas requirements of the armed

forces; aluminum in various shapes and

forms, indispensable to the tremendous aircraft program; and special alloy steels for

armor plate and armor-piercing projectiles.

Most of these items were semifinished materials and the immediate bottleneck to their

production in adequate quantity was a shortage of equipment, such as textile looms and

metal rolling capacity, rather than basic raw

materials.

As contracts were placed in increasingly

large numbers, the shortages spread both

vertically and laterally throughout the industrial community. They soon included

raw and crude materials at the base of the

productive process; fabricated and semiprocessed items at intermediate stages; and

complex parts and components (instruments, gages, motors, generators, compressors, and the like) required for the expansion

of industrial capacity as well as for incorporation into military end products. A serious

handicap to war production at all levels—

whether in raw material, component, or endproduct production—was the drastic short1

 OPM Priorities Regulation 1, 27 Aug 41, Sec.

944.1 (c); " 'Material' means any commodity,

equipment, accessories, parts, assemblies, or products

of any kind." For the most part, however, the term

"material" was used in World War II to indicate

basic and intermediate supplies below the endproduct level.
506 THE ARMY AND ECONOMIC MOBILIZATION

age of machine tools. The machine tool

shortage was felt even before the United

States began its own rearmament program,

as a result of earlier British and French orders for American-produced aircraft and

other war munitions. By the time of Pearl

Harbor, when the United States settled

down to the serious business of a nation at

war, it was evident that America's military

success depended upon the prior solution of

the problem of feeding its vast industrial

machine.

The eventual solution of the "materials"

problem was achieved by the adoption of

a complex array of control measures generally falling into three groups or categories:

(1) controls designed to direct the flow of

materials into their most important uses;

(2) controls designed to prohibit or limit

the consumption of materials in less important uses; (3) measures to increase the

total supply of scarce materials. Controls

in the first category began with the establishment of the priorities system in 1940,

passed through various modifications including allocation systems and the Production Requirements Plan (PRP) in 1941-42,

and culminated in the adoption of the

Controlled Materials Plan in 1943. The

second group of controls consisted of the

various limitation, conservation, and substitution orders and programs which affected

the majority of military end products as

well as regular commercial items. The

third category included intensified overseas

purchase and importation, increased domestic production, and stockpiling. At the

peak of the war, all these measures were

the broad responsibility of the War Production Board, but many of them were

initially sponsored and instituted by the

Army. As the largest contracting agency

with the greatest variety of procurement

problems, the Army played the largest role

throughout the war in the actual use and

operation of the several systems.

The classification of wartime material

controls into the three broad types mentioned above is somewhat arbitrary since

they overlapped and merged at many points.

Moreover, they were not of equal importance. Of the three, controls in the first

group were by far the most complete and

all-pervasive. They affected intimately

every significant producing firm in the

entire economy and represented a degree of

control over the operation of American industry never before attempted. Eventually,

they required the detailed planning and

scheduling of production programs of all

procuring agencies and of the bulk of the

nation's industrial output. Their application and refinement contributed heavily to

the knowledge of production management

on the part of business and industrial executives, as well as to the art of directing national economic activity into channels

required by the national interest. In view

of the importance which they assumed in

the activities of the procuring agencies and

in the process of industrial mobilization for

World War II, they are accorded a predominant place in the present discussion.2

The systems developed to control the flow

of materials in World War II were ultimately nationwide in scope and centrally

administered by wartime superagencies.

In addition to these external control systems,

the complexities of wartime economic mobilization required the expansion or crea2

 Group 1 controls, as described above, form the

subject matter of Chapters XXII through XXV of

the present volume. A brief sketch of the Army's role

in the adoption and administration of Group 2 and

Group 3 controls is contained in Chapter XXVI.
ESTABLISHMENT OF THE PRIORITIES SYSTEM 507

tion, by each of the procuring agencies, of

countless organizations and procedures for

the internal management of their own immense programs. These new internal production-control arrangements consisted of

the kind of administrative measures which

any rational agency, in either private industry or government, would adopt under

comparable circumstances to insure the success of its objectives. For the War Department they included: (1) The establishment, at all echelons, of comprehensive

production schedules showing the projected

delivery dates of all items of procurement

in approved programs; (2) statistical,

progress-reporting, and follow-up organizations to indicate the current status of all

programs, to uncover or anticipate delays

and delinquencies in the performance of

contracts, and to reveal the character of the

bottlenecks or other trouble spots responsible

for delays; (3) trouble-shooting or expediting organizations to overcome delays, whatever their causes, and more specifically to

assist contractors in obtaining equipment,

materials, manpower, funds, engineering

assistance, and other aids required to break

production bottlenecks; (4) the development of new and expanded organizations,

techniques, and regulations for the inspection and approval, at various stages of

completion, of all items of military procurement.

Each of these activities was indispensable

to the success of the program as a whole.

The production expediting function, for example, was of such importance that Under

Secretary Patterson once remarked that the

War Department's top expeditor and

trouble-shooter—Lt. Gen. William S.

Knudsen—had been personally responsible

for the accomplishment of 10 percent of the

Army's procurement program.3 Inspection

and its associated functions were of such

magnitude and complexity that the War

Department's inspection staff—including

statisticians, mathematicians, physicists,

chemists and other scientists—numbered

over thirty thousand persons at the peak of

the war effort. In all these activities, basic

policy was formed by the Office of the

Under Secretary of War and, after the War

Department reorganization of 9 March

1942, by Headquarters, Army Service

Forces under the broad supervision of

OUSW. In either case, the great bulk of

the Army's detailed production-control

activities was executed by the several technical services and the Air Forces in their

respective areas of procurement.4

Inauguration of the Priorities System

America's experience with industrial mobilization in World War I had indicated

conclusively the need for direct governmen3

 Millett, Army Service Forces, p. 31. After

OPM's replacement by the WPB, former OPM

Director General Knudsen became Lieutenant

General, in charge of production, in the Office of

the Under Secretary of War. 4

 Limitations of time and space have precluded

detailed discussion of these aspects of wartime procurement in the present volume. Further information may be obtained from the several histories of

the technical services in the series UNITED

STATES ARMY IN WORLD WAR II. An excellent treatment of this whole area with abundant

documentation of primary source material, is to be

found in the following pioneer monographs prepared by Dr. Harry B. Yoshpe for the Army Quartermaster Historical Studies: (1) Production

Control in the QMC; (2) Labor Problems in

Quartermaster Procurement, 1939-1944; (3)

[with Marion U. Massen] QMC Procurement

Policies. An additional study by Dr. Yoshpe in this

field is Army Industrial College R44, Organization

for Production Control in World War II—A Study

of the Follow-up and Expediting Function of the

War Department, 1939-1945 (February 1946),

ICAF Library.
508 THE ARMY AND ECONOMIC MOBILIZATION

tal controls over the distribution of materials

to insure effective war production.5 Material control devices used in World War I

included preference-rating certificates, industry-wide preference orders, allotments

among industries, conservation regulations,

and other measures. These controls, however, were rudimentary in both scope and

intensity as compared with those eventually

developed in World War II. Following the

usage of World War I, the term "priority"

was widely used throughout the planning

period to describe the general nature and

purpose of all systems of direct controls for

channeling scarce materials to their most

important wartime uses.

As indicated early in the present study,

the Industrial Mobilization Plan contemplated the use of automatic "priority classification ratings" as the simplest and most

advantageous method of material control at

the beginning of an emergency.6 Although

studies had been initiated during the planning period to develop the details of a wartime priority system, these had never been

completed. As a result, only the broad outlines of a priority system were available upon

the arrival of the emergency in 1940.7

The adoption of the Munitions Program

of June 1940 signaled the need for prompt

development of specific and detailed priority plans which could be applied as soon

as shortages appeared. This presented the

Army with a threefold problem of priority.

First of all, the Army's vast procurement

program had to be arranged into a kind

of master schedule, showing the order of

urgency of the various military end products called for by the program. This was

the responsibility of the General Staff, operating chiefly through its Supply Division

(G-4), and the various supply arms and

services. Secondly, agreement had to be

reached with the Navy—the other principal claimant upon the national economy in

war—as to which portions of the respective

Army and Navy programs were to be

deemed of equivalent importance and therefore to receive an equivalent priority status.

This was the task of the Joint Board (later

the Joint Chiefs of Staff) which represented

the ranking prewar body for making joint

strategic decisions of the armed forces. Finally, the Army had to see that adequate

priority measures were adopted by industry

to insure the production of military goods

on time and in the proper sequence. Under

the terms of the National Defense Act of

1920, and ensuing organizational arrangements, this was primarily the responsibility

of the Assistant Secretary of War in conjunction with the Army and Navy Munitions Board.

The first step in the establishment of the

priorities system for World War II was

taken by the Assistant Secretaries of War

and Navy on 17 June 1940, with the creation of the Priorities Committee, ANMB.

This was in keeping with the Industrial

Mobilization Plan, which contemplated that

the ANMB would guide the economic mobilization effort in an emergency until the

establishment of a civilian-directed central

mobilization-control agency. The committee

was directed to organize a simple and effective system, based on strategic plans of

the two services, whereby priorities could

5

 (1) Baruch, American Industry in the War;

(2) Clarkson, Industrial America in the World

War; (3) Maj Frank W. Gano, A Study of Priorities (App. 5 to AIC Course 40, 1938-39, 182 pp.,

appendixes, and bibliography), ICAF Library. 6

 See above, page 89. 7

 A priorities annex to IMP was apparently proposed but never completed. See Tentative Draft—

Priorities Annex, 10 May 39, AIC, copy in ANMB,

Navy Section, Correspondence and Reports, 1922-

42, 1941 folder, National Archives.
ESTABLISHMENT OF THE PRIORITIES SYSTEM 509

be placed upon production orders to industry. The system was to include "priorities

on materials, machine tools, etc., required

for such production." The committee was

also to act as a liaison agency with any "Priorities Commissioner" who might be appointed in the NDAC "to handle the subject on a national basis."

 8

While the ANMB committee was at work

on this assignment, legislation sponsored by

the War and Navy Departments was passed

by Congress to provide the legal basis for

requiring industry to give priority treatment to Army and Navy Orders. Section

2 (a) of the National Defense Expediting

Act, approved on 28 June, contained the

following provision: ". . . deliveries under

all orders placed pursuant to the authority

of this section and all other Naval contracts

or orders and all Army contracts or orders

shall, in the discretion of the President, take

priority over all deliveries for private account or for export."

 9

In the meantime G-4 had determined the

general strategical priority for items in the

Army's Munitions Program. The G-4 proposal, concurred in by the War Plans Division of the General Staff, established three

broad classes—a, b, and c—representing

respectively complete aircraft and accessories, antiaircraft matériel, and other material. Items in classes b and c were ranked

internally in order of importance, thus

facilitating a future subdivision of these

classes if this should become necessary.10

These recommendations were integrated

into a broad program of production and

facilities expansion by the Planning Branch,

OASW. The Navy had been at work on its

corresponding program, and on 5 August

the Joint Board and the two Assistant Secretaries approved the official version for

both the Army and the Navy. This became

the first ANMB priorities directive. Its

formal announcement on 12 August 1940,

together with detailed instructions for its

application, marked the birth of the World

War II priorities system.11

The first ANMB priorities directive was

a classification of military procurement objectives into ten degrees of urgency with

corresponding priority ratings ranging from

A-1 to A-10; a top rating of AA was reserved for emergencies. The following summary indicates the specific portions of the

Army program allotted to each rating

scale:12

8

 Memo, ASW Johnson and ASN Lewis Compton, 17 Jun 40, sub: Establishment of Priorities

Committee, ANMB. The two Assistant Secretaries

were ex officio cochairmen of ANMB. 9

 54 Stat. 676, 28 Jun 40. This power was extended by the Selective Service Act of 1940 (54

Stat. 885, 16 September 1940 which gave the President authority to commandeer plants for defense

production, and the act of 31 May 1941 (55 Stat.

236), specifically extending the priority power to

civilian supplies, foreign purchases, and subcontracts. The powers under the May 1941 act were

retained by the President until their delegation to

OPM on 28 August 1941 by Executive Order 8875.

10

 Memo and incls, Lt Col Henry S. Aurand for

Gen Moore, DCofS, 26 Jun 40, sub: Priority of

Production for Items of Equipment. 11

 Ltr, Robert Patterson and Lewis Compton To

All Supply Arms and Services of the Army and

Bureaus and Offices of the Navy Department, 12

Aug 40, sub: Priorities, with 5 incls: (1) ANMB

Priorities Instructions; (2) Preference Ratings on

Contracts; (3) Contractors' Extension of Preference

Ratings; (4) Memo; Establishment of Priorities

Committee, ANMB; (5) Dir Priorities Committee

5 Aug 40 (Joint Board 355; Serial 656, 7-25-40).

The Navy program had been previously laid down

in Memo, Adm Harold R. Stark, CNO, for Bureaus

and Offices, Navy Dept, 9 Jul 40, sub: Priorities

in Material Procurement, Op-23,-1, JJ 40/L 8-3

(400612), Ser. 107023. 12

 (1) ANMB Priorities Dir, 5 Aug 40; (2)

Memo, Gen Rutherford, Dir Planning Br OASW,

to Priorities Com ANMB, 4 Oct 40, sub: Material

in A-1 Priority. Throughout the defense and war

periods the term "priorities directive" referred to

the authoritative document establishing the several
510 THE ARMY AND ECONOMIC MOBILIZATION

A-1 Complete equipment for authorized Regular Army (375,000 men) and

National Guard (235,000 men).

Attainment of first aircraft objective—

12,835 planes by 1 October 1941, including

production facilities and operating bases for

same.

A-2 Critical and essential items for

PMP (1,200,000 men), including one

year's maintenance, and construction required for authorized selective service training.

A-3 Seacoast and overseas defenses (including antiaircraft, aircraft warning, and

other equipment).

A-4 Attainment of second aircraft objective—18,000 planes by 1 April 1942,

including production facilities and operating bases for same.

A-5 Critical items of equipment and

construction for 2,000,000-man Army.

A-6 Essential items for same.

A-7 Expansion and construction of facilities (government or private) for 18,000

annual plane production and for production of critical equipment for maintenance

of 2,000,000-man Army.

A-8 Passive defense for Army installa- tions.

A-9 Facilities expansion to provide for

Army augmentation beyond 2,000,000 men.

A-10 Educational orders and additional

reserves of critical and essential items.

The application of priorities was to be accomplished by means of a "preferencerating" certificate bearing the rating established in the priorities directive for the military end item concerned. At the request of

the NDAC, the new priorities system was

to be applied to industry on a voluntary basis

until such time as the President found it

necessary to use his mandatory powers recently acquired under the National Defense

Expediting Act.13

Also at the request of NDAC, priorities were

to be confined to "critical items" only, and

the ANMB's covering letter of 12 August

indicated that lists of critical items would

shortly be furnished to contracting officers.

The "Critical List" was to consist of noncommercial items, that is, military end products and components designed to military

specifications. Since ratings were to be used

only to expedite military programs, no rating scale was specified at this time for civilian

products, although B, C, D, and lower classes

were mentioned for possible future use. All

military production was thus to be "superimposed" on the civilian economy. This

meant, in effect, that no direct curtailment

of civilian production was currently contemplated.14

During the weeks after the announcement

of 12 August 1940 the ANMB, the OASW,

and the supply arms and services were busily

engaged in launching the new system. First

of all, under continued pressure by NDAC,

the ANMB was obliged to issue for the use

of contracting officers a list of items for which

preference ratings were authorized. The

Navy promptly issued its Critical List on

14 August, but it was more than two months

later before the Army, under the prodding

of NDAC, had compiled a list which it

deemed even temporarily satisfactory. The

priority rating classes. "Priorities instructions" and

other documents contained rules and regulations

for the implementation of the directive.

13

 Although the gentler sounding term "preference rating" was more appropriate than "priority"

to a voluntary, peacetime system, it was retained

after the system was placed on a mandatory basis.

The terms were used synonymously, although

strictly speaking the broader term "priority" referred to the general principle of granting precedence to more urgent items, whether by means of

ratings, allocations, rationing, or other devices. The

"preference rating" was thus a specific instrument

of priority policy. 14

 NDAC Press Release, PR 69, 12 Aug 40.
ESTABLISHMENT OF THE PRIORITIES SYSTEM 511

Army and Navy items were then combined

in the first official joint list, issued 23 October 1940.15

 The Critical List subsequently

became a source of much difficulty and

controversy.16

A second prerequisite to the assignment

of preference-rated orders to industry was

the protection of contractors from the operation of the "liquidated damages" clause.

This provision, which was a standard feature of most contracts of the federal government, imposed financial penalties upon

contractors for failure to complete their contracts on schedule. Unless this provision were

waived, contractors would be unwilling to

defer existing or future low-rated government orders in favor of higher ones. To meet

this problem, the President requested all government agencies to refrain from acting

under the liquidated damages clause in all

cases of delay resulting from the application

of preference ratings. The War Department

implemented this by the issuance of a procurement circular and appropriate changes

in Army Regulations.17

In theory, the application of preference

ratings was simple. Each military prime

contract or purchase order for an item on

the Critical List would be assigned the priority rating called for by the ANMB directive if in the opinion of the contracting officer preferential treatment was necessary for

completion of the contract on schedule. Actually conveyed in the form of a certificate

signed and "authenticated" by the contracting officer, the preference rating required

that the contractor schedule his operations,

including the disposition of his inventory,

to insure completion and delivery of the preferred item on time. This was required at

the expense of other contracts—Army,

Navy, private, or export—bearing no preference rating or a lower rating. Lower or

nonrated contracts were to be disturbed only

if necessary, and then only to the extent

necessary. Contracts bearing equal preference ratings were to be completed in order

of delivery dates specified in the contracts.

The initial effect of a preference rating was

thus the placing of a preferred claim upon

the plant capacity and inventory of the

prime contractor or other direct supplier of

military procurement.

Of greater significance, especially as material shortages began to appear, was the

authority given to prime contractors, subcontractors, and vendors under various conditions to "extend" their ratings to immediate subcontracts and purchase orders for

tools, materials, and other supplies. Extension of a rating was accomplished on a simple form announcing the priority status of

the order and requiring of the subcontractor

the same type of preferential treatment

which was required for the prime contract.

15

 (1) List of Items for Which Preference Ratings Are Authorized, October 23, 1940, with covering ltr, Col Charles Hines, Ex Secy ANMB To

All Supply Arms and Services of the War Department and Bureaus and Offices of the Navy Department, 23 Oct 40, sub: Priorities—Items for

Which Preference Ratings are Authorized. (2) Ltrs,

Donald Nelson to Col Rutherford, 15 and 26 Aug

40, and Rutherford to Nelson, 28 Aug 40 regarding issuance of Critical List. 16

 See below, pages 528-37. 17

 (1) Ltr, Roosevelt to SW and SN, 8 Oct 40.

This action was apparently prompted by the ANMB,

whose 10 July draft of priorities instructions (par.

4) raised the issue. (2) A procurement circular of

the War Department requiring action similar to that

requested by the President had been drafted on 4

October. Memo, Gen Rutherford, Dir Planning Br,

for Capt Almy [USN], 5 Oct 40, and incl. (3) WD

Procurement Circular 36, 23 October 1940, announced changes in AR 5-140 and AR 5-200 authorizing the general omission of liquidated damages clauses in future contracts and instructing contracting officers to grant extensions of time of performance in appropriate cases.
512 THE ARMY AND ECONOMIC MOBILIZATION

In order to prevent the use of rating extensions to obtain larger quantities of scarce

supplies than were needed, the purchaser

was obliged to subscribe to the statement

that the item was essential to completion of

the prime contract, and that the specified

quantities were no greater and the delivery

date no earlier than necessary for the contract. Until 1942 this statement had to be

approved and countersigned by the contracting officer or local inspector of the Army or

Navy. A subcontractor or vendor receiving

a rated order was to inform his customer

immediately if the requested delivery date

could not be met, with reasons therefor.

In such cases, the supply arm or service concerned would attempt to resolve the problem

by locating another subcontractor, rescheduling, or other measures. If necessary, the

matter would be taken to the ANMB, which

could grant a "higher than routine" rating,

or adopt other measures to expedite production.18

Contracting officers, responsible for the

completion of urgent programs or schedule,

immediately made wide use of their new

priority powers and soon found it necessary

to use preference ratings wherever these

were authorized. Only one month after the

announcement of the new system, Assistant

Secretary Patterson foresaw its probable

breakdown if it were not applied with restraint and protected by intelligent scheduling and other measures:

Effective scheduling of manufacturing operations by the Supply Arms and Services will

be required to meet the above objectives and

to avoid unnecessary conflicts in the administration of the priorities system already established. It is obvious that it is not only

unnecessary but may be harmful to the defense

program as a whole, to initiate and expedite

production of all items or of all components of

an item simultaneously. Under the priority

system, all components will bear the same

priority rating as the complete item and this

rating will be the same as that of many other

items. Unless some method of differentiating

between these priorities is established, the

priorities system will break down because of

congestion in one or more categories.

The proper scheduling of delivery dates

necessary for the completion of key components of an item and of the major items is

the only method for obtaining orderly and

efficient progress in the War Department Program. Proper scheduling will keep out of the

market those who are not in immediate need

of materials, tools, equipment, etc. Priority is

designed to give orders so deferred the preferential treatment needed when their turn comes

under the scheduling system.19

Mr. Patterson's prediction was borne out

within a month. On 30 September, OASW

received word that 97 percent of the two

thousand machine tools on order from

Warner and Swasey carried an A-1 priority: "It does not require any elucidation

to convey the idea that Warner and Swasey

are completely confused. . . . It is 

fore imperative that something be done this

week to break A-1 into at least four subdivisions."

 20

 By the end of October congestion in the A-1 category—particularly

for the machine tool industry—was so great

that subcontractors besieged with orders

bearing A-1 extensions were at a loss as to

how to proceed. As the pressure increased,

Army and Navy representatives agreed that

an extensive subdivision of the A-1 classification was necessary; the original classification was not only vague and wide in scope

but was composed of items of widely varying

urgency. On 27 November the ANMB is18

 Memo, Donald Nelson, Coordinator of National

Defense Purchases, for the President, 15 Oct. 40.

19

 Ltr, ASW Patterson to CofAC, 19 Sep 40, sub:

Priorities and Scheduling. Identical letters were

sent to all the Army's supply arms. 20

 Memo, Lt Col A. B. Johnson for Gen Rutherford, Dir Planning Br OASW, 30 Sep 40.
ESTABLISHMENT OF THE PRIORITIES SYSTEM 513

sued a new directive, dividing the A-1 class

into ten subgroups: A-1-a to A-1-j.21 The

A-1-a class was confined to supplies and

facilities for selected manufacturers of

machine tools and gages; military end items

received ratings from A-1-b to A-1-j. This

elevation of critical production equipment

to the head of the list was recognition of

the inadequacy of priorities for end items in

the absence of the availability of all necessary contributory items.

By the end of 1940 the priorities system

was rapidly becoming a familiar part of the

American industrial scene, and the War Department had established internal agencies

at various levels for planning and conducting the operation of the system. These included priorities units in both the Planning

and Production Branches, OASW, in the

offices of the chiefs of supply arms and

services, and in field offices of the various

services. The first priorities unit, created 10

July 1940, was the Priorities Division, Planning Branch, OASW. The officers in this

division composed the Army half of the

Priorities Committee, ANMB; the division

thus functioned principally as the "home

base" for the Army officers attached to

ANMB. In the Production Branch, OASW,

the Priorities Section (later Division) established on 25 October 1940, became the

principal War Department co-ordinating

agency for priority matters. It supervised the

supply arms and services in the execution of

priority policy, adjusted priority conflicts

between two or more Army establishments,

maintained liaison with other government

priority agencies, and assisted the ANMB

and higher echelons in determining policy

and operating procedures. It became the

nucleus of the War Department's top priority agency in the Resources Division (later

Production Division), ASF, after the departmental reorganization on 9 March

1942.22

Evolution of Civilian Priority-Control

Agencies

The leadership of the ANMB in establishing the priorities system at the beginning of

the emergency had long been contemplated

by the Industrial Mobilization Plan. But

IMP recognized the broad desirability as

well as the political necessity of vesting central control over the priorities system in a

civilian superagency responsible for the

over-all control of the national economy in

time of war. This type of control was desirable both from an administrative and a

political point of view. As the industrial

21

 [Memo] Hines, Secy ANMB, to SW and SN,

4 Dec 40, sub: Priorities, Changes in, with incl,

ANMB Directive, Priorities Committee, 27 Nov 40,

It should be recorded that the need to subdivide

the A-1 category had been anticipated at the outset; See Incl (2) to Patterson and Compton ltr of

12 Aug 40, cited above, note 11 (2).

22

 Annual Report of the Production Branch,

OUSW, for FY Ending 30 June 1941. A rich heritage of information on the early operation and

development of the priorities system is found in

the file of Weekly Progress Reports, Priorities Section, Production Division, OUSW (file 319.1 Production Div ASF) prepared by Maj. (later Col.)

Elmer E. Barnes, CE, who was chief of the section

from its inception until after the War Department

reorganization of March 1942. The reports are

hereafter cited as Barnes, Weekly Progress Rpt, with

date. For additional detail on War Department

organization for handling priorities, see: (1) OASW

Planning Br Office Order 37, 10 Jul 40, establishing

Priorities Division; (2) Mohler, Administrative Log

of the Production Division, Headquarters, ASF,

and Its Antecedent Agencies, 1939-45; (3) Industrial College of the Armed Forces R60, Priorities

and Allocations: A Study of the Flow of Matériel

to War Suppliers (September 1946) ICAF, Library.

ANMB Priorities Com Cir 1, 9 Dec 40, sub: Description of the Preference Rating System, gives an

informative summary of the status and operation

of the priorities system at the end of 1940.
514 THE ARMY AND ECONOMIC MOBILIZATION

mobilization process absorbed more and

more of the nation's productive resources

the problem of management alone would

reach formidable proportions, requiring the

assistance of large numbers of industrial experts and administrators. More important,

from the standpoint of national policy it was

desirable that decisions directly and pervasively affecting the entire economy be

made by a body with broad civilian representation. This view was consistently held

by the Army.23

The Advisory Commission

As it became apparent that the Advisory

Commission to the Council of National Defense had been given the top-level co-ordinating role cast for the War Resources Administration in the Industrial Mobilization

Plan, the ANMB deferred to the commission in matters of broad policy. In the summer of 1940, the NDAC had used its

influence, principally in a negative or restraining manner, in modifying the ANMB's

blueprint for priorities. But it was not until

the end of the year that the NDAC was ready

to enter the field of actual priorities administration and to consolidate its power as the

senior policy determining agency in the field.

By this time—after four months of operation under the operating control of ANMB

and the services—it was clear that priorities

were causing dislocations in the civilian

economy.24

The NDAC wished to retain control of

priority decisions affecting not only civilian

end products but all commercial and industrial materials and supplies entering into production of both military and civilian end

items. Hence, it did not want the President's

priority powers granted by Congress the previous June to be delegated directly to the

military services.

On 4 September 1940 a report was circulated in a regular NDAC meeting that the

Army and Navy were seeking an amendment to the selective service bill which would

give them separate authority to establish priorities.25

 To counter this move the commission gave Donald Nelson, Co-ordinator of

National Defense Purchases, the task of

drafting a proposal to the President to delegate his priority powers to a board to be

established within the NDAC. This body

would determine broad priority policy and

would be headed by an administrator to recommend as well as carry out policy. The

proposal was submitted to the President on

15 October and on 21 October the President

approved the proposal and authorized the

NDAC Priorities Board to replace the system on a mandatory basis. The order provided for the promulgation of rules and regulations to be approved by the President,

and on 15 December, after numerous conferences with the ANMB and the services,

23

 (1) Memo, Gen Rutherford for ASW, 23 Oct

40, sub: Executive Order Establishing a Priorities

Board in the Advisory Commission; (2) Memo,

Rutherford for Donald Nelson, Administrator of

Priorities, 12 Nov 40; (3) Memo, Rutherford for

USW, 13 Jan 41, sub: Organization for Priority;

(4) IMP, 1939, p. 6. 24

 A major incident late in 1940 was the demand

of the Secretaries of War and Navy that the aircraft industry devote all its resources to the production of military aircraft, except for maintenance

and replacement of civilian aircraft. The NDAC appointed a special Committee on Aircraft Priorities

and on the basis of the committee's reports made a

compromise adjustment. CPA, NDAC Minutes and

Minutes of the NDAC Priorities Board, November,

1940 through January 1941. 25

 CPA, NDAC Minutes, 4 Sep 40. This was the

power to commandeer plants, if necessary. It was

included in the Selective Service Act both because

it was recommended in the Industrial Mobilization

Plan and because of popular demand to provide for

the "conscription of capital" to balance the power

to draft men for military service.
ESTABLISHMENT OF THE PRIORITIES SYSTEM 515

the official rules and regulations of the Board

were issued.26

Under the new NDAC regulations the

ANMB and the services retained control

over the determination and administration

of military priorities. Contracting officers,

under ANMB regulations, were to continue

to assign and extend preference ratings;

higher-than-routine ratings and similar adjustments were to be made by the ANMB.

The NDAC Priorities Board, however, reserved to itself the authority to assign or

extend ratings to materials not on the Critical List, and the list could not be amended

without the board's approval. On the other

hand, major policy changes were to be determined by the board "after due consultation" with the procurement agencies and the

ANMB. Consultation was insured by the

appointment of ANMB representatives as

advisers to the Board.

The Office of Production Management

The NDAC Priorities Board, as such, was

short-lived. On 7 January 1941 the President created the Office of Production Management and delegated all of his priority

powers to this Agency.27 A new OPM Priorities Board replaced its NDAC predecessor and a new Priorities Division, headed by

Edward R. Stettinius, Jr., supplanted the

organization of the NDAC administrator.

Mr. Stettinius and his assistants immediately conferred with Army and Navy officers in an effort to provide a proper division of effort and authority between the

OPM and the services.

The negotiations which followed were

complicated by a proposal by Secretary of

the Navy Frank Knox to abolish the priority

functions of the ANMB. Mr. Knox's view

was that "the continued existence of two

Priorities Boards, on in the OPM and the

other in the Army and Navy Munitions

Board, is an unnecessary waste of effort and

time." He further felt that the concentration of all priority activities in an independent agency "would eliminate one of the frequent causes of friction between the two

departments.28 This proposal was in part the

outgrowth of earlier efforts of the Navy to

obtain from Donald Nelson, shortly after

he became the NDAC Priorities administrator, a more favorable position for Navy

procurement than accorded by the 5 August

1940 directive of the Joint Board. Mr. Nelson and his associates had refused to involve

the NDAC in decisions on relative priorities

among military items, clearly a function of

the military agencies.29

Under Secretary Patterson and his Planning Branch chief, Brig. Gen. Harry K.

Rutherford, were firmly opposed to the

shelving of ANMB's priority functions.

General Rutherford pointed out that

ANMB had handled perhaps 90 percent of

26

 (1) Executive Order 8572, 21 Oct 40. (2) Executive Order 8612, 15 Dec 40. 27

 Executive Order 8629, 7 Jan 41. NDAC personnel and policies were largely taken over by OPM.

For greater detail on the OPM priorities organization and its early problems, see CPA, Industrial

Mobilization for War, pp. 171-77.

28

 Ltr, Knox to Stimson, 9 Jan 41. 29

 (1) CPA, Industrial Mobilization for War, p.

67. (2) NDAC, Priorities Board, Mins, 5 Dec 40.

(3) Memo, Knox for Nelson, 12 Nov 40. Mr.

Knox proposed to place the defense program into

four priority classes: AA-1, to cover Navy needs for

the existing fleet; AA-2, Navy needs for the new

fleet; A-1, further items for the new fleet and

equipment for the existing Army and National

Guard; A-2, equipment for the new Army. Mr.

Stimson, to whom Mr. Knox had handed his proposal at the 12 November Cabinet meeting, replied

that the proposal was properly one for the consideration of the Joint Board. Memo, SW Stimson

for the SN, 13 Nov 40, copy in OCMH.
516 THE ARMY AND ECONOMIC MOBILIZATION

the problems arising in the actual administration of priorities and that no other agency

was equipped to do so; that most of

ANMB's work involved screening, policing,

and other operations in the application of

military priorities requiring intimate knowledge of military programs; and that in the

absence of the ANMB type of organization

a host of minor problems internal to the

military services would be congested at the

top of the priority control system, seriously

interfering with the policy-making function.30

As a result, the Knox proposal was withdrawn but OPM adhered to the position

that its Priorities Division should retain the

sole authority to issue or extend preference

ratings for "industrial" materials and supplies, even when these were vital to subcontracts for high-rated items of military procurement under prime contracts of the War

and Navy Departments. Operations on this

basis proceeded for about a month, but

OPM was unable to handle the flood of

priority applications from industry:

. . . it proved impossible for Stettinius to

recruit and train a staff large enough . . .

With no field organization, OPM was compelled to rely on the procurement officers of

the Services, and even in Washington the

volume of paper work proved too much for

the personnel available.31

By the middle of March 1941, a comprehensive agreement between OPM and

ANMB had been perfected and a revised

priority system, retaining the significant

features of its predecessor under NDAC, but

groomed for mandatory compliance by industry, was ready for launching. On 15

March the ANMB sent a detailed set of new

priority instructions to all supply arms of

the Army and bureaus of the Navy. Together

with these instructions were the latest revision of the Critical List and a complete

sample set of the new printed OPA preference-rating forms. These forms, listed below,

were soon to become well known to industry

and procuring agencies alike for their essentiality to daily operations and for the

large volume of paper work which they

entailed:

 32

Under the new arrangements all preference ratings were to be issued over the name

of Mr. Stettinius, the director of Priorities.

The actual issuing authority, however, was

divided between OPM and the military procuring agencies. Contracting officers in the

field were supplied in advance with OPA

serially numbered and machine-signed PD3 preference rating certificates. These officers would continue to assign and authorize

30

 (1) Memo, USW Patterson for SW, 14 Jan

41; (2) Memo, Gen Rutherford for USW Patterson, 13 Jan 41, sub: Organization for Priority; (3)

Memo, Rutherford for Stettinius, Dir Priorities Div

OPM, 18 Jan 41, sub: Continuance, With Certain

Modifications, of Priorities Procedure in Current

Use by War and Navy Departments. 31

 CPA, Industrial Mobilization for War, p. 173.

32

 Complete copies of ANMB Priorities Instructions, the revised Critical List, and OPA Priorities

Division forms of this date may be found in Exhibit

5, Vol. II, in Priorities and Control of Materials in

the Ordnance Department, 1940-45 (hereafter

cited as Ordnance Priority Docs.) copy in OCMH.

The sixteen-page Priorities Instructions issued by

ANMB at this time provides an excellent description of the priorities system as it existed in 1941.
ESTABLISHMENT OF THE PRIORITIES SYSTEM 517

extension of original ratings for military contracts in accordance with the ANMB priorities directive and instructions. Higherthan-routine ratings, as before, were to be

assigned by ANMB on appeal by contracting officers through the chiefs of their supply arms or services. The emergency AA

rating and all ratings for items not on the

Critical List were to be assigned by OPM.

Likewise, all additions to the Critical List

required OPM's approval. The application

of priorities to services—such as power, labor, and transportation—was specifically

prohibited, and these remained outside the

scope of the priorities system throughout its

existence.

Thus, within little more than two months

after its creation, the OPM had consolidated

the authority gained by NDAC over priorities policy and had commenced operations

in a field which was certain to expand enormously within the coming months. With the

benefit of legislation and additional delegations of power from the President, OPM

issued a series of orders throughout 1941

which gradually transformed the priorities

system from a voluntary basis to one requiring mandatory observance by industry.33

The Supply Priorities

and Allocations Board

The next development in organization for

central priority control was the establishment by the President, on 28 August 1941,

of the Supply Priorities and Allocations

Board. The creation of SPAB was made necessary by broad conflicts of policy in materials allocation. Challenging OPM's authority were the newly created Office of

Price Administration and Civilian Supply,

under Leon Henderson, and the Lend-Lease

Administration under Harry Hopkins; both

were concerned with obtaining enough materials for their respective programs. In order to resolve conflicting claims effectively,

SPAB was composed of widely representative interests and was made the highest policy determining body on all priority matters.34

 Its decisions were executed by OPM,

the ANMB, and other operating agencies,

whose basic organization and operating responsibilities were left largely unchanged.

The OPM Priorities Board was, however,

abolished with the establishment of SPAB.

Although it was soon replaced by the War

Production Board and left little imprint upon the internal functioning of the priorities

system, SPAB resorted to direct allocation

of scarce materials on an increasing scale.

This was tacit recognition of the inadequacy

of the priorities system and helped to pave

the way for its replacement by more effective control systems.35

The War Production Board

On 17 January 1942 the War Production Board was created as the supreme industrial mobilization control agency, replacing both OPM and SPAB. General responsibility within the WPB for priority

matters was vested in James S. Knowlson,

the director of Industry Operations. Mr.

Knowlson, as did his predecessor Mr. Stettinius a year earlier, shortly reached a working agreement with ANMB on priority

policy and procedures. On 18 February the

33

 CPA, Industrial Mobilization for War, pp. 92,

179-80.

34 Executive Order 8875, 28 Aug 41. SPAB's membership consisted of Knudsen, Hillman, Stimson,

Knox, Henderson, Hopkins, and Henry A. Wallace.

Vice President Wallace was chairman and Donald

Nelson the executive director. 35

 (1) CPA, Industrial Mobilization for War, pp.

109-14. (2) CPA, SPAB Minutes.
518 THE ARMY AND ECONOMIC MOBILIZATION

ANMB issued a new and elaborate set of

priorities instructions, running to some

thirty-two pages and bearing the signed approval of Mr. Knowlson.36

 With the adoption of these regulations the priorities system and the overhead arrangements for its

administration may be said to have reached

substantial maturity.

The establishment of the War Production

Board did not immediately alter the basic

role of the ANMB in administering the

priorities system for the military and related

agencies. During 1942, however, a number

of developments combined to strip the

ANMB of most of its functions in this field.

With the creation of the Army Service

Forces under General Somervell, Army personnel in ANMB were gradually withdrawn

into the new supply organization. Direction

of the technical services and the conduct of

relationships with the War Production

Board were centered more and more in the

various divisions of ASF, which was organized to administer all War Department

procurement activities. With the departure

of Ferdinand Eberstadt from ANMB in

September, the announcement of the Controlled Materials Plan, and the increasing

concentration of authority within WPB for

all production control measures, it was evident that the role of the ANMB in priorities

matters would thereafter be confined chiefly

to the issuance of the military priorities

directives and similar matters requiring the

close co-operation of the Army and Navy.

During the summer of 1942, when the

pattern of Army-WPB relationships was

just emerging, mutual suspicion and considerable friction arose between the two

agencies. Donald Nelson, the WPB chief,

was under criticism for having "surrendered" control over priorities, as well as

other matters, to the armed forces. Partly to

counter this criticism, and partly to curb

what was felt to be an important source of

priorities inflation, Nelson announced on 22

August that he had withdrawn, effective 7

September 1942, the authority of military

contracting officers to assign preference

ratings:

The fundamental weakness in the present

administration of priority ratings by the Army

and Navy contracting officers is that it is an

attempt to administer a control system, which

must often restrict parts of the program for

the benefit of the whole, through field officers

whose primary function is expediting the particular parts of the program entrusted to them.

Accordingly, the War Production Board will

immediately undertake supervision over the

functions now exercised by contracting and

procurement officers of the armed services

with relation to the issuance of priority orders

and certificates.37

Thenceforth, contracting officers would

"propose" military ratings to WPB field officers, who would decide upon the actual

rating to be issued. This process was to be

expedited by the placement within WPB

district offices of liaison personnel from the

military agencies in the field.

Alarmed by the shortness of the notice,

the prospect of substantial delays to procurement, and the breaking of an important link

in the military contracting and procurement

process, the Army and Navy submitted a

counterproposal to Nelson, which he ac36

 ANMB Priorities Instructions, 18 Feb 42. This

document is invaluable for affording a definition

of terms, procedures, and problems associated with

the priorities system at the peak of its existence. A

similar view of the system in its final form, especially from the standpoint of the Army, may be

found in PR 16, Priorities.

37

 Ltr, Nelson to Patterson, Forrestal, and Eberstadt, 22 Aug 42, in Ordnance Priority Docs.,

Exhibit 21.
ESTABLISHMENT OF THE PRIORITIES SYSTEM 519

cepted.38 This was the assignment of WPB

review analysts to military procurement offices in the field where proposed ratings

could be approved or rejected at the source.

Under this arrangement the contracting officer could immediately assign the rating

approved by the review analyst. He could

then, if he wished, appeal the rating to a

WPB-ANMB Priority Appeals Committee

in Washington.

The new arrangement went into effect on

10 September 1942. Although subject to

shortcomings in practice, it worked harmoniously and gave substantial impetus to

the growing practice of joint utilization of

personnel. Thereafter an increasing number

of officers from the War and Navy Departments were placed within various operating,

staff, and committee organizations of WPB.

This expedited decision making, gave

broader representation to the composition

of WPB, and materially improved interagency relationships. Under the circumstances, there was less need for ANMB

activity on its earlier scale.39

Changes in the Basic Rating Structure

Priority Directives

in the Defense Period

A fundamental problem throughout the

life of the priorities system was the determination of a basic rating structure which

would truly reflect the strategic needs of the

armed forces. As originally conceived, this

task was simply one of indicating the order

or precedence in delivery to be accorded the

various items of completed equipment

called for by the military procurement program. This was clearly a military—not a

civilian—responsibility, to be performed on

the basis of a joint agreement between the

Army and Navy, or ultimate determination

by the Commander in Chief. As already

indicated, the task was actually accomplished by means of a priorities directive

setting forth a number of preference-rating

classes and the items or programs assigned

to each. The determining authority was

originally the Joint Board, later the Joint

Chiefs of Staff; the directive itself was published and distributed by the Army and

Navy Munitions Board.

Unfortunately, the simple concept of the

establishment of a fixed and dependable

scale of "military priorities," to be implemented by the proper harnessing of the

nation's industrial economy, did not adequately reflect the realities of either military strategic planning or industrial organization and operation. So complex were the

needs of the armed forces that is was impossible for the services, with painfully inadequate staffs and pressed by cruel deadlines, to construct a blueprint of a "perfect"

38

 (1) Ltr, Patterson, Samuel M. Robinson, and

Eberstadt to Nelson, 27 Aug 42. (2) WPB Priorities

Dir 2, 10 Sep 42, sub: Military Rating Procedure.

(3) Brig Gen Theron D. Weaver, Dir Resources

Div SOS, For All Supply Services SOS, 4 Sep 42,

sub: Signing of PD-3A Priority Certificates by War

Production Board Representatives. 39

 (1) Millett, Organization and Role of the ASF,

Ch. XVI. (2) ICAF R60, Priorities and Allocations, pp. 12-14. (3) CPA, Industrial Mobilization

for War, p. 301. The following comment, made at

the end of October 1942, reveals certain aspects of

field operations at the time: "Under Priorities

Directive No. 2 there appears to be a very cooperative relationship between Army and Navy and WPB

offices. Most certificates are being taken to the WPB

offices for approval as the majority of Army and

Navy offices do not have sufficient flow to warrant a

half or full time WPB Review Analyst in the Services' offices. Despite explanation and because of the

fact that neither the Services nor the WPB have the

Directive, the new approval is regarded by all

parties as 'eye wash.' " Observations From Field

Education Meetings Concerning Priorities Representatives, par. 4, in Ordnance Priority Docs.,

Exhibit 24.
520 THE ARMY AND ECONOMIC MOBILIZATION

military procurement program to fit even

a fixed set of strategic assumptions. To add

to the difficulty, a satisfactory strategical

foundation upon which to base a scale of

military priorities never became available.

With the dynamics of global warfare constantly calling for changes in strategic plans,

with rates of equipment loss and ammunition expenditure changing from day to day

and varying from one theater to another,

with research and development making

large segments of planned procurement obsolete, and with inevitable changes in the

availability of raw materials and other productive resources, a stable preference-rating

structure was inconceivable. Merely from

the standpoint of the necessity for periodic

redetermination of military requirements,

the basic preference-rating structure would

be subject to constant revision.

All this was foreseen but dimly when the

priority system was launched in the summer

of 1940. Equally difficult to foresee was the

extent to which the military preferencerating structure would be upset by the need

to provide nonmilitary ratings to support

the general industrial and civilian economy.

The Army had long realized that the assignment of priorities to military end items,

without corresponding priorities over plant,

machinery, equipment, and materials to

produce such items, would be a futile gesture. Hence the original ANMB blueprint

for a priorities system had proposed the

automatic and unlimited extension of military priorities throughout the industrial

system as a means of insuring the availability of all items contributory to preference-rated military end products. This arrangement would have confined the basic

rating structure to a system of purely military priorities, with "industrial" priorities

taking a derivative rather than a co-ordinate

status. Such a system could only endure so

long as military requirements could be

"superimposed" upon the nation's economy

without creating fundamental dislocations

or running into over-all feasibility limitations. When these developments occurred,

it would be necessary to intersperse the military rating scale with ratings for other

essential needs.

Paradoxically, the ANMB proposal for

unlimited vertical extension of priorities was

emasculated at the beginning of the program when it would have been most feasible

only to be adopted soon after Pearl Harbor

when material shortages were reaching

their peak. In any case, with the growth of

lend-lease, basic economic, and civilian requirements and the spread of shortages

throughout the economy in 1941 and 1942,

the stage was set for deep-seated disagreement. Much of the controversy and acrimony surrounding the priorities system,

especially in late 1941 and throughout 1942,

was generated in debates over the relative

position in the total rating structure of nonmilitary items.

As a result of the many factors involved,

some half-dozen or more basic priorities

directives were issued by ANMB throughout the life of the system, and most of these

were subject to numerous amendments before giving way to a successor. Three types

of change were made by the various revisions: (1) new rating classes were established; (2) new items or programs were

included in existing classes; (3) the position

of old items in the rating scale was changed.

In addition, with the refinement of requirements estimates and additional experience

under the system, a more fundamental type

of change—the placing of quantitative limitations upon various programs within the

several rating classes was introduced.
ESTABLISHMENT OF THE PRIORITIES SYSTEM 521

Even the original priorities directive of 5

August 1940, was far from a simon-pure

rating scale for military end items.40 Classes

A-1, A-4, A-7, and A-9 were either partly

or completely devoted to industrial facilities—whether government-owned or private—for the production of military end

items, and similar provision for industrial

facilities was included in the Navy section.

The first revision, known as the Priorities

Directive of 27 November 1940,41 created

the subdivisions of the A-1 class, and, as

already indicated, had as a major purpose

the placing of critical machine tools and

gages as sole occupants of the new A-1-a

class at the head of the list. Here again was

an indication that military end items could

not be quickly obtained merely by giving

them a high position in the rating structure.

Contributory items essential to military production were needed prior to the completion of end items and might well require a

higher priority status.

By the summer of 1941—with the passage

of the Lend-Lease Act, the separate issuance

of industrial and civilian ratings by OPM,

and the generally increasing momentum of

military programs—ratings below the A-1

class had become increasingly less effective.

On 20 August 1941, the ANMB, under the

direction of the Joint Board and with the

approval of Mr. Stettinius, issued a completely new priorities directive. Navy, Air

Forces, and Maritime requirements were in

general placed at the top of the rating

structure. At the same time all military procurement was lifted out of the A-2 to A-10

classes and placed in A-1; military items

not specifically placed in higher classifications were blanketed into A-1-j.42

The August 1941 Priorities Directive represented, in one respect, an advance in technique over its predecessor of the year before.

It introduced, although on a limited scale,

specific quantitative restrictions upon the

amounts of procurement accorded various

ratings. Quantity limitations had become

necessary for two reasons—first, to combat

the general "priorities inflation" which

threatened to wreck the entire system, and

second, to give effect to the principle long

known to economics as "marginal utility."

The original priorities directive had been for

all practical purposes "open ended"; the

vague description and status of programs in

each rating class permitted virtually unlimited procurement in each class. This

meant that the grand total of priority claims

issuable for all classes could far exceed the

capacity of the nation's facilities, materials,

and other contributory items to honor the

claims. But even more damaging, the absence of quantity limitations gave each

rating class an absolute and unlimited priority over all lower classes, no matter how

essential the lower-rated items might be to

a balanced program. If the total claims of

high-rated classes exceeded total available

supplies of essential materials, none of the

lower-rated classes could be produced until

all of the more favored classes were complete. The system thus violated the elementary principle of economics that the

importance of any item or class of items is

a relative—not an absolute—magnitude

and diminishes per unit as the number of

available units increases. In terms of the

Army's procurement needs, it meant that

10,000 aircraft engines without any frames,

or vice versa, or 10,000 of both without any

40

 See above, pages 509-10. 41

 This was not a complete replacement of the 5

August directive, since it did not, except by removal of certain programs, affect classes A-2

through A-10. 42

 ANMB Priorities Directive, 20 Aug 41.
522 THE ARMY AND ECONOMIC MOBILIZATION

aircraft guns or ammunition, would be useless. A balanced program, using an equivalent amount of materials, might produce

5,000 completely armed and equipped

planes. By the same token, planes without

pilots, pilots without clothes, and an Air

Force without well-equipped ground forces

could not win the war.

In the August 1941 directive, the construction program for Navy and Maritime

vessels, instead of being lumped into one

rating category, was distributed into three.

Vessel completions scheduled for 1941 were

classified as A-1-a, 1942 as A-1-b, and

1943 as A-1-c. In this way, ship construction not scheduled for delivery until 1943

could not, for example, pre-empt materials

needed by the Army for the defense of the

Panama Canal (rated A-1-b) although this

in turn was considered less vital than scheduled 1941 ship completions. In the same

manner, production of .303-caliber rifles

up to 2,000 per day was given an A-1-d

rating; quantities in excess of 2,000 per day

were rated A-1-f. Replacement of Navy

aircraft under A-1-b was limited to 1,000;

the same rating for new naval aircraft construction, other than 4-engine bombers, was

limited to 2,473 units.

Despite these and similar quantitative

ratings, the August 1941 directive was still

predominantly "open ended" and priorities

inflation continued with increasing severity.

By the end of 1941, it was becoming evident

to many observers that the priorities system

was an inadequate instrument for controlling the distribution of the nation's materials. Yet until a new system could be devised and put into operation, the old one

had to be used. Even though it meant further

inflation of a depreciated system, a new

"shot in the arm" was required for urgent

military programs.

Major Developments

After Pearl Harbor

Pearl Harbor brought in its wake pressures from many directions for a thorough

revision of the existing priorities directive.

On 6 January 1942, the President announced to Congress and the world his new

"Must" program for obtaining astronomical

quantities of certain crucial weapons of

war—planes, tanks, machine guns, merchant shipping. In mid-February the Combined Chiefs of Staff, established on 26

January as a result of the Anglo-American

discussions in December, proposed the

laying of a broad strategic base for priorities

in the production of critical munitions. The

War Production Board, faced with the

problem of dovetailing industrial and

civilian priorities with those for munitions,

was insistent upon the early realignment of

military ratings to accord with both the

latest strategic objectives and the availability of resources.43

The next most specific impetus to a revision of the existing military rating structure came from the Army and Navy Munitions Board. On 21 February, Under Secretaries Patterson and Forrestal requested the

Joint Chiefs of Staff—which functioned as

successor to the Joint Board and as the

American Section of CCS—to take prompt

action "with a view to the immediate issuance to the Army and Navy Munitions

43

 (1) Min (S), CCS 5th mtg, 17 Feb 42, Item

3. (2) CPA, Industrial Mobilization for War, p. 294.

The preference-rating levels assigned to industrial

and civilian items at the time of Pearl Harbor are

concisely shown on pages 8-9 of Report on the

Office of Production Management to the United

States Senate in Compliance With Senate Resolution 195, Relating to Policy, Methods, Plans, and

Programs for the Allocation or Distribution of

Materials (Washington: Government Printing

Office, 1942).
ESTABLISHMENT OF THE PRIORITIES SYSTEM 523

TABLE 55—ESTIMATED MILITARY PROCUREMENT EXPENDITURES IN 1942 AND PERCENTAGE

DISTRIBUTION BY RATING CLASS, 26 FEBRUARY 1942

a

 Total includes small amounts for "Navy Defense Aid" and "Treasury Procured Lend-Lease." b

 Excludes $29 millions of Navy expenditures authorized to carry "AA" ratings. c

 Air Corps comprised the bulk of Army A-1-a ratings.

Source: Memo, ANMB (sgd Hines) to CCS (American Section), "Resume of Priorities Situation and Request for Revised Directive,"

26 Feb 42, JB 335, Ser. 745, and CCS 400.17 (2-20-42), Section 1, both cited in Lt Col S. E. Otto, 1942—Priorities in Production for 1942

and 1943 (March 1950), MS, Historical Section JCS. p. 6.

Board of a revised basic directive, reclassifying the relative importance and amounts of

the various major items in the military program in accordance with present military

objectives."

 44

The basis for ANMB's request was the

congestion of the top priority categories resulting from numerous, piecemeal changes

in the directive since its issuance in August

1941. This imbalance, especially conspicuous following the new appropriations and

all-out program after Pearl Harbor, was a

major threat to the successful equipping of

the armed forces. Evidence of the degree of

congestion in the upper rating classes was

provided in a supplementary memorandum.

(Table 55) It is apparent from these

figures that, apart from any other shortcomings, the priorities system was failing to

achieve its avowed objective of "purposeful

discrimination," and that a drastic revision

in the basic structure was necessary.

The task of drawing up a satisfactory

priorities directive early in 1942 was fraught

with well-nigh insuperable obstacles and

has been described in detail elsewhere.45 The

Joint Chiefs passed the assignment to their

Planning Staff, which in turn delegated the

spade-work to another JCS staff agency, the

44

 (1) Memo, ANMB (signed Patterson and Forrestal) for CCS (American Section), 21 Feb 42,

sub: Resume of Priorities Situation and Request

for Revised Directive, 26 Feb 42, JB 335 ser 745,

and CCS 400.17 (2-20-42), Sec 1, both cited in

Lt Col S. E. Otto, 1942, Priorities in Production for

1942 and 1943 (March 1950), MS Historical Sec

JCS, p. 4. This request was made at the suggestion

of Ferdinand Eberstadt, whose appointment as

chairman of the ANMB was confirmed by President

Roosevelt on the same day.

45

 (1) Otto, 1942, Priorities in Production for

1942 and 1943. (2) Leighton and Coakley, Global

Logistics and Strategy, 1940-1943, Ch. VIII. (3)

CPA, Industrial Mobilization for War, pp. 293-

305.
524 THE ARMY AND ECONOMIC MOBILIZATION

Joint Strategic Committee. Despite its name,

this committee did not have responsibility

for formulating basic U.S. strategy, and no

fundamental plans or blueprint of projected

military operations had been made available. These were only gradually coming into

being with successive Allied conversations at

the highest level. Thus the committee, in

trying to base priorities upon strategy, found

itself working in a strategic vacuum. At the

same time, with admonitions from WPB

that the program must be kept within the

limits of feasibility, the committee soon

found itself not once, but many times traversing the complete circle of gearing strategy

to production and production to strategy.

Mindful of the need for a "balanced program"—a useful concept but one which in

1942 was rapidly becoming a verbal cliché—

the committee soon found itself "a focal

point where all the various views on priorities within the services were drawn together in an effort to reconcile them in an

acceptable manner."

 46

 A "balanced program," in the eyes of each contending

claimant for high priority ratings, tended to

be the one which placed its own claims at

the head of the list and balanced the remainder of the program around its own as

the independent variable. Both the Navy

and the Air Forces were adamant that their

major programs properly belonged at the

head of the list. Industrial and civilian priorities, as well as those for the less privileged

military supply arms and services, would

have to fall into line as best they could. At

the center of the problem was the "Must"

program demanded by the Commander in

Chief, which was not to be challenged on

the ground of either feasibility or balance:

"Let no man say it cannot be done. It must

be done—and we have undertaken to do

it."

 47

On 10 April 1942 the JCS sent its recommendations, based on the intensive labors

of the Joint Strategic Committee and the

Joint Planning Staff, to the President for

approval. The President concurred in the

recommendations, which made provision

for the "Must" program, and ordered that

they be translated into an ANMB directive.

At the same time he sent a memorandum to

Donald Nelson, reiterating the necessity for

successful accomplishment of the "Must"

program and stating that the necessary priorities and allocations for facilities to

achieve the revised military program

"should receive the concurrent approval of

the Army and Navy Munitions Board."

 48

On 20 May the ANMB sent a draft of its

proposed new priorities directive to the

WPB. The purpose of the directive was to

lift the military program for 1942 well out

in front of all other production objectives.

To do this it placed the 1942 program (and

materials needed in 1942 for the 1943 program) into four new "superrating" classes:

AA-1 through AA-4. A rating of AAA was

reserved for emergencies. Roughly 50 percent of the 1942 program (including 50

percent of the President's Objectives) was

carried in specific quantitative terms in

Class AA-1. A general note at the end of the

46

 Otto, 1942—Priorities in Production for 1942

and 1943, p. 7.

47

 Presidential Address to Congress on the State

of the Union, 6 Jan 42. As indicated previously, the

President's "Must" program was, in principle, accomplished, although internal readjustments and

specific cutbacks were found desirable. See above,

pages 141-42. 48

 (1) Memo, President for Mr. Nelson, 1 May

42, incl to Memo, President for JCS, 1 May 42,

sub: Recommendations to Joint Chiefs of Staff for

Priority of Production of War Munitions, and CCS

400.17 (2-20-42), Sec. 1, both cited in Otto, 1942,

Priorities in Production for 1942 and 1943, p. 20.

(2) CPA, Industrial Mobilization for War, pp. 281,

295.
ESTABLISHMENT OF THE PRIORITIES SYSTEM 525

directive made the following statement:

"No additional ratings may be issued in the

foregoing categories, nor will any allocations

of materials be made, which are prejudicial

to production of the end items or facilities

covered thereby, without the concurrence of

the Army and Navy Munitions Board."

Reactions in the War Production Board

to the draft directive were immediate and

spirited. In view of the fact that the military programs covered by the new superratings would absorb most of the nation's basic

resources, it was apparent that projects vital

to the maintenance of the industrial and

civilian economy would have to be accorded

comparable priority if they were to be

achieved. But if the necessary industrial and

civilian ratings could not be issued without

the concurrence of ANMB, the military

services would have a veto power over an

area clearly belonging—under both the Executive order establishing WPB and the

prewar Industrial Mobilization Plans drawn

by the services themselves—to the civilian

superagency in charge of the nation's wartime economy. For this reason, as well as

others, the WPB Planning Committee recommended nonapproval of the directive.49

To the Planning Committee, as well as

others in the War Production Board, the

ANMB draft directive indicated an effort

by the armed forces "to take over" the operation of the nation's economy. To the military services, on the other hand, it represented their legitimate concern—in the dark

days after Pearl Harbor—that only items

which were truly essential be given a coordinate position with top military programs. In order to protect the new military

rating scale against indiscriminate dilution

by allocations and ratings ordered at all

echelons in WPB, the ANMB wanted a

specific opportunity to review any additional

superrating proposals before they went into

operation. The associated "veto power"

would merely balance the power otherwise

available to WPB to cancel the effect of the

military ratings with new ratings of its

own.50

Despite the doubts of many on his staff,

Donald Nelson had faith in the possibility

of reaching satisfactory agreement with the

services in the day-to-day operation of the

proposed directive. He therefore decided to

accept it after it had been amended by

ANMB to include certain materials for the

1943 program and revised ratings for the

Maritime Commission's shipbuilding program. In a discussion with the President,

he obtained Mr. Roosevelt's approval of

the basic principle that essential civilian

items later be included in the higher rating

scale. On 12 June 1942, the new priorities

directive was officially issued by ANMB,

with the new ratings to take effect on 1

July. The official directive still contained

the requirement of ANMB concurrence in

the assignment of additional ratings within

the new series, but Nelson did not consider

this binding. He instructed his subordinates

that projects indispensable to the maintenance of the industrial and civilian economy

were to receive the necessary rating. ANMB

was to be consulted and its concurrence solicited, but its nonconcurrence was not to

stand in the way "if the responsible official

determines that the national economy can

only be maintained in that way." The necessary implementing order was to be issued

49

 CPA, Industrial Mobilization for War, pp. 296-

99.

50

 For a discussion of this episode in relation to the

general question of Army-WPB friction at this time,

see: (1) Millett, Organization and Role of the ASF,

Ch. XIV; (2) Otto, 1942, Priorities in Production

for 1942 and 1943, Secs. I and II; (3) CPA, Industrial Mobilization for War, pp. 293-305.
526 THE ARMY AND ECONOMIC MOBILIZATION

and the ANMB or the armed services could

appeal, if they chose, to the WPB chairman.51

This conflict over rating authority was

liquidated by the end of September by a

series of events. In the middle of August,

Joseph L. Weiner—head of WPB's Office

of Civilian Supply—obtained from ANMB

Chairman Eberstadt approval of the creation of a new AA-2-x rating band, midway

between AA-2 and AA-3 in the military

program, to provide supplies and services

for urgent foreign and domestic industrial

programs. On 20 September 1942, Eberstadt left the ANMB to become vice chairman of WPB. This move, together with the

impending adoption of the Controlled Materials Plan sponsored by Eberstadt, left the

ANMB with a minor role. On 23 September, in response to a query by JCS, the

ANMB noted that the controversy over

concurrences had been "satisfactorily adjusted."

 52

Two other noteworthy amendments to

the new rating structure were made shortly

after the issuance of the 12 June 1942 Priorities Directive. The first involved the transfer of all aircraft programs into the AA-1

bracket. Previously, in February 1942, the

entire aircraft program had been placed by

WPB into A-1-a, then the highest rating

class. The 12 June directive of ANMB split

the program four ways: the bulk of the

program was specifically covered into classes

AA-1 through AA-3; nonrerated items

were left in A-1-a. The aircraft industry,

solidly backed by the Army Air Forces, the

Navy Bureau of Aeronautics, and the WPB

director of Aircraft Production, vigorously

protested this cleavage into four segments,

stating that it would destroy any possibility

of meeting existing aircraft production

schedules. Aircraft spokesmen pointed first

to the wholesale confusion and administrative burden which would attend any effort

to rerate each and every one of the hundreds

of thousands of prime contracts, subcontracts, and purchase orders then outstanding. This procedure alone (which would be

unnecessary if all outstanding aircraft ratings in A-1-a could be rerated AA-1 by a

blanket order) would, it was charged,

threaten production delays of two to three

months. More important was the permanent damage which would result from the

effect of split ratings upon actual production schedules: ". . . because of th

plexity of the aircraft production system involving the nicely balanced flow of thousands of parts and components—all with

varying lead times and most of them common to two or more types of airplanes—

the application of split-ratings would cut

directly across existing schedules, destroying

flexible control and any certainty that these

schedules could be met."

 53

 As a result of

these representations, and after full discussion by the Under Secretaries and the Assistant Secretaries for Air of the Army and

Navy, the ANMB on 4 August moved all

portions of the aircraft program into AA-1.

Thereafter, in order to remove at least part

of the resulting disadvantage to other high51

 (1) Memo, Nelson for William L. Batt, James

S. Knowlson, Leon Henderson, Joseph L. Weiner,

and C. H. Matthiesen, Jr., 19 Jun 42, sub: Effect

of the Rerated Military Program on Work of the

War Production Board, and CCS 400.17 (2-20-

42), Sec 1, both cited in Otto, 1942—Priorities in

Production for 1942 and 1943, p. 34. 52

 (1) Memo, ANMB (signed Weaver and Keleher) for JCS, 19 Sep 42, sub: WPB-ANMB Conflict With Respect to Concurrences, and CCS

400.17 (2-20-42), Sec 1, both cited in Otto,

1942—Priorities in Production for 1942 and 1943,

p. 26.

53

 Otto, 1942—Priorities in Production for 1942

and 1943, p. 28.
ESTABLISHMENT OF THE PRIORITIES SYSTEM 527

rated items in the military program, all

AA-2 ratings were given equal status with

AA-1.54

The other change, the creation of the

AA-5 rating class, was made on 25 September 1942 by Eberstadt in his capacity

as chairman of the WPB Requirements

Committee. This classification was created

to permit effective allocations, under the

new Production Requirements Plan, of metals not provided for under military programs in the top four superrating bands.

Since PRP had been made mandatory on

1 July 1942 for most of American industry

some such step was essential if PRP was to

function.55

The basic problems faced and the procedures developed in adopting and implementing the Priorities Directive of 12 June

1942 represented a marked advance in the

establishment of military priorities and their

general relation to industrial and civilian

ratings. Controversy over the relative position of important programs, whether military or civilian, reached its peak in late 1942

with a succession of conflicts among the

synthetic rubber, aviation gasoline, landing

craft, destroyer escort, Maritime, and similar programs. The major conflicts were

gradually ironed out with the resolution of

the well-known Feasibility Dispute in October and November, the scaling down of the

general military program, the adoption of

the Controlled Materials Plan, and numerous specific compromises. On 30 April 1943,

a new priorities directive was issued to replace an interim directive for the 1943 program. The existing scale of superratings was

retained, and these remained for the duration of the war although the specific coverage of the ratings was repeatedly changed.

Despite its diminished role in the day-today administration of priorities after the fall

of 1942, the ANMB continued for the next

year to issue the basic military priorities directive. The final one in the series was apparently that of 8 October 1943, covering

military programs through 1944. By mid1944 the major war production goals had

been achieved and controversy had shifted

to problems of reconversion.

In preparation for V-J Day and the transition to a peacetime economy, WPB instituted a simplified rating system. After 1 July

1945, all military procurement of an urgent

nature was assigned an MM rating. Effective 30 September, all outstanding AA

ratings were canceled, leaving only MM ratings for military procurement and CC

ratings for spot civilian purchases. The CC

ratings were nonextendible for any purpose.

The MM ratings were extendible for operating supplies but not for capital items such

as machine tools and equipment. The AAA

rating was retained for emergency use in

breaking bottlenecks wherever needed. 54 56

 (1) Ibid., p. 29. (2) WPB Amendment 4 to

Priorities Regulation 1, Sec. 944.5 (b). 55

 GPA, Industrial Mobilization for War, p. 300. 56

 Ibid., pp. 946-49.
CHAPTER XXIII

Priorities: Problems in Application

and Operation

The Critical List and Preference-Rating

Extensions

Perhaps the most controversial feature of

the priorities system from its inception in

the summer of 1940 until well after Pearl

Harbor was the role of the so-called Critical

List. This feature exerted a profound influence upon the development of the priorities

system. It created considerable friction between the armed services and the early priority-control agencies, and was an important factor in the later insistence of the

services upon the adoption of a vertical system of material controls. A consideration of

the various issues surrounding the development and application of the Critical List

goes to the heart of the problem of organizing production controls in a complex industrial economy.1

The exact origin of the Critical List is

shrouded in considerable mystery. In order

to trace its beginnings it is necessary to go

back to the eight-week period between 17

June 1940—when the ANMB Priorities

Committee was appointed—and 12 August

when the new priorities system was announced. Under its 17 June mandate from

the Assistant Secretaries, the Priorities Committee had proceeded on the assumption

that the purpose of a priorities system was

to insure, so far as possible, the production

and delivery of procurement items in order

of their strategic importance or urgency.

This meant that an item assigned a given

priority rating must have a superior claim,

as against lower rated items, upon a manufacturer's facilities and upon all contributory materials or services—from whatever

source—needed by the manufacturer and

his suppliers to produce the completed item.

All this had been contemplated by priority

proposals under industrial mobilization

planning in the interwar period.

Accordingly, the committee's first draft

of the proposed new system (10 July 1940)

provided that priority ratings assigned to

prime contracts could be automatically "extended" to successive subcontracts or orders

all down the contractual chain, thus requiring preferred treatment of all items contributory to the prime contract: "This priority

rating, if necessary, may be automatically

extended to materials, services, machine

tools, related production machinery, equipment, and supplies essential to production

and the scheduled completion of these contracts."

 2 To implement this purpose the

1

 See above, pages 510-11, for earlier discussion

of the Critical List.

2

 Draft of Ltr, Johnson, ASW, and Lewis Compton, ASN, To All Supply Arms and Services of the

Army and Bureaus of the Navy, 10 Jul 40 sub:

Priorities, with 3 incls: (1) Draft Rules and Regulations, Priorities Committee, ANMB, 10 Jul 40
PRIORITIES: PROBLEMS 529

committee's proposed "priority certificate"

for prime contracts contained the following

provision: "This rating will be placed conspicuously on all subcontracts issued by you

or any of your subcontractors [italics in

original], and on all orders for materials,

services, machine tools, or other items contributory to this contract, or its subcontracts [italics added]." This provision for

automatic extension of preference ratings to

all subcontractor levels was fundamental to

the Army's conception of the meaning and

purpose of priority. It recognized the probable futility of assigning a high priority to

military end items without a corresponding

priority to obtain delivery of essential supplies to contractors at all levels in the vertical chain of production. But this conception of the operation of a priorities system

was not effectively used until after the system was slated for replacement. The barrier

to its use was the establishment of the Critical List, and the list's subsequent, unanticipated transformation in function.

On 23 July 1940 a meeting of procurement officers, held under the auspices of the

ANMB Priorities Committee, was called in

order to give the military supply arms and

services an opportunity to help shape the details of the new system. Several important

decisions were made at this meeting, including one to limit the assignment of priorities

to critical items:

The question was raised—should all contracts carry a priority number? After some

discussion, it was decided that it would probably be better to limit the field to critical items

only. Commander Sickel stated that he would

have a list prepared in the Navy Department

to correspond with the Army's critical items.

It was felt that there might possibly be items

not now listed as critical for which it would be

desirable to obtain priority. Provision will be

made to include such items in the Class A

priority list when recommended by chiefs of

services.3

This decision, which was apparently independent of any representations made by

the NDAC, was evidently an agreement to

concentrate the priority power upon items

of military equipment long referred to in

Army planning circles as critical items.

These were primarily Section I items in the

procurement planning list—difficult-to-procure items such as planes, tanks, guns, and

ammunition—for which extensive facilities

would have to be built and whose production in quantity could not be achieved for

at least one year, perhaps two. It was primarily to obtain these items in quantities

adequate for an expanded Army of the future that the Munitions Program of June

1940 was launched. And it was the impact

of this huge program which created the need

for a system of priority.

The 23 July decision to establish a list of

critical items was thus a decision to establish

some kind of priorities directive to provide

selectivity in the assignment of original preference ratings to military prime contracts.

With the appearance of the first ANMB

priorities directive the following month,

there was no need, in principle, for a separate critical list. In so far as the directive

needed amplification (since it was only a

skeletonized outline of broad programs),

this could be done by detailed amendments

or supplements to the directive. Neverthe- (6 pp.); (2) ANMB Draft of Priority Certificate

for Army and Navy Contracts, 10 Jul 40; (3)

ANMB Draft of Purchaser's Certificate of Priority,

10 Jul 40 (all in mimeographed form). A complete

set of the 10 July 1940 draft instructions may be

found in the ICAF Library.

3

 Memo, Lt Col A. B. Johnson, Priorities Com,

for File, 24 Jul 40, Box 29, ANMB, Navy Sec. Correspondence Rpts, 1922-42, Priorities Regulations

folder, National Archives.
530 THE ARMY AND ECONOMIC MOBILIZATION

less, under pressure brought to bear by the

NDAC, the Critical List was published as a

separate document. Ironically, this instrument—whose original purpose was to insure

the early completion of important prime

contracts—soon had the effect of limiting

the power to execute many of these same

contracts.

A closely related decision was reached by

the procurement officers on 23 July:

The next question was—should we allow

any echelon below the prime contractor to use

Purchaser's Certificate of Priority? The con- sensus of the meeting was that the privilege

of passing priorities to lower echelons should

be limited to prime contractors only, and that

subcontractors or suppliers would not have

the privilege of passing on the priority rating.

It was brought out that there would be cases,

undoubtedly, when it would be necessary to

grant priority to purchases made by subcontractors or suppliers, but that they should be

provided for by applications to the Priorities

Committee from the representatives of the

contracting officer through his chief of branch

or bureau.4

This limitation was a control device to prevent the abuse of the extension privilege; it

did not prevent the procuring agencies,

working through the ANMB, from issuing

ratings essential to the completion of subcontracts or orders at any level. Moreover,

the ANMB could relax this rule at any time;

alternative procedures and controls at the

field level could be established if later developments required.5

Meanwhile, the NDAC had already begun to exert some influence in the field of

priorities. On 6 July the ANMB sent an advance copy of its 10 July draft plan to

NDAC's deputy commissioner for production. His response indicated the commission's reaction at this stage: "The plan, as

outlined, seems to be simple and complete

and we have no suggestions or criticisms to

offer with regard to it. However, we feel that

the plan should not be put into operation

until circumstances have developed a clear

need for it. Making the plan effective is

bound to be a shock to industry and to the

public at large."

 6

Shortly thereafter, NDAC's priority responsibilities were centered in Donald Nelson and his staff. On 27 June, Nelson had

been appointed Coordinator of National

Defense Purchases, with the responsibility

among other matters for investigating and

passing upon the granting of priorities to

national defense orders. By mid-July Nelson was already negotiating with the services on an informal basis.7

 The earliest written indication of his attitude is found in a

letter of 3 August 1940: "I have looked

through the memorandum on ANMB proposed priorities procedure and would like to

discuss it with you before this is made public

to your procurement agencies. . . . I 

there are several things about this system

which will cause a great deal of difficulty

and would not like to see it put into effect

until after it has been discussed with the

commission."

 8

The nature of Mr. Nelson's objections to

the ANMB plan can only be inferred from

collateral evidence. The essence of the mat4

 Ibid.

5

 This limitation was, in fact, removed effective

9 December 1940. Thereafter any rating which

could be extended by a prime contractor could be

successively re-extended as far as necessary. Memo,

ANMB (signed Charles Hines) for SW and SN,

4 Dec 40, sub: Additional Priorities Instructions.

6

 Memo, John Biggers for Col Hines, ANMB, 11

Jul 40, in file 141 Priorities System, 1940-April

1941, National Archives. Also see Memo, Hines,

Secy ANMB, for Biggers, 6 Jul 40, sub: Priorities. 7

 CPA, Industrial Mobilization for War, p. 64. 8

 Ltr, Nelson to Col Rutherford, Dir Planning Br

OASW, 3 Aug 40, in file 141.32 Priorities—Procedures, ANMB, 1940-41, National Archives.
PRIORITIES: PROBLEMS 531

ter is that the NDAC was not ready in the

summer of 1940 to sanction the extensive

application of priorities to standard commercial items, materials, or civilian-type

products. Under the influence of British and

French purchases, American industry was

experiencing greater prosperity than it had

at any time during the previous decade and

was in no mood for controls which would

interfere with its regular commercial business. The NDAC feared that the sudden impact of priorities upon industry would lead

to "scare buying," speculation, and hoarding of materials with consequent widespread

price rises. Also, it was undoubtedly concerned with the political repercussions of

any appearance of "all-out" industrial mobilization for war in an atmosphere heavily

charged with isolationism, especially in an

election year confronted with the third-term

issue. Moreover, even in the summer of 1940

the NDAC felt the need for firm retention of

civilian control over the industrial mobilization process.9

As a result of this concern, the NDAC

prevailed upon the ANMB and the services

to confine the assignment of original preference ratings to contracts for military-type

end items and important fabricated components of a noncommercial type. This was

agreeable to the services since they had no

desire at this time to assign priorities to all

of their procurement contracts covering

everything from subsistence to post exchange items and office supplies. The new

priorities instructions issued on 12 August

were drawn up accordingly, and the procuring arms were informed that lists of critical

items would be made available to them.10

After considerable prodding by Nelson

throughout the summer, the ANMB finally

issued its first official Critical List on 23

October 1940. By this time, however, circumstances had materially changed. Two

days earlier the President had created the

NDAC Priorities Board delegating to it his

priority powers conferred by statute on 28

June.11 The NDAC now insisted that the

Critical List be used not only to limit the

assignment of original ratings for prime contracts, but also to limit the extension of preference ratings. Thenceforth, preference ratings could not be used even by prime

contractors (to say nothing of lower tier

contractors) to acquire materials and supplies to fulfill their high priority contracts

unless the needed materials were specifically

mentioned in the Critical List. But (except

for a provision favoring the aircraft industry) the list had been deliberately drawn to

exclude materials and supplies of a general

nature and the NDAC forbade the addition

of any items to the list without its prior

consent.12

9

 (1) CPA, Industrial Mobilization for War, p.

64. (2) Remarks of A. C. C. Hill, Jr., 27 Jul 45,

Before Policy Analysis Staff, in file 020.1, WPB Histories, National Archives. (3) Memo, Maj Barnes,

Priorities Sec Production Br OASW, for Col Young,

7 Jan 41, sub: Defense of Procurement Activities

Under the Various 1941 Appropriations. (4) CPA,

NDAC Minutes, 4 Sep 40, p. 80; 21 Jun 40, pp.

4-5; 2 Aug 40, p. 50; 9 Aug 40, p. 57; 28 Aug 40,

p. 77; 11 Oct 40, pp. 99-100. (5) Novick, Anshen,

and Truppner, Wartime Production Controls, pp.

43-44.

10

 ANMB Priorities Instructions, 12 Aug 40,

par. 2. 11

 Executive Order 8572, 21 October 1940. 12

 For special treatment accorded the aircraft industry, see below, pages 534-35. The establishment of the Critical List did not prevent the granting of blanket ratings by ANMB for complete construction projects (both command and industrial

facilities), which were specifically rated in the

priorities directive. (1) Memo, ANMB To All

Supply Arms and Services of the WD and Bureaus

and Offices of the Navy Dept, 23 Oct 40, sub:

Priorities—Items for Which Preference Ratings

Are Authorized, par. 4. (2) ANMB Additional

Priorities Instructions, 4 Dec 40, par. 1(e).
532 THE ARMY AND ECONOMIC MOBILIZATION

"The Lord giveth and the Lord taketh

away." The Critical List had now been

transformed into a device which granted

priority to critical items and then automatically withdrew that priority the moment it

was applied. To be of any practicable value

a priorities system would have to insure preferential treatment in the delivery of materials and supplies going into high-priority

end products. Although there were occasions

on which the Army and Navy had to apply

their priority powers to obtain acceptance of

military orders by prime contractors, the

real problem faced by the services during

the defense period was the implementation

of their contracts after they had been placed.

This had also been true during World

War I:

The first certificates of priority were issued

at the end of September of 1917, and during

the following 14 months the Board and Committee dealt with over 211,000 applications

for them. . . . The object of these certificates

was not to direct producers to complete certain orders ahead of other orders, but rather

to permit them to secure the materials, equipment, and transportation which would enable

them to produce goods according to contracts

or agreed estimates of scheduled output. A

large proportion of the certificates were issued

by systems of automatic ratings.13

By delaying the extension of preference

ratings to materials and supplies essential to

the completion of military contracts, the

NDAC facilitated the very process of "scare

buying by nonmilitary users" which the

Critical List restriction was allegedly designed to prevent.14

The practical effect of the Critical List

under the new ruling was to outlaw the extension of preference ratings (with the exceptions noted) until such time as the

NDAC and its successors could be prevailed

upon to add—in peacemeal fashion—specific materials, parts, and supplies of a

"commercial nature." This converted the

direct, automatic system of priorities

planned by the services into a cumbersome,

roundabout arrangement which was to bog

down in a welter of negotiation and controversy for the next year and a half. By attempting to insulate the civilian economy

from the inevitable impact of a huge procurement program, it helped to delay for

many months a true realization of the magnitude of impending material shortages and

the necessity for a tight system of material

controls.

Although the implications and effects of

the Critical List restriction were later painfully obvious, they were not so apparent in

13

 Memorandum on Priorities in the World War,

Col Leonard P. Ayres, 12 Nov 40, attached to copy

of Memo, Gen Rutherford for Nelson, 12 Nov 40,

in file 206 Priorities to 10 Mar 41, Priorities Sec

Production Div ASF. A handwritten notation on

Col Ayres' memorandum states that portions of it

were read to the NDAC Priorities Board on 12

November 1940.

14

 Quoted phrase from Novick, Anshen, and

Truppner, Wartime Production Controls, p. 43.

The following statement is the only indication

found in War Department records, after diligent

search, of the rationale underlying the NDAC's imposition of the Critical List: "The views of the

Advisory Commission, Council of National Defense, were emphatic that commercial items should

be omitted until circumstances proved the necessity for their inclusion. The commission reasoned

that if preference ratings were assigned generally

to commercial items, price rises were inevitable."

Barnes Memo cited above, note 9(3). It should be

noted that, in the absence of price controls, price

rises were inevitable by virtue of the tremendous

increase in demand resulting from the rearmament

program. This increase in demand could not be

concealed or exorcised merely by the absence of

priorities. The failure to apply priorities meant that

materials would tend to go to the highest bidder

rather than to urgent military production as such,

thus providing an additional incentive to price

increases.
PRIORITIES: PROBLEMS 533

the hectic days of the early defense period

when quick decisions had to be made by officials new to the field of economic mobilization and without adequate staffs or the time

to reach studied conclusions. Perhaps the

most remarkable aspect of the Critical List

controversy is the fact that there was no dispute at the time of the list's adoption and

transformation in function.15 The first vigorous objections to the new rule were made by

representatives of the supply arms and services before the ANMB Priorities Committee

on 13 December 1940.16

Interservice Discrimination; Abolition of

the Critical List

Whether for lack of understanding of its

real implications or for other reasons, the

services had been remarkably docile in their

acceptance of the Critical List limitation on

rating extensions. But almost immediately

after its imposition, procurement personnel

in the Army began to feel its effects. It then

became apparent that it made little sense for

the Army to possess overriding priorities for

strategic military end items only to have its

procurement objectives thwarted by its inability to extend the priority power to materials and components. These were frequently available at the preference-rating

level assigned to the end item for which they

were required; without the extension of this

rating, however, irreplaceable materials

would go to lower-rated projects or to nonrated orders of regular customers eager to

build up their inventories. Many suppliers,

desirous of giving preference to orders under

military contracts, remarked that all they

wished was official recognition on their orders of the importance of the prime contract

to show to their regular customers. Such

demonstration would serve as protection

against ill will and possible legal liability

under prior contracts.17

To be sure, after 15 March 1941, contractors could apply directly to the OPM on

PD-1 applications for individual rating certificates, but the required paper work and inevitable delays discouraged such action.18

OPM had neither the organization nor the

specific knowledge of particular military

contracts to process such applications effectively. Likewise, the ANMB could apply to

OPM for additions to the Critical List when

it was obvious that the items in question

were no longer available in the open market.

At best this was time-consuming and at

worst resulted in no relief:

These twenty items are the accumulation of

about four months in operation of the system,

as compared with the original list of about two

hundred items. Our efforts to have the list

extended in the meantime have been unsuccessful. The inability of our procurement

officers to obtain ratings on these items is

interfering with production.19

Moreover, relief provided by piecemeal additions to the Critical List would cover only

limited areas of the general problem and

would appear as belated recognition of a

need which—under the original ANMB

plan—would have been automatically supplied at the outset. Procurement officials of

the Army felt that the Critical List limitation 15

 A careful search of War Department and

ANMB records has given no indication that the

Army or Navy objected, even mildly, to the adoption of the rule limiting the extension of ratings to

items on the list. 16

 Memo, Maj Barnes for Gen Rutherford, 13 Dec

40, sub: Debatable Point in Established Priorities

Procedure, copy in Barnes, Weekly Progress Rpt.

17

 Memo, Maj Barnes for Gen Rutherford, 9 Jan

41, sub: Priorities—Defect in Procedure. 18

 See above, page 516. 19

 Memo, Gen Rutherford for Gen Moore, DCofS,

29 Jan 41, sub: Automatic Priorities.
534 THE ARMY AND ECONOMIC MOBILIZATION

was a negation of the whole concept of priority and that it slowed down the process of

rearmament without making any contribution to the solution of the materials problem.

As a matter of note, the priorities system

from its inception until well into 1942 discriminated heavily against the regular supply arms of the Army in favor of the Air

Corps and Navy. This discrimination operated in three ways: (1) the Air Corps and

Navy enjoyed substantially higher ratings

for the bulk of their programs; (2) the imposition of the Critical List reflected additional discrimination; (3) producers for the

Air Corps in early 1941 were granted automatic blanket ratings for the procurement of

scarce materials and components.

The succession of priorities directives from

August 1940 to June 1942 gave top priorities to the building and equipping of aircraft

and naval vessels and installations. In the directive of 27 November 1940, which gave

A-1-a only to machine tool builders, the

A-1-b category was devoted primarily to

the Navy, while A-1-c was split jointly by

Navy and the Air Corps. These two services

got the lion's share of all ratings down to

A-1-g, which also included combat vehicles

and antitank guns and ammunition for the

Army. The majority of Ordnance items were

carried in A-1-h and A-1-i, while the

Quartermaster Corps dropped to A-1-i and

A-1-j. In general, this disparity persisted

until mid-1942.

The assignment of high preference ratings

to the Air Corps and Navy was, of course,

the decision of the Joint Board and was thus

taken to represent the official concept of the

relative strategic importance of the various

items in the total military program. Nevertheless, it was not the intention of the Joint

Board thereby to prevent Ordnance, Quartermaster, Signal Corps, and other supply

arms from procuring equipment and supplies essential to a balanced military machine:

In determining priorities supply arms and

services were not called upon for representation as the quantities and times of their requirement were already known to the General

Staff. Priorities have never been broken down

nor classified by supply arms and services. The

original breakdown made by the General Staff

was by items; the breakdowns subsequently

made by the Joint Board and the Army and

Navy Munitions Board have all been by military objectives. Quartermaster items in these

objectives have the same priority as Ordnance

items, Signal items, or any other Army items.20

Yet practical discrimination was the unfortunate by-product of an open-ended priorities system which continually deferred lower

rated items as long as the influx of new

higher-rated items absorbed all available

productive capacity. As previously noted,

this condition was finally recognized and

substantially improved by the new quantitative rating structure produced by the Joint

Chiefs of Staff in June 1942.

A second discriminatory effect was produced by the operation of the Critical List.

This resulted partly from the composition

of the list and partly from the more liberal

interpretation placed upon it by the Air

Corps and Navy, whose aggressive methods

of implementing their programs were sometimes considered "high-handed" by personnel in the older supply arms of the Regular

Army. Thus in the original and apparently

tentative Navy list of 14 August 1940, both

20

 Memo, Gen Moore, DCofS, for ASW, 13 Dec

40, sub: Statement Concerning Priorities Contained

in Report of TQMG to the ASW, Dated December

11, 1940, G-4/32103. This memorandum was written in response to the complaint of The Quartermaster General concerning the unsatisfactory position of QMC items in the November 1940 subdivisions of the A-1 class. Ltr, TQMG to ASW, 11 Dec

40, file 319.1 A-S-PR-L (SBA-20).
PRIORITIES: PROBLEMS 535

aircraft and ships were listed with the sweeping definition "all types, complete." In the

23 October list—the first one to have joint

approval and wide application—the definition of aircraft was broadened to read "all

types, complete, or components, accessories,

materials, parts—including lighter than

air." Protected by this all-embracing provision, the Air Corps had little to lose by the

prohibition of rating extensions to items not

on the list, and its relative position was improved by the denial of the extension privilege to others. The Navy for a time achieved

a similar result by a ruling of Rear Adm.

Samuel M. Robinson, chief of the Bureau of

Ships and subsequently chief of the Navy's

Office of Procurement and Material, abolishing the Critical List and permitting the

application of priorities to all basic materials

required for the manufacture of naval end

items. In the meantime, procurement policy

officials in OASW and the older supply arms

of the Army pressed for relief from the Critical List by more conventional methods:

The Navy has issued new instructions which

abolish the critical list and permit application

of priorities to all basic material needed in

manufacture of the military items required.

This is the procedure which our office has been

arguing for, for months. The same principles

were recommended formally on January 18 in

a memorandum, prepared here and signed by

General Rutherford, to Mr. Stettinius. The

O.P.M., however, rejected the principle,

maintaining that special authority for priority

must be granted by the O.P.M. where the

item is commercial unless that item has already

been reviewed by the O.P.M. and added to

the critical list. It is understood that Admiral

Robinson has taken a firm stand on this matter

and has stated that he will not change the

instructions already sent out—that he will

carry the matter to the President if necessary.

. . . One thing is clear, the War Department

and the Navy Department must follow the

same procedure on a principle as important as

this one.21

In addition to the double advantage of

higher ratings and the automatic extension

privilege, the Air Corps early in 1941 became the beneficiary of a third priority

measure giving it a preferred position in the

general procurement program. This was the

assignment by OPM of blanket preference

ratings to producers of military airframes,

engines, and propellers.22 Blanket ratings, officially promulgated under "general preference orders," enabled specified contractors

to use a single rating on all their purchases of

scarce materials enumerated in the order.

Blanket ratings typically provided a rating

level well out in front of competing demands

and included all major materials and components likely to cause procurement difficulty. In addition, they carried the enormous

administrative convenience of not requiring

recourse to contracting officers, the ANMB,

or the OPM for countersignature or clearance. It is small wonder then, that the relatively underprivileged members of the

Army's supply arm and services complained loudly and bitterly of their plight

during the period when the priorities system

was the chief instrument for obtaining deliveries of materials, components, and finished items.23

21

 Barnes, Weekly Progress Rpt, 5 Mar 41; also,

ibid., 26 Mar 41: "It is increasingly difficult to

counsel our own Services to follow the prescribed

procedure in the face of Navy violations." 22

 E. R. Stettinius, Jr., Summary of Priority Action

Taken by OPM During First Half of 1941, in OPM

Press Release, PM 553, 3 Jul 41. An illuminating

discussion of the nature and effects of blanket ratings

is found in Novick, Anshen, and Truppner, Wartime

Production Controls, Ch. IV. See also, ANMB Priorities Instructions, 15 Mar 41, par. 25, Blanket or

Company Ratings. 23

 (1) Memo, Gen Wesson, CofOrd, for USW, 12

Mar 41, sub: Probable Failure of the Ordnance Program. (2) Memo, Wesson for USW, 2 Jun 41, sub:
536 THE ARMY AND ECONOMIC MOBILIZATION

The mounting tension over the role of the

Critical List resulted in a succession of modifications by OPM until the final abolition of

the list on 2 February 1942. The first major

revision, on 15 March 1941, was the addition of the following general rule:

1. Parts and Accessories: The items that

appear on this list shall be deemed to include

all fabricated parts and accessories necessary

for the completion, maintenance or mechanical operation thereof, which are designed to

meet military qualifications, and as designed

are not commercially useful for civilian

purposes.

The restrictiveness, as well as the ambiguity,

of the phrase excluding "commercially useful" items led to its withdrawal the following

month.24 Also in the 15 March edition of the

Critical List a number of basic materials

were introduced—chiefly metals for highspeed alloy steels, aluminum and magnesium, chemicals, cotton linters (essential to

the manufacture of high explosives), and

synthetic rubber. On 1 May 1941, most

standard metals were added, including

ferro-alloys, iron and steel products, and

lead. The 1 June 1941 list broadened the

field to include a number of commercialtype end products—photographic, sound,

and X-ray equipment, office machines,

blankets, mattresses, various types of cloth,

articles of clothing, and others. Thus by mid1941 the Critical List had lost all semblance

of homogeneity and, although its restrictive

effects had been considerably relaxed, it

posed a major complication in the day-today administration of the priorities system.25

By the fall of 1941, OPM was ready to

agree to the removal of critical list restrictions on extension of preference ratings to

materials so long as these were "physically

incorporated" into the end products. At the

same time the OPM proposed that Army

and Navy officials be prohibited from assigning ratings to any materials not to be

physically incorporated in rated end products. This limitation was not at all acceptable

to the armed services. In a joint letter to the

OPM, Under Secretaries Patterson and Forrestal, speaking for the ANMB, pointed out

that such a provision would prevent the

Army and Navy from assigning or extending

ratings to materials and productive equipment entering into the construction of plant

and facilities vital to the production of strategic munitions. It would also prevent the

Army from extending a rating on high explosives to the procurement of alcohol, for

example, large amounts of which were consumed in explosives production without being physically incorporated into the end

product.26

The ensuing discussions, colored by the

new urgency inspired by Pearl Harbor, led

to the complete abolition of the Critical List

and to new priority procedures for handling

construction projects, individual pieces of Necessary Measures To Prevent Failure of the Ordnance Production Program. (3) Memo, Maj Barnes,

Chf Priorities Sec, Production Br OASW, for Gen

Rutherford, 9 Jan 41, sub: Priorities—Defect in

Procedure. (4) Memo, Gen Rutherford, ANMB, for

Gen Moore, DCofS, 29 Jan 41, sub: Automatic Priorities. (5) Memo, Gen Gregory, TQMG, to USW,

16 Aug 41, sub: Revision of Priorities System. (6)

Memo, Gregory to Priorities Div ANMB, 20 Mar 42,

sub: Priorities Affecting Quartermaster Procurement. 24

 Barnes, Weekly Progress Rpts, 23 and 30 Apr

41.

25

 Personnel using the Critical List testified that

by early 1942 it "had expanded to resemble an encyclopedia." Col William H. Hutchinson, Priorities

and the Preference Rating System, 15 Feb 46, ICAF

Lecture (L46-31). 26

 Ltr, ANMB to Nelson, Dir of Priorities OPM,

26 Nov 41, sub: Amendment of Priorities Division

Administrative Order No. 1. Throughout the Critical List controversy the ANMB had retained authority to assign ratings to construction projects for command and service-owned industrial facilities.
PRIORITIES: PROBLEMS 537

productive equipment, and maintenance, repair, and operating supplies. A prominent

feature of the new procedure was the elimination of certificates and military countersignatures on all preference-rating extensions. Thereafter, an indorsement on the

purchase order was all that was required for

such extensions. The new procedure, combined with the abolition of the Critical List,

saved many thousands of man-hours on the

part of both contractors and military personnel.27

Other Problems in the Operation of

Priorities

Extent of Preference

Accorded Higher Ratings

As defense orders spread throughout the

economy in the fall of 1940, manufacturers' production schedules became more and

more congested. The change from a voluntary to a mandatory system in 1941, first for

military and later for essential civilian orders, removed much of the pressure upon

suppliers by their regular customers to ignore ratings and make deliveries under nonrated commercial orders.28

 But with defense

orders competing more and more with each

other, the simple directive to give preferred

scheduling to higher ratings left unanswered

many questions essential to sound decisions

by contractors. Should a manufacturer,

upon receipt of a higher rated order, cease

production immediately on items halfway through the productive process? If

he did, much time in organizing and setting

up production lines would be lost and

overall defense production would suffer.

Moreover, if such displacement were made

mandatory what guarantee of completion

would the new order have if it were displaced in midprocess by a still higher rating?

In the case of orders for identical items could

a new, higher-rated order pre-empt units already completed but still undelivered? And

if so, would customers under lower-ratings

have to see their orders processed from the

very beginning after each pre-emption?

All these issues were vital to military procurement, and contracting officers were deluged by questions from industry. The Army

took steps to clarify the regulations and to

prevent the "piracy" of completed units or

the repeated displacement of lower-rated

orders. Through written regulations and in

repeated discussion and conferences, it emphasized to its contracting officers and to

industry that interruption to previous orders

should be made only to the extent necessary

to meet the actual required delivery of the

supplanting order and that schedule delivery

dates would have to meet the test of military

urgency.29 Since the Army had a greater proportion of lower-rated contracts than its sis27

 See below, pages 546 ff. The effective date of

the abolition of the Critical List was 2 February

1942. OPM, Priorities Div, Amendment to Div

Admin Order 1, 12 Jan 42. The complete new rules

governing the priorities system at this time are found

in ANMB Priorities Instructions, 18 February 1942. 28

 For example, machine tool builders were under

heavy pressure by the automobile industry to furnish

tools to them in disregard of priorities. A number of

the larger builders had assured the ANMB Machine

Tools Committee earlier in the year that they could

handle the system on a voluntary basis. By the end

of 1940, they requested that priorities be made mandatory in order to relieve them of the ill will and

possible legal complications of refusing delivery to

preferred or other customers under contract. ICAF

R60, Priorities and Allocations, p. 16.

29

 This was a basic requirement of the priorities

system from its inception. (1) ANMB Priorities Instructions, 12 Aug 40, Par. 5 (b). (2) ANMB Additional Priorities Instructions, 4 Dec 40, Par. 1 (c).

(3) ANMB Priorities Instructions, 18 Feb 42, Par.

15 (a) (ii). Despite constant exhortation and supervision, it was never possible to prevent greater use of

ratings than was necessary to meet authorized schedules.
538 THE ARMY AND ECONOMIC MOBILIZATION

ter service, it took the lead within ANMB in

proposing for these some measure of protection. It objected to the practice of indiscriminately serving new orders on producers

already booked to capacity, and urged that

supplanting orders be accompanied by a certificate of the procuring official that all other

practicable sources of supply had first been

explored and rejected for adequate reasons.30

Navy representatives within the ANMB

gave their approval but the Navy Department, which enjoyed a generally higher priority status than the Army, refused to ratify

the agreement.31 After repeated efforts the

Army finally obtained a compromise agreement which was incorporated into the official regulations:

. . . material on hand that has not been completed to fill a specific order rated A-10 or

higher may not be diverted and delivered

under a subsequently accepted but higher

rated contract. Likewise, material in the course

of production on a contract or order rated

A-10 or higher and scheduled for completion

within 15 days after acceptance of a higher

rated contract or order may not be diverted to

the latter contract. It is to be noted, however, that these provisions are not effective if

the subsequently placed contract or order

bears an AA rating.32

This regulation, together with subsequent

amendments, was only partially successful in

preventing repeated delays to lower-rated

orders. Although it afforded protection

against the more flagrant kinds of piracy, it

could not deal with the fundamental shortcoming of the priorities system—the inability of rating scales alone to achieve balanced

production in the face of widespread shortages of materials and productive capacity.

A few weeks after the adoption of the AA

series of rating scales in mid-1942, it was

found that mill capacity in major industries

could accommodate only the top rating; thus

it was impossible in the fall of 1942 for steel

fabricators to accept any orders bearing less

than AA-2 (by this time elevated to equivalence with AA-1); all others tended to be

perpetually deferred.33

Equally difficult in determining the

proper degree of preference was the problem

posed by "split ratings." Split ratings occurred under two typical conditions. The

first was the necessity faced by subcontractors to "basket" a large number of rating extensions received by them on many separate

orders. In placing their own orders for materials or parts, subcontractors and vendors

would have to show on the face of each order the quantity of each item which they

were authorized to purchase at each rating

level. An order might thus be split three

ways: 40 percent AA-2, 30 percent AA-4,

30 percent A-1-a. If the supplier adhered

strictly to the regulations, he might be able

to produce only that portion of the total order which was covered by the highest rating.

In many cases this would have meant the

dismantling of a production line just as it

had reached peak efficiency. It is understandable that many suppliers in these circumstances chose to "throw the book away"

30

 (1) First Ind, Col Thomas J. Hayes, Dir Production Br OUSW, for Priorities Com ANMB, 29

Jul 41, to Memo, Gen Lewis, Asst Chf Production

Div, Industrial Service Ord Dept, for Dir Production Br OUSW, 25 Jul 41, sub: Priorities. (2) Ind,

Hayes to Memo for Priorities Com ANMB, 5 Aug 41. 31

 Barnes, Weekly Progress Rpts, 7, 21, and 28

Oct 41. 32

 ANMB Priorities Instructions, 18 Feb 42, p. 29,

Sequence of Deliveries. For later rulings, see: (1)

PR 1670 (10-15-43); (2) WPB Priorities Regulation 1, Pt. 944.7 and amendments.

33

 Ltr, Gen Safford, ACofOrd, to Gen Weaver and

ANMB, 5 Oct 42, sub: Priority Ratings for 1943

Program, and 14 incls, in Ordnance Priority Docs.,

Exhibit 26. General Safford pointed to the probable

stoppage, within ten days, of production of tank

components at the Chrysler plant unless these could

receive an AA-1 rating.
PRIORITIES: PROBLEMS 539

and complete the entire order at little additional cost in resources. The same situation

existed when split ratings resulted from

quantity limitations in the priorities directive. In the case of large prime contractors,

close adherence to the directive was both

necessary and desirable because of the large

quantities of materials involved. In the case

of small subcontractors for minor parts or

components far down the line, it was often

a matter of common sense to complete an

entire order in one production run.

A particularly difficult aspect of the split

rating problem was the administration of the

"item by item" ruling adopted by the War

Production Board when shortages were at

their peak. Because of the heterogeneous array of parts and materials going into many

complex components, quantity limitations

on many ratings had to be expressed in terms

of dollar value. In the re-extension of such

ratings, it was supposed that manufacturers

would distribute the total allowed dollar

value over the various parts and materials in

the proportion in which each entered into

the rated product. But more often than not,

manufacturers' inventories were "long" on

readily available materials and "short" on

generally scarce items. The inevitable result

was that contractors used a disproportionately large amount of the total allowed dollar value for purchasing scarce items for inventory. This accentuated the very shortages

which controlled preference ratings were designed to minimize. The WPB therefore

ruled that rating extensions should be confined to amounts which could be justified on

an "item by item" basis. This provision was

more honored in the breach than in the observance, and the technical difficulties of accounting and enforcement were so great that

the provision was reluctantly abandoned.

Fortunately, by the time of its formal abandonment, the general problem of material

shortages had passed the crisis.34

Throughout the life of the priorities system, problems of this type plagued contractors, contracting officers, and the War Production Board. Because of the many opportunities for abuse of discretion, regulations

had to be tightly drawn. On the other hand,

good judgment and even patriotism, intelligently construed, sometimes required unauthorized departures from the rules in order

to win the war.35

Higher-Than-Routine Ratings

An integral part of priorities procedure

under the ANMB was the authorization of

spot ratings higher than allowed by the current priorities directive. Such "higher-thanroutine" or "out-of-line" ratings were frequently required in order to break specific

bottlenecks threatening the completion on

schedule of major items or even entire programs. This up-rating could not, as was frequently supposed, be performed by contracting officers. It could only be done by the

34

 (1) Draft Memo, Gen Weaver, Deputy Dir Resources and Production Div ASF, for Chfs of Technical Services, 5 Apr 43, sub: Use of Split Preference

Ratings by Army Contractors During the Second

Quarter 1943, and incl, WPB Ltr CMPL-122, 16

Mar 43. (2) Memo, Lt Col William H. Hutchinson,

Chf Priorities Br, Production Div ASF, for Chf

Office of Liaison and Co-ordination, ODM ASF, 6

Nov 43, sub: Proposed Basic Rating Structure for

First Quarter 1944, par. 8. 35

 OPM Priorities Division, Priorities and Defense

(Washington: April 1941), "Questions and Answers," p. 16: "Q. Should a manufacturer upset his

production schedule for goods in process in order to

comply with a preference rating suddenly imposed

on an order? A. Preference ratings should be complied with. A problem of this kind, however, calls

for the exercise of sound judgment and skill in scheduling. In cases of special difficulty, the matter should

be brought to the attention of the military service involved or the Priorities Division, whichever assigned

the rating."
540 THE ARMY AND ECONOMIC MOBILIZATION

ANMB (later the WPB) after application

by contracting officers through the chiefs of

their supply arms. By mid-1941 applications

for special consideration had become so numerous that a large staff of officers in the

ANMB was devoted to their review and disposition.36

Priorities personnel in the Army and Navy

were aware, early in the life of the system,

that widespread use of higher-than-routine

ratings could easily whittle away the basic

priorities directive to the point where the entire procurement program would be thrown

out of balance. On the other hand, considerable flexibility was needed in translating

strategic priorities for end items into industrial priorities for components, parts, and

materials. Although it was only implicit and

imperfectly understood, the basic theory underlying the priorities system was a presumption—the presumption that the assignment

of equal ratings to two different end items

would result in the production of both items

on schedule. But with delivery schedules and

(even more significant) production periods

varying widely for equally rated items this

presumption was open to serious question.

The matter was further complicated by the

fact that the length of the production period

for different components of the same end

item, frequently contracted or subcontracted

to different producers, showed extreme

variations.

It was on this ground that the existing

philosophy underlying the whole priorities

system was challenged by an Ordnance officer in the War Department.37

 In a study submitted to OUSW, Maj. William F. Sadtler

pointed to the 37-mm. antitank gun as a

typical example of the weakness of the system. The gun consisted of five principal components—the tube, the mechanism, the carriage, the sighting system, and the control

set. The tube, the carriage, and the mechanism each required distinct production techniques, although they all fell into the broad

category of metal working. The sighting

equipment required elements produced only

by the optical industry as well as precision

work ordinarily available only from instrument makers. An analysis of delivery schedules and actual performance revealed that

the chief bottleneck was the production of

mechanisms and that these were being seriously held up because of a higher-priority

rating properly assigned to a similar aircraft

gun. While deliveries of the completed antitank gun were held to the least common denominator (the delivery of mechanisms),

completion of the other components was creating a storage problem as well as absorbing

the use of facilities, manpower, and materials at a more rapid rate than required for actual end-product utilization. Although only

a minor disadvantage in the case of the 37-

mm. gun, these considerations could and did

become of major importance for heavy items

of equipment ordered in large quantities,

such as tanks. Major Sadtler's proposal was

to replace the existing system of strategic or

end-item priorities with one of production or

"process" priorities. This would require the

initial assignment of different preference ratings for different components, based upon

36

 The ANMB Priorities Committee had approximately a hundred officers devoting full time to

screening applications. Each division of the committee was headed jointly by an Army and a Navy officer. Concurrence of both was necessary before any

out-of-line rating could be authorized. This prevented mutual encroachment by the Army and Navy

upon each other's programs. Col Hutchinson, ICAF

Lecture (L46-31), p. 3.

37

 The Fallacies of the Present Priority System, unsigned and undated Photostatic copy in OCMH files,

bearing AGO-CRB file 400.174 Priorities, Preference Ratings (6). Associated material identifies the

officer as Major Sadtler, Ordnance Dept.
PRIORITIES: PROBLEMS 541

the estimated length of the manufacturing

period of each.38

This proposal, although sympathetically

received, was rejected by OUSW. The reasoning behind the rejection, as well as substantial insight into the nature and operation of the priorities system, is provided by

the following quoted material:

The Priorities Directive announces the relative precedence of programs from a strategic

viewpoint. This means that if all programs

cannot be completed within the desired time

objective, precedence is given to those in the

higher positions. This strategic alignment then

becomes the order of preference in manufacture until such time as industrial factors are

encountered which throw a particular program out of phase as to deliveries of its related

items. When this occurs it is the principle of

operations . . . to apply priority adjustments

to the specific item or component which is

thrown out of balance. The procedure . . .

consists of reporting the circumstances by the

Chief of Branch to the Priorities Committee,

ANMB, presenting all facts relative to the

industrial delay, the established delivery schedules, the preference rating required to overcome the particular manufacturing delay, and

the prospective interference which would be

caused to higher rated items under manufacture in the same plant if the recommended

priority adjustment is approved.

It should always be recognized that the

solution of unbalanced deliveries does not necessarily lie in adjusting existing priorities. In

many, if not in most, instances the fault lies

in failure to recognize the longer time of manufacture for a particular item and the consequent neglect in placing this item under

manufacture at an earlier time, or neglect in

developing additional productive capacity for

its manufacture.

It is not practical to predict accurately the

manufacturing time differentials for all components or for all programs in advance. To

attempt to do so would require assumptions

regarding such variable and unpredictable

factors as management difficulties, labor troubles, and production engineering problems.

Any one of these factors could work to upset

basic assumptions upon which time-priorities

might have been based. We therefore would

be faced with the necessity of priority adjustments in either case. Since such adjustments

would be required whether strategic interests

or component timing was used as the governing principle underlying the established priority precedence, it would seem better to

anchor the system to strategic principles as

is now done.39

It is thus clear that under the priorities

system there was no systematic procedure for

the treatment of what eventually came to be

known as "lead time." This factor was later

given an appropriate place in determining

material requirements and allotments on a

time basis under the Controlled Materials

Plan. But CMP was confined to three basic

materials—steel, copper, and aluminum—

and was geared to carefully scheduled endproduct programs. The priorities system, on

the other hand, covered at its peak the whole

gamut of materials, part, and components

entering into unknown and constantly shifting programs. Under the circumstances, the

advance incorporation of lead-time factors

into priority decisions was a practical if not

a conceptual impossibility. The only visible

means for dealing with the problem at that

stage in the evolution of material controls

was a continuous flow of "after the fact" priority adjustments in the form of higher-thanroutine ratings.

As to be expected, therefore, the large volume of adjustments constantly required gave

color to charges of irresponsible inflation of

priorities by rerating officers. The term

"leapfrogging" was aptly used to describe

the migration of items into higher rating

38

 Ibid., p. 4 and Exhibit B.

39

 Portions of Comments by Lt. Col. E. E. Barnes

on Study Prepared by Maj. W. F. Sadtler, Ordnance

Department, entitled the Fallacies of the Present

Priority System, 14 Dec 41.
542 THE ARMY AND ECONOMIC MOBILIZATION

classes in order to obtain precedence over

competing items which had obtained earlier

precedence by the same process, or which

represented new, higher-rated programs not

in existence at the time the previous rating

had been assigned.

Whatever the factors explaining specific

rerating decisions, the actual number of outof-line ratings authorized was small in proportion to those requested. Screening officials at each echelon in the proces s

complained constantly of the number of inadequately supported requests for priority

assistance or requests which were unnecessary or irrelevant in view of alternative solutions. Thus in February 1942 an officer in

the Production Branch of OUSW observed

that for a majority of requests "no good reason" was given for a higher rating and that

"in 90 percent of the cases the matter had

been adjusted without recourse to priorities."

 40

 In April 1942 the Ordnance Department deplored the indiscriminate resort to

requests for up-rating as a cure-all for production difficulties:

From the experience of priorities personnel

in the Ordnance Department it seems reasonable to estimate that not more than one out of

every six requests for higher priority ratings

are actually deserving of such action. Frequently a higher priority rating would not

solve the problem. In some cases the item for

which priority assistance is requested might

actually have to be stored when completed

since other components of the military item are lagging in production. In other cases, to

grant higher priority ratings on specific material orders would seriously delay a project of

greater importance.41

Some indication of the efforts made by the

Army to keep to a minimum the issuance of

out-of-line ratings may be inferred from the

steady stream of instructions sent to the various supply arms and services, and by them

to establishments in the field. Governing instructions in increasing detail were in evidence from the original announcement of

the priorities system on 12 August 1940 until

the end of the war.42 As early as mid-1941

the basic policy had been announced of issuing higher-than-routine ratings only as a

last resort, and then to limit their issuance to

cases where relatively small quantities of material or equipment were needed to complete

a large contract.43 Applicants not only had

to pass this "low input—high output" test,

but also to show exhaustion of alternatives.

In the 16 August 1941 instructions, the alternatives included:

1. Early placement of orders by anticipation of requirements;

2. Simplification of design;

40

 Lt Col L. M. Johnson, Procurement Br OUSW,

26 Feb 42, commenting on Memo, Lt Col Gaillard

for Brig Gen Thomas J. Hayes, 23 Feb 42. 41

 Commentary on Production Requirements Plan,

p. 6, one of 2 incls to Memo, Lt Col Robert A. Kohloss, Jr., Priorities Sec Production Br, Industrial

Service Div OCofOrd, for Brig Gen Charles Hines,

ANMB, 30 Apr 42, sub: Production Requirements

Plan, in Ordnance Priority Docs., Exhibit 18. 42

 For example: (1) ANMB Priorities Instructions, 12 Aug 40, par. 13; (2) Ibid., 15 Mar 41, par.

16; (3) Ibid., 18 Feb 42, par. 6; (4) Memo, Gen

Hines, Ex Secy ANMB, For Supply Arms and Services, War Department, and Bureaus and Agencies,

Navy Department, 17 Jun 41, sub: Requests for

Higher-Than-Routine Preference Ratings; (5)

Memo, Col Hayes, Dir Production Br OUSW, for

Chfs of All Supply Arms and Services, 16 Aug 41,

sub: Priorities—Requests for Higher-Than-Routine

Preference Ratings; (6) [Memo] ANMB (signed

Hines and Keleher) To All Supply Arms and Services of the Army and Bureaus and Offices of the

Navy Department, 10 Feb 42, sub: Requests for

Higher-Than-Routine Preference Ratings; (7)

[Memo] Gen Safford, OCofOrd, To All Ordnance

Industrial Division Establishments, 23 Apr 43, sub:

Applications for Higher-Than-Routine Preference

Ratings; (8) same for same, 6 Mar 44, same sub,

and Exhibits A and B; (9) PR 16, Priorities, Sec.

XIII, Special Rating Procedures and Scheduling Assistance; (10) ICAF R60, Priorities and Allocations,

pp. 23-28, and additional sources cited. 43

 Hines memo cited above, note 42 (4).
PRIORITIES: PROBLEMS 543

3. Specification of use of standard items

and materials;

4. Examination of all possibilities of substitution;

5. Efforts to obtain material or equipment

from other sources under the present preference rating;

6. Efforts to increase production by discussing with the contractor the possibilities of:

using extra shifts; subcontracting; revision of

production technique; renting or purchasing

suitable second-hand equipment which may

have been previously disposed of by the contractor through sale to other contractors or

through transfer to nondefense jobs.44

With the removal of all Controlled Materials from the orbit of the priorities system

and the evolution of the war production program as a whole, the organization and procedures for handling special rating requests

were streamlined. A new Special Rating Division, WPB, was established, consisting of

Army and Navy representatives as well as

WPB personnel. All requests for higherthan-routine ratings were thenceforth made

on a new form—WPB Form SR-1—which

could be filled out only by the procuring

agencies, not by private contractors. Run-ofthe-mill requests could be processed and disposed of at lower echelons, but all applications for emergency (AAA) ratings had to

be approved by the Special Rating Division.

The AAA rating, established in mid-1942

to succeed the old AA emergency rating, represented the ultimate in higher-than-routine

ratings.45 As just mentioned it could be issued only by the Special Rating Division,

WPB, and was typically limited to small dollar-value quantities of materials or components which could break strategic bottleneck s without seriously interfering with

major programs. Special procedures and

thorough investigations were required for all

such applications and notification of the decision was made to contractors by telegram.

The policy of refusing to assign the AAA rating to entire projects or programs was studiously observed throughout its history and

kept the rating from depreciating in value.

(Table 56) The following summary of the

dollar value of AAA approvals for all purposes indicates the circumspection with

which the rating was used; in a period when

national war production ran well over $75

billion annually, AAA ratings applied to less

than one tenth of 1 percent of the total. By

the end of the war approximately 60,000

AAA ratings had been approved, covering

material to the value of $156 million.46 Thus

the smashing of bottlenecks by AAA ratings

in the last three years of the war was accomplished by an average rating value of only

$2,600.

Compliance Problems and Procedures

Fundamental to the success of the priorities system was adequate compliance on the

part of both industry and the procuring

agencies. The priorities system was, in effect,

an additional currency system superimposed

upon the regular monetary economy. Debasement of preference-rating currency,

either by excessive authorizations at the

source or by "counterfeiting" and exaggera44

 Hayes memo cited above, note 42 (5). 45

 The AAA rating superseded AA at the time of

the JCS directive of 12 June 1942. Although AAA

was the highest priority rating, a still more powerful

instrument of priority was available in the form of

the WPB "production directive." This was a direct

order from WPB to divert completed or nearly completed items from some other order, or to schedule

production ahead of other orders, regardless of preference rating. Memo, Gen Weaver, Deputy Dir Resources and Production Div SOS, for Chfs of Technical Services, 28 Jan 43, sub: Program Determination No. 266—Precedence of AAA. 46

 Undated memo prepared by Lt Col Casey in

Jun 45, copy in OCMH.
544 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 56—NUMBER AND VALUE OF AAA RATINGS APPROVED BY WPB SPECIAL RATING

DIVISION AS OF 3 FEBRUARY 1945

Source: Daily Report, 3 Feb 45, Special Rating Division, WPB.

tion of claims by individual purchasers,

would create runaway inflation and wreck

the system. Excessive authorization at the

source was ultimately checked by quantity

limitations in the priorities directive. The

task of controlling the use of priority claims

by purchasers was a major object of compliance measures, established initially by

ANMB and the services.

In addition to controlling the volume of

preference-rating currency outstanding,

government officials had to insure that properly issued priority claims would actually

control the behavior of suppliers. If suppliers

or producers of scarce items failed to give

proper precedence to priority orders, largescale "black market" operations would result and the basic purposes of the system

would be defeated. This aspect of compliance was of great importance to the military

procuring agencies. But unless specific complaints of violations affecting military procurement were forthcoming to the ANMB,

it took no action. The general enforcement

of priority regulations upon industry was left

to civilian mobilization agencies.

The immediate task of the ANMB in obtaining compliance was to see that preference-rating certificates and extensions, authenticated or countersigned by military

personnel, did not authorize the use of

higher ratings or the purchase of greater

quantities of material than were required in

order to fulfill the relevant contracts. This

meant that the assignment of proper delivery

dates in preference-rating instruments, as

well as ratings and quantities, was an essential ingredient in compliance. In order to

check these factors, the ANMB on 4 December 1940 issued instructions to all supply arms of the Army and Navy requiring

contracting officers to send to the ANMB

Priorities Committee two copies of every

preference-rating certificate issued for prime

contracts. Likewise, countersigning or approving officers were required to forward

two copies of all rating extension certificates.47

47

 ANMB Additional Priorities Instructions, 4 Dec

40. When the new OPM preference-rating forms

were introduced on 15 March 1941, the ANMB received one copy (the quadruplicate) of all PD-3

rating and extension certificates; another copy (the
PRIORITIES: PROBLEMS 545

As copies of preference-rating instruments

began to flow into ANMB in large numbers,

it became apparent that a systematic reviewing procedure was essential. It was not until

29 April 1941, however, that an organized

system for even minimum review went into

effect. Under new procedures established

at this time, reviewing officers in ANMB

were to record, upon check sheets devised

for the purpose, all defects found in rating

certificates. In the case of minor defects,

chiefs of supply services would receive copies of check sheets pertaining to their contracts and would take steps to educate

offending personnel and prevent a repetition of such errors. Major defects subjected

the rating certificate to possible revocation

and were separately recorded. Copies of

major-defect check sheets were sent to the

Production Branch, OUSW, for indorsement to the appropriate chief of service,

notifying the service of revocation unless

adequate justification were forthcoming by

return indorsement. Unfortunately, because

of inadequate facilities for checking, the

only defect classified as "major" was an

erroneous rating (violation of the priorities

directive or Critical List). Quantity and

delivery date violations were listed as

"minor."

 48

During the first three weeks of this procedure, 45,980 certificates (including extensions) were reviewed. Of these, 55 percent pertained to Air Corps contracts, 20

percent to Navy, and the remainder to

Army and other government agencies. Of

the Army and the Air Corps certificates, a

total of 398 were found to have major defects. It is interesting to note that 360 of

these, or over 90 percent, pertained to the

Air Corps alone.49

At first the notices of major defects in

rating assignments and extensions did not

result in revocation of ratings. But during

the week of 11 June 1941, 470 revocations

were ordered by the Under Secretary of

War. All but six of these were Air Corps

ratings, the majority covering extensions to

three aircraft subcontractors. Investigation

revealed that most of the improperly rated

extensions derived from a single improperly

rated prime contract. Others resulted from

prime contracts covering several items with

different ratings; Air Corps countersigning

officers had approved extensions based on

the highest rating. To prevent future difficulty a representative of OUSW spent several days at Wright Field, where a new system of review procedure was installed.50

With the spread of material shortages and

the increasing number of priority actions, it

became evident that the ANMB review procedure would have to be drastically overhauled. By mid-August 1941 the ANMB

was being deluged with from twenty thousand to twenty-five thousand certificates

weekly. Review operations were from two

to three weeks behind schedule. ANMB had

septuplicate) went to the relevant Army supply arm

or service or Navy bureau. 48

 Lt B. W. Covington, Priorities Sec Production

Br OUSW, Progress Report on Reviewing of Preference Rating Certificates, attached to Barnes,

Weekly Progress Rpt, 21 May 41.

49

 Ibid. Government agencies using priorities included Coast Guard, Coast and Geodetic Survey,

and others performing small amounts of defense

procurement and obtaining ratings through the

ANMB Priorities Committee. Toward the end of

May it was reported that "The Air Corps continues

to be the greatest abuser of the rating system."

Barnes, Weekly Progress Rpt, 28 May 41. 50

 Barnes, Weekly Progress Rpts, 11 and 25 Jun

and 30 Jul 41. Under the new arrangement Wright

Field prepared a master list of all contracts awarded

prior to 1 July 1941, listing all items and correct

preference ratings. These were distributed to Air

Corps procurement districts for guidance in assigning ratings. Ratings for all subsequently awarded

contracts were cleared through ANMB and forwarded in weekly lists to the districts.
546 THE ARMY AND ECONOMIC MOBILIZATION

neither the personnel, the office space, or

even the filing cabinets essential to the task:

"Three or four hundred thousand [certificates already reviewed] are piled up on the

floor of the Facilities Division." Review was

perfunctory for most certificates and nonexistent for many. Because of the absence of

serial numbers on certificates, coupled with

inadequate filing systems, it was not possible

to survey all rating extensions associated with

a given prime contract. Thus no check could

be made of quantitative padding of orders

or of improper advancement of delivery

dates.51

The result of this crisis was the decentralization of the bulk of review operations

to the various supply services. Effective 1

November 1941 all supply arms and services were directed to establish a priorities

compliance section in the office of the chief.

Thereafter, all rating extension certificates

were to be examined by service compliance

sections for correctness of ratings, quantities,

and delivery dates. Errors in these crucial

factors were to result in revocation. Prime

contract rating assignments (which were

only a small fraction of the number of rating extensions) would continue to be reviewed by the ANMB although the services

also were urged to review this class of certificates and take independent corrective action. Compliance sections in the services

were to maintain adequate records and provide progressive training and education of

all personnel engaged in priority matters. A

monthly inspection of each compliance section would be made, for purpose of co-ordination and control, by the priorities staff in

the Production Branch OUSW.52

This decentralization of routine compliance operations, freeing ANMB from an impossible administrative burden, occurred

none too soon. At the time of its announcement, copies of preference rating certificates

were flowing into ANMB at the rate of

seventy thousand per week.53 After a few

weeks of operation it was evident that the

new procedure was successful, and it was

even suggested that with the problem well

in hand a system of spot checking would be

adequate for the purpose. By this time, however, the OPM—also plagued with mountains of undigestible paper work in connection with all its PD certificates—was undertaking drastic simplification of priorities procedures. The first step—elimination of the

use of rating certificates for extensions involving less than $500 in materials—was

expected to yield a 60-percent reduction in

the volume of certificates reviewed by compliance sections.54

With the advent of Pearl Harbor, the creation of the War Production Board, and the

substantial revision of the priorities system

effective 15 March 1942, all rating extensions regardless of amount, were accomplished by the purchaser's indorsement on

51

 Memo, Lt Col Elmer E. Barnes for Lt Col J. L.

Phillips, Priorities Com ANMB, 6 Aug 41, sub: Observations on Present Procedure for Reviewing Preference Rating Certificates and Recommendations

for Corrections of Defects, incl 2 to Barnes, Weekly

Progress Rpt, 13 Aug 41.

52

 Memo, Brig Gen Thomas J. Hayes, Dir Production Br OUSW, for Chfs of Supply Arms and

Services, 13 Oct 41, sub: Establishment of a Priority Compliance Section in the Offices of the Chiefs

of Supply Arms and Services. 53

 Barnes, Weekly Progress Rpt, 14 Oct 41. 54

 Ibid., 9 and 23 Dec 41. The effective date of

the $500 exemption for all but machine tools and

similar items was apparently some time in December 1941. OPM Priorities Div Supplement 6 to

Admin Order 1, cited in Gen Lewis, Asst Chf Production Div, Industrial Service OCofOrd, to CGS

All Ord Dept Mfg Arsenals and All Ord Procurement Districts, 23 Dec 41, sub: Preference Rating

Extensions, in Ordnance Priority Docs., Exhibit 11.
PRIORITIES: PROBLEMS 547

each purchase order. No approval by contracting or inspection officers was required,

but the purchaser in certifying his order

represented that his purchase complied with

WPB regulations governing quantities, ratings, and delivery dates for preference-rating extensions.

The indorsement was required to show

the name of the contracting agency and

prime contractor, prime contract number,

original preference-rating and certificate

number, and the name of the cognizant field

officer in charge of compliance under the

prime contract. This information (the minimum for satisfactory review) was transmitted down the chain of suppliers by

means of successive purchase orders, and

purchasers were required to send copies of

each certified purchase order to the indicated compliance officer.55

Under the new simplified procedures, the

priority compliance sections in the Army's

technical service headquarters were transformed into supervisory agencies, and compliance operations were transferred to the

field. Local contracting, procurement, and

inspection officials previously responsible for

authenticating PD-3A certificates were now

required to review all priority actions under

prime contracts in their jurisdiction and

take the necessary corrective action. All certified purchase orders were to be checked

for validity of ratings, quantities, delivery

dates, and other relevant items. Incorrect

purchase orders were to be revoked unless

corrective action was taken by purchasers

promptly after notification. In the event of

revocation, suppliers were requested to return the original purchase order to the compliance officer and to suspend production

and delivery. Recalcitrant purchasers or

suppliers were cited to the ANMB, which

would, in co-operation with the War Production Board, institute corrective action including possible criminal prosecution.56

Thus from early 1942 on, military procurement personnel assigned preference ratings only to prime contracts. Rating extensions for materials, parts, and supplies were

automatically applied by contractors, without countersignature and subject only to

"after the fact" review and compliance

measure.57 Thereafter, the largest part of

the priorities system was in effect operated

under an "honor system," with American

industry chiefly responsible for its success.

As new systems of production and material

control partially supplanted the priorities

system, further relaxations were made.

Purchase order indorsements were simplified to the point where satisfactory review

was no longer possible and copies were no

longer required to be sent to compliance

officers. There is evidence that this relaxation resulted in increased violation of regulations.58

55

 ANMB Priorities Instructions, 18 Feb 42, par.

14, Extension of PD-3A.

56

 ANMB Priorities Instructions, 18 Feb 42,

par. 16, Responsibility and Authority of Army and

Navy Contracting, Procurement, and Inspecting

Field Offices. Memo, Gen Hayes, Dir Production

Br OUSW, for CofOrd, 24 Feb 42, sub: Administration of Priorities Compliance Activities Under Revised ANMB Priorities Instructions Dated February 18, 1942, in Ordnance Priority Docs., Exhibit 14. 57

 This applied to supply contracts generally.

Special procedures governed ratings and extensions

for construction contracts, machinery and equipment, and maintenance, repair, and operating supplies. ANMB Priorities Instructions, 18 Feb 42, pars.

9, 10, and 11. 58

 Memo, Maj John S. Swaim, Ord Dept, for Chf

Priorities Div, Production Br, ASF, 5 Oct 43, sub:

Comments on Present Status of Priorities Compliance, in Ordnance Priority Docs., Exhibit 36.
548 THE ARMY AND ECONOMIC MOBILIZATION

In any case by 1943, responsibility for

compliance had gravitated almost completely out of the custody of the military

services into the orbit of the War Production Board. As the character of violations

became more subtle, their detection required increasing resort to detailed examination of a firm's records and correspondence. This was especially true as the impetus

to violation became more and more an upward pressure from underlying suppliers

rather than a downward pressure from purchasers initially armed with inflated preference ratings. Perhaps the greatest problem

in late 1942 and 1943 was the perennial

insistence of suppliers, during negotiations

preliminary to placement and acceptance

of orders, that prospective purchasers obtain and extend a higher rating than that

originally tendered. Suppliers would insist

that they were "booked to capacity" with

higher ratings even when this was not the

case, and purchasers hesitated—because of

the delay as well as for other reasons—to request official inspection of the supplier's

books. Suppliers in turn felt the same pressure from their own underlying suppliers, all

of whom wished to receive high ratings in

order to build up their inventories or take

care of other customers. The inevitable result was widespread application by purchasers for higher-than-routine ratings, the

unwarranted advancement of delivery dates,

and other irregularities.59

Throughout the life of the priorities system it was apparent that most compliance

problems resulted from the novelty and

complexity of the regulations, their frequent

internal inconsistency or seeming lack of

relevance to the job at hand, the task of

educating and disseminating information

to all concerned, and the very nature of

production under wartime conditions. It

was difficult to expect industry to comply

with regulations which often were not

known by contracting officers and field representatives of civilian agencies. These in

turn were continually hampered by inadequate staff and facilities, personnel turnover, and the incessant pressure to reach

quick decisions and turn out work at top

speed. During the early days when huge organizations, such as the major aircraft

plants, were building facilities, tooling up,

and laying in materials and supplies to complete their contracts, dependable contract

objectives and production schedules were

nonexistent. A prime CPFF contract with

an initial ceiling value of $20 million might

be raised by a stream of amendments to ten

times its original figure. Neither the contractor nor the military countersigning officer could tell what the production objective would be or even the quantity of materials required to achieve a given objective.

The countersigning officer might be a Reserve officer suddenly recalled to active duty

from a banking firm, an automobile dealership, or a college faculty to find himself

confronted with the task of approving

scores of complex purchase orders and rating extensions daily. Even an officer thoroughly trained in industrial engineering

would have to become familiar with thousands of technical details, input-output

ratios, and other information difficult or

59

 (1) Ibid. (2) Report of Special Committee on

Preference Rating and Allied Controls, Program

Adjustment Committee, WPB, 24 Oct 43, Report

No. 10 by Program Adjustment Subcommittee on

Compliance, Copy in OCMH. The Army representative on this subcommittee was Col. William H.

Hutchinson, chief of the Priorities Branch, Production Division, ASF.
PRIORITIES: PROBLEMS 549

impossible to obtain, in order to do a technically correct job of validation.60

It is not surprising, therefore, that the

War Production Board announced in the

spring of 1943 that out of 75,000 investigations of priority compliance, only 247

suspensions were issued, 59 criminal prosecutions instituted, and only 1 prison sentence imposed.61

 Nor is it surprising, on the

other hand, that "it has been told that one

manufacturer built a million dollar factory

with a preference rating he had received

on a $500 order."

 62

60

 "Some officers did nothing but countersign all

day long. Naturally it was impossible, under these

circumstances, to do any real checking of delivery

dates or quantities ordered." Hutchinson, ICAF

Lecture (L46-31), p. 3.

61

 New York Times, 20 Mar 43, p. 21. 62

 Hutchinson, op. cit., p. 5.
CHAPTER XXIV

Material Controls in Transition

Allocations and Scheduling

The priorities system in its developed

form was an attempt to control the flow of

scarce materials by starting at the top of

the productive process, namely, at the endproduct level. Preference ratings assigned

to end products, when extended vertically

down to producers of basic materials, were

expected to direct the flow of these materials. But no sooner had the priorities system been adopted and placed in extensive

operation than collateral control measures

were introduced which eventually came

into serious conflict with priorities. These

measures, instead of beginning at the endproduct level, involved the application of

direct controls at the source of supply.

It was the policy of NDAC, continued

by OPM, to forbid the extension of military preference ratings to basic industrial

and commercial materials until the central

control agency could adopt measures designed to minimize dislocations of the civilian economy. In accordance with this policy, the addition of an important basic

material to the Critical List was typically

delayed until it could be accompanied by

the issuance of an M order (material order)

which placed the material under "industrywide-control." The implications of such

control were concisely stated by the OPM

shortly after placing aluminum under industry-wide control:

Putting aluminum on the critical list meant

that the Army and Navy Munitions Board

and agents of the services could issue preference ratings against it. But, since the metal

was also put under industry-wide control, this

meant that the allocations made by the Priorities Division [OPM] would take precedence

over individual certificates in case of conflict.1

Thus the introduction of allocations provided OPM with an effective tool enabling

it to retain final control over the distribution of scarce materials.

The aluminum order (General Preference

Order M-1, issued 21 March 1941) was the

first of a long series of M orders, most of

which were revised many times with the

gradual tightening of controls until their

ultimate relaxation at the end of the war.

The M-1 order on aluminum supposedly

"brought all aluminum deliveries under allocation."

 2 Actually this phrase—which was

similar to those often used to describe the

techniques of most of the early M orders—

1

 OPM Priorities Division, Priorities and Defense, p. 10. On 31 May 1941, by 55 Stat. 236,

the President was expressly given the power to

apply priorities and allocations to any orders or

contracts, civilian or military, at all contractor

levels. This removed all doubts as to the legality

of priority action to meet indirect military and

general industrial requirements. OPM's General

Counsel, John Lord O'Brian, had previously indicated that these powers were implied in the act

of 28 June 1940. CPA, Industrial Mobilization for

War, p. 175; for opposite view, see p. 192; for

accounts of problems, see pp. 90, 96, 102-5, and

110.

2

 CPA, Industrial Mobilization for War, p. 179.
MATERIAL CONTROLS IN TRANSITION 551

was something of a misnomer. The aluminum order required mandatory observance

of preference ratings, except when otherwise directed by OPM, and limited deliveries of aluminum for nondefense uses to

various percentages (from 80 percent down

to 10 percent) of the amount used in 1940

for the same purpose.3 This curtailment of

nondefense consumption did not, however,

provide a system of "complete allocation"

in any meaningful sense. It left producers

free to select their nondefense customers as

long as total shipments in each end-use category did not exceed the allowable percentage. Moreover, initial allocation procedures

varied widely from one material branch of

OPM to another, were loosely applied, and

were intended only to supplement, not to

replace the established priorities system.

By the spring of 1941, the American economy was experiencing the greatest wave of

prosperity since 1929. Material suppliers

everywhere—faced with the cumulative demands of British and French military orders, the huge rearmament program of the

United States, and the consequent rise in

civilian consumption expenditures—found

themselves unable to handle the flood of

orders. At the same time, sharp increases

in speculative demand—in direct competition with military orders—were felt in all

sectors of the economy. Particularly noteworthy was the rush of consumer durablegoods industries to lay up heavy inventories in anticipation of impending decisions

to place positive restrictions on non-defense

consumption of scarce materials.

The War and Navy Departments, as well

as an important segment of OPM, had been

pressing for some time for the curtailment

of nondefense industries.4 On 3 May 1941

a voluntary curtailment, negotiated by OPM

Director General Knudsen, was accepted by

the automobile industry to become effective

1 August 1941. After this agreement had

been reached, steel companies made "extraordinary efforts . . . to ship the gre

possible tonnage of steel to the automobile

companies before July 31, 1941."

 5 With

similar demands from producers of electric

refrigerators, washing machines, and other

consumer hard goods, to say nothing of requirements for plant and equipment, steel

mills were booked far beyond capacity. Not

only did many essential civilian industries

(for example, containers) lose out in the

scramble for steel and other metal products;

even military contractors armed with high

preference ratings found their steel deliveries badly delayed and in some cases were

unable even to place their orders.6

A brief sketch of the development of controls over the supply of steel up to the fall

of 1941, as viewed from the Office of the

Assistant Secretary (later the Under Secretary) of War, is of interest in outlining

the origins of allocation systems in World

War II. From almost the very beginning of

the defense period, the Army and Navy had

recommended that the steel industry adopt

a system of allocations such as proposed by

the Steel Plan developed by the Army and

the ANMB during the interwar period. Estimates of War Department steel requirements for a major rearmament effort had

been turned over to the NDAC on 13 June

1940. On 24 September 1940, with steel

consumption rising at an extremely rapid

3

 Ibid.

4

 As early as October 1940, the War Department

had urged that commercial production of aircraft

be halted to permit the production of military

planes. See note 24, Chapter XXII, above. 5

 CPA, Industrial Mobilization for War, p. 193. 6

 Ibid.
552 THE ARMY AND ECONOMIC MOBILIZATION

rate, the War Department again recommended that the Steel Plan be placed into

effect. No specific reply was given to this

proposal but on 5 November 1940 a memorandum from NDAC to the Assistant Secretary of War stated that available information "indicates we are on the safe side

for full steel production." On 24 January

1941, in the face of increasing difficulty in

obtaining structural shapes for constructing

Army facilities, the OPM Steel Priority

Committee stated that there was no shortage of steel for civilian or defense purposes.

At the same time the committee refused a

member's request for issuance of a public

statement against inventory increases. At

the 31 January meeting of the committee,

specific cases of unsatisfactory steel deliveries were presented; but attempts by the

Army and Navy to have structural shapes

placed on the priorities Critical List met with

no success.

As steel shortages spread from shapes to

alloys and plates, representatives of the

Army and Navy repeatedly requested the

addition of these items to the Critical List,

but without result. On 12 February 1941

the Under Secretary of War—in a letter

to the chief of OPM's Iron and Steel

Branch—once more called attention to the

Steel Plan, explained its nature in detail,

and stressed the necessity for co-ordinating

civilian with defense requirements. But both

the steel industry and OPM's Steel Priority

Committee continued to resist efforts to

place steel under mandatory controls, stating that capacity was adequate or would

shortly be improved, and that in any case

priorities "should be avoided as long as

possible."

At the 14 March 1941 meeting of the

Steel Priority Committee, shortages of

nickel steel as well as of tungsten were discussed but no action was taken to place them

under mandatory control. On the following day the Army and Navy Munitions

Board issued a new Critical List, adding

special-treatment steels and bullet-core steel

to the list of items to which preference ratings could be applied. At the next weekly

meeting of the Steel Priority Committee

this body passed a formal resolution condemning the action of ANMB in adding certain steels to the Critical List.

Meanwhile, steel deliveries in an increasing number of categories were falling further and further behind defense needs. On

28 May 1941 a list of two hundred delayed

deliveries of steel, whose nonavailability was

holding up aircraft and other vital production, was furnished OPM, together with a

request that mandatory priorities be immediately instituted on alloy steel. OPM

replied a few days later that priorities were

not required and that the new general preference order on steel would take care of the

situation. But this order,7 in the view of the

services, was only a "complicated system of

expediting" whose effect was "barely noticeable." Steel in abnormal quantities was still

flowing to the automobile industry, and on

3 June 1941 OASW requested that OPM

take immediate steps to regulate the flow

of tonnages into nondefense industries.

The first major improvement in the steel

situation, in the Army's view, was announced on 1 August 1941 when pig iron

was placed under mandatory allocation,

effective 1 September 1941, by order M-17.

But a companion order, M-21 of 9 August

1941, placing all steel products under

mandatory priorities, was not similarly successful—apparently because steel shortages

had passed the stage where they could be

rectified by priorities. Accordingly, on 27

7

 General Steel Preference Delivery Order, 29

May 41.
MATERIAL CONTROLS IN TRANSITION 553

August 1941 the Under Secretaries of the

War and Navy Departments—acting as the

Army and Navy Munitions Board—again

recommended to OPM Director General

Knudsen the adoption of a system of steel

allocations such as contemplated by the

Steel Plan. Two months later OASW was

still preparing forceful memorandums attempting to convince OPM that the time

had passed when simple priorities could be

effective in channeling steel supplies to their

most urgent uses.8

The realization in the late spring and

summer of 1941 that grave material shortages, as in the case of steel, were no longer

merely "potential or "impending" but had

actually arrived, was a bitter pill for OPM

to swallow in the face of its earlier reassurances in this area. But it was also a disconcerting fact to the military procuring

agencies. The latter, having fought for

months with only indifferent success to have

priorities extended to basic materials, now

found their preference-rating currency sadly

depreciated. Ironically, the depreciation

was at this stage only in part attributable

to the cause almost universally ascribed—

the prodigality of military contracting officers in issuing and extending preference

ratings. The basic difficulty was the critical

lack of productive capacity throughout all

segments of the economy for meeting at

short notice the huge requirements of a

major rearmament program. Moreover,

with commercial demand for materials skyrocketing, and with priorities only partially

and belatedly applied to them, it was inevitable that powerful groups in private industry would be favored and that both

rated and nonrated defense orders for materials would suffer.

By the fall of 1941 the overriding defect

of the priorities system was becoming painfully apparent: it failed to provide a positive guarantee of delivery to any item; it

could only offer a relative urgency standing,

unrelated to conditions of supply and subject to momentary change with changes in

other variables in the total supply-and-demand equation. Preference ratings thus

came to be widely and aptly referred to as

"hunting licenses." What was needed was

some method of grasping material supplies

at their source and of making specific allotments to important uses—allotments which

once made could be relied upon. Without

this element of certainty in the availability

of essential materials, production and delivery schedules were meaningless and war

production was in jeopardy.

Whatever the effects of the repeated suggestions of the Army and Navy, it seemed

to an increasing number of observers in the

fall of 1941 that a system of allocations,

controlling material deliveries at the source

of supply, was the logical successor to the

priorities system. As early as September

Donald Nelson had indicated this belief in

his testimony in hearings on the price control bill.9

By the end of 1941 OPM's material

branches had become well established and

in an effort to cope with the serious shortages now evident were making extensive

8

 The preceding paragraphs are based primarily

upon Memo, Steel Distribution by Allocations for

National Defense, 29 Oct 41, in National Archives

Record Group 225, file 470.1/203.2-9.1. This

twelve-page memorandum was apparently prepared in OASW for the Army and Navy Munitions

Board as the basis for a request that OPM immediately place all steel products under an allocation

system.

9

 (1) Memo, Lt Col Joseph W. Battley, Chf

Liaison Div OUSW, for Director Planning Br, 10

Oct 41, sub: Priorities and Allocations. (2) H.

Com on Banking and Currency, 77th Cong., 1st

Sess., Hearings on H. R. 5479, Price Control Bill,

1941.
554 THE ARMY AND ECONOMIC MOBILIZATION

use of their powers of allocation. A regular

procedure of many of the branches was to

require submission, for their advance approval, of the proposed monthly mill delivery schedules of all important producers

in the industry. Prior to each month's allocation of mill capacity, the applications of

prospective material users were scrutinized

to determine the importance of their requests, their inventory position, and other

data. Producers' mill schedules were then

rearranged by the OPM branches in accordance with their judgment and latest information on relative urgencies, and the

mills were instructed to make shipments

accordingly. This channeling by OPM of

all shipments of individual producers to

their various customers represented the allocation process as developed by the spring

of 1942. Under this procedure shipments

could be tailored to the inventory position

of recipients, thus reducing inventory

hoarding. Since no shipments could be

made which were not specifically approved,

the flow of materials to nonessential uses

could be prevented. Moreover, a positive

guarantee of delivery could be made to all

material users whose needs were considered sufficiently urgent to warrant inclusion

in approved delivery schedules since these

schedules were limited to actual mill capacity. These features of the allocation procedure represented a distinct advance over

the priorities system and were later incorporated into the Controlled Materials Plan.

The scheduling technique was also to become the foundation of General Scheduling

Order M-293 and the later Component

Scheduling Plan (CSP).10

Unfortunately, the allocation procedures

used in late 1941 and early 1942 had several grave defects. First of all, the decisions

of the several material branches were unco-ordinated. A producer of Army tanks

might receive a sufficient allocation of steel

but fail to receive a sufficient quantity of

copper. This meant not only that he could

not meet his tank delivery schedule, but that

he would possess more steel than he could actually use. Secondly, the material branches,

either individually or collectively, were

hardly the best authority on the relative

importance of requests for the materials

which they were dispensing. To the extent

that their allocations differed from established preference-rating patterns, they

tended to vitiate basic decisions of the Joint

Board as to the relative urgency of military

items and programs. Allocations reflected

the varying degrees of pressure brought to

bear by the multiplicity of competing interests, including not only the different

branches of the Army and Navy but all other

defense claimants and a wide array of nondefense users as well. Thus, for the final

quarter of 1941, when it was generally believed that 100 percent of all copper shipments were rated A-10 or higher, a preliminary survey disclosed that 20 percent of all

shipments were unrated and that only 45

percent had gone to A-1-j or higher ratings.11

 There was grave danger that arbi10

 See below, pages 597-99. The detailed allocation procedures of the various branches may be inferred from a study of the various M orders. See

also, Report on the Office of Production Management to the United States Senate in Compliance

With Senate Resolution 195, Relating to Policy,

Methods, Plans, and Programs for the Allocation

or Distribution of Materials. A valuable analysis of

the philosophy and procedures of the various allocation systems may be found in Novick, Anshen,

and Truppner, Wartime Production Controls, especially pp. 37-38, 48, 65-67. 11 Barnes, Weekly Progress Rpt, 17 Mar 42, citing

Census Bureau tabulation of OPM metal questionnaires (PD-275). This result undoubtedly reflected

lack of compliance on the part of industry as well

as laxity in the making of allocations.
MATERIAL CONTROLS IN TRANSITION 555

trary and un-co-ordinated allocations by the

several OPM material branches would degenerate into complete planlessness.

A third difficulty confronting allocation

proposals in the peacetime atmosphere of

1941 was the absence of price ceilings.

Faced with unstable and generally rising

prices, contractors felt compelled to take

material deliveries in large quantities which

might not be needed for many weeks or

months. This was especially the case under

fixed-price contracts extending over fairly

long periods:

We believe that contractors feel that they

are compelled to resort to this practice in order

to avoid financial loss, even bankruptcy in

some instances. Under these circumstances,

a contractor probably would feel that he could

conscientiously sign an affidavit that he had

"not taken delivery in larger quantities or at

an earlier time than needed for his contract."

No matter how much affidavits are worded,

their interpretation would be subject to the

individual contractor and . . . the net result

would be that the water would not be squeezed

out of the orders. . . . We feel strongly that

this problem must be definitely solved before

any allocation plan, which is based on the

contractor's statements of "needed" quantities,

can be successful.12

The coming of Pearl Harbor put an end to

vacillation over the question of price controls and the political feasibility of adopting a tight system of material controls. But

it did not, of itself, furnish the technical and

administrative know-how or the organizations necessary to design and implement

such a system, which perforce had to be

far more complex than any body of industrial controls ever before attempted. It was

nevertheless evident by the beginning of

1942 that neither the "end-product" approach of the priorities system, nor simple

allocations at the source of supply, could

separately provide the desired solution. The

priorities system failed to budget material

claims within the available supply. Allocations at the source could not satisfactorily

evaluate competing needs. Somehow a marriage of the two systems would have to be

effected. The Production Requirements Plan

(PRP), presently to be described, brought

about such a marriage. Unfortunately—to

press the figure of speech still further—this

turned out to be a "shotgun wedding" and

lacked certain fundamental prerequisites of

an abiding relationship.

The Production Requirements Plan

The mandatory application of the controversial Production Requirements Plan in

mid-1942 ushered in a significant stage in

the development of material control systems

for World War II.13 PRP—as the plan was

universally called—had its origin in the Defense Supplies Rating Plan (DSRP) instituted by OPM in May 1941.14

 DSRP was a

device to overcome the special difficulties

faced by manufacturers and vendors of

standard "shelf" items used either directly

or indirectly in defense production. These

items ran the gamut from commercial hard12

 Memo, Gen Hines, Ex Secy ANMB, for Blackwell Smith, 28 Aug 41, sub: Comments on Your

Proposed Basic Priorities Procedure Dated 25 Aug

41, Incl 2 to Barnes, Weekly Progress Rpt, 3

Sep 41.

13

 Detailed description of PRP, as well as considerable background and evaluated material on the

plan, is found in Novick, Anshen, and Truppner,

Wartime Production Controls, Chs. V and VI. These

chapters draw heavily from the widely circulated

WPB mimeographed memorandum, David Novick

for Knowlson, August 1942, sub: Description of

the Production Requirements Plan and Its Operation. A cogent analysis of PRP, together with the

steps leading to its adoption and ultimate demise,

is available in CPA, Industrial Mobilization for

War, Pt. II, Ch. 12. 14

 (1) OPM Press Release, PM 402, 19 May 41.

(2) Defense Supplies Rating Order P-6.
556 THE ARMY AND ECONOMIC MOBILIZATION

ware—nails, screws, nuts and bolts, hinges,

locks, ordinary hand tools, and similar

items—to fairly complex products such as

electric motors, pumps, compressors, and

other important components of modern mechanical equipment. The Army made direct

purchases of substantial quantities of such

items, but its chief concern was their availability on short notice, to contractors and

subcontractors turning out military equipment.

By the spring of 1941 inventories of many

standard commercial items had been depleted and producers experienced difficulty

in obtaining materials for their manufacture and replacement. The use of individual

preference ratings for this purpose was cumbersome and inadequate. Extensions of ratings on military prime contracts trickled

slowly down the chain of subcontractors and

were frequently prohibited by rules governing the extension privilege. In any case,

manufacturers of standard items would have

to accumulate from numerous purchasers a

sufficient number of individual extensions

for each preference-rating class to permit

material purchases in economical quantities.

Moreover, this accumulation of claims and

the subsequent manufacturing process took

place after instead of in advance of inventory

depletion of finished items. Where rating

extensions under military contracts were not

available, materials for replacement could

be obtained only by filing numerous PD-1

applications with the OPM in Washington.

This procedure, especially during the growing pains of OPM's organization, was costly

and fraught with repeated delays.15

Under DSRP a manufacturer could elect

to apply to OPM in advance for a preference rating to cover an entire quarter's supply of scarce materials, components, and related supplies. His application (OPM Form

PD-25) recorded his dollar volume of both

defense and nondefense work, consumption

and inventory status of materials for the past

quarter, and estimated material requirements for the current and succeeding quarters. OPM would review the application and

assign an A-10 rating to cover specific quantities of all approved materials, including

parts and assemblies, needed for defense purposes. This rating was to be used in place

of all individual ratings and extensions and

could itself be re-extended by suppliers on

the strength of a copy of the original rating

order. Thus by submitting one application

per quarter the manufacturer could hope to

be assured in advance of a sufficient quantity of materials to cover his entire quarter's

needs.16

By November 1941 some five thousand

firms were operating voluntarily under

DSRP and similar plans developed for

health supplies and for maintenance and

operating supplies. Priorities inflation had

by then rendered the A-10 rating of relatively little value for scarce metals and the

several quarterly plans were merged into

the more elaborate Production Requirements Plan.17

 Introduced at this time on

a voluntary basis, PRB provided for the

quarterly issue of preference ratings (in

some cases allocations) to cover the purchase of some two hundred materials, specified on OPM Materials List No. 1. Ratings

assigned under PRP were limited to specific

quantities or dollar value of materials but

ranged from A-1 through A-9—a substantial improvement over the flat A-10 rating

under DSRP. Nevertheless, many manufacturers working on high-rated military con15

 See above, page 516.

16

 Novick, Anshen, and Truppner, Wartime Production Controls, pp. 77-81. 17

 Preference Rating Order P-90, 3 Dec 41.
MATERIAL CONTROLS IN TRANSITION 557

tracts enjoyed a superior rating under the

existing priorities system and elected to remain outside PRP. Others refused to come

under the plan because it entailed much

paper work each quarter and was advantageous only for firms distributing their

products to large numbers of purchasers.

Pearl Harbor and the establishment of

the War Production Board made it evident

to the military services as well as to WPB

that the problem of materials distribution

had reached a crisis. Two steps would have

to be taken with a minimum of delay: (1)

the development of satisfactory estimates

of material requirements; (2) the replacement of existing material control schemes

with a system which would guarantee that

claims to scarce materials would be honored

once these claims had been validated. This

required that allotments to claimants be

limited to total available supplies.

Those responsible for the development of

PRP saw in it the answer to both these

problems. Why not generalize PRP on a

mandatory basis for all industry? With universal coverage, WPB could tabulate total

material requests from all industry for a

quarter in advance or perhaps longer. With

this information and knowledge of available

supplies from its various material branches,

WPB could make quantitative allocations

of materials to all industry on a plant by

plants basis. Total allocations would be kept

within available supplies, thus achieving

what the priorities system had failed to do.

On the day after Pearl Harbor, Donald

Nelson suggested to the ANMB that all

Army and Navy contractors be brought

within PRP under ANMB supervision. The

ANMB was unwilling to apply the plan to

fabricated materials, finished parts, and

subassemblies, so the matter was temporarily dropped.18

 Throughout the early

months of 1942, WPB continued to broach

the subject and the services studied the various versions of the proposal. Within the

Army the Quartermaster Corps was the

only service reacting favorably. This was

due largely to the fact that QMC procured

many standard commercial items from

large numbers of small firms for which the

PRP procedure was especially suited. Also,

because of its generally low ratings, the

QMC had fared poorly under the priorities system and welcomed any prospect of

an improvement in status.19

Within the Army, the most complete

analysis of the PRP proposal was submitted

by the Ordnance Department. In a closely

reasoned critique, Ordnance held: That

PRP was gravely defective as a means of determining quantitative material requirements; that it would seriously disturb the

rating pattern established by the priorities

directive (which would have to be the

starting point in any allocation procedure);

that it failed to provide the information essential to effective centralized allocations;

that its "horizontal" procedure was too inflexible to permit vital interim adjustments;

 20

 that it would make production

18

 Ltr, Nelson to Gen Hines, Secy ANMB, 8

Dec 41, and reply thereto, cited in Notes on the

Production Requirements Plan, [prepared by Col

John D. Millett] p. 2. 19

 (1) Notes on the Production Requirements

Plan, pp. 3, 6. (2) Yoshpe, Production Control in

the QMC, pp. 37-39. 20

 The term "horizontal" was used in World War

II to describe a materials control system which

involved direct dealings between the central control agency of the government and each individual

producing firm. Each firm would thus submit its

requirements directly to the control agency and

this agency would transmit allotments directly to

each firm. A "vertical" system, on the other hand,

channeled requirements estimates and material allotments vertically through the procuring agencies

and the contractual chain associated with each prime
558 THE ARMY AND ECONOMIC MOBILIZATION

scheduling and contract administration by

the services well-nigh impossible; and that

it was defective in other respects. While

conceding the procedural advantages for

certain types of material-using firms, the

Ordnance Department concluded that these

were far outweighed by the basic defects of

the plan.21

The Ordnance Department view was

shared by Ferdinand Eberstadt, the chairman of ANMB, whose survey of the problem

had convinced him of the superiority of a

vertical system of allocation. In various exchanges with WPB, Eberstadt and the services made clear their opposition to PRP and

the reasons therefor; they nevertheless offered full co-operation when WPB finally

announced its decision to adopt the plan on

a mandatory basis.22

Despite the objections of the services and

many of his own staff, Nelson finally decided

in favor of PRP. With the passage of each

month in early 1942 the priorities system

had fallen into increasing disrepute. Also,

in the spring of 1942, Nelson was under considerable criticism and pressure because of

WPB's considered estimate that the 1942

production target, including the President's

"Must" Program, could not be fulfilled.

Drastic action was necessary and the proponents of a revised mandatory PRP, with

a specific proposal to offer, gained headway.

On 13 May 1942, Nelson advised the Under

Secretaries of the War and Navy Departments that he had tentatively decided to

make PRP effective 1 July 1942 on a nationwide, mandatory basis. The plan was

announced to the press on 30 May, and on

10 June the implementing order (Priorities

Regulation No. 11) was issued—barely

three weeks before the plan was to take

effect.23

The new version of PRP provided for

quarterly allocation of scarce metals to all

industrial users under the plan. The metal

list included all important shapes and forms

of steel, copper, and aluminum as well as

some two dozen other metals and alloys.

Certain classes of user, including the construction, transport, public utilities, and

mining industries, as well as firms using

less than $5,000 of metals per quarter, were

exempt. Each metal-consuming firm under

the plan was required to submit to WPB

its comprehensive application, on Form

PD-25-A, by the middle of each quarter

preceding the quarter for which the metals

were required. Form PD-25-A served both

as a statement of total metal requirements

and as an application for a corresponding

allocation by WPB. Information covered

by the completed form included the previous quarter's shipments of the firm's products, classified into prescribed industry or

product groupings and applicable preference-rating classes. Also recorded for the

previous quarter was the consumption and

contract. A more picturesque nomenclature labeled

all ratings or allotments under the vertical procedure as "horse" ratings; those under the horizontal

method were referred to as "cow" ratings. Col

Hutchinson, ICAF Lecture (L46-31), p. 5. 21

 Ordnance Priority Docs., Exhibit 18, Comments on the Production Requirement Plan. This

seven-page single-spaced copy carries no signature

or date but was apparently written at the end of

April 1942. 22

 (1) Notes on the Production Requirements

Plan, pp. 3-8. (2) ASF Annual Rpt, 1942, p. 20.

(3) Memo, Eberstadt for Batt, WPB, 21 Mar 42,

sub: Suggested Organization of Commodity Committees and Procedure for Commodity Allocation.

(4) Memo, Eberstadt for Knowlson, Vice Chmn

WPB, 9 Aug 42. (5) Ltr, Eberstadt to Ernest Kanzler, 12 Sep 42, cited in CPA, Industrial Mobilization for War, pp. 481, 483.

23

 For an indication of the opposition within WPB

to the adoption of PRP, and the pressures which

led Nelson to decide in its favor, see CPA, Industrial Mobilization for War, pp. 457-63.
MATERIAL CONTROLS IN TRANSITION 559

end-of-quarter inventory status, of each

listed metal. For the advance quarter, estimated metal requirements as well as estimated shipments of finished products (similarly classified by product groups and rating classes) were to be listed.

Thus the War Production Board would

receive in the middle of the third quarter

each applicant's record of second-quarter

production and related metals consumption

together with his estimated production and

metals requirements for the fourth quarter.

By summarizing all applications, the WPB

Requirements Committee would have the

estimated total requirements of each metal

for all industry.24 Corresponding estimates

of supply would be furnished by the WPB

material divisions. It would then be the

task of the Requirements Committee to allocate the available supply of each metal

among the various metal-using industries.

For this purpose some 230 metal-using industry groups had been set up. The group

allocations made by the Requirements

Committee would be transmitted to the

various WPB industry and materials

branches. These would in turn decide upon

the amounts to be allocated to individual

plants in each industry group, staying

within the total allocation for each group

and taking account of each firm's inventory

position. Firms would be notified of their

allocation in sufficient time to permit them

to place their orders for the quarter with

their suppliers.

Although the term "allocation" was generally used in connection with the distribution of metals under PRP, the system was

actually a hybrid combination of allocations

and preference ratings. The individual direction of all shipments of all materials covered by PRP was manifestly an administrative impossibility. The larger part of the task

of materials distribution to metal-using firms

was accomplished by making quantitative

purchase authorizations supported by preference ratings (usually not more than three

different grades for a single purchaser). Total authorizations were kept within total

available supply but most individual purchasers were obliged to locate their own suppliers. Direct allocation was used to cover

the more urgent cases or where otherwise considered feasible and desirable.

Preference ratings continued, of course, to

be used for all materials outside the coverage

of PRP.25

To meet its obligations and needs under

PRP, the War Department—operating

through Headquarters, ASF, and the

ANMB—undertook numerous changes in

internal organization and procedures. It

also recruited and assigned sufficient staff

to provide adequate representation and collaboration with WPB. On 14 August 1942

the Priorities Branch of the Resources Division, ASF, was redesignated the Priorities

and Allocation Branch and made responsible

for the supervision of Army operations under

PRP. As early as 1 June, the ANMB had

created an Allocations Steering Committee

to collaborate with WPB in the establishment and operation of the plan. Among the

efforts of this committee was the issuance of

the series PRP Procedural Instructions for

the use of military staff members concerned

with the details of administration.26

24

 Except for small firms and exempted industries. These would receive their requirements under

existing or special procedures out of a "kitty" reserved for the purpose.

25

 (1) CPA, Industrial Mobilization for War, pp.

464-65. (2) Comments cited above, note 21. 26

 (1) Resources Div Office Order 25, 14 Aug 42.

(2) Notes on the Production Requirement Plan, p.

7. (3) Yoshpe, Production Control in the QMC,

p. 39. (4) ICAF R60, Priorities and Allocations, pp.

48-50.
560 THE ARMY AND ECONOMIC MOBILIZATION

The most important function of Army

personnel in the administration of PRP was

membership in the numerous WPB committees at various echelons concerned with the

actual making of allocation decisions. The

composition and status of these committees

was in a constant state of flux as WPB sought

to gear its own organization to the novel and

unpredictable administrative requirements

imposed by the sudden adoption of PRP. In

making its allocation decision, WPB needed

the advice and assistance of the military procuring agencies. These in turn had a vital

interest in seeing that both the industry

groups and individual firms producing important military equipment actually received

sufficient metal supplies for the purpose. For

the third quarter of 1942 the WPB Requirements Committee subdivided its broad task

of allocation among numerous product

group subcommittees upon which ANMB

was represented. At the processing level for

specific allocations to individual plants, the

ANMB was also represented by analysts

who reviewed the proposed allocations made

by WPB analysts. The Army representatives for ANMB were drawn from the Production Division, ASF. With the gradual

curtailment of ANMB operations, the ASF

provided direct representation to WPB,

headed at the operational level by the Army

PRP officer. At the broad policy level, the

Army was represented by Maj. Gen. Clay,

the Army member of the WPB Requirements Committee.

Operations under PRP for the third quarter of 1942 represented a series of improvisations which differed radically from both

the announced plan and its later developed

form. The time between the plan's announcement and the effective date of operations was simply too short to permit

either industry or the relevant governmental

agencies to develop the necessary organizations, procedures, training programs, and

actual performance required to implement

the plan. Additional complicating factors

were the appearance of the new Priorities

Directive of 12 June 1942, requiring the

rerating of tens of thousands of contracts

and purchase orders to conform to the new

AA rating series, and the introduction of

Priorities Regulation No. 10. This regulation imposed upon industry the Allocation

Classification System, which required all

manufacturing firms to place a set of enduse symbols upon each purchase order or

contract outstanding or issued after 1 July

1942. The purpose of the system, which

partly duplicated the function of preferencerating symbols, was to enable WPB and

others to identify the end use and therefore

the relative importance to the war effort

of each purchase. The physical burden and

the complex problems of interpretation thus

placed upon industry were so great that the

completion date of this operation was delayed beyond the time when it could be of

any use in making even fourth-quarter allocations. Disillusionment with the end-use

classification scheme resulted in its revocation on 5 November 1942.27

Many other shortcomings of PRP appeared during its first trial period, so that

its full operation was postponed until the

fourth quarter of 1942. The administrative

and procedural difficulties were considerably

reduced in the fourth and subsequent quarters. But the bitter third-quarter experience,

combined with increased pressure from the

services as well as numerous elements within

WPB for a vertical system of material controls, indicated clearly that PRP's days were

numbered. On 2 November 1942 the Controlled Materials Program was announced,

27

 CPA, Industrial Mobilization for War, p. 470.
MATERIAL CONTROLS IN TRANSITION 561

with provision for retaining PRP on a diminishing scale until the full transition to

the new system could be effected.28

The question of whether PRP actually

"failed" or whether it had not been given

a fair chance was the subject of debate long

after its demise. Considerable criticism has

been directed at the services, especially the

Army, for their "implacable" and "stubborn" hostility toward the plan. This criticism was frequently accompanied by the

charge that the Army and Navy wished to

"take over" and "run" the wartime economy.29

 Apart from the fact that the Army

and Navy supplied vigorous co-operation

in the plan's administration, these criticisms

are wide of the mark. The objections of the

services to PRP rested in a rational analysis

of its fundamental weaknesses—defects

which, as noted above, had been foreseen by

the Army's Ordnance Department and appeared to be of such nature as to preclude

any possibility of the plan's success in meeting the basic problems at hand.

The overriding defect of PRP, in the eyes

of the Army as well as others, was its "horizontal" approach to the control and distribution of all materials.30

 This approach, for

the great bulk of military procurement, had

certain inherent weaknesses which crippled

the control procedure at every important

stage of its planning and execution. The

first and most obvious weakness of the horizontal approach was its failure to go directly

to the task of estimating material requirements. Instead of beginning with carefully

balanced production programs drawn by

the claimant agencies responsible for defining the major objectives of the war effort,

PRP relied upon the statements of thousands of individual manufacturers each interested in obtaining what he considered a

satisfactory share of materials. Not only

were total requirements likely to be overstated. Because they were based upon the

projection of past input-output ratios for

production in large part different from that

in future quarters, the stated requirements

did not reflect the specific needs of the future period for which materials were requested. Moreover, the thousands of requests from separate manufacturers bore

no readily identifiable relationship to each

other or to common end-product programs.

Hence it was impossible to determine the

material requirements essential to the execution of any given program or segment

thereof or even for the completion of specific, individual end products. In the absence of this information, it was impossible

to make allocations which could be expected to achieve the purposes in view.31

This defect was magnified and became

painfully apparent when it was necessary to

28

 The overwhelming difficulties confronting the

initial quarter's attempt to operate under PRP, and

some of the bizarre results, are excellently portrayed

in CPA, Industrial Mobilization for War, pp.

465-72. 29

 For example, "The unremitting opposition of

the military was rooted in two considerations. The

first was a belief that the control of war production was a military and not a civilian function,

one to be exercised by the Army and Navy and not

by the War Production Board." Novick, Anshen,

and Truppner, Wartime Production Controls, p. 133.

Also, ". . . the idea of military control of the economy in time of war was firmly held and vigorously

advocated by officials of the War and Navy Departments and the military chiefs. . . . Military leaders . . . never abandoned the sincere conviction

that they could run things better and more expeditiously than could the civilians. This approach was

involved, for example, in the transition from the Production Requirements Plan to the Controlled Materials Plan." U.S. Bureau of the Budget, The

United States at War, pp. 280-81.

30

 See note 20, above. 31

 This point is well developed in CPA, Industrial Mobilization for War, p. 469.
562 THE ARMY AND ECONOMIC MOBILIZATION

make allocations substantially less than estimated requirements. Faced with the necessity of making allotments equal to only 80

percent of stated requirements, WPB had

no satisfactory method of making selective

cutbacks of less important programs. This

situation was particularly evident in the

fourth quarter of 1942 when the Requirements Committee was forced to make

across-the-board cuts for all industry

groups. Such a makeshift technique was

bound to result in anomalies. It did not

mean a simple 20-percent reduction in all

programs, unsatisfactory as that might have

been. Because of the impossibility of insuring that all subcontractors under an important prime contract would receive balanced

allocations, it was impossible to guarantee

any desired percentage of completion for

any given program.32

The second fundamental defect of the

horizontal method was its emasculation of

the power of the procuring agencies to control their own programs and make intelligent

adjustments in logistical plans, production

schedules, contracts, and all related matters.

Under a vertical control system, material

allotments by WPB would be given directly

to the Army, Navy, and other claimant

agencies, to be subdivided by them to the

best advantage among their various programs. Material shortages, indicated by an

allotment less than requested by claimant

agencies, called for prompt adjustments in

the production schedules of hundreds of

prime contractors. For example, a shortage

of copper for the Army would require a rebalancing of programs among the various

technical services. Within a single service

alone, such as Army Ordnance, this might

require the curtailment of production by

certain copper-using contractors under the

ammunition program while leaving other

schedules fixed. At the same time it might

call for an increase in the schedules of firms

equipped to use steel. Decisions of this kind

could be made only by Army administrators

familiar with the technical and strategic

needs of the Army and having an intimate

knowledge of Ordnance contracts, production schedules, the capabilities and performance records of various contractors, and a

variety of other considerations.

As already indicated the horizontal

method of allocation, typified by PRP,

called for direct allocations by the War Production Board to each firm in the economy.

It thus removed from the procuring agencies effective control over the internal management of their own programs and transferred this control to another agency

technically unqualified and basically not responsible for the task. It imposed an insuperable administrative burden upon the

central control agency, making it responsible

for detailed decisions vitally affecting the

individual contracts and programs of the

Army, Air Forces, Navy, Maritime Commission, Petroleum Administrator, Rubber

Director, and all the other claimant agencies

responsible for carrying out their respective

32

 For the fourth quarter of 1942, the Program

Adjustment Committee, a subsidiary of WPB's Requirements Committee, recommended allocations

to military programs in the following ratio to stated

requirements: Carbon steel 80 percent; alloy steel,

871⁄2 percent; stainless steel, 80 percent; copper

for aircraft and radio, 871⁄2 percent; copper for

other military items, 82 percent. These recommendations received the concurrence of the Army

and Navy, in view of the lack of any alternative

and were approved with few exceptions by the

Requirements Committee. But because of the unsatisfactory effects upon particular programs, the

services insisted on the right to make adjustments

by means of material-division allocations at the

mill level. These allocations, of course, ran counter

to PRP procedure and hindered the full operation

of the plan. Notes on the Production Requirements

Plan, pp. 10-12.
MATERIAL CONTROLS IN TRANSITION 563

segments of the war effort. Some idea of the

nature of this administrative burden may be

inferred from the mechanics required to

accomplish interim allocations needed for

the sudden expansion of a single program,

such as amphibious craft for the Army. Instead of the transfer of a single steel allotment by WPB to the Army, to be passed

down to users via the prime contractor, the

War Production Board under the horizontal procedure would have to undertake simultaneous negotiations with dozens and

perhaps hundreds of subcontractors at all

echelons in an attempt to determine their

additional steel requirements and make the

necessary additional allocations.

In the face of these shortcomings of the

horizontal procedure, the services felt that

they would be derelict in their basic responsibilities to acquiesce in the permanent retention of PRP. That PRP was unsuited

to the needs of the services is evident from

the history of its origin and the circumstances of its adoption on a mandatory

basis. It came into being as an exception

to the basically vertical procedure of the

priorities system in order to accommodate

the special needs of firms for which the

horizontal approach to materials distribution was more appropriate. It was made

general and imposed upon all industry at

a time of major crisis when no well-developed alternative was available and when

any action promising an improvement was

better than none. Nevertheless, the efforts

of the Army and Navy to retain control

over the internal management of their own

programs exposed them to the charge of

attempting to "take over the economy."

While PRP did not provide the "solution" to the materials distribution problem,

it cannot be recorded as a "failure." It was

the first systematic attempt to balance total

material requirements against available

supplies. It brought new understanding of

the necessity for the careful programing

of national requirements and many collateral actions without which any control system was foredoomed to failure. Its horizontal methodology was a superior technique

for insuring the flow of materials to an important segment of the wartime economy,

a fact which was recognized in the B-product procedure of the Controlled Materials

Plan.33 Furthermore, it made a vital contribution in recording and controlling the

inventory position of material users. By

bringing into balance manufacturer's inventories of scarce materials, PRP laid a solid

foundation for the successful operation of

the Controlled Materials Plan which followed.34

Finally, the PRP experience provided a

rich lesson in the administration of a war

economy. This lesson was the full appreciation—on the part of the Army, Navy, War

Production Board, and all others concerned—of the indispensability of adequate

preparation in launching a nationwide program intimately affecting all parts of the

economy. Such preparation would of necessity require careful and meticulous planning,

the provision of adequate staff and facilities

at all levels, and the intensive training of

personnel in all operating agencies of government and private industry—all far

enough in advance of the effective date of

operation to insure a smooth transition to

the new system. The administrative success

of the Controlled Materials Plan, and the

33

 See below, pages 591 ff. 34

 Ltr, Novick to Gen Smith Chf of Military History 15 Feb 55 in OCMH files. It is Mr. Novick's

view that the failure to deal with the inventory

problem during the Korean crisis resulted in less

satisfactory operations under CMP in 1951-53

than in World War II.
564 THE ARMY AND ECONOMIC MOBILIZATION

later contract termination and settlement

program, owed a heavy debt to the experience acquired under PRP.

Special Procedures for Machine Tools

An important contribution to the basic

philosophy of material control was made by

developments in the distribution of machine

tools. Machine tools were the first and most

important class of items in short supply at

the beginning of the defense period, and

remained so until well into the war. The

first extensive application of priorities was

made to machine tools with the result already described—the establishment on 27

November 1940 of the new A-1-a category

devoted to tool priority. The necessity of top

priority for machine tools lay not only in

their basic essentiality to major production

programs such as aircraft, ordnance, and

shipbuilding; machine tools were necessary

for their own reproduction.35

By the beginning of 1941, it was evident

that the priorities system alone could not

provide adequate control over the production and distribution of machine tools. Some

method was needed for refining the degree

of preference within each rating category,

especially at the top of the scale where the

congestion of orders was greatest. Various

proposals led to the adoption on 7 July 1941

of a "master preference list," compiled by

ANMB and circulated to machine tool

builders by OPM.36 This list gave a numerical urgency standing within each rating

band to a total of 676 military prime contracts considered of top importance and requiring machine tools for their completion.

Machine tool orders would first be filled for

contractors having the A-1-a rating in the

sequence of their standing on the master

preference list. Then all A-1-a orders without urgency standings would be filled in accordance with existing priority regulations.

The same procedure would be followed

down the line for each preference-rating

class. Unfortunately, this did not result in

balanced distribution since the urgency

standings, like the preference-rating classes,

were "open ended" and permitted contractors high on the list to order more tools than

they needed and to specify delivery earlier

than actually required. The inevitable result

was the hoarding and inefficient use of tools

by some contractors while others saw their

important production programs delayed for

lack of similar tools. The situation was later

vividly described by an official of the machine tool industry:

The Machine Tool Industry very early in

the war effort made a survey of 50 of the

highest-ranking contracts on the Preference

List. We found there just what you will find

in any war effort . . . We had new machines

pouring into a plant that for six months would

have no sewer. We had machines pouring

into a plant where the foundations had still

to be put into the ground and where at least

two months would be required before the

35

 The machine tool industry was its own greatest

customer before the war. A concise description of

the nature and mobilization problems of the machine tool industry, including bibliography, may

be found in Industrial College of the Armed Forces

SR49-26, The Machine Tool Industry (15 April

1949), ICAF Library. See also ICAF R60, Priorities and Allocations, Continued Difficulties in the

Application of Priorities to Machine Tools, pp. 18-

22, and sources cited therein.

36

 Supplemental Order 1 to OPM General Preference Order E-1, 7 Jul 41. The original E-1 order

(26 March 1941) had assigned an A-10 rating to

all defense orders not otherwise rated. It also provided that delivery dates for equally rated orders

could be decided by agreement between producers

and consumers.
MATERIAL CONTROLS IN TRANSITION 565

machines could be brought in out of the

weather and put under cover.37

Quantity limitations were finally imposed,

effective 15 January 1942, with the issuance

of OPM General Preference Order E-1-a

and a revised master preference list. The

new list specified the number of machine

tools which could be purchased under each

urgency number; the urgency standing

lapsed when tool orders up to the

prescribed number had been accepted by

builders.38

The new master preference list was a

marked improvement over its predecessor,

but it was obsolete even before it could be

issued. The tremendous increase in procurement contracts after Pearl Harbor resulted

in a new flood of high-rated machine tool

orders which had to be fitted into the list.

Experience with the previous revision, which

had required four months to consummate,

indicated that existing procedures were entirely too cumbersome. Each of the supply

services of both the Army and Navy had to

be consulted for any material change since

all were likely to be affected, and final clearance was required by OPM. Moreover, it

was now evident that distribution controls

alone could not resolve the basic shortage of

capacity in the machine tool industry.

Under the leadership of Ferdinand Eberstadt of the ANMB, the problems of increased production and improved distribution were attacked simultaneously. With the

aid of government financing of plant expansion and the development of the "pool

order" system, machine tool output was

raised in 1942 to six times its prewar peak.

On 30 April 1942 the new General Preference Order E-1-b introduced a system of

machine-tool allocations. Under this order

75 percent of the industry's capacity was allocated to military (including Maritime)

needs; the remainder went to civilian and

foreign orders. The ANMB subdivided the

military allocation among the various services on the basis of their relative quantitative requirements as represented by orders

already on the books of manufacturers. This

was done for each class of tools, so that Army

Ordnance, for example, would receive 10

percent of the total capacity available for

the production of 14-inch engine lathes if

its orders for that type represented 10 percent of the total of all similar orders upon

the industry. This 10 percent, in turn, would

have to be spread among the various producing firms handling that type of equipment so that no one service could pre-empt

the best facilities available.39

The beneficial effect of the new system of

allocations was noticed almost immediately.

With each contracting agency held to a fixed

percentage of capacity, a premium was

placed on the most efficient use of that capacity. Overordering and undue advance in

delivery rates was held in check as interservice competition at the local procurement

level was eliminated. Furthermore, with

each service assured of scheduling control

over its own share of capacity, adjustments

could be made quickly and as needed to

37

 Tell Berna, The Machine Tool Industry in

World War II, 26 Mar 46, ICAF Lecture (L46-

60). Mr. Berna was general manager of the National Machine Tool Builders Association. An indication of the congestion in the top rating classes

and the relative position of orders lower in the

scale is found in the number of urgency standings

in the several classes under the original master preference list: A-1-a, 195; A-1-b, 297; A-1-c, 92;

A-1-d, 59; A-1-e, 5; A-1-f, 7; A-1-g, 21. Incl

to Barnes, Weekly Progress Rpt, 9 Sep 41. 38

 (1) OPM General Preference Order E-1-a, 12

Jan 42. (2) Barnes, Weekly Progress Rpt, 13 Jan

42 and attachment.

39

 Capt Elmer R. Henning, USN, Machine Tools

in World War II, 28 Feb 46, ICAF Lecture (L46-

41).
566 THE ARMY AND ECONOMIC MOBILIZATION

supply low-rated programs when the requirements of balance dictated a change in

status.

Although the system of allocations under

E-1-b was still vulnerable to pressures for

preference, its basic principle was sound and

represented a major contribution to the rationale of materials distribution. This principle—the rationing of the total available

supply among the several claimant agencies,

to be further subdivided according to the

same principle—became the foundation for

the Controlled Materials Plan. Before the

year was out, CMP was adopted as the central control device for the nation's war production program.40

40

 The following is a representative view of the

effectiveness of E-1-b: "No device is perfect, but

no means of bringing order out of chaos was found

during the course of World War II which worked

as well as this one. In any future emergency we

should place our initial reliance on a similar procedure and only modify it if demanded by the

situation as a whole. I have an idea that little

modification will be found possible or desirable."

Ralph Flanders, The Machine Tool Industry in

World War II, 26 Mar 46, ICAF Lecture (L46-

60). Mr. Flanders, formerly president of the Jones

and Lamson Machine Tool Company, was later

president of the Federal Reserve Bank of Boston.

Subsequently he became United States Senator from

Vermont.
CHAPTER XXV

The Controlled Materials Plan

The Adoption of the Controlled

Materials Plan

The Controlled Materials Plan, officially

announced to the public on 2 November

1942, has been generally acclaimed as the

instrument which finally resolved the complex problem of material and production

controls for the American economy in

World War II. In both its original form

and in its subsequent numerous modifications and refinements, CMP was the product of the combined thinking and experience of many individuals and many agencies. Yet despite its varied background, the

plan owed perhaps as much to the Army

as to any other single agency for its conception, its development, and its ultimately

successful operation.

As already indicated in earlier sections,

by mid-1942 the success of America's war

production program, and with it the prospects of ultimate victory for the United

Nations, appeared to rest upon the discovery of a satisfactory system for the distribution of basic industrial materials. The

summer and early fall of 1942 were unquestionably the lowest point of the war in

terms of morale on the war production

front: Production was rising but fell far

short of the goals established by the President and the armed forces. The War Production Board, the military services, and

the other wartime agencies were still in the

throes of expansion and successive reorganization. American industry was undergoing

the last of a series of major efforts to convert

to war production, with all the confusion

attending its adaptation to a regime of complex and uncertain governmental control

measures. The American public—harried

by the simultaneous pressures and uncertainties of the heavy draft of its manpower

for military service, large-scale migration

of defense workers and their families to

centers of war production, and acute shortages of housing and other consumer goods

and services—looked to Washington for

guidance out of the confusion.

In such an atmosphere, both military and

civilian leaders responsible for war production chafed under the inadequacy of existing instruments for discharging their heavy

responsibilities. Jurisdictional disputes and

interagency friction were inevitable as rival

solutions to common problems were urged.

Basic requirements of essential national

policy and procedure were often obscured

by interagency suspicion and the labeling

of proposals and programs as "military" or

"civilian." At the very time when the problem of selecting a definitive material control

system reached its crisis, the major wartime

agencies were engaged in a number of

heated and widely publicized controversies.

These included the aforementioned Feasibility Dispute over the capacity of the economy to support military programs; the relative priority of basic production and facility

expansion programs; the final authority to
568 THE ARMY AND ECONOMIC MOBILIZATION

schedule production; and the scope of operations to be assigned to the respective

agencies at all echelons.

The announcement of the Controlled

Materials Plan to a large degree put an end

to this mood of doubt, dissension, and frustration. The boldness of the plan, the challenge of putting it into effective operation,

and the knowledge of its irrevocability all

captured the imagination. For it was generally understood in Washington that with

the adoption of CMP "the chips were

down." Just as D Day was later to represent the supreme Allied effort on the military front, so the launching of CMP represented the supreme effort on the war production front. In view of the tremendous

stakes, failure was unthinkable; but nothing less than the commitment of the entire

economy to the principles of CMP would

suffice to make it effective. Thus the Controlled Materials Plan, apart from its intrinsic importance, became a rallying point

around which the various agencies and war

production leaders gathered to submerge

their differences and address themselves to

the common task which lay ahead. Although important disagreements over major

aspects of the plan appeared in the course

of its development, these were virtually all

resolved by the time of the plan's full operation and were never strong enough to

destroy the fundamental unity of purpose

which had been achieved.

The conceptual basis of the Controlled

Materials Plan had been indicated as early

as 1938 by Army planners in the Commodities Division, OASW.1

 Probably because of

the influence of the prewar plans, the Army

was the earliest advocate of a tight system

of material controls in areas where priorities were inadequate. In August 1941,

Quartermaster General Gregory outlined

and strongly advocated a system which in

principle was indistinguishable from the

later Controlled Materials Plan:

A system of allocating all critical and strategic materials should be set up and administered by some agency with full knowledge of

both defense and non-defense requirements

and present and prospective supplies thereof.

The War Department should be required to

compute its requirements covering critical and

strategic materials for a given period and submit the same to the above agency. This agency

will, in turn, make an allocation of available

materials to the War Department. . . 

determination of the allotment to be made to

each supply arm and service would be made

by a War Department board or committee,

and would be based upon the relative importance of the requirements of the respective

arms and services. Even though a supply arm

or service should not receive an allotment

equal to its total requirements under this system, it would be able to plan for substitutes

or defer procurement until such materials

were available.2

But the Quartermaster proposal was a voice

crying in the wilderness. As long as the more

powerful claimants were able to operate under the priorities system, proposals for a

sweeping reform lack sufficient urgency to

force the issue. Nearly a year later, after

PRP had been made mandatory, an officer

in the Resources Division, ASF, criticized

the conceptual failure of PRP to tie material

distribution to programed requirements and

suggested a system substantially equivalent

to CMP:

It is suggested that the only possible basis

of allocating critical materials and securing

intelligent adjustment of programs to quantities so allocated, in the case of military, naval,

and facilities construction requirements, is to

make such allocations at the level of the re1

 See above, pages 92-93.

2

 Memo, Gen Gregory, TQMG, for USW 16

Aug 41, sub: Revision of Priorities System, file

QM161-PC-Proc. (Priorities).
THE CONTROLLED MATERIALS PLAN 569

quirement programs themselves; and to impose on the originators of these requirement

programs the responsibility for adjusting their

programs to such allocations, when they are

reduced below original program requirements.3

By the end of the summer of 1942, suggestions and proposals for the "ideal" materials distribution system had become so

numerous as to suggest the existence of a nationwide essay contest. Army Ordnance had

long advocated its own warrant plan, Navy

had a similar plan, General Motors and the

steel industry each had plans, and many individuals and trade associations presented

their ideas ranging from fragmentary suggestions to elaborate and complex proposals.4

Within the War Production Board there

were wide divergencies of opinion as to the

most suitable system, with varying emphasis

on horizontal versus vertical allocation. The

most important WPB plan was that developed by Ernest Kanzler, the deputy chairman on Program Progress. The Kanzler

plan helped to crystallize WPB opinion in

favor of a vertical system.5

The prime mover behind the adoption of

the Controlled Materials Plan was not, however, initially a representative of industry

or the War Production Board, but the new

chairman of the Army Navy Munitions

Board—Ferdinand Eberstadt. Eberstadt

had been active in breaking the machine

tools bottleneck and was impressed with the

possibility of extending the principles of the

E-1-b procedure to important basic materials.6

 Familiar with the problems of the

Army and Navy, he was convinced of the

necessity for a vertical system of materials

distribution. The specific incident which set

in motion the chain of events culminating

in the adoption of CMP was a memorandum sent by Eberstadt on 9 August 1942 to

James Knowlson, WPB's director of Industry Operations. Following a brief summary

of the evolution of material and production

controls up to that time, Eberstadt stated:

It is submitted that with the Country substantially on an all-out war basis, the principles

of Order E-1-b can now be extended to other

fields of important but scarce materials, with

beneficial results.

To fit the foregoing proposal into existing

organizations, it is contemplated that the Requirements Committee [WPB] would allocate

broad bands of the various materials in question to the military, basic economic, and foreign uses for a period, say of 3 months in

advance. A.N.M.B. could then allot to the

various Military Services, Aircraft, Ordnance,

Ships, etc., their respective proportionate

amounts of these materials and they in turn

would schedule them to the best interests of

their respective programs. This type of allocation, it is presumed, would be confined to

those materials with respect to which a real

scarcity exists.

After setting forth various possible ramifications of the proposal, including provision for

horizontal allocation in appropriate cases,

the memorandum concluded:

The above system has the merit of confining

decisions at the highest levels to broad ques3

 Memo, Maj Maurice R. Scharff, Power Unit

Facilities Sec, for Ex Priorities Br, Resources Div

SOS, 27 Jun 42, sub: Production Requirements

Plan and the Control of Critical Material. 4

 CPA, Industrial Mobilization for War, pp. 484-

85.

5

 Ibid., p. 482. The Kanzler plan was itself similar to earlier plans: "Mr. Ernest Kanzler's proposed

scheduling plan . . . is in essence identical to

that presented by the Ordnance Department and

the Allocations Steering Committee to the Army

and Navy Munitions Board and the War Production Board some months ago, and is the Ordnance

scheduling plan with the methods for handling

policy distribution added." Memo, Lt Col James

Boyd Office for Liaison and Co-ordination SOS for

ACofS for Materiel, 16 Sep 42, sub: Scheduling

Plan, and incl, Analysis of Scheduling and Material

Control Program as Outlined by Mr. Ernest

Kanzler. 6

 See above, pages 564 ff.
570 THE ARMY AND ECONOMIC MOBILIZATION

tions and decentralizing the detail . . . . This

plan recognizes and fits into the present broad

lines of organization. The basic distribution

of materials between the military, basic economic, Lease-Lend, and other export would be

made by the War Production Board . . . but

the actual scheduling and directing of materials, particularly in the military field, would

be taken over by those who are responsible for

procurement and production, which can not

be carried out without control of the flow of

materials in accordance with their schedules.7

Knowlson turned the Eberstadt memorandum over to Robert Nathan, chairman

of WPB's Planning Committee. Nathan immediately recognized its significance and

enthusiastically sent a direct reply to Eberstadt: "I find your memorandum extremely

interesting and provocative. Without question, many of the proposals you suggest are

extremely important and we should move

in that direction as quickly as possible."

Nathan then went on to state three prerequisites to the satisfactory operation of such

a plan: (1) balancing of the over-all production program within the available supply

of critical materials; (2) proper scheduling

of end items and components in the balanced program; (3) adoption of a tight

system of disbursing materials to meet the

schedules.8

Eberstadt's energy and administrative

ability had been noticed by WPB leaders as

early as July, at which time he was tendered

an appointment within the War Production

Board. After his 9 August memorandum, he

was again approached, this time with the

offer of an appointment carrying the broad

responsibility for putting into effect such a

plan as he had advocated.9 As a result,

Eberstadt left the ANMB on 20 September

1942 to become vice chairman of the War

Production Board in charge of Program

Control. In the interim he had effectively

prepared the military services for the assumption of heavy responsibility in the new

undertaking and was able to assure the War

Production Board of their wholehearted cooperation.10

WPB's confidence in Eberstadt was justified. Immediately upon his appointment, he

set about the creation of a Committee on

Materials Control Plan with broad representation from WPB and the services. Beginning with its first meeting on 30 September, this committee and its principal subcommittee—working behind locked doors

in a series of meetings and conferences

rarely equaled in intensity of purpose—

hammered out the plan which was to organize and integrate the nation's economy

for the duration of the war. The formal

announcement of the Controlled Materials

Plan on 2 November 1942 followed Eberstadt's appointment of WPB by only six

weeks.11

Basic Features of CMP

The Controlled Materials Plan was a system of rationing applied to the three most

important industrial materials—steel, copper, and aluminum—about which the

7

 Memo, Eberstadt, Chmn ANMB, for Knowlson,

9 Aug 42, sub: Priorities. 8

 Memo, Nathan, Chmn Planning Com WPB, for

Eberstadt, Chmn ANMB, 27 Aug 42. 9

 CPA, Industrial Mobilization for War, p. 260.

10

 Ltr, Eberstadt, Chmn ANMB, to Kanzler, Dir

Gen for Opns WPB, 12 Sep 42. 11

 Further details on the initial formulation of

CMP are found in: (1) CPA, Industrial Mobilization for War, Pt. III, Ch. 12, passim, especially

pp. 485-86; (2) U.S. Bureau of the Budget, The

United States at War, pp. 304-07. For a general

description of the nature and operation of CMP,

see Novick, Anshen, and Truppner, Wartime Production Controls, Ch. VIII. Additional details pertaining to the Army's experience under CMP may

be found in ICAF R60, Priorities and Allocations,

The Controlled Materials Plan, pp. 53-97.
THE CONTROLLED MATERIALS PLAN 571

whole war production program turned. It

departed substantially from the methodology of its two major predecessors, the priorities system and the Production Requirements Plan. In contrast to the priorities system, which was an open-ended, currencytype system, CMP limited its material allotments to available supplies and imposed

a closed system of accounting and auditing

which made impossible the inflation of

claims to scarce materials. Since no allotments were issued for materials beyond the

aggregate capacity of suppliers, each recipient of an allotment was assured of receiving his allotted materials on schedule.

By contrast with PRP, CMP was a vertical

control system enabling it to accomplish

certain indispensable objectives which were

administratively impossible under a horizontal plan. These objectives may be

summed up in the term "program control,"

and their attainment flowed from three outstanding aspects of CMP: (1) Its estimates

of material requirements were, so far as

possible, derived from approved production

programs specifically geared to the war effort; (2) it assured the completion of important end products by providing supplies

of controlled materials to all subcontractors

associated with a given prime contract; (3)

it decentralized detailed operations to the

agencies responsible for conceiving and administering the several production programs.

CMP was constantly modified and refined

both before and after it went into full effect,

but the basic features essential to an understanding of Army operation under CMP

may be briefly described. The plan's operational cycle began with the quarterly determination of requirements for controlled materials by a number of claimant agencies

under general rules laid down by the WPB.

The claimant agencies were of two kinds—

procuring and nonprocuring; collectively,

they represented all users of controlled materials throughout the economy.12

 Material

requirements of the procuring agencies were

to be based upon their established or tentative production schedules for all procurement programs. The mechanics of requirements determination involved the use of unit

bills of material supplied by prime consumers (prime contractors) to their respective contracting agencies. The unit bill of

materials covered the material requirements, per unit of finished product, of all

secondary consumers (subcontractors and

suppliers at any level) as well as of the prime

consumer. The quantity of each controlled

material shown in the unit bill was multiplied by the number of units of the end

product required to be delivered in each

month in accordance with the governing

production schedule. An appropriate "lead

time"—the number of months between the

required date of shipment of the controlled

material by the supplier and the completion

of the finished end product—was shown in

the bill of materials. The claimant agency,

in tabulating its material requirements,

would apply the lead time to each production schedule in order to show correctly the

month in which the controlled materials

were actually required. Nonprocuring claimant agencies, such as WPB's Office of Ci12

 At the time of CMP's adoption the seven claimant agencies were: War Department, Navy Department, Maritime Commission, Aircraft Scheduling

Unit (agent for Army Air Forces and Navy Bureau

of Aeronautics), Office of Lend-Lease Administration, Board of Economic Warfare, and Office of

Civilian Supply, WPB. On 8 January 1943 six additional claimant agencies were announced: National

Housing Agency, Office of the Rubber Director, Office of Defense Transportation, Petroleum Administration for War, War Food Administration, and

WPB Facilities Bureau. CPA, Industrial Mobilization for War, p. 668.
572 THE ARMY AND ECONOMIC MOBILIZATION

vilian Supply, made less use of bills of materials; their estimates were based chiefly on

applications from manufacturers, past experience under PRP, general forecasts of

consumption needs, and whatever additional

specific information could be obtained.

All claimant agencies were obliged to present their statement of requirements to

WPB a full quarter in advance. The WPB

Requirements Committee, which had the

task of making bulk allotments of each controlled material to each claimant agency,

was a representative body upon which all

claimant agencies had membership. The Requirements Committee, working through a

large staff and various subcommittees,

would obtain from the appropriate material

division in WPB the latest estimate of the

supply of each controlled material for the

quarter in question. After a careful scrutiny

of affected programs, and discussion of the

relevant strategic, logistical, production, and

other factors, available supplies were then

allocated, in the form of a "program determination," among the various claimant

agencies. This distribution of bulk allotments to the several claimant agencies was

made two months before the beginning of

the affected quarter.

The next step in the process, the distribution of allotments to prime consumers by

the claimant agencies, was to be completed

within the following month. Within each

claimant agency, programs and schedules

would have to be adjusted or curtailed in

order to permit the agency to live within

its allotment. The agency was assisted in this

process by a review of each prime consumer's

quarterly application for controlled materials, filed with the claimant agency on CMP

Form 4-A. This application reflected the

consumer's inventory position and other factors, and often called for smaller quantities

of controlled materials than indicated by

the bill-of-materials calculation.

After its allotment decisions had been

made, the claimant agency transmitted to

all its prime consumers their revised and

approved production schedules together with

their allotments of each controlled material

to support the schedules. Prime consumers

were instructed to immediately pass on to

each of their secondary consumers a subsidiary production schedule related to the

prime contractor's own schedule together

with an allotment of materials sufficient to

implement the schedule. The process was

repeated by all subcontractors under a given

prime contract.

Each allotment transmitted to a prime

consumer carried an individual number,

which was to be repeated on all subsequent

reallotments down the contractual chain and

used by all concerned in placing their orders with controlled material suppliers. All

firms were instructed to place their orders

with mills as far as possible in advance of

the opening date of the allotment quarter

so that mill schedules could be arranged in

time to permit maximum production. Except in the case of special "designated allotments," firms were free to select their

own suppliers of controlled materials. Controlled materials producers were permitted

to accept only orders bearing allotment numbers and were required to schedule them in

order of receipt. Orders beyond their capacity, except for specified allowances to

permit flexibility, were to be rejected.13 Rejected orders would be redirected by contractors to unfilled productive capacity still remaining in the system until all allotments

were used and capacity filled.

13

 WPB, Controlled Materials Plan (2 November

1942), Restriction on Shipments by Producers of

Controlled Materials, p. 12.
THE CONTROLLED MATERIALS PLAN 573

It was the supposition and hope of CMP

that its control of the flow of steel, copper,

and aluminum would—by resolving the nation's most fundamental material shortages—provide the basic direction of the war

production program within the pattern set

by balanced requirements.14 All other scarce

materials would continue to be distributed

by preference ratings or other established

procedures. A prime consumer under

CMP—such as a manufacturer of Army

trucks—would automatically receive an appropriate preference rating along with his

authorized production schedule and allotment of controlled materials. This rating,

which was extendible to quantities required

to meet the authorized schedule, would enable both prime and secondary consumers

to obtain essential noncontrolled materials.

Because of the great importance of meeting CMP schedules, special efforts were

made to insure adequate supplies of all contributory items. Military contracts not under

CMP schedules, such as makers of military

clothing, obtained their preference ratings

through the regular PD-3-A procedure.

An important exception to the basic vertical procedure of CMP was the horizontal

allotment of controlled materials by the War

Production Board for the production of socalled B products. These were specifically

listed items of the type for which vertical allocation was supposedly too cumbersome

and for which PRP was originally designed.

The composition of the B list immediately

became an object of heated controversy with

consequences described in a subsequent section.15

 Other special procedures included the

handling of small orders, maintenance, repair, and operating supplies, and distribution of controlled materials through warehouses.

The abortive experience of the hasty introduction of PRP was fresh in the minds

of all concerned. Hence, the launching of

CMP was carefully planned to allow time

for building necessary organizations, education and training of employees, and refinement of procedures. Although CMP was officially announced on 2 November 1942, it

was not to go into full operation until the

third quarter of 1943. For the second quarter of 1943 CMP was to be used as completely as possible under the circumstances,

but PRP was to remain in effect to ease the

transition. Thus, all firms in the economy

could place advance orders for secondquarter requirements of controlled materials

up to a substantial percentage of their first

quarter PRP allocation; duplicate allotments subsequently received under CMP

were to be canceled. Various other devices

were employed to facilitate the shift to CMP

as smooth as possible.16

Army Preparations for Launching CMP

The adoption of the Controlled Materials

Plan placed an unprecedented burden of

14

 Actually, the supply and distribution of a single

material—carbon steel—became the focal point of

operations under CMP: "The chief problems raised

were on the total quantities of controlled materials

to be allotted and the distribution of the over-all

quantity of carbon steel among claimant agencies.

The adjustment of total requests for other controlled

materials to the supply available for allotment was

not a difficult task once carbon steel was brought

into balance since it involved chiefly the balancing

of other materials to carbon steel allotments." Memo,

Charles E. Kohlhepp, Dir Program Bureau, for

Julius A. Krug, Program Vice Chmn 24 Sep 43,

sub: Fourth Quarter Allocations Under Controlled

Materials Plan. Carbon steel requirements and production accounted for all but a minor fraction of the

output of the steel industry.

15

 See below, pages 591 ff. 16

 WPB, Controlled Materials Plan (2 November

1942), Transition, pp. 16-17.
574 THE ARMY AND ECONOMIC MOBILIZATION

planning, organization, training, and related preparations upon the Army. As the

largest and most diversified of all the claimant agencies the Army was confronted with

the greatest number and variety of procurement programs, contracts, contractor relationships, and controlled material requirements. Also, as the leading sponsor of a vertical system of material controls, the Army

bore a heavy moral responsibility for the

successful operation of the new system.

Although CMP was widely advertised as

not "taking effect" until the second quarter

of 1943 (and then only to the extent practicable), the actual operating responsibilities of the claimant agencies began immediately. In order to permit second-quarter deliveries of controlled materials under CMP,

the whole process of the determination and

distribution of allotments would have to be

completed during the first quarter. The

greatest task of all—the determination of

eighteen-months' advance requirements for

controlled materials—was scheduled for

completion by 1 January 1943. To meet

this deadline in a matter of weeks the Army's

technical services and ASF staff divisions

had to conduct actual operating tasks while

simultaneously building new organizations,

recruiting and training personnel, interpreting, refining, and modifying the deluge of

WPB regulations, and conducting discussions and debates on major matters of policy which affected the basic concept of

CMP.

With the adoption of CMP, it became apparent that responsibility for the supervision

and effective operation of the plan within

the Army should be concentrated within a

single staff division in Headquarters, ASF.

The logical place for such responsibility was

in the organization of the Assistant Chief of

Staff for Materiel (later Director of Materiel), who had general responsibility

within the ASF for all Army procurement

activities. Accordingly, the Production Division, ASF, was designated as the War Department claimant agency under CMP and

was given the task of devising procedures,

training programs, organizational changes,

and general Army-wide policy in all CMP

matters.17

Within the Production Division, ASF, the

key planning and regulatory unit was the

CMP control Branch. This branch was the

focal point within the Army for the flow of

information, the development of basic organizational and training needs, the establishment of new procedures, and the discussion and resolution of major operating

problems pertaining to CMP. The chief of

the CMP Control Branch played several

important roles. As the Army controlled

materials officer (ACMO), he handled the

bulk of conference and liaison activity with

the War Production Board on matters of

CMP operation and procedure and was an

alternate Army representative on the WPB

Controlled Materials Board. Within the

ASF he was chairman of the CMP Control

Committee, composed of representatives of

the various branches of the Production Division, as well as of the Office of the Director

of Materiel. The CMP Control Committee

served to keep all appropriate ASF staff

agencies abreast of CMP matters and to in17

 The Production Division was originally established on 20 July 42 by SOS General Order 24.

On 29 December 1942, by SOS Circular 96, it was

merged with the Resources Division in order to

bring production and material controls under common direction. The Resources and Production Division was redesignated simply as the Production

Division on 17 May 1943 (Production Div Office

Order 38, 17 May 43, and ASF Cir 32, 18 May 43).
THE CONTROLLED MATERIALS PLAN 575

sure proper co-ordination of activities

within Headquarters, ASF.18

To provide adequate organization and

uniformity of operations at the technical

service level, a number of steps were taken.

As early as 16 October 1942, while CMP

was still in the draft stage, the director of

the Production Division had requested each

of the technical services to appoint a responsible full-time officer or civilian to head up

work under the new system. These officials

were also to participate in the review and

modification of the emerging draft plan.19

Three months later, a general directive was

sent to the services requiring each of them

to establish a central planning section which

would be responsible for the supervision of

all CMP operations within the service. A

primary responsibility of the central planning section was the preparation and maintenance of master procurement and production schedules upon which CMP requirements and allotments would be based.20

Shortly thereafter, the technical service representatives appointed under the 16 October directive were designated as CMP

control officers, and their duties were spelled

out in some detail. These officers, who

typically held key positions in the central

planning branches, functioned at the technical service level much as did the Army

controlled materials officer at the Armywide level; broadly stated, their task was to

make CMP work effectively within their

respective services.21 All technical service

control officers were ex officio members of

the CMP Control Officers Committee,

which met monthly under the sponsorship

of the Production Division, ASF. This committee was the chief instrument for coordinating the CMP activities of the several

services and for providing necessary changes

in regulations or other solutions to technical

service problems.22

An important contribution to the rationalization of Army organization and procedures for launching the Controlled Materials Plan was the series of management

surveys conducted by the Control Division,

ASF, during the first three months of the

program. Reports based on these surveys

covered all aspects of the program in both

the ASF headquarters organization and

within the several technical services. Because of the cogency of the reports and the

prestige of the Control Division, a number

of significant improvements were made.23

Inasmuch as the ramifications of CMP

spread throughout the Army's entire massive procurement organization, thousands

18

 (1) Resources and Production Div Office

Memo 5, 4 Mar. 43. (2) CMP Control Committee,

Minutes. 19

 Memo, S. E. Skinner, Dir Production Div SOS,

for Chfs of Technical Services, 16 Oct 42, sub:

Allocations of Material. 20

 Memo, Gen Ulio, TAG, to Chfs of Supply

Services, 16 Dec 42, sub: Organization of Central

Planning Sections and Preparation of Schedules.

21

 Memo, Gen Minton, Dir Resources and Production Div, for Chfs of Services et al., 10 Feb 43,

sub: Functions of CMP Control Officers. 22

 Undated memorandum in files of Production

Division, ASF, sub: History of CMP Control

Branch. 23

 The Control Division was a part of General

Somervell's office and its recommendations received

immediate and careful consideration. The principal recommendations under the CMP surveys were

the improvement of the training program, the provision of additional competent personnel, and the

rearrangement of functions in numerous instances.

(1) Control Division, Hq ASF, Controlled Materials Plan Functions and Organization in the Resources and Production Division (25 January

1943). (2) Memo, Gen Minton, Dir, Resources

and Production Div, for ACofS for Materiel, 22

Mar 43, sub: Control Division Survey of CMP.

(3) Maj Leighton, History of Control Division,

ASF, pp. 13-14. (4) ICAF R60. Priorities and

Allocations, pp. 61 ff.
576 THE ARMY AND ECONOMIC MOBILIZATION

of new employees had to be added and the

activities of others modified. An integral

ingredient in the plan to launch CMP was

the systematic training of individuals in all

agencies. The War Production Board initiated CMP training with an intensive threeday course for some five hundred key

employees within WPB and the claimant

agencies. The course consisted of a series

of lectures and written materials on the

plan as a whole and its major special aspects.

It included question and answer sessions as

well as a lengthy CMP "problem" to be

worked out overnight between sessions. A

number of brief written examinations were

given in order to judge the effectiveness of

the course.24

The training program ultimately adopted

by the Army was designed not only to

prepare its own representatives for their

appointed tasks but to provide Army contractors with an intimate, effective, and

enthusiastic knowledge of CMP. Without

the thorough understanding and wholehearted co-operation of contractors, CMP

could easily go the way of PRP. The

Army's first training efforts under CMP

centered in the use of training films developed by the Civilian Personnel Division.

Partly because of the general nature of the

films and partly because of the manner in

which they were used, this approach was

deemed to be inadequate.25

On 10 April 1943 the chief of the CMP

Control Branch proposed an intensive program of training in CMP field operations.

Training was to be given to Army personnel

at various echelons, to be followed by the

systematic interview and training of all important Army contractors. The program

was formally launched on 22 April with a

target date for completion of 31 July 1943.

The substance of the program was built

around a detailed three-day Field Operations Course, which was carefully laid out

in an instructor's textbook of some 120

pages. The textbook was prepared in the

latter part of April 1943 and thus had the

benefit of six months of intensive discussion

and substantial experience under CMP. It

covered all significant operating features of

CMP including preparation of bills of

materials, various classifications and treatment of B products, preparation of manufacturers' applications for controlled

materials, relationship of CMP to production scheduling, control of inventories,

special procedures for maintenance, repair,

and operating supplies, construction and

facilities, warehouse and small orders,

placement of orders with metal mills, all

stages of the allotment process and the

general effect of CMP upon production

control and purchasing. Question and

answer sessions, outside reading assign24

 Memo, C. L. Bowman, Chf Training and Information Sec, CMP Control Br, for Skinner, Dir

Production Scheduling, 12 Jan 43, sub: Comparison of WPB and SOS Courses on CMP. 25

 (1) Memo, Col John S. Cooke, ACMO, for

Chmn CMP Bd WPB, 13 Dec 42, sub: War

Department Progress on CMP. (2) Memo, Cooke

for Dir Resources and Production Div SOS, 21

Jan 43, sub: CMP Training. (3) Memo, Skinner

Dir of Production Scheduling, for Gen Minton,

23 Jan 43. (4) Memo, Cooke for Dir of Production Scheduling ASF, 30 Apr 43; sub: CMP

Training. A major difficulty in the early CMP

training efforts of the Army was the division of

responsibility between the Civilian Personnel Division, ASF, which had general cognizance of

training methods and programs within the Army,

and the Resources and Production Division, which

was responsible for the implementation of CMP.

The personnel division was handicapped by lack

of detailed knowledge of CMP, and the Resources

and Production Division wished to take over all

CMP training activities and integrate them with

the actual administration of the plan. This was

the procedure later adopted in the development

of the field operations training program.
THE CONTROLLED MATERIALS PLAN 577

ments, and written examinations were

among the features of the course.26

Under the directive establishing the program, each technical service was required

to designate for training an appropriate

number of representatives who would in

turn be required to interview and train contractors in the field. Each service was required to submit a list of its prime contractors, alphabetically by states, to the CMP

Control Branch. All duplicate names were

submitted to a co-ordinating committee of

CMP control officers, who designated a

single service to train each contractor. Officers in the CMP Control Branch trained

technical service representatives and then

accompanied them to district offices to

launch the field training program. When

this was well under way, further training

and administration of the program was left

largely to the technical service CMP control

officer and his assistants. After enough field

service employees had been trained, the

service CMP control officer would take

them in groups of twos and threes to visit

contractors for experience in interviewing

and training key workers in each plant.

These meetings were "down-to-earth" sessions on the contractor's own problems,

designed both to assist the contractor to

meet all CMP requirements with a minimum of difficulty and to develop information on operating problems which would

assist policy makers in making desirable

adjustments in the plan.27

The Army's Field Operations Training

Program proved to be eminently successful.

In approximately three months some 3,600

Army officers or employees and 8,287 War

Department contractors were trained under

the program. The results of the basic program were briefly summarized by the Army

controlled materials officer:

. . . these reports show that the training 

gram has fulfilled a real need, was enthusiastically received by contractors, has provided

uniformly trained personnel, has reduced

paper-work through proper understanding

and application of CMP principles, and has

facilitated completion of Army contracts on

schedule. In addition, CMP training has resulted in a more efficient use of the limited

quantity of steel, copper, and aluminum allotted to the War Department by the War

Production Board.28

An important contribution to the successful launching and operation of the Controlled Materials Plan within the Army was

the systematic dissemination of information

to all concerned with the functioning of the

plan. This was accomplished not only by

the prompt distribution of available WPB

regulations, orders, bulletins, and pamphlets but by the issuance of ASF and

technical service directives, circulars, memoranda, and other media. Early in 1943

it was decided to combine all CMP information and procedural instructions into a

comprehensive manual which would be

kept up to date and would serve as a single

26

 (1) Memo, Col Cooke, Chf CMP Control Br,

for Dir Resources and Production Div ASF, 10 May

43; sub: Field Operations Course. (2) Army

Field Operations Course and Training Manual

for CMP. 27

 (1) Col Cooke for Dir Resources and Production Div ASF, 10 Apr 43, sub: Program for

Personal Contacts by Services with Contractors.

(2) Memo, Gen Minton, Dir Resources and Production Div, for Chfs of Services et al., 22 Apr 43,

sub: CMP Program for Personal Contacts by Services with Contractors. 28

 Memo, Col Cooke for Asst Dir of Production,

Production Div ASF, 14 Sep 43, sub: CMP Training for Army Personnel and Contractors. Exhibit

1 of this memorandum shows the number of trainees

for each technical service. The Corps of Engineers led all the services with 1,854 service personnel and 3,802 contractor trainees. Ordnance

was second with 245 service personnel and 1,773

contractors.
578 THE ARMY AND ECONOMIC MOBILIZATION

authoritative source of information.29 The

constant succession of changes in CMP

details and the necessity for the firm establishment of organizations and procedures

delayed publication until 30 September

1943. At this time ASF M-602, Controlled Materials Plan Operation, was published and widely distributed. Consisting

of some 250 pages of carefully organized instructions and descriptive material, supplemented by numerous charts and diagrams,

the manual covered all aspects of the Army's

responsibilities under CMP. It was planned

to keep the manual current by issuing revised paragraphs to be distributed to all

holders. This was eventually found to be

impractical and on 18 March 1944 the

method of formal revision was abandoned

and the manual remained only as an overall guide and reference work. Thereafter

all operating personnel were to be guided

by current instructions from the Production

Division, ASF.30

A further effort to insure the successful

launching of CMP was represented by the

"trial run" of CMP for mechanical time

fuzes produced by ordnance contractors for

the Army and Navy. This test operation was

conducted mainly in January and early

February 1943 in conjunction with the War

Production Board and covered requirements and allotments of controlled materials for six prime consumers and thirtyeight secondary consumers for four months,

March through June 1943. The experiment

was given a "green light" by all concerned

in order to gather experience in advance of

the general second-quarter CMP run. Despite the fact that the experiment was on a

highly simplified basis (for example, no B

products were involved), it revealed many

of the operating problems which were later

to appear on a large scale. These included

numerous types of error in filing CMP-4-A

applications for materials; problems attending changes in schedules and specifications;

the difficulties of maintaining balanced inventories and the relationship of parts to

materials inventories; and the necessity of

extending contracts and schedules beyond

the required "lead time" for materials. The

trial run resulted in a wider dissemination

of instructions to contractors and alerted

CMP operating personnel to difficulties

previously unanticipated.31

The Determination of Requirements for

Basic Materials

The task of determining in detail the

quantities of basic materials entering into

military end items was completely foreign to

the Army's peacetime procurement operations. Military procurement in the period

between the World Wars was so small relative to the economy as a whole that it had

no appreciable effect upon material supplies. Contractors were responsible for completing projects on schedule and placed

their orders for materials accordingly.

29

 Preparation of the manual was ordered by the

Chief of Staff, ASF, on 1 March 1943. (1) Memo,

Cooke for Dir Resources and Production Div ASF,

21 Apr 43, sub: Status of CMP Operations Manual.

(2) Memo, Cooke for Chf Materials Br, Resources

and Production Div, 17 May 43, sub: CMP Operations Manual. (3) Memo, Cooke ExO Production

Div ASF, 1 Jun 43, sub: Simplification and

Standardization of Procedures and Practices-CMP

Operations Manual. 30

 Changes No. 1 to ASF M-602, 18 Mar 44.

For additional reasons underlying the discontinuance of revisions, see Memo, Gen Clay, Dir of

Materiel, for CofS ASF, 11 Dec 43, sub: Army

Service Forces Manual M-602. The manual is

a permanent source of information on the complex

responsibilities of the Army under CMP.

31

 Memo, Cooke for Chfs of Services et al., 3 Feb

43, sub: CMP Trial Run—Mechanical Time

Fuzes.
THE CONTROLLED MATERIALS PLAN 579

During most of the interwar period, supplies of raw materials in relation to demand

were abundant—so much so that governments as well as private interests in various

parts of the world resorted to schemes for

the curtailment of output and the artificial

support of prices. Under these circumstances, there was no occasion for concern

over the quantity of materials entering into

either individual items or procurement programs as a whole.

Procurement planning officers were nonetheless well aware that a war emergency

would completely upset the peacetime balance of supply and demand. Not only would

material control systems be found necessary

in time of war but their administration

would soon require definite knowledge of

the quantities of important materials essential to the completion of military programs.

Accordingly, early in the interwar period

the Commodities Division was established

in the Planning Branch, OASW, for the

purpose of estimating the Army's wartime

needs of important materials and of taking

steps to insure the adequacy of wartime

supply.32

The Commodities Division and its associated commodity committees in the interwar years never possessed the resources or

manpower to make detailed estimates of

Army material requirements for all stages

of an emergency. Furthermore, the expenditure in peacetime—on a scale comparable

to that eventually attained in World War

II—of efforts to determine indirect material requirements would have been a preposterous undertaking. Contemporary estimates of end-product requirements for a

future war, in terms of either types or quantities of equipment, were too incomplete

and unstable to permit more than rough

approximations of required quantities of

material ingredients.

As a result, it was only after the Munitions Program was well under way that the

necessity and possibility of intensive study

of Army material requirements arose. As

shortages of particular materials appeared

or were considered likely, requests for statements of material requirements began to be

made. The resulting estimates were necessarily crude since bills of materials for items

of military equipment were almost nonexistent, procurement programs were continually undergoing revision, and no systematic procedures or organizations had been

created to make the necessary computations.

After Pearl Harbor and the emergence of

material shortages as the major bottleneck

to war production, it was apparent that the

task of estimating material requirements

would have to be realistically approached.

This meant the hiring and placement of

many hundreds of additional employees

throughout the Army establishment, the

identification of thousands of material ingredients of finished items of military equipment, the development of standard nomenclature and code numbers, the acquisition

of batteries of complicated tabulating machines with experienced operators, and extensive correspondence with Army contractors to acquire unit bills of materials for

items of military procurement. The refinement and use of the necessary procedures

was a laborious and often uninspiring task.33

An important step in laying the foundation for accurate statements of material requirements was the development of the

ANMB Red Book, which established de32

 See above, pages 86 ff.

33

 A concise statement of the Army's problems

in computing material requirements made during

the formative period of CMP is the four-page

Memo S5-32-43, Gen Ulio, TAG, 9 Feb 43: General Policy—Material Requirements.
580 THE ARMY AND ECONOMIC MOBILIZATION

tailed classifications and coding for a wide

variety of materials. The Red Book went

through a number of editions and contained

specifications and descriptions of hundreds

of items within the major material classes—

basic agricultural and forest products, iron

and steel and ferro-alloys in numerous

shapes and forms, nonferrous metals, chemicals, fabrics, fuels, and lubricants.34

 By the

latter part of 1942, the Red Book was issued

jointly by the Army, Navy, Maritime Commission, and the War Production Board,

and its classification had become widely accepted as the basis for the analysis and

expression of material requirements. It continued to be used after the adoption of CMP,

not only for noncontrolled materials, but

for basic bill-of-materials analysis of controlled materials. Since the Red Book classification was more detailed than CMP

codes, data from bills prepared on the Red

Book basis could usually be transformed

without additional information into requirements figures for the purpose of

CMP.35

The first effort to provide the foundation

for a comprehensive determination of the

Army's indirect requirements for materials

was made many months before the formulation of the Controlled Materials Plan.

On 9 January 1942, the Under Secretary

of War directed each Army supply service

to obtain bills of materials for all items of

procurement.36 The accumulation and refinement of bills of materials for the many

thousands of Army procurement items was a

slow and tedious process, complicated by

lack of time and personnel on the part of

contractors as well as the technical services.

Moreover, contractors themselves often had

only rough knowledge of the gross stock

weight of materials required to turn out

finished items never before produced.37

Early in September 1942, the Combined

Production and Resources Board ordered a

general survey of military requirements for

materials for the eighteen-month period

ending 31 December 1943. This survey,

which was actually supervised by the War

Production Board, required the Army to

make within approximately one month its

first comprehensive study of its indirect requirements for steel, copper, aluminum, and

rubber. Known within the Army as Basic

Industrial Materials (BIM) Job 0012, the

34

 The following exotic samples taken verbatim

from the October 1942 edition of the Red Book

give some indication of its detailed coverage:

Mica, block, muscovite; Mica, block, phlogopite;

Barathea, 18 oz., O.D.; Wigan, black; Coir fiber;

Istle, tula; Istle, juamave; Istle, pita; Istle, palma;

Loofa sponges; Pyrethrum flowers; Chloroacetophenone; Dichloradifluoromethane; Resin, synthetic, polymethacrylates (one of twenty listed

classes of synthetic resins); Uranium, "a heavy, rare,

radioactive element used in pigments for glassware and porcelain, and as an alloying element in

some steel." 35

 The Red Book classification was well received

by industry. "In our opinion, this classification of

materials was definitely a great step forward in

accounting for critical and strategic material requirements and consumption, and should be made

a part of every production material analysis system in use today." Origin and Development of Material Analysis, prepared by T. R. Murphy, Accounting Dept Ford Motor Company, incl to Ltr,

Murphy to Control Div SOS, 4 Sep 42.

36

 (1) Memo, USW for All Supply Services, 9

Jan 42, sub: Computation of Basic Industrial Material Requirements, cited in par. 1 of Memo, Hq

SOS for the Services of Supply, 30 Sep 42, sub:

Bills of Materials. During most of 1941, the services had been directed to base their requirements

estimates for specific materials upon bills of materials. (2) Memo, Col Clifford V. Morgan, Chf

Commodities Br, Resources Div, for Dir Resources

Div SOS, 28 Aug 42, sub: Bills of Materials. 37

 ". . . it was shown that the quantity of alu

num per plane varied as much as 2,000 pounds,

depending upon whether the bill of materials came

from the manufacturers, the Army Air Forces, the

War Production Board, or Alcoa." Memo cited

36 (2) above.
THE CONTROLLED MATERIALS PLAN 581

survey called for a degree of intensive activity and co-ordination of effort never before

undertaken for the purpose. Thousands of

bills of materials had to be hurriedly acquired or revised, procurement and production schedules prepared or revised, IBM

equipment and operators obtained, and

numerous conferences, directives, and memorandums employed to define procedures,

convey instructions, and make necessary adjustments in the program.38

The experience obtained from BIM Job

0012 was of tremendous importance in indicating the nature of the task which would

be a quarterly responsibility under the Controlled Materials Plan. A formal study and

report of the results obtained under the survey led to detailed recommendations for

improving the various steps and stages in

the production of material requirements estimates. A statistical tabulation revealed

that approximately 17,000 items of procurement had been analyzed, requiring

nearly a million individual punch cards in

order to compute the requirements for the

four materials involved. The technical services alone expended some 18,500 man-hours

in preparing the data and another 19,000

man-hours in actual machine calculations.

The combined effort within the technical

services thus ran to nearly 19 man-years of

effort in terms of the peacetime 40-hour

week.39

The adoption of the Controlled Materials

Plan revolutionized both the philosophy

and the procedures of material requirements determination. Instead of relying

upon estimates of material requirements

gathered previously, partially, haphazardly,

or incidentally to other purposes, CMP instituted a built-in set of procedures which

insured the determination of requirements:

(1) on the basis of specific, identifiable, endproduct programs; (2) in the precise material categories and for the exact time

periods covered by the allotment process.

Under CMP each claimant agency was

obliged to present once each quarter its

total requirements for each controlled material classification.40

 Under the original

plan, requirements estimates were to cover

the eighteen-month advance period (beginning with the base quarter) and were to be

shown separately by months for the first

twelve months, with a lump sum for the

terminal six months. After experience under

the plan was obtained, it was found satisfactory to state only quarterly figures for

a year in advance.

The Army's presentation was divided into

three broad groups and also into a number

of major programs. The three basic groups

were production; construction; and maintenance, repair, and operating supplies for

Army-owned establishments. Production requirements were classified into some thirtyfour major programs. This classification enabled the WPB Requirements Committee,

as well as the Army, to adjust allotments on

the basis of program or end-product importance. In addition to submitting its require38

 (1) Memo, Gen Ulio, TAG, for Chfs of Supply Services, 24 Sep 42, sub: Computation of estimates of raw and basic industrial material requirements. (2) Memo, Ulio for Chfs of Supply

Services, 3 Oct 42, same sub, with 2 incls. 39

 Memo, John D. Witten, Chf Statistician SOS,

for Brig Gen W. H. Harrison, Production Div SOS,

3 Nov 42, sub: Analysis of Computation of Material Requirements, BIM Job 0012, and Recommendations. Because of the shortage of qualified

operators, it was necessary in some instances to

work an individual as much as seventy-two consecutive hours without relief.

40

 CMP operations initially covered 39 controlledmaterial classifications composed of separate basic

shapes or forms as follows: carbon steel, 13; alloy

steel, 12; copper, 6; aluminum, 8. Steel requirements were expressed in short tons, others in

thousands of pounds.
582 THE ARMY AND ECONOMIC MOBILIZATION

merits thus summarized, the Army was also

required to submit to WPB at least one

complete set of detailed tabulations which

would show program subdivisions to any

desired degree.41

A complicating factor in the statement of

requirements under CMP was the necessity

for showing separately requirements for "A"

and "B" products. "A" products were those

for which the Army would receive and make

material allotments directly to its contractors. "B" products were those for which

contractors would receive material allotments directly from the War Production

Board. The Army did not state its material

requirements for B products; it merely

stated the number of units or the dollar

value of the B products which it required

in each time period. The computation of

controlled materials entering into such

products would be made by the War Production Board. The Army would be granted

a blanket allotment of materials for its total

B-product needs, and this allotment would

be charged off as the WPB allotted materials

to producers of Army B products.

In order to keep CMP responsive to

changing needs it was soon found desirable

to make continuous changes in the specific

coverage and form of requirements estimates. Accordingly, each quarter's requirements were based on a specific WPB directive which announced the classification of

materials and programs, the time period to

be covered, the designation of the appropriate B-product list, and similar matters. In

general, these changes resulted in substantial simplification of CMP over its lifetime.42

The complexity of the Army's task in determining its material requirements can

only be suggested in the present survey. The

first basic step, the development of adequate

bills of materials, ran into endless complications. Bills of materials were of several

types. A detail bill carried a separate analysis of the material content of each part or

group of parts for a complete end product.

For large and complex items like planes and

tanks a detail bill might run to many hundreds of pages. A summary bill merely listed

the total content of each material in the

complete end product. A complete, as distinguished from a partial, bill covered all

materials, not merely controlled materials

under CMP. For many items of Army procurement there were numerous models with

variations in design and material content

ranging from slight to major differences.

Frequently a prototype bill could be used

for all models within certain limits of variation. Similar to the prototype bill was the

modal bill, representing a weighted average

of the material consumption experienced by

different contractors producing the same

item.43

41

 The original breakdown contained some eighty

Army programs. Memo, Eberstadt for USW, 16

Dec 42, sub: Presentation of Army Requirements

under CMP. 42

 ASF M-602, Controlled Materials Plan Operation, 30 Sep 43, Pt. III, Requirements.

43

 (1) WPB, CMP Instructions on Bills of Materials, 15 May 43. (2) WPB, CMP Div, Papers Presented at the Special Three-Day CMP Courses of

Instruction for Key Personnel, January-February

1943, Bills of Materials, version of 10 Feb 43. (3)

Memo and incls, Hq SOS for the Supply Services,

30 Sep 42, sub: Bills of Materials. (4) Memo, Gen

Ulio, TAG, for Chfs of Supply Services, 29 Nov

42, sub: Bills of Materials for Controlled Materials Plan. (5) Memorandum for All the Supply

Services, 6 Mar 43, sub: Bills of Materials Under

the Controlled Materials Plan. (6) Preparation of

Modal Bill of Materials for the Scheduled Item,

Step 0-2.6 in Procedure for Preparing Tabulating

Decks of Unit Weights, App. A to Report on

Standard Procedures for Preparing Controlled Material Requirements in the Supply Services, issued

by Requirements Branch, Resources and Production Div, ASF, 15 Apr 43.
THE CONTROLLED MATERIALS PLAN 583

For all bills of materials there were a

number of technical and administrative

problems. Responsibility for the preparation

of bills was placed on the prime contractor.

This was a considerable burden especially

where the number of subcontractors supplying parts, components, and subassemblies ran into large numbers. The Army

therefore attempted to confine its requests

for bills of materials and revisions thereof to

items for which total material requirements

were significant. On the other hand, the

Army was obliged to make a systematic

check of bills for accuracy and completeness.

Comparisons were made with previous bills

of the same contractor or of other contractors, and individual bills were scrutinized

for internal consistency and accuracy of

computations, as well as for errors in the

light of known specifications, manufacturing processes, and so on. The basic item of

importance in all bills was the gross or rough

stock weight of material required to yield

the specified material content in the finished

product. Because of the inevitable losses in

processing, as well as losses due to rejects,

testing, and spoilage, actual material requirements greatly exceeded the net material content in finished items.44

For many items of procurement, bills of

materials could not be obtained for lack of

time or were otherwise impractical. In such

cases material requirements were based on

engineering estimates, dollar-value ratios,

statistics of past consumption, or other methods. Engineering estimates were customarily

used for construction projects as well as for

nonrepetitive production items. The statistical approach was most appropriate to civilian-type items in the electrical and other

industries turning out a miscellaneous variety of products.45

Perhaps the most complex single element

affecting the preparation of bills of materials, the computation of material requirements, and the determination of material allotments under CMP was the factor of lead

time. Lead time was the nexus which linked

bills of materials to master production schedules in the calculation of material requirements by time periods.46

 The Army's production schedules called for delivery of finished items of procurement at certain dates.

The manufacturing process which incorporated raw materials into the finished item

often required many months. Hence, actual

material requirements antedated end-item

delivery dates by time periods varying with

each material for each product.

As in the case of many other aspects of

requirements computation it soon became

evident in the determination of lead time

that absolute accuracy was not only impossible but not essential. After much study

and analysis of the problem, the Requirements Branch of the Production Division,

ASF, prepared and disseminated a comprehensive statement of Army doctrine on the

subject of lead time. Elaborating upon the

War Production Board's official definition,

the governing memorandum discussed in

detail the nature and implications of lead

time, the considerations entering into the

44

 Handling Bills of Materials, Statement B, 11

Feb 43, in Forms and Procedures for Operation of

CMP in the Signal Corps, prepared by L. W. Greenwood and J. L. Huck, Consultants, issued by Resources Br, Materiel Div, OCSigO, 1 May 43.

45

 WPB paper, Bills of Materials, 10 Feb 43, cited

above, note 43 (2). 46

 The War Production Board's official definition

of lead time was "the time interval expressed in

months between the required delivery of materials

from the plant of the supplier of the listed materials

and final acceptance or delivery of the procurement

item." Memo, and incls, Maj John A. Sargent, Chf

Reqmts Br Resources and Production Div ASF, for

TQMG et al., 7 Apr 43, sub: Lead Time, p. 2.
584 THE ARMY AND ECONOMIC MOBILIZATION

choice between average and detailed lead

time, and the treatment of inventory, transportation, inspection, and other factors at

all contractor levels affecting lead time.47

For purposes of presenting requirements

estimates, Army and WPB officials decided

to use a weighted average lead time for all

controlled materials entering a given end

item. Exceptions were permitted in the case

of large items, such as ship construction,

involving an array of lead times varying

tremendously in length and complicated by

irregular production schedules. Although

the determination of an appropriate average lead time was a complex process, often

performed on electrical computing machines, once the determination was made it

was a relatively simple matter to incorporate

the lead factor into further mechanical calculating operations. Lead time was always

expressed in units of months, with an arbitrary minimum of one month.

Two basic sets of data entered into the

calculation of material requirements—data

from bills of materials, and data from master production schedules. Bills of materials

specified the unit weights of required materials for specific end items; production

schedules specified the quantities and time

periods for the required delivery of end

items. After all bills of materials had been

received and checked for accuracy, they

passed through a standard processing operation. This included coding and editing in

various ways in order to facilitate the manual punching of basic tabulating decks of

IBM cards. A similar lengthy process attended the preparation of data from master

production schedules. This included the establishment of firm production schedules,

ultimately based on the Army Supply Program, and the detailed coding and editing

of the schedules to permit the incorporation

of all relevant data—end items, programs,

time periods adjusted for lead time, and

other information—into the basic tabulating deck.

The heart of the process of material requirements computation was accomplished

on mammoth electric accounting machines,

together with punch cards and various automatic sorting, collating, calculating, and

tabulating devices. Without these unbelievably complex and versatile machines and

their experienced operators, the task of requirements determination would have been

virtually impossible. Within the Army a

standard procedure was developed, providing in detail for every step of the process.

For each technical service the standard operation required no less than seventeen complete decks of punch cards. Beginning with

manually punched cards and progressing

through various stages of electrical punching, machine operators converted the raw

data from individual, detail bills of materials up through various summary stages,

and then collated these data with master

production schedules to present finally a

mechanically calculated and recorded summary of total material requirements by material classes for time periods and by programs. In accomplishing this task, whole

batteries of IBM machines would be in operation twenty-four hours per day behind

locked doors in order to meet the final

deadline.48

47 Ibid.

48

 Some idea of the complexity of an IBM run

of Army controlled material requirements may be

inferred from a scrutiny of the following documents: (1) Interim Report on the Joint Project

by Central Planning Sec, Production Service Br,

Industrial Div, OCofOrd, and Reqmts Br, Resources and Production Div, Hq ASF, With Respect

to Material Requirements and Certain Related Subjects, 12 Mar 43; (2) Report on Standard Pro-
THE CONTROLLED MATERIALS PLAN 585

The accumulated statements of requirements of the various technical services were

turned over to the Requirements Branch,

Production Division, ASF, for consolidation

into the over-all Army statement to be submitted to WPB. The detailed statement of

total Army requirements submitted each

quarter was sufficiently voluminous to fill

several books of standard format. Although

the Army's task of estimating material requirements each quarter was nominally

finished when it submitted the estimates

to WPB, it was in fact only the beginning

of a lengthy process. This process included

the defense of estimated requirements before

the various WPB offices involved in the

allotment process. Also, for the first few

CMP runs, it included collaboration with

WPB in detailed postallotment audits of requirements to provide a check on the Army's

methodology, accuracy, and general performance.49

The Allotment of Controlled Materials

The basic division of the nation's supply

of controlled materials was made by the

Requirements Committee of the War Production Board. This division took the form

of allotments to the various claimant agencies representing the total demand for materials. Although the military procuring

agencies were from the outset directly represented on the Requirements Committee, the

final decision—in case of dispute over the

share of materials given to each agency—

rested ultimately with the civilian chairman

of the War Production Board.

Shortly after CMP had been firmly established on an operating basis, WPB's new

Program vice chairman, Julius A. Krug,

took steps to affirm WPB's policy-making

role in the allotment of materials to claimant

agencies. Mr. Krug was aware, on the one

hand, that the bulk allotment of each controlled material to each claimant agency,

without any control over suballotments by

the agencies, could lead to substantial abuse.

On the other hand, by this time WPB had

acknowledged the wisdom of allowing each

agency legitimate discretion in the internal

management of its own programs. The resolution of the problem was made in a carefully worded memorandum to all claimant

agencies:

Thus far, an over-all allotment of controlled materials has been made to each Claimant Agency for subdivision among specific

programs at its discretion. The Requirements

Committee has not assumed, and in my judgment, should not assume the responsibility of

the Claimant for the areas within its jurisdiction. At the same time, the Requirements

Committee .. . has the right and the obligation to assure itself that materials allotted

to a Claimant are not diverted to objectives

that at the time of original authorization

would not have received the same degree of

preference over competing objectives.

Existing procedures are inadequate to preserve the principle of trusteeship of the Claimant in the use of materials allotted to it at the

expense of the claims of other Agencies.50

cedures for Preparing Controlled Material Requirements in the Supply Services, issued by Reqmts Br,

Resources and Production Div ASF, 15 Apr 43;

(3) Signal Corps study cited above, note 44. 49

 See: (1) elaborate volume of documents transmitted with Memo, Lt Col John A. Sargent, Chf

Reqmts Br, for Asst Dir Production Div ASF, 14

Jul 43, sub: Audit of Controlled Materials Requirements—4th Quarter, 1943 (Machine Job 22);

(2) binder of statements by technical services transmitted with Memo, Maj John C. Swartley for Chf

Production Service Br, Production Div ASF, 23 Oct

43, sub: Screening of Controlled Material Requirements, Job 25.

50

 Memo, Krug, Program Vice Chmn WPB, To

All Claimant Agencies, 13 Jul 43, sub: Procedure

for Allotment of Controlled Materials to Programs.
586 THE ARMY AND ECONOMIC MOBILIZATION

Under the new procedure announced by

the Program vice chairman, a program

determination by the Requirements Committee would be accompanied, when considered desirable, by a tentative subdivision

of the aggregate allotment among broad

general programs of a claimant. If the

claimant's subsequent allotments to specific

programs did not conform with the basis

on which the aggregate allotments had been

made, the Program vice chairman reserved

the right to question the agency, to present

the matter to the Requirements Committee

for its consideration, and to take such

further action as in his judgment seemed

appropriate.51 This precautionary measure

apparently served its purpose.52

The detailed process of making controlled

material allotments was considerably simplified by early amendments to CMP, often

made at the request of the claimant agencies. One of these provided that steel allotments would be made in fewer material

categories than those in which requirements were expressed. Accordingly, one

over-all allotment was made to each claimant for all thirteen classifications of carbon

steel, and one for the twelve forms of alloy

steel. This was done on the theory that

with an over-all balance between supply

and allotments for the major categories,

only minor adjustments would be necessary

to prevent substantial overordering of particular shapes or forms. These adjustments

could be made partly by curtailing programs drawing heavily on shapes in tight

supply. For some forms, such as steel plate,

where stated requirements were great in

proportion to known capacity, specific

quotas for the several agencies could be

established and implemented by mill

directives. As a result of the policy of minimizing the kinds of allotment, there were

only sixteen allotment categories as compared to the total of fifty-six used in the

statement of requirements. In view of the

tremendous amount of bookkeeping at all

levels of the allotment process, this simplification prevented the system from collapsing under a burden of paper work.53

A second simplification was the making

of all allotments on a quarterly instead of a

monthly basis as originally planned. In order

to prevent the congestion of delivery orders

upon mills for any given month under the

new procedure, the War Production Board

issued an order restricting consumers to the

use of approximately one third of their quarterly allotment in any one month within the

quarter. This restriction would have resulted

in considerable hardship to many Army contractors with small quarterly allotments because of the difficulty of placing small orders

and receiving separate small shipments one

third the size of the quarterly figure. Perhaps

of greater importance, many contractors

had ascending, declining, or sporadic production schedules calling for concentrated

activity within a particular month. The

Army therefore requested and obtained permission to authorize monthly delivery of any

51

 Ibid. 52

 The author has found no indication in War

Department files of WPB objections to the Army's

subdivision of controlled materials, and the War

Production Board's official history makes no mention of any unwarranted diversion of controlled

materials by claimant agencies.

53

 WPB, Rpt of Chmn, 9 Oct 45, pp. 50-51.

Early in 1944, after the crisis in materials had

passed, the Army and Navy proposed a reduction

in the number of all allotment and requirements

categories under CMP to four—carbon steel, alloy

steel, copper, and aluminum. Memo, Gen Clay, Dir

of Matériel, for the Program Vice Chmn WPB,

23 Feb 44, sub: Procedural Simplification of the

Controlled Materials Plan. Although this drastic

proposal was rejected, some reduction was made in

the number of copper and aluminum classes.
THE CONTROLLED MATERIALS PLAN 587

portion of a consumer's quarterly allotment

with the understanding that total deliveries

in any one month for all Army contractors

collectively would not exceed one third of

the Army's total quarterly allotment from

WPB. This authority was in turn delegated

to each of the technical services with a comparable stipulation. In this manner internal flexibility was provided without destroying the over-all control necessary to

preserve the system.54

From its inception, CMP had recognized

the necessity for firm advance allotments beyond the current quarter in order to permit

dependable planning for important longterm contracts. Firm advance allotments of

controlled materials permitted reliance

upon production schedules and justified the

long-term commitment of other resources

to such programs. Also, under this procedure, claimant agencies and contractors

were relieved of the immense burden of having each quarter to reallot and reorder materials to cover the same schedules. In the

original plan, claimant agencies were allowed to make forward allotments for future quarters up to specified percentages of

the firm allotment made by the WPB Requirements Committee for the base quarter.

These percentages were 80, 60, and 40, respectively, for the first, second, and subsequent quarters following the base quarter.

The Army found these percentages, especially for quarters immediately following the

base quarter, too low to accomplish the

underlying purpose of the advance allotment procedure. This was true because

controlled material orders in accordance

with WPB regulations had to be placed with

mills anywhere from 30 to 120 days in advance of the month of delivery, depending

upon the shape or form concerned. Accordingly, for the third quarter of 1943, WPB

granted authority to the Army (and one

or two other claimant agencies) to make

advance allotments in the three succeeding

quarters up to 100 percent of its third quarter allotment. For the fourth quarter, WPB

reduced this percentage to 90, 80, and 60

percent on the ground that the 100-percent

basis was too risky and that claimant agencies should be treated more uniformly.55

These percentages remained (with some

variations among the several material

classes) for several quarters until the easing

of material shortages in the face of program cutbacks made possible allotments

substantially equal to requirements.

Before the latter part of 1943, it was the

practice of WPB to cancel advance allotments and substitute the new total allotment as this was authorized for each current quarter. Beginning with the fourth

quarter of 1943, WPB accounting was

placed on a "net allotment" basis. This

meant that only plus or minus adjustments

would be made to the advance allotments

previously authorized, thus reducing the

volume of paper work for all concerned.56

54

 (1) Memo, Col Cooke, ACMO, for the Dir Controlled Materials Div WPB, 6 Feb 43, sub: Suggested Change in Procedure in Authorizing Deliveries. (2) Memo, Gen Minton, Dir, Resources

and Production Div, for TQMG et al., 17 Feb 43,

sub: Limitations on Quarterly Grants of Allotment

for Class A Products Under the Controlled Materials Plan.

55

 (1) WPB, Controlled Materials Plan (2

November 1942), p. 7. (2) Memo, Col Cooke for

Dir Program Bureau WPB, 8 Mar 43, sub: Advance Allotments. (3) Memo, Gen Minton for

CofEngrs, 20 Mar 43, sub: Advance Allotments.

(4) WPB Program Determination 331, 4 May 43.

(5) Gen Clay, Dir of Materiel ASF, for Chmn,

Requirements Com WPB, 10 Aug 43, sub: Advance

Allotments. (6) Memo, Kohlhepp, Dir Prog

Bureau, for Krug, Program Vice Chmn WPB, 24

Sep 43, sub: Fourth Quarter Allocations Under

Controlled Material Plan. 56

 WPB, Controller's Report on the Operation

of the Controlled Materials Plan for the Fourth

Quarter, 1943, December 1943, p. 74.
588 THE ARMY AND ECONOMIC MOBILIZATION

The basic process of receiving and passing down allotments each quarter represented an intense period of activity for all

concerned. Since controlled material orders

could not be honored without an allotment

number, it was important that contractors

at all levels receive their allotments as

quickly as possible. As soon as the Army

received its allotment from WPB, the Production Division, ASF, through its Program Control and Requirements Branches,

determined the share going to each supply

service. If shortages were involved, two

general "rules of thumb," or some compromise between them, were applied. If

the requirements of a single service represented as much as 90 percent of the total,

that service absorbed the entire shortage

and the remaining services received allotments equal to the stated requirements. If the

Army's total requirements were fairly well

divided among the various services, all of

them shared the deficit on a proportionate

basis.57

Each supply service, upon receiving its

own allotment, made its distribution among

its prime consumers. This step was facilitated by the practice of making tentative

determinations in advance so that only

minor adjustments would be necessary at

the time of actual allotment. Such "earmarkings" were based upon each prime contractor's carefully screened CMP-4-A

application for the quarter in question together with the latest revision of his production schedule. In the event that a service

received an allotment short of its stated

requirements, it would request its principal

contractors to ascertain inventory and other

considerations, involving both prime and

secondary consumers, which might permit

an allotment lower than originally requested

without disturbing production schedules.58

After all possible internal adjustment had

been made, each service drew up a balance

of its unused allotments and shortages. Unused allotments were returned to the Production Division, ASF, and requests for

additional allotments were made for those

material categories in which urgent needs

remained. To meet such needs the Production Division would then redistribute

any returned allotments; if none were available and specific needs warranted, the division would actively seek additional returns.

After no further adjustments internal to the

Army could be made, the Production Division would return surplus allotments to

WPB and request additional allotments to

cover remaining shortages in other material

categories. During the first two quarters of

CMP, WPB made supplemental allotments

to meet shortages wherever it could. Thereafter it adopted the policy of making a single

firm allotment per quarter, and subsequent

adjustments were made by transfers between

agencies. Trading of alotments—particularly among the military procuring agencies—gave desired flexibility to the program

and was approved by WPB as long as all

such transfers were duly recorded.59

57

 (1) Determination of Allotments to Supply

Service and Subsequent Adjustments, 6 Apr 43

(unsigned draft of procedure), in files of Production Div ASF. (2) ASF M-602, Controlled

Materials Plan Operation, 30 Sep 43, Pt. IV, Sec.

404 Allotment Functions of Headquarters, ASF.

58

 (1) Memo, Gen Minton, Dir Resources and

Production Div, for CofEngrs et al., 13 May 43, sub:

Allotment of Controlled Materials for Third

Quarter. (2) ASF M-602, Controlled Materials

Plan Operation, Pt. IV, Sec. 402, Allotting Procedure in the Technical Services. (3) Ordnance Operations Under Controlled Materials Plan, (1943).

(3) ICAF R60, Priorities and Allocations, pp. 82-

89, Accounting Control and Disbursement of Allotments. 59

 (1) Memo, Gen Minton, Director, Resources

and Production Div, for Dir Requirements Div

SOS, 13 Mar 43, sub: Effects of Changes in Au-
THE CONTROLLED MATERIALS PLAN 589

Although the basic distribution of allotments took place once each quarter, constant minor adjustments made the allotment process a continuous affair. Thus, the

Army developed standard procedures for

reclaiming unused and excessive allotments

from contractors faced with changes in

or failure to meet production schedules or

with other special circumstances. By stretching its allotments as far as possible, the Army

was able to avoid any significant curtailment

of production schedules for reasons of controlled material shortage throughout the

life of CMP.60

An illustration of the speed with which

allotments could be made to contractors is

indicated by a report describing the second

quarter 1943 distribution by the Supply

Division, Office of the Chief of Engineers.

This office received its allotments from the

Production Division at 10:00 A.M., Saturday, 6 February 1943. All twelve engineering districts were immediately notified by

telephone to standby for their allotments to

be made later in the day. In the Washington office, OCofEngrs, allotments were distributed to programs and subprograms and

then further divided into allotments by

district. The allotments of each material by

subprogram and by district were telephoned

to the districts between 6:00 and 8:00

P.M. the same day. On Sunday, 7 February,

the districts completed previously prepared

letter grants of allotment for each prime

consumer. These grants were distributed

by mail or special messenger on the same

day. In cases where this notification would

not reach prime consumers by Monday, 8

February, advance notification was made

by telephone. All prime consumers were

urged to cover their mill orders immediately

with letter certification bearing the allotment number assigned by the Army. Many

of these certifications reached the mill level

on Tuesday, 9 February 1943.61

Each allotment to a prime consumer

was covered by a specific allotment number

which afforded a complete identification

of the sources and nature of an allotment.

Thus, W-2345-678-3Q43 indicated an

Army (War Department) allotment to its

program 2345 covering its production

schedule 678 for the particular contractor

in the third quarter of 1943. In passing

along this allotment to secondary consumers the prime contractor and his various

subcontractors used an abbreviated allotment number—in this case W-2-3Q3—indicating only the claimant agency, the first

digit of the full program number, and the

quarter. Although this simplification made

it more difficult to trace back allotment

authority at lower contractor levels, the

simplification was necessary to avoid a prohibitive amount of recording and filing for

contractors at all echelons.62

All claimant agencies and all contractors

were required to keep and preserve for at

least two years all records of allotments received and distributed. Such records were

subject to inspection by WPB. Persons willfully issuing suballotments in excess of total

amounts authorized to them were subject to

a fine up to $10,000, or imprisonment, or

both.63

Early in the operation of CMP it was

discovered that from 10 to 15 percent of

thorized Procurement on the Allocations of Controlled Materials. (2) WPB, Controller's Report

on the Operation of the Controlled Materials Plan

for the Second Quarter, 1943, pp. 38-40. 60

 This was, of course, also due to other factors.

See below, page 590.

61

 Incl B to SOS CMP Cir 10, 3 Mar 43. 62

 WPB, Controller's Report on the Operation of

the Controlled Materials Plan for the Third

Quarter, 1943, September 1943, p. 70. 63

 WPB CMP Regulation 1, par. aa.
590 THE ARMY AND ECONOMIC MOBILIZATION

each quarter's allotments remained unused.

This "wasting" of allotments was commonly

referred to as "attrition" and was the result

of a number of factors. Army and WPB

studies of attrition indicated four major

classes of influence at work: (1) overstatement of requirements; (2) reductions in

actual operating requirements for controlled materials; (3) allotment "hoarding" at

all echelons; (4) the use of alternate sources

of controlled material supplies.

Overstatement of requirements resulted

from erroneous bills of materials, failure

adequately to consider inventories, and the

tendency at all echelons to pad requirements in anticipation of shortages. Reductions in actual operating requirements

stemmed from a variety of considerations—

failure to meet production schedules (referred to as "slippage" and caused by shortages of resources other than materials, technical difficulties, "Acts of God," and the

like, reduction in production schedules because of contract changes or cancellation,

and changes in specifications permitting

conservation of controlled materials. Allotment "hoarding" was both voluntary and

involuntary. Inevitable delays in passing

down allotments through the vertical chain

of contractors resulted in the cumulative

waste of allotments. Contractors at all levels

also deliberately reserved portions of their

allotments to meet unexpected demands.

Finally, small amounts of controlled materials were obtainable, without specific charge

to allotments, from warehouses and through

similar small order procedures.64

The original version of CMP had anticipated the need for keeping material

mills booked to capacity and had authorized

claimant agencies to make allotments up

to 105 percent of their own allotments received from WPB. Also, controlled material

mills were authorized to accept orders bearing allotment numbers up to 105 percent of

expected production in any month. As the

significance of the attrition factor became

evident, the Requirements Committee,

WPB, made its total quarterly allotments

in excess of estimated supply. Thus for the

fourth quarter of 1943, carbon steel allotments were 110 percent of estimated supply,

the figure for alloy steel was 111 percent,

and allotments for copper products ranged

from 100 to 109 percent of estimated

supply.65 The technique of overallotment,

both at the WPB and the claimant agency

level, combined with the provision for overordering at the mill level, served to compensate for the waste of allotments and prevented losses of production which would

otherwise have occurred. In the early quarters of CMP, unforeseen slippages in the

steel expansion and production program

were fortunately offset by substantial underestimates of attrition, thus resulting in a

balance between steel supply and allotment

orders actually presented to mills. In time,

improved accuracy in estimating both

supply and attrition enabled the War Production Board to make allotments close to

the quantity needed to keep capacity output and the use of allotments in balance.66

64

 (1) Memo, Maj. John A. Sargent, Chf Reqmts

Br, Resources and Production Div, for Col Frank

R. Denton, 4 Jun 43, and attached study, Wasting

of Allotments, dated 22 May 43. (2) Memo, Col

Denton, Asst Dir for Production ASF, for Program

Vice Chmn WPB, 1 Nov 43, sub: Army Attrition—

Third Quarter, 1943. (3) WPB, Controller's Report on the Operation of the Controlled Materials

Plan for the Third Quarter, 1943, September 1943,

pp. 10-11, 59-64. (4) ICAF R60, Priorities and

Allocations, pp. 87-89. 65

 Memo, Kohlhepp, Dir Program Bureau WPB,

for Krug, Program Vice Chmn WPB, 24 Sep 43,

sub: Fourth Quarter Allocations under Controlled

Materials Plan, p. 5. 66

 CPA, War Production Achievements and the

Reconversion Outlook, p. 50.
THE CONTROLLED MATERIALS PLAN 591

The B-Product Controversy

A fundamental problem in formulating

and launching the Controlled Materials

Plan was the determination of the extent

to which a horizontal allocation procedure

would be used under the plan. Eberstadt's

original proposal for a vertical system had

explicitly stated that such a system could

provide for horizontal allocation where this

was most suitable.67 The initial version of

CMP accordingly provided for horizontal

allocation of materials for the production

of items to be known as B products. A specific list of B products was to be published

and all items not included therein would

automatically be classified as A products.

The A products would be subject to the

standard vertical procedure under which

claimant agencies would submit their material requirements to WPB and receive allotments for vertical subdivision among their

contractors. In the case of B products,

claimant agencies would obtain quarterly

dollar or quantity estimates of their contractors' requirements of B products as such.

These would be consolidated and submitted

to WPB, which would total up all requirements of B products, convert these into controlled-material equivalents, and make

material allotments direct to B-product producers in accordance with decisions of the

WPB Requirements Committee.68

Two closely related problems immediately emerged in connection with the B list:

(1) What general principles would be used

in selecting items to be listed as B products?

(2) How could the B list be "frozen" and

all B products clearly defined? The latter

consideration was an all-important practical one, inasmuch as A products were

themselves defined as all products not on

the specific B list. Unless all manufacturers,

claimant agencies, and the War Production

Board could quickly and uniformly identify

any manufactured product as either A or

B, the determination of material requirements and all other CMP operations would

be at sea. This possibility was a real threat

to the success of the plan during the first

few months after its adoption.69

The first question raised fundamental

issues of policy: the larger the B list, the

smaller the role of vertical allocation. A

large B list would, in effect, constitute a

substantial repudiation of the basic principle of CMP, and with it the possibility of

close control of the flow of materials in

accordance with the urgency of end-product

requirements. It soon became apparent that

the battle which the services had so recently

fought to obtain a vertical system of material

controls was now to be fought all over again,

although on a smaller scale, in the B-product

controversy.

The Army's first misgivings concerning

the B list appeared even before CMP was

formally adopted. On 21 October 1942, the

Corps of Engineers submitted preliminary

comments on the CMP draft plan which

had been released the day before. Noting

the inconsistency of items suggested for the

B list, the Engineers remarked:

In connection with the handling of "Class

B" items the Corps of Engineers is in a peculiar position since many of its items will be in

67

 Eberstadt Memo, cited above, note 7. 68

 WPB, Controlled Materials Plan (2 November

1942).

69

 (1) Ltr, Skinner, Dir Production Div SOS, to

Eberstadt, 5 Dec 42. (2) Memo, Skinner, Dir of

Production Scheduling SOS, for Dir CMP Div

WPB, 26 Jan 43, sub: Suggested Simplification of

CMP Procedure. (3) Unsigned Memo for File,

28 Jan 43, sub: Simplification of Operation Under

CMP. (4) Memo, Gen Minton, Dir Resources and

Production Div ASF, for Br Chfs, 11 May 43, sub:

Class B Products for the Third Quarter 1943.
592 THE ARMY AND ECONOMIC MOBILIZATION

this class. The Corps of Engineers is unwilling

to jeopardize its procurement program by allowing other agencies to make decisions which

may affect drastically the ability of this office

to fulfill its obligations. For example, this office

will allocate material for the production of

trailers for the portable air compressor program on a given schedule. Another agency

will be allocating material for the compressors,

possibly on another schedule.70

As the nature of the B-product list began

to emerge in greater detail in succeeding

drafts of CMP, the objections of the Engineers became more pronounced:

The entire question of the handling of Class

B products is extremely unsatisfactory [italics

in original]. The list of Class B products has

apparently been prepared without an underlying philosophy as to the selection of items to

be included in the list. It was the understanding of this office that the Class B list was prepared in order to permit simplification of

procedures and yet the present draft of the

plan contemplates as much work by the Claimant Agencies on Class B items as on Class A

items. Unless the procedure involved in handling Class B items is clarified and unless the

Class B list is prepared on a more rational

basis, the plan cannot be considered satisfactory to the Corps of Engineers.71

The official version of CMP announced

on 2 November 1942 contained only a provisional and highly general list of B products, with the statement that a definitive

product classification would be issued

promptly. The classes of items included in

the provisional list consisted of general industrial machinery, (for example, compressors, pumps, condensers, heat exchangers,

power boilers), civilian-type end items

(agricultural machinery and equipment,

consumers' durable goods, and so on), and

fabricated components and intermediate

products (bearings, nuts, bolts, screws,

switchgear, electrical accessories, and similar items).72

During the remainder of November and

December the composition of the B list was

the subject of almost daily conferences and

memorandums among the various interested

groups. These included not only personnel

of the War Production Board and the several claimant agencies, but representatives

of trade associations and industry groups,

many of whom had strong convictions

on the manner in which their allotments

should be handled.73 Much of the discussion between claimant agencies and WPB

was held in the WPB Engineering Board of

Review, which had the basic responsibility

for drawing up the B list. Finally, at the end

of December, WPB issued its Official CMP

Class B-Product List, containing hundreds

of items and item classes defined as B

products.74

The publication of the official list threw

the B-product controversy wide open. When

the Army reviewed the new list, it found

to its surprise and chagrin that large segments of its direct procurement programs

fell into the B-product category. This meant

that material allocations vital to the pro70

 Memo, Brig Gen Raymond F. Fowler, Chf

Supply Div OCofEngrs, for Dir of Production, Hq

SOS, 21 Oct 42, sub: Comments on Controlled

Materials Plan. 71

 Memo, Gen Fowler for Dir of Production SOS,

28 Oct 42, sub: Comments on Revised Draft of

Controlled Materials Plan.

72

 WPB, Controlled Materials Plan (2 November

1942), pp. 43-44. 73

 Many firms feared the amount of paper work

under vertical allocation and were anxious to be

treated as B-product producers. The initial version

of CMP permitted firms to apply for the type of

procedure they preferred. This provision was

characterized by the official WPB history as a

veritable Pandora's box. CPA, Industrial Mobilization for War, p. 665. 74

 WPB, Official CMP Class B Product List, 21

Dec 42. An intermediate version of the B list had

appeared on 14 November. WPB, Controlled Materials Plan—General Instruction on Bills of Materials, 14 Nov 42, pp. 10-21.
THE CONTROLLED MATERIALS PLAN 593

duction of crucial items of equipment were

removed from Army jurisdiction and turned

over to the Office of Civilian Supply and

various material divisions of the War Production Board. All items which qualified as

civilian-type end items appeared on the

B list, even though these items were produced in Army owned and operated establishments or by private firms whose entire

output was under Army contract. The B

list included bulldozers, steamshovels,

cranes, and other construction and materials-handling equipment used all over the

world by Army Engineers in clearing

jungles, building airfields, loading and unloading military equipment, and numerous

other activities. Removal of these important

items from the A-product classification

meant not only a corresponding loss of Army

control over the internal management of its

own programs. It also signified the substitution of horizontal for vertical allocation,

with a corresponding diminution of responsibility on the part of allotment recipients to devote scarce materials to any particular end-product program.75

But the 21 December B-product list went

even further. It included a long list of military aircraft equipment and components

(for example, torpedo directors, hoist assemblies, guns, magazines, and other armament). Some of these items had apparently

been added in contravention of agreements

reached in earlier discussions:

. . . it is understood that there was an 

ment at the . . . meeting of the Engine

Board of Review that Guns and Magazines

. . . should be treated as Class A p

. . . . This office strongly p

dure by which substantive changes, such as

the aircraft list, can be made "official" without any review by regularly constituted Boards

having Services of Supply [ASF] representation.

Furthermore, it is disturbing to see such

items as engines and tractors added to a B

list which is already too large. It has been the

assumption of this office that major component or end item programs would not be

considered for Class B treatment unless there

were specific reasons for so doing. In the case

of engines and tractors, the only reasons which

have been brought to the attention of this

office are such that almost any other major

component or end item program could be

shifted on the same basis. Such an attitude, if

extended, could easily result in a complete

breakdown of the Controlled Materials Plan.76

An additional factor in the B-product

controversy was WPB's ruling that claimant

agencies were prohibited from obtaining

bills of materials for B products. Requests

for B-product bills were confined to WPB's

own staff to reduce the tremendous burden

of work imposed on industry in the launching of CMP. But the effect of the prohibition was to prevent claimant agencies from

making an accurate determination of Aproduct requirements for controlled materials. Existing bills of materials for A products

typically included substantial material requirements for B-product components entering into finished A products. The only

way the Army could compute its controlled

material requirements for A products for

75

 The granting of material allotments to individual B-product producers was transferred early

in 1943 from the Office of Civilian Supply to

WPB's industry divisions concerned with the various classes of end product. CPA, Industrial Mobilization for War, p. 492. Although this was regarded as an improvement by the Army (which had

representatives in the various industry divisions),

it was the firm position of the Army that the distribution of allotments to all its contractors under

scheduled procurement programs should be performed by the technical services responsible for

administering these programs.

76

 Memo, Col Cooke, ACMO, for Dir Controlled

Materials Div WPB, 2 Jan 43, sub: Official CMP

Class B Products List, 21 Dec 42.
594 THE ARMY AND ECONOMIC MOBILIZATION

the first CMP period was to compute total

material requirements and then deduct the

estimated quantity of materials entering into

B products and components. But this could

not be done without bills of materials for B

products, and the Army was obliged for the

second and third quarters of 1943 to rely on

obsolescent bills of materials and other information already in its files. Moreover, the

same problem arose every time a product

was transferred from the B to the A list, or

vice versa.77

Army procurement officials now viewed

the B list as a kind of Trojan horse which

threatened to wreck the entire Controlled

Materials Plan. This view was not confined

to the Army and the other military procuring agencies but was shared by an important

element within the War Production Board

itself:

The "B" List was not published until late

in December, making it utterly impossible for

the Claimant Agencies to calculate their re- quirements in accordance with the instructions

to Claimant Agencies. Furthermore, the "B" List is altogether too long, complicated and

confusing. This made it almost impossible to

obtain Bills of Materials or Requirements for

these products and will make the task of issuing allotments unnecessarily involved and difficult. I cannot refrain from registering my

disgust at the whole philosophy that permitted

this to happen.78

Along with the simplification of paperwork

in the "A" chain in the second quarter, I view

it as essential that the products now on the

"B" List be reincorporated into the vertical

system to the greatest possible extent, begin- ning in the third quarter. This is necessary to

restore the vertical integration between flow

of materials into components and end-products, and flow of components into end-products, which is the basic purpose of CMP.79

Throughout the first half of 1943, the

Army made a series of proposals looking

to the reduction in size of the B list and elimination of the restriction against obtaining

bills of materials.80 On 26 March the Army

controlled materials officer submitted a drastic proposal to abolish the B list and to

simplify the basic allotment process. The

heart of the new proposal was the elimination of allotments to all consumers of controlled materials below the prime contractor

level. Claimant agencies would continue

to receive allotments and agency programs

would, as before, be tailored to conform to

allotments received. Each prime contractor

would receive a token allotment of controlled materials to cover his authorized production schedule and that of his subcontractors. Each subcontractor would be

given a production schedule based on the

availability of controlled materials but he

would be free to order materials, without a

77

 (1) Memo, Col Cooke for Mr. Harold Boeschenstein, Dir CMP Div WPB, 1 Dec 42, sub: Procedure

for Estimating Program Requirements Under Controlled Materials Plan. (2) Memo, Cooke for Dir

Resources and Production Div ASF, 21 Apr 43, sub:

Elimination of Organizational Duplications, Overlappings, and Conflicts. (3) ASF Annual Rpt. 1943,

Ch. V, Procurement Problems, p. 71. 78

 Memo, H. O. King, Chmn Copper Reqmts

Com, for Eberstadt, Program Vice Chmn WPB, 29

Jan 43, sub: Recommendations for Distribution of

Copper Under the Controlled Materials Plan for

2d Quarter 1943.

79

 Memo, Lincoln Gordon, CMP Div WPB, for

Boeschenstein, Dir CMP Div WPB, 19 Jan 43, sub:

CMP—Simplification of Paper Work and Curtailment of B-Product List. 80

 (1) Memo, Col Cooke, ACMO, for Boeschenstein, 6 Jan 43, sub: Classification of Engines under

CMP. (2) Memo, Skinner, Dir Production Scheduling SOS, for Vice Chmn WPB, 28 Jan 43, sub:

Product Classification Under CMP (The B List

Problem). (3) Memo, Col Cooke for Dir CMP

Div WPB, 9 Feb 43, sub: Proposed "B" List Policy

for Third Quarter. (4) Memo, Cooke for Dir

CMP Div WPB, 15 Feb 43, same sub, and incl,

Proposed "B" List for Third Quarter. (5) Memo,

Cooke for Dir CMP Div WPB, 4 Mar 43, sub:

Proposed Principles Governing Classification of

Products.
THE CONTROLLED MATERIALS PLAN 595

specific allotment, in amounts required to

fulfill his authorized schedule.81

On the same day that this proposal was

submitted to the War Production Board,

the chief of the Requirements Branch, Production Division, ASF, submitted a detailed

criticism of the proposal to the Army controlled materials officer. This critique,

which was widely circulated within the Production Division, pointed to the serious loss

of control over the flow of materials which

would result if the plan were adopted:

During the last two months, a great many

collateral benefits have been noted as a direct

result of the provisions in the C.M.P. which

provide for a definite balance of schedules

within an allotment of material and definite

records to confirm the fact that such a readjustment was made. A close observation of the

operations of the Supply Services in this connection indicates that the token allotment

recommended in the proposed simplification

would not insure . . . that actual procurement would be carefully scheduled and actually related to material allotments [italics in

original].82

On 21 April 1943, the proposal was rejected

by Mr. Julius A. Krug, the Program Vice

Chairman, WPB. Krug characterized the

the proposal as equivalent to the unlimited

extension of priorities, which "does not provide for any basis for checking orders for

critical materials so certified against bona

fide requirements."

 83 By this time, however, sentiment within the Army for the

proposal had cooled considerably.

The accumulated pressure from within as

well as outside WPB for a resolution of the

B-product problem led to a series of modifications of the existing arrangements. On 15

May 1943, WPB announced a new B-product list together with a list of Class A Civilian Type End Products. The latter was a list

of important items formerly on the B list,

such as equipment used by Army Engineers,

for which claimant agencies could elect to

make allotments on a vertical basis. Other

changes included the elimination of military aircraft items as well as a number of

clarifications which simplified the interpretation and application of the B list.84

The really significant change, which effectively disposed of the B-product controversy

as a major issue, came about on 23 June

1943. On this date the Production Executive Committee, WPB, voted to approve a

short list of "excluded B components" and,

effective with the first quarter of 1944, to

permit claimant agencies to treat all other

items as A products if such items were required to meet regularly scheduled procurement programs. At the same time, claimant

agencies were given authority to obtain complete bills of materials for all items in their

procurement programs except for the excluded B components. The practical effect of

this disposition of the B-product problem

was to abolish the B list for the procurement

agencies (except for the twenty-two excluded B components) but to retain it for

all other purposes. WPB still had control

81

 (1) CPA, Industrial Mobilization for War, p.

676. n. 41. (2) Memo, Col Cooke, Chf CMP Control, Br, for Dir Resources and Production Div

ASF, 20 Mar 43, sub: Proposed Simplification and

Enforcement of the Controlled Materials Plan, and

Attachment A (mimeographed): Summary of Proposed Simplification of the Controlled Materials

Plan, and Simplification of the Controlled Materials

Plan. 82

 Memo, Maj Sargent, Chf Reqmts Br, for Chf

CMP Control Br, Resources and Production Div

ASF, 26 Mar 43, sub: Comments on Proposal To

Alter CMP.

83

 Ltr, Krug, Program Vice Chmn WPB, to Gen

Clay, ACofS ASF, 21 Apr 43. See also CPA Industrial Mobilization for War, pp. 675-78, for a discussion of this episode. 84

 WPB, Official CMP Class B Product List and

Class A Civilian Type End Product List, 15 May 43.
596 THE ARMY AND ECONOMIC MOBILIZATION

over the broad area of the detailed determination of requirements and allotments

for the maintenance of civilian supply

and the basic industrial economy.85 The

Controlled Materials Plan was thus effectively restored to a vertical basis of operation where that type of operation was most

essential—in the execution of military procurement geared specifically to military

requirements. 85

 (1) Ltr and attachment, Krug, Program Vice

Chmn WPB, to Gen Clay, 12 Jun 43. (2) Memo,

Clay for Program Vice Chmn WPB, 16 Jun 43, sub:

Proposed Revision of CMP Procedure for Class "B"

Products. (3) CPA, Industrial Mobolization for

War, p. 679. The list of excluded B components, as

well as the detailed procedure under the new arrangement, is contained in the attachment to the

Krug letter of 12 June 1943.
CHAPTER XXVI

Other Measures for Control and

Conservation of Materials

Miscellaneous Controls

The Controlled Materials Plan rapidly

achieved its basic purposes and remained

throughout the war as the instrument for

channeling the supplies of steel, copper, and

aluminum into their most important uses.

No other materials were brought directly

under CMP although a number of them

become so critical that the priorities system

proved inadequate for their effective distribution. Special allocation systems were

therefore devised for tires, lumber, cotton

textiles, woolen and knit goods, pulp and

paper, and chemicals. These systems drew

heavily from the experience of CMP but

were tailored to suit the nature of the material and the organization of the industry

concerned. Their common feature was the

budgeting of available supplies in accordance with the urgency of need as indicated

by careful estimates of requirements. As in

the case of priorities and CMP, the administration of these controls on behalf of the

War Department was supervised by the Production Division, ASF, with the details of

operation falling upon the various technical

services. Each of these systems presented its

own problems and peculiarities, but as in the

case of controlled materials the improved

methods of distribution combined with expanded production and curtailment of procurement objectives gradually eased the

shortages.1

Component Scheduling

An important sector of production for

World War II was represented by complex

intermediate parts essential to the completion of end items of procurement. These

intermediate units—commonly referred to

as components—represented a wide array

of items including motors, generators, compressors, heat exchangers, electrical measuring instruments, engine accessories, antifriction bearings, and others. By the end of

1942, serious shortages in these categories

were interfering with facility expansion programs and the production of major items of

munitions. Among the procurement programs affected were AAF aircraft, Navy

destroyer escorts, and ship construction by

the Maritime Commission and by the Army

Transportation Corps. Facility completion

programs jeopardized by component shortages included those for synthetic rubber and

aviation gasoline as well as in varying degree

the six hundred scheduled construction proj1

 (1) ICAF R60, Priorities and Allocations, pp.

97-98. (2) CPA, Wartime Production Achievements and the Reconversion Outlook, pp. 73-98,

passim. (3) CPA, Industrial Mobilization for War,

pp. 826-34; Novick, Anshen, and Truppner, Wartime Production Controls, Chs. X-XIX.
598 THE ARMY AND ECONOMIC MOBILIZATION

ects of the Army and corresponding projects

of the other procuring agencies.2

In December 1942, a committee headed

by Maj. Gen. Lucius Clay submitted proposals for dealing with thirty-four important

components required in common by various

claimants.3 After intensive study of the problem under WPB auspices, a priority rating

of AA-1 for all thirty-four components was

authorized by Ferdinand Eberstadt.4 This

proved to be only a temporary expedient

and, on 26 February 1943, WPB issued its

first General Scheduling Order (M-293).

This order initially covered thirty-six classes

of components handled by eleven of WPB's

industry divisions and divided all listed components into three degrees of critical importance with corresponding degrees of control. An unlabeled class—the least critical—

was subject only to periodical status reports

by manufacturers. The next group—known

as X components—was subject to "orderboard" inspection and revision by WPB;

component manufacturers' schedules, once

screened and approved by WPB, were

"frozen" against all interference and had to

be followed. The Y group—consisting of

seven types of highly critical components—

could not be purchased or ordered without

prior specific approval of WPB, which

placed approved orders under frozen schedules with the manufacturer deemed most

appropriate.

These efforts to control component delivery schedules were, in the view of the

military procuring agencies as well as others,

inadequately related to end-product programs.5

 As in the case of control over producers' mill schedules for basic industrial

materials,6 separate decisions by the several

WPB industry divisions failed to provide a

balanced and properly timed flow of components and parts at all contractor levels

into predetermined end-product programs

on the basis of relative importance. The

chief, as well as highly important, result of

scheduling under the original order M-293

was the "dehydration" of order boards by

screening out all duplicate orders, prematurely placed orders, and others deemed to

be not important enough to be included

in a particular delivery schedule.7

To achieve a greater degree of program

control in scheduling components, M-293

went through several modifications designed

to approximate the vertical programing and

allotment procedure typified by CMP. As

early as June 1943, the Component Scheduling Plan was superimposed on M-293 for

certain key components, programs, and

claimant agencies. This plan attempted to

obtain from claimant agencies a statement

of their requirements for control components up to twenty-four months in advance.

The capacity of component manufacturers

was allocated by WPB against the stated

requirements and firm schedules were prescribed. Unfortunately, the burden of paper

work and the fact that CSP was applied to

manufacturers on a voluntary basis resulted

2

 (1) CPA, Industrial Mobilization for War, pp.

683-84, 692. (2) Construction Scheduling Section, Historical Report, 12 Jun 43, incl to Memo,

Lt Col F. W. Crandall, Production Div ASF, for

Dir Control Div ASF, 6 Jul 43, sub: Annual

Historical Report of the Production Division and

Its Branches. 3

 CPA, Industrial Mobilization for War, p. 683. 4

 WPB Program Determination 270, 22 Jan 43.

5

 CPA, Industrial Mobilization for War, p. 692. 6

 See above, page 554. 7

 Findings of the Subcommittee on Scheduling

Practice in Relation to Preference Ratings, 13 Oct

43, App. A to Report No. 10 of Special Committee

on Preference Ratings and Allied Controls, transmitted with Memo, L. Gordon (Chmn) et al., for

Kohlhepp, Chmn Program Adjustment Com WPB.

24 Oct 43, sub: Report of Special Committee on

Preference Ratings and Allied Controls.
CONTROL AND CONSERVATION OF FACILITIES 599

in its attaining only indifferent success. In

order to tighten up the program in the fall

of 1943 the so-called Z component procedure was added to M-293. This covered

sixteen control components and eight subcomponents and made CSP mandatory at

the discretion of certain claimant agencies.

In general, the objectives of Z component

procedure were to identify orders at all contractor levels with end-product programs,

to mesh the delivery dates of all intermediate products with end-product schedules,

and to decentralize much of the paper work

to the field.8

The foregoing attempts at component

scheduling met with considerable opposition

from industry because of the paper work involved and a fairly widespread feeling that

they were of dubious value. In 1944 the Z

procedure was dropped and the X procedure was modified to reduce paper work,

especially by confining the procedures to

major firms representing the bulk of a given

industry. By this time the peak demand had

passed and the general refinement of war

production schedules and procedures under

both private and governmental direction

had added substantially to productivity.

Thus World War II ended without the

achievement of, or the compelling necessity

for, more than fragmentary scheduling control techniques at the level of complex components.9

Export Controls

An important group of material controls

initiated at the beginning of the defense period

aimed at preventing the exportation from

the United States of scarce materials, tools,

and equipment. In the fall of 1939 after

the outbreak of war in Europe, losses of

crude rubber and tin by re-export to Europe

had become large enough to alarm the

ANMB. With the increased foreign demand

for American machine tools, scrap iron,

ferro-manganese, and other strategic and

critical materials sought for industrial use

or stockpiling by the U.S. Government, it

became apparent that unrestricted foreign

purchases posed a serious treat to American

defense objectives. Exhortation and "moral

embargoes" failed adequately to curb these

losses and on 2 July 1940 the President was

authorized to prohibit or curtail the exportation of critical materials.10

Under the new legislation an export licensing system was established, to be administered by the administrator of Export Control. The administrator and his staff relied

heavily upon the Army and Navy Munitions

Board in reviewing export applications and

in reaching decisions as to which items were

essential to the defense needs of the United

States.11 For various reasons, owners of materials denied export licenses were sometimes

8

 The shipbuilding program of the Army Transportation Corps was a principal "guinea pig" in the

application of the Z procedure. CPA, Industrial

Mobilization for War, pp. 692-93. 9

 (1) Ibid., pp. 834-35. (2) CPA, Wartime Production Achievements and the Reconversion Outlook, p. 15. (3) Novick, Anshen, and Truppner,

Wartime Production Controls, pp. 284-86. 10

 54 Stat: 712, 2 Jul 40. See also, Jt Releases of

the War and Navy Depts, 11 Oct 39, Statement by

the Army and Navy Munitions Board on Strategic

and Critical Raw Materials; and 19 Jan 40, Statement by Army and Navy Munitions Board on Exports of Essential Raw Materials. 11

 Brig Gen R. L. Maxwell, Administrator of Export Control, Export Control, 31 May 41, AIC Lectures, 19:101ff. By mid-1941, the Office of Export

Control under General Maxwell had some 425 personnel, including approximately 100 Army and Navy

officers and some 50 to 60 "top grade" Civil Service personnel. Ibid., p. 104 therein. The Office of

Export Control and its successor agencies were the

counterpart of the War Trade Administration proposed in the Industrial Mobilization Plan for the

control of foreign trade in time of emergency and

war.
600 THE ARMY AND ECONOMIC MOBILIZATION

unwilling or unable to sell to domestic purchasers. It was soon found that positive

measures were needed to direct the flow of

materials frozen under export embargoes

into actual defense uses within the United

States. In response to this need, Congress on

10 October 1940 conferred upon the President the authority to requisition material

which had been denied export.12 Under the

new procedures, the War and Navy Departments, acting through ANMB, were empowered to determine the need for requisitioning specific items and to sell or otherwise dispose of them. Actual requisitioning

was performed by the administrator of

Export Control in behalf of the department

concerned. The formal requisition process

consisted of seizure of the property, followed by hearings under the administrator

to determine "the fair and just value." The

administrator then made specific recommendations to the President on the terms

of compensation. The President's determination, which typically followed the recommendations, could be accepted or rejected

by the owner. If accepted, the owner was

immediately paid the value in full as determined. If rejected, the owner received 50

percent of the determined value and was

presumably free to take his case to the

courts.13

In actual practice, requisitioning was employed only as a last resort. In most instances, with the requisitioning power in the

background, the War and Navy Departments were able to procure the items in question on the basis of negotiation. Shortly before Pearl Harbor, the requisitioning power

was extended by statute to include virtually

all kinds of property within the United

States, not merely that which had been denied export license. At this time the broad

supervision of requisitioning was placed

under OPM and its successor agencies.14

Government-Furnished Materials

A positive program for insuring an adequate supply of scarce materials and equipment to Army contractors was developed in

the form of Government Furnished Materials (GFM) and Government Furnished

Equipment (GFE). Introduced as a temporary expedient in World War I, the device of having the government furnish materials was found to have certain advantages.15

 With its far-flung purchasing facilities and statutory powers the War Department could obtain scarce supplies far more

easily than could small private contractors.

With the advance guarantee of GFM a

larger number of contractors was encouraged to bid, and contracts were more widely

diffused among small business. Also, contractors were less inclined to slow down production and hoard labor and other resources

because of material shortages. By purchas12

 54 Stat. 1090, 10 Oct 40. This act was implemented by Executive Order 8567, 15 Oct 40. 13

 All War Department requisitions under the

1940 act were apparently settled without litigation.

ASF, History of the Purchases Division, p. 373.

14

 (1) Ibid., pp. 361 ff. (2) Harry B. Yoshpe, The

Flow of Materials to War Suppliers, circa 1946

(preliminary draft, copy in OCMH, hereafter cited

as Yoshpe, Flow of Materials), p. 101. The Office

of Export Control, under an administrator, was the

first of the economic warfare agencies of the United

States, and was succeeded in turn by the Economic

Defense Board, the Board of Economic Warfare,

and the Foreign Economic Administration. 15

 The War Department in World War I found

it necessary to supply its aircraft contractors with

certain grades of lumber and textile products in

order to meet aircraft specifications. AAF, Historical Section, History of the Bureau of Aircraft Construction, 1919. During the interwar period the

Quartermaster Corps supplied clothing contractors

with cloth and garment findings. Yoshpe, Production

Control in the QMC, p. 22.
CONTROL AND CONSERVATION OF FACILITIES 601

ing for a number of its contractors at one

time, the Army could eliminate competitive

bidding for numerous small lots and thereby effect purchasing economies. Moreover,

inspection was simplified and the Army

could obtain greater uniformity and higher

quality of both materials and finished items

of procurement.16

With the growth of material and equipment shortages as well as for other reasons,

the utilization of GFM and GFE in World

War II spread to all of the Army's technical

services.17

 In the case of GFE (machine tools

and industrial equipment), various kinds of

equipment were furnished to contractors,

chiefly for Ordnance procurement, under

the terms of supply and facility contracts

and in conformity with the regulations and

procedures for property accountability and

cost allocation referred to in an earlier chapter.18

 The GFM procedure, in its simplest

and strictest sense, was used primarily by

the Army Quartermaster Corps for the purchase of more or less standardized raw materials to be furnished to a variety of contractors producing the same item. The term

"GFM" was sometimes used, however, to

include contracting by the Army for complex parts, components, and subassemblies

to be delivered to specific prime contractors

such as aircraft final assembly plants and the

huge Ordnance ammunition and shell-loading plants. The GFM procedure, construed

in this sense, was widespread throughout

Army procurement during World War II.

In general, the use of GFM was limited to

a relatively few bottleneck situations, where

the particular urgency and other specific

factors justified the government's assumption of activities which were normally the responsibility of contractors in private industry.19

Broadly speaking, government-furnished

materials were supplied under one or the

other of two alternative methods: (1) the

price discount method, under which the

price of the end product to the Army was

reduced by the value of freely furnished

GFM; (2) outright sale of GFM at a fixed

price with no reduction in end-product

prices. Intermediate arrangements permitted the sale of GFM at reduced or fixed

prices reflected in adjusted end-product

prices. Because of the complexities of War

Department property accountability regulations, outright sale of GFM was in many instances to be preferred. On the other hand,

the loss of control involved in outright sale

restricted the use of this method to special

types of situations.20

Increasing use of GFM and GFE forced

widespread changes in the antiquated peacetime property accountability regulations of

the War Department. Originally designed

to cover the issue of personal and field equipment to troops, the regulations provided for

the personal financial liability of accountable officers and frequently prohibited the

transfer of property and equipment. The

same regulations which made an officer financially liable for the loss of his side-arms or

binoculars were at first technically applicable to a contracting officer responsible for

vast quantities of supplies and equipment in

the possession of contractors or in warehouses remote from his personal supervision.

Adequate revision and codification of the

regulations governing property accounta16 bility were slow in coming and existing rules Yoshpe, Flow of Materials, pp. 76, 79-80. 17

 Ibid., p. 77. 18

 See above, Chapter XXI, esp. sections on DPC

and War Department-owned facilities.

19

 Yoshpe, Flow of Materials, p. 79. 20

 Ibid., pp. 76-78, and sources cited therein.
602 THE ARMY AND ECONOMIC MOBILIZATION

had to be widely ignored to meet the new

urgency. As instances of contractor misappropriation or mishandling of GFM came

to light, responsible officials sought a thorough and systematic revision of the regulations. A major revision was initiated on 16

February 1943 by issuance of the War Department Industrial Accounting Manual.

This accomplished many reforms, including

abolition of time-consuming surveys and reports of losses by military personnel completely unfamiliar with the complexities of

the contracts and circumstances under

which GFM was advanced and used. Sound

business practices were substituted for obsolete procedures, and the details of accountability and financial responsibility were made

largely a matter of contract terms and administration. Under these conditions, officers

accountable for industrial property were

made subject to appropriate discipline in

lieu of a hypothetical financial liability

which was meaningless in view of the pecuniary magnitudes involved. Numerous other

changes and revisions before the end of the

war served to bring the War Department's

accountability regulations into line with the

realities of modern procurement practice.21

Importation and Stockpiling

During the twenty years of interwar planning the Army and Navy were engaged in

the study and recommendation of measures

concerning what might have become a

major instrument for anticipating and forestalling shortages of basic raw materials vital

to the defense of the nation. This was a program for importing and stockpiling, during

the favorable conditions of peacetime, strategic materials which were available exclusively or predominantly only from abroad.

The experience of World War I had dramatically indicated the unwisdom of delaying the importation of strategic materials

until the country was in the stage of largescale mobilization or actual participation in

war. In 1917 and 1918, at the very time

when foreign sources of supply were largely

cut off, demand for manganese, chrome,

vanadium, mercury, tin, and other strategic materials rose to unprecedented levels.

The consequent shortages sent prices skyrocketing: ferro-manganese went from

$37.50 per ton to $400.00; ferro-vanadium

from $2.20 per pound to $5.50; tungsten

from $7.50 per unit to $80; tin from 38

cents per pound to $1.10; mercury $38.85

to $125 per flask.22

In its extremity the United States in

World War I found its ore-bearing ships

sunk as they attempted to run the gauntlet

of German submarine warfare; scarce and

costly shipping facilities, not to mention

manpower, were transferred from other badly needed uses to the importation of scarce

materials, often to end up at the bottom of

the ocean; naval vessels were diverted from

other urgent duties to the convoy of strategic materials. In addition to shipping difficulties, foreign sources were often preempted by the preclusive buying of the

enemy or made unavailable through lack of

internal transportation and production facilities. Thus the United States was obliged

to ship coal to Brazil to enable railroad locomotives to bring manganese ore from the

interior to the seaboard. At one time consideration was given to the use of airplanes

to fly vanadium ore concentrates from the

21

 For further details, see: (1) ASF, History of

Purchases Division, pp. 550-52, and sources cited

therein; (2) Control Division ASF, Control of

Government Furnished Material (draft of proposed ASF manual, 15 August 1945).

22

 Baruch, American Industry in the War, pp.

149-64.
CONTROL AND CONSERVATION OF FACILITIES 603

interior of Peru to the seacoast.23 Experiences of this kind later prompted the following observation by a prominent spokesman

for the steel industry:

As a matter of national defense in time of

need, it seems to me there should be a prohibition on the use of domestic supplies of manganese in peacetime, and preservation of the

limited amounts that we have. The Manganese Producers' Association however, would

not agree with me on that.24

As early as 1921 the War and Navy Departments undertook continued studies looking to the establishment of a program for

stockpiling strategic materials. In 1933 the

National Resources Board recommended

the stockpiling of "deficiency" minerals.

After further studies, Congress included the

sum of $31⁄2 million for stockpiling purposes

in the 1938 Naval Appropriations Act. Additional amounts of $500,000 for the same

purpose were authorized in each of the two

following years. These funds were used for

Navy purchases of manganese, chrome, tin,

tungsten, optical glass, and manila fiber.25

On 7 June 1939, after recommendations

of the ANMB and other agencies, Congress

passed the Strategic War Materials Act,

which permitted the ANMB to determine

the quantities and qualities of materials to be

purchased and retained in a military stockpile. Actual appropriations for the purpose

were left to future acts of Congress, and until the spring of 1940 totaled only $10 million against earlier ANMB recommendations of between $202 and $690 million. The

act itself was hedged with "Buy-American"

limitations. These limitations not only subordinated the Strategic War Materials Act

to the Buy-American Act of 1933, but included a special provision allowing domestic

producers up to a year to develop and produce, without giving bond for delivery, the

needed materials in preference to spot purchases from foreign sources.26

Tied down by these restrictions, limited by

meager appropriations, and for various

other reasons, the ANMB was unable to go

forward with a vigorous program and made

its actual purchase recommendations cautiously. Moreover by 1940—after a year of

war in Europe and with the adoption of the

United States own large-scale Munitions

Program—the very same difficulties of skyrocketing demand, shortages of ocean shipping, and failures of supply at the source

which plagued the United States in World

War I had reappeared to cripple preparations for World War II. The Strategic War

Materials Act was too inadequate and had

come too late to do more than partially realize the objectives of a realistic stockpiling

program.27 All these factors thus combined

to nullify interwar planning for a successful

importing and stockpiling program.

In order to meet the needs of an acrossthe-board program of industrial mobilization, Congress on 25 June 1940 passed new

legislation providing for large-scale purchases of a wide variety of strategic and

critical materials from all available sources.28

This legislation authorized the establishment

23

 Ibid., pp. 150-51. 24

 Dr. Walter S. Tower, Ex Secy American Iron

and Steel Institute, Problems and Trends in the

Iron and Steel Industry, 29 Oct 35, AIC Lectures,

12:1221⁄2. 25

 ANMB, Report to Congress on Strategic Materials, reproduced in S. Doc. 5, 79th Cong., 1st

Sess., 29 Jan 45, p. 5.

26

 (1) 53 Stat. 811, 7 Jun 39, Sec. 5. (2) 47 Stat.

1250, 3 Mar 33, Buy-American Act. 27

 (1) Industrial College of the Armed Forces

R78, Stockpiling Activities of the War Department

and Other Agencies, 1939-46 (November 1946),

ICAF Library. (2) Yoshpe, Flow of Materials, pp.

83-85. (3) Supply Priorities and Allocation Board

Report 25. The Stockpiling Program, 7 Oct 41. (4)

Truman Committee, Hearings, 42:25675. 28

 54 Stat. 572, 25 Jun 40.
604 THE ARMY AND ECONOMIC MOBILIZATION

of the Metals Reserve Corporation, a subsidiary of RFC, which was given ample

funds and adequate powers to obtain materials both for current industrial use and

stockpiling purposes. Because of these circumstances, the ANMB stockpiling program

under the 1939 act was frozen by agreement

at $70 million (the level of total appropriations by mid-1940) and was confined to

materials indispensable to munitions production and meeting exacting specifications.29

 The broad objectives to be carried

out the Metals Reserve Corporation were

determined by NDAC and its successors,

OPM and WPB, in consultation with the

War and Navy Departments and other

agencies of the government. By 1 November

1944, Metals Reserve had purchased some

$1.7 billion of strategic and critical materials, representing a quantity of 19 million

tons, 11.6 million of which were imported

from abroad.30 Although the proportions of

purchases going into stockpiles varied widely

from commodity to commodity, by far the

greater proportion of the program as a whole

went into current wartime industrial consumption.

With actual stockpiling operations in

World War II conducted almost entirely by

civilian agencies, the War and Navy Departments once more set about the study and

formulation of long range stockpiling objectives. Included in these efforts were the

preparation of suitable postwar legislation

as well as opposition to various inadequate

"stock pile" bills introduced in Congress

largely for the benefit of the American mining industry.31

 On 2 January 1945, in response to a requirement in the Surplus Property Act of 1944, the ANMB submitted to

Congress a report and recommendations on

postwar stockpile objectives and policy.32

Attached to the report was a confidential list

of the recommended maximum and minimum stockpile goals for a long list of strategic and critical materials. In its policy

recommendations, the ANMB pointed to the

substantial depletion of U.S. mineral resources during World War II and the increased necessity for relaxing the various

Buy-American restrictions of previous legislation.

Early in 1946, with the experience of two

world wars fresh in mind, Congress undertook to enact new stockpile legislation. The

result was the Stockpiling Act of 1946,

which replaced its predecessor of 1939.33

Despite the recommendations of ANMB

and despite references in the policy statement of the act to the necessity for conserving the deficient resources of the United

States, the act retained verbatim the BuyAmerican restrictions of the prewar legislation. President Harry S. Truman reluctantly

signed the act, pointing to the increased

costs, the further depletion of America's inadequate underground reserves, the jeopardizing of national security, and the damaging effects upon U.S. foreign economic

policy—all resulting from the inclusion of

the restrictive features.34

Conservation of Materials

An important segment of the total program for increasing the flow of scarce materials to their most important uses was the 29

 ICAF R78, Stockpiling, p. 5. 30

 Charles B. Henderson, Chmn RFC and President Metals Reserve Corporation, Report on Activities of Metals Reserve Corporation From 28 June

1940 to 1 November 1944 (mimeographed), p. 35,

cited in ICAF R78, Stockpiling, p. 17.

31

 ICAF R78 Stockpiling, p. 9. 32

 Rpt cited above, note 25. 33

 60 Stat. 596, 23 Jul 46. 34

 ICAF R78, Stockpiling, p. 21.
CONTROL AND CONSERVATION OF FACILITIES 605

development of direct measures for reducing

the consumption of materials in less important uses. The curtailment of relatively

nonessential uses of materials for the economy as a whole was the broad responsibility

of the War Production Board and its predecessors. Such curtailment was accomplished

in general by the various L (limitation) and

M (material) orders issued by WPB. These

orders contained a wide variety of restrictions, including the reduction or prohibition

of the manufacture of specified end products, or the limitation or prohibition of the

use of scarce materials for various products

and purposes. The terms of L and M orders,

especially before Pearl Harbor, usually exempted the military services in whole or in

part. Later, with the growing seriousness of

material shortages, these exemptions were

substantially reduced or eliminated. In practice, the major responsibility for initiating

and applying conservation measures to military procurement rested with the services

themselves. Not only were the services active in promoting their own conservation

measures; frequently these became the prototype or model for similar measures which

were extended to the entire economy.35

Within the Army, the term "conservation" came to embrace a number of activities all designed to reduce the consumption

or waste of scarce materials. These included

substitution of more abundant materials,

simplification and standardization of procurement end items, improvement of manufacturing processes, more efficient methods

of distribution, improved utilization and

maintenance of end items, and various reclamation and salvage measures. In addition

to these conservation efforts, the Army undertook periodic reviews of its procurement

requirements in order to minimize materials

consumption when this could be done without jeopardizing military objectives.36

Systematic measures for conserving scarce

materials were formally adopted by the War

Department on 11 June 1941, soon after the

material shortage problem had attained

prominence and threatened to remain for

an indefinite period. At this time the Under

Secretary announced the necessity for a comprehensive program of conservation and directed the supply arms to appoint qualified

persons to co-ordinate the relevant activities

within each service.37 Two days later a Conservation Section was established within the

Commodities Division, OUSW. The function of this office was to direct attention, as

needed, to materials requiring conservation

measures; to receive and summarize reports

from the supply arms; to transmit information on the results of conservation activity

to OPM and other interested bodies; and

to act in co-operation with OPM, the

ANMB, the supply arms and services, and

other branches and divisions in OUSW in

carrying out conservation measures.38 Thereafter the Army's organization and procedures for conservation underwent numerous

changes.

Throughout the defense and war periods,

the Army collaborated with numerous outside agencies in carrying out the program.

35

 For a more extensive treatment of the Army's

conservation activities in World War II, see: (1)

Industrial College of the Armed Service Forces R87,

Conservation Within the Army Service Forces During World War II (March 1947), ICAF Library;

(2) ASF annual rpts, 1942-45; (3) Yoshpe, Production Control in the QMC, pp. 27-36. See also

the volumes of the individual technical services in

the series UNITED STATES ARMY IN WORLD

WAR II.

36

 ICAF R83, Conservation, p. 2. 37

 Memo, USW Patterson for Chfs of Supply Arms

and Services, 11 Jun 41, sub: Conservation of Certain Basic and Semi-finished Materials. 38

 Memo, Gen Hines, Dir Planning Br OUSW, 13

Jun 41, sub: Conservation of Materials.
606 THE ARMY AND ECONOMIC MOBILIZATION

Among these were the many interested subdivisions of the War Production Board and

its predecessor agencies, the Navy Department, Maritime Commission, Petroleum

Administration for War, Office of Defense

Transportation, Lend-Lease Administration, War Food Administration, National

Housing Agency, and the Procurement Division of the Treasury. Continuous liaison

was maintained, either by Conservation

representatives or through the Research and

Development Division, ASF, with scientific

and engineering groups such as the National

Academy of Science, the American Standards Association, the American Society for

Testing Materials, the Society of Automotive Engineers, the National Inventors

Council, and the Federal Specifications

Board. Likewise, the Army was represented

on numerous standing committees organized

to deal with specific segments of the nationwide conservation program. Included in

these were such diverse groups as the Combined Conservation Committee of the Combined Production and Resources Board, the

U.S. Conservation Coordinating Committee, the Iron and Steel Scrap Dealers Industry Advisory Committee, and committees for the die casting industry and waste

materials dealers.39

The achievements of the War Department's conservation program can be briefly

indicated through examples of the major

categories of activity in the program. In the

realm of substitution heroic efforts were

made to change specifications, manufacturing processes, tooling and equipment, and

other factors to permit the replacement of

scarce materials by those in relatively greater

supply. Thus, after extensive experimentation by research laboratories and and contractors, the Army succeeded in developing

steel cartridge casings in place of those made

of copper and brass. This was expected to

save 600,000,000 pounds of copper by the

end of 1943 for artillery cartridge cases

alone.40 Savings of zinc in substituting steel

for brass cartridge cases were estimated for

the same period at 260,000,000 pounds. The

conversion of motor vehicle cargo bodies

from steel to wood was expected to save

75,000 tons of steel in 1942 and 350,000 tons

in 1943. When all available aluminum was

needed for aircraft manufacture, the savings

of this metal were calculated at 1.4 million

pounds by eliminating aluminum in radio

sets; 85 million from Army Quartermaster

supplies; 17 million from the substitution

of steel or secondary aluminum in fuze production; 35 million from substitution of

plastics in another type of fuze; 9 million by

replacement of aluminum with steel in

searchlights; and so on.41 The substitution

of enamelware for nickel in medical utensils

saved 113,000 pounds of that metal in the

first six months of 1943. Another 21⁄2 million pounds were to be saved by the end

of 1943 from Quartermaster items, and 45

million pounds through substitution in

armor plate and armor-piercing shot.42

Small items as well as large were scrutinized for possibilities of substitution, since

these individually in large volume, and collectively for all the Army's needs, consumed

tremendous quantities of materials. Thus the

Army "made do" with plastic instead of

metal bugles, plastic buttons, plastic insignia, plastic raincoats, plastic identification discs, and other plastic items, ad infinitum. Not infrequently substitute materials

adopted under the compulsion of necessity

turned out to be superior in many ways to

39

 ICAF R87, Conservation, passim.

40

 ASF, Annual Rpt, 1943, p. 77. 41

 (1) ASF Annual Rpt, 1942, p. 23. (2) Ibid.,

1943 p. 77. 42

 Ibid. 1943, p. 77.
CONTROL AND CONSERVATION OF FACILITIES 607

the ones replaced. Glass gages used to replace steel gages in Ordnance plants were

corrosion free, resisted abrasion better, lasted

longer, and did not expand so readily from

transmitted body heat as steel ones.43

Throughout the war, utilization of substitutes was a complex and dynamic program.

At any particular time, numerous substitutes

for a single material were likely to be found

in use depending on the nature of the end

item. Thus reclaimed and synthetic rubber

were substituted for natural rubber in tires,

steel for rubber in tank tracks, and plastic

for rubber in raincoats. Also, in some cases

"reverse substitution" became desirable as

the production of scarce materials soared to

unprecedented heights following completion

of new facilities. By early 1944, the supply

of aluminum and magnesium had grown to

such a point that new uses of these metals

were actually encouraged.44

Cutting across all segments of the War

Department's conservation program was the

task of revising specifications for military

end items. As already indicated, revised

specifications were necessary to permit the

use of substitute materials. The systematic

review of specifications also permitted important material savings by simplification

and standardization of end items. In many

cases this could be accomplished without

sacrifice of performance characteristics; in

other cases the loss in performance was unimportant or less important than material

savings. Thus the reduction in tread depth

and tread radii in rubber tires for Army

combat vehicles saved substantial amounts

of rubber; the resulting loss in tire mileage

was considered not significant in view of

combat conditions in overseas theaters.45

A corollary of design simplification was

the reduction in the number of permitted

types or models of procurements items. To

insure that simplified designs would serve

their purpose it was necessary for the Army

to "standardize" designs, eliminating all

specifications except those approved on the

simplified basis. By mid-1942, when material shortages had reached their peak,

1,200 Army specifications had been revised

or approved in accordance with conservation requirements, and 425 had been canceled altogether. By the same time, in collaboration with the National Bureau of Standards, the Army had adopted 17 Simplified

Practice Recommendations and 12 Commercial Standards issued by the bureau.

Sample achievements of the Army in carrying out its standardization program were the

reduction of 44 specifications for chests and

tool boxes to 1; 87 models of small gasoline

engines to 47; 63 models of engine-driven

generators to 14; 21 trailer-chassis models to

15; 170 color standards to 72; 26 types of

waterproof ignition oil to 1.46 In order further to reduce the total number of outstanding procurement specifications, the Army

in late 1942 undertook a long-range program of collaboration with the Navy in the

formulation of Joint Army-Navy Specifications (JANS). By early 1945 some 155

JANS had been formally adopted. The official adoption on a modest scale in World

War II of consolidated specifications for the

Army and Navy marked the beginning of

a program with profound possibilities for the

improvement of future procurement practices of the armed services.47

In the important area of construction,

enormous savings were accomplished by the

43

 Ibid., 1943, p. 77. 44

 ASF Annual Rpt, 1944, p. 144. 45

 Ibid., 1943, pp. 71-72.

46

 (1) Ibid., 1942, p. 19. (2) Ibid., 1943, p. 77. 47

 Rpt, Col Draper and Capt Strauss, Co-ordination of Procurement Between the War and Navy

Departments, I, 34-35; II, 85-115.
608 THE ARMY AND ECONOMIC MOBILIZATION

flat prohibition, subject to individual appeals, of the use of numerous scarce materials. This policy was announced in ANMB

Priorities Instructions of 18 February 1942.

To carry out the policy the ANMB on 1

April 1942 issued the first edition of the List

of Prohibited Items for Construction Work.

The list, which was amended from time to

time and widely circulated throughout the

Army and elsewhere, was an important instrument in the application of the Directive

for Wartime Construction, approved on 20

May 1942 by the Army and Navy Secretaries and the chairman of the War Production Board.48

 The list was used not only by

the Army and Navy but also by the War Production Board and the Defense Plant Corporation in screening and "stripping" applications for approval of construction projects.

The prohibitions in question forced the development and use of substitute materials on

a wide scale, thus serving the same purpose

as design simplification and other such techniques in eliminating need for critical materials.49

Improved manufacturing processe s

brought substantial savings of scarce materials as well as other benefits. These were

conceived largely by civilian employees in

the production establishments of government and private contractors. Originating

in engineering departments as well as on the

production line, these improvements were

often adopted as a result of employees' suggestion systems sponsored or encouraged by

the War Department and the War Production Board. Although frequently motivated

by the need for materials conservation, the

improvements typically had beneficial results far wider in scope. Many millions of

man- and machine-hours, as well as materials, were saved, and—often of even greater

importance—delivery of badly needed munitions and equipment for the Army was

speeded. For example, a new method of

producing adapter boosters for Army Ordnance made use of built-up stampings instead of machining from bar stock. This

saved 1,800,000 machine hours in addition

to 23,000,000 pounds of steel.50 Illustrations

of this type could be multiplied by the thousands through an examination of the wartime suggestion system files in both government and private establishments.

Improvements in distribution included a

countless variety of techniques and procedures for locating and making available to

producers idle or unused materials and

equipment, expediting shipment of materials and end products, revising methods of

packing and packaging to reduce breakage

and wastage, and so on. In collaboration

with the War Production Board the Army

prepared and circularized lists of idle equipment and materials to war contractors, and

engaged in many activities for the redistribution of all types of property in furtherance of

the war effort.51 Major revolutions in transportation and shipping procedures were

effected by the War Department independently or in collaboration with other agencies. For example, Army construction and

supply contracts normally provided for payment for materials based on "railroad

weights." This meant the weight as recorded

on railroad track-scales, a facility not readily

or universally available during peak operations. In order to eliminate frequent backhauling and delays incident to railroad

weighing, the War Department in 1942 en48

 See above, pages 447-48. 49

 For additional detail, see ICAF R87, Conservation, Ch. VII, Conservation in Construction, pp.

66-7, 76.

50

 ASF Annual Rpt, 1942, p. 23. 51

 (1) PR 7, Disposition of Property. (2) ASF

Annual Rpt, 1943, Redistribution and Salvage, pp.

79-80.
CONTROL AND CONSERVATION OF FACILITIES 609

tered agreements with certain carriers to accept shippers' weights as administered by

territorial weighing bureaus. Eventually the

specification of "railroad weights" was forbidden in contracts for all supplies and

materials, including coal.52

Very large savings were effected by the

development of protective packaging for the

prevention of rust, corrosion, and other

damage to finished items of equipment. It

was estimated that improved packaging reduced damage to overseas shipments by 50

percent. In addition to measures for the protection of finished items containing scarce

materials, new packing techniques by mid1943 had effected savings in shipping space

equivalent to requirements for 10 percent

of total Army overseas shipments. During

the first half of 1943 the redesign of shipping

boxes was said to have saved 75,000 tons

of shipping space, equal to the capacity of

eight Liberty ships. This development was

at a time when the shortage of steel was a

matter of grave concern and steel requirements for ship construction was a major

item of controversy.53

As a part of its conservation program as

well as in furtherance of other objectives,

the Army trained its personnel both in and

out of uniform in the proper handling, use,

and preservation of equipment and supplies

of all kinds. This ran the gamut from the

care of rifles to the conservation of food,

and from the operation of huge pieces of

industrial equipment to the maintenance

of typewriters. Elaborate repair and maintenance organizations were established

throughout the zone of the interior and in

overseas theaters, and rigid requirements

were established for the periodical inspection, maintenance, overhaul, and rebuilding

of equipment. The magnitude of these operations is suggested by partial statistics available for the latter part of the war. The

Army's "fifth echelon" repair shops (operating under the technical services for the

rebuilding of unserviceable equipment) returned to service approximately $2 billion

of unserviceable material and equipment

in the twenty-month period 1 January 1944

through 31 August 1945. In the last twelve

months of the same period, Army "fourth

echelon" maintenance (replacement of unserviceable parts and assemblies, primarily

under service command jurisdiction) restored approximately $4 billion in material.

During this time the Army employed, on an

average, 48,200 and 24,500 persons respectively in its fourth and fifth echelon

maintenance establishments.54

A still further effort by the Army to conserve scarce materials was reflected in its diverse salvage operations. Closely related to

redistribution and maintenance, and functioning as an integral part of the War Production Board's nationwide salvage program, Army salvage operations grew from

negligible beginnings in the defense period

to the equivalent of an important industry

by the end of the war. During the extensive

scrap drives of 1942 the Army streamlined

its contracting methods for the sale of scrap

and obsolete and surplus equipment, and ordered its establishments to ferret out all possible supplies of such material. Obsolete

guns, mortars, vehicles, and other matériel 52

 PR 1182 (8-31-44). (2) WD Cir 284, 25 Aug

42.

53

 ASF Annual Rpt, 1943, pp. 77-78. Changes in

packing and packaging were also made to reduce

the consumption of scarce packing materials and

to permit the substitution of other materials for

this purpose. Risch, QMC Supply, I, pp. 202-06.

54

 (1) Control Div ASF, Statistical Review, World

War II, pp. 9-10. (2) ASF Annual Rpt, 1944, Ch.

16, Maintenance Service, pp. 273-80. (3) Ibid.,

1945, pp. 254-58.
610 THE ARMY AND ECONOMIC MOBILIZATION

at Army posts were turned in for scrap.

Kitchen waste at posts, camps and stations

was salvaged and sold under standardized

procedures. Crate-fastening methods were

revised in order to permit the maximum salvage of lumber. With the growth in overseas

shipments and operations, an increasing volume of salvage was recovered from overseas

theaters. Thousands of tons of fired cartridge

cases, the tracks of tanks and half-trucks,

lumber, and wide varieties of scrapped

equipment were recovered. Long before V-E

Day the return from overseas of all types of

property—scrap, repairable, and surplus

equipment—had reached mountainous proportions. The salvage centers earlier established in eastern and coastal service commands for the segregation of salvage, gave

way in September 1944 to ASF Classification Depots created to serve each major port

of embarkation. These depots separated all

returned property into appropriate classes

under the three main categories of "serviceable," "repairable," and "salvage". After

V-E Day the classification depots at eastern

seaboards were abolished after overseas theaters were able to handle their own classification and repair operation.55

It is evident that the conservation activities of the Army, together with those in other

sectors of the nation's economy, were an indispensable ingredient in the solution of material shortage problems in World War II.

No amount of rational apportionment of

scarce materials—through priorities, CMP,

and other allocation devices—would insure

the adequacy of supply in the absence of direct measures, such as described above, to

prevent major leakages and loss.

55

 (1) ASF Annual Rpts, 1942, p. 21; 1943, pp.

79-80; 1944, pp. 130, 144; 1945, pp. 245-46. (2)

PR 7, Disposition of Property.
PART SEVEN

CONTRACT TERMINATION AND

SETTLEMENT

CHAPTER XXVII

Contract Termination: Background

and Preparations

Nature and Implications of

Contract Termination

During World War II the Army canceled

thousands of its procurement contracts because of reductions in estimated requirements, obsolescence of particular items, more

important demands upon a contractor's facilities, and for other reasons.1

 Beginning

with a mere handful of cancellations prior

to Pearl Harbor, terminations began to assume importance in 1942. In the summer of

1943, when procurement deliveries attained

peak rates, there was a rapid increase in cancellations, and by the fall of 1944—with the

approach of victory in Europe—the problem

of widespread terminations had become a

major concern of the War Department. Toward the end of 1944 the sudden increase in

requirements associated with the Battle of

the Bulge caused a substantial decline in the

number of terminations. But shortly thereafter, from the collapse of German resistance

in the spring of 1945 until V-J Day, contract

termination and its associated problems became the number one item of business for all

the procurement agencies as well as for the

entire business community. Before V-J Day

arrived, the War Department had canceled

59,000 of its ultimately terminated 135,000

World War II prime contracts. On V-J Day

alone 48,000 contracts were terminated, and

during the following year the War Department continued to be actively engaged in

liquidating its tremendous war procurement

program.2

Contract termination and its associated

procedures represented the core of the process of Army materiel demobilization. This

process may be summed up as the resolution

of three broad groups of problems: (1)

problems connected with the decision to terminate contracts; (2) problems dealing with

the settlement of terminated contracts; (3)

problems involving the disposition of war

1

 The termination of a war contract (not to be

confused with contract completion) involves the

cancellation of all remaining work under the contract at some stage prior to completion.

2

 Two valuable studies of contract termination in

World War II are: (1) Office of Contract Settlement, A History of War Contract Terminations and

Settlements (July 1947), 84 pp. including 19 pages

of bibliography (hereafter cited as OCS, History).

This was prepared by Reynold Bennett, later of the

Legal Office, OCofOrd. (2) "War Contract Termination," Law and Contemporary Problems, X, No.

3 (Winter 1944), 427-560, and No. 4 (Spring

1944), 561-696. This study was published by the

Duke University School of Law and consists of a

dozen articles on the subject written by actual

participants in the termination problem at the

time of the drafting and passage of the Contract

Settlement Act. The principal article in the series is

the richly documented "Policies and Procedures for

the Termination of War Contracts," pp. 449-517,

by Leon Malman, then chief of the Legal Unit,

Contract Termination Section, OCofOrd.
614 THE ARMY AND ECONOMIC MOBILIZATION

matériel. A brief consideration of each of

these affords some indication of the nature

and complexity of the issues concerned.

The decision to terminate a particular

contract during World War II was the end

result of many prior decisions. First of all

were decisions concerning military requirements. Changes in military strategy, the

progress of the war, the development of new

and improved items of procurement, the accumulation of adequate reserves, and many

other considerations dictated cutbacks in

the procurement of particular items or of

broad classes of matériel. After a decision to

effect cutbacks, many complex questions

had to be decided. Should the contracts of

the least efficient producers be terminated

completely and all remaining production be

concentrated in the most efficient plants?

Or should all contracts be proportionately

reduced by partial termination? Should the

Army base its cutback decisions only on its

own direct interests such as economy of procurement, quality of output, security considerations, maintenance of reserve capacity,

and the like? Or should it adjust its termination policy to reflect the existence of labor

shortage and unemployment areas, problems

of transportation and crosshauling, the needs

of small business, the demands of regional

and local groups, civilian consumption requirements, reconversion issues, and other

matters of broad postward policy? A moment's consideration will indicate that all the

diverse and controversial issues which entered into the formation of contract placement policy earlier in the war inevitably

entered into cutback and termination policy.

Thus the whole area of contract termination

was aptly described during the latter half of

World War II as "procurement in reverse,"

signifying that the majority of problems encountered during the expansion of procurement would have their counterparts during

the contraction of the procurement process.

The second broad group of problems

concerned the terms and procedures for the

settlement of terminated contracts. What

should the Army pay to a producer of tanks

whose $300 million contract was canceled

after only a third of the items had been completed and whose plant was bulging with

special machinery, materials, parts, subassemblies, and tanks in various stages of completion? Should the tank producer, for the

loss of his bargain, be allowed in addition

to all his costs the total profit originally contemplated when the contract was let? This

would be his right under common law in

the absence of an agreement to the contrary.

But could the government in good conscience pay out hundreds of millions in profits for work not done while American soldiers were giving their lives for $50 per

month? What legal basis, if any, did the government have for paying a less amount, and

how should such lower amount be determined? How should the tank producer compensate his four hundred immediate subcontractors for the termination of their contracts

following the termination of the prime?

Should he be allowed to negotiate whatever

settlement he could with his subs and pass

the charges on to the government? And what

about the thousands of sub-subcontractors,

extending all the way down the chain of production, whose contracts in turn must be

wholly or partially terminated and settled?

The consequences of the termination of just

one large prime contract by the War Department could produce ramifications whose unraveling might well run into years of auditing, negotiation, correspondence, and debate without producing a final settlement.

It is small wonder that the War Department,

with over a hundred thousand outstanding
CONTRACT TERMINATION: PREPARATIONS 615

prime contracts in the middle of 1943, became gravely concerned over the prospect

of mass terminations at the end of the war.

But the problem of defining the precise

terms for the settlement of war contracts was

subordinate to an even larger consideration—the task of insuring the transition of

the American economy from wartime to

peacetime operation with the utmost dispatch and smoothness. The vast majority of

war producers operated primarily on borrowed capital, often many times the amount

of their peacetime capitalization. A sudden

cancellation of contracts would find them

with both their fixed and working capital

tied up in war plant, equipment, and inventories of raw materials and goods in process. With their operating income closed off,

they could not maintain their swollen payrolls unless adequate interim financing and

prompt settlement were forthcoming. The

alternative to such measures would be mass

unemployment which might well wreck the

reconversion effort and precipitate a prolonged depression. The resulting economic

chaos and loss in national income might well

be of far graver damage to the economy and

to the government itself than any probable

losses incurred through overpayment in

rapid contract settlement or nonrepayment

of generous termination loans. It was this

general background which made prompt

settlement and adequate financial assistance

the keynote of contract termination policy

for World War II.

The third broad group of problems comprising the process of contract termination

dealt with the difficult and delicate tasks

involved in the disposition of war matériel.

At the time of contract termination a contractor's plant would typically be stocked

with wartime equipment, machinery, raw

materials, purchased parts, and partially

fabricated goods in all stages of production.

Most of this would have relatively little

peacetime value and its prompt removal

was prerequisite to a rearrangement of the

plant and the resumption of peacetime production. But in the absence of alternative

arrangements, this wartime inventory would

belong to the government upon settlement

of the contract. Prompt plant clearance

would thus depend upon prompt decisions

on the part of military contracting officers

overburdened with the task of liquidating

mass terminations at the end of the war.

Upon the contracting officer and his staff

would fall the principal burden of making

specific decisions in response to specific questions concerning the disposition of each and

every item of inventory. Should a given item

be scrapped, salvaged, retained by the government for possible future use, sold to the

contractor, or placed on the open market?

And for each item of equipment, machinery,

raw material, purchased part, or partially

fabricated product, what was a fair value

upon which to base any or all of these decisions? What about the major problems of

nationwide economic policy involved in the

disposition of surplus materials of all kinds,

whether in the hands of contractors, in government depots, arsenals, and warehouses

in the United States, or overseas? To what

extent should the government be interested

in the financial returns from property disposals and to what extent in other—often

mutually conflicting—objectives such as

quick sale and disposal, prevention of profiteering by speculators and middlemen, and

preservation of future markets for established producers?

Finally, what of the broad issues in the

sale and subsequent operation of billions of

dollars' worth of complete industrial establishments created for World War II? Should
616 THE ARMY AND ECONOMIC MOBILIZATION

the government be willing to sell virtually

new plant and equipment for as little as

thirty cents on the dollar in order to speed

reconversion, and to allay the fears of those

who saw in government ownership a threat

to established institutions? Or should it hold

on indefinitely to its multi-billion-dollar industrial empire in order to recoup a maximum of costs and prevent private interests

from making a "killing." What steps should

the government take to insure that plant disposal would not further augment the concentration of industrial ownership and

power?

All these problems and many more were

of such magnitude and importance that only

Congress could properly establish the basic

policies governing their final resolution. Yet

Congress would have to rely heavily on the

procuring and mobilization-control agencies

for the information and recommendations

essential to the establishment of basic policy.

Fortunately for the national economy, these

agencies were better prepared to advise Congress and to discharge the tasks of contract

administration than had been the case at the

conclusion of World War I.

Evolution of Contract Settlement Policy

The Liquidation of

World War I Contracts

The armistice of 11 November 1918

found the United States ill prepared to meet

the problems of economic demobilization.

America's entry into World War I a year

and a half earlier had found the nation similarly unprepared for mobilization, and the

bulk of supplies for U.S. troops abroad was

actually furnished by its allies. By the end of

the war, the United States had barely completed the tooling-up stage of mobilization

and many of its contracts had been let within

a month or two of the armistice. As a consequence responsible officials had devoted little thought to termination problems and to

the development of the necessary organizations and procedures. Perhaps most significant of all, they saw little relation between the liquidation of war contracts and

the problems of postwar adjustment. Contract termination and its associated problems

were thus regarded largely as a matter of

governmental housekeeping and budgeting.3

After the armistice, the complexities of the

termination problem were soon revealed as

the War Department and other agencies proceeded to cancel or suspend their procurement contracts. Only a portion of the contracts provided for termination at the government's convenience and there was little

uniformity in the termination clauses. Some

contracts, let under the terms of appropriation acts which specified the termination

privilege, were deemed to contain the

clause by implication. Many others were

3

 The present brief sketch merely presents a few

of the highlights of the World War I contract termination problem. For additional information, see

the fallowing selections and sources cited therein:

(1) I. J. Gromfine and J. Donald Edwards, "Termination After World War I," Law and Contemporary Problems (Duke University School of Law), X,

No. 4 (Spring 1944), 563-93; (2) Stuart Portner

and Victor Gondos, Jr., Preliminary Checklist of

the Records of the War Department Claims Board,

1918-22 (February 1943, 105 pp.), National Archives PC 43-22; (3) Problems of Contract Termination, Letter and Supplementary Material From

the Secretary of Labor to the Subcommittee on War

Contract Termination of the Committee on Military Affairs, U.S. Senate, November 20, 1943, 78th

Cong., 1st Sess., Subcommittee Report (Committee

Print), 1944 (148 pp.) (hereafter cited as Labor

Dept, Problems of Contract Termination); (4) J.

Harry La Brum, "Termination of War Contracts

for the Government's Convenience," Temple University Law Quarterly, XVIII, No. 1 (December

1943), 1-60; (5) OCS History, App. B, Bibliography and Legislation-World War I, pp. 66-69.
CONTRACT TERMINATION: PREPARATIONS 617

covered by no termination provision whatever; it was thus necessary for the War Department to "suspend" such contracts and

negotiate supplemental agreements to settle

the contractors' claims. If negotiation failed,

the contracts were held to have been breached and settlement was left to litigation. To

add to the difficulties, a substantial volume

of procurement had been obtained under

oral or other informal arrangements later declared to lack a valid governmental commitment. Special legislation was required

to validate such commitments and furnish

a basis for settlement.4

The War Department in November 1918

thus found itself with doubtful authority to

terminate many of its contracts; without

organizational machinery to process contractors' claims; without established criteria

for effecting settlement; and, as subsequent

events painfully demonstrated, without authority to effect a binding settlement. Of the

thirty thousand termination claims presented by contractors for World War I, over

three thousand were appealed to the Court

of Claims alone. These appeals "averaged

three and one half years for final settlement;

many represent masterpieces of dragged-out

litigation."

 5

As if the problems of legislation, administration, and litigation growing out of World

War I terminations were not enough to discourage all concerned there was added—

three and a half years after the end of the

war—a fourth category: investigation. A

preliminary inquiry by a Congressional committee led Congress in May 1922 to appropriate $500,000 to be spent by the Attorney

General for the investigation and punishment of war frauds. On 20 July 1922, a War

Transactions Section in the Department of

Justice was created for this purpose. The activities of this group have been succinctly

described in the following words:

For almost four years this unit busied itself

with a wholesale reexamination of war contract settlements. In February of 1923, when

the inquisition movement reached its climax,

it joined forces with the War Department in

the form of a Joint Board of Survey. The group

was established to examine literally all war

transactions in the War Department which

had not hitherto been audited or reported to

the War Transactions Section.6

Failing to find more than a handful of

cases of outright fraud, the War Transactions Section concentrated its efforts chiefly

on the recovery of money paid out in what

it considered overgenerous settlements or in

other cases where recovery was technically

possible. These efforts were facilitated by

previous rulings of the Supreme Court that

the government was not bound by mistakes

of its officers, even in the absence of fraud.

At the end of its four years of activity, the

section had recovered about $13 million

against its own expenditures of $21⁄2 million. During the same period, only 37 fraud

indictments had been returned with 2 convictions and 2 pleas of guilty.7

Available statistics indicate that total War

Department contract commitments for

4

 This was accomplished by the Dent Act (40

Stat. 1272), approved 2 March 1919. In the meantime, by virtue of a decision of the Comptroller of

the Treasury, the Secretary of War "was powerless

to make any payments for uncompleted items on

any of the contracts which fell short of the formal

requirements of the Law." La Brum "Termination

of War Contracts," p. 12. This caused substantial

hardship to many contractors who found their

working capital tied up in materials and partly

finished goods. More than 7,000 claims were subsequently filed under the Dent Act. 5

 Gromfine and Edwards, "Termination After

World War I," p. 586. The Bethlehem Steel case

was not finally settled until after Pearl Harbor.

6

 Ibid., p. 588. 7

 Final Report of the War Transactions Section

(30 June 1926), cited in ibid.
618 THE ARMY AND ECONOMIC MOBILIZATION

World War I amounted to $22 billion. By

the time of the armistice $14.5 billion in deliveries had been made, leaving some 30,000

uncompleted contracts with a face value of

$7.5 billion. Of these, approximately $11⁄2

billion were approved for completion, leaving $6 billion to be canceled. In the 25-day

period following the armistice cancellation

plans were delayed, a circumstance which

helped to ease the impact. During this

period, $2 billion in additional procurement

deliveries were made. At the time of abrupt

cancellation early in December, the uncompleted portion of canceled contracts

totaled about $4 billion. Against this

amount, claims of around $700 million were

filed and were subsequently settled for $530

million.8

Although there was some difference of

opinion by the outbreak of World War II as

to the efficiency and equity with which

World War I terminations had been settled,

the predominant recollection was one of

widespread unpreparedness, confusion, delay, litigation, and even inequity.9

 This general impression early in World War II was

a strong factor in the determination on the

part of the various war agencies and of interested members of Congress to plan for termination well in advance and thereby to

avoid a repetition of the "failure" of World

War I.10

Development of the

Negotiated Settlement

Contract termination played little or no

part in the peacetime procurement activities

of the War Department. Under the limited

budgets of the interwar period, purchases

were carefully planned and made only for

necessary supplies. Hence, there was little

occasion for cutting off work prior to full

contract completion. Nevertheless, to provide for sudden changes in specifications and

requirements for complex items such as aircraft, OASW in 1927 promulgated for optional use a termination article for "technical material and supplies." This provision

was little used and made no contribution to

the drafting of a wartime termination article to be employed on a large scale.11

In contrast to the situation in current procurement, the preparation of an adequate

termination article was a major concern of

procurement planners responsible for devel8

 (1) Labor Dept, Problems of Contract Termination, p. 61. (2) La Brum, "Termination of War

Contracts," p. 4. 9

 Gromfine and Edwards, "Termination After

World War I," passim. A common rumor widely circulated early in World War II was that contractors

in World War I had received "only 14 cents on the

dollar" for their terminated contracts, the implication being that they were out of pocket for the bulk

of their expenditures. Actually they received in the

neighborhood of 75 percent of their claims, which

in many cases were heavily padded. The 14-percent

figure referred to the ratio of total payments to the

commitment value of the uncompleted portion of

terminated contracts, a completely meaningless

figure for judging the equity of settlements.

10

 Attorney General Francis Biddle, testifying in

1943 before a Senate Military Affairs subcommittee,

indicated that World War I settlements were well

handled. Hearings on S. J. Res. 80, 9 Nov 43, 5:344.

See also La Brum, "Termination of War Contracts,"

pp. 17-18 and references. A favorable estimate of

the speed and equity of World War I settlements

is made by Mr. Mark A. Brown, Vice President,

Harris Trust and Savings Bank and member of

the War Department Purchase Policy Advisory

Committee, in Leverett S. Lyon, et al., Your Business and Postwar Readjustment (Chicago: The

University of Chicago Press, 1944), pp. 45-47. Mr.

Brown pointed out that only 995 claims out of

27,000 terminations remained unsettled by 1 July

1920. Further, in the celebrated Bethlehem case

settled finally in 1942, the contractor had long since

been compensated for his costs and fixed fee; the

only unsettled issue was a disputed incentive payment to the contractor. 11

 (1) AR 5-140. (2) ASF, History of Purchases

Division, p. 287 and Exhibit 46.
CONTRACT TERMINATION: PREPARATIONS 619

oping wartime contracting policy.12 During

the 1920's and 1930's the draftsmen of war

contract forms included termination provisions in their proposals.13

 In September

1939, OASW announced six approved contract forms to take care of most procurement situations and each of these contained

a termination clause.14 But the use of these

forms was not mandatory and the various

supply arms and services tended either to

use their own termination articles or to omit

termination provisions entirely from fixed

price contracts. The uniform CPFF supply

contract promulgated by OASW in August

1940 contained a standard termination article providing for government assumption

of all of the contractor's obligations.15 But

for most of the defense period—during

which procurement activity expanded tremendously—there was no standard termination article in use in War Department

fixed-price contracts.

This deficiency was rectified in October

1941 when Under Secretary Patterson made

mandatory the inclusion of a termination

article in all standard fixed-price contracts.16

The article provided for termination at the

convenience of the government and settlement in accordance with a formula. The

formula required payment of the contract

price for all completed items; for the uncompleted portion of the contract the contractor

was to be paid all costs plus a profit allowance for work actually done. The profit allowance was to be made at the same percentage rate that would have been realized on

the entire contract. This became the standard War Department termination article

and was later embodied in the first issue of

Procurement Regulations on 1 July 1942.17

Up until the spring of 1942 terminations,

heretofore merely incidents in the expanded

procurement program, were handled largely

by contracting officers in the field as part of

their responsibility for contract administration. With America's entry into war on 7

December 1941, the nation's attention was

focused on the task of obtaining maximum

production and there was properly no great

concern with the problem of mass terminations at the end of the war—perhaps five,

perhaps ten, years hence. But a development

in April 1942 forcibly brought to the attention of the War Department the fact that

large terminations in increasing number

would soon become a major wartime problem and that failure to handle them satisfactorily might well play havoc with wartime

procurement. At this time the Ordnance Department found it necessary to cancel $7,-

000,000 in contracts for a certain item before actual production had begun.18

 The

plant and facilities involved were badly

needed by a different contractor for the production of another critical war item. In attempting to arrange prompt settlement and 12

 See above, pages 70 ff. 13

 ASF, History of Purchases Division, p. 288. 14

 Short forms for simple or small purchases merely

provided for equitable settlement by "the Chief of

the Branch concerned.'' Long forms provided for

settlement by formula similar to that in the 1927

article for technical material. ASF, History of Purchases Division, p. 288. 15

 Ibid. Termination of CPFF contracts did not,

however, pose the pricing difficulties encountered

in fixed-price terminations. 16

 This was a feature of War Department Supply

Contract No. 1, announced on 13 October 1941.

17

 PR 324. 18

 The account of the Ordnance Department's

difficulties in the settlement of this termination and

its role in the development of the negotiated type

of settlement is presented by Lt. Col. Harold Shepherd, "Settlement of Ordnance Contracts," Army

Ordnance Association Report (Army Ordnance

Association, Washington, D. C.), Vol. 2 (August 9,

1943). See also, Malman, "Policies and Procedures for the Termination of War Contracts," pp.

462-63.
620 THE ARMY AND ECONOMIC MOBILIZATION

clear the plant the Ordnance Department

ran into serious difficulties. The wording

of the formula settlement in the recently

adopted termination article required the

contracting officer to certify that all costs

reimbursed in settlement were actually incurred by the contractor. Few contracting

officers, faced with personal liability for

overpayment, would be willing to make such

a broad certification without the protection

of a detailed audit even though the over-all

terms of the settlement were clearly favorable to the government. Moreover, the

Comptroller General took the position that,

if a contract contained a formula for settlement, the formula would have to be adhered

to unless it could be shown that an alternative settlement was more advantageous to

the government, in which case the General

Accounting Office would require satisfactory demonstration that the costs of performance allowed the contractor were actually

incurred by him. This defeated the major

purpose of an alternative method of settlement, since proof of a more advantageous

alternative would first require an audit

under the formula.19

The Comptroller General had always

possessed the authority to audit all expenditures under cost-plus-a-fixed-fee contracts

and to disallow questionable items. Contractors had no reason to complain, on

principle, of CPFF audits since the government under CPFF contracts was required

to reimburse contractors for expenditures

rather than for procurement deliveries. But

under a fixed-price contract the contractor

merely agreed to deliver a specified product for a specified sum. His costs were traditionally his own business and he kept his

books accordingly. Under the novel and

urgent conditions of all-out conversion and

production for war, he had neither the time

nor the occasion for meticulous documentation of each transaction and operation, and

his books were typically not devised to facilitate detailed audit procedures. The worst

fears of the Ordnance Department in this

connection were confirmed when a preliminary survey of the $7 million Ordnance cancellation disclosed it would take nine months

for a staff of fifteen auditors working full

time to make a 100-percent audit that would

rigorously satisfy the formula and stand up

to General Accounting Office review.20

Realizing that its termination problems

had just begun and that it would be physically impossible to carry on a procurement

program and at the same time effect settlements according to a detailed formula, the

Ordnance Department, through its Legal

Branch and in consultation with OUSW

and the Purchases Division, ASF, undertook the creation of a plan which would protect the government's interest, permit

prompt and final settlement, and still satisfy

all the legal requirements. Out of these efforts there emerged the plan for a negotiated settlement between the government and

the contractor. Such a settlement would represent a merger and compromise of all claims

and counterclaims under the contract and

19

 The Comptroller General's position was formalized in his opinion B-28750, 1 October 1942,

similar to a ruling of his predecessor, the Comptroller of the Treasury, in connection with World

War I contracts. 25 Comp. Dec. 398, 25 Nov 18.

20

 Shepherd, "Settlement of Ordnance Contracts,"

p. 4. Malman cites another case, involving some

3,300 claims through the third tier of subcontractors for which an estimated 13,440 man-days

would be required to complete a detailed audit.

This was the equivalent of 50 men working 11

months. Selective audit procedures considered adequate to protect the government's interest in a

negotiated settlement for this case would require

only five men working four months. Malman, "Policies and Procedures for the Termination of War

Contracts," p. 462, n. 64.
CONTRACT TERMINATION: PREPARATIONS 621

would become, in the form of an amendment, a part of the contract itself. This procedure was founded in well-established principles of common law and appeared to be

permissible for the procuring agencies even

without the benefit of the First War Powers

Act and related Executive orders.21 A negotiated settlement would have the virtue of

both speed and finality, since it would be no

more subject to General Accounting Office

review than an original contract price fixed

by the contracting parties.

Provision for a negotiated settlement of

all War Department terminations was approved by the Under Secretary and in November 1942 was officially incorporated in

Procurement Regulations. The standard termination article set forth in the regulations

was modified to call for settlement by payment to the contractor of "such sum as the

Contracting Officer and the Contractor may

agree by Supplemental Agreement is reasonably necessary to compensate the Contractor for his costs, expenditures, liabilities,

commitments and work in respect to the uncompleted portion of the contract."

 22

 If the

contractor and contracting officer failed to

agree within ninety days after termination,

or a longer agreed period, the contracting

officer was directed to make settlement in

accordance with the formula previously

available. The new regulations urged maximum use of the principle of negotiation by

all War Department agencies and a directive by the Under Secretary made it clear

that all outstanding War Department contracts could be amended by agreement with

the contractor, even after termination, to

provide for settlement by negotiation.23

Background and Passage of the Contract

Settlement Act

The adoption of the negotiated settlement

by the War Department marked a major

step forward in its handling of termination

problems. But it was only a first step and

numerous additional problems were presented as the war progressed toward its conclusion. The acceptance of the principle of

negotiation was, by itself, an inadequate

guide to contracting officers in devising actual terms of a satisfactory settlement. The

formula adopted in 1941 offered general

guidance but needed much elaboration to

cover important problems of even relatively

simple settlements. Moreover, the desirability of allowing the services to negotiate

binding settlements was soon severely challenged, and it eventually became clear that

extensive new legislation would be needed

to resolve the issue and to make firm provision for many other elements of termination policy.

As early as the spring of 1942 the War

Production Board became interested in contract termination policy. At that time the

Procurement Policy Branch, WPB, appointed a subcommittee including representatives of the procuring agencies to work

on the development of a uniform termination article and regulations for all agencies.

The meetings of the subcommittee served

to advance the thinking of all concerned but

21

 In addition to the fact that contract settlement

by negotiation had long been sanctioned in common

law, it was held by both the Attorney General and

the War Department Judge Advocate General to

be specifically authorized for government war contracts by the First War Powers Act (18 December

1941) and Executive Order 9001 (27 December

1941). (1) 40 Op. Atty. Gen. 225, 29 Aug 42.

(2) Opinion of the Judge Advocate General

(SPJGC 164) dated 18 Dec 1942. 22

 PR 324.1(c).

23

 Memo, USW for CG ASF, 8 May 43, reproduced in Shepherd, "Settlement of Ordnance Contracts," p. 3.
622 THE ARMY AND ECONOMIC MOBILIZATION

led to no definitive agreement and the committee was disbanded after a year of labor.24

All members had agreed on the desirability

of settlement by negotiation and the provision of adequate interim financing to contractors. But the War Production Board representatives felt that over-all control of termination settlements should be lodged in a

civilian agency, a matter that the services

were not yet willing to concede in view of

the intimate relationship between current

terminations and wartime procurement. The

chief stumbling block to agreement, however, appeared to be differences between the

Army and Navy on the length of the termination article and the basis for calculating

the contractor's profit in settlement of cases

under the formula after failure of negotiations. The Navy wished to include a definition of termination costs specifically or by

reference in each contract whereas the Army

preferred to leave this matter to a joint

regulation. For settlements under the formula the Navy held fast to a flat 6-percent

profit rate for work actually done on the

uncompleted portion of the contract, while

the Army preferred a flexible arrangement

permitting the rate of profit contemplated

for the contract as a whole at the time of

placement.25

The Army's opposition to the flat-rate

profit allowance rested on both equitable

and practical grounds. A 6-percent guarantee would provide a windfall to inefficient

producers currently operating at a loss or

at much less than 6 percent; it would penalize efficient producers currently earning

much more than 6 percent and would discourage the amendment of profitable contracts to include the new termination article;

it would make no distinction between profits

on unprocessed raw materials and parts on

the one hand, and extensively processed materials on the other, thus penalizing the contractor who had done substantial processing

and rewarding the accumulation of idle raw

material inventories; finally, it would tend

to be used by contracting officers as a norm

for establishing the rate of profit on negotiated settlements.26

In the meantime, the War Department

was faced with an increasing number of

terminations which called for definite policy

decisions. Contracting officers and technical

service headquarters were embarrassed by

the degree of latitude arising from lack of

specific regulations. The technical services

began to develop their own organizations,

forms, procedures, and policies which

tended to diverge not only from service to

service but sometimes within a single service.

Industry complained of the duplication of

effort involved when two or more procuring

agencies or services made separate audits of

a firm's books in connection with the termination of numerous individual contracts.

Contractors were slow in presenting termination claims, partly for lack of established

procedures, party out of reluctance to consummate settlements which might later be

reopened, and partly because of inertia or

preoccupation with production under other

war contracts.27

24

 (1) CPA, Industrial Mobilization for War, p.

655. (2) OCS History, p. 8. (3) WPB, Procurement Policy Board, Doc. 115, 14 Sep 43, and attached longer version of proposed WPB termination regulation for fixed-price supply contracts,

dated 21 Sep 43. 25

 ASF, History of Purchases Division, pp. 293-96.

26

 Memo, Maj Gen Arthur H. Carter, Fiscal Dir,

for Dir of Materiel ASF, 18 Nov 43, sub: Proposed

Army-Navy Joint Termination Article. 27

 (1) War Department, Bureau of Public Relations, Press Branch, Release, 28 Sep 43, Report on

Contract Termination, delivered by Gen Browning,

Dir Purchases Div ASF, at WD Conf of Industry,

Labor, and Newspaper Leaders, 28 Sep 43, Wash-
CONTRACT TERMINATION: PREPARATIONS 623

The first step in bringing a degree of order

into the picture was the publication of War

Department TM-320, the Termination Accounting Manual for Fixed-Price Supply

Contracts, often referred to as TAM.28 Although issued by the Office of Fiscal Director primarily as an accounting aid, TAM

was a fairly comprehensive guide to both

contractors and contracting officers in matters of substance as well as procedure in the

settlement of terminated contracts. Shortly

thereafter, on 14 August 1943, a new termination section (PR 15) was added to Procurement Regulations, setting forth termination and settlement procedure in detail

and supplanting in general the previous provisions of PR 324 contained in the basic

section on contracts (PR 3).

A major development at this time was the

establishment on 22 June 1943 of the Contract Termination Branch, Purchases Division, ASF.29

 The creation of this branch was

designed to provide top-level policy formation and staff supervision of all termination

activities of the War Department. As in the

case of renegotiation, the director of the

Purchases Division was made Special Representative of the Under Secretary of

War when dealing with the Air Forces. The

Contract Termination Branch immediately set about the task of obtaining

more rapid settlement of outstanding

terminations and of providing a regular

flow of adequate statistics on all phases of

contract termination. It was soon revealed

that as of 21 June, the day before the establishment of the branch, a total of 3,778

terminations had been directed by the War

Department since Pearl Harbor. Of these,

1,952 cases had been settled. Of the remaining unsettled cases at least 493 were more

than 6 months old and an additional 411

cases (378 of them Air Forces) were of uncertain duration. In terms of dollar value,

total War Department cancellations by the

time of the establishment of the Contract

Termination Board had exceeded the figure

for the entire World War I termination

experience.30

The summer and fall of 1943 witnessed a

marked increase in the number of terminations and in public and Congressional interest in the problem. Congress' formal attention to termination problems was first

attracted by a legislative proposal of the

War Department aimed at clarifying its authority to provide financial assistance to contractors and subcontractors pending final

settlement of their terminated contracts. The

resulting hearings in the House Military Affairs Committee proved of much interest to

certain members of the Senate and soon several bills had been introduced in both houses.

As the discussion and hearings proceeded, all

aspects of the termination, settlement, and

property disposal problem began to receive

wide consideration.

On 18 October 1943, Comptroller General Lindsay Warren in his testimony before

the House Military Affairs Committee threw

a bombshell into the proceedings. He attacked the War Department's proposal for

interim financing (the wording of which

ington, D.C. (2) S. Rpt. 12, Pt. 4, 78th Cong., 1st

Sess., July 1943 (Committee Print). (3) Memo,

Asst Dir Purchases Div for Dir of Materiel, 30 Aug

43, sub: Contract Termination. (4) Memo, Maj

F. C. McCoard for Col Bryan Houston, Special Representative of USW, 17 Sep 43, sub: Contract

Termination. 28

 This Manual was revised and republished as

War Department TM 14-1005 on 1 June 1944. 29

 Memo, USW for CG AAF and CG ASF, 22

Jun 43, sub: Staff Work on Current Contract

Terminations.

30

 (1) ASF, History of Purchases Division, p. 298.

(2) Report on Contract Termination by Col Bryan

Houston [circa October 1943].
624 THE ARMY AND ECONOMIC MOBILIZATION

was very broad) as "an arrogant snapping

of fingers in the face of the Congress" and

proposed that "the War Department should

be peremptorily stopped in what it is now

proceeding to foist on the Congress and the

Nation."

 31

 He agreed that the War Department had the legal power to negotiate settlements of fixed-price contracts but warned

that unless this power were transferred by

statute to the Comptroller General the looseness of the War Department's Procurement

Regulations and the "proven inefficiency" of

contracting officers would result in the dissipation of untold millions of taxpayers'

money. In support of his charges he cited

270 examples, taken from CPFF settlements, of alleged illegal or unauthorized

payments to contractors which had been approved by contracting officers and subsequently suspended by the General Accounting Office.32

The unfavorable publicity resulting from

the Comptroller General's charges and the

specter of General Accounting Office power

to reject all termination settlements provoked Under Secretary Patterson's immediate return to the hearings. Although he had

previously given a careful and detailed account of the magnitude of the problem facing the War Department, and of the department's expanding organization and procedures for safeguarding the government's interest in termination settlements,33

 he now

re-emphasized these and proceeded step by

step to refute the charges which had been

made. He pointed out that perhaps 90 percent of the 270 suspensions by the General

Accounting Office either had been subsequently allowed by GAO after investigation

or had originally been called to the attention

of the GAO as the result of regular War

Department auditing procedures. He further

indicated that over a recent four-month period the General Accounting Office had

made no exceptions to 99.95 percent of all

War Department vouchers. Disallowances

by the General Accounting Office, moreover, totaled less than 10 cents per $1,000

of expenditures under War Department contracts. Summing up he stated:

I think that the record before you plainly

shows the careful and conscientious job being

done by the War Department and its officers.

The microscopic percentage of the questioned

transactions, the debatable nature of many of

them, and the fact that most of them were

first questioned within the War Department

itself established this. In handling this enormous number of transactions [30,000,000 procurement vouchers since 1940], under the

pressure of time imposed by the war, any

organization will inevitably make errors and

mistakes of judgment. The War Department

has, of course, made such mistakes in the past,

including some of the cases cited by the Comptroller General, and we will make similar mistakes in the future. But we must insist that the

record of our officers is remarkably good and

demonstrates that they are conscientious,

hardworking, and capable.34

The controversy over whether the Comptroller General or the procuring agencies

should have final settlement authority, together with other elements of termination

policy, was thoroughly aired in the closing

months of 1943 and in early 1944 before

various committees of both houses. These

included the committees concerned with

military and naval affairs, appropriations,

31

 H. Com. on Military Affairs, 78th Cong., 1st

Sess., Hearings on H. R. 3022, Authorizing the

Secretary of War To Use Funds for Adjustment of

Contracts, June and October 1942, 2:189-90. 32

 These cases, with a brief comment on each, were

incorporated into the record. Ibid., 2:194-218. 33

 Ibid., 2:144-82. Under Secretary Patterson's

original testimony, as reproduced in these pages,

constitutes a valuable statement and analysis of the

whole termination problem. 34

 Ibid., 2:260.
CONTRACT TERMINATION: PREPARATIONS 625

the judiciary, and small business, as well as

several special committees—the Senate

Committee Investigating the National Defense Program (Truman Committee) and

the newly established committees of both

houses on Post-War Economic Policy and

Planning; of the latter, the most important

was the Senate committee headed by Senator Walter F. George. It was evident that,

by the end of the legislative year, Congress

would lay down a comprehensive statute

which would define in considerable detail

the elements of contract settlement policy

and establish a top-level civilian agency to

supervise the law's administration.

Several developments in the latter part

of 1943 were of significance both for dealing

with current termination problems and for

providing Congress with guidance for its

legislative effort. On 20 November 1943, the

Under Secretary ordered the establishment

of the Readjustment Division, ASF, with

general responsibility for all War Department problems of matériel demobilization.35

The Readjustment Division functioned as

a control organization within the War Department—supervising the actual settlement

operations of the technical services, initiating and clarifying matters of policy, conducting extensive training and public relations activities, and representing the War

Department to other governmental agencies

in matters under its jurisdiction. It functioned through five branches—Contract Settlement, Property Disposal, Control (statistical and analytical), Training, and Information. The Readjustment Division upon

its establishment took over the activities of

the former Contract Termination Branch,

Purchases Division. Beneath the Readjustment Division as the War Department's toplevel organization were termination units

in technical service headquarters and in

district procurement offices, the latter being

generally responsible under local contracting officers for actual settlement negotiations.

While the War Department was thus perfecting its organization for termination,

progress was also made in the development

of a uniform termination article. Late in

the summer of 1943 the Under Secretaries

of War and Navy decided to submit the

disagreements of the two services to arbitration. Assistant Secretary of War McCloy,

whose duties did not include procurement,

served as arbitrator. His decision was that

the Navy's cost definition and profit formula

should be adopted but that the War Department's termination article should serve

as the basis for a new uniform article.36 Before the agreement could be fully implemented, developments external to the services broadened the area of discussion and

resulted in reconsideration of the whole termination problem.

On 12 November 1943, under the supervision of the Office of War Mobilization

(later the Office of War Mobilization and

Reconversion), the six major procurement

agencies (the War, Navy, and Treasury Departments, the Maritime Commission, the

RFC subsidiaries, and the Foreign Economic Administration) established the Joint

35

 WD Admin Memo S-102, 20 Nov 43. Also see

History of the Readjustment Division, ASF [circa

1946] (hereafter cited as ASF, Readjustment History), copy in OCMH, for a broad description of

organization and functions of the division. This

study consists of Vol. I (text, 194 pp.), Vol. II (13

appendixes), and Vol. III (supplement, 56 pp.);

unless otherwise indicated, all citations herein refer

to Vol. I. The Readjustment History was written by

Reynold Bennett, then a first lieutenant in the

Transportation Corps and later author of the OCS

History.

36

 ASF, History of Purchases Division, pp. 303-

04.
626 THE ARMY AND ECONOMIC MOBILIZATION

Contract Termination Board (JCTB).

This organization, whose chairman was Mr.

John M. Hancock of OWM, was charged

with the development of a uniform termination article and a uniform program for handling terminations by all the agencies.

Working through a number of subcommittees, the board carefully explored all aspects

of the problem. Its first major contribution

was the drafting of a uniform termination

article for fixed-price contracts—based on

the recent Army-Navy agreement—and an

associated statement of principles of cost

determination. On 8 January 1944, the

Office of War Mobilization made mandatory the use of this article in all new war

contracts, with certain exceptions in behalf

of administrative simplicity. JCTB was also

making extensive studies of such matters

as the development of a uniform CPFF termination article, the desirability of including

a termination article in subcontracts, the

possibility of companywide settlements and

direct governmental settlement of subcontractors' claims, administrative safeguards

against fraud, review and appeals procedure, and the issuance of cost interpretations and manuals of instruction.37

An outstanding development, which did

much to influence Congressional thinking

and shape the legislation which followed,

was the submission on 15 February 1944 of

the widely heralded Baruch-Hancock Report on War and Post-War Adjustment Policies.38

 This report—sponsored by the Office

of War Mobilization—contained broad recommendations on all aspects of the demobilization problem, but much of it was focused

on contract settlement procedures. The report was unequivocal that settlements would

have to be "fair, fast, and final"; otherwise

the reconversion effort would bog down in

a welter of wholesale unemployment. The

chief ingredients of the report's recommended policy for contract settlement were

the negotiation of final settlements by the

procuring agencies, generous and immediate

interim financing for contractors, and a

vigorous sixty-day plant clearance policy.

The following passage of the report is typical

of its content and style:

Any course, such as that proposed recently

by the Comptroller General, would quibble

the Nation into a panic.

The Comptroller's suggestions, as we understand it, was that he review every settlement before payment and that no payment be

final until approved by him. Pending this

audit, the Comptroller proposed that advances

and loans be made; but the amounts would

be entirely inadequate to keep business and

jobs going. If such an audit before payment

were decreed, no war contractor would know

where he stood, prime contractors would be

unable to pay subcontractors, banks would be

reluctant to make adequate loans, billions in

working capital would be frozen. The delays in

settlement could force many concerns into

bankruptcy. It would mean unemployment by

audit. The essential thing to remember about these

contract settlements is that they be fair—fair

both to the Government and to the contractor.

What is fair can be determined just as well

in a matter of weeks as in years.39

During the final months of 1943 the War

Contracts Subcommittee of the Senate Committee on Military Affairs had been working

on a contract termination bill. The subcommittee chairman, Senator James E. Murray,

37

 The activities of JCTB are described at length

in Bernard M. Baruch and John M. Hancock, Report on War and Post-War Adjustment Policies (15

February 1944) (hereafter cited as Baruch-Hancock

Rpt). 38

 Ibid., p. 53. The Uniform Termination Article

developed by JCTB is reproduced in full at pages

83-86 of the report; the widely used Statement of

Principles for Determination of Costs is found at

pages 87-89. 39

 Ibid., p. 8.
CONTRACT TERMINATION: PREPARATIONS 627

was also chairman of the Senate Small Business Committee and had been actively following the termination problems of small

business for nearly a year. Senator Murray

collaborated closely with the Senate Committee on Post-War Economic Policy and

Planning, and on 11 February 1944—four

days before the submittal of the BaruchHancock report—S. 1718 was introduced

jointly by Senators Murray and George.

Early in May, after considerable discussion

and revision in committee, the bill was

passed by the Senate and referred to the

House Judiciary Committee, which reported the bill favorably with an amendment. At the same time, a rival bill had been

reported by the House Military Affairs

Committee which would have placed the

Comptroller General in charge of termination settlements. A third bill, presented by

the House Naval Affairs Committee, offered

still another proposal. The House Rules

Committee recommended the MurrayGeorge bill, which was also favored by Baruch and Hancock. This was soon passed by

both houses and became the Contract Settlement Act of 1944, later described by Senator Murray as "one of the most carefully

considered pieces of legislation ever to have

been enacted by the Congress."

 40

The Contract Settlement Act was a 25-

page document setting forth the broad objectives of the act and providing comprehensive policies governing its implementation.

It created the Office of Contract Settlement

(OCS), to be headed by a director and advised by the Contract Settlement Advisory

Board, composed of representatives of the

principal procuring agencies, the War Production Board, the Smaller War Plans Corporation, and the Attorney General. The

director was ordered to prescribe policies,

procedures, and standards under the act

and was empowered to require their observance by all concerned. He was directed to

submit quarterly reports to Congress, summarizing the progress of terminations, termination settlements, interim financing, and

other developments that would enable Congress to evaluate the administration of the

act and the need for additional legislation.41

The act emphasized the necessity for

speed, equity, and finality in the settlement

of terminated contracts. The negotiated settlement, to be effected by the contracting

agencies, was made the kingpin of contract

settlement procedure. As a basis for negotiation the act permitted the use of "actual, standard, average, or estimated costs,"

or "any other equitable basis" deemed appropriate by the contracting agencies. It

specified numerous types of cost to be included or excluded from settlement, without

prejudice to other types not mentioned in

the act. Negotiated settlements would be

final, and the termination functions of the

General Accounting Office were limited to

review, after final settlement, to determine 40

 (1) 58 Stat. 651, approved 1 Jul 44. (2) Senator James E. Murray, "Contract Settlement Act of

1944," p. 683. Senator Murray's article provides a

valuable condensed history and summary of the

Contract Settlement Act. (3) Allen W. Maddren,

"Administrative and Judicial Machinery," pp. 659-

82. Last two in Law and Contemporary Problems

(Duke University School of Law), X, No. 4 (Spring

1944). (4) Bertram M. Gross, "The Role of Congress in Contract Termination," Ibid., X, No. 3

(Winter 1944), 540-58. (5) OCS History, Ch. V, pp. 14-20.

41

 After the passage of the act the staff and committees of JCTB were absorbed by OCS. The JCTB

itself became the Contract Settlement Advisory

Board. In response to the act, nine quarterly reports

were eventually submitted to Congress by the director. These reports (hereafter cited as OCS Rpt,

number, and date) constitute a valuable source of

information on contract termination and settlement

problems as they arose.
628 THE ARMY AND ECONOMIC MOBILIZATION

whether actual payments to the contractor

were in accordance with the settlement and

whether the settlement had been induced by

fraud. Cases of suspected fraud were to be

reported to the Department of Justice for

investigation and collection, and special provisions were made for the punishment of

fraud. The Comptroller General was given

permission to investigate the settlements of

each agency for the purpose of reporting to

Congress whether settlement procedures

were efficient and adequate to protect the

interests of the government.

In order to ease the impact of terminations, the act specified that notice should be

given as far in advance of termination as

possible. Interest was to be paid on all

amounts due to a contractor, at the rate of

21⁄2 percent per annum, for the period from

30 days after termination to date of final

payment. Within 30 days after application,

contractors and subcontractors were to be

provided with interim financing, consisting

of advance and partial payments on the contract or of termination loans guaranteed by

the government. A policy of rapid plant

clearance was adopted, requiring the government to remove all termination inventory

from the contractor's premises within 60

days after submission of the contractor's inventory statement. If the government failed

to remove the inventory within the 60-day

period, the contractor was authorized to

store it at government expense.

Many other provisions of the act—including settlement by government determination

in the event of failure of negotiation (with

procedures for contractor appeals), the

validation of informal and defective contracts or commitments such as provided by

the Dent Act of 1919, and the personal nonliability of government officers for settlement

payments not involving their own fraud—

were additional testimony to the thoroughness with which the drafters considered their

legislation. An important feature of the

act was the latitude and flexibility allowed

in actual administration when such flexibility was essential to a practical and common-sense approach. Most of the actual

procedures of settlement had their basis

either specifically or by implication in the

wording of the act.

War Department Preparations for Mass

Termination

The preparations of the War Department,

the other governmental agencies, and the

many tens of thousands of the nation's war

contractors for handling mass terminations

at the end of the war represent perhaps the

greatest co-ordinated and detailed planning

effort in the nation's history. The success

of the Controlled Materials Plan—due

largely to its careful and detailed planning—

was fresh in the minds of those who were responsible for demobilization planning. All

were determined that the nation's reconversion effort should not fail through lack of

advance thinking and preparation.

With the passage of the Contract Settlement Act the War Department's termination planning activities went into high gear.

These activities comprehended four broad

categories: (1) the progressive elaboration

and refinement of termination regulations

to meet the various problems raised by actual termination experience; (2) the creation of termination organizations in both

government and industry; (3) the education

and training of contractors and government

employees in termination problems and procedures; (4) the reaching of specific pretermination agreements with as many contractors as possible in order to minimize the work
CONTRACT TERMINATION: PREPARATIONS 629

load and the number of decisions which

would have to be made at the peak of termination activity.

The chief contribution in the first category was the publication, effective 1 November 1944, of the Joint Termination Regulation (JTR), which soon became the

bible of contract termination matters. JTR

represented the combined efforts of the

Army and Navy to spell out in complete

detail all aspects of termination law and

procedure. Consisting of nine major sections

and several hundred pages, it contained

statements of policy, definitions of terms,

facsimiles of official forms, and detailed regulations and procedures binding upon all

contracting officers in the termination and

settlement of contracts. It superseded the

Army's PR 15 and the Contract Termination directives of the Navy, and carried as

an appendix the joint Termination Accounting Manual, which superseded the

Army's TM 14-1005.42 Although it was not

binding upon agencies other than the Army

and Navy, it was used by other agencies as

a guide in making settlements. It was also

a principal reliance of prime contractors,

who found in it information on how to proceed in obtaining interim financing, preparing settlement proposals, settling subcontractor claims, disposing of inventory, and

in resolving many other problems. The distribution of JTR was so widespread that a

special Joint Army-Navy Distribution Center was established in New York City.43

JTR was kept up to date by a stream of

amendments. These were so numerous during the first few months that a complete revision of JTR was issued on 20 April 1945.

This revision contained a reproduction of

the Contract Settlement Act and all regulations of the Office of Contract Settlement,

as well as other material. Revision No. 2, effective 20 June 1945, was a partial revision

of some two hundred pages.

The War Department, as the principal

contracting agency, played a major part in

shaping policy and procedure as enunciated

by the Director of Contract Settlement.

Since the Office of Contract Settlement was

a policy making and co-ordinating office, it

drew the subject matter of its decisions and

regulations from the operating agencies.

Representatives of these, in turn, composed

the larger part of the Contract Settlement

Advisory Board, upon whom the director

relied heavily in reaching policy decisions.

Relations between the War Department and

the Office of Contract Settlement were harmonious and characterized by a minimum

of red tape; problems at the operating level

flowed up to the OCS and back down again

in the form of decisions which were promptly incorporated into JTR for general application.44

42

 See above, page 623. 43

 Eventually known as the Readjustment Distribution Center, 90 Church Street, New York City,

New York. This office also handled the distribution

of informational and training materials prepared for

contractors by the Army and Navy. Copies of JTR

may be found in OCMH or the Pentagon Army

Library. JTR was the work of an Army-Navy committee guided largely by Col. William H. Draper,

Jr., chief of the Contract Termination Branch,

Readjustment Division, ASF, and Capt. Lewis L.

Strauss, USNR. Their work together on termination

problems common to the two services convinced

Colonel Draper and Captain Strauss of the advantages of closer co-ordination of Army and Navy

procurement activities and led to the widely circulated Draper-Strauss Report in February 1945,

Co-ordination of Procurement Between the War

and Navy Departments. 44

 The director of OCS characteristically gave immediate attention to the problems of the operating

agencies. For example, on 6 September 1944, General Clay wrote the director pointing to difficulties

arising out of existing regulations in instituting pretermination agreements. On the following day the

director replied: "I have your letter of September 6

dealing with predetermination of costs and prices
630 THE ARMY AND ECONOMIC MOBILIZATION

The story of organizational growing

pains, of the difficulties of mobilizing some

30,000 War Department termination employees by V-J Day, or of the problems of

retaining qualified officers and civilians

during the general exodus back into private

industry at a time when the War Department's contract settlement activities were at

their peak, would be too long for inclusion

here.45 Likewise, only a hint can be given of

the magnitude of the task faced by business

firms, individually and collectively, in developing their termination organizations.

The War Department from the beginning

urged upon contractors the importance of a

well-developed termination organization

with adequate office space, facilities, and authority. Large corporations often established

a complete termination department, staffed

with experts in many fields and co-ordinate

in authority with other major operating departments. Complex realignments of the

duties of the "old line" departments—such

as purchasing, production, and accounting—became necessary. Many firms developed their own extensive termination

manuals, spelling out detailed procedures

and responsibilities.46 Exceptions and variations were necessary in the case of different

units in multi-plant organizations. Small

firms often had to conduct their termination

activities with part-time personnel or by

"robbing" the regular staffs of production

and accounting personnel to meet particular

crises.47

The area of greatest activity in preparing

for the deluge of mass terminations was

probably that of public relations and training. It was all-important to the success

of the program that the industrial community and the nation as a whole be educated in the full implications of the problem.

The tasks imposed by the total termination

and settlement process were novel and

onerous. In the absence of a general atmosphere of urgency—fully appreciated by

business, workers, and the entire community—contractors would be dilatory in

preparing and submitting termination

claims, financial institutions would be slow

as a method simplifying and speeding up the settlement of terminated contracts; and I hereby exempt

from Directive Order 2, of the Office of War Mobilization, dated February 24, 1944, the arrangements

in the textile, clothing, and related fields recommended by you." Ltr, Robert H. Hinckley, Dir OCS,

to Gen Clay, Dir of Materiel ASF, 7 Sep 44. Again

on 6 October 1944, Under Secretary Patterson

wrote a lengthy letter to the director pointing out

the widespread unwillingness of CPFF contractors

to conclude settlement agreements because of the

danger of vitiation of the agreement through postaudit and disallowance by the General Accounting

Office. The very same day the director wrote the

President for relief. Five days later the President referred the matter to the Attorney General, who on

31 October confirmed final settlement authority for

CPFF contracts in the contracting agencies. 40 Op.

Atty. Gen. 328, 31 Oct 44. Copies of above cited

letters and opinion of Attorney General in Purchases

Div file 161 Contract Termination. 45

 The general character of the War Department's

organization for termination has already been described. See above, pages 622-25. For greater detail,

see ASF, Readjustment History, pp. 8-17.

46

 A number of contractor-issued manuals are on

file with the records of the Readjustment Division,

ASF. [In Departmental Records Branch, AGO,

Alexandria, Virginia.] The Allis-Chalmers Manufacturing Corporation's manual Termination Procedure, issue of 20 November 1944, contains 11 sections of 136 pages in addition to numerous forms. 47

 For example, the following remarks of a small

contractor, quoted in Memo, Gen Browning, Asst

Dir of Mat, for CofEngrs, 22 Aug 44, sub: Termination Personnel: "We are terribly short-handed, and

are having considerable trouble in keeping pace

with delivery schedules, but I was compelled to take

two men from the Welding Department for 21⁄2

days while we counted carefully, under the surveillance of these civilians, all the Work in Process,

Purchased Parts, channels, etc. . . . Manpow

least with the small war plants, is at a premium.

For the past ten days, I have spent most of my time

at the warehouse, with little time for more important

things."
CONTRACT TERMINATION: PREPARATIONS 631

in granting termination loans, plant clearance would bog down, and the whole reconversion effort would be jeopardized.

Dissemination of information was not

enough; the War Department and the

other contracting agencies found it necessary

to resort to exhortation on a nationwide

scale.48

In implementing its program the War

Department utilized all available public relations media. Its officials issued a multitude of press releases, held numerous press

conferences, gave talks over the radio, made

speeches before trade associations and civic

groups, and spread the gospel of termination throughout the country. Newspapers,

magazines, trade papers, and business and

professional journals co-operated in various

ways—by sending qualified reporters and

representatives to speeches and conferences,

by allotting ample space to termination

news, and by carrying editorials and special

feature articles, often prepared by War Department staff writers, on the latest developments and issues. The widespread publicity

given the program did much to enlist the

co-operation and even enthusiasm of contractors in meeting the termination and

settlement problem.

More directly related to the practical execution of the program was the task of imparting systematic information on settlement

procedures. As part of its technique for educating contractors on a nationwide scale,

the War Department individually or in

collaboration with the Navy prepared and

distributed millions of pieces of termination

literature—ranging from the complex and

detailed JTR and its revisions to brochures,

booklets, pamphlets, and training materials

and posters—all calculated to inform and

educate termination officials in both industry and government. The Baruch-Hancock

report had recommended issuance of a booklet of instructions to contractors. The Readjustment Division immediately set about the

drafting of the first Contractor's Guide.49 By

early summer in 1944, 300,000 copies of

this clearly and attractively presented booklet had been distributed. A year later a new

joint Army-Navy edition of the guide was

printed and 300,000 additional copies distributed. In November 1944 the deputy

director of the Readjustment Division drew

up a Pretermination Flyer, a four-page circular summarizing problems of plant clearance. Some 300,000 copies of this were

distributed, either through contracting officers in the field or through the Joint ArmyNavy Distribution Center. In order to utilize

the far-flung contacts and machinery of

trade associations throughout the country,

the Readjustment Division, in co-operation

with the Navy, brought forth the monthly

Production Adjustment Bulletin. The bulletin was primarily a feeder for trade association periodicals and carried digests of

changes in JTR, notices of training programs for contractors in various centers,

statistics, news items, and termination cases

of interest. In these and numerous other

publications, the War Department made

free use of diagrams, cartoons, color charts,

and other expository devices designed to

48

 War Department termination personnel often

found it difficult to understand the delay of contractors in filing claim for amounts due them.

Baruch-Hancock Rpt. p. 13: "It its reported to us

that in the past an average of 4 months has been

required to get contractors to submit claims. Only

a part of this slowness can be laid to preoccupation

with the war or to inadequacies of Government

policy. Contractors will have only themselves to

blame if they do not get set to handle the problems

of termination."

49

 Readjustment Division, Contractor Guide (WD

Pamphlet 34-2, 1 June 1944).
632 THE ARMY AND ECONOMIC MOBILIZATION

simplify, clarify, and emphasize its message.50

In order to prepare industrial and other

groups to fulfill their specific roles in the

termination process, the War Department

organized a wide array of training programs. These represented different areas of

specialization and degrees of intensity and

included the following: (1) conferences;

(2) small contractor training; (3) university courses; (4) special centralized schools;

(5) on-the-job training.

Conferences were arranged both in Washington and the field to meet the needs of the

groups concerned and to deal with specific

problems. Thus early in 1944, the Readjustment Division held a two-day regional staff

conference in Washington for leaders of industry in the six New England states. The

conference was presided over by General

Somervell and attended by representatives

of the technical services. It represented one

of the earlier attempts to acquaint industrial leaders with the current thinking of the

War Department on termination and surplus disposal problems. Conferences were

likewise held in Washington and the field

for formulating policy and training contractors in problems of salvage. Regional conferences for termination training personnel

were held by the Readjustment Division in

Philadelphia, Atlanta, and Chicago. The

Army Air Forces conducted two contractor

conferences on the west coast in July 1944.

In general the conference technique was

utilized to stimulate the thinking and obtain

the enthusiastic support of key officials in

both industry and government circles.51

The education of subcontractors was a

vital element in the War Department's pretermination planning and training program.

Unless the claims of subcontractors were

promptly presented and settled at all stages

in the contractual chain it would have been

impossible for prime contractors to present

their final claims to the government. While

many of the nation's largest manufacturing

concerns were largely engaged in subcontract work, it was still true that the smaller

firms constituted the vast majority of War

Department subcontractors. Not only were

the smaller firms likely to have meager staffs

and facilities for handling termination matters; they were also the farthest removed

from direct contact with the War Department.

To meet the problem of subcontractor

training the War Department developed

several approaches. One of the most important was the utilization of the facilities

of the Smaller War Plants Corporation.

The SWPC had 14 regional offices and 100

district offices throughout the country, and

these were used to disseminate information

to the 35,000 war contractors which it represented. In the year ending with the spring

of 1945, SWPC sponsored some 125 meetings attended by approximately 10,000 individuals representing 5,000 firms. At these

meetings small business was made aware of

its role in the demobilization program and

the necessity for adequate preparation.52

By the spring of 1945 the War Department

had developed, in conjunction with the

Navy, the highly successful Four-Hour Basic

50

 Material in this paragraph is elaborated in ASF,

Readjustment History, pp. 88ff. The following discussion of War Department termination training

activities likewise relies largely on this monograph.

Other sources supporting the discussion are: (1)

History of Fiscal Services, 1940-1945, Chs. XXIII,

Army Finance School, XLV, Contract Termination,

and LXVI, Fiscal Training; (2) Memorandum on

Contract Termination Training and Organization

(unsigned), 12 Sep 44, in file 161 Contract Termination, Control Div ASF.

51

 ASF, Readjustment History, pp. 99-102. 52

 Ibid., 98-99.
CONTRACT TERMINATION: PREPARATIONS 633

Course, more familiarly known as the ABC

Course, in termination procedures. Primarily concerned with the filing of claims and

the filling out of the required settlement proposal forms, this course provided down-toearth information and was well received by

contractors throughout the country. The

ABC Course, which was conducted by

trained representatives of the War and Navy

Departments, reached an estimated 30,000

individuals representing over 20,000 separate firms in 283 different cities and towns.

All together, some 900 class meetings were

held.53

Despite these efforts of the Army and

Navy the training of subcontractors and

small prime contractors would have been

substantially less successful had it not been

supplemented by the effective work of trade

associations, chambers of commerce, manufacturers' organizations, the Automotive

Council for War Production, the Committee

for Economic Development, other nonprofit

organizations, and even individual major

contractors. These organizations sponsored or conducted numerous termination

courses and training activities which

reached many thousands of smaller contractors who for one reason or another were

unable to attend the government-sponsored

courses.

Somewhat similar in purpose and effect

were the short termination courses offered

by universities in various parts of the country. Early in 1944 the University of Pennsylvania, in co-operation with Army and Navy

procurement offices in the Philadelphia area,

began offering three-day contract termination courses for both prime contractors and

subcontractors as well as others interested in

termination matters. Some 2,500 contractor

personnel, representing about 1,200 firms,

were trained at this institution. Other universities provided similar offerings.54

 The

Readjustment Division actively co-operated

with nongovernmental training organizations by furnishing information, materials,

recommendations, and other assistance.

The most concentrated and highly developed type of termination training was

made available by the War Department

through the medium of centralized schools,

established to train government specialists

in termination matters. In June 1944, the

Army Industrial College in Washington,

D. C., was reactivated and began training

officers to act as members of settlement

teams. The standard course varied from

three to four weeks in duration. Beginning in

July 1944, the AIC also instituted a twomonth termination course for Army Air

Forces officers. By 1 September 1945, over

3,700 students were graduated from readjustment courses by the college.

All together some half-dozen major centralized termination training schools were

conducted by the War Department. The

Fiscal Director's School, established at Duke

University in October 1943 (moving in

1944 to Fort Benjamin Harrison, Indiana)

graduated 3,300 students—officers, enlisted

men, and civilians—from courses in fiscal

and auditing aspects of termination. The

Judge Advocate General's School at Ann

53

 The effectiveness of the Four-Hour ABC

Course led to the introduction in June 1945 of the

Four-Hour "XYZ" Accounting Course. This

course featured organized discussion of termination

accounting problems by war contractors and government representatives. Such problems were

often the heart of settlement difficulties. By V-J

Day, 60 of these meetings had been held in 25

cities and were attended by 2,500 contractor employees representing 1,636 firms. Ibid., p. 109.

54

 A partial list of participating universities includes Boston University, New York University,

University of California, University of Michigan,

University of Indiana, Western Reserve, and Xavier

University. Ibid., p. 108.
634 THE ARMY AND ECONOMIC MOBILIZATION

Arbor, Michigan, in addition to its other responsibilities, trained 500 officers in the legal

aspects of contract termination. The Army

Air Forces Termination Officers' Training

School at Vandalia, Ohio, trained nearly

800 officers and civilians in Air Forces termination and procurement matters. Over

1,200 Air Forces auditing personnel received

termination accounting education at the

Budget and Fiscal office, Wright Field, Dayton, Ohio. The Harvard University Graduate School of Business Administration,

which had for many years conducted special

courses in procurement matters for Army

officers, trained 329 AAF officers in a course

equivalent to the one given Air Forces officers by the Army Industrial College. A

unique combination of formal instruction

and on-the-job training was provided Signal

Corps officers and enlisted men at the Signal

Corps Contract Termination School, Fort

Monmouth, New Jersey. The course consisted of three weeks' training in the school

and one week on-the-job training in the

Monmouth Signal Corps Procurement District. Because of the unusually complex nature of Signal Corps procurement and

termination problems, students were carefully selected and limited to personnel with

considerable experience in the settlement

of actual termination cases. Further to facilitate Signal Corps contract settlements,

the Fort Monmouth school conducted a

ten-day course for contractors, who remained in residence at the school from 8

to 18 November 1944. A total of 402 military personnel and 13 civilians were enrolled

in the course for Signal Corps personnel, and

51 Signal Corps contractors took the contractor-training course.55

Much of the success of the Army's contract settlement program for World War II

is attributable to the extensive preparations

and training which went into the program.

The training sessions and materials provided

contracting organizations as well as governmental agencies with knowledge and information essential to the discharge of the contract settlement process. Moreover, by

bringing contractors and the government

into close association in the study of illustrative problems where no immediate interests

were at stake, they promoted a deeper understanding and more rational appraisal of

the issues involved. The development of the

contract settlement procedures discussed in

the following chapter owed much to the

close association and collaboration of all

parties to procurement contracts.

55

 Ibid, pp. 104-08. See also other sources cited

above, note 50.
CHAPTER XXVIII

Termination and Settlement Procedure

General Settlement Procedure

Contract termination and settlement procedure, reduced to bare essentials, consisted

of three steps: (1) the serving of a termination notice by the contracting agency; (2)

presentation by the contractor of his settlement proposal (generally referred to as the

contractor's "claim"); (3) the negotiation

of the settlement agreement. Each of these

steps had many possible ramifications, and

for large settlements approval by higher

authority was required before final agreement could be reached.

The standard settlement procedure was

known as the vertical settlement system. It

was so described because all termination

claims under a given prime contract were

passed in successive stages up the contractual

chain into the hands of the prime contractor.

Each subcontractor's claim would thus be

reviewed by his immediate customer who in

turn would incorporate all his subcontract

termination costs into his own claim. The

prime contractor, standing at the top of the

contractual chain, would then present to

the government the total accumulated termination charges under the entire contract.

In this manner the contracting agency negotiating the settlement would deal directly

only with the prime contractor instead of

with perhaps a thousand or more contracting firms at all stages of production under

the contract. This procedure followed the

pattern of relationships established in the

basic contracting and subcontracting

process, under which the government had

privity of contract and direct face-to-face

relationships only with the prime. But just

as the processes of wartime procurement

required deviation from the traditional contracting procedures, so did the urgency and

complexities of the contract settlement

process call for departures from the standard settlement procedure.1

The decision to terminate a contract was

made, as already indicated, only after a careful review of various considerations, many

of which were unconnected with the circumstances of the individual contractor.2

 In anticipation of termination, government representatives held preliminary discussions

with the contractor whenever feasible in

order to reach tentative agreement on as

many issues as possible.3 These included such

matters as "stop-work" points, the classification, valuation, and disposition of contractor's inventory, allocation of common

inventory and overhead costs, termination

and settlement of subcontractors' claims,

and so on. In many cases, "pretermination

planning" for important prime contracts resulted, as pointed out later, in written pretermination agreements which bound the

1

 The nature of these departures will be examined

in a subsequent section. See below, pages 643 ff. 2

 See above, pages 614-16. Also JTR, Sec. II, Pt.

3, Distribution of Cutbacks. 3

 JTR 242; JTR, Sec. II, Pt. 2, Advance Preparations for Termination Settlements.
636 THE ARMY AND ECONOMIC MOBILIZATION

government and the contractor to specific

procedures and terms to be used in the final

settlement. In other cases informal agreements were reached; although not binding,

these usually disposed of many troublesome

issues in advance of termination, thus expediting final settlement when the pressure

of time was greatest.

The actual notice of termination was a

letter (or telegram followed by letter) to

the prime contractor, identifying the terminated contract, stating the date on which

work—in whole or in part—should cease,

and any other necessary instructions. The

War Department also sent copies of termination notices to assignees, guarantors, and

sureties of the prime contractor to enable

them to protect their interests.4 Upon receipt

of the termination notice, the contractor was

obligated to stop all further work immediately or by a specified date. In special cases

where safety, the clearing of machinery, or

other common-sense considerations dictated

a continuance of work, the contractor could

so proceed but had to notify the contracting

officer immediately and obtain written approval. He was also required to terminate

immediately all his relevant subcontracts

and to see that subcontractors in turn terminated their subcontracts, and so on down

the contractual chain. No contractor at any

tier was entitled to reimbursement for work

done, either by himself or his subcontractors,

after the official stop-work date.5

The second step—the presentation of

the settlement proposal—was the responsibility of the contractor. This step centered

in the use of official settlement proposal

forms, first developed by the War Department and later revised and made standard

by the Office of Contract Settlement. The

importance of these forms in organizing and

directing the termination activities of all contractors, in simplifying and standardizing

their settlement proposals, and in resolving

many individual problems cannot be overemphasized. As in the case of the income

tax, these consisted of a basic form supplemented by schedules and separate forms

calling for all necessary supporting information. A "short form," OCS Form la, was

used for expeditious settlement of claims

amounting, after deduction of disposal

credits, to less than $1,000. Form 1, for

presenting claims on the so-called inventory

basis, was the generally used "long form."

 6

A copy of Form 1, containing illustrative

figures, is reproduced on pp. 638-39.

In support of the contractor's Form-1

claim were detailed inventory schedules on

Forms 2a through 2d, which classified all

inventory items into specified groups—

metals, raw materials, purchased parts,

finished components, finished product, and

miscellaneous. Work in process was listed

separately because of the special disposal

problems relating thereto (most partially

completed items had only scrap or salvage

value). Each item of inventory had to be

listed and carefully described according to

regulations. Appropriate columns opposite

4

 JTR 245 (3). 5

 JTR 251.1; JTR 251.3 The drafting of an appropriate termination notice demanded great care

in order to anticipate all issues arising out of its

service. Standard forms of telegraphic notices as

well as of letter notices for the various types of contract were provided in the regulations. JTR 243;

JTR 941; JTR 942. The War Department was

able to prepare and serve some 48,000 notices of

termination within a day or so of V-J Day only as

a result of careful organization and planning and

around-the-clock efforts on the part of Army termination personnel. 6

 OCS Form 1b was used for settlement proposals submitted on the "total-cost" basis. This basis

of settlement was relatively little used. Copies of

OSC settlement proposal forms are reproduced in

JTR, Sec. IX, Statutes, Orders, and Forms.
TERMINATION AND SETTLEMENT PROCEDURE 637

each item called for such information as

quantity, condition, unit of measure, unit

and total cost, and contractor's offer (if he

desired to retain the item) or proceeds of

sale (if sale by the contractor had been authorized and consummated). The inventory schedules served a double purpose:

they were the heart of the contractor's claim

for settlement, and they were an important

instrument in the difficult problem of property disposal. From the inventory schedules

the contractor built up lists and catalogs of

government property available for redistribution and disposal. The very nature of the

process of taking inventory and filling out

the schedules placed pressure upon the contractor to reach decisions and make specific

efforts toward inventory disposition.

A "schedule of accounting information"

(Form 3) was a part of each long-form settlement proposal and supplemented Forms

1 and 2. This was a signed statement by

the contractor concerning the accounting

methods used in preparing the settlement

proposal. It called for the name of the firm's

public accountants, if any, the name of any

governmental agency previously reviewing

the firm's books in connection with a settlement, method of determining inventory

quantities and prices, method of allocating

common inventory items, and many other

items designed to facilitate analysis of the

proposal as well as to discourage any irregularity on the part of the contractor. On the

back of Form 3 was a tabulation of all indirect factory expense for the plant or department in which the contract was performed, with the amount and basis for

allocation to the terminated contract.

The bulk of the typical contractor's claim

consisted of his actual outlays on materials,

parts, labor, and other expenses required to

build up and process his inventory. In return

for reimbursing the contractor for all such

items, the government would, of course, receive title to the entire heterogeneous inventory thus accumulated. To the sum of all the

contractor's costs on the uncompleted portion of the contract was added the estimated

allowable profits on such costs, together with

specific expenses of settlement (cost of taking inventory, salaries of termination employees, and the like). Further additions

were subcontractors' termination claims

paid by the prime, and a charge at the regular contract price for completed items undelivered at the termination date.7

From the total charges thus computed

were deducted disposal credits accruing to

the government from contractor retention or

sale of any portion of the inventory, and all

payments previously made by the government on the uncompleted portion of the contract. These consisted of advance, partial,

or progress payments which often amounted,

because of the government's liberal policy

of advance financing, to the greater share of

the contractor's gross termination charges.

The remaining net charge to the government

was in effect a final due bill under the contract, satisfactory settlement of which would

discharge all obligations of both parties under the contract.8

The preparation of the contractor's settlement proposal was the end result of an intensive period of activity by the prime

contractor, all relevant subcontractors, and

the contracting officer's staff. It was the

7

 Contractor reimbursement for settlement of subcontractor termination claims for work in process

was limited to actual settlement costs. Amounts paid

or payable for pretermination deliveries by subcontractors were, however, considered as part of the

contractor's own costs upon which he was allowed

his contractual rate of profit. JTR 541.3. 8

 That is, all obligations except items specifically

reserved in the settlement agreement and interest

on the payment as finally determined.


640 THE ARMY AND ECONOMIC MOBILIZATION

prime contractor's responsibility not only

to prepare his settlement proposal as such,

but to develop a concrete program for disposing of termination inventory held by himself and by the various tiers of subcontractors. This was a task requiring the

joint efforts of all concerned. Often a substantial portion of the termination inventory

could be used by the contractor for remaining contracts with other procurement arms

or agencies, a matter best known to the contractor himself. The same situation applied

to subcontractors and it was to the advantage of the government no less than of contractors to minimize packing, reshipment,

and other expenses of material redistribution. On the other hand, many contractors

were unfamiliar with the problems of marketing scrap and salvaged materials and

needed expert assistance.

In addition to meeting the many problems

associated with inventory—counting, recording, classification, segregation, retention, sale, or removal and storage on behalf

of the government—contractors were required to obtain and settle their subcontract

claims as expeditiously as possible so that the

cost of all claims under a terminated contract could be passed up the line and incorporated in the claim of the prime with a

minimum of delay. To accomplish this, contracting officers were instructed by termination regulations to develop, at the initial

posttermination conference with the prime

contractor, a time schedule calling for completion of the various steps in the settlement

process by certain dates. Thus the prime

contractor's inventory schedules were, if possible, to be submitted within thirty days of

termination, with partial inventories submitted earlier. Similarly, a time was to be set

for any application by the prime or subcontractors for interim financing, for subcontractor inventory schedules and settlement

proposals, and for any partial proposals of

the prime covering a portion of his own

charges. The final settlement proposal of

the prime contractor, except for the complicated cases, was to be submitted wherever

possible not later than sixty days from the

termination date. The suggested deadline

for review of the proposal by procuring

agencies and negotiation of the final settlement was ninety days after the termination

date.9

In view of the many important decisions

which had to be made prior to the submission of the contractor's settlement proposal,

and in order to expedite the whole process,

contracting officers and their staffs were

enjoined by regulation not to delay action

until after proposals were submitted. They

were required in all important settlements

to work with the contractor continuously in

disposing of termination inventory, in making and approving subcontract settlements,

and in preparing the contractor's settlement

proposal.10 In actual practice, therefore, the

settlement process was a joint effort at every

stage rather than a series of separate steps

respectively by the contractor or contracting

agency.

The third and final step in the general

settlement process was normally the responsibility of the contracting officer and his staff.

This consisted of a careful review of the

contractor's claim by specialists, followed

by negotiation with the contractor and conclusion of a mutually satisfactory settlement

agreement. The minimum review accorded

all settlement proposals for Army contracts

was the so-called office review, which involved a careful scrutiny of all aspects of the

claim by members of the contracting officer's

9

 JTR 255, Time schedule for settlement. 10

 JTR 711.3.
TERMINATION AND SETTLEMENT PROCEDURE 641

staff. This review not only tested the proposal itself for internal consistency, legality,

and reasonableness, but brought to bear

other information on the contractor's history, operations, financial structure, and

general characteristics. Such information

was available from the files pertaining to

the letting and administration of the terminated contract as well as from other contracts let by the procuring agency. If the

contracting officer was not satisfied with the

adequacy and reliability of the data in the

settlement proposal, he could request additional information from the contractor or

request members of his staff to visit the contractor's plant and examine plant records

or other evidence to the extent necessary

When any such additional examination was

made the reviewers were required to submit

written reports and recommendations to the

contracting officer.11

Actual settlement negotiations with the

contractor were conducted by a team of

specialists operating under the direction of

the contracting officer. The team consisted

of legal, accounting, engineering, and property disposal personnel whose services were

co-ordinated by the negotiator in charge.12

Since the contracting officer could not personally participate in most negotiations, he

was represented by a negotiator appointed

to head up the team. Each specialist was

qualified to protect the government's interest

in his particular area. Thus Army engineering and inspection personnel assigned to a

team frequently had intimate knowledge of

the state of the contractor's inventory—its

quantity, quality, value, allocability to the

terminated contract, and other relevant

matters. War Department accountants,

familiar with official termination accounting procedures and with the accounting

practices of contractors in general, could

detect internal inconsistencies in the settlement proposal or inconsistencies of the proposal with the books of the contractor.

Property disposal experts could facilitate

difficult decisions with respect to the scrapping, sale, contractor retention, or other disposition of materials. The essence of the

negotiated type of settlement, conducted by

a team of experts, was its flexibility in permitting common-sense adjustments and

compromises which would protect the government's interest in the over-all settlement

while avoiding a stalemate in negotiations

over minor technicalities.13

Arrival at a final agreement was typically

the culmination of a series of discussions and

partial agreements on a step-by-step basis.

The final agreement was drawn up as a supplement to the basic contract. Its general

form and content were prescribed in current

official termination regulations, which reflected the accumulated experience of all the

procurement agencies. In addition to containing the basic settlement terms, the final

agreement carried special reservations of

varying nature. Thus, in addition to the normal statement of disposal credits, offsets for

11

 JTR 724.1. 12

 The composition of the team varied with the

size and complexity of the settlement. JTR 711.2,

Settlement team. Some teams might have as many

as fifty people. See Memorandum on Contract Termination Training and Organization (unsigned),

12 Sep 44, in file 161 Contract Termination, Control Div ASF.

13

 The fact that War Department negotiated

settlements were conducted by a team of experts

rather than by a single individual was strongly emphasized by Under Secretary Patterson in his testimony before Congress prior to the passage of the

Contract Settlement Act. Such teamwork minimized

the possibility of either error or fraud, an important

consideration in the debate with the Comptroller

General over final settlement authority. Malman,

"Policies and Procedures of the Termination of

War Contracts," p. 507.
642 THE ARMY AND ECONOMIC MOBILIZATION

advance payments, and other specific counterclaims of the government against the

terminated prime contract, the agreement

reserved the government's right of subsequent over-all renegotiation, and its rights

under various royalty, patent, facility, and

other provisions. Similar reservations were

made to protect the continuation of those

normal rights of the contractor which were

outside the contemplation of the settlement

as such.14

The contracting officer had sole authority

to execute all settlement agreements. For

large settlements, however, he was by regulation forbidden to exercise this authority

in the absence of certain review and approval procedures. The principal requirement was review by the local Settlement Review Board. This board had to review prior

to execution all fixed-price settlements involving a payment of more than $25,000

and all fixed-fee adjustments under CPFF

contracts with a terminated value in excess

of $50,000. In addition, the chief of the relevant technical service could require board

review of any particular settlement before

execution. Also, the contracting officer could

at his own discretion submit to the board for

its advice any proposed settlement or specific

problem thereunder.15

The review board had to give prompt

consideration to all matters submitted to it

and to report its recommendations to the

contracting officer in writing. Failure to act

within thirty days automatically constituted

board approval. Board disapproval of any

settlement precluded its execution by the

contracting officer unless it was subsequently

approved by the head of the office in which

the board was established.

In addition to local board review, all War

Department settlements exceeding $500,000

required approval by such higher authority

as the chief of the revelant technical service

prescribed. The chief of each service could

also prescribe a figure lower than $500,000

for this mandatory review procedure if he

deemed it desirable.

In the event that a negotiated settlement

for all or any part of a termination claim

could not be reached, or if the contractor

were dilatory in negotiation, the contracting

officer was authorized to make a determination of the disputed amounts due. Determinations were based on the formula prescribed in the termination article of the contract or, in the absence of such formula,

upon an equivalent formula in JTR. Because of the inflexibility and greater amount

of work involved, this type of settlement was

unattractive to both contractors and procuring agencies and was relatively little used.16

Appeal from determinations could be

made in several ways. Under the standard

Disputes Article of War Department contracts, appeal from the contracting officer's

decision could be made within thirty days

to the War Department Board of Contract

Appeals. This board granted a full hearing

and afforded the contractor an opportunity

to present evidence in support of his claim.

The board's decision was final within the

War Department. Appeal from its decision,

or directly from the decision of the contracting officer, could be taken to the Appeals

Board of the Office of Contract Settlement.

Procedure of the OCS Appeals Board was

similar to that of the War Department

board. Even a decision of the OCS board

did not exhaust the contractor's remedy.

14

 JTR, Sec. VII, Pt. 4, Settlement Agreements. 15

 Settlement review boards consisted of three or

more responsible officers or civilians of the War or

Navy Departments and were established, so far as

possible, in each office empowered to negotiate final

settlements. JTR 581. 16

 OCS History, p. 62.
TERMINATION AND SETTLEMENT PROCEDURE 643

He could still take his case to the U.S. Court

of Claims or to a U.S. District Court. Both

courts could likewise receive cases which bypassed both the War Department and OCS

appeals boards. An indication of the relatively small number of termination appeals

is found in the record of the OCS Appeals

Board, which as late as 31 March 1947 had

received on appeal less than one tenth of one

percent of all settlements. The number of

cases taken to the courts was undoubtedly

even smaller.17

Special Settlement Procedures

While the general procedure for contract

settlement was being developed, continual

search was made for special methods of handling difficult problems and for additional

optional procedures which would expedite

the settlement process on any reasonable

and equitable basis. The more important of

these special procedures were developed

mainly by the War Department and contributed substantially to the success of

contract settlement operations for World

War II.

No-Cost Settlements

A major factor in the ability of the contracting agencies to handle their enormous

workload of termination claims was the

popularization of the "no-cost" type of

settlement. As implied by its name, the nocost settlement was a waiver by the contractor of any claim against the government

resulting from the termination of his contract. In return for the waiver the contractor

had the right to retain and dispose of his

termination inventory as he saw fit. Moreover, he was freed from the onerous task of

taking inventory and preparing and filing

inventory schedules. He had no settlement

proposal to prepare and participated in no

time-consuming negotiations. Hence, he was

free to devote his time and energy to production under other war contracts or to meeting his problems of reconversion.18

Against these obvious advantages the contractor had to weigh the value of his termination claim. Several types of situation indicated the clear advantage of a no-cost

settlement. First were the thousands of small

claims which were not worth the bother of

formal settlement procedures. Next were

cases where the contractor's inventory was

worth more to him than the value of his

termination claim. Such cases usually involved inventories of scarce or difficult-toacquire materials, parts, and perhaps even

partially processed materials, which the contractor could immediately use on other contracts, sell advantageously on the open

market, or reserve for his subsequent use.

Finally, a consideration facing many contractors was the avoidance of taxes and renegotiation payments which might well

absorb the entire profit realized on a termination claim. If a firm had already earned

excessive profits, the receipt of further profits

for the same renegotiable year would merely

involve an additional and unnecessary

double exchange of funds.

Until the end of 1943, procuring agencies

as well as contractors were concentrating on

all-out production for war. Termination of

a particular contract frequently meant that

the contractor merely shifted his efforts to

the production of similar items under other

contracts, using the same materials, equip- 17

 Ibid. Also see Chapter XII of the OCS history

for a concise but informative discussion of the principal decisions of the OCS Appeals Board and the

issues resolved thereunder. 18

 ASF, Readjustment History, pp. 43-46.
644 THE ARMY AND ECONOMIC MOBILIZATION

ment, and labor. Since the termination resulted in little additional expense, the contractor more often than not would simply

sign a "no claim" agreement and proceed

under his new contract. By the end of 1943,

80.5 percent of all War Department termination settlements, representing 63.6 percent

of the value of settled canceled commitments, had been closed "without claim."

 19

Early in 1944, as replacement contracts became more difficult to obtain, the ratio of

"no cost" to total settlements began to drop.

During the first six months of 1944, no-cost

settlements represented 64.3 percent in number and 45 percent by value of all settlements. By the end of 1946, when the task of

contract settlement for World War II was

nearly over, no-cost settlements by the War

Department for both fixed-price and CPFF

contracts represented 53.8 percent by number but only 14.8 percent by value of cumulative canceled commitments.20

Because of the importance of the no-cost

type of settlement in speeding and simplifying the whole termination program, the War

Department took steps to encourage its widest use. One of these steps was made possible

by a ruling from the Bureau of Internal

Revenue that the execution of a no-cost

settlement would not affect the contractor's

right to deduct for tax purposes all costs under the terminated contract which were

otherwise allowable under existing regulations. Prior to this ruling, which was sought

by the War Department as well as by industry, there had been increasing reluctance on

the part of contractors to execute no-cost

settlements.21 This ruling clarified the right

of contractors to possible tax benefits resulting from inventory losses. Under the ruling,

contractors could deduct inventory losses

realized in the year of termination from taxable income for that year. If the loss were

realized in a subsequent year, the contractor

might likewise realize a tax saving through

loss-carryback provisions or by the utilization of otherwise unused excess profits credits. The prospect of inventory losses and

revaluations at the time of mass terminations

was a major factor for many firms in electing settlement procedures and planning their

readjustment policy. As soon as the ruling

was issued, the War Department had it

widely distributed with instructions that contracting officers point out its possible advantages to contractors before the end of the

year.22

Of even greater complexity than the associated tax problems were the possible

effects of no-cost settlements upon renegotiation. A principal advantage of the nocost settlement was its administrative simplicity combined with the possibility of reduced tax payments and reduced payments

in renegotiation. Renegotiators, however,

were faced with the problem of ascertaining

the validity of inventory losses claimed in renegotiation. A careful identification of inventory items upon which loss was claimed

19

 ASF, Monthly Progress Report, Section 14-A,

Contract Terminations, 30 Apr 44, pp. 1, 8-9. 20

 (1) Ibid., 31 Dec 45, pp. 34-35, 52-53. (2)

WD, Progress Report, Section 5-A, 31 Dec 46, pp.

11-14.

21

 Joseph D. Nunan, Commissioner, 1944-22-

11883, Mimeograph 5766, to Collectors et al., 1

Nov 44, regarding Sec. 29.42-1. The bureau ruled

that no amount would be included in income as a

result of the termination. 22

 Memo, CG ASF for Chfs of All Technical Services, 3 Nov 44, sub: No-Cost Settlements. The

memorandum concluded ". . . it is suggested 

the ruling and any information . . . be sent to y

procuring officers by wire, and this matter be given

very high priority in view of the inherent possibilities

of largely eliminating the present termination

backlog."
TERMINATION AND SETTLEMENT PROCEDURE 645

would require detailed audit procedures

largely nullifying the administrative benefits of no-cost settlements. Moreover, the

substantive effects of allowing inventory

losses in renegotiation might discriminate

in favor of contractors with excessive profits

and militate against closer pricing. These

issues were part of the general problem of

the proper relationship to be established between termination and renegotiation, the

ramifications of which cannot be explored in

a general study. After a survey of the problem, it was decided that the benefits of the

no-cost settlement to the government and

to contractors generally outweighed the disadvantages and inequities. Contractors were

assured that they would be fairly treated in

renegotiation and their reluctance to enter

no-cost settlement in consideration of renegotiation matters was largely dispelled.23

The nearly 72,000 no-cost settlements

effected by the War Department, representing almost $7 billion in canceled contract

commitments, were a major contribution to

the entire readjustment program. Although

the value of contracts settled by the War

Department on a no-cost basis was half

again as great as that of all other contracting

agencies combined, the department's use of

the no-cost procedure was relatively the

lowest for all agencies. A comparative study,

based on settlements effected through 30

September 1946, indicates that each of the

other agencies had a higher percentage of

no-cost settlements in terms of both number

and value. (See Table 63, page 699.)

Pretermination Planning

and Agreements

In the broadest sense, pretermination

planning by the War Department comprehended all its advance efforts connected with

the termination and settlement problem. As

already described, these included the War

Department's complex training program,

the early efforts to develop a standard contractual termination article, the establishment of internal organizations to deal with

termination and reconversion, the perfection

of administrative policy and procedures,

the obtaining of suitable legislation from

Congress, and the sum total of its pretermination relations with contractors and others

designed to facilitate the liquidation of war

contracts.

By the summer of 1944 the term "pretermination planning" began to take on a narrower and more specific meaning. As early

as 1943, it had become evident that the circumstances facing a large prime contractor

at termination would require tens of thousands of decisions before a settlement proposal could be made. These decisions—pertaining to the scrapping, retention, sale, or

storage of hundreds or thousands of items of

raw materials, components, and partly

finished products, the allocability of inventory and overhead costs to terminated contracts, the basis for settlement of subcontractor claims, and many other issues in

termination—were novel both as to substance and procedure. The Army's experience with a few large terminations in 1942

23

 (1) Memo, W. James Macintosh, General

Counsel for WDPAB, 2 Aug 44, sub: Waiver of

Termination Claims—Effect on Statutory Renegotiation. (2) Memo, W. E. Harrington, Deputy Dir

Renegotiation Div, for CG ASF, 12 May 45, sub:

Advice to the Members of the National Association

of Manufacturers' Subcommittee Studying Cost

Accounting Procedures as to Method of Handling

Termination Claims, Control Div file 161. (3)

Jacob K. Lasser, How to Speed up Settlement of

Your Terminated War Contract (New York: McGraw-Hill Book Company, Inc., 1945), pp. 158-59.

(4) Research Institute of America, Contract Termination Guide for Contractors and Subcontractors

(June 1944), How to Relate Termination to Renegotiation, pp. 67-73.
646 THE ARMY AND ECONOMIC MOBILIZATION

which remained unsettled throughout 1943

and well into 1944 indicated that, no matter how elaborate the education, training,

and general preparation of contractors

might be, an important element was lacking.

Some method was required whereby much

of the actual work of settlement could be

achieved prior to termination. This was

found to be essential for at least two major

reasons: (1) to reduce the posttermination

workload to manageable proportions; (2)

to prevent the incurrence by the government

of substantial unnecessary costs.24

The first of these considerations was uppermost in the minds of the larger contractors whose complex, day-to-day operations

at the center of a network of hundreds of

subcontractors foreshadowed the magnitude

of the termination problem. Outstanding for

its advance planning to meet the challenge

of termination was the Studebaker Corporation. The director of Studebaker's termination activities, Mr. Courtney Johnson,

did much to develop and apply the possibilities of the pretermination agreement and

to sell the idea to industrial leaders throughout the country. Starting with a few specific

decisions pertaining to the disposition of

bulky inventory items to be made after termination, planning at Studebaker gradually

spread to include all items of inventory for

a particular contract, then to the basis for

allocating factory overhead, administrative

expense, profit percentages, and posttermination items of expense. To put its decisions

to the acid test of acceptability by the contracting officer, Studebaker assumed a hypothetical termination of its current contract

for the M29 cargo carrier (the weasel) and

prepared a complete termination claim for

submission as a dry run to the Chicago Ordnance District. The purpose of the experiment was not to secure acceptance of the

dollar amounts proposed in the claim, but

to obtain agreement on the methods of computation, inventory items to be scrapped,

retained, or transferred to the government,

and similar matters. After intensive study of

the proposal by the Chicago Ordnance

District, the Office of the Chief of Ordnance,

and the Readjustment Division, ASF, a revised pretermination agreement was completed and incorporated into the basic contract on 24 November 1944.25

Although not the first pretermination

agreement to be concluded,26 the Stude24

 An important case which brought increased attention to the desirability of greater pretermination

planning was the Army's tank contract with the

International Harvester Company. This contract

was canceled early in 1943 and required sixteen

months for settlement. The termination represented

a canceled commitment of some $217,000,000, involved 2,400 subcontractors, and gave rise to claims

in the neighborhood of $25,000,000. At the time of

its settlement in July 1944, it was the largest termination settlement processed by the War Department.

(1) Memo, Gen Somervell for CofOrd, 25 Jul 44,

sub: International Harvester Settlement, file 161

Contract Termination, Control Div ASF. (2) ASF,

Readjustment History, p. 128.

25

 The general background of Studebaker's pretermination planning activities is excellently depicted in An Address by Mr. Courtney Johnson of

the Studebaker Corporation on Thursday, 7 December 1944 (19-page mimeographed reproduction by

the Army Industrial College of address given for

the AIC War Readjustment Course). See also

Studebaker pretermination material accompanying

following letters: (1) Courtney Johnson, Asst to

Chmn of the Board, Studebaker Corporation, to

Gen Browning, Asst Dir of Materiel ASF, 12 Sept

44, sub: Predetermination of Property Disposal and

Other Factors in Anticipation of Contract Termination; (2) Johnson to Maj C. T. Everett, Head Contract Termination Sec, Tank-Automotive Br, Chicago Ord District, 9 Feb 45; (3) Johnson to Col

Curtis G. Pratt, Readjustment Div ASF, 3 May 45;

(4) Johnson to Chetwood-Aiken Company, Philadelphia, Pennsylvania, 23 May 45. All in file 204.5

Readjustment Div ASF. 26

 "The first formal pretermination settlement

agreement was consummated on 26 October 1944 by

the Quartermaster Corps with Botany Worsted

Mills." ASF, Readjustment History, p. 92.
TERMINATION AND SETTLEMENT PROCEDURE 647

baker case was of major significance in

demonstrating the capacity of a large corporation, with current procurement deliveries of $40 million per month and over 400

first-tier subcontractors, to reach binding decisions on policies and procedures well in

advance of termination. Studebaker immediately went to work on its other major contracts and also did much pioneer work in

developing model pretermination agreements between prime contractors and their

subs. Numerous copies of its agreements

were distributed throughout the country to

aid other contractors in solving their termination problems.27

Even before Studebaker submitted the experimental claim for the weasel, the Army

had decided to generalize the benefits of the

company's planning experience. On 8 August 1944, General Somervell announced to

the chiefs of the technical services the institution of a selective pretermination planning

program.28 Two days later, the details of the

plan were forwarded by the director of the

Readjustment Division. A total of 183 of the

War Department's leading contractors were

apportioned among the technical services.

Each service, operating through its field offices, was to collaborate with these assigned

contractors in developing a written termination plan. Such plans would represent informal agreements resolving in advance of termination as many issues as possible. While

not binding on either contractors or the government, the plans were expected to be implemented in the absence of major changes

in the underlying situation. Included in the

instructions was a letter from the Studebaker

Corporation indicating the kind of planning

required. A formal report of its progress was

requested from each technical service by 1

October 1944.29

In the meantime, the Readjustment Division had also been developing the pretermination planning idea along somewhat

different lines. On 19 June 1944, Lt. Col.

C. M. Gilmour of the Termination Branch,

Readjustment Division, proposed the actual

predetermination of contract termination

charges in the form of a binding agreement

as a means of keeping settlement charges

borne by the government to a minimum.30

Colonel Gilmour pointed out that existing

methods of computing termination charges

were a thinly disguised cost-plus-a-percentage-of-cost method of payment. Although

the First War Powers Act had explicitly outlawed CPPC contracts, the existing formula

upon which the negotiated termination

rested allowed the contractor all his costs

plus 2 percent profit on unprocessed materials and 8 percent on work in process.

This furnished a positive inducement for all

contractors to build up their inventories to

a maximum in anticipation of termination,

thereby saddling the government with the

additional inventory costs as well as profit

allowances upon unnecessary inventory. Existing inventory limitations under CMP and

other WPB regulations applied only to a

fraction of all materials. Likewise, current

termination regulations provided for full

compensation for all allocable inventory,

subject only to the restriction that the inventory could not exceed the needs of the

entire contract. Colonel Gilmour proposed

that pretermination agreements could be

made which would determine reasonable in27

 See documents cited above, note 25. 28

 Memo, Gen Somervell for TQMG, 8 Aug 44,

sub: Termination Planning, Purchases Div file 161

Contract Termination, 1 Sep 44-31 Oct 44.

29

 Memo, Col David N. Hauseman, Dir Readjustment Div, for CofTrans, 10 Aug 44, sub: Fixed Contract Termination Charges, Purchases Div file 161

Contract Termination, 1 Sep 44-31 Oct 44. 30

 Memo, Col Gilmour for Col Draper, 19 Jun

44, sub: Fixed Contract Termination Charges.
648 THE ARMY AND ECONOMIC MOBILIZATION

ventory and other charges allowable upon

termination for various brackets or stages of

contract completion. The settlement charge

would be based upon a specified working inventory level and other considerations, and

would be expressed either as a graduated

lump sum, varying with the stage of contract

completion, or as an amount per unit permitting a simple "count and multiply" procedure upon termination. This would at

once eliminate most of the workload at termination, discourage the wastage of materials, and keep termination charges to a

minimum.

The possibilities of Colonel Gilmour's

suggestion were immediately recognized and

brought to the attention of General Browning.31

 On 22 July in a lengthy memorandum, General Browning authorized the

technical services to make predetermination

agreements with contractors, either in new

contracts or by amendment to existing ones.

The general philosophy underlying the plan

of a fixed termination charge was described

together with various advantages of the

plan. Two days later, he sent more elaborate

instructions pointing to the experimental

nature of the predetermination program and

encouraging the services to exercise ingenuity in fitting the plan to the circumstances

of each contract. All agreements thus

reached would be subject to approval by the

Readjustment Division.32

Shortly thereafter the Office of Contract

Settlement, in response to the War Department's request, conferred its blessing upon

the program:

Any department or agency of the Government may embody in any contract a special

agreement to pay the contractor, as fair compensation for the termination of the contract,

amounts specified in the contract or to be

readily computed according to specific methods, standards or bases appropriate to the

particular contract and set out therein, in lieu

of any other compensation therefor, whenever

the department or agency determines (1) that

the available data permits [sic] a reasonable

forecast, consistent with sound commercial

standards, of the factors involved in determining what will be fair compensation for termination in the case or class of cases and (2)

that such agreement will substantially facilitate settlements, plant clearance, reconversion

from war to civilian production or the efficient

use of materials, manpower and facilities or

will otherwise promote the objectives of the

Contract Settlement Act of 1944.33

31

 Mr. Glen Lloyd, who had worked closely with

General Browning on the Army's company pricing

program, was instrumental in selling the idea to

General Browning. Mr. Lloyd saw a close similarity

between forward pricing and the advance determination of termination charges. He therefore

recommended that negotiation of advance settlements be tied in with the company pricing program

of the Purchases Division, ASF. Memo, Lloyd for

Gen Browning, 25 Aug 44, sub: Administration of

Program for the Predetermination of Termination

Questions and Claims, Purchases Div file 161 Contract Termination, 1 Sep 43 through July 1944.

32

 (1) Memo, Gen Browning, Assist Dir of Materiel, for Chfs of the Technical Services, 22 Jul 44,

sub: Negotiation of Fixed Termination Charges. (2)

Memo, Browning for Chfs of Technical Services, 24

July 44, inclosing unsigned, five-page, mimeographed Memo, 22 Jul 44, sub: Experimental Program for Simplifying Termination Procedures and

Predetermining Termination Allowances. (3)

Memo, Gen Clay, Dir of Materiel, for Asst Dir of

Materiel and Dirs Production, Purchasing, and Readjustment Divs, 4 Sep 44, sub: Predetermined

Termination Settlements and Advance Arrangements as to Elements of Termination Settlements,

in Purchases Div file 161 Contract Termination, 1

Sep 44-31 Oct 44. 33

 OCS Regulation 3, 27 Sep 44, amending

OWMR Dir Order 2. See also: Ltr, Gen Browning

to Mr. Arnold Stifel, 22 Sep 44, Purchases Div file

161 Contract Termination, 1 Sep 44-31 Oct 44:

"Today the Director of Contract Settlement approved our plan of predetermined settlements, and

the regulations will be issued in the next few days."
TERMINATION AND SETTLEMENT PROCEDURE 649

A number of predetermination agreements were soon reached, especially with

smaller contractors whose termination problems were relatively simple. It was soon recognized that the objectives of this program

were intimately related to those of the pretermination planning program involving the

183 leading contractors. Although the latter

began with the idea of reaching only tentative agreements, the experience of Studebaker and other firms indicated that binding

agreements could be reached and would provide the most certainty for all concerned.

Accordingly, both plans were merged into

a general Pretermination Planning Program, the purpose of which was to conclude

as many written pretermination agreements

as possible—binding agreements where

feasible and informal agreements on issues

requiring greater flexibility because of the

uncertainties of future prices and market

conditions.

By 31 August 1945, the War Department

had consummated 1,637 formal pretermination agreements with contractors, in addition to 1,570 informal agreements.34

 These

3,200 arrangements in advance of termination, some of which involved individual

firms holding a half-billion dollars in war

contracts, were a major factor in the ultimate success of the War Department's contract settlement operations. The agreements

varied considerably in scope, some providing a complete basis for settlement, others

covering only certain areas. Collectively,

they covered a wide variety of subject matter, the principal items of which were as

follows:

1. Disposition of specific items or classes

of inventory.

a. Retention by contractor.

b. Transfer to the Government.

c. Scrapping.

2. Definition of agreed stop-work points.

3. Rates and methods of computing general and administrative expense, overhead,

or other indirect expense.

4. Treatment of engineering and tooling

costs and other nonrecurring starting-load

expenses.

5. Allowance for special facilities.

6. Determination of rates or amounts of

profit.

Of these several problem areas, a brief discussion of stop-work points will illuminate a

termination problem that had general economic implications.

With the passage of the War Mobilization

and Reconversion Act of 1944, it became

definite national policy not to continue production of war matériel in excess of military

needs in order to ease the process of national

readjustment at the end of the war.35 Hence

it was the established policy of the procuring

agencies to order immediate cessation of

work with the serving of a termination notice. Exceptions allowed by the Office of

War Mobilization and Reconversion included considerations of safety, clearance of

machinery, and bringing work in process to

a useful or marketable stage where the additional costs would be more than compensated by the additional value to the government. The last-named exception was at first

officially discouraged by the War Department on the ground that it placed contracting officers in the position of making highly

speculative decisions. It was feared that the

authorization of additional production at a

time when the market was glutted by sur34

 ASF, Readjustment History, p. 95.

35

 This policy was expressed in Section 202 of the

act, which permitted certain exceptions under the

direction of OWMR.
650 THE ARMY AND ECONOMIC MOBILIZATION

pluses would result in the dissipation of War

Department funds for the prospect of uncertain gains, which in any case would be

recouped by the surplus disposal agencies

rather than by the War Department.36

The need for a more definitive and enlightened stop-work policy was demonstrated by a number of War Department

terminations in the fall of 1944. These terminations required the abrupt cessation of

work and much of the related termination

inventories had to be disposed of as scrap.

Later, with the increase in requirements accompanying the Battle of the Bulge, some

of these contracts were renewed and manufacturers had to start production runs anew.

It was then painfully obvious that a policy

which would have permitted production

under terminated contracts to be carried to

reasonable stop-work stages would have

prevented substantial losses.37 In its pretermination agreements drawn up during 1945,

the War Department gave careful consideration to the entire problem; as a result detailed definitions of stop-work stages, especially for the textile and similar industries,

were incorporated in such agreements.

The stop-work stages were carefully designed by experts, largely from the War

Production Board and industry, to permit

production after termination continued long

enough to bring work in process to the first

economical stopping point. Not only was

this a desirable procedure from the standpoint of nationwide conservation of materials and parts; it also placed the War Department in a better bargaining position

with contractors in determining the retention or sale price of termination inventory.

In spite of earlier misgivings, by bringing

work in process to a marketable stage the

War Department did not have to accept individual contractors' retention offers at

scrap prices.38 Likewise, the incorporation

of stop-work points in pretermination agreements enabled contractors to plan with

greater certainty their readjustment programs and especially facilitated the clearance

of plant and machinery.

The complexity and significance of the

Army's pretermination agreements are

barely suggested in the foregoing brief discussion. Many of the agreements were based

on extended conferences with representatives of an entire industry, such as steel,

textiles, clothing, and leather. As in the case

of most economic mobilization issues, representatives of WPB, OWMR, OCS, and

other superagencies and procuring agencies

participated in the program. Nevertheless,

the Army was the leader in developing and

utilizing the pretermination agreement as

an effective instrument of early contract settlement. With the arrival of V-J Day the

Pretermination Planning Program came to

an end, and in the face of mass contract ter36

 (1) Memo, Gen Clay, Dir of Materiel ASF, for

TQMG, 4 Jul 44, sub: Contract Termination Policy

To Be Followed on V-Day, Control Div file 161

Contract Termination; (2) Ltr, USW Patterson

to Hancock, Chmn JCTB, 15 Jul 44. (3) Memo,

Col Draper, Chf Contract Settlement Br, Readjustment Div, for Gen Clay, 15 Sep 44, sub: Cut-Off

Point. (4) Memo, Brig Gen David N. Hauseman,

Dir Readjustment Div, for Dir of Materiel, undated,

sub: Stop-Work Policy, copy in OCMH. 37

 (1) Hauseman Memo, cited above, note 36(4).

(2) Memo, Col Draper, Asst Dir for Contract Settlement, for Gen Hauseman, 1 Jan 45, recommending a plan for completion of important items more

than 50-percent finished.

38

 General Hauseman (see references above, note

36) cited the example of Army shoes having a cost

of $3.50 and negligible scrap value at the point of

termination. By spending another 50 cents to bring

the shoes to completion, the Army could sell the

shoes for $2.00 to UNRRA or the civilian market

thus reducing the net termination cost from $3.50 to

$2.00.
TERMINATION AND SETTLEMENT PROCEDURE 651

minations the full fruits of the program

began at this time to be realized.39

The Consolidated Termination Program

With the sharp rise in terminations beginning in the summer of 1943, many of

the operating and procedural problems associated with widespread termination began

to appear. An important group of problems

arose from the fact that the typical manufacturing firm was working on not one war

contract, but many, representing orders

from several supply arms of one or more

procuring agencies. Some of these orders

might be prime contracts; others would be

subcontracts, varying widely in the number

of tiers or stages removed from the prime

contract. Many of the largest manufacturing firms in the country, such as the Aluminum Company of America (ALCOA), the

General Electric Corporation, and the large

steel companies, actually did a greater

volume of business on subcontracts than on

direct orders placed with them by the procuring agencies.

Under the standard vertical settlement

procedure each terminated contract was

separately processed, audited, negotiated,

and settled. This meant that a large contractor holding hundreds of subcontracts in

addition to a number of prime contracts was

faced with a steady procession of auditors,

inspectors, and other representatives of

Ordnance, Signal Corps, Engineers, Quartermaster, and so on, to say nothing of the

various Navy bureaus and higher level contractors who had the task of approving for

payment the claims of their underlying subcontractors. Much of the work was sheer

duplication, involving the auditing of overhead and other accounts common to many

contracts. Each set of auditors had to be

newly indoctrinated in the nature of the

firm's books and business operations. The

system was annoying to contractors and

expensive to the Government.

The first step to rectify the situation was

taken on 18 October 1943 with the decision

by the Army to appoint a permanent Field

Accounting Representative (FAR) to each

of four large corporations.40 All auditing and

accounting activity required by the War

Department to settle the company's terminated contracts, whether prime or sub, was

consolidated in the Field Accounting Representative. The FAR was thus responsible

for the accounting review—as required by

Procurement Regulations and the Termination Accounting Manual—of all the company's settlement proposals regardless of the

technical service concerned. He made the

physical inventory check on which the proposal was based. He examined the settlement proposals of the company's subcon39

 The following commentary made shortly after

V-J Day is illustrative. "Because of pretermination

settlement agreements, the Botany Worsted Mills

were able to resume full production on civilian

fabrics after a two-day holiday following the announcement by the President of the surrender of

Japan, at which time notices of termination of the

company's war contracts were received. The management is enthusiastically satisfied with the results

of the agreements and expressed the opinion that

the manner in which their pretermination settlement agreements have been handled and the principles and regulations on which they are based could

not be improved upon." Memo, Maj T. F. Parks,

Pretermination Br, Readjustment Div, for the Asst

Dir for Contract Settlement, 7 Sep 45, sub: Report

of Travel.

40

 Gen Ulio, TAG, to CG AAF and Chfs of Technical Services, 18 Oct 43, sub: Accounting review

of termination settlements of contracts with companies holding many War Department, prime and

subcontracts, SPX-167 (18 Oct 43) SPPDL-MBA. The four corporations were Alcoa and Bendix,

assigned to the Air Forces, and General Motors and

Allis-Chalmers, assigned to Ordnance.
652 THE ARMY AND ECONOMIC MOBILIZATION

tractors, as well as the company's own

proposals forwarded in turn to its customers.

He was authorized to discuss his findings

with the company, and was required to submit them to the contracting officer having

jurisdiction over the prime contract. Contracting officers, in effecting settlement, were

authorized to rely upon the audits and reports of the FAR. The FAR was instructed

to keep appropriate records, to co-operate

closely with renegotiators, and to co-ordinate his work with any War Department

administrative CPFF audit conducted at the

project. The directive announcing the new

procedure indicated that it would be expanded as soon as justified by the results.41

It soon became evident that efficient accounting review was not enough to guarantee the prompt settlement of contracts.

Many of the most difficult problems revolved

about the pricing and disposition of termination inventory and other physical property. Accordingly, on 28 January 1944, disposal advisory officers were placed in the

four companies together with the FAR. The

basic responsibility of the disposal advisory

officer was to make recommendations to the

contracting officer concerning the disposition of property and to assist contractors in

their disposal efforts. This relieved the FAR

of many of his inventory problems and freed

contracting officers from the necessity of

an independent investigation of the numerous issues in property disposal.42

The results of the four-company experiment were favorable and on 24 February

1944 the program was expanded to a total

of 29 companies assigned to the various

services as follows: Army Air Forces, 8;

Ordnance, 13; Quartermaster Corps, 1;

Signal Corps, 3; Transportation Corps, 1;

Corps of Engineers, 3. The next logical step

was to include the Navy in the program

thus eliminating the major remaining source

of duplication. This was done initially on

18 March 1944. By the time of the issuance

of the Joint Termination Regulation in

November, the program had acquired its

permanent name—the Consolidated Termination Program.43

Companies desiring to come under the

program made written application and were

selected on the basis of the following qualifications: (1) large number of war contracts; (2) large volume of termination

claims; (3) demonstrated ability to process

termination claims efficiently; (4) probability of more expeditious settlement after

assignment. The number of companies

under the program grew slowly as procedures were being developed throughout the

summer and fall of 1944. As of 20 November

1944, there were 31 participants. This grew

to 63 in June 1945, and later to "nearly

one hundred."

 44

By the end of 1945, when the peak of

terminations had passed, the War Department recognized that the program would be

discontinued for each assigned company as

soon as the workload had been reduced to

41

 Ibid., par. 2. 42

 Memo, Col Hauseman, Dir Readjustment Div,

for CG AAF and Chfs of Technical Services, 28 Jan

44, sub: Advisory Officers to Expedite Disposal of

Property on Termination in Companies Holding

Many War Department Prime and Sub-Contracts.

43

 (1) Memo and 3 incls., Hauseman for CG AAF

and Chfs of Technical Services, 24 Feb 44, sub:

Contract Termination Field Accounting Representatives and Disposal Advisory Officers. (2) Jt

Dir, 18 Mar 44, published as Sec. V, ASF Cir 80,

cited in ASF Cir 166, 1 Jun 44. (3) JTR, Sec.

VIII, Pt. 2, Consolidated Termination Program for

Selected Contractors. 44

 (1) JTR 829. (2) JTR (Revision No. 2, 20

Jun 45), pp. 3505-07. (3) OCS History, p. 31.

Of the sixty-three participating firms in June 1945,

six were assigned to the Navy and nineteen were

subsidiaries of other participating corporations assigned to the Army.
TERMINATION AND SETTLEMENT PROCEDURE 653

the point where it could be handled by the

normal vertical settlement procedure.

Hence, the general rule was adopted that

all claims arising out of terminations made

after 31 December 1945 and all claims

submitted after 31 March 1946 would be

excluded from the program and processed

under standard procedures. Exceptions

could be made by the Readjustment Division. Nevertheless, the various projects were

rapidly liquidated and little, if any, activity

under the program continued beyond 30

June 1946.45

The significance of the Consolidated Termination Program was much greater than

the number of participating companies

would indicate, inasmuch as it was confined

to very large concerns having a high dollar

volume of war contracts. Not only were settlements of the contracts of the participating

companies expedited; settlement and payment of all other related contracts, in both

higher and lower contractor echelons, were

also facilitated. Moreover, as indicated in

the following section, the Consolidated

Termination Program provided the groundwork for the establishment of the companywide settlement program.

Company-Wide Settlements

Even before the introduction of the Consolidated Termination Program, there had

been extended discussion in termination

planning circles of a basic alternative to the

standard vertical settlement procedure. As

early as April 1943, Mr. Clarence L. Collens, chairman of the Contract Termination

Committee, National Electrical Manufacturers Association, had proposed an over-all

company settlement plan.46 Subsequently,

other representatives of industry, the armed

services, Congress, and the Joint Contract

Termination Board all explored the possibility of direct settlement procedures between the government and individual contractors at all levels in the contractual

chain.47

The desire for direct settlement stemmed

from a number of shortcomings of the vertical settlement procedure. Under the ver45

 ASF, Readjustment History, Vol. III (Supplement), pp. 16-19.

46

 AIC Special Course in Contract Termination,

3-13 Jan 44, Committee Report on Problem 8,

Overall Company Settlements, p. 1, ICAF Library.

Mr. Collens, who was president of the Reliance

Electric and Engineering Company, testified at

length on his proposal before the Senate Military

Affairs subcommittee. Hearings on S. J. Res. 80,

Pt. 1. The substance of Mr. Collens' plan is contained in his Memorandum on Procedure for

Merged or Over-All Claims Under War Contract

Terminations Rendered Direct to the Government

by the Claimant, 26 Nov 43, in source cited in

note 47. 47

 The initial responsibility for developing a company-wide settlement plan fell to the JCTB Subcommittee on Overall Settlements. After the passage

of the Contract Settlement Act of 1944 the policymaking role fell to the Director of Contract Settlement. In either case, the principal labors fell to

Army and Navy personnel in subcommittee and

departmental staffs. See the following documents

in Bibliography on Company-Wide or Merged Claim

Settlements, issued by the Navy, 18 Jan 44, copy

in Readjustment Div file 161: (1) Memo, Comdr

H. F. Linder for Capt L. L. Strauss, 4 Dec 43, sub:

Outline of Policy and Procedure for Contract Termination and Property Disposal; (2) Proposed

Statement of Policy on Termination Procedure,

Navy draft, 17 Jan 44, PM601/ALW:adc; (3)

AIC Com Rpt on Problem No. 8 (cited above, note

46); (4) Excerpt from Memo, USN Forrestal for

Senator Murray, 11 Jan 44, sub: Company Settlements; (5) Memo prepared by WD, n.d., sub:

Tentative Plan for Over-All Company or Group

Termination Settlements, Combined With Renegotiation Settlements Where Possible; (6) Memo, Lt

(jg) A. L. Wadsworth for Lt Col F. Workum, 21

Dec 43, sub: Suggestions for Redraft of Overall

Company Settlement Plan; (7) Collens' memo cited

above, note 46; (8) Memo, Wadsworth to Comdr

Linder, 18 Jan 44, sub: Industrial Concentration

of War Production.
654 THE ARMY AND ECONOMIC MOBILIZATION

tical system the original notice of termination would have to filter down from the

prime contractor to all subcontractor levels

before steps would be taken at the lower

levels to discontinue work. In the meantime,

unnecessary production and additional costs

to the government would continue to pile

up. When it came to the task of settlement,

each war contractor faced the task of accumulating the claims of all lower echelon

subcontractors before he could present a

complete claim of his own. By the time the

accumulated claims reached the prime contractor many weeks would often elapse.

More time would elapse before the prime

contractor's claim was approved and payment made. Since intermediate contractors

were reluctant and frequently unable to

settle with their subcontractors until they

themselves had received payment for their

subcontract costs, many subcontractors

down the line were left "holding the bag"

until the lengthy process was completed. If

any intermediate contractors should become

insolvent during the process, lower tier subcontractors might find themselves permanently unable to recover their costs.

Apart from these considerations, the

vertical settlement system contemplated the

separate processing and settlement of each

individual terminated contract. With some

250,000 prime contract terminations in the

offing for all procuring agencies, the prospective workload for processing all claims

on an individual contract basis was appalling. It was estimated that the number

of first-tier subcontract claims would run to

800,000, and lower tier claims to many millions.48

 A single large subcontractor might

be faced with the task of preparing claims

on several thousand terminated contracts

and purchase orders within a few short

months. Each of these claims would require

separate compilation, presentation, auditing, and approval. Likewise, the termination

inventory for each would have to be separately priced, segregated, and stored or

otherwise disposed of. These property disposal decisions—far below the prime contractor but ultimately subject to the approval of the contracting officer—were

crucial to prompt reconversion but susceptible of great delay under orthodox vertical

procedure. If some means could be found

of merging all claims of a single firm over a

period of time into one consolidated claim

against the government, a tremendous

amount of duplicate processing, auditing,

inventory treatment, and other activities

could be eliminated. Furthermore, all subcontractors beneath a direct settlement

would find the processing time for their own

settlements substantially reduced.

Impelled by these reasons, planners devoted much intensive research and investigation late in 1943 and throughout 1944 to

development of a satisfactory plan for company-wide settlements.49

 Investigation revealed that the obstacles to such a plan were

formidable. The problem of properly identifying lower tier purchase orders and subcontracts as associated with a particular terminated prime contract appeared in many

cases to be impossible of solution in the absence of the very process of vertical communication which the company-wide plan

sought to avoid. Then, too, if the government were to assume the obligation for direct

settlement of subcontracts, higher echelon

contractors would have to be released from

all liability and procedures would have to be

developed to protect the government from

48

 Hearings on S. J. Res. 80, 1:14. 49

 See above, note 47.
TERMINATION AND SETTLEMENT PROCEDURE 655

double payment. Negotiation and settlement under a company-wide system would

have to be conducted by a single contracting

agency for many unfamiliar contracts which

had been placed and administered by other

procuring agencies and districts in all parts

of the country. Large numbers of government auditors and others composing settlement teams would have to be recruited,

trained, and placed in residence at plants

coming under the system. New legislation

and administrative regulations, with crossdelegation of powers among procuring agencies, would have to be devised and approved.

Many other problems of a novel and complex nature were faced by the planners.

The more enthusiastic advocates of company-wide settlement proposed that it be

used on a wide scale throughout the economy, regardless of the size of individual

plants. Others proposed an intermediate

course, suggesting limitation of the scheme

to the 3,000 plants representing 90 percent

of the subject matter of termination claims.

The Baruch-Hancock report pointed to the

inherent difficulties of the plan but nevertheless recommended that contracting agencies

"launch immediately a vigorous experiment,

fully exploring its possibilities." The Contract Settlement Act of 1944, following the

Baruch recommendations, authorized the

use of the company-wide system on such

basis as the Director of Contract Settlement

found desirable.50

In May 1944, the Army began its first experiment in company-wide settlement with

the selection of the Allis-Chalmers Manufacturing Corporation and the Bendix Aviation Corporation. Both firms were participating in the Consolidated Termination

Program, a fact which provided a substantial basis for operations under company-wide

settlement. In October, some four to five

months after the program was initiated,

General Clay reported its progress to the

Director of Contract Settlement. He found

that at this stage it required excessive personnel and excessive time in developing information on internal procedures of the corporations, that it posed grave difficulties in

property disposal and identification of subcontracts, and that it tended toward excessive accounting review. Nevertheless, he

recommended the continuance of the program: "Our tentative conclusion is that this

type of settlement will work, but because of

the difficulties outlined in the preceding

paragraphs it will probably be of use only

for limited application."

 51

On 29 May 1945, after a year of experimentation by the Army, the Office of Contract settlement defined in broad terms the

program and policies for company-wide settlement. On the same date ASF set forth in

detail the procedure to be followed under

the program. These procedures were refined

and published on 20 June 1945.52

The basic features of the standard companywide settlement plan were a compromise between the extremes of completely

merged-claim settlement and settlement on

a contract-by-contract basis. Those com50

 (1) AIC, Special Course in Contract Termination, pp. 4ff., Selection of war producers to be included. (2) Page 3 of Linder memo cited above,

note 47(1). (3) Baruch-Hancock Rpt, p. 52. (4)

Contract Settlement Act of 1944, Sec. 7(c).

51

 Ltr, Gen Clay to Hon. Robert H. Hinckley, Dir

OCS, 12 Oct 44, Readjustment Div file 161 Direct

Settlement, Nov-Dec 44. General Clay stated that

the Chicago Ordnance District had assigned sixteen

people to the Allis-Chalmers Corporation, and the

Midcentral Procurement District, AAF, had assigned thirty-four to the Bendix Corporation. 52

 (1) OCS, Regulation No. 16, 29 May 45. (2)

ASF Circular 192, 29 May 45. (3) JTR (Revision

No. 2, 20 Jun 45), Sec. VIII, Direct Settlement of

War Contracts on a Companywide Basis.
656 THE ARMY AND ECONOMIC MOBILIZATION

panies desiring to use the procedure applied

to the appropriate Army service or Navy

bureau and were selected on the basis of a

number of qualifications similar to those for

the Consolidated Termination Program. Selected contractors were assigned to the appropriate service or bureau, which was represented by a "designated officer" located at

or near the contractor's termination headquarters. The assigned contractor entered a

master agreement pledging himself to the

company-wide procedure and agreeing not

to assert claims in any other manner unless

authorized.53

Within fifteen days after receiving each

termination notice, the assigned contractor

filed an abstract of the notice with the designated officer, who in turn notified the applicable prime contracting officer. If the

latter wished to exclude the termination

claim from the company-wide procedure because of the complex nature of the claim,

adverse effect upon war production, or other

reason he so advised the designated officer

who would then exclude it along with any

other exclusions deemed advisable.54 If his

claim was accepted, the assigned contractor

then prepared and submitted to the designated officer a settlement proposal for each

claim, using the standard procedure for

prime contract settlement claims.55 The designated officer, with the aid of his specially

trained, on-the-spot settlement team for

property disposal, review, auditing, and

negotiation, was in a position to reach an

agreement with maximum expedition. In

contrast to normal settlement procedures, a

settlement agreement under the companywide system could cover any number of

termination claims. Moreover, property disposal decisions covering large quantities of

inventory pertaining jointly to many claims

could be made as a unit, often in advance of

the contractor's submittal of termination

claims.56 The designated officer had substantial latitude in adapting procedures to the

needs of his particular situation.

Some idea of the scope of activities under

a single company-wide settlement organization may be had from a review of salient

features of the operation at the Aluminum

Company of America. A survey by the Readjustment Division early in 1944 had disclosed that Alcoa was supplying the armed

forces, directly or indirectly, with approximately $70 million in war matériel per

month. Only 5 percent of this was done

under prime contracts, the remaining 95

percent being supplied under subcontracts

with 2,000 customers at numerous levels in

the contractual chain. It was estimated that

55 percent of Alcoa's output went ultimately

to the Army Air Forces, 30 percent to Navy

aircraft, and the remainder to Army Ordnance and Quartermaster. To carry on its

war production, Alcoa operated 2 mines, 4

ore plants, 12 reduction plants, and 20

fabricating plants.57

Alcoa was assigned to the AAF under

both the Consolidated Termination Program and the company-wide settlement

53

 JTR 854, Master agreement for companywide

settlement. 54

 Out of approximately the first 1,000 cases at

Alcoa, only 3 were excluded from company-wide

settlement. One of these was excluded at the request

of the Navy contracting officer, and the other two

by the designated officer. Ltr, Maj Robert L. Fisher,

AAF Plant Representative, to Lt Col Robert H.

Andrews, Chf Jt Settlement Br, Readjustment Div,

31 Jul 45, in Readjustment Div file 161/JS/Aluminum Co. of America, 1 Jan 44 to 31 Jul 45 (hereafter cited as Readjustment Div, Alcoa file). 55

 JTR 855, Procedure.

56

 JTR 855.9, Disposal of property. 57

 Readjustment Div, Report on Contract Termination Procedures, Aluminum Company of

America, Pittsburgh, Pennsylvania, 10 Apr 44, in

Readjustment Div, Alcoa file.
TERMINATION AND SETTLEMENT PROCEDURE 657

plan. Shortly before V-J Day it was estimated that Alcoa would soon present between 35,000 and 50,000 termination

claims. In the opinion of the designated

officer, it would take anywhere from one to

three years to settle these claims under existing company-wide settlement procedures.

With Alcoa's termination expenses, reimbursable by the government, running to

$35,000 per month, continued operation

under existing procedures might cost the

Government over $1,000,000 for this item

alone. Adding the expenses of maintaining

a large AAF designated office and settlement team, and the even greater economic

and social costs of delayed reconversion, it

was apparent that substantial streamlining

of the whole procedure was essential.58

A major stumbling block to prompt approval of subcontract claims under the

direct settlement method was the JTR requirement that evidence of allocability of

subcontracts to terminated prime war contracts be furnished in the form of detailed

certificates of allocability from higher level

contractors.59 Fulfillment of this requirement

in a large percentage of cases had broken

down because of the volume of paper work,

the difficulty of quantitative allocation of

each item of each purchase order at every

step in the contractual chain, and for other

reasons. To overcome this difficulty, alternative procedures were devised. First of all,

Alcoa agreed to cease work on all production

deemed to be war business upon receipt of

general notification by the War Department

instead of waiting for the receipt of individual termination notices. Then, from its total

termination claims it agreed to a standard

percentage deduction to compensate for excessive "quantitative allocation." The percentage deduction was based upon the analysis of a representative number of carefully

investigated test cases. A similar deduction

was made to avoid breaching the legal requirement that the sum of termination settlements under any prime contract not exceed the contract price. The adoption of

these procedures, which would not have

been allowable without the flexibility and

discretion permitted by the negotiated settlement, saved the settlement procedure

from bogging down completely in a mass of

red tape.60

A second major problem was the separate

processing of thousands of individual termination charges. The standard company-wide

settlement procedure contemplated the

merging of claims as far as possible. Because

of Alcoa's complex sales organization, with

numerous offices throughout the country

each receiving notices of complete or partial

termination, it was at first thought necessary

to prepare a separate claim for each item

of each purchase order. This procedure was

workable for a fairly large volume of terminations but could not be expected to withstand the deluge of V-J Day terminations.

Accordingly, a plant-by-plant procedure

was devised under which each of Alcoa's

fabricating plants would present one com58

 (1) Ltr, Maj Fisher, AAF Plant Representative, to Col Andrews, Readjustment Div, 20 Aug

45; (2) Office of the AAF Representative at

Aluminum Company of America, Proposal for

Settling V-J Day Claims of Aluminum Company

of America, 22 Aug 45; (3) Proposal for Settlement of V-J Day Claims of Aluminum Company of

America, 30 Aug 45. All in Readjustment Div,

Alcoa file. 59

 JTR 855.8.

60

 (1) Ltr, Roy A. Hunt, President, Aluminum

Company of America, to Maj Fisher, AAF Plant

Representative, 14 Sep 45; (2) AAF Plant Representative, "Report to the Settlement Board," undated copy, in folder Proposed Plant-by-Plant Plan

for Aluminum Company of America. Both in Readjustment Div, Alcoa file.
658 THE ARMY AND ECONOMIC MOBILIZATION

bined claim covering the termination

charges on all terminated war orders being

performed at that particular plant. Supporting each partial claim would be a documented summary of all material and direct

labor charges. To such charges would be

applied over-all percentages for factory burden, corporate general and administrative

expenses, profits, and so on, thus eliminating

similar calculations for each and every item

of individual purchase orders.61 As in the case

of allocability and other problems, the successful resolution of the problem of processing individual claims could be effected only

by the adoption of a commonsense, businesslike approach in lieu of a microscopic audit

procedure hypothetically calculated to

achieve 100-percent accuracy on an item by

item basis.

By the end of March 1946 the companywide settlement program at Alcoa had been

completed. The terminated value of contracts handled under the program exceeded

$135,000,000.62 In accordance with the

prearranged plan, Alcoa ceased work on all

war orders on the day following the announcement of the Japanese surrender. If

it had waited until individual termination

notices had trickled down to it through

prime and intermediate contractors, it

would have put into processing an estimated

additional 50,000,000 pounds of aluminum.63

 As it was, Alcoa had on hand on

V-J Day some 300,000,000 pounds of

aluminum in various stages of fabrication

for the fulfillment of war contracts. The

chief barrier to expeditious settlement was

not the processing of claims, as such, but

delays in decisions by the RFC and other

agencies in the disposition of termination

inventory.64 Some of these delays no doubt

reflected uncertainty concerning the government's over-all postwar policy in the

matter of concentration of ownership in the

aluminum industry. In any case, in view of

the innumerable problems existing in late

1945, the liquidation of the company-wide

settlement program at Alcoa by the end of

the first quarter of 1946 was a notable

achievement.

At the peak of the program there were

only thirty-one company-wide settlement

teams assigned by all agencies, bearing out

General Clay's earlier prediction of its

limited applicability. But far from indicating

the failure of the program this limitation

was perhaps responsible for its success. The

basic philosophy underlying this view is best

expressed in the following words, written at

a time when the program was still in the

planning stage: "There is a key to the contract settlement problem. It lies in awareness of the amazing extent of the concentration of war production and war contracts

in a relative handful of firms. . . ."

the end of 1946, when the program was

drawing to a close, the 31 company-wide

teams—dealing with less than one tenth of

61

 Ibid.

62

 Ltr, Malcolm A. White, Chf Readjustment Br,

to Roy A. Hunt, President, Aluminum Company of

America, 2 Apr 46, Readjustment Div, Alcoa file. 63

 Hunt ltr cited above, note 60 (1).

64

 (1) Ibid. (2) Ltr, Fisher to Andrews, 29 Aug

45. (3) Ltr, Robert A. Hurley, Actg Chmn Surplus

Property Bd, to Gen Hauseman, Dir Readjustment

Div, 11 Sep 45. (4) Memo, Lt Col V. H. Knoop,

Fixed Price Settlement Br, Readjustment Div, for

Asst Dir for Contract Settlement, Readjustment Div,

20 Sep 45, sub: Visit to Aluminum Company of

America. (5) Ltr, Col Fisher, Resident Readjustment Officer, to A. A. Throckmorton, Chf Nonferrous Metals Section, Office of Surplus Property

RFC, 13 Nov 45. (6) Ltr, Fisher to F. W. Huston,

Chf Warehousing Div Office of Surplus Property

RFC, 28 Nov 45. (7) Ltr, Fisher to Col Andrews,

Chf Fixed Price Settlement Div ASF, 30 Nov 45.

All in Readjustment Div, Alcoa file. 65

 Linder memo cited above note 47 (1).
TERMINATION AND SETTLEMENT PROCEDURE 659

one per cent of all war contractors—had accounted for the settlement of over 67,000

claims, involving some 15 percent of the

total dollar amount of all termination

claims.66

Other Subcontract Settlement Procedures

A primary concern of Congress and others

engaged in drafting the Contract Settlement

Act was the plight in prospect for tens of

thousands of smaller subcontractors at the

time of mass terminations. As already indicated, many observers felt that the vertical

settlement system was too slow and cumbersome to insure prompt payment to lower tier

contractors and that widespread losses and

insolvency would result. These fears were

cogently expressed by a contemporary participant in termination planning:

The present system of settling with subcontractors may well be compared to the oldfashioned bucket brigade method of putting

out a fire. . . . In many cases there are five

or ten hands through which a subcontractor's

claim must go before it can reach a contract- ing agency. . . . Each time the bucket is

passed, another set of accountants is usually

called in to make a new examination before

allowing it to go up the line. . . . In many

cases the man in Hartford or Philadelphia

may be completely uninterested in worrying

about the Peoria claim anyway or, if he gets

paid on it, in passing the money down the

line to Peoria. Furthermore, after Germany

is beaten, and especially after the defeat of

Japan, many little men in the bucket

brigade—and some big ones also—will close

up shop. Their subcontractors will then

have no place to go. They will be termination orphans in the post-war storm.67

The Consolidated Termination Program

and the company-wide settlement plan represented partial solutions. Both helped to

speed up payment of subcontractors,

whether above or below the firms assigned

under these programs. In the case of company-wide settlement, a handful of giant

subcontractors received direct settlement

and payment of their claims by the government. But under both programs only subcontractors in the same chain as the assigned

firms were helped directly although all contractors benefited from the speeding up of

settlements in general. Nevertheless, the

problem of assuring and expediting individual payments to the vast majority of subcontractors still remained.

The subcontract settlement problem was

complicated by the fact that the government ultimately bore all subcontract charges

while having no direct liability to subcontractors. Under peacetime conditions, the

government would simply place its prime

contract with the lowest bidder. Other

things equal, the lowest bidder under a

prime contract was the one who had obtained the most favorable subcontract terms.

In any case, the government was assured of

procurement deliveries at least cost, and the

payment of subcontract claims was a private

transaction between the parties, subject to

established principles of the law of contracts.

Under wartime procurement, however,

true competition no longer existed and

there was abundant opportunity for contractors all down the line to pad their cost

estimates which were the basis for the negotiated price of a military end item. Hence,

the government was obliged, in self-protection, to develop and apply the various pric- 66

 OCS History, p. 33. 67

 Gross, "The Role of Congress in Contract

Termination", pp. 544-45. Mr. Gross was staff

director of War Contracts Subcommittee, Senate

Committee on Military Affairs. See also John S.

Carter, "Problems Arising Out of the Subcontractor

Relationship," Law and Contemporary Problems

(Duke University School of Law), X, No. 3 (Winter

1944), 518-28.
660 THE ARMY AND ECONOMIC MOBILIZATION

ing techniques already described to insure

reasonable treatment in fixed-price contracts. But a reasonable contract price for

completed end items was no guarantee that

the government would not be heavily overcharged in termination claims for work

performed on the terminated portion of

canceled contracts. Again, in self-protection

the government reserved the right to refuse

reimbursement to prime contractors for

their subcontract termination costs if such

costs were unreasonable. The only way the

government could insure the reasonableness

of subcontract claims was to insist that such

claims receive adequate review before payment. Unfortunately, such a requirement—

if interpreted to mean individual review by

government personnel—would spell the

complete breakdown of the readjustment

program at the time of mass terminations

following V-J Day. Neither the procuring

agencies nor any other offices of government

had the staff to provide review of each and

every subcontract claim arising under terminated prime contracts. The only practicable solution to the problem was to make

higher-echelon contractors responsible for

review of subcontracts, placing upon them

the authority and responsibility for satisfactory settlement of their own subcontractors' claims. This could be accomplished by

the adoption of definite subcontract settlement regulations, supplemented by training

programs and a system of spot checks to

insure compliance.

The early War Department regulations in

this area stressed the importance of contractor responsibility in the examination of subcontract claims and held the contractor to

the standard of scrutiny that a businessman

would employ in the conduct of his own

affairs. The regulations required an office

review as a minimum and called attention

to a number of specific matters to be checked

for each claim. Further review was to be

made if the contractor judged it necessary.

This could involve requests upon subcontractors for additional information, a visit

by members of the contractor's accounting

staff to the subcontractor's plant, or even an

audit of the subcontractor's books by qualified accountants of the reviewing contractor.68

 War Department Procurement Regulations required the reviewing contractor to

subscribe to a notarized certificate that he

had provided an examination of the claim

which he deemed adequate and that in his

opinion the dollar amount of the claim was

fair and reasonable, proposed in good faith,

and not more favorable to the supplier than

the undersigned would make in the absence

of reimbursement by the government.69

When the succession of subcontractor claims

and their accompanying certifications

reached the contracting officer, the latter

was empowered to require such additional

examination as he deemed necessary to protect the interests of the government. Thus

the whole system of subcontract review

rested largely on the discretion of the contracting officer. This wide discretionary latitude permitted substantial variation in reviewing standards from one procuring office

to another. On the one hand, this could lead

to laxity in protecting the interests of the

government; on the other, no subcontractor

at any level could be certain that a settlement made in good faith would not be overturned when it reached the contracting

officer.

With the accumulation of experience, the

War Department endeavored to tighten up

68

 (1) WD TM 14-320, pars. 2401-07, 3701-06.

(2) WD TM 14-1005, pars. 38-44, 102-08. 69

 PR 15-440. The certification procedure was

continued throughout the termination program:

JTR 632(3); JTR 642.3(c); JTR 987.1.
TERMINATION AND SETTLEMENT PROCEDURE 661

its subcontract review procedures and improve the workability of the system. An analysis revealed that over 90 percent of all subcontractor claims amounted individually to

less than $10,000.70 Early in 1944 the department revised its regulations to provide

separate settlement procedures for three

classes of subcontractor claims: (1) mandatory review prior to settlement by contracting officers of all claims in excess of $10,000;

(2) blanket authority to all war contractors

to review and settle all claims of less than

$1,000; (3) granting of special delegations

of authority to reliable contractors to settle

all claims of less than $10,000. Procedures

(2) and (3) were revokable if abused and,

in order to insure performance, War Department accountants under the contracting officer made selective checks of various classes

of settlement. In the absence of fraud, a

settlement made under delegated authority

was binding on all concerned, and could not

be reviewed, either by higher tier contractors

or by the government.71 The adoption of

standard procedures for delegating final

settlement authority to contractors did much

to clarify responsibility and to expedite binding settlements at all contractor levels. By

31 August 1945, the War Department had

made 4,762 delegations of authority of type

(3).72

An important aim in developing subcontract settlement procedures was to get subcontractors to relinquish their common law

rights to anticipated profits under terminated contracts. There was no substantial

reason, at a time when the government was

devising measures for the protection of subcontractors, for the latter to demand a more

favorable basis of settlement than that accorded prime contractors.

A significant step in eliminating subcontractor claims for full anticipated profits

was the announcement by OWM, on 29

May 1944, of the approved subcontract

termination article promulgated by the

Joint Contract Termination Board.73 This

article—which could be voluntarily included in subcontracts, either originally or

by amendment—provided for "fair compensation" of subcontractors on a basis

equivalent to that in the Uniform Termination Article for prime contracts. Whether or

not a subcontract contained the approved

article, it was the policy of the government

to favor a settlement made in accordance

therewith. Since the contracting officer

could refuse reimbursement of the prime

excessive subcontract costs, either the prime

or another intervening contractor would

shoulder the burden of any excess payment.

Higher level contractors were therefore reluctant to settle any lower tier claims which

departed substantially from the approved

basis. This was a heavy deterrent to unreasonable demands by subcontractors since a

prolonged delay in payment might mean

insolvency.74

70

 ASF, Readjustment History, p. 47. 71

 JTR 642.5, Recognition of authorized settlements. The original provisions for delegated authority were made by PR 15-325.2, May 1944. 72

 (1) ASF, Readjustment History, p. 48. (2)

JTR, Sec. VI, Pt. 3, Review of Subcontract Settlement Proposals by War Contractors, and Pt. 4, Review of Subcontract Settlements by Government

Personnel.

73

 OWM Dir Order 6, 29 May 44, and attached

statement of policy by JCTB. 74

 Termination claims of subcontractors unwilling to settle on a fair basis could be excluded from

the negotiated settlement of the prime contract and

left to subsequent determination. JTR 613.1. As of

30 September 1946, the AAF reported 4,476 unassumed subcontractor exclusions involving $230

millions in canceled commitment value. At the same

time, Army Ordnance reported 62 unassumed exclusions of $1.5 millions in canceled commitments.

WD, Progress Report, Section 5-A, 30 Sep 46.

These figures represent complicated, controversial,

and contingent liabilities and do not necessarily
662 THE ARMY AND ECONOMIC MOBILIZATION

The procedures thus far described were

designed to expedite subcontract settlements and still protect the interests of the

government. Another important class of procedures had as a primary purpose the protection of subcontractors against default by

their customers. Included in these were

supervision of payments to prime contractors

for subcontractors; duplicate payment

where higher tier contractors failed to pass

down the original payments; and direct

settlement of subcontract claims of firms

not included in company-wide settlements.

The first of these procedures was used in

cases of actual or imminent insolvency,

bankruptcy, receivership, or corporate reorganization on the part of a war contractor. Upon the complaint of subcontractors in such situations, the contracting

officer was required to supervise all payments to the war contractor on account of

the termination claims of his subcontractors.

Such payments could either be made directly

to the subcontractor by the contracting

agency or they could be placed in a controlled partial payment account disbursable

by the prime contractor only with the countersignature of the contracting officer. In

either case, detailed regulations carefully

protected the rights of all concerned.75

The making of duplicate payments permitted—as a matter of equity and good

conscience—the payment of fair compensation to a war contractor who had been deprived of payment and had no reasonable

chance of securing payment even though

payment had already been included in the

settlement with another war contractor. All

such payments to War Department subcontractors required the approval of the

Readjustment Division, ASF.76

Direct settlement of subcontracts—other

than under the company-wide settlement

plan—was used only on a limited basis to

facilitate particular settlements which could

not be accomplished equitably or expeditiously by the higher tier contractor.77

 In

such cases the War Department had to have

the written approval of the head of the local

procurement district or other office, and

each settlement was limited to a stated maximum figure. In general, prime contract settlement procedures were used in direct

settlement of subcontracts. In all cases, the

subcontractor was required, as a condition

of direct settlement, to release his customer

from liability or to assign his claim to the

government. The choice between these two

was made by the contracting officer at the

time of settlement. Assignment of the claim

was obtained when the government had a

continuing interest which would be protected thereby.78

The vast majority of subcontract claims

settled or approved directly by the War Department were at the first tier level. Many

of these were subcontracts under prime

CPFF contracts, which frequently called

for government assumption of all subcontractor claims. Others were difficult claims

under prime fixed-price contracts, originally

excluded from settlement of the prime in

order to eliminate delay. Still others were

settlements under the company-wide settlement plan, or under the provisions of JTR

permitting direct settlement in individual

cases for a variety of reasons. By 30 June

1947, the total number of first tier subconimply unreasonableness on the part of subcontractors. Unassumed exclusions were either later assumed for direct settlement by the government or

were settled through normal procedure. 75

 JTR 367; JTR 651; JTR 667; JTR 954.

76

 JTR 652.3. Duplicate payments were authorized by Section 7 (f) of the Contract Settlement Act. 77

 JTR 662.4(2). 78

 JTR 663.3.
TERMINATION AND SETTLEMENT PROCEDURE 663

tracts settled or specifically approved by the

War Department ran to nearly 460,000,

over three times the number of War Department prime contract settlements for World

War II.79

The Settlement of CPFF Contracts

Special procedures for settling CPFF contracts were necessary because of the traditional authority of the General Accounting

Office—headed by the Comptroller General—to audit and disallow payments under

contracts calling for Government reimbursement of contractors' costs. CPFF contractors were kept currently paid for their expenses (as well as a pro rata share of their

fixed fee) by local disbursing officers after

careful review of cost vouchers, contract

terms, and other data. The additional review by the GAO, whether done in the field

or in Washington, inevitably took time and

it was usually several months before either

the procuring agency or contractor knew

whether a given item would be approved or

rejected. Even approval after audit was not

conclusive, inasmuch as the GAO had the

power (prior to the Contract Settlement

Act) to re-examine a contractor's accounts

at any time.80

Under these conditions, CPFF contractors

at the time of termination found themselves

dealing with a government that wore two

hats. The government (War Department)

would make a "final" agreement with the

contractor, binding him to a termination settlement necessarily based, in part, on payments already made at the time of termination. Later, the government (Comptroller

General) could disallow payments previously made and compel the government

(War Department) to withhold any further payments due the contractor under any

contract. In the rare event that these withholdings were inadequate to cover disallowances, numerous other instruments were

available for collection.

For this reason contractors from the outset were extremely reluctant to enter final

settlement agreements under CPFF contracts. At the end of 1943, of the 220 prime

contracts which had been terminated by the

War Department, not one involving a termination claim had been settled.81

 During

the next six months the situation was but

slightly improved; only four CPFF termination claims were settled within the period.

By the end of the summer of 1944, the

settlement of some $6 billion in terminated

CPFF contracts (largely for Army aircraft)

was hanging fire pending a clarification of

the final settlement authority of the contracting agencies.82

The Contract Settlement Act, which gave

the procuring agencies unequivocal authority to negotiate final settlements, did not

exempt CPFF contracts from its terms. But

since the Act did not at the same time remove the responsibility of the GAO for

auditing CPFF contracts prior to termina79

 Report of the Under Secretary of War to the

Secretary of War, 1 July 1945 to 30 June 1947,

p. 19. 80

 There was apparently no statute of limitations

and it was doubted that the General Accounting Office could legally waive its right to future examination. Ltr, USW Patterson to Robert Hinckley, Dir

OCS, 6 Oct 44, in file 161 Contract Termination,

1 Sep 44-31 Oct 44, Purchases Div ASF.

81

 ASF, Monthly Progress Report, Section 14-A,

Contract Terminations, 30 Jun 44, p. 32. It should

be noted that the typical CPFF prime contract was

many times larger and more complex than the

average fixed-price contract, and was expected to

require a longer settlement period. Also, as of 31

December 1943, of the 220 terminated CPFF contracts, 79 had been settled on a no-cost basis. 82

 OCS Rpt, No 1, Oct 44, pp. 18-19.
664 THE ARMY AND ECONOMIC MOBILIZATION

tion a number of troublesome problems

arose. Did the power of the services to make

final settlement apply only to items in the

terminated portion of a contract? Or did it

apply to any item of dispute under the entire

contract? If the former were true, no binding settlement of the contract as a whole

could be made by the procuring agencies. If

the latter were true, these agencies could,

in the process of settlement, override the

carefully considered decision of the Comptroller General in matters over which he

had long had final administrative authority.

The resistance of contractors finally

forced action to break the log-jam. On 6

October 1944, Under Secretary Patterson

wrote the Director of Contract Settlement

that a decision would soon have to be

reached. CPFF contractors were not only

refusing to enter settlement agreements. In

many cases, they also declined to assume

any responsibility for disposal of termination inventory or for settling subcontractors'

claims if they could not at the same time

reach a binding agreement with the government on all items of cost whether incurred

before or after termination. In taking this

position, contractors were within their legal

rights.83 Furthermore, they had little or

nothing to lose since a settlement would yield

only a relatively small additional payment

in comparison with the potential value of

rights relinquished on the completed portion

of the contracts. The Under Secretary therefore urged that final settlement authority for

all items in terminated CPFF contracts be

confirmed in the contracting agencies.84

On 31 October, the Attorney General in

a lengthy opinion found the authority of

the contracting agencies under the Contract

Settlement Act to include all claims under

a terminated contract, including those arising under any portion of a CPFF contract

performed prior to termination. This opinion rested on the wording of Section 3(h)

of the act, a sentence which had been drafted

with considerable perspicuity and foresight:

"The term 'termination claim' means any

claim or demand by a war contractor for

fair compensation for the termination of

any war contract and any other claim under

a terminated war contract, which regulations prescribed under this Act authorize to

be asserted and settled in connection with

any termination settlement." Since the basic

purpose of the Act was to expedite the fair

settlement of contracts, and since settlement could not be expeditiously accomplished on a piecemeal basis, the Attorney

General concluded that the Director of

Contract Settlement had the authority to

issue regulations adequate to the purpose.85

In order to implement the Attorney General's decision the several agencies involved

held conferences to determine procedures.

The contracting agencies unanimously

agreed that every effort be made to answer

satisfactorily any informal inquiries or exceptions raised by the GAO in connection

with the completed portion of the contract.

The new procedures adopted at this time

provided that within the 60-day period following termination the contracting officer

was to submit to the General Accounting

83

 The contracting agencies could, of course, make

a unilateral determination, but this would likewise

be inconclusive and subject to expensive and prolonged litigation in the courts. Most CPFF contracts

bound the government to assume and pay the claims

of subcontractors after termination. Also, the government was required by the Contract Settlement

Act to remove termination inventory, title to which

technically passed to the government prior to termination.

84

 See USW ltr. cited above, note 80. Mr. Hinckley

promptly requested an opinion from the Attorney

General; see above, pages 629-30, note 44. 85

 40 Op. Atty. Gen. 328, 31 Oct. 44.
TERMINATION AND SETTLEMENT PROCEDURE 665

Office answers to all outstanding GAO inquiries and exceptions.86

 At the end of the

60-day period ("audit status date") the

GAO was to advise the contracting officer

of any uncleared matters still remaining in

connection with the contract. A further 30-

day period beyond the audit status date was

allowed to facilitate final clearance with the

GAO. Thereafter, the contracting officer

was free to proceed with final settlement of

all items except formal disagreements with

the GAO still outstanding. Only the highest

procuring authority in the contracting

agency was permitted, under the regulations,

to effect an agreement in conflict with the

position of the General Accounting Office.87

The resolution of the CPFF controversy

thus gave the government the full benefits

of the extensive organization and experience

of the General Accounting Office without

permitting undue delays in final settlement.

The importance of rapid settlement of

CPFF contracts may be inferred from the

fact that such contracts accounted for 28

percent of the value of all War Department

terminations and 24 percent of the value of

terminations by all other agencies. (See

Table 61, page 697.)

Even in the absence of interagency conflicts, CPFF settlements were necessarily

complicated and time-consuming. The Joint

Contract Termination Board had completed

its uniform termination article for CPFF

contracts in April 1944, and with the issuance of JTR in November a tentative set of

procedures was adopted.88 These were perfected in April 1945, after resolution of the

controversy with the GAO. The special

CPFF settlement procedures covered all

cost and cost-plus-a-fixed-fee contracts; reimbursable cost portions of fixed-price contracts; and letter orders, letter contracts,

letters of intent, and letter purchase orders

providing for current reimbursement of allowable costs. All regular provisions of JTR

applied to CPFF settlements except where

specifically inapplicable or in conflict with

the special CPFF regulations.89

The complexities of CPFF termination

and settlement problems cannot be adequately portrayed in a necessarily brief treatment of the subject. A few figures concerning

the Army's tank contract with the Baldwin

Locomotive Works may, however, give some

indication. On 27 October 1941, Baldwin

contracted to produce a number of medium

tanks at an estimated cost of $22 million

and a fixed-fee of $1,540,000. By 14 May

1943, a succession of supplements had

raised procurement called for by the contract to an estimated $296 million with a

fixed fee of over $14 million. Termination

reduced actual procurement deliveries under

the contract to $92 million. Of the $204 million terminated, over $24 million was represented by termination inventory at the Baldwin works alone. Many millions more in

inventory was held by 400 subcontractors

throughout the country. During the life of

the contract, more than 125,000 purchase

orders and changes were issued by Baldwin.

To administer the contract, the Ordnance

Department had a staff of between 400 and

500 persons continuously stationed at the

Baldwin works, approving action, auditing,

inspecting, and checking. The contractor,

in his termination claim, estimated that at

86

 JTR, Sec. V, Pt. 6, Basis for Settlement of

Cost-Plus-A-Fixed-Fee Contracts, 20 April 1945. 87

 For example, the Under Secretary of the War

Department or the Secretary of the Navy. JTR

563.6(2). 88

 Ltr, Col R. A. Cutter, Chmn Subcom on Contract Clauses, to Hancock, Chmn JCTB (final

draft), 29 Apr 44, and incls, in Readjustment file,

Jt Contract Term Bd.

89

 JTR, Sec. V, Pt. 6, Basis for Settlement of CostPlus-A-Fixed-Fee Contracts.
666 THE ARMY AND ECONOMIC MOBILIZATION

the time of termination all but approximately $4 million in costs had been previously reimbursed. As a result of negotiation

this was reduced to slightly more than $3.5

million.90

The elaborate array of contract settlement

procedures for World War II reflected the

magnitude of the war production program

and the underlying complexity of American

industry in the middle of the 20th century.

The development and application of these

procedures made possible the rapid and efficient discharge of one of the greatest administrative tasks in the nation's history. The

character of this achievement is more fully

revealed by the following review of the

terms of settlement, the financing of contractors, the rate at which settlements were

made, and the results of the program as a

whole.

90

 Negotiator's report of proposed settlement, Termination of Contract W-670-ORD-1814 with the

Baldwin Locomotive Works, 13 Dec 44, Readjustment Div, file Baldwin Locomotive Works.
CHAPTER XXIX

Contract Settlement in Operation

The Terms of Settlement

The central purpose of the entire system

of contract settlement was the payment of

fair compensation to war contractors for

work done on their terminated contracts.

Promptness of payment was an essential

ingredient but the heart of the settlement

problem was the task of defining and applying principles of settlement which would be

fair both to the contractor and to the ultimate purchaser—the general public. Most

of the difficulties were associated with the

settlement of fixed-price contracts; as already indicated, reimbursement for terminated CPFF contracts presented no great

theoretical problems inasmuch as reimbursable costs were defined in each contract and

elaborated in special manuals and regulations devoted to the purpose.1

Very early in the settlement program, the

procuring agencies recognized that fair compensation in the case of terminated fixedprice contracts consisted of the following elements: (1) the full contract price for all

items completed under the contract prior

to termination; (2) all costs allocable to the

terminated portion of the contract; (3) a

reasonable profit on work undertaken or performed as represented by the costs in (2);

(4) posttermination expenses, including the

costs of the contractor's termination organization and expenses of storing and protecting government property. The sum of all

costs in categories (1), (2), and (3) was

not to exceed the total price specified in the

procurement contract.2

The complexity of the Army's task of determining the kinds and amounts of contractor reimbursement under each of these categories for more than 100,000 contracts

varying widely in purpose and scope cannot

be adequately described. The chief problems

centered around category (2), and to a

smaller extent (3).

To illustrate the initial difficulties, suppose a firm with a number of war contracts

had agreed in a contract undergoing settlement to deliver 10,000 jeeps at a fixed price

of $1,000 each. Suppose also that at the

date of termination, 6,424 jeeps had been

completed and would be paid for, under

standard termination provisions, at their full

contract price. Two broad problems of cost

allocation would immediately arise in con1

 See Chapter XII, above. It was, however, necessary to develop a CPFF termination article to provide for posttermination expenses and other considerations. See above, page 663, note 81.

2

 These four categories of reimbursement were

contained in the standard termination article

adopted by the War Department in October 1942,

and were continued under the Contract Settlement

Act throughout the program. See Malman article

in "War Contract Termination," cited above, page

613, note 2(2), App. C, "Article . .Termination for the Convenience of the Government." See

also, PR 15-443, 14 Aug 43. The exclusion of posttermination expenses from the limitation on total

reimbursement did not appear in the 1943 regulations, but was later recognized as a valid exclusion.

JTR 534.2.
668 THE ARMY AND ECONOMIC MOBILIZATION

nection with the settlement: (1) how much

of the contractor's general costs used for all

his productive activities—costs of plant,

facilities, equipment, managerial and administrative organization, common inventory and the like—could be considered as

attributable to production under the jeep

contract? and (2) how much of the expenses

allocable to the jeep contract were properly

attributable to the terminated portion

thereof?

To answer the first question properly the

Army would have to decide, for example,

to what extent advertising and entertainment expenses, officers' salaries and bonuses,

employees' pension costs and separation pay,

research and development expenditures,

sales commissions, travel expense, and so on

ad infinitum, were proper expenses of war

production, and then determine the proportion thereof allocable to the particular contract in question. To answer the second

question the Army would have to decide,

among other things, how to distribute between the completed and uncompleted portions of the jeep contract such irregular costs

as high starting load, special engineering,

design, layout, planning, and other preparatory expenses. The greater the cost which

could be allocated to the terminated portion, the greater would be the amount paid

in settlement of the contractor's termination

claim, over and above amounts paid for

completed deliveries.

The present brief review of the terms of

contract settlement can do no more than

provide a sampling of the standards used in

cost and profit determination. The evolution of the principles of fair compensation

for termination claims has been touched

upon in the preceding two chapters and is

elsewhere described in greater detail.3 At

the beginning of 1944, the principal authoritative document was the "Statement of

Principles for Determination of Costs upon

Termination of Government Fixed-Price

Supply Contracts" issued by the JCTB.4

These principles were largely incorporated

in or ratified by the Contract Settlement

Act, which gave the Director of OCS the

authority to issue further clarification and

changes. This was done principally under

OCS Regulation No. 7, which stated in considerable detail the philosophy and principles of fair compensation, and Regulation

No. 14, which introduced a series of OCS

interpretive rulings known as "Termination

Cost Memorandums" (TCM's).5 All together sixteen memorandums were issued

under the following headings:

1. Recognized Commercial Accounting Practices.

2. General, Administrative, and Distribution Expense.

3. Common Items.

4. Partners' and Sole Proprietors' Salaries.

5. Application of the Limitation of

Subparagraph 1(i) of the Statement of Cost Principles.

6. Materials Acquired Prior to Date

of Contract.

7. Initial Costs.

8. Rejects.

9. Loss on Facilities.

10. Engineering and Development, Special Tooling, and Preparatory expenses.

3

 OCS History, Ch. VI, pp. 21-28.

4

 See above, page 626, note 38. 5

 The complete texts of these documents may be

found in the following sources: OCS Regulation 7

in OCS First Rpt, October 1944, pp. 76-81; OCS

Regulation 14 and TCM's 1-9, in OCS Third Rpt,

April 1945, pp. 25-38; TCM's 10-16, in OCS Fifth

Rpt, October 1945, pp. 26-36. The amended

"Statement of Principles" is found in OCS First

Rpt, pp. 70-72.
CONTRACT SETTLEMENT IN OPERATION 669

11. Settlement Expenses, Costs of Protection, and Disposition of Property.

12. Depreciation.

13. Advertising Expense.

14. General Experimental and Research

Expense.

15. Cash Discounts on Purchases.

16. Severance Pay.

The interpretations and rulings in the Cost

Memorandums were promptly incorporated

in the Joint Termination Regulation and

used by the Army and Navy in making

settlement.

In answering the broad questions of cost

allocation noted above, the Contract Settlement Act and related regulations laid down

the principle that the accounting system

used by the contractor would be relied upon

in settlement if it reflected the costs reasonably necessary for the performance of

the contract and was consistent with recognized commercial accounting practice.

The governing regulations pointed out that

costs includible in fixed-price settlements

were generally broader in scope than those

ordinarily contemplated in factory cost accounting and recognized by the government

under CPFF contracts. Greater liberality

was accorded the treatment of costs under

fixed-price contracts because of the greater

risks assumed under such contracts, the absence of cost definitions in the contract, and

the presumption that the contractor's obligation to deliver at a fixed-price entailed

the authority to make the necessary decisions involving production costs. Cost and

accounting data were to be regarded as

guides to the ascertainment of fair compensation rather than as rigid measures thereof,

and contracting agencies were advised

against the expenditure of greater time and

effort than the advantages of absolute accuracy warranted in obtaining and interpreting cost data.6

General expenses, not directly related to

production, such as salaries of officers and

clerical employees, general office expenses,

dues and memberships, professional fees,

financial expenses, and general selling and

distribution expenses—except items prohibited by the Statement of Cost Principles—were considered allowable costs of

war production with the appropriate portion thereof allocable to terminated contracts. Any basis of allocation was permitted

so long as it was reasonable in the light of

the circumstances of the particular case and

consistent with the general principles laid

down. Special treatment was indicated for

cases where the ratio of raw material costs

to processing costs was out of line, for unusual degrees of subcontractor supervision,

for distribution and service contracts, and

other special situations.7

Allowance was permitted for salaries of

proprietors and partners in unincorporated

firms to the extent that such individuals devoted their time to the contracts in question.

The amount of the salaries was to be reasonable taking into account the nature and extent of the services rendered, the general

level of compensation for persons similarly

situated elsewhere, the amounts paid prior

to the receipt of government contracts, and

the increase in the volume of business due to

war contracts. Thus, even if such individuals

did not explicitly charge their firm for their

6

 OCS Regulation 7 and TCM No. 1, 22 Feb 45

Sec. 6(b) of the Contract Settlement Act contained

the following wording: "To the extent that such

methods and standards require accounting, they

shall be adapted, so far as practicable, to the accounting system used by war contractors, if consistent with recognized commercial accounting practices." 7

 OCS, TCM No. 2, 22 Feb 45.
670 THE ARMY AND ECONOMIC MOBILIZATION

services, the firm was assured of compensation therefor to the extent applicable in

termination.8

Initial or "starting load" costs, resulting

from the difficulties of getting production

satisfactorily under way in the early stages

of the contract, could be separated from

normal production costs and properly allocated between the completed and terminated portions of the contract. The basis for

allocation was ordinarily the ratio of pretermination deliveries to total contract requirements, but some other basis—such as

machine or labor hours—could be used

where more equitable results would be obtained. High starting load costs reflected the

costs of training labor for new tasks, excessive spoilage and defective work resulting

from inexperienced labor, idle time associated with changeovers to new methods,

and so forth. Similar treatment was given to

engineering, developmental, and other

preparatory costs, although these planningtype costs were kept distinct from "initial

costs" of the operating type.9

An important consideration for a majority of fixed-price contractors was proper

compensation for special facilities which

they had purchased in order to perform their

contracts. At the time of termination they

would have recouped only a portion of the

cost of the facilities through reimbursement

for actual deliveries. Hence, provision was

necessary for defraying any loss sustained by

the contractor on special facilities as a result

of termination. To qualify as such, proof

was necessary that special facilities had been

specifically required for the discharge of war

contracts and that they were not economically usable by the contractor in his other

business. The loss was calculated by allocating the total cost of the facilities among

the various war contracts involved, and between the completed and terminated

portions thereof, usually on the basis of completed deliveries made and required under

the contracts. No allowance for depreciation was made, and the proceeds from the

final disposition of the facilities were credited

to the government as disposal credits in the

termination claim. The net loss determined

under this procedure thus automatically

accounted—in theory, at least—for all the

special facility costs whether resulting from

depreciation, obsolesence or loss in useful

value due to economic conditions. The

practical application of these provisions

necessarily gave rise to serious problems calling for the careful ascertainment of facts

and the exercise of sound judgment. The

really difficult decisions under this heading

fell to the contracting or disposal officer who

approved the retention or sale value of the

equipment.10

A somewhat less complicated issue, but one

which involved potentially heavy governmental expenditures as a result of mass

terminations, was whether and to what extent the government should reimburse contractors for severance pay granted to

employees laid off because of contract termination. Contractors would certainly not

be averse to granting substantial amounts of

severance pay to their employees if they

could be assured in advance of reimburse8

 OCS, TCM No. 4, 22 Feb 45. Salaries of corporate officers were normally explicit and allocable

on the same basis as other general expenses. 9

 OCS, TCM No. 7, 22 Feb 45.

10

 OCS, TCM No. 9, 5 Apr 45. Apart from termination regulations, the "facilities clause" in

procurement contracts carried provisions for protecting the government's interest in special facilities.

Nevertheless, the government was obliged to assume

the loss on special facilities as part of the costs of

war production, and the amount of the loss depended on the sale or retention value of the facilities

covered in the settlement.
CONTRACT SETTLEMENT IN OPERATION 671

ment by the government. To prevent the

termination provisions from conferring

wholesale and indiscriminate bonuses upon

war workers, the OCS—some ten days after

V-J Day—announced its severance pay

regulation. This provided that severance pay

was an allowable cost of war production

provided the contractor was required to

make such payments (1) by statute, (2) by

written agreement, or (3) by the operation

of an established policy constituting an implicit agreement. No amount could be included for severance pay where payment

was contingent upon recovery from the

Government. Within the framework of these

restrictions, severance pay was allocable to

terminated contracts according to the circumstances of each contractor and the

established principles of termination cost

allocation.11

Allowable advertising expense for settlement purposes included both the cost of

maintaining an advertising department in

the contractor's organization and the expenses of exploiting outside media such as

newspapers, magazines, billboards, radio,

and paid endorsements. Amounts of advertising expense nominal in relation to a

contractors' other expenses were includible

in general expenses and allocated on the

same basis. Large amounts were considered

individually on their own merits, chiefly in

terms of consistency with the contractors'

prewar program. The average dollar

amount of advertising expenditures during

the base period 1935-39 was the maximum

chargeable jointly to government contracts

and the contractor's other business during

the period of operation of the terminated

war contracts. Moreover, advertising expense was first chargeable to the contractor's

remaining commercial business up to the

prewar percentage of such charges. Thereafter, charges were allocable against war

contracts up to a rate not in excess of the

prewar percentage against sales. Thus if the

contractor's commercial business was maintained throughout the war at prewar levels,

no advertising expense was to be charged

against his government contracts. Newly organized firms without a prewar base were

granted amounts determined on the basis of

individual circumstances.12

In the absence of any special limitation

on reimbursable advertising, experimental,

and similar general expenses, it would have

been possible for contractors in advance of

termination to have created substantial postwar assets in the guise of current expenditures for war production. Although this result was inevitable in any large mobilization

program, the Statement of Cost Principles

attempted to curb excesses by limiting reimbursement for such expenditures. Subparagraph 1 (i) of the statement limited the aggregate allowance for experimental and

research expense, engineering and development and special tooling, loss on facilities,

special leases, and advertising. These items

were known as "costs subject to limitation"

and could not be compensated collectively

in excess of the amount which would have

been available for them out of the contract

price after all other costs were met, had the

contract been completed instead of terminated. Since "all other costs" did not include

profit, the limitation applied only when it

appeared at the time of termination that

the contract would have been completed at

a loss. As a result of termination the contractor could be "bailed out" of an unprofitable

contract; but he could not also get the benefit of free advertising, research, special fa11

 OCS, TCM No. 16, 24 Aug 45. 12

 OCS, TCM No. 13, 26 Jul 45.
672 THE ARMY AND ECONOMIC MOBILIZATION

cilities and the like, beyond the stated limitation.13

The allowance of profit on terminated

contracts was confined to profit on work

actually performed and did not include the

common-law element of anticipated profit

for the entire contract. Profit on the completed portion of the contract was presumed

to have been included in the price paid for

any items completed prior to termination.

Profit on the terminated portion was paid

in final settlement and was based on actual

performance in connection with the terminated portion. Any reasonable procedure

was permitted for arriving at a fair profit

although three methods were suggested in

the regulations:

1. The amount agreed upon or consented to at the time the contract was negotiated. This was the amount either explicitly

stated in the contract or used in negotiating

the contract price.

2. The amount which would have been

earned had the contract been completed.

This was to provide a general basis where

alternative methods were not available. It

was, however, altogether too hypothetical

and too complicated to afford a satisfactory

basis, and was not generally used.

3. The amount which the contractor

agreed to accept in the event of termination.

This figure could be expressed either in a

termination article in the original contract,

or in a pretermination agreement.14

Where the total profit contemplated at

the time of original negotiation was used as

the basis for settlement, the amount allocable to the terminated portion was to represent the ratio of work performed on the

terminated portion to the total work contemplated by the contract. The regulations

recognized the difficulties in arriving at such

a ratio, cautioning against the use of any

single criterion and suggesting numerous

considerations which might enter into such

calculations.15

A special problem in the case of many

contracts was the effect of price adjustment

articles upon profit determination. These

articles, included in contracts where a firm

fixed price could not be determined at the

time of negotiation, called for the use of a

tentative price which would be redetermined

or "adjusted" upon the occurrence of a

specified event such as completion of a certain percentage of the contract.16

 The termination of such contracts prior to the required adjustments raised the question of

whether the profit allowance, as well as payment for completed articles, based on the

terms of the original contract would be too

high or too low. In general, JTR provided

that if termination occurred after the event

calling for price adjustment, the adjustment

negotiations or computations should be completed and their effects incorporated in the

settlement. If termination was made prior to

the event, neither party had a right to a

revision of the contract price of completed

articles delivered prior to termination; but,

in the settlement, weight would be given to

the fact that the contract contained a price

adjustment article.17

In order to determine whether actual

settlements were being made fairly, the

Office of Contract Settlement sponsored

several independent field surveys. All to13

 OCS, TCM No. 5, 22 Feb 45. In view of the

numerous difficulties in determining what costs

"would have been" had the contract been completed, it is probable that this limitation was

broadly interpreted. 14

 JTR 533.1.

15

 JTR 533.2, especially JTR 533.2 (2). 16

 See above, pp. 325-38. 17

 JTR 535.1.
CONTRACT SETTLEMENT IN OPERATION 673

gether four intensive surveys, conducted by

staff members of leading public accounting

agencies, were made during the period from

December 1944 to June 1946. The reports

were, in general, favorable and indicated

that actual settlement payments by the Government were appreciably lower than the

maximum permissible under the terms of

the Contract Settlement Act.

The first survey, conducted from 29

November to 31 December 1944, covered

573 completed settlements in 36 procurement offices of the various contracting

agencies throughout the country. Total

claims of $91.6 million had been settled for

$81.5 million, or 89 percent of claims. In

133 cases no profit was claimed or allowed.

For 366 cases permitting statistical tabulation, allowed profits averaged 5.3 percent of

the contractors' own costs. This figure, however, had little significance since many allowable costs, such as various items of overhead,

settlement expenses, and so on, had not been

claimed. Contractors' apparent indifference

to the full possibilities of termination claims

reflected a high level of earnings in the face

of renegotiation and excess profits taxation.

Since the survey covered cases involving between 15 and 20 percent of the dollar value

of all fixed-price settlements to the end of

1944, it provided a representative sample of

settlement operations prior to the application of the Joint Termination Regulation.18

The second survey covered 425 settlements made between 1 December 1944 and

30 April 1945. Total claims of $163.2 million for these cases were settled for $147.5

million, or slightly more than 90 percent of

claims. In 360 cases, profit was allowed;

profit averaged 5.9 percent on contractors'

own costs for the 292 cases susceptible of

statistical analysis. The second survey indicated substantial progress by procurement

offices in discharging their settlement responsibilities.19

The third survey, made during the third

quarter of 1945, was directed to an analysis

and improvement of the contracting agencies' organizations and procedures for meeting mass terminations. Hence, it was not

designed to evaluate the equity of actual

settlements.20 The fourth survey, made in

June 1946, was prompted by statistical evidence that an increasing number of large

settlements were made substantially on the

basis of the contractors' claims. It was feared

that this indicated a growing laxity on the

part of contracting agencies in screening out

and disallowing improper elements of reimbursement. Accordingly 83 large fixed-price

settlements negotiated at 17 procurement

offices of the War and Navy Departments

were analyzed. The findings revealed that

the rough equivalence of claims and settlements was the inevitable and desirable result of improved termination procedures.

Contractors were in general submitting controversial questions to the contracting agencies for decision before preparing their

settlement proposals. This eliminated in

advance the major areas of disagreement.

In other cases, revised claims had been submitted after agreement was reached on controversial items in the original proposal.21

The cumulative evidence of the four independent surveys furnished substantial indication that the interests of the government

18 were being adequately protected while con- OCS Second Rpt, January 1945, pp. 7-9. As of

31 December 1944, the gross settlement value (before disposal credits) of completed fixed-price

settlements for all contracting agencies was $522

million. Ibid., p. 49.

19

 OCS Fourth Rpt, July 1945, pp. 8-9. 20

 OCS Fifth Rpt, October 1945, pp. 17-18. 21

 OCS Eighth Rpt, July 1946, pp. 21-22.
674 THE ARMY AND ECONOMIC MOBILIZATION

tractors were being dealt with fairly and

with reasonable speed in settlement.

Financing of Contractors

A major concern of war contractors before the passage of the Contract Settlement

Act was the fear of serious financial embarrassment or even insolvency as the result of

sudden, widespread termination of their

contracts. Under the most sanguine estimates of rapid settlement, contractors could

not expect to be able to present their claims

and receive payment before several months

had elapsed from the date of termination.

Many considered the problem of obtaining

adequate cash to support their payrolls and

other expenditures in the interim to be the

major hazard in the whole readjustment

process. This was especially true for subcontractors. Subcontractors were faced with the

prospect of a longer settlement period, were

more likely to be financially overextended

than primes, and did not have the "giltedge" security of direct liability of the government.

The War Department's role in termination financing was essentially an extension

of its activities in supplying contractors with

working capital for production purposes.

These activities were indispensable to wartime procurement long before their adaptation to the final liquidation of the war effort.

The three principal mechanisms for providing contractors with working capital

throughout World War II were advance

payments, guaranteed loans, and partial

payments.22

Advance Payments

As already indicated, the National Defense Expediting Act of 2 July 1940 authorized the making of advance payments to war

contractors up to 30 percent of the contract

price.23 Although the wording of this statutory provision was virtually identical to that

of its World War I predecessor, the administration of advance payments in World War

II was apparently more liberal and efficient.

During World War I, advance payments

were treated much like ordinary bank loans,

and contractors were obliged to put up acceptable security to guarantee performance

of the contract and hence repayment of the

advance. As a result of negotiations over the

question of security, the War Department in

World War I acquired a heterogeneous collection of collateral instruments ranging

from bonds, stocks, plant mortgages, and life

insurance, to mortgages on contractors' own

homes.24

Partly as a result of the philosophy laid

down by Assistant Secretary of War Johnson at the beginning of the defense period

and partly as a result of experience thereafter, advance payments in World War II

were treated as independent advances in the

22

 The furnishing of fixed capital to Army contractors is discussed above in PART FIVE, EXPANSION OF FACILITIES FOR THE ARMY.

In the interest of simplicity, discussion of the War

Department's role in supplying contractors with

working capital has been deferred until the present

chapter.

23

 See above, page 220. An advance payment was

distinguished from partial and progress payments by

the fact that it was made in advance of performance

or cost incurrence by the contractor. A partial payment, in one sense, was payment for "partial delivery," that is, delivery of completed items representing a portion of the total number of items called

for by the contract (PR 303.6). The term "partial

payment" was also used by the Army in World War

II to include progress payments. Progress payments,

used extensively by the Navy and Maritime Commission but less so by the Army in World War II, were

payments after incurrence of costs but prior to delivery (PR 303.6, 330, and 331). 24

 Address of Colonel J. C. Mechem, Office of

Fiscal Director, ASF, in AIC Seminar, War Department Financial Aids to Industrial Production, 15

November 1945, pp. 16-17.
CONTRACT SETTLEMENT IN OPERATION 675

performance of specific contracts, guaranteed solely by the contract itself and the

terms of its administration.25 Under these

terms advance payments, upon authorization, were paid into a special bank account

to be used by the contractor solely for the

purposes of the contract. The government

retained a first lien on funds in the account

as well as on inventory purchased therewith.

The degree of control over disbursements

from the account depended on the size,

reputation, and financial responsibility of

the contractor. In some cases only advance

approval, once each month, of the contractor's budget was required; in other cases

the contracting officer's countersignature

was necessary for each withdrawal. Liquidation of advances was usually accomplished

by proportional deductions from payments

for delivery of completed items rather than

by a simple repayment of the advance. Thus,

if a contractor was given a 30-percent advance, he would receive only 70 percent of

the contract price in payment for all deliveries until contract completion; the remaining 30 percent would be credited to

him as repayment of advances. Moreover,

as additional security in guarantee of contract completion and repayment of advances, he had to place in the special

account all but perhaps a tenth of the 70-

percent payments against deliveries. Under

these arrangements the contractor, at any

stage of contract completion, would retain

for his uncontrolled use what was in effect

a reasonable profit for actual deliveries.26

Like most types of financial aid to contractors, whether private or governmental in

nature, advance payments were at first made

cautiously and timidly. In accordance with

the War Department policy of encouraging

a maximum of financing from private

sources, contractors during the defense period were required to show need, as well as

nonavailability of private credit at fair rates

of interest, in order to obtain advance payments. All advances had to be authorized

by the Assistant Secretary of War. Throughout the defense period no interest was

charged on advances, on the theory that the

War Department was not a lending agency

and Congress had not intended that interest

be charged.27

After Pearl Harbor the great increase in

the demand for credit by old and new contractors of all sizes, together with the difficulties of getting private lending institutions

to streamline their loan agreements and

lending procedures, led to a much more

liberal advance payment policy on the part

of the War Department. With the passage

of the First War Powers Act shortly after

Pearl Harbor, advance payments could be

made up to 100 percent of the total contract

price. The Under Secretary of War delegated to technical service chiefs, with power

of redelegation, authority to determine advances up to 50 percent of the contract price

on all contracts under $5,000,000. Applicants no longer had to show nonavailability

of private credit, and all steps in the administration of advance payments were

streamlined. Furthermore, the liberalized

advance payment policy was to be made

known to prospective contractors so that "no

bidder would be 'handicapped or preju25

 During the early part of the defense period,

performance bonds were required of contractors in

general and these provided security for repayment

of advances. In unusual cases, "advance payment"

bonds were required to guarantee performance of

contractual provisions covering advance payments

only. See PR 321.4 and 406.4. 26

 Ibid., p. 17. See also PR 321 in its entirety, and

PR's 347, 348, 348A and 348B.

27

 (1) Yoshpe, Production Control in the QMC,

p. 56. (2) Page 18 of Mechem Address, cited

above in note 24.
676 THE ARMY AND ECONOMIC MOBILIZATION

diced' in the award of contracts because of

his need for an advance payment," and contracting officers were required to report all

cases of refusal to grant advance payments.28

However, upon the complaint of commercial

banks and at the insistence of the Navy, the

War Department modified its no-interest

policy. Except under special circumstances,

all advances under new contracts entered on

or after 8 June 1942 carried interest charges

of 21⁄2 percent upon unliquidated balances.29

The cumulative amount of War Department advance payments grew rapidly after

Pearl Harbor, rising from some two thirds

of a billion dollars at the end of 1941 to

$3/3 billion at the end of 1942 and $5

billion by the end of 1943.

In 1943 and 1944, the regulations governing the authorization and use of advance

payments were adapted to meet the needs

of termination financing. Under the new

rules amounts on deposit in advance payment accounts at the time of termination

could be used at the discretion of the contracting officer to make payments chargeable to terminated contracts. Amounts previously authorized but not made available

could be added to such accounts. Additional

authorizations, although officially discouraged in favor of partial payments under the

new procedures, could be made after termination by the contracting officer. As before, total advance payments under any

particular contract could not exceed total

charges under the contract.30

Although the standard advance payment

procedures exhibited a certain measure of

rigidity and "red tape", pooled accounts

used by the larger contractors permitted considerable administrative flexibility. These

accounts often covered a number of contracts in various stages of completion and

termination. Inasmuch as advance payments could ordinarily be made available

immediately, they were the most rapid

means of mobilizing working capital for

prime contractors. Subcontractors were not

eligible to receive direct advances from the

government, but prime contractors were authorized and in many instances urged to

make readvances to subcontractors. Nevertheless, for various reasons readvances rarely

got below the first tier, and in general were

an unsatisfactory means of financing subcontractors.31

 A more successful arrangement was the use of advance payments by

prime contractors to make partial payments

to subcontractors in the settlement of terminated contracts.32

By the end of World War II, the cumulative amount of advance payments authorized by the War Department was approximately $13 billion. This represented

authorizations to more than 1,500 contractors operating under some 4,000 contracts.

Of this amount more than $7 billion was

actually advanced or paid over to contractors. In view of the character of advance

payments as revolving funds, the maximum

amount outstanding at any one time was

much less, amounting only to some $2 billion. (Chart 4) The vast bulk of total advances was made for the purpose of financ28 ing production, but an indeterminant Yoshpe, Production Control in the QMC, p. 57. 29

 (1) AIC R41, Financial Aids to Contractors,

pp. 39-40. (2) PR 321.12 Interest, and 321.13,

Exceptions to Interest Requirements. 30

 JTR, Sec. III, Pt. 3, Use of Advance Payments

for Interim Financing.

31

 Page 18 of Mechem Address, cited above in

note 24. 32

 See below, pages 683-86. Also PR's 349 and

349A.
CONTRACT SETTLEMENT IN OPERATION 677

CHART 4—WAR DEPARTMENT ADVANCE PAYMENTS: ADVANCES, RECOUPMENTS, AND BALANCE OUTSTANDING

[End-of-Quarter Status]

30 June 1941-30 September 1945

Source: AIC, Department of Research, WD Financial Aids to Industrial Production, 15 Nov 45, p. 181⁄2.

amount—perhaps as much as $1 billion—

was attributable directly to termination requirements.33

 The Army Air Forces made

wide use of advance payments for termination financing, obtaining an estimated 90

percent of its financing by this device.34

The relative use of advance payments

within the War Department varied widely

33

 The increase in cumulative total advance payments of around a third of a billion dollars in

September and October 1945 may safely be ascribed

to termination financing, and termination needs

during the preceding two years might well have

accounted for an additional two thirds of a billion.

34

 ASF, Readjustment History, p. 77. This statement undoubtedly referred only to working capital

for prime contractors; fixed-capital requirements

in the aircraft industry were enormous and working

capital for subcontractors was supplied largely by

guaranteed loans.
678 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 57—WAR DEPARTMENT ADVANCE PAYMENTS, STATUS AS OF 31 AUGUST 1945

[Dollars in Millions]

a

 Less than five hundredths of one percent.

Source: AIC R41, Financial Aids to Contractors, Tables 6 and 7.

from one procuring arm to another (Table

57). It is apparent that the Army Air Forces

and the Ordnance Department accounted

for the lion's share of advances, while the

Quartermaster Corps made far less use of

this form of financing than suggested by the

relative size of its procurement program.

The War Department's advance payment

program was remarkably successful, not

only in providing financial resources for the

war effort and its liquidation, but in recouping outstanding funds. Losses on advance payments amounted to only $1.5

million or about one fortieth of 1 percent of

all advances made. Interest payments received by the War Department on advance

payments amounted to $30 million or about

twenty times the losses of principal. This

record of recoupment of principal and ratio

of earnings to losses was notably better than

the War Department's experience with

guaranteed loans.35

Guaranteed Loans

A second major source of working capital

for war contractors was the governmentguaranteed loan. This instrument was

adopted early in 1942, primarily for the purpose of meeting the urgent problem of subcontractor financing. After Pearl Harbor the

pressure upon procuring agencies and prime

contractors to increase the amount of subcontracting had become very great. As a

result, many thousands of small firms who

35

 Report of the Under Secretary of War to the

Secretary of War, 1 July 1945 to 30 June 1947,

p. 21.
CONTRACT SETTLEMENT IN OPERATION 679

were unable to finance themselves were

brought into the field of war production.

Since these firms were not prime contractors, they were ineligible to receive direct

advance payments. Then, too, most prime

contractors were unwilling—in view of their

ultimate liability—to assume responsibility

for subadvances to subcontractors, especially

to those below the first tier. Regular commercial banks were prevented by tradition

and in some instances by specific regulations

from making bold and rapid advances to

firms untried in the field of war production.

The Smaller War Plants Corporation, with

its special funds, powers, and responsibility

for supplying the needs of small firms, had

not yet been established. Under all these

limitations a number of small producers of

important items found themselves with insufficient funds to continue operations. This

situation was dramatized by the testimony of

an Army Air Forces colonel early in 1942

that "the entire aircraft program" was being

held up for lack of a critical ingredient produced by a small subcontractor who had

been unable to obtain adequate financing.36

To meet this problem the President, acting under the recently adopted First War

Powers Act, authorized the major procuring

agencies (Army, Navy, and Maritime Commission) to make or participate in direct

loans and to guarantee loans made by

financing institutions to contractors, subcontractors, or others whose work was considered "necessary, appropriate or convenient to the prosecution of the war."

 37

 With

these broad new powers and the immense

appropriations made to them in the first

three months of 1942, the procuring agencies

might have become—in addition to their

other functions—huge lending agencies

comparable to the Reconstruction Finance

Corporation. Instead, the Under Secretary

of War and other officials responsible for

economic mobilization preferred, so far as

possible, to make use of the established institutional machinery and idle lending

capacity of the nation's commercial banking

system, operating under the direction of the

Federal Reserve System. The War Department had already supported new legislation broadening the powers of the Federal

Reserve System, and intensive negotiations

with Federal Reserve authorities soon resulted in the establishment of the wartime

system of guaranteed loans.38

The new guaranteed loans, initially

known as V-Loans, were obtained by contractors from their own banks and were

guaranteed both as to principal and interest

by the contracting agency holding a preponderant portion of the borrower's war

contracts. The amount of the loan and the

rate of interest were determined by negotiation between the borrower and the lending

bank subject to a maximum interest rate of

5 percent. As soon as the bank and the bor36

 AIC, War Department Financial Aids to Industrial Production, p. 18. 37

 Executive Order 9112, 26 Mar 42.

38

 The guaranteed loan system for war production followed the precedent established in the 1930's

by the federal government in the field of housing.

Nevertheless, the pathway to launching of the new

system was by no means smooth, as indicated by

the following: "We got off to a rather difficult

start on the guaranteed loan program. It was a new

idea. The banks were timorous about it to start

with, although I would like to say that by and

large they have done a fine job. The bank's lawyers

were worried about it and frightened. Some of them

thought the guarantee was no good. A lot of people

thought the President did not have the power to

issue the Executive Order and, as a result of that,

the original guarantee was a very complicated thing.

I am sorry it was so, but we could not control it.

We had to get the banks in and in order to get

them in we had to satisfy their lawyers and the

lawyers had a perfect field day on it." Page 20 of

Mechem Address, cited above in note 24.
680 THE ARMY AND ECONOMIC MOBILIZATION

rower agreed upon the amount and terms

of the loan, the bank applied to the Federal

Reserve bank of its district for a guarantee.

The War Department maintained a Liaison

Officer—appointed by the Office of Fiscal

Director, ASF—in each Federal Reserve

bank for consultation on applications for

War Department guarantee. The Liaison

Officer reviewed the recommendations of

the Federal Reserve bank, consulted the

contracting officers involved, determined the

borrower's eligibility, and approved or rejected the application. As the program developed the Federal Reserve banks received

increasing delegations of authority from the

War Department, and took over many of

the duties of Liaison Officers.39 Thus, except

for specified types of cases, including all

loans in excess of $100,000, the Federal

Reserve bank was authorized to execute the

guarantee on behalf of the War Department.

The guarantee supplied by the War Department was an agreement to purchase,

within ten days after demand, a specified

percentage of the loan from the financing

institution. Actual purchases were made by

the Federal Reserve bank as fiscal agent of

the War Department. In return for the guarantee the lending bank paid to the War

Department a graduated "guarantee fee"

equal to a specified percentage of the interest

payable by the borrower on the guaranteed

portion of the loan. For V-Loans this fee

ran from 10 percent, when the guaranteed

percentage of the loan was 60 percent or

less, up to a range of 30 to 50 percent for

guarantees in excess of 90 percent.40

An important feature of the V-Loan was

the right of the prospective borrower, in return for payment of a fee, to negotiate a loan

commitment from his bank in advance of

actual need with the option of drawing on

the commitment only to the extent desired.

A loan commitment, supported by a War

Department guarantee, constituted a line of

credit against which a contractor could draw

at any time without having to pay interest

on large unused balances. The total amount

of guarantees therefore greatly exceeded the

amount of loans outstanding at any particular time. On the other hand, since repeated borrowings and repayments could be

made within the limits of established commitments, cumulative disbursements under

the program eventually exceeded total

guarantee authorizations.

Although the guaranteed loan program

was begun mainly to help small subcontractors, its advantages soon resulted in its use by

firms in all categories. Whereas advance

payments generally required segregation of

a contractor's accounts on a contract-bycontract basis, a single V-Loan could be

made to cover all a firm's contracts whether

prime or sub. The V-Loan was therefore

especially recommended for three important

classes of contractor: (1) firms holding contracts with a number of different procuring

arms or agencies; (2) firms performing simultaneously as both prime contractors and

subcontractors on government orders; (3)

firms holding a large number of contracts

and purchase orders.41

The suitability of the V-Loan to the needs

of large corporations is indicated by the fact

that the largest single industrial loan commitment in the nation's history was made

under the War Department's guaranteed

loan program. This was the "King Kong"

credit of one billion dollars established in

39 October 1942 to finance the contracts of Pages 19-21 of Mechem Address, cited above

in note 24. (2) PR 319 through 320.8. 40

 AIC R41, Financial Aids to Contractors, p. 52. 41

 PR 319.1.
CONTRACT SETTLEMENT IN OPERATION 681

the General Motors Corporation. Some 475

banking institutions participated in this

credit, which was arranged by the Federal

Reserve Bank of New York. It was soon ascertained that the aggregate capital and surplus of all the banks in the United States at

that time was in the neighborhood of only

$5.75 billion. Under the general rule limiting loans to a single borrower to 10 percent

of a lending bank's capital and surplus, the

combined capacity of all commercial banks

in the United States available for lending to

General Motors at this time was only some

$575 million. Shortly thereafter the billiondollar loan commitment was reduced to

$500 million.42

The adaptation of the guaranteed loan

system to the needs of termination financing

took place in a series of developments beginning with the original V-Loan agreement of 1942. At that time no general plans

for termination financing existed. In order

to make the guaranteed loan program more

acceptable to contractors as well as to banks,

a special clause was introduced into the

standard V-Loan agreement. This clause

provided for suspension of maturity and

assumption of interest payments by the

guarantor upon termination of any of the

governing contracts in the ratio of terminated to current contracts.43

 While this provision would cushion the shock of termination, it still did not permit new borrowings

against terminated contracts; moreover, it

later proved embarrassing to the War Department after improved methods of termination had been adopted.44

 In 1943 the

VT-Loan was developed to cover the financing of both current and terminated war

contracts. The 1944 V-Loan Guarantee was

a simplified form eliminating the distinction

between V- and VT-Loans. While designed primarily to finance production, it

could, at the discretion of the lending

agency, provide new funds after termination.45

The final stage in the evolution of the

guaranteed loan was the T-Loan, specifically designed on recommendation of the

Baruch-Hancock report to afford a maximum of assistance to contractors undergoing termination. The T-Loan was administered in the same manner as its predecessors, but its application was confined to

terminated contracts and its terms were

somewhat more liberal. The maximum interest rate was 41⁄2 percent and the War

Department's guarantee fee was reduced by

as much as 50 percent.46 Loan commitments could be negotiated before termination, to be drawn upon thereafter only as

42

 (1) AIC R41, Financial Aids to Contractors,

p. 55. (2) Page 21 of Mechem Address, cited above

in note 24. (3) ASF Annual Rpt, 1943, p. 197. 43

 JTR 322. This ratio could easily be determined

by the lender since war contracts were typically

assigned to lending institutions under terms providing that all government payments under the

contract be made directly to assignees. Assignees

were notified of terminations at the same time as

contractors. The guaranteed loan program rested

heavily upon the permissive foundations of the

Assignment of Claims Act of 1940.

44

 Page 20 of Mechem Address, cited above in

note 24. 45

 JTR 323.4. 46

 It is of interest to compare the scale of War

Department guarantee fees for V-Loans with that

for T-Loans:

(1) AIC R41, Financial Aids to Contractors, p. 52. (2) OCS,

Termination Financing for War Contractors, pp. 21-24.
682 THE ARMY AND ECONOMIC MOBILIZATION

needed; the commitment fee was not to exceed one fourth of 1 percent per annum on

the unused balance of the total commitment

except where the bank elected to charge a

flat fee not to exceed $50. Although T--

Loans were available only after termination,

commitments provided advance insurance

against the freezing of working capital by

sudden contract cancellation. Borrowers

were required to reduce T-Loans as rapidly

as they received payments or credits in

settlement of terminated contracts, and final

maturity of the loans was to be no later

than 30 days after final contract settlement.47

Contractor borrowing under T-Loans fell

far short of expectations at the time of the

program's announcement. By 30 June 1946,

only 842 applications for commitments

totaling $391 million had been made for all

contracting agencies. Furthermore, contractors found little need to draw against

their commitments; total T-Loans outstanding at any one time reached a peak of only

$30 million in December 1945 and thereafter steadily declined.48

Aside from the effective partial payment

system for terminated contracts, presently to

be described, the principal reason for the

small volume of T-Loans is to be found in

the high degree of financial liquidity provided for war contractors throughout the

period of the war as a whole. Much of this

liquidity is attributable to a variety of causes

unrelated to the pretermination stages of the

guaranteed loan program. In its entirety the

guaranteed loan program provided 6,333

War Department contractors with over $8

billion in authorized guarantees.49 As in the

case of advance payments, guaranteed loans

represented a kind of revolving fund: while

cumulative disbursements to War Department contractors exceeded $9 billion by the

end of October 1945, the average amount of

guaranteed loans outstanding was only

about $11/

3 billion during the peak of the

program from mid-1943 to mid-1945. Uncollectible guaranteed loans amounted to

less than one twentieth of 1 percent of total

borrowings. Income from guarantee fees approximated $25 millions, which was reduced by losses amounting to $3.8 million.50

Even more than in the case of advance

payments the preponderance of guaranteed

loans went to contractors and subcontractors

for the Army Air Forces. Out of a total of

approximately $7.9 billion in War Department guaranteed loan authorizations made

by 31 August 1945, the Air Forces accounted for nearly $5.1 billion as against

only $2.8 billion for the Army Service

Forces. This heavy use of borrowed working

capital in relation to the size of the aircraft

procurement program reflected the tremendous expansion of all segments of the aircraft industry in order to meet the needs of

World War II. Of the ASF total of $2.8

billion in guaranteed loans, Ordnance contractors took an estimated $1.6 billion, the

Signal Corps $0.7 billion, and all other tech47

 See OCS, Termination Financing for War Contractors, for a complete copy of the standard TLoan agreement (pp. 25-31), the standard T-Loan

Guarantee Agreement (pp. 21-24), the loan formula (p. 32), and other information concerning

T-Loans. See also JTR 325, Procedure for T-Loan

guarantee, and JTR 326, Factors to be considered

by guarantor. 48

 OCS Eighth Rpt, July 1946, p. 12.

49

 Page 19 of Mechem Address, cited above in

note 24. 50

 Report of the Under Secretary of War to the

Secretary of War, 1 July 1945 to 30 June 1947, p.

16. This report shows combined earnings of $25.5

million for War Department guarantee fees and interest receipts on direct loans. The War Department's direct lending program was relatively insignificant, totaling only $62.8 million for World War

II. See AIC R41, Financial Aids to Contractors,

p. 45.
CONTRACT SETTLEMENT IN OPERATION 683

nical services together somewhat less than

$0.5 billions.51

Partial Payments

The basic philosophy of the BaruchHancock Report and the ensuing Contract

Settlement Act was that the liquidation of

the war effort should be "fair, fast, and

final." In keeping with this philosophy,

major emphasis in the field of termination

financing was placed upon a procedure

which would recognize the right of contractors to immediate reimbursement of costs

already incurred in the performance of terminated contracts. Such reimbursement

would make borrowing unnecessary; it

would be directly related to the contractor's

eventual termination claim and would constitute a part of the settlement process itself.

Termination financing of this type was made

available in the last year of the war by a

fundamental revision of existing partial payment systems of the several procuring

agencies.

On 8 September 1944, the Office of Contract Settlement established a uniform partial payment system for all procuring

agencies. The new system was an outgrowth

of partial payment provisions in the old War

Department standard termination article,

revised Army Procurement Regulations, and

the Uniform Termination Article promulgated by the Joint Contract Termination

Board.52 Under the new procedures, adequate interim financing was to be made in

the form of partial payments to be granted

within 30 days after application. Three types

of payment were authorized: (1) immediate partial payments, based on contractors'

estimates; (2) cost-supported partial payments; (3) controlled partial payments into

special accounts.

Immediate partial payments were designed to afford financial assistance to

contractors without waiting for a cost investigation. As soon as a contracting agency

received an application from a war contractor, whether prime or sub, it was required to grant a partial payment up to 90

percent of the contractor's own costs.

Within the 90-percent over-all maximum,

the contractor was to receive not less than

75 percent of the contract price of completed

articles not delivered plus 75 percent of the

estimated cost of raw materials, purchased

parts, supplies, direct labor and overhead

allocable to the terminated portion of the

contract (except for the cost of special

facilities and other items likely to be controversial). Lower payments were to be made

only upon the contractor's request or in cases

where the contracting agency had reason to

believe that the application was not made in

good faith, was excessive in amount, or that

the interests of the government required

denial or payment of a lower amount.53

Cost-supported partial payments, which

required the submission of substantial ac51

 The subdivision of the War Department total

into the several components above was made by the

Army Industrial College using actual ratios found

by the Fiscal Director, ASF, for 30 December 1944.

See AIC R41, Financial Aids to Contractors, p. 54. 52

 Before the passage of the Contract Settlement

Act, contracting officers had been personally liable

for overpayments in the settlement of terminated

contracts. In self-protection, contracting officers demanded detailed audits before making substantial

partial payments. The inevitable delays involved in

obtaining audits defeated the use of such payments

for interim financing. The Contract Settlement Act

relieved contracting officers of all personal liability

in the absence of their own fraud. The essentials of

the new partial payment system were incorporated

in a revision of PR 15, under the broad authority of

the Contract Settlement Act, even before the issuance of OCS Regulation No. 2. ASF, Readjustment

History, pp. 79 ff. 53

 (1) OCS Regulation 2, par. 3. (2) JTR 352.
684 THE ARMY AND ECONOMIC MOBILIZATION

counting data (usually in the form of an

actual termination claim), could be substantially greater. In this case the maximum

was the total amount estimated by the contracting officer to be due the contractor by

reason of termination. This included 100

percent of the contract price of undelivered

completed articles; 90 percent of the cost

of raw materials, purchased parts, supplies,

direct labor, and allocable manufacturing

overhead; a reasonable percentage of other

allowable costs under the contract; and such

additional amounts deemed by the contracting agency to provide the contractor with

adequate interim financing. Contractors

who had previously received one or more

partial payments could obtain additional

amounts, up to the maximum allowable,

under the cost-supported procedure.54

Controlled partial payments were authorized to be made to war contractors deemed

to be insolvent or in imminent danger of

insolvency. The solvency test was applicable

both to contractors making application and

to contractors forwarding applications from

lower tier contractors since the latter had to

be protected from nonreceipt of payments

transmitted down the contractual chain.

Controlled partial payments were initially

deposited in special bank accounts and were

released as particular items of cost or payments to subcontractors were approved by

the contracting officer. Specific regulations

for handling controlled accounts were developed by the individual contracting

agencies.55

Regardless of type, all partial payments

were subject to diminution by the amount of

any unliquidated balances of advance and

partial payments previously made under the

contract, and by the amount of all credits

arising out of contractor retention or sale of

property whose costs of production were included in the application.56

 Also, all partial

payments were to be made in such a manner

as not to impair any valid assignment of a

claim under the contract without the consent of the parties.57

 In order to discourage

excessive estimates in connection with partial payment applications, a penalty of 6

percent was to be charged the contractor on

any excess of his estimate over the amount

determined in final settlement to be due

him.58 In addition, if he received partial payments in excess of the amount finally due,

he was required to pay interest on the excess

at the rate of 6 percent per annum until the

government was repaid. The Director of

Contract Settlement could suspend or

modify the penalty for overstatement of

claims, but not for overpayment. If a contractor attempted to avoid these penalties by

failing to file an actual termination claim,

the contracting agency could resort to the

standard provision of all partial payment

agreements which permitted the government, under stated conditions, to demand

immediate repayment of all partial payments or any portion thereof.59

Subcontractors' applications for partial

payment were normally filed with their customers. If the customer possessed delegated

authority to make final settlement with his

subcontractors he could grant a partial payment, from his own funds or funds allotted

54

 (1) OCS Regulation 2, par. 4. (2) JTR 353. 55

 (1) OCS Regulation 2, par. 5. (2) JTR 356;

JTR 954.

56

 JTR 344. 57

 JTR 345. 58

 JTR 316. 59

 (1) JTR 316. (2) OCS, Form 4, Application

for Partial Payment, Sec. IV, Agreement of Applicant, par. (3). The director of Contract Settlement

delegated authority to the contracting agencies to

suspend or modify the overstatement penalty. As a

result the penalty was rarely applied unless the overstatement was judged to be willful.
CONTRACT SETTLEMENT IN OPERATION 685

to him for the purpose, without the specific

approval of the contracting officer. In the

absence of delegated authority the subcontractor's application was transmitted up the

chain to the contracting agency. Each intervening contractor above the applicant, including the prime, was required to subscribe

to the application, stating that he had no

reason to doubt the propriety of the amount

requested and recommending that the payment be made. At the same time, he agreed

to credit or reimburse promptly his immediate subcontractor with any amount received for the benefit of the applicant. Contractors unwilling to subscribe to these statements were required to give written explanation of their position.

The vertical procedure was considered

essential both to establish allocability of

subcontracts to particular prime contracts

and to insure proper treatment of offsets held

by higher tier contractors against those in

lower echelons. Throughout the war many

contractors rendered financial assistance to

their subs by means of loans, advance payments, and other arrangements. The resulting claims against subcontractors were normally liquidated by credits for deliveries

under the contract. The government had no

knowledge of such offsetting claims against

subcontractors and relied on the vertical

processing of applications and payments to

permit their proper discharge.

Exceptions to the vertical partial payment procedures were to be made when

there was evidence of unwarranted delay

under normal procedures, or where direct

settlement arrangements with subcontractors were in effect. Also, as indicated, exceptions were made in cases of delegated settlement authority or of insolvency.

A further development to speed partial

payments to subcontractors was the establishment of special funds in possession of

responsible war contractors out of which

subcontractors could be granted partial or

final payments without specific approval by

the contracting officer. Selection of funded

contractors was limited to those already

given delegated authority to make final settlement of subcontract claims not in excess

of $10,000. Funds were obtainable either in

the form of special partial payments earmarked for the benefit of subcontractors, or

in the form of direct loans by the contracting

agency. Under either procedure the contractor desiring the fund made application

by letter to the contracting officer requesting

a specified amount of money and furnishing

pertinent information. Approval of the application was followed by the signing of an

agreement on administrative details and the

transmittal of the funds. The loan procedure

required more rigorous qualifications for approval but was more flexible in its administration. Both procedures were available to

either prime contractors or subcontractors;

in the case of subcontractors the short-circuiting of the normal vertical procedure was

often substantial and eliminated many steps

in the processing of applications and the reverse flow of money payments.60

Of the several methods of interim financing created by the Contract Settlement Act,

partial payments were by far the most widely

used. By 31 December 1945, when over 95

percent of its World War II contracts had

been terminated, the War Department had

made approximately $1.5 billion in partial

payments. As of that date $722 million in

partial payments under fixed-price contracts

was still outstanding; an additional $48

million was also outstanding to subcon60

 (1) JTR 364 (Revision No. 2, 20 Jun 45),

Funds for the benefit of subcontractors. (2) OCS

Fourth Rpt, July 1945, pp. 21-22.
686 THE ARMY AND ECONOMIC MOBILIZATION

tractors under CPFF contracts. Of the $722

million for fixed-price contracts, $368 million had been made under cost-supported

procedures against termination claims of

$887 million. The remaining $354 million

was paid in advance of claim. Assuming

that War Department partial payments

made after 31 December 1945 rose proportionately with those of all agencies, they

totaled some $2.3 billion by the end of the

program.61 This would approximate 50 percent of the $4.4 billion eventually paid by

the War Department in final settlement of

all its war contracts.

It is apparent that the objectives of the

Contract Settlement Act in the area of termination financing were abundantly realized.

By providing virtually 100-percent liquidity

of contractor investment in termination inventory, the Act stimulated the availability

of private credit, with or without government guarantee, on favorable terms. Loans

under previous borrowing arrangements including V-Loans of all types were freely

renewed or extended in an atmosphere of

general liquidity. Moreover, by the end of

the war many contractors were in a strong

financial position and were able to supply

the bulk of their own working capital needs.

Termination financing was but the final

phase of the larger task of supplying contractors with the financial means for the

execution of their production responsibilities

throughout the war. As in the case of fixed

capital for the expansion of facilities, the

provision of adequate working capital required drastic departures from conventional

standards and procedures long observed in

private banking operations. These changes

were at first resisted or adopted only reluctantly by the banking community, but

after Pearl Harbor all barriers were broken

down as the full implications of the nation's

war production assignment began to be revealed. The vigorous action of the government in providing advance payments and

other direct financial aids to contractors set

the pattern for the bold program of war

finance which removed, for the first time in

many years, all monetary limitations upon

the full utilization of the nation's economic

resources.

The Disposition of Contractor Inventory

An inevitable accompaniment of contract

termination was the problem of what to do

with leftover materials, parts, tools, and machinery acquired or produced by the contractor for the purpose of fulfilling his contract. Such leftovers had to be promptly

disposed of for several reasons: to clear contractors' plants for work on other war contracts and to permit reconversion at the end

of the war; to rechannel scarce, critical materials into current production where they

were most needed; to permit final settlement

of terminated contracts; and to avoid transfer to the government of unneeded matériel

which would be costly and burdensome to

store and dispose of at a later date.

Under the terms of procurement contracts the government received title to termination inventory not sold or retained by

contractors. The War Department, of

61

 Figures as of 31 December 1945 taken from

ASF, Monthly Progress Report, Section 14-A, Contract Terminations, 31 Dec 45, Partial Payments,

pp. 26-28. Partial payment statistics were not

regularly reported in Monthly Progress Reports or

their successor, War Department, Progress Reports.

The rough estimate of $2.3 billion for the War

Department at the end of the program was determined by applying the proportions existing at the

end of 1945 to totals for all agencies as of 30 June

46, after which there was relatively little new termination financing. OCS History, p. 46; OCS

Eighth Rpt, July 1946, p. 12.
CONTRACT SETTLEMENT IN OPERATION 687

course, reserved the right in all cases to

claim any termination inventory desired by

it for production or supply purposes, as well

as secret, confidential, and restricted material whose release was deemed contrary to

national security. With these exceptions, the

policy of the department was to release a

maximum of contractor inventory to the

private industrial economy.62

Standard contract provisions required

that whenever inventory was sold or retained

by the contractor the sale or retention price

(which was credited to the government in

settlement) had to be approved by the contracting officer. Unfortunately, many

items—especially goods in process—had no

substantial resale value and had to be disposed of as scrap. This led to a number of

complications when unneeded contractor inventory began to appear on a large scale with

the upsurge of Army contract terminations

in mid-1943. Contracting officers, new to the

complexities of property disposition and

fearful of unfavorable publicity, criticism, or

worse, were reluctant to authorize sale prices

below cost. The inevitable result was the

slowing down of termination settlements, the

clogging of industrial facilities with leftover materials, and unnecessary shortages

elsewhere in the war economy.

On 30 June 1943, Under Secretary Patterson took steps to correct the situation.

On that date he issued instructions that all

War Department contracting officers be directed to adopt a bold policy of property disposition, stating that such officers would be

supported in the exercise of their honest

judgment. The instructions fully recognized

all the difficulties, stating in part:

Frequently this material must be sold at

a substantial amount below its cost. In many

instances, work in process must and should be

sold as scrap for scrap prices. It is inevitable

that losses will take place. Rarely will delay

in disposing of such property help the war

effort or result in any substantial savings to

the Government. Under present circumstances, no materials should be hoarded

merely in the vague hope that at some future

date the property may have a future use or

a greater value.

The same policy must be applied to obsolete

or unneeded machinery and equipment.

Where it has no suitable use in production it

should be disposed of promptly so that the

scarce and critical materials out of which it is

made can be used in the manufacture of new

and vitally needed instruments of production.63

Procurement Regulation 15—the Army's

new termination regulation issued on 14

August 1943—incorporated the Under Secretary's letter verbatim and contained procedures for its implementation. No limitation, other than the exercise of honest judgment, was placed on contracting officers'

authority to approve sale or retention prices.

In deciding whether a price was fair or

reasonable, the contracting officer was to

consider the nature of the property, general

market conditions and prices, the location

62

 JTR 411; JTR 441. The term "contractor inventory," as used in the Surplus Property Act of

1944, was a broader concept than "termination inventory" as defined in the Contract Settlement Act.

"Termination inventory" consisted of leftover materials, small tools, and parts which would have

been incorporated in, or used up in production of,

finished items. "Contractor inventory" included

termination inventory and also machinery covered

by special contract clauses, government furnished

material, and other items. Inasmuch as the principles governing the disposition of contractor and

termination inventory were substantially the same

for purposes of the present discussion they are here

used interchangeably. See ASF, Readjustment History, p. 135, and JTR 400.2.

63

 Memo, USW Patterson for CG AAF and CG

ASF, 30 Jun 43, sub: Disposition of ContractorOwned Property on Termination of Contracts for

the Convenience of the Government, reproduced in

PR 15-350.2.
688 THE ARMY AND ECONOMIC MOBILIZATION

of the property, the utility to the Government of the property if title were taken,

storage and transportation costs, and the

necessity for prompt disposition as a step in

the settlement of the termination claim.64

In order to facilitate disposition, contracting officers were to grant as much discretionary power to prime contractors as practicable. Under the terms of the War Department's standard termination article for

prime contracts, contractors agreed to use

their best efforts to sell their termination

inventory in the manner, to the extent, at

the time, and at the price or prices directed

or authorized by the contracting officer.

Since time was of the essence in selling to

advantage it was desirable to eliminate so

far as possible the need for advance approval of each transaction by the contracting

officer. Accordingly, contracting officers

were authorized to grant advance permission to contractors to dispose of various

classes of property at stated discounts from

cost, and this authority could be extended

by prime contractors to their subs. The discount levels were fixed by the contracting

officer and frequent periodic reports by contractors of sales under this authorization

were required.65 Sales at scrap prices required that the property be identified as

scrap and that the purchaser provide a warranty not to resell except as scrap in accordance with OPA and WPB regulations. To

assist the contracting officer in doubtful

cases the several technical services were required to make available to him, on request,

appraisal personnel who would render assistance with a minimum of formality and

paper work.66

The channels for disposition of termination inventory varied with the trade practices of the industry, the nature and relative

scarcity of the material, and the contractor's

own situation. Standard parts and materials

were the easiest items to dispose of since they

had a wide variety of uses. If the contractor

had no foreseeable need for them, they could

be sold in the open market or returned to

the supplier with the government defraying

expenses of packing, transportation, and related costs. Strategic and critical materials

were redistributed in accordance with applicable WPB regulations and the needs of

other contractors. Work in process was to

be realistically valued and scrapped whenever necessary. Both contractors and contracting officers were urged to use their

imagination, ingenuity, courage, and aggressiveness in disposing of property. Telephone calls were to be preferred to letters;

informal, flexible procedures were to replace formality.67

Despite the general urgency and the pressures from above, contracting officers

throughout 1943 and 1944 found it difficult

to move termination inventory with sufficient speed to keep pace with new terminations. Repeated admonitions were made by

the Under Secretary, the Commanding General, ASF, and later the Surplus War Property Administrator.68

 On the other hand, a

number of "atrocity" stories concerning

Army destruction of supposedly useful property or sales at seemingly "give away" prices

64

 PR 15-358, Sale price. 65

 PR 15-359, Grants of discretionary power to

prime contractor. 66

 PR 15-360, Ascertainment of value.

67

 PR 15-361. Channels of disposition. 68

 (1) Memo of USW Patterson dated 28 Dec 43,

cited in ASF, Readjustment History, p. 138; (2)

Memo, CG ASF for Chfs of Technical Services, 4

Mar 44, sub: Property Disposition in Contract

Termination, quoted in Ord Procurement Cir 65-

44, 8 Mar 44; (3) SWPA, Statement of Policies to

be Followed by Government Agencies in the Sale

of Contract Termination Inventories, 21 Apr 44.
CONTRACT SETTLEMENT IN OPERATION 689

had appeared in newspapers and Congressional hearings. Contracting officers found

themselves squeezed between the upper millstone of pressure to get the work done and

the lower millstone of public criticism for

doing their work. By the end of 1944, with

the specter of mass terminations looming on

the horizon, it was becoming increasingly

clear that conservatism, born of tradition

and nurtured by fear of criticism, might defeat the whole reconversion program.

Two difficult classes of decision faced contracting officers in the disposition of termination inventory: (1) decisions to accept

prices substantially below cost in order to

move the property; (2) decisions to scrap

costly work which had no immediately foreseeable use. As indicated later, the question

of price policy was a perennial issue, and the

governing regulations were changed many

times to satisfy changing pressures and conditions. The other delicate issue, the question of when to scrap costly assemblies or

work in process, is perhaps best illuminated

by the following:

Consider a part in our aviation engine.

An aviation engine is made up of parts that

are beautifully finished. For instance, pistons;

they are great big aluminum pistons. You

could put one right up on the mantlepiece.

They look like they are made of platinum and

set with diamonds, and they cost about like

that too. Now, let's say that the contract is

terminated and there were 10,000 of those

pistons on hand. Let's say at the same time

that that engine is not going to be built again

in the foreseeable future, and let's say furthermore that they don't need any additional lifetime spare parts, which is actually the case with pistons . . . .

Let's suppose that there are 10,000 left

over. They are packed in cotton, in special

cartons and handled like eggs. If you have a

fingernail scratch on one it is ruined. You

say to the contracting officer, "We recommend

them to be scrapped." He says, "All right,

throw them out in the scrap pile. Let the

rain and snow fall on them—put them under

the hammer and smash them up." I am glad

I am not a contracting officer. That is the kind

of decision that has to be made.

What is the alternative? You pack them,

you box them, you crate them, you ship them

and you put them in a warehouse, and you

watch them for five years . . . and then 

scrap them.

That is the other solution of the problem,

and that's the solution I don't believe the

country can stand . . . . I t

say that if the Government takes over a hundred dollars worth of material and goes

through all this preparation for storage . . 

packing, crating, shipping, renting a warehouse, putting a watchman on the job—and

then after a length of time, perhaps a year,

they sell the material for $100, only about $50

would be realized. The expense eats up the

remainder. It would be a short length of

time before it would have no value at all even

if you sold it at the original price. You have

used up the original value in trying to take

care of it.69

While these issues were being debated

among contractors and the procuring

agencies, steps were being taken to formulate a broad, consistent attack upon all

aspects of the federal surplus property problem as part of the larger task of reconversion.

A major factor in shaping public opinion

and national policy in this whole area was

the Baruch-Hancock report of 15 February

1944. Beginning with a sixty-day plant

clearance policy for termination inventories,

the report presented recommendations on

all major aspects of the surplus property

problem. It indicated the need for prompt,

effective, orderly handling of termination

inventories and other government surpluses

in order to expedite war production, combat

69

 Excerpt from An Address by Mr. Courtney

Johnson of the Studebaker Corporation on Thursday, 7 Dec 44, War Readjustment Course, AIC,

pp. 11-12.
690 THE ARMY AND ECONOMIC MOBILIZATION

inflation, speed the resumption of civilian

employment, reduce the national debt, and

lower postwar taxes. It stressed the need for

immediate action in order to take full advantage of the excellent disposal conditions

in the remaining months of the war, and

pointed to the shortage of civilian-type

goods and materials as well as those for war

production. These shortages provided a

superior market which could absorb the bulk

of government surpluses pending the reestablishment of peacetime levels of production. Among the basic principles of

disposal recommended in the report were

selling "as in a goldfish bowl" with records

always open to public inspection; selling as

much and as early as possible without disrupting normal trade; scrapping what must

be scrapped, but no deliberate destruction of

useful property; use of regular channels of

trade, so far as possible, in disposing of particular properties; no sales or rentals to

speculators and promoters; equal access to

surpluses for all businesses; fair market

values with proceeds of all sales going to

reduce the national debt. The report recommended the creation of a Surplus Property

administrator within the Office of War

Mobilization to establish basic policy and

co-ordinate the activities of the disposal

agencies. The War Department and the

other procuring agencies would be represented on a Surplus Property Policy Board

chaired by the administrator.70

Four days after the publication of the

Baruch-Hancock report the President established the Surplus War Property Administration (SWPA) in the Office of War

Mobilization.71 SWPA was headed by an

administrator, who was assisted in policy

determination by an Advisory Board, composed of representatives of some fourteen

government agencies, including the War

Department. SWPA was a policy-making

agency; actual sales of surplus property—

except for termination inventories, small

lots, and other exceptions—were made by

the five disposal agencies, who received for

disposal the surpluses declared by the procuring and other property owning agencies.

SWPA promptly set about two major

tasks—the making of interim regulations to

establish policy and co-ordinate the disposal

activities of the various agencies, and the

drafting of permanent surplus property

legislation.72

The largest segment of the government's

long-run disposal problem consisted of the

70

 Baruch-Hancock Rpt, Pt. IV, Addendum 2,

Surplus Property, pp. 56-68. The report proposed

that actual sales be made by four disposal agencies:

(1) Treasury, Procurement Division, for consumer

goods other than food; (2) RFC (preferably a new

corporation within RFC) for all capital and producers' goods; (3) Maritime Commission, for ships

and maritime properties; (4) Food Administrator,

for all food. This recommendation was shortly

adopted by the Executive order establishing the

Surplus War Property Administration with the addition of a fifth disposal agency, the Foreign Economic

Administration, for all overseas surpluses. 71

 Executive Order 9425, 19 Feb 44. 72

 The Surplus Property Act of 1944, approved

3 October 1944, was based largely on SWPA

recommendations. It created a three-man Surplus

Property Board (SPB) to replace SWPA. On 1

October 1945, as a result of an amendment to the

Act, the Surplus Property Administration (SPA)

headed by a single Administrator replaced SPB.

On 1 February 1946 SPA gave way to the War

Assets Corporation (WAC), which in turn was

taken over on 25 March 1946 by the War Assets

Administration (WAA). WAA persisted until

the surplus disposal job was practically completed.

In 1948 its remaining duties were assumed by the

General Services Administration (GSA). Meanwhile, overseas disposal had passed progressively

from the Foreign Economic Administration to the

Army-Navy Liquidation Commission, and then to

the Department of State (Foreign Liquidation

Commissioner). See SPA, Quarterly Progress Report—Fourth Quarter 1945, pp. 11-12, 48; WAA

Quarterly Progress Report—First Quarter 1946,

pp. 6-7.
CONTRACT SETTLEMENT IN OPERATION 691

eventual surpluses of finished items already

in the hands of the procuring agencies. In

mid-1944, however, these surpluses had not

yet developed and the disposition of contractor inventory was the most pressing surplus

property problem. On 21 April 1944

SWPA issued its Statement of Policies to be

followed by Government Agencies in the

Sale of Contract Termination Inventory.73

The statement urged a bold policy of inventory disposition, stressing the importance

of scrapping unusable work in process and

selling to contractors who would put materials immediately into other war production

or essential civilian work; at the same time it

proposed safeguards against unduly low

prices.

Under ensuing regulations SWPA limited

the authority of contracting officers to approve retention or sale prices. For any portion of inventory under termination claims

of less than $10,000 the contracting officer

could approve the price only if it were "the

best price obtainable." This was defined as

the best price offered after reasonable efforts

to test the market, with due allowance for

the location and other circumstances of the

particular material.74 Inventory associated

with termination claims of more than

$10,000 was classified into four groups: (1)

scrap; (2) crude or simple raw materials;

(3) used production equipment; (4) other

materials.

Scrap could be sold or retained at the going market price without offering it to the

general public under competitive bidding.

If the market price could not be realized, the

material could be sold only under competitive bidding, the government reserving the

right to reject all bids at a price deemed to be

inadequate. To prevent unwarranted classifications as scrap, material sold as scrap in

the absence of competitive bidding could

only be used or resold for scrap purposes, and

the purchaser was required to sign a warranty to this effect. Release of the warranty

could later be obtained by payment to the

government of the difference between the

scrap price originally paid to the government and the current value of the material

for non-scrap uses.75

Raw materials could be sold only at the

going market price, except that quantities at

any one location, if less than minimum

commercial quantities, could be retained or

sold to any buyer at the best price obtainable. Used production equipment, including

machine tools and listed categories of industrial products, were subject to SWPA Regulation No. 3, which authorized sale prices at

standard percentages of cost, depending

upon the length of time the equipment had

been used. The percentages declined with

each month of use, running from 90 percent

for less than 1 month down to 50 percent for

36 months or more in the case of retentions.

For sales to others, the corresponding percentage was 5 percent less, in order to compensate for removal costs and prevent undue

favoritism to existing holders of equipment

under war contracts.76

All other materials could be retained or

sold only at the best obtainable price in excess of 75 percent of cost, or at a lower price

73

 The statement was drawn up by an interdepartmental committee of SWPA, composed of

representatives of the War, Navy, Treasury, and

Justice Departments, the RFC, and the Bureau of

the Budget. Shortly thereafter, on 2 May 1944,

JCTB delegated to SWPA all its authority on price

policy applicable to termination inventories. OCS

History, p. 39. 74

 JTR 432.3; JTR 433.

75

 JTR 434. 76

 JTR 435.1 (Revision No. 1, 20 Apr 45), Crude

or simple raw materials, and JTR 435.2 (Revision

No. 1, 20 Apr 45), Used production equipment.
692 THE ARMY AND ECONOMIC MOBILIZATION

if equivalent to that currently charged by

normal sources of supply. Exceptions were

made for "nominal quantities" under

$2,500 (best price obtainable) and in cases

where the material could not be sold in a

reasonable length of time at the minimum

price indicated above. In such cases the

material could be sold on a negotiated basis

to domestic "buyer-users" at the best price

obtainable, under a warranty not to resell

at a profit. If negotiation failed to yield a

sale within a reasonable period, the item

could be sold on competitive bids to the

highest bidder. Civilian-consumer type

items could not be thus sold since these were

to be turned over to regular disposal agencies for sale.77

The adoption of the 75-percent-of-cost

floor under retention or sale prices for termination inventory was done over the objections of the War Department, which took

the position that this would unduly delay

disposition and plant clearance. This position was borne out by events and with the

approach of V-J Day and mass terminations, the regulations were modified to reduce or eliminate the floor while tightening

up the procedures in other respects. Under

the revision, contractors were permitted to

retain for their own use any property at

prices which were fair and reasonable and

not less than the proceeds that could reasonably be expected if the property were

offered for sale. No minimum price was

stated, but appropriate review procedures

were required of the owning agencies and

the contractor was required to state in writing his intention not to resell at a profit. All

scrap sales under termination claims in excess of $10,000 had to be made under competitive bidding, subject to contracting

agency approval of the price. Serviceable

property for similar size claims had to be

advertised locally seven days in advance and

the price was subject to a minimum of 50

percent of cost. The "nominal quantity"

figure was reduced from $2,500 to $300 and

other changes were made.78

The numerous provisions and changes in

price policy suggested by the foregoing are

testimony to the complex nature of the disposal problem faced by the War Department

and the other procuring agencies. Each of

the provisions and each of the changes was

made on the basis of experience, tempered by

the changing circumstances of the nation's

economy but subject always to the inexorable pressure of urgency. As the principal

procuring agency, the War Department was

faced with the greatest volume of unneeded

termination inventory and the greatest array

of disposal problems. This fact gives rise to

some basic questions of appraisal: How did

the War Department—and thus the taxpaying public—fare in the disposition of its termination inventory costing many hundreds

of millions of dollars to produce? What was

the total volume of termination inventory

generated by World War II contract cancellations and what percentage of cost was recovered as a result of sales? Although no

precise answers can be given to these questions, available statistics reveal the essence of

the story.

From 1 June 1944 through 31 August

1945, War Department contractor inventory

available for disposition totaled approximately $710 million in cost value. Of this

amount, some $353 million had been retained or sold for the government by contractors, $226 million was transferred to

government ownership, and $131 million 77

 JTR 435.3 (Revision No. 1, 20 Apr 45), Other

materials. 78

 ASF, Readjustment History, pp. 144-45.
CONTRACT SETTLEMENT IN OPERATION 693

TABLE 58—WAR DEPARTMENT CONTRACTOR INVENTORY DISPOSALS: 1 SEPTEMBER 1945-

31 DECEMBER 1946

[Dollars in Millions]

Source: WD, Progress Report, Section 4-G, 31 Dec 46, p. 34.

was in process of disposition.79 At this time a

new statistical reporting system was inaugurated and subsequent figures were based on

dispositions after 1 September 1945. From

this date through 31 December 1946 when

some 98 percent of all World War II terminated contracts had been settled, an additional $4 billion in contractor inventory was

disposed of. War Department dispositions

accounted for $3 billion, the remaining $1

billion being declared surplus to disposal

agencies. Of the $3 billion of War Department dispositions, $2.3 billion was retained

or sold by contractors, the remainder being

redistributed for use by the War Department

and other government agencies for donations

and for salvage.80

An analysis of disposal credits for War

Department contractor inventory other than

plant equipment for the period subsequent

to 1 September 1945 reveals the relative return to the government for the several classes

of sale. (Table 58) Since these figures cover

more than two thirds of War Department

dispositions for the period, a 15 percent return on its contractor inventory may be inferred as typical for the War Department.

As indicated above, the return for scrapped

items ran from 3 to 4 percent. Although

these figures are of interest, they do not in

themselves shed much light on the wisdom

of disposal price policy. The important consideration was the readjustment of the nation's economy. Low disposal prices, apart

from reflecting market conditions in a surplus market, were a means of accomplishing rapid reconversion from war to peace.

To the extent that these prices were lower

than the value ultimately realized by purchasers, the government presumably received revenue via subsequent income tax

collections and lower refunds under losscarryback and excess profits credit provisions.

The War Department record in the matter of plant clearance is also of interest. The

79

 ASF, Monthly Progress Report, Section 14-B,

30 Jun 44, p. 8 and 31 Aug 45, p. 28. Of the total

figure of $710 million, some $65 to 70 million was on

hand 1 June 1944. The systematic recording of War

Department termination inventory statistics began

with the month of June 1944. Ibid., issue of 30 Jun

44, p. 8. 80

 WD, Progress Report, Section 4-G, 31 Dec 46,

p. 34.
694 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 59—PLANT CLEARANCES EFFECTED BY THE WAR DEPARTMENT 1 SEPTEMBER 1945-

31 DECEMBER 1946

Source: WD, Progress Rpt, Section 4-G, 31 Dec 46, p. 32.

60-day plant clearance requirement of the

Contract Settlement Act could be waived

in individual cases by agreement between

the contractor and the contracting officer.

During the hectic period of mass terminations following V-J Day it was impossible

for the War Department in all cases to effect clearance within the required time. In

order to effect prompt clearance and storage arrangements the War Department acquired many millions of square feet of

storage space at strategic points throughout

the country. It also made numerous arrangements to store inventory on contractor's premises, paying them a suitable storage fee. From 1 September 1945 through

31 December 1946, the War Department received 105,295 plant clearance requests. At

the end of the period, only 102 remained

uncompleted. The disposition by time periods is also of interest. (Table 59) In only 5

percent of all cases did the War Department

fail to complete plant clearance within the

time specified by the Contract Settlement

Act or agreements thereunder. Nearly 60

percent of all cases were completed in 40

days or less, well within the 60-day target.

Thus, with a few exceptions, the objective

of prompt plant clearance—so important to

rapid reconversion—was accomplished. A

major factor behind its achievement was the

rigorous requirement of the statute which

established a specific goal well in advance of

mass terminations and permitted exceptions

only with the consent of the affected contractors.

Statistics of Contract Termination

Like the record of most large-scale mobilization activities carried on under the stress

of war, contract termination and settlement

statistics fall short of 100-percent accuracy

or completeness. No systematic record of

terminations was kept in the War Department prior to the establishment of the Contract Termination Branch in the Purchases

Division, ASF, in June 1943. Early reports,

which attempted belatedly to account for all

terminations occurring "after Pearl Harbor," were inaccurate and constantly subject

to revision. Changes in the needs of the program from time to time made difficult the

maintenance of continuity and comparability. CPFF termination statistics were the

last to be developed and the first to be curtailed after termination activity subsided.

The basic statistics shown herein were com-
CONTRACT SETTLEMENT IN OPERATION 695

piled from a number of sources and are

believed to represent the best available

data.81 (Tables 60, 61, 62, and 63)

Table 60 summarizes the broad record of

the War Department's experience in contract termination and settlement for World

War II. This table shows the progress of

terminations and settlements from the practical inception of the termination program

in mid-1943 to its virtual completion. For

the entire period the War Department terminated over 135,000 prime contracts.

Nearly half (59,000) of these were terminated prior to V-J Day. By the end of September 1945—the first full calendar month

after V-J Day—95 percent of all World

War II terminations had been effected. Corresponding settlement figures indicate that

47,000 settlements had been accomplished

by V-J Day and over 63,000 by the end of

September. By the end of 1945 over 80 percent of all World War II contracts eventually terminated by the War Department had

been settled, and a year later only a handful

remained for disposition.

The dollar figures shown in Table 60 reveal additional aspects of the termination

and settlement record. Total canceled commitments of the War Department exceeded

$46 billion—more than ten times the $4 billion of World War I cancellations. Against

this amount, actual settlement payments

were under $4.5 billion or less than 10 percent of canceled commitments. This contrasts favorably with the 14-percent figure

for World War I, which thus may be said

to have cost the government 40 percent more

than World War II in the settlement of each

dollar of canceled commitment. This substantial improvement was attributable in

part to the better planning and more fortunate circumstances, already described, associated with the World War II termination

problem.

Further study of Table 60 indicates that

terminations were settled more rapidly in

numbers than in dollar value. This was

partly the natural consequence of the greater difficulty and delay connected with

large and complicated settlements. It was

also the result of a definite effort by the

War Department to settle quickly the maximum number of contracts when confronted

with mass terminations. This yielded the

widest distribution of settlement payments

throughout the economy in a short period

of time and rapidly narrowed administrative responsibility to a relatively small number of cases. Under this policy the War Department settled nearly 65,000 contracts in

the last six months of 1945.

Table 61 gives a broad comparison of the

termination activity of the War Department

with that of the other contracting agencies.

The War Department's $46 billion in canceled commitments represents 70 percent of

the total for all contracting agencies. By

number of individual terminations, its share

of the total was only 42 percent. This smaller

percentage reflects the large number of

small-contract cancellations made by subsidiaries of the Reconstruction Finance Corporation—the Defense Plant Corporation,

Metals Reserve, Defense Supplies, and so

81

 Sources for Table 60 data are as follows for the

indicated dates: (1) 31 Dec 42: ASF, History of

Purchases Division, p. 304; (2) 21 Jun 43 through

30 Sep 43: monthly and special reports (all typescript) of Contract Termination Branch, Purchasing

Division, ASF (copies in OCMH); (3) 31 Dec 43

through 31 Mar 46: data transcribed or computed

from ASF, Monthly Progress Report, Section 14-A;

(4) 30 Jun 46 through 31 Dec 46: WD, Progress

Reports, Section 5-A; (5) 31 Mar 47: OCS History,

App. A, p. 65; (6) 30 Jun 47: Report of the Under

Secretary of War to the Secretary of War, 1 Jul 45

to 30 Jun 47, p. 19; (7) 31 Dec 51: GSA, War Contract Terminations and Settlements, Thirtieth

Report, Jan 52.
696 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 60—WAR DEPARTMENT CONTRACT TERMINATIONS AND SETTLEMENTS

CUMULATIVE PROGRESS AT SPECIFIED DATES

a

 After disposal credits. b

 Precise data not available.

Source: ASF Monthly Progress Rpt., Sec. 14-A, and supplementary data. See above, p. 695, note 81.
CONTRACT SETTLEMENT IN OPERATION 697

ABLE 61—WAR CONTRACT TERMINATIONS AND VALUE OF CANCELED COMMITMENT BY

AGENCY AND TYPE OF CONTRACT THROUGH 31 MARCH 1947

[Dollars in Thousands]

a

 Total commitment value figures rounded. b

 Less than $500 thousand.

Source: Adapted from OCS, History, p. 65.

forth. The canceled commitment value of

these small RFC contracts averaged only

$1,600 compared with the $346,000 average for the War Department—the highest

for all agencies.

Table 61 also reveals the high average

canceled commitment value of CPFF terminations. For all agencies, CPFF contract

cancellations were less than half of 1 percent

in number. Yet this small number accounted

for over 25 percent of the value of total terminated commitments. The War Department's $13 billion in CPFF cancellations

accounted for nearly 75 percent of the total;

its average commitment cancellation per

contract was, however, overtowered by the

$34-million average for the ten high Maritime cancellations.

Tables 62 and 63, in addition to showing the relative use of no-cost settlements

already discussed,82 reveal other significant

relationships.

Table 62 shows the number and value of

settled terminations for each of the War Department technical services through 31

December 1946. Army Ordnance alone

effected over 35,000 terminations or more

than 25 percent of the War Department

total. In terms of canceled commitment

value for both fixed-price and CPFF contracts, the Air Forces headed the list with

over $21 billion—nearly half the War Department total. Together, Ordnance and the

Air Forces accounted for five sixths of all

82

 See above, pages 643-45.
698 THE ARMY AND ECONOMIC MOBILIZATION

TABLE 62—WAR DEPARTMENT CONTRACT SETTLEMENTS: BY TECHNICAL SERVICE, TYPE OF

CONTRACT, AND TYPE OF SETTLEMENT

[Cumulative: 7 Dec 41—31 Dec 46]

Source: WD, Progress Rpt, Section 5-A, 31 Dec 46.

War Department cancellations by number

and over 99 percent of CPFF canceled

commitments.

Concluding Observations

The foregoing account of the contract

settlement activities of the War Department

portrays the salient features of the problem,

the policies and procedures adopted for its

resolution, and the statistical record of the

results achieved. The account would be incomplete, however, without a broad summary of the general results of the program,

especially in the light of subsequent criticisms

of the World War II contract settlement

process.

In terms of its broad objectives the contract settlement program was eminently

successful. A task of overwhelming proportions, with potentially grave consequences

for the nation's postwar reconstruction, was
CONTRACT SETTLEMENT IN OPERATION 699

TABLE 63—COMPARATIVE USE OF NO-COST SETTLEMENTS: BY PRINCIPAL

CONTRACTING AGENCIES

[Fixed-Price Contracts through 30 September 1946]

Source: OCS Ninth Rpt, Oct 46.

achieved with a degree of rapidity and

smoothness which appeared highly improbable to many sober observers in 1943 and

1944. The program was boldly conceived

and boldly executed. At the same time, it

was the beneficiary of far more detailed and

meticulous planning than perhaps any other

operation of similar magnitude in the nation's history. It represented the combined

and integrated efforts of all the procuring

and appropriate control agencies. Narrow

jurisdictional lines were dissolved as procuring and control agencies jointly formulated

policy, and as procuring agencies frequently

conducted actual operations in each other's

behalf. Thus the history of War Department

contract settlement operations—greatest in

magnitude and variety for all the agencies—

is largely the history of settlement activities

for the nation as a whole.

The keystone of the whole program was

the negotiated settlement, effected by the

procuring agencies, and made final except

for cases of fraud. The process of settlement

by negotiation was not the substitution of

personal caprice and bargaining for established principles of fair compensation.

Rather, it was the use of carefully defined

rules of settlement which could be applied

with intelligent flexibility, thus preventing

the crippling of common sense and simple

equity by hair-splitting, bureaucratic technicality. Under the governing regulations,

anticipated profits under terminated contracts were relinquished by contractors and

subcontractors generally. On the other

hand, terms of settlement provided a liberal

definition of costs and profits for work

actually performed. Such liberality was in

keeping both with the needs of nationwide

economic readjustment and the premises of

equitable government. The principle of finality of settlement by the procuring agencies was an integral part of settlement by

negotiation. To have made all settlement

agreements subject to later approval by another agency would have relegated the original negotiations to the status of pantomime.

A "settlement" without finality would have

been a contradiction in terms; by the same

token it would have perpetuated long into

the postwar period the very task which had

to be accomplished as a precedent to peacetime economic activity.
700 THE ARMY AND ECONOMIC MOBILIZATION

To state that the major administrative

and substantive foundations of the contract

settlement program were properly conceived, and that the program as a whole

was "successful," is neither to imply perfection nor to overlook the fact that an indeterminate amount of waste and fraud

were present. The Comptroller General of

the United States, in his postaudit of contract settlements, discovered a number of

cases of contractor fraud as well as instances

of collusion by officers or employees of the

procuring agencies. Unfortunately, the official reports of the incumbent Comptroller

General tended to exaggerate the amount

and nature of various kinds of overpayment

and went out of their way to create an impression of wholesale fraud and scandal in

the conduct of the contract settlement program.83

 The burden of these reports was

not the obvious need for swift and adequate

punishment of the parties to fraudulent

transactions, but the alleged unwisdom of

Congress in failing to require the Comptroller General's approval of all settlements before they became final.

The sixth and final report, made in 1950,

summarizes the results of General Accounting Office review of World War II contract

settlements. As of 30 April 1950, the GAO

had examined 9,239 settlements covering

26,566 terminated contracts or roughly one

twelfth of the total for all agencies. The

Comptroller General concluded that improper payments of some $20.9 million in

549 settlements had been "induced by

fraud," and these were so certified to the

Department of Justice. In addition to the

fraud allegations the final report cited nonfraudulent overpayments of nearly $4.3 million in connection with 684 settlements. The

Comptroller General thus pointed to a total

loss to the government of some $25 million

with the implication of many more millions

in unknown losses on settlements not reviewed.84

 All of the reports were couched in

supercharged language condemning the

Contract Settlement Act, settlement personnel in the procuring agencies, and the alleged waste, extravagance, and fraud

experienced under the program.85

A sober analysis of the Comptroller General's charges indicates that his general

position with respect to the operation of the

Contract Settlement Act was untenable.

Many of his cases upon examination had no

substantial merit; perhaps a majority had

been discovered by the Army auditors prior

to GAO review; the meritorious cases discovered solely by the GAO staff amounted

in dollars to only a small fraction of 1 percent of all World War II contract settlement

83

 The Comptroller General made a total of six

reports to Congress on the operation of the Contract

Settlement Act of 1944 as required by Section 16

thereof. These reports were dated 27 August 1945,

26 July 1946, 10 July 1947 (printed as S. Doc. No.

75, 80th Cong., 1st Sess.), 24 February 1948 (S.

Doc. No. 121, 80th Cong., 2d Sess.), 1 August 1949

(S. Doc. No. 108, 81st Cong., 1st Sess.), and 19

May 1950.

84

 1950 report, pp. 6-7, 9-10. 85

 For example, from the 1950 report: "careless,

inept, or overgenerous contracting officers" (p. 2);

"overwhelming proof of the vast and unnecessary

damage where . . . representatives of the contr

ing agencies were authorized to audit themselves

and to pump out of the Treasury such amounts as

they approved" (p. 8); "The foregoing summarization . . . throws light but partially on the full da

age wrought by the Contract Settlement Act of

1944" (p. 9); "This unbridled waste and extravagance was revealed only as an incident. . . ." (p. 9

"the tragic consequences when the Congress releases

the reins that control the public purse" (p. 12);

"The sad story of operations under the Contract

Settlement Act of 1944. . . ." (p. 12). B

comptroller was not without a sense of humor: "One

firm presented three termination claims which were

so outlandish in amount that they were even rejected

by the contracting agency." 1947 report, p. 7.
CONTRACT SETTLEMENT IN OPERATION 701

payments.86 In large part, the postwar findings of the Comptroller General were comparable in nature to his 270 cases introduced

into the 1943 hearings and refuted at the

time by Under Secretary Patterson—cases

turning largely on the differences between

the cautious, legalistic approach appropriate

to a peacetime government accounting

agency and the pragmatic philosophy of

wartime procuring agencies who authorized

any cost reasonably necessary to the effective

prosecution of the war.87

Available statistics indicate that the percentage of the fraud allegations subsequently upheld in court was small. As of 31 December 1948, out of 220 cases sent to the

Department of Justice, 167 had been dismissed for insufficient evidence to warrant

criminal proceedings and 99 similarly rejected for purposes of civil proceedings. Of

the remainder, 10 criminal and 23 civil proceedings had been started, with the rest still

under investigation.88 While the lack of successful fraud actions does not prove absence

of fraud, it casts some doubt on the extreme

interpretations made by the Comptroller

General.

The exact amount of fraud and "overpayment" involved in World War II contract settlements will never be known. In the

nature of the case, there can be neither a

universally acceptable definition nor an accurate measure of these magnitudes. That

there was considerably more than there

ought to have been is certain. That there

was much more than to be expected, considering the vast scope, complexity, and

urgency of the program is not so certain.

But it is doubtful that under the most liberal

estimates the combined losses from fraud

and unwarranted overpayment in World

War II settlements amounted to as much as

half a day's national income. Many times

this amount might easily have been lost if

the contract settlement program had faltered, despite the presence of other conditions favorable to the smooth reconversion

of the nation's economy.

86

 Even if the entire $25 million had been established as unwarranted overpayment, the total loss

would have amounted to less than one half of 1

percent of the total settlement payments of $6.5

billion for all agencies. 87

 For reference to cases cited in 1943, see above,

page 624.

88

 Legislative Brief on the Armed Services Contract Settlement and Property Disposition Act of

1949, p. 31. This study, prepared by the Air Force

9-6691, AF), is on file in the ICAF Library.

PART EIGHT

EPILOGUE

CHAPTER XXX

The Summing Up

Historical Recapitulation

Prewar Planning and the

Launching of Rearmament

For a period of twenty years, under the

statutory responsibilities conferred in 1920

upon the Assistant Secretary of War, the

Army bore the principal burden of insuring

the nation's industrial preparedness to meet

a war emergency. Within the limitations imposed by lack of funds, insufficient personnel, public indifference or hostility, and the

inherent obstacles to planning for so uncertain and difficult an enterprise, the

Army's prewar plans were realistic and thorough. First to be undertaken was the development of specific procurement plans,

which resulted in basic specifications for

military items, balanced estimates of initial

requirements, and the earmarking of specific

industrial capacity to permit the immediate

launching of a rearmament program. At the

beginning of the defense period the procurement plans were revised, expanded, and put

to work. When the emergency arrived, the

availability of these plans and the knowledge

gained in their preparation made possible

the rapid placement of contracts without

the degree of floundering, delay, and confusion apparent at the beginning of World

War I.

Also contributing to victory in World War

II were the Army's general procurement

plans and the complex array of studies in the

field of nationwide industrial mobilization.

General procurement planning reviewed the

whole field of procurement law, devised the

form and principles of wartime contracting,

and prepared new legislation to remove the

crippling barriers of peacetime law and to

create additional powers essential to emergency procurement. Industrial mobilization

planning produced studies and recommendations for the apportionment of basic industrial capacity and for the application of

wartime controls in many fields: prices, materials, labor, foreign trade, transportation,

and other categories. The several versions

of the Industrial Mobilization Plan also contained important organizational proposals,

not only for existing and new governmental

agencies essential to wartime functions, but

for harnessing and integrating the nation's

basic industries into a unified war effort.

The War Production Board, the Office of

Price Administration, the Board of Economic Warfare, and many other World War

II organizations and agencies bore remarkable resemblance to prototypes suggested in

the Industrial Mobilization Plan.

At the time of the crisis brought on by the

fall of France, President Roosevelt decided

against the formal adoption of the Industrial

Mobilization Plan. In view of the precarious

political situation in 1940, the President was

unwilling to relinquish personal control over

the rearmament effort. The state of the nation's economy, moreover, made the complete adoption of the IMP unnecessary in

some respects and undesirable in others. In
706 THE ARMY AND ECONOMIC MOBILIZATION

the face of idle plant capacity and unemployed manpower still remaining after ten

years of depression, and because the Munitions Program of 1940 was only half the

size of the "maximum effort" contemplated

by the IMP, compulsory allocation of facilities was considered unnecessary. Under the

conditions of 1940, prompt utilization of

available capacity was more important than

allocation.

The eighteen-month "defense period" between mid-1940 and 7 December 1941 thus

became the "transition period" contemplated by the Industrial Mobilization Plan.

Many of the actions taken and policies

adopted during this period were in general

accordance with the provisions of IMP;

others were not. No amount of planning

could have been "complete," nor could the

planners have guaranteed that their program, however meritorious, would be adhered to by those selected to lead the nation

in time of emergency. But the basic purpose

of the Industrial Mobilization Plan—the

analysis of the problems of mobilizing the

nation's economic resources and the preparation of comprehensive recommendations

and plans to be used at various stages of the

emergency—was fulfilled. Despite the fact

that it was never formally adopted, the Industrial Mobilization Plan, together with all

its associated planning activities throughout

the interwar period, made a vital contribution to the nation's preparedness and eventual victory in World War II.

Determination of Requirements

Two basic objectives underlay the determination of Army requirements for

World War II: winning the war and saving American lives. There is little doubt that

America's outpouring of war matériel,

rather than an allied preponderance of manpower, was the dominant factor in winning

the war. Moreover, the same superiority in

the quality and abundance of weapons, supplies, and services that turned the tide of

war also reduced the loss of American lives

to a fraction of the losses sustained by the

Axis powers. Not only were total casualties

for the entire war much less but in individual

actions the hand-to-hand combat loss rates

among American soldiers were usually the

lowest of the combatant nations. By substituting prodigality of matériel for prodigality

of manpower the United States demonstrated that its oft-criticized "materialism" was

an instrument for enhancing the effectiveness, the comfort, and the survival of its

fighting forces as well as its citizens on the

home front.

A major factor in the nation's success in

equipping its armed forces was the boldness of the procurement programs established by the military agencies. The procurement goals of World War II were

high in both qualitative and quantitative

terms, requiring for their fulfillment the

best efforts of the nation's scientists, inindustrial management, and manpower.

At the beginning of the defense period

the War Department proposed a program of rearmament double the size of the

Munitions Program actually adopted. But

the country was not yet ready to undertake

so large a program, or indeed to prosecute

the one in hand with full vigor. It therefore

became necessary throughout the defense

period to make successive additions to the

initial program as the gravity of the crisis

increased and as the United States assumed

the role of "Arsenal of Democracy." Finally, under the greatly expanded programs

after Pearl Harbor—centering around the

President's spectacular objectives for the
THE SUMMING UP 707

production of ships, planes, tanks and

guns—total requirements exceeded the nation's physical productive capacity. In the

face of this development, boldness in the

determination of requirements had to be

tempered by feasibility and balance. In the

fall of 1942 the War Production Board ordered major cutbacks in military programs

and, under the decision of the Joint Chiefs of

Staff, the bulk of the cutbacks came from

the Army's ground forces program.

Despite the high level of military requirements throughout the war, the economic

needs of the civilian population were adequately filled. Many segments of the civilian

population found their living conditions and

standards substantially improved as a result

of wartime prosperity and full employment.

In any case, as compared with civilian populations in both allied and enemy countries,

the American public found itself relatively

unscathed by the total requirements and

consequences of the war.

Purchasing Policy

The basic objective of Army purchasing

policy was "to get the goods," that is, to

obtain on schedule the delivery of munitions

needed to win the war. To this end the Army

created a vast purchasing organization

whose offices and agencies were to be found

in every state of the union. Relying basically

upon decentralized operations under central

staff direction, the Army's procurement activities penetrated and vitally affected all

areas and departments of the national

economy.

Primary emphasis in the procurement

program was placed on the selection of competent contractors and on the support of

these contractors in the discharge of their

responsibilities. Procurement contracts went

first to facilities designated in prewar plans

or to other firms with established reputations

and demonstrated capacity for production.

This policy reinforced existing tendencies

in the economy for business to gravitate

to large corporations. After the major problems of converting the economy to a wartime footing had been resolved and basic

requirements filled, contract distribution

was increasingly influenced by nonmilitary

considerations and a larger share of war

business was given to small firms.

Army pricing practices, like the selection

of contractors, also reflected the military objective (getting the goods) first and other

considerations later. This resulted in generous prices for military items, a development

which had much in its favor during the defense period and early post-Pearl Harbor

era. In the face of the urgent need for munitions and the impossibility of accurate advance pricing, contracting officers felt

obliged to devote their efforts to launching

and expediting production rather than to

"haggling over price." After a decade of

economic stagnation and business failures,

generous prices provided the greatest single

stimulus to rapid production, relieved contractors of their perennial fear of insolvency,

and furnished them with abundant means

for discharging their new and difficult responsibilities. On the other hand, once full

employment and conversion of the nation's

resources to war production had been attained, overpricing became increasingly

dangerous to economic efficiency, and corrective measures had to be devised. The

formulation and administration of a sound

pricing policy, adequately differentiated

and responsive to a multiplicity of changing

circumstances, was an unbelievably difficult

and never-ending assignment.

The difficulties of wartime pricing re-
708 THE ARMY AND ECONOMIC MOBILIZATION

suited in the adoption, early in 1942, of

statutory contract renegotiation. Pioneered

by the War Department, and enacted into

law by Congress to prevent war profiteering,

renegotiation was one of the major innovations of World War II in the field of economic mobilization. It was the initial hope

of Congress as well as of the War Department that renegotiation would bring about

"close pricing" and thus "write its own

death warrant." But close pricing, in terms

of the standards of prices and profits of the

prewar decade, was not achieved in World

War II. The task was too great, the time

too short, pricing staffs and cost accounting

systems too inadequate, the resistance of

contractors too heavy, and the sustained

will for the job lacking on the part of most

procurement officers. The goal of uniformly close pricing by all agencies for all contractors was gradually recognized as a willo'-the-wisp, and renegotiation was retained

throughout the war as an essential backstop

to recapture excessive profits inevitably

accruing despite even the best efforts of pricing personnel. The task of renegotiation thus

developed into the process of deciding

whether and to what extent each contractor,

on the basis of his over-all performance record, was entitled to retain profits which

might otherwise be considered "excessive."

This task called for omniscience but could

not be avoided. With all the pressures and

difficulties involved, it is not surprising that

contractors as a whole were treated generously in renegotiation.

In spite of evident shortcomings in the

execution of purchase policy, the efforts of

the procuring agencies to implement a system of close pricing, combined with renegotiation and high rates of taxation, did succeed in keeping retained profits generally

within the range of propriety. World War II

was not followed by revelations and condemnations of wartime profiteering comparable to those which took place after

World War I. Meanwhile, the primary objective of Army purchase policy—the filling

of procurement requirements in time to win

the war—was abundantly realized.

Expansion of Facilities

Most of the numerous camps, cantonments, training establishments, and other

"command facilities" required for the operation of the Army in World War II had

to be built from scratch after mid-1940.

This was also true of the special processing

plants needed to turn out the great quantities of powder, high explosives, small arms

and artillery ammunition, poison gas, and

other munitions supplied by the Army's

Ordnance Department and Chemical Warfare Service. After World War I all the

government-owned powder plants had been

destroyed, and only a handful of government arsenals—operating in peacetime on

starvation budgets—remained to keep alive

the art of ammunition making.

In addition to command facilities and

highly specialized ammunition plants, the

Army and its sister procuring agencies in

1940 required an across-the-board expansion of general productive capacity throughout the economic system. During the depression of the 1930's much of the nation's industrial plant and equipment had been allowed

to atrophy. The failure of the American

economy to grow at normal rates over a

period of ten years meant that many of the

scientific, engineering, and technical developments of the 1930's lay dormant. Under

the circumstances, much of the unused plant

capacity available at the beginning of the

defense period was obsolescent. With the
THE SUMMING UP 709

great expansion of industrial activity following the adoption of the Munitions Program

of 1940, productive capacity in all sectors of

the economy rapidly became inadequate.

The War Department's facility expansion

program was as virile as its procurement program as a whole. Both in the establishment

of facility requirements and in the methods

of facility financing, the Army used bold

estimates and vigorous, open-handed administration. Instead of using cramped, inefficient, and obsolete facilities merely

because of their availability, the Army ordered for its major programs the construction of vast new enterprises designed in

accordance with the latest engineering developments and equipped with the finest

machinery obtainable. Under such sponsorship and with the efforts of the Advisory

Commission, the Defense Plant Corporation, and other agencies, the creation of

industrial capacity in the United States during three short years was as great as it had

been for the preceding decade and a half.

By mid-1942 it had become evident that

in the face of general shortages of materials

the Army's facility expansion program was

overambitious and would have to be cut

back. In particular, plant capacity for small

arms ammunition soon proved to be excessive, and some plants were shut down or reduced to part-time operation. It is possible

that the post-Pearl Harbor waves of facility

expansion in this field could have been foreseen as excessive at the time of their adoption. On the other hand, the emergence of

excess capacity might be regarded as a result

of the favorable progress of the war. Low

rates of expenditure in the European Theater, and the unforeseen capitulation of Japan

at least a year ahead of schedule, made unnecessary the consumption of the last available round of ammunition or the use of the

final increment of plant capacity hurriedly

created in the eleventh hour of the nation's

need.

In many respects the most significant

area of facility expansion was the general

addition to the nation's industrial capacity

under "tax amortization." Some 80 percent

of the World War II tax amortization

program was represented by War Department certifications, most of which had been

made by mid-1942. This program proved to

be highly effective in breaking down the resistance of private industry to capital expansion early in the defense period. In addition

to its effectiveness in stimulating aircraft

production and industries contributory

thereto, the Army's tax amortization program provided badly needed capacity for

the production of materials, parts, supplies,

machinery, and equipment essential to general war production and the maintenance of

the industrial economy.

As long as additional privately-owned

capacity appeared to be essential to the military procurement program, the Army was

liberal in its certification policy. After mid1943 the military agencies were no longer

greatly concerned with general industrial

expansion and the certification function

passed to the War Production Board. During this period the evident approach of the

end of the war called for a tightening of

certification policy and the War Production

Board adopted the practice of partial certification, commonly on a 35-percent-of-cost

basis. But there was no conceivable formula—especially in the earlier stages of the

war—which could accurately anticipate the

amount of economically useful life that

would remain in facilities at the war's end.

It was precisely for this reason that Congress,

in the face of the urgent necessity for stimulating capital expansion, had adopted the
710 THE ARMY AND ECONOMIC MOBILIZATION

bold concept of 100 percent write-off of

emergency facilities within a five year

period.

The liberal use of this provision by the

Army and Navy during the defense period

and early in 1942 undoubtedly conferred

high profits upon contractors—profits which

in many instances were not finally realized

by individuals until the end of the era of

plant disposals, property sales, corporate

mergers, and refinancing long after the war

was over. But as in the case of purchase policy, the primary objective of the facility expansion program was achieved. The United

States and her allies attained the matériel

superiority necessary to overwhelm the

enemy. Moreover, the same productive facilities which were created to win the war constituted the cream of the nation's postwar

heritage of plant capacity available for future emergencies and for supplying the large

and expanding requirements of peace.

Production and Material Controls

America's industrial mobilization experience in World War I had convinced Army

planners that the ordinary price system was

an inadequate instrument for the allocation

of the nation's resources in time of war. Accordingly, the Industrial Mobilization Plan

contemplated that in an emergency a system of direct controls would be superimposed upon the regular price system to insure the most effective distribution of productive capacity and scarce materials. At

the same time, price controls would be applied to prevent inflation, distortion of the

price structure, unjust enrichment, and

other evils.

This general scheme was eventually

adopted to govern the apportionment of a

large share of the nation's productive resources in World War II. Price controls of

the ceiling variety and rationing of consumer

goods were administered by the Office of

Price Administration. Because of their typical lack of a price and production history,

military goods were exempted from OPA

controls and left to special pricing procedures administered by the procuring agencies in the course of the contracting process.

After Pearl Harbor—with the tightening of

material control systems, the development of

a regime of price ceilings, and the great expansion of procurement programs without

regard to price considerations—the pricing

process became primarily a device to insure

that the money costs of production under

each contract would be covered. The function of resource allocation was in large part

shifted from the price system to direct administrative decisions governing the placement of contracts and supported by wartime

material control systems.

The technical problems involved in developing material control systems adequate

to the needs of World War II posed perhaps

the greatest challenge faced by economic

mobilizers during the war. Three general

types of system for the distribution of scarce

materials were ultimately utilized—priorities, allocations and budgeting—reflecting

three different approaches to the control

problem. The priorities system was the

earliest, simplest, and most widely used of

the three. Devised and administered by the

Army and Navy Munitions Board at the beginning of the defense period, priorities were

a kind of additional currency superimposed

upon the nation's existing monetary system;

by the end of the defense period they had

become an important factor in allocating the

nation's basic resources.

With the great increase in programed requirements after America's entry into the
THE SUMMING UP 711

war the burden carried by the priorities system became too great for the system to handle. Inflation of priority ratings reached the

point where only orders with top ratings had

any assurance of delivery, and lower ratings

became worthless. In the critical months

after Pearl Harbor the problem of adequately controlling the flow of materials to

individual firms throughout the economy

appeared to be so complex as to defy solution. Finally, after a period of intensive debate and experimentation with various allocation schemes, the War Production Board

and the procuring agencies adopted the Controlled Materials Plan—a tight system of

material controls of the budget variety

envisaged in the Army's prewar plans.

The announcement of the Controlled

Materials Plan in November 1942 committed the nation to its most difficult and heroic

undertaking in the World War II economic

mobilization program. The application and

refinement of the new system, together with

related developments, succeeded by late

1943 in bringing a high degree of order into

the entire field of war production. The budgeting principle used in the Controlled Materials Plan was later successfully extended

to lumber, tires, and other materials not

covered by CMP as shortages of these items

reached critical proportions. Nevertheless,

the priorities system—because of its simplicity and general applicability—was revised and retained throughout the war to

direct the flow of the numerous materials,

parts, and supplies not governed by more

specific controls.

The Army was directly or indirectly involved in many other activities concerned

with the availability of materials to meet

the needs of war. The peacetime efforts of

the Army and Navy to import and stockpile

strategic and critical materials had been

largely thwarted by inadequate budgets and

the crippling limitations of "Buy-American" legislation. After the fall of France,

responsibility for stockpiling as well as for

augmenting domestic production was given

to new government agencies with large budgets and adequate powers. Under the guidance of NDAC and its successors, domestic

production of aluminum and magnesium—

to mention two outstanding examples—

soared to unprecedented heights and became more than adequate for the tremendous aircraft programs of the Army, Navy,

and Lend Lease. Likewise, imports of strategic and critical materials after Pearl

Harbor, although obtained at the cost of

many lives and many ships, eventually rose

to unanticipated levels. At the same time,

around-the-clock efforts of the Army's technical services and their contractors resulted

in thousands of material-saving changes in

specifications and production processes. The

ultimate solution of the materials problem

was thus achieved by a combination of

measures—controlled distribution, augmented supplies, and drastic conservation

programs—supplemented by production

scheduling orders and other controls essential to the balanced progress of war production.

Contract Termination and Settlement

Long before the end of World War II the

attention of the military procuring agencies

was forcibly directed to the necessity of preparing an adequate legislative and administrative framework for the orderly liquidation

of the nation's war production program. As

early as the spring of 1942 the cancellation

of several large projects by Army Ordnance

revealed the complexity of the contract settlement problem, and demonstrated the im-
712 THE ARMY AND ECONOMIC MOBILIZATION

possibility of prompt and satisfactory settlement of terminated contracts under existing

laws and administrative regulations.

By mid-1943 the cumulative dollar value

of War Department contract cancellations

for World War II—made necessary by

changing military requirements, shortages

of materials, and other circumstances—exceeded the department's total for its entire

World War I experience. With over a hundred thousand prime contracts still in effect at this time, the War Department

became gravely concerned at the prospect

of mass terminations and administrative

chaos if the war should suddenly end. In

addition to current pressures to make adequate preparations for the task of nationwide economic demobilization, government

administrators were plagued with recollections of serious failure in this area in World

War I, as well as with widespread fears and

predictions of postwar depression and unemployment.

All these influences led to a concerted

program of planning, legislation, and administrative preparations on the part of

Congress, government agencies, and the entire industrial and business community. The

central theme and purpose of the program

was rapid demobilization and reconversion

of the nation's economy to the pursuits of

peace.

The substantive problems of economic

demobilization fell into three broad areas:

contract termination, contract settlement,

and disposal of government property. Termination decisions resulted primarily from

reductions in military requirements with the

approach of victory and the accumulation of

excess stocks of war matériel. Nevertheless,

both the timing and the distribution of cutbacks were influenced by labor shortages

and surpluses, civilian requirements, differences in contractor efficiency, and many

other nonmilitary considerations. All these

factors had their counterparts in the buildup of the war production program—a circumstance which led wartime observers to

label the whole contract termination and

settlement process as "procurement in

reverse."

The second and third areas—contract settlement and property disposal—were to a

large extent mutually dependent; together

they constituted the heart of the task of

economic demobilization. The basic responsibility of contract settlement was prompt

reimbursement of contractors for their expenditures of money and effort on contracts

up to the point of termination. Discharge of

this responsibility required the development

of a body of complex regulations based on

broad principles of fair settlement, together

with elaborate organizations and procedures

for carrying out the policies thus evolved.

The keystone of the whole program was the

negotiated settlement, under which the procuring agencies were given authority to

make binding settlements without reference

to the Comptroller General. This carried

over into contract settlement, for both fixedprice and cost-plus-a-fixed-fee contracts, the

same degree of contractual authority and

freedom of bargaining which the procuring

agencies had been given at the beginning of

the war to permit the effective placement of

original contracts.

The negotiated settlement, stoutly resisted

by the Comptroller General, was authorized

by Congress in the Contract Settlement Act

of 1944. This legislation owed much to a

special report prepared by Bernard Baruch

and John M. Hancock under the auspices of

the Office of War Mobilization and Reconversion. The Baruch-Hancock report insisted that settlements be "fair, fast, and
THE SUMMING UP 713

final," that sixty days was in general a sufficient period in which to effect settlement,

and that in the interim contractors be made

liquid by adequate termination financing.

Throughout the report ran the basic theme

that full employment and national prosperity in the postwar era were the primary

objectives of reconversion policy, and that

these objectives were consistent with

standards of fairness both to contractors

and to the government.

The liquidation of the nation's war production program was carried out with the

same kind of boldness which characterized

the wartime build-up. Rigorous deadlines

were established for various stages of the

process, and contracting officers were forced

to make promptly decisions that might

otherwise have been postponed indefinitely.

Under generous settlement payments and

provisions for termination financing, the

nation's economy was placed in a highly

liquid financial position, facilitating the reconversion process with a minimum of dislocation and unemployment. Surplus war

matériel was sold for what the traffic would

bear, unfinished items of procurement were

typically sold for scrap, and contractors'

plants were rapidly cleared. While the pressures for prompt reconversion in many cases

resulted in settlements seemingly unfavorable to the government, a realistic appraisal

of reconversion losses could charge them

partly to the inevitable costs of war and

partly to the price of a vigorous postwar

economy.

Concluding Observations

This volume has attempted to recount

and summarize the basic role of the U.S.

Army in planning and participating in the

war production activities of the United

States in World War II. Both as the statutory industrial mobilization planning authority during the interwar period, and as

the principal wartime procuring agency, the

Army and its air arm played a crucial part

in the direction and execution of the nation's war production program. But it must

be evident to the reader of this record, as

well as to all who lived and served on the

home front in World War II, that the war

production achievements of the United

States reflected a truly national effort, representing the combined contributions of all

its citizens. Without the unremitting efforts

and wholehearted co-operation of the nation's industrial workers and management

no amount of planning or direction could

have produced the munitions and supplies

which made allied victory possible. Nor

could the Army have successfully conducted

and administered the program for which it

was responsible without the central direction of the nation's war production effort by

the President and the civilian agencies appointed to discharge this task. Finally, none

of these achievements would have been possible unless the program had been sponsored

and underwritten by the Congress of the

United States, which provided the authority, the funds, and the ultimate responsibility for the execution of the war effort.

In appraising the Army's record in the

field of economic mobilization—and a fortiori that of the nation as a whole—it is

necessary to keep in view the economic consequences of the war as well as the success of

wartime policies in achieving victory. The

condition of the national economy in the

postwar era was a direct outgrowth of the

policies and activities pursued by the procuring agencies and the government as a

whole throughout the war period. It is not

too much to say that the over-all merits of

the program of economic mobilization for
714 THE ARMY AND ECONOMIC MOBILIZATION

World War II cannot be fruitfully discussed

without reference to its impact upon the

postwar period.

The United States was plunged into

World War II by the crippling attack,

without warning, of a powerful aggressor.

The war aims of the United States were the

defeat of its enemies and the suppression of

international aggression. Yet the unanticipated by-products of the war were of scarcely

less significance than the realization of the

nation's war aims. Instead of experiencing

postwar depression and the widely predicted

unemployment of eight million men, this

country after World War II found its economy stronger than ever. As a result of the

war the nation brought an end to more than

a decade of depression, raised both its real

and its money income to unprecedented

heights, and embarked on an era of capital

expansion which dwarfed all previous records. While playing a major role in combat

operations throughout the world, the United

States ushered in a new industrial, technological, and scientific revolution, and at the

same time gave a majority of its citizens a

better standard of living than they had before the war.

The war program tore down the barriers

to occupational and geographical mobility

of labor, put millions of people back to work,

rehabilitated their atrophied and forgotten

skills, and trained old and new workers in

new skills, new processes, new techniques,

and new administrative methods. While

achieving peak utilization of its manpower

for the first time in many years, the nation

found it unnecessary to sacrifice any significant gain of its recent social legislation,

much less to "regiment" its civilian workers.

The great contribution of American labor

in World War II was made possible by a

permanent addition to the total labor

supply—in its qualitative as well as its quantitative dimension—resulting directly from

the war program.

Also for the first time in more than a decade the nation made full use of the technical

know-how, organizing ability, and driving

energy of its business executives and leaders.

The role of the businessman, half-forgotten

and discredited during ten years of economic stagnation, was abundantly restored

as the basic problem faced by American industry ceased to be that of finding "something to do" and became a proliferation of

interesting problems under the heading

"how to do it." The tasks of converting and

expanding facilities, of recruiting, training,

and utilizing manpower, of discovering and

developing new materials, new sources of

supply, new processes of production, and

even the new end products of war production itself, provided businessmen with the

greatest challenge and opportunity of their

generation. The response to this challenge

was the application of rational and scientific methods to the solution of industrial

problems on a scale never before attained.

Intensified research and development, job

analysis, engineering planning, quality control, cost accounting and analysis, and improved techniques of personnel and industrial relations became the heritage as well

as the instruments of World War II. The

new knowledge and experience acquired

during the war by business executives and

managers at all echelons of industry constituted an important and permanent addition to the nation's economic resources

for peacetime production.

The role of science and technology in

World War II is well known, yet the allpervasive and permanent effects of the war

upon them, and in turn upon mankind as a

whole are but dimly understood. Like the
THE SUMMING UP 715

temporarily eclipsed businessman, scientists

and engineers during the 1930's found their

services of doubtful market value. The war

brought insatiable demands for the fruits

of both pure and applied science as military

procurement programs were designed to

exploit the maximum possibilities of technological warfare. Physicists, chemists, and

mathematicians were soon in short supply,

just as were engineers and technicians in all

fields and at all levels of practical and theoretical training. The result of this forced

draft of science and technology was a scientific revolution—a revolution which embraced the biological as well as the physical

sciences. Although the most spectacular results were achieved in the physical sciences,

the development and large-scale production

of penicillin, the sulfa drugs, blood plasma,

and countless other medical items, as well as

major advances in surgery and postoperative

therapy, were among the many contributions of the war.

Paradoxically, the desirable social and

economic consequences of the war resulted

to a large extent from the extravagant scale

on which the war was waged. Combined

war production requirements, centering in

the programs of the armed forces, were

quantitatively so great and qualitatively so

all-embracing that they not only harnessed

but taxed to the limit the economic potential of the entire nation. The same material

shortages which were the country's despair

in the dark days of 1942 became avenues to

material abundance as they led to drastic

measures which introduced a new era of

plentiful aluminum, magnesium, plastics,

and special alloys, as well as augmented supplies of oil, steel, rubber, and other war-developed and expanded resources. Likewise,

in the face of the diversion of 12 million men

into the armed forces, the pressure upon the

nation's ultimate productive resource—its

manpower—forced a constant outpouring

of invention and improvements in manufacturing organizations, processes, procedures,

machinery, equipment, and other facilities—

all resulting in long-run increases in national

productivity. In thus bringing to full fruition

the nation's productive power, the huge requirements of war created the great aggregations of equipment, skills, and scientific

and technical knowledge which constituted

America's postwar economic inheritance.

The boldness of the production objectives

for World War II was matched by the boldness of the administrative and fiscal methods

used in their achievement. The task of rapidly shifting the nation's productive resources from peacetime pursuits to the difficult and unfamiliar tasks of war required

imagination of the highest order and a willingness to use vigorous and unorthodox

measures. The government in World War

II imposed a greater number and variety of

restrictions upon conventional freedoms

than ever before; but it also shook off a multiplicity of peacetime restrictions upon freedom of action—not only with respect to its

own operations but for those of private industry as well. It gave its procurement agencies unlimited spending powers and virtually

complete freedom of action in the placing,

administration, and settlement of contracts.

On the other hand, it freed private enterprise from the operation of the antitrust laws,

permitted industry to charge off the full costs

of new investment in five years or less, and

supplied it with the material and financial

means of fulfilling its contractual obligations.

In short, the government entered into an

intimate partnership with industry and labor—a partnership in which private enterprise for the first time in many years was
716 THE ARMY AND ECONOMIC MOBILIZATION

given the opportunity to realize its full potential. In this partnership, industry found

a new kind of freedom—the freedom to operate at full capacity in the knowledge that

all costs would be recovered and a fair profit

obtained. Despite the regime of wartime

controls, the central characteristic of free

enterprise—freedom of basic operations

under the stimulus of the profit motive—

was maintained. Although the government

as the major customer of industry specified

the objectives of most industrial operations,

private industry made and carried out the

vast bulk of the decisions on the production

front which won the war. At the same time

American labor found in this partnership

the opportunity for full employment, generous earnings, development of its skills, and

a great expansion in the size and strength

of the permanent organizations representing

its long-range interests.

As a result of its spectacular performance

in World War II, together with the industrial and financial revolution which

made this performance possible, America's

system of private enterprise was revitalized

and made stronger than it had been for

many years. American industry had again

demonstrated that it could turn out a greater abundance and variety of goods and services with more efficiency and speed than had

yet been done by any other economic system. A major factor in this achievement—

the sine qua non of a successfully functioning free enterprise economy—was adequate

monetary demand for the products of industry. This monetary demand was furnished by the tremendous expenditures of

the armed forces—expenditures in large

part made possible by the great increase in

the nation's money supply resulting from

the bold program of deficit financing authorized by Congress and administered by the

Treasury Department and the Federal Reserve System. The expanded supply of

money persisted beyond the end of the war

and made possible in the postwar era a level

of monetary demand adequate to permit

full employment and capacity operations

for the nation's greatly expanded economy.

These results were, to be sure, reinforced by

a resumption of military expenditures during the period of Korea and the "Cold

War." The general benefits resulting from

full employment and high productivity in

the decade after the war greatly outweighed

the disadvantages and inequities of the degree of inflation experienced during the

same period.

The mistakes, shortcomings, and failures

in the planning and execution of the nation's

war production program—on the part of the

Army as of all other agencies—were many

and varied. Victory in World War II, on the

home front as in the fields of battle, did not

come easily or without its portion of error,

waste, and tragedy. Nor were the permanent

effects of the war on the nation's economy

all desirable. But the broad pattern of the

war production effort, in its methods as well

as its results, was unquestionably one of success. To many observers in mid-passage the

wartime program appeared to be constantly

taking the wrong course. Yet, like the progress of a skillfully directed sailing vessel

which in crossing the ocean must constantly

tack before changing winds, the course of

the war program when seen in large perspective was surprisingly direct.

No single account can adequately describe, or even list, all the factors which led

to the success of the nation's program of economic mobilization in World War II. One

indispensable element, among all others,

should be re-emphasized. This was the unparalleled degree of national unity and will
THE SUMMING UP 717

to victory brought about by the Japanese

attack on Pearl Harbor. Without such unity

of purpose at the time when it was most

desperately needed, it would have been impossible to administer a program whose success depended on the co-operation and

support of the whole people. Unity of this

kind in a large nation composed of widely

different groups and interests is not often or

easily attained. Ironically, it was presented

to the United States, as a free gift, by this

nation's enemies on the morning of Sunday,

7 December 1941.

The knowledge gained from the experience of World War II has permanent significance and validity. But every war in the

history of mankind has involved its own

unique set of political, military, economic,

technological, and other conditions and objectives. The lessons learned from the study

of one particular war will poorly serve the

planners and administrators appointed to

prepare for future crises if these lessons consist merely of actual solutions to particular

problems existing in the past; in World War

II the United States was favored by a combination of circumstances which may never

recur.

For perhaps the last time in its history the

nation's ocean barriers furnished a generous

measure of protection from serious damage

or invasion by a hostile power. Also, in a

war in which the survival of free democratic

institutions was at stake, this nation's efforts were preceded by those of other nations

engaged in a common cause. The heroic resistance of these allies provided this country

with an indispensable period of eighteen

months of borrowed time—a period considered by industrial mobilization planners

between the wars to be the minimum essential to adequate rearmament. Finally, in

undertaking its vast rearmament program

in mid-1940, the United States started from

a condition of widespread unemployment of

men, machines, and productive resources in

general. Great as were the shocks and dislocations accompanying the transition from

peace to a war economy—a transition not

fully completed until long after Pearl Harbor—they were relatively small by comparison with those which would necessarily arise

in the absence of huge surpluses of idle resources.

For these and other reasons, World War

II may well turn out to be the last war of

the "classical" type envisaged by the industrial mobilization planners of the interwar

period. In preparation for such a war a

relatively unarmed, nonaggressor nation

placed its principal reliance on the ponderous mechanism of industrial mobilization during a period of presumed safety from

attack. Wars of this type are obsolete in an

era of international hostility and nuclear

technology in which a hostile power could

create, without warning, an atomic holocaust in the nation's midst. In such an era,

when weakness is an open invitation to

aggression and all-out war is the short, certain pathway to international destruction

and chaos, many of the successful prescriptions and advantageous consequences associated with World War II have lost their

relevance. Industrial mobilization planning

can no longer be regarded as an adequate

substitute for military power in being. Nor

in the atomic age can victory in war be considered an acceptable alternative to the

prevention of war.
Bibliographical Note and Guide to Footnotes

The Army and Economic Mobilization

was written on the basis of a wide variety

of source materials located chiefly in various

offices and agencies of the Department of

Defense in and around Washington, D. C.

The principal sources of information were

governmental records, especially those of

the War Department—the senior predecessor of the Department of Defense. Nongovernmental records—books, periodicals,

and other publications—also supplied valuable insights and information.

The records of the United States Government in the mid-20th century have become

so voluminous and heterogeneous in character that the methods and tasks of the historian working in this area have undergone

a substantial revolution. The graduate historiographer at the beginning of the century

was a kind of Sherlock Holmes—a trained

sleuth skilled in the art of extracting a maximum of reliable information from a paucity

of sources. Today, in the complex field of

governmental operations and policy, the age

of scarcity is past, and the historian is faced

with a bewildering superabundance of documentary materials which must somehow

be surveyed, abstracted, studied, comprehended, evaluated, and appropriately synthesized into a readable summary—all

within a period considerably shorter than a

single lifetime.

In this milieu the historian of government

policy and administration is interested first

and foremost in documents containing the

highest yield of significance per page. Such

documents are typically the general reports

and summaries, the major directives and

manuals, the books of regulations, codes,

and statutes which reveal the basic tasks,

methods, and accomplishments of those

responsible for forming and executing governmental policy. Documents of this type,

devised during the course of actual operations in order to appraise, influence, and

control the general trend of events in the

relevant areas, are primary sources par excellence. As indicated in footnote citations

herein, the present volume relies heavily

upon such sources.

A second important class of primary documents consists of those which collectively

reveal in detail the multitudinous pressures,

problems, and other reasons for the formulation and development of specific policies.

These documents are the countless individual memoranda, letters, telegrams, notes,

clippings, abstracts, forms, diaries, logs,

studies, exhibits, tabulations, ad hoc reports,

and other materials found in the operating

files of the numerous offices and agencies

involved during the time period in question.

These primary sources are of a lower order

of generality than those described in the

preceding paragraph, but they are indispensable to a genuine understanding of the origins, nature, and consequences of the general policies and procedures under review.

Inevitably, only a minute fraction of these

materials can be perused by a single investigator.

Under these circumstances it is fortunate

for students of America's World War II experience that an official governmental historical program was firmly established by

the President at the beginning of the late

war. This program forced the preparation

of historical reports and summaries by every
BIBLIOGRAPHICAL NOTE AND GUIDE TO FOOTNOTES 719

significant unit in each of the several war

agencies of the Federal government. These

reports and summaries are still to be found

in the remaining records of many governmental units. In addition to other uses they

served as the basis for the more general historical monographs of the wartime agencies

and their principal divisions, written at the

end of the war or shortly thereafter.

As a result of the interim historical program, later historians have inherited a

wealth of secondary sources of information

prepared by those who were typically participants in or close observers of the events

about which they were writing. These secondary sources quickly convey to the student

the basic events, problems, and atmosphere

of the war period. Of perhaps even greater

significance, the interim monographs are frequently accompanied by elaborate documentary appendixes containing copies of the

specific memoranda, directives, reports, and

other primary documents actually used to

direct and control the war effort. These

documentary collections, in the eyes of interested historians, are among the most valuable fruits of the entire program.

The principal monographs used in support of the present volume, together with

their important documentary appendixes,

may now be found in the General Reference

Branch, Office of the Chief of Military History, Department of the Army, Washington,

D. C. These include the histories of the

major Army Service Forces divisions—Requirements, Purchases, Renegotiation, Readjustment, and Control—as well as the

Quartermaster Historical Series, the History

of Ordnance Pricing Policy, and other monographic studies. The General Reference

Branch, OCMH, also has in its collection of

materials many of the principal wartime

manuals, regulations, studies, reports, and

other major primary sources initially described above.

Most of the detailed records examined in

support of the present study were found in

the Army's Departmental Records Branch

(DRB), Adjutant General's Office (now

known as the Military Records Branch, Region 3, General Services Administration),

Alexandria, Virginia. As the principal repository of Army and War Department files,

DRB contains both types of primary source

materials described above, as well as many

of the lower-echelon historical reports and

summaries prepared during and shortly after

World War II. The holdings of DRB are

described in detail in Federal Records of

World War II, Vol. II, Military Agencies,

prepared by the General Services Administration, Archives and Records Service, The

National Archives (Washington, 1951),

and are further amplified in the bibliographical appendix (pp. 743-50) of Global

Logistics and Strategy, a companion to the

present volume in the War Department subseries of THE UNITED STATES ARMY

IN WORLD WAR II. The two principal

collections within DRB used in support of

the present volume are those of the Army

Service Forces and the Office of the Under

Secretary of War. Each of these collections

is in general subdivided into the holdings of

the component offices and divisions as they

existed at the end of the war.

The third major source of information for

the present volume was the unique collection

of materials on economic mobilization available in the library of the Industrial College

of the Armed Forces. Most useful were the

materials for the prewar period—especially

the bound copies of the contemporary lectures presented to successive classes of students. The college library also contains

many other primary source materials, as well
720 THE ARMY AND ECONOMIC MOBILIZATION

as a comprehensive collection of published

and unpublished secondary sources.

Two other repositories of information and

source materials should also be mentioned:

the National Archives, which frequently

served as a dependable source of last resort

for prewar Army materials as well as wartime materials from non-Army sources; and

the Army Library in the Pentagon whose

general and legislative reference services

were a convenient source of information to

the author on numerous occasions.

Copies of most individual documents

cited in footnotes have been assembled in

the author's collection in the files of OCMH

maintained for possible future reference.

When such copies could not be obtained,

reference has been made to the location of

the source by file number. In many cases,

copies of individual documents are available

as numbered exhibits of the historical monographs referred to above and are specifically

cited in footnotes.
List of Abbreviations

AAF Army Air Forces

ACMO Army Controlled Materials Officer

ACof AS Assistant Chief of Air Staff

ACofEngrs Assistant Chief of Engineers

ACofS Assistant Chief of Staff

ACof Trans Assistant Chief of Transportation

Actg Acting

Adm Admiral

Admin Administrative

AEC Army Extension Course

AFL American Federation of Labor

AG Adjutant General

AGF Army Ground Forces

AGO Adjutant General's Office

AIC Army Industrial College

ANMB Army and Navy Munitions Board

AP Armor Piercing

App. Appendix

AR Army Regulation

ASF Army Service Forces

ASN Assistant Secretary of the Navy

ASP Army Supply Program

ASTP Army Specialized Training Program

ASW Assistant Secretary of War

Attn Attention

AUS Army of the United States

Bd Board

BIM Basic Industrial Materials

Bk. Book

BLS Bureau of Labor Statistics

Br Branch

Bull Bulletin

CGS Combined Chiefs of Staff

CE Corps of Engineers

CG Commanding General

Ch. Chapter

Chf Chief

Chmn Chairman

CINC Commander in Chief
722 THE ARMY AND ECONOMIC MOBILIZATION

CIO Congress of Industrial Organizations

Cir Circular

Civ Civilian

CMP Controlled Materials Plan

CNO Chief of Naval Operations

CO Commanding Officer

CofAAF Chief of Army Air Forces

CofAC Chief of Air Corps

CofCWS Chief of Chemical Warfare Service

CofEngrs Chief of Engineers

CofOrd Chief of Ordnance

CofS Chief of Staff

CofTrans Chief of Transportation

Com Committee

Comdr Commander

Comdt Commandant

Comm Commission

Conf Conference

Cong Congress

CPA Civilian Production Administration

CPFF Cost-Plus-a-Fixed-Fee

CPPC Cost-Plus-a-Percentage-of-Cost

CQMD Chicago Quartermaster Depot

DCofS Deputy Chief of Staff

Dept Department

Dir Director; Directive

Div Division

Doc Document

DPC Defense Plant Corporation

DSRP Defense Supplies Rating Plan

d. w. Deadweight

Ed Edition; editor

EPF Emergency Plant Facilities

ETO European Theater of Operations

Ex Executive

Ex Asst Executive Assistant

ExO Executive Officer

FAR Field Accounting Representative

FDAP Field Director of Ammunition Plants

Fig Figure

FM Field Manual

FY Fiscal Year

G-1 Personnel

G-2 Intelligence
LIST OF ABBREVIATIONS 723

G-3 Organization and Training Division

G-4 Supply

GAO General Accounting Office

Gen General

GFE Government Furnished Equipment

GFM Government Furnished Materials

GMPR General Maximum Price Regulation

GO General Order

GOCO Government-Owned Contractor-Operated

GP Government Protection

GP Group

GPO Government Printing Office

GSA General Services Administration

GSC General Staff Corps

Hon. Honorable

H House of Representatives

Hq Headquarters

H. R. House of Representatives

ICAF Industrial College of the Armed Forces

IG Inspector General

IMP Industrial Mobilization Plan

Incl Inclosure

Ind Indorsement

IPD Industrial Personnel Division

IPF Initial Protective Force

JAG Judge Advocate General

JAGD Judge Advocate General's Department

JB Joint Board

JCS Joint Chiefs of Staff

JCTB Joint Contract Termination Board

JANS Joint Army-Navy Specifications

J. Res. Joint Resolution

Jt Joint

JTR Joint Termination Regulation

Ltr Letter

M Day Mobilization Day

Memo Memorandum

M&E Plancors Machinery and Equipment Plancors

Mil Military

Min Minutes

MPR Maximum Price Regulation; Monthly Progress Report

MRO Maintenance, Repair, and Operating Supplies

MS Manuscript
724 THE ARMY AND ECONOMIC MOBILIZATION

Mtg Meeting

NA National Archives

NATO North African Theater of Operations

n. d. No date

NDAC Advisory Commission to the Council of National Defense

NPAB Navy Price Adjustment Board

NR Nonreimbursement

OACofAS Office of the Assistant Chief of Air Staff

OASA Office of the Assistant Secretary of Army

OASW Office of the Assistant Secretary of War

OCMH Office Chief of Military History

OCofEngrs Office Chief of Engineers

OCofOrd Office of the Chief of Ordnance

OCS Office of Contract Settlement

OCSigO Office of the Chief Signal Officer

OEM Office for Emergency Management

OHF Ordnance Historical File

OO Ordnance Office

Op Opinion

OPA Office of Price Administration

OPACS Office of Price Administration and Civilian Supply

OPM Office of Production Management

Opns Operations

OQMG Office of the Quartermaster Corps

Ord Ordnance

OUSW Office of the Under Secretary of War

OWM Office of War Mobilization

OWMR Office of War Mobilization and Reconversion

ORDGC Office Chief of Ordnance, Comptroller's Office

ORDIX Office Chief of Ordnance, Executive Office of the Industrial

Division

PR Press Release; Price Regulation; Procurement Regulation;

Procedural Regulation

Par. Paragraph

P & C Purchases and Contracts

PD Priorities Division

Plancors DPC Contracts

PMP Protective Mobilization Plan

PRP Production Requirements Plan

Pt. Part

PWA Public Works Administration

QMC Quartermaster Corps

Rcd Record
LIST OF ABBREVIATIONS 725

RDX Research Development Explosive Cyclonite

Reqmt Requirement

RFC Reconstruction Finance Corporation

Res Resolution

Ret. Retired

RP Research Project

Rpt Report

S Senate

SAA Small Arms Ammunition

SCS Supply Control System

Sec Section

Secy Secretary

Ser Serial

Serv Service

Sess Session

SGO Surgeon General's Office

SN Secretary of the Navy

SOS Services of Supply

SPA Surplus Property Administration

SPAB Supply Priorities and Allocations Board

SPB Surplus Property Board

Stat. Statute

SW Secretary of War

SWPA Surplus War Property Administration

SWPB Small War Plants Branch, Purchases Division, ASF

SWPD Smaller War Plants Division (SWPD), WPB

T/A Table of Allowances

TAG The Adjutant General

TAM Termination Accounting Manual

T/BA Tables of Basic Allowances

TC Transportation Corps

TCM OCS Termination Cost Memorandums

TD Treasury Decision

T/E Table of Equipment

Telg Telegram

TM Technical Manual

Tng Training

TNT Trinitrotoluene

T/O Table of Organization

T/O & E Table of Organization and Equipment

TQMG The Quartermaster General

USA U.S. Army

USA (Ret.) U.S. Army (Retired)

USN U.S. Navy
726 THE ARMY AND ECONOMIC MOBILIZATION

USNR U.S. Naval Reserves

USW Under Secretary of War

Vol. Volume

WAA War Assets Administration

WAC War Assets Corporation

WCPAB War Contracts Price Adjustment Board

WD War Department

WDPAB War Department Price Adjustment Board

WDGS War Department General Staff

WDPRB War Department Procurement Review Board

WPA Works Progress Administration

WPB War Production Board

WRA War Resources Administration

WRB War Resources Board

ZI Zone of Interior
UNITED STATES ARMY IN WORLD WAR II

The following volumes have been published or are in press:

The War Department

Chief of Staff: Prewar Plans and Preparations

Washington Command Post: The Operations Division

Strategic Planning for Coalition Warfare: 1941-1942

Strategic Planning for Coalition Warfare: 1943-1944

Global Logistics and Strategy: 1940-1943

Global Logistics and Strategy: 1943-1945

The Army and Economic Mobilization

The Army and Industrial Manpower

The Army Ground Forces

The Organization of Ground Combat Troops

The Procurement and Training of Ground Combat Troops

The Army Service Forces

The Organization and Role of the Army Service Forces

The Western Hemisphere

The Framework of Hemisphere Defense

Guarding the United States and Its Outposts

The War in the Pacific

The Fall of the Philippines

Guadalcanal: The First Offensive

Victory in Papua

CARTWHEEL: The Reduction of Rabaul

Seizure of the Gilberts and Marshalls

Campaign in the Marianas

The Approach to the Philippines

Leyte: The Return to the Philippines

Triumph in the Philippines

Okinawa: The Last Battle

Strategy and Command: The First Two Years

The Mediterranean Theater of Operations

Northwest Africa: Seizing the Initiative in the West

Sicily and the Surrender of Italy

Salerno to Cassino

Cassino to the Alps

The European Theater of Operations

Cross-Channel Attack

Breakout and Pursuit

The Lorraine Campaign

The Siegfried Line Campaign

The Ardennes: Battle of the Bulge

The Last Offensive
The Supreme Command

Logistical Support of the Armies, Volume I

Logistical Support of the Armies, Volume II

The Middle East Theater

The Persian Corridor and Aid to Russia

The China-Burma-India Theater

Stilwell's Mission to China

Stilwell's Command Problems

Time Runs Out in CBI

The Technical Services

The Chemical Warfare Service: Organizing for War

The Chemical Warfare Service: From Laboratory to Field

The Chemical Warfare Service: Chemicals in Combat

The Corps of Engineers: Troops and Equipment

The Corps of Engineers: The War Against Japan

The Corps of Engineers: The War Against Germany

The Corps of Engineers: Military Construction in the United States

The Medical Department: Hospitalization and Evacuation; Zone of Interior

The Medical Department: Medical Service in the Mediterranean and Minor Theaters

The Ordnance Department: Planning Munitions for War

The Ordnance Department: Procurement and Supply

The Ordnance Department: On Beachhead and Battlefront

The Quartermaster Corps: Organization, Supply, and Services, Volume I

The Quartermaster Corps: Organization, Supply, and Services, Volume II

The Quartermaster Corps: Operations in the War Against Japan

The Quartermaster Corps: Operations in the War Against Germany

The Signal Corps: The Emergency

The Signal Corps: The Test

The Signal Corps: The Outcome

The Transportation Corps: Responsibilities, Organization, and Operations

The Transportation Corps: Movements, Training, and Supply

The Transportation Corps: Operations Overseas

Special Studies

Chronology: 1941-1945

Military Relations Between the United States and Canada: 1939-1945

Rearming the French

Three Battles: Arnaville, Altuzzo, and Schmidt

The Women's Army Corps

Civil Affairs: Soldiers Become Governors

Buying Aircraft: Materiel Procurement for the Army Air Forces

The Employment of Negro Troops

Manhattan: The U.S. Army and the Atomic Bomb

Pictorial Record

The War Against Germany and Italy: Mediterranean and Adjacent Areas

The War Against Germany: Europe and Adjacent Areas

The War Against Japan
Index

Acceleration of derived demand, 185n

Accepted schedules of production, 61, 65, 82, 260,

439

Accountability for government property, 69, 601-

02

Accountants, wartime demand for, 244, 300, 641

Accounting control, War Department philosophy of,

299-300

Accounting problems

in company-wide settlements, 655

in Consolidated Termination Program, 652

in conversion of CPFF contracts, 304-05

in cost analysis, 319

detailed cost accounting as barrier to efficiency,

329, 333

and tax amortization, 464

Accounting systems, contractors'

and contract settlement, 637, 669

inadequacies of, 313, 328-29, 329n, 604

and progressive pricing, 332

Adjusted compensation contract, 71, 244n

Adjutant General, Office of The, 114

Administrative barriers to procurement, 67, 217ff.

Administrative law, wartime expansion of, 313n

Advance payments, 5, 106, 224, 427

authorized by statute, 220, 226

and contract settlement, 628, 637

general account of, 674-78

illustrations of, 307-08, 352

prohibited in prewar period, 69

Advertising, for bids. See Formal advertising.

Advertising expenditures

and conventional selling prices, 341

as cost elements in procurement prices, 299, 671

Advisory Board on Tax Amortization, 460

Agricultural products, exemption from renegotiation, 340, 376

Agriculture, Department of, 78, 81, 100n, 441n,

443n

Air Force, U. S., 115

Air Transport Association of America, 97

Aircraft

priorities for, 509, 510, 521-22, 526-27, 531

procurement difficulties in prewar period, 217-

18, 245

requirements for, 125-31, passim, 140-42, 147-

48, 174-75

Aircraft industry

and DPC financing, 484

and GFM, 600n, 601

profits in, 307-09

and tax amortization, 472-73

and working capital, 679

Aircraft Resources Control Office, 148

Aircraft Scheduling Unit, 571n

Airfields, 174, 444

Alamogordo Army Air Base, 441

Allis-Chalmers Company, 630n, 651n, 655, 655n

Allocation Classification System, 560

Allocation of facilities. See Facility allocation system.

Allocations, of materials

in prewar plans, 89-92

in World War II, 550-66, 597

Allotments of materials

under CMP, 567-96, passim

in prewar plans, 92-93

Aluminum, controls over, 550-51, 570 ff.

Aluminum Corporation of America, 651, 651n,

656n, 656-58

Aluminum industry, exemptions from renegotiation, 377-78, 484

American Bankers Association, 485n

American Bantam Company, 255-56

American Iron and Steel Institute, 90

American Petroleum Institute, 97

American Society for Testing Materials, 606

American Standards Association, 606

American Telephone and Telegraph Company, 99n

Ammunition

expenditures of, 29, 174, 203, 207

facilities for, 203, 206-07, 294-96, 437, 484,

497-500

methods of computing requirements for, 173-74,

202-08

procurement planning for, 66

requirements of, 125, 128, 140, 147

shortages of, 123-24, 156n, 206-08

small arms, calibers produced by Army, 301n

stocks, 159, 204, 205

surpluses of, 159, 205

technical difficulties in production of, 8, 28

Antiaircraft guns, in President's Objectives, 141,

142n

Appeals, contractors', of unilateral settlements, 628,

642-43

Apportionment of capacity, in prewar plans, 41-42

Apportionment of load, in prewar plans, 50, 54-55,

65

Appropriations, War Department, 119-39, passim,

208, 258, 481, 484

deluge of, after Pearl Harbor, 226

great increases in, during defense period, 216,

216n, 219

inadequate, 36, 51, 61n, 64, 74

per se, not sufficient to win war, 226
730 THE ARMY AND ECONOMIC MOBILIZATION

Appropriations, War Department—Continued

reversion of, to Treasury, 250n

total, for period 1922-1940, 216

Architect-engineer contracts, 286, 446

Armstrong, Brig. Gen. Donald, 260n

Army, U. S.

deterioration of, between the wars, 120 ff.

size of, in various plans, 53, 127-30, 140, 168,

173, 176-79, 208-09

organization and structure of, 121-23, 133, 135-

38, 153, 156, 173, 176-79, 208-09

Army Air Corps. See Army Air Forces.

Army Air Forces. See also Aircraft.

and contract termination, 632, 634, 652, 656-

57, 677, 682, 697

and CPFF contracts, 284-310, passim

and facility expansion, 450-51, 482 ff., 494-97,

499

and material controls, 534, 535, 545

and prewar period, 45, 49, 245

and purchasing liaison with ASF, 359n

and requirements, 30, 112, 143, 147-48, 156,

172n, 175

and small business, 429, 432-33

in War Department reorganization, 112, 114n

Army Contract Distribution Division, 418

Army Ground Forces, 112, 127, 137-38, 153, 156,

707

Army Industrial College, 40, 43-45, 102, 258, 633

Army and Navy Munitions Board

and facilities, 259, 453, 454, 454-55n, 493

and other material controls, 551-53, 569, 579-

80, 599n, 599, 600, 603-04

and prewar planning, 40-43, 52-54, 56, 75, 80,

84, 88, 99

and priorities, 508-27, passim, 528-49, passim,

608, 710

and requirements, 145

Army-Navy Liquidation Commission, 690

Army Service Forces

establishment of, 40, 112, 146

general description of, 112-15

termination of, 115

Army Specialized Training Program, contracts for,

288-89

Army Supply Program, 134, 162-212, passim

final edition of, 164, 168

general account of, 143-62

origin of, 142n, 143 ff.

publication of, by sections, 147 ff.

replaced by Supply Control System, 162 ff., 234

special, for demobilization planning, 167 ff.

Arnold, General of the Army Henry H., 143n

Arsenal of Democracy, 31, 119, 209

Arsenals, government, 61, 64, 114, 216, 497-98,

708

Assignment of claims, 106, 480-81, 482

Act, passed, 221, 221n

and guaranteed loans, 681n

laws prohibiting, 69

protected in termination, 636, 684

Assistant Director for Pricing, Purchases Division,

315, 343-44

Assistant Secretary of War

replaced by Under Secretary, 40n, 108

responsibilities under National Defense Act, 39-

46

Association of American Railroads, 97

Atlantic Charter, 219

Atomic bomb, 149, 221, 288

Attorney General

on Anti-Kickback Act, 68n

on contract clearance, 266n

on contract settlements, 617, 621n, 627, 630n,

664

and procurement operations, 68

on raw material exemption, 377

on redelegation of powers, 312-13, 313n

on World War I contracts, 70

Auditing

and contract settlement, 620, 624, 626

on CPFF operations, 282, 298, 299-300, 478

excessive, criticized, 626

policies established by OASW, 106

Aurand, Lt. Col. Henry S., 509n

Austria, 127

Automatic supply, 159, 172-73

Automotive industry, 29, 191n, 537n, 551, 552, 633

Aviation gasoline, 174, 174n, 527

Awards, contract

automatic, in peacetime, 216

splitting of, 220, 223, 261, 416-17

Ayres, Col. Leonard P., 532

Bacon-Davis Act of 1935, 68

Balance, in procurement programs, 67, 141, 505-27

Baldwin Locomotive Works, 665

Balkans, 159

Banks

and facility financing, 476, 477, 477n, 480-85,

passim, 492

and supply of working capital, 676, 679 ff., 686

and surety companies, 222n

Barnes, Lt. Col. Elmer E., 513n, 535, 538

Baruch, Bernard M.

advice to NDAC, 236

on effects of excess profits tax, 384n

interwar recommendations of, 44n, 74, 77, 88.

93-94

joint author of Baruch-Hancock Report, 626,

712 and War Industries Board, 37-39, 109, 236

and War Resources Board, 99-100
INDEX 731

Baruch-Hancock Report, 626, 631n, 655, 683, 689-

90, 712-13

Base-period earnings

as criteria for price ceilings, 409

in renegotiation, 381

Basic Magnesium, Las Vegas, 494

Battle of the Bulge, 210, 336, 613, 650

Baytown Ordnance Works, 499n

Beaverbrook, Lord, 141

Belt links, for machine guns, 29

Bendix Corporation, 651n, 655, 655n

Berna, Tell, 565n

Bethlehem Steel Corporation, 617n, 618n

Bid proposals, contractors', defined, 277n

Bidders, responsibility of, 217

Biddle, Attorney General Francis, testimony of,

618n

Biggers, John, 530

Bills of materials, 62, 571-72, 579, 580, 582-84,

593-94, 595

Black market operations

in materials, 544

in meats, 407-08

Blind-Made Products, Committee on Purchases of,

218, 224

Board of Economic Warfare, 571n, 600n, 705

Boeing Aircraft Company, 483

Bombs, aircraft, requirements for, 204

Bonding requirements, 222, 224, 675n

Botany Worsted Mills, 646n, 651n

Brazil, 602

Brokers

real estate, 442

and renegotiation, 356

and Smaller War Plants Corporation, 424

Brookings Institution, 99n

Brown, Mark A., 618n

Browning, Brig. Gen. Albert J., 308-09, 343, 372-

73, 428n, 648

Browning automatic rifle, 189

Brownlow, Louis, 100

Bruce, Howard, 164n

Bryan, William Jennings, 39

Budd, Ralph 103n

Budget, War Department, 123, 127-29, 132, 209.

See also Appropriations, War Department.

Bulk-line prices, 94-95, 407

Bullitt, Ambassador William C., 127

Bureau of the Budget, 451, 691n

Bureau of the Census, 554n

Bureau of Internal Revenue, 357, 458, 462, 477n,

480, 480n, 644

Bureau of Labor Statistics, 317, 317n, 325-26, 400,

412

Burns, Maj. Gen. James H., 105n, 129, 131, 135

Business leaders, proposed for War Resources Administration, 81

Business machines, use of, 183, 198, 201, 579, 581,

584

Buy American Act, 68, 224, 603, 604, 711

Cabinet departments, and economic mobilization,

78

California, state tax amortization bill, 481

Camp Blanding, 502n

Camp construction, 123, 284-85, 440, 445, 446, 510

CampCuster, 199

Camp Irwin, 441

Canadian supplies, 224

Capacity, plant

difficulties in predicting, 260-61, 331

measurement of, in prewar planning, 56-57, 91

Capital turnover, and renegotiation, 387

Carbon steel, focal material under CMP, 573n

Carey, James, 104n

Caribbean, excess of bases in, 161

Carryover method, 195-96, 198

Cartridge cases, 28, 606, 610

Casablanca, 160n

Catton, Bruce, 238n

Cavalry, Chief of, 253

Ceiling article, 330. See also Redetermination

article.

Central mobilization control agencies, 74, 77. See

also Superagencies.

Central Nevada Bombing and Gunnery Range, 441

Chamberlain, Senator, on World War I supply, 36

Chaplains, Chief of, 114

Charitable organizations, exemption from renegotiation, 378

Chemical industry, exemptions from renegotiation,

340

Chemical Warfare Service

facilities for, 438-39, 497-98, 498n, 499, 500n

number of civilian employees, 114

prewar planning, 45, 49, 438-39, 497-98

and requirements, 174n, 204

Cherbourg, port rehabilitation, 182

Cherne, Leo M., 44n, 83n

Chicago Quartermaster Depot, 144, 406 ff.

Chicago Ordnance District, 332, 646 ff., 655n

Chicago Sun, 138n

Chicago Tribune, 138n

Chief of Naval Operations, 52n

Chief of Staff, 52n, 112, 115, 123, 129, 132, 138,

179. See also War Department General Staff.

China, 137, 159

China-Burma-India theater of operations, 189

Chrysler Corporation, 304n, 305n, 325, 325n, 490n,

492n, 494, 538n

Churchill, Prime Minister Winston S., 141, 143, 150

Circuit Court of Appeals, 478, 479
732 THE ARMY AND ECONOMIC MOBILIZATION

Citizens' Military Training Camps, 216

Civilian employees of War Department, 105, 112

Civilian requirements, 57, 212, 228, 233, 400,

520 ff., 525-26, 527, 707

Classification of procurement items, 174-75

Clay, Maj. Gen. Lucius D.

appoints Red Tape Committee, 232n

and Army requirements, 153n, 154n, 162, 164n,

560

and contract settlement, 629-30n, 655-58

and material controls, 560, 596, 598

Climate, and military requirements, 182, 189, 201

Close pricing

advance pricing as key element in, 277-78, 309,

311-12, 330 ff., 347-48

barriers to attainment of, 330, 372-73, 375, 385-

86

as basic element of War Department pricing

policy, 229, 277

as key to economy of productive resources, 264-

65, 303, 309

paradoxical nature of, 311-12, 324, 331, 351

and relation to dollar value estimates, 5n, 157

and renegotiation, 279, 330, 382 ff.

Coast Artillery Corps, 45, 114n, 253

Coast and Geodetic Survey, 545n

Coast Guard, 144, 545n

Collens, Clarence L., 653

Color plans, 81n

Combat arms, 50

Combined Chiefs of Staff, 143, 173n, 182, 522

Combined Production and Resources Board, 580,

606

Command facilities, 437, 438, 444-47

Commandeering, 70, 222, 248

Commerce, Department of, 78, 81, 100n, 102

Commercial items, standard

and exemption from renegotiation, 340n, 378

and material controls, 531-32, 555-56

pricing practices for, 341

profits on, 340

Commissary General of Purchases, 235

Commissions, 356, 442

Committee for Economic Development, 633

Commodities Division, OASW, 66, 87, 579

Commodity classification, ANMB Red Book, 579-80

Commodity Committees, 88, 440

Communication systems, 174

Community facilities, 237, 261, 442

Company pricing, 233, 234, 279, 334, 339-50

Company-wide Settlements, 653-59

Compensation, executive, 386, 386n, 387

Competition, decline in, during war emergency,

217, 225, 227, 242-45, 248, 274, 312. See also

Contract placement.

Compiègne, 3

Component Scheduling Plan, 554, 598

Components, 49, 175, 232, 505, 597-99

Compton, Karl T., 99n

Comptroller General, 68, 246, 299, 478, 492, 712

and audit of CPFF contracts, 282, 289, 298

and audit of terminated contracts, 620-21,

623-24, 626-27, 628, 630n, 663-65

and conversion of CPFF contracts, 304, 305,

305n, 310

delays from audit by, 68, 327, 337, 356

disallowances and suspensions by, 282, 299, 305n,

307-08, 623-24, 663

field offices under, 300n

forbids standardization of Army trucks, 253

as head of the General Accounting Office, 282

reports of, contract settlement, 700-701

Comptroller of the Treasury, 70, 617n, 620n

Compulsory orders, 248

Compulsory pricing powers, 278, 279, 342n, 343

Congress, U. S., 121, 129, 132, 134, 219 ff., 235,

312, 604, 616, 623-27

and facility programs, 469-70, 471, 477, 477n

House, 128

Judiciary Committee, 627

Military Affairs Committee, 623, 627

Naval Affairs Committee, 351, 627

Rules Committee, 627

Ways and Means Committee, 459

Senate, 128-29

Appropriations Committee, 157

Couzens Committee, 459n

Military Affairs Committee, 626

Post-War Economic Policy and Planning,

Committee on, 625, 627

Small Business Committee, 627

Conscription of capital, peacetime proposals for,

351

Conservation, 400-401, 506, 604-10

Consolidated Termination Program, 651-53, 656,

659

Construction. See also Facilities.

contracts for, 68, 106, 262n, 283-88, 446

curtailment of, 262

difficulties of wartime, 284 ff., 446-47

and material controls, 531n, 547n, 597-98, 608

overseas, 174, 284n

prewar plans for, 55, 57, 65, 438-40

programs and requirements, 125, 140, 142, 149,

154, 156n, 209

Construction Division, Corps of Engineers, 442

Construction Division, OASW, 438

Construction Division, OQMG, 438, 442, 445-46,

493, 497

Consumption

as element in requirements, 175

factors, 189, 203

Contingent costs, in contractors' proposals, 319,

321, 323, 328, 330, 332, 337, 346, 348, 349
INDEX 733

Contract administration, 67, 224 ff., 261, 426-27,

505-06, 619

Contract authorization, 129

Contract clauses, standard. See Contract forms.

Contract clearance, 43, 110, 226, 251, 315

general account of, 266-73

Contract distribution, 57, 216, 225, 248-49, 261-63,

413-34

Contract Distribution Division, OPM, 268, 418,

451

Contract forms, 67, 70-72, 106, 223, 271, 306

Contract negotiation. See Contract placement.

Contract placement, 55, 67, 84

by formal advertising and competitive bidding

advantages of, in prewar period, 216, 242

among allocated facilities, 107, 241

as barrier to rigid allocations, 64

exemptions from, in peacetime, 217-18

failure of, with decline in competition, 217,

225, 227, 242, 244-45, 248, 274, 313

inappropriateness for complex, novel projects, 274

partial retention of, in emergency, 250, 275,

275n

preponderance of prewar purchases under,

219

by negotiation

authorized by statute, 223

competition retained under, 107, 246, 248,

251, 254, 259, 313, 314

definition of, 246

essential to rapid procurement, 69, 245, 426-

27

general account of, 242-56

policies and procedures for, 67, 256, 260 ff.,

314-15, 429-30

and political pressures, 243, 243n, 425-26

and prime contract concentration in large firms,

413-16

Contract renegotiation. See Renegotiation.

Contract settlement. See also Contract termination

and settlement,

agreements, 635, 640, 641-42

contractors' proposals for, 635, 636-41

cost principles used in, 668 ff.

nature of, 614

by negotiation, 618-21, 626, 699, 711

procedure, general, 635-43

procedures, special, 643-66

review of, 637-40, 642

and subcontracts, 626, 635-66

teams, 641, 656

terms of, 615, 667 ff.

unilateral determinations, 628, 642-43

Contract Settlement Act, 655, 663, 683

background of, 621-27

Contract Settlement Act—Continued

criticized by Comptroller General, 700-701

passage of, 627

provisions of, 627-28

reproduced in Joint Termination Regulations,

629

Contract Settlement Advisory Board, 627, 627n, 629

Contract termination. See also Contract termination and settlement,

accounting, 623, 629, 633n

amendment of contracts after, 621

article

development of, for World War II, 618-19

lack of, in World War I contracts, 70, 616-

17

standard, War Department, 621, 625-26,

683

uniform, 625-26, 626n, 661, 665, 683

claims, 635, 643, 645-55

clause. See Contract termination, article,

costs, 622, 668 ff.

financing, 614, 626, 628, 640, 681-82, 686, 713

inventories

disposal of, 636, 637, 640, 652, 686-94

nature of, 687

necessity for removal of, 615

recording of, 636-40

title to, 686-87

loans (T-Loans), 681-82

notices, 628, 635, 636

organization for, Army, 623, 625, 630

organization for, contractors, 630

regulations, development of, 628-29

and subcontracts, 636, 651 ff.

Contract termination and settlement, 5n, 70, 166,

227, 234, 334, 564

appraisal of, 698-701, 711-13

general account of, 613-701

statistics of, 694-98

Contracting officers, 282, 330

liability of, 620, 628, 683n

general role of, 225, 225n

Contractors' capital, ratio to sales and earnings,

281, 307

Contractors' operating statements

in cost analysis, 320, 321-22

in renegotiation, 363-64

Contractors' proposals

forms for, 314, 316

as starting point of cost analysis, 319

Contractual instruments, 70-72. See also Contract

forms; Preliminary contractual instruments.

Contributory Division, OASW, 93

Contributory items, 66, 513, 521, 528

Control Division, ASF, 185
734 THE ARMY AND ECONOMIC MOBILIZATION

Controlled Materials Plan, 158, 427-28, 506, 526,

527, 541, 563

A products, defined, 582

B products, defined, 582

claimant agencies under, 571, 571n

experience under, and demobilization planning,

628

foreshadowed in Army prewar plans, 89-93

general account of, 567-96

indebted to earlier material control systems, 554,

563-64, 566

and long-term contracts, 331n

materials covered by, 570, 573, 581n, 586

and program control, 273, 585

results of, 589, 595, 597, 711

Conversion of industry, 57, 62-63, 65, 128, 157

Coordinator of Purchases, NDAC, 103n, 263, 267,

450, 530

Copeland Anti-Kickback Act, 68

Copper, 28, 207, 377 ff., 606

Corps Areas, 105, 123n, 438

Cost analysis, for fixed-price contracts, 229, 233,

273, 316, 317-18

as basis for close pricing, 277 ff.

general account of, 319-25

need for, foreseen in prewar planning, 243-44

prerequisites of, 314

unnecessary, for prewar procurement, 312

Cost control, 300 ff., 323

Cost indexes, 318

Cost-plus-a-fixed-fee (CPFF) contracts

avoidance of pricing problem by, 274-75, 311

and contract settlement, 619, 624, 626, 642,

663-66, 667n, 694, 697

conversion of, 278-79, 294, 302-10

cost control under, 278, 297-302

and evaluated fee contracts, 71, 439

excessive expenditures and waste under, 276, 286,

302-03, 306, 307

general account of, 280-310

minimum use of, as Army policy, 229, 233, 278,

303, 313

permitted by statute, 220

reasons for use of, 278

renegotiation of, 291, 367-69

and subcontract prices, 339-40

subject to OASW approval, 266

Cost-plus-a-percentage-of-cost contracts, 70, 229,

347

disguised forms of, 308, 325-27, 329, 330n, 442,

647

statutory prohibitions against, 220, 226

World War I experience with, 280

Costing practices, and product: prices, 321, 341.

See also Overhead costs.

Costs, starting-load, 307, 328, 670

Council of National Defense, 36, 100n, See also

National Defense Advisory Commission.

Court of Claims, U. S., 617, 643

Critical items, 125, 128-30, 137, 175, 181-82, 510,

544

Critical List. See Priorities.

Cross procurement, 144, 144n

Crosshauling, avoidance of, 91, 96

Current procurement, in prewar period, 40, 82

Curtailment, of nonessential production, 110, 551,

605

Cutbacks, in procurement programs, 154-55, 166,

170-71, 614

Czechoslovakia, 64, 127

Davis, Chester C., 103n

Davis, Col. Dwight F., 82n

Day of fire, 203n

Day of supply, 159, 161, 171, 191, 195-97, 203-

07

Decentralization of procurement, 229-32, 262

Declaration of war, abandonment of, by aggressor

nations, 85

Defense Aid Section, OASW, 106

Defense Contract Service, OPM, 262, 418

Defense migration, 240-41, 442-44, 567

Defense period

basic accomplishments of, 111-12, 260

defined, 98, 219

Defense Plant Corporation, 439, 482-83, 608, 695,

709

and facility expansion, general account of, 484-

96

and renegotiation, 356

Defense Supplies Corporation, 695

Defense Supplies Rating Plan, 555-57

Delivery dates, and material controls, 512, 537-38,

544 ff., 555

Demobilization. See also Contract termination and

settlement.

economic, planning for, 613, 626, 628

and military requirements, 167-71

Dent Act, 70, 628

Deployment of troops. See Troop deployment.

Depots, storage, and supply, 114, 149, 163, 193,

216, 239. See also Storage, of military items.

Depreciation, of Army equipment, 182

Depreciation rates, 458, 458n, 479, 479n, 481, 487,

487n

Depreciation rental, 487, 489

Deputy Chief of Staff, 145, 161-62

Description of Manufacture, in prewar planning,

61-62

Desert Training Center, 441

Design, of military items

effects of changes in, 52-53, 280-81, 385-86,

400

simplification of, 542, 605, 607

step in procurement process, 239

under technical service jurisdiction, 114
INDEX 735

Detroit Tank Arsenal, 499n

Development. See Research and development.

Dewey, Rep. Charles S., 372n

Differential prices, required for efficient procurement, 69, 407. See also Bulk-line prices; Premium prices.

Directed procurement, 225, 229-30, 230n

Director of Contract Settlement, 653n, 655, 664,

684

Director of Materiel, ASF, 114, 163, 164n

Director of Plans and Operations, ASF, 113, 163

Director of Supply, ASF, 163

Directory of Load, 57n

Disarmament, 73, 119, 121, 208

Disbursing officers, 299

Discounts, for war business, 347

Disposal Advisory Officers, 652

Disputes Article, in War Department contracts, 642

Distribution, of supplies and equipment, 114, 193,

239

Distribution factors, 179, 190-91, 194-95, 198

Distribution requirements, 149-50, 161, 170, 175,

179, 183, 190-91, 193-201

District Courts, U. S., 643

Divisions, Army, 137, 176-79

Dodge, truck, 254

Doherty, Robert E., 105n

Dollar-value figures, and requirements, 151-58

Douglas Aircraft Corporation, 293, 481-82

Draper, Col. William H., Jr., 144n, 629n

Draper-Strauss Report, 144n, 607, 629n

Drawings, engineering, 62

Duke University School of Law, 613n

Dunkerque, 3, 128

Dunn, Gano, 92n

Durr, Clifford J., 477n, 484n

Duryee, Samuel, 460n

Earmarking of firms, 55, 230n, 420

Eberstadt, Ferdinand, 454, 558, 565, 598

first civilian chairman, ANMB, 43, 518, 523n,

526, 527

and machine tool shortages, 565

role in adoption of CMP, 93, 569-70, 591

Economic Defense Board, 600n

Economic mobilization, 3, 8, 46, 46n-47n, 109. See

also Industrial mobilization.

Economic potential, 3, 30, 39

Edison, Charles, 99

Educational orders, 62-64, 257, 263, 510

Educational organizations, exemption from renegotiation, 378

Eight Hour Law of 1912, 69, 221

Eisenhower, Maj. Dwight D., 74n, 77n, 236n

Elliott, Harriet, 103n

Emergency Plant Facilities Contract, 467, 476-84,

485

Emergency ratings, 509, 517, 524-25, 527, 538, 543

Engineers, Corps of, 45, 114, 216n, 235, 652

and facility expansion, 442, 443n, 483, 499

and material controls, 589, 591-92

and prewar planning, 49, 50n, 95

and renegotiation, 286-87, 367, 388

and requirements determination, 166, 181, 185n,

187, 194

and responsibility for construction, 446, 483

Equipment, as major requirements category, 174,

175-201, Escalator clauses, 70, 278, 307-08, 325-28, 334,

335. See also Price adjustment.

Essential items, 136, 175, 505-06

Estimated costs, and contract placement, 282-83,

298, 313, 314, 321, 342

European Theater of Operations, 182, 189

Evaluated fee contract, 71, 439

Excess profits tax

on constructive income, 482

enacted in 1940, 351, 457

and inflation, 384, 384n, 403

and profiteering, 351-52, 414-15

and renegotiation, 370-71

and tax amortization, 458, 459, 475

Excessive profits. See Renegotiation.

Executive Office of the President, 100-101

Expediting funds, War Department, 266n, 449, 456,

489, 492, 497

Expendable supplies, 148, 174, 175, 189, 201-08

Expenditure Programs, 134

Expenditures, total U. S. government for World

War II, 4-5

Export controls, 221, 599-600

Export-Import Bank, 81

Ezekiel, Mordecai, 44n

Facilities Board, War Department, 450-51, 452

Facilities Branch, ASF, 455

Facility allocation system

based on major military effort, 246-47

and competitive bidding, 243-45, 257

educational orders to plants under, 64

expansion of plants under, 259

fruits of, 257-60

general account of, 55-61

inadequate to meet all facility requirements, 225,

439, 456

major element of procurement planning, 50

not formally invoked, 107, 249-50, 258-59, 706

Facility Clearance, 447-55. See also Contract clearance.

Facility Clearance Board, WPB. and related offices,

454-55
736 THE ARMY AND ECONOMIC MOBILIZATION

Facility costs, 267-68, 670. See also Tax amortization; Emergency Plant Facilities Contract; Defense Plant Corporation.

Facility expansion, for World War II

excessive, 154

general account of, 437-502

need for, under rearmament program, 112, 135

and plant location, 267

priorities for, 510, 521

results of, 708-10

Facility utilization, and contract placement, 262,

263, 265

Fair Labor Standards Act, 69, 263

Farm Security Administration, 444

Feasibility, productive. See also Feasibility Dispute.

of specific items, 51, 52n, 149, 150

of total requirements, 53-54, 131, 138, 141, 145,

163, 208-10, 212, 452-53

Feasibility Dispute, 154-58, 178, 196, 210, 527

Federal Loan Agency, 81

Federal Prison Industries, Inc., 218, 224

Federal Public Housing Authority, 444

Federal Reserve System, 81, 417, 480, 679-81

Federal Specifications Board, 606

Federal Trade Commission, 94

Ferguson, Senator Homer, 306

Field Accounting Representatives, 651-52

Field Artillery, Chief of, 253

Field Director of Ammunition Plants, 300-302

Finance, Chief of, 114

Financing of contractors

fixed capital, 437-502

working capital, 5n, 674-86

First War Powers Act, 226, 251-52, 278, 313n, 328,

621, 647, 679

Fiscal Director's School, 633

Fixed fee contracts. See Cost-plus-a-fixed-fee

(CPFF) contracts.

Fixed fees, 71-72, 220, 282-84, 289, 293, 307-08, 309

Fixed price contracts. See also Price policy.

for construction projects, 286-87

disadvantages of, during emergency, 276-78, 281,

307

general account of, 311-38

in prewar plans, 71

settlement of, 667-73

termination article for, 619

in World War I, 70

Flanders, Ralph, 566n

Food. See Subsistence.

Food and Fuel Administration, 94

Ford Motor Company, 255, 267. 305n, 481n, 483,

492n, 494n, 580

Foreign Economic Administration, 600n, 625, 690n

Foreign Liquidation Commission, 690n

Foreign purchases, 64-65, 506, 531, 551, 599

Foreign requirements, 134, 136-37, 145, 149. See

also Lend Lease.

Foreign trade controls, 78-79, 599

Forest Service, U.S., 442

Formal advertising, in contract placement, 69,

218-19, 220, 223, 242, 246-47, 251-52, 254-

55

Formula

for contract settlement, 619n, 619, 621, 622

for renegotiation, 380, 380n

Forrestal, James V., 43n, 522, 536

Fort Bliss, 441

Fort Bragg, 285n, 446n

Fort George Meade, 502

Forward pricing, 343, 346

Foster, Col. George H., 457n, 460n, 466, 471n

Foster Report, on tax amortization in World War

II, 457n

Foulois, Maj. Gen. Benjamin D., 245

Fowler, Brig. Gen. Raymond F., 592

France, 127, 128

Army procurement for, 144, 147, 171

declaration of war on Germany, 101

fall of, 3, 85, 138, 209, 219

Frankford Arsenal, 61

Fraud, 617, 628, 700-701

Frey, John P., 44n

Fuller, Samuel R., Jr., 104n

Fuzes, 28, 66

Gages, working and inspection, 29, 62, 66, 218

Galbraith, John K., 398-99n, 403n, 405

General Accounting Office. See Comptroller General.

General Electric Corporation, 651

General Maximum Price Regulation, 398-402

General Mobilization Plan, 53-54

General Motors Corporation, 99n, 254, 305n, 336,

651n, 680-81

General Munitions Board, 36-37

General Purchasing Board, 150

General Scheduling Order M-293, 554, 598-99

General Services Administration, 690n

General Staff. See War Department General Staff.

Geneva Steel Plant, 487n

George, David Lloyd, 37-38

George, Senator Walter F., 625

Germany, 127, 129, 133, 136, 138, 209

attack on Russia, 135, 219

collapse of, 170, 210, 265

Hitler's rise to power, 245

invades Poland, 101, 219

situation of, in 1918, 38

surrender of France to, 3

and utilization of small plants, 420

Gifford, Walter S., 99n, 100

Gilmour, Lt. Col. C. M., 647

Ginsburg, David, 457n, 479
INDEX 737

Gordon, Lincoln, 594, 598n

Government agencies, role of, in prewar plans, 78,

80-81

Government Corporation Control Act, 492n

Government corporations, proposed in IMP, 79

Government Furnished Equipment, 315, 600-602

Government Furnished Materials, 600-602

Government-owned-contractor-operated (GOCO)

facilities, 301, 439

contracts for, 294-97, 302, 308

general account of, 496-502

Government ownership of plants

advantages of, 497

attitudes toward, 616

permitted by emergency statute, 220

Government Printing Office, 218

Great Britain, 3, 101, 127, 159, 308-09, 420

Greenbaum, Brig. Gen. Edward S., 460n

Gregory, Quartermaster General Edmund B., 253,

568

Gross, Bertram C., 659

Groves, Lt. Gen. Leslie R., 285, 287, 303n

Guaranteed loans, 224, 628, 678-83

Gun carriage, antiaircraft, 30, 293

Hancock, John M., 44n, 100n, 626, 712

Harbord, Maj. Gen. James G., 39n, 86

Harvard University, 634

Hauseman, Brig. Gen. David, 650n

Henderson, Leon

and exemption of military items from price control, 403-05

head of price control in World War II, 103n,

397n, 479, 517

role in Feasibility Dispute, 155

testimony on small business, 415, 417

Henderson-Patterson-Forrestal agreement, 316,

403-05

High explosives, 28, 66

Hillman, Sidney, 103n, 104, 262-63, 267, 517n

Hinckley, Robert H., 630n

Hindenburg, Field Marshal Paul von, 38

Hitler, Adolph. See Germany.

Holland, Lou, 420, 428

Home front, 237, 713

Hopkins, Harry L., 105n, 125n, 134-36, 141n, 517

Horizontal controls, 557n, 561-63, 571, 573, 591-96

Houston, B. D., 485n

Hutchinson, Col. William H., 536n, 549, 557n

Imports, of essential supplies, 408, 602-04

Incentive goals, for war production, 157, 211-12

Incentive pricing, 71-72, 323, 337, 337n

Income tax, 370-71, 457, 475, 477n, 480, 482, 636,

693

Industrial Accounting Manual, 602

Industrial facilities, 154, 413, 414-15, 416, 422,

497, 499. See also Facility allocation system;

Facility expansion for World War II.

Industrial mobilization, use of term during interwar

period, 46n-47n

Industrial Mobilization Plan, 40-42, 104, 127, 243,

397, 438, 528, 599n, 705-06, 710

annexes, to 1939 edition

Commodities, 76n, 88n, 89

Facilities, 76n

Labor, 76n, 85n

Power and Fuel, 76n, 85n

Price Control, 76n, 85n, 87n, 94

Transportation, 76n, 85n, 97n

War Finance, 76n, 85n

War Trade, 76n, 78n, 85n

appendixes, 75

detailed account of, 73-97

inception of, 74-75

informal application of, 258, 260

legislative appendix, 70, 222n

misconceptions concerning, 76-77, 102

nonadoption of, 81, 92, 93, 98, 106-07

and priorities, 89-93, 508, 513, 525

published editions of

1930, 74-75, 78, 78n, 79, 84

1933, 75-76, 78n, 79, 84n, 94

1936, 75, 76n, 78n, 79, 84

1939, 75-81, 84n, 85, 88n, 89, 93n, 94, 97n

Industrial mobilization planning

fruits of, 259-60, 705-06

general account of, 73-97

relation to procurement planning, 46, 67

responsibility of Assistant Secretary of War, 42

Industrial revolution, wrought by World War II,

3, 30, 438, 714 ff.

Industry advisory committees, 104

Industry integration committees, 302

Inflation, price, 93-95, 276, 325-27, 403

Initial issue, and requirements, 175-82, 194-95,

201, 204n

Initial Protective Force, 121, 127-28

Inland waterways, 96-97

Inspection

in prewar plans, 62, 65

responsibility of technical services, 114, 223, 233

role of, in procurement, 239, 362-63, 427, 507,

601, 641

size of Army organization for, 507

Inspector General, 114, 307-09

Integrated firms, and renegotiation, 382

Interchangeability of parts, 29

Interest, 481, 628, 637n

Interior, Secretary of the, 100n

International Aid. See Foreign requirements.

International Harvester, 646n

In-transit requirements, 198, 199n, 204
738 THE ARMY AND ECONOMIC MOBILIZATION

Inventories, industrial

and contract settlement, 628, 630n, 635, 636-39,

641-49, passim, 686-94

and exemption from renegotiation, 377-78

and material controls, 551, 552, 554, 556, 559,

563, 571, 578, 588

and OPA ceilings, 401

Inventories, War Department, 158, 163, 188, 192,

193. See also Stocks, of military items.

Iron and steel, in prewar plans, 90-92

Isolationism, 100, 127, 133, 138, 531

Jack and Heintz case, 351-52, 384

Japan, 209, 219, 709, 714, 717. See also Pearl

Harbor.

Jeep, contracts for in defense period, 255-56

Jigs and fixtures, 29, 62, 64, 218

Johnson, Courtney, 646, 646n, 689

Johnson, Brig. Gen. Hugh S., 36n

Johnson, Louis A., 64, 77, 99, 108, 130-31, 223,

245, 253, 449, 674

Johnson, Brig. Gen. Robert Wood, 420-21, 421n,

425-26, 426n

Joint allocations, 56

Joint Army and Navy Board. See Joint Board.

Joint Army-Navy Distribution Center, 629, 631

Joint Army and Navy Munitions Board. See Army

and Navy Munitions Board.

Joint Army-Navy Specifications, 607

Joint Board, 52, 52n, 90, 137-38, 143, 508, 509,

515, 515n, 519, 521, 534, 554

Joint Board of Survey, 617

Joint Chiefs of Staff, 143, 155-56, 158, 173n, 182, 519, 522 ff., 534, 707

Joint Contract Termination Board, 625-26, 627n,

653, 653n, 665, 683, 691n Joint Price Adjustment Board, 358

Joint procurement, 144n

Joint Termination Regulation, publication of, 629

Jones, Jesse H., 485

Judge Advocate General, 68, 71, 114, 356, 490,

490n, 621n, 633-34

Justice, Department of, 617, 628, 691n, 700-701

Kanzler, Ernest, 569

Keller, K. T., 304

Kickbacks, legislation against, 68n

King, Admiral Ernest J., 143n

King, H. 6., 594

Klagsbrunn, Hans A., 484n, 490n

Knowlson, James S., 517-18, 569

Knox, Frank, 135, 515-16, 517n

Knudsen, William S., 44n, 507, 517n, 551, 553

and contract clearance, 266-67

and facility expansion, 450, 452, 477, 485n

and military requirements, 129-31, 134

NDAC commissioner for production, 103n

OPM Director General, 104

Krug, Julius A., 585, 595

Kuznets, Simon, 154-55

Labeling, importance of adequate, 192n

Labor

and contract placement, 263 ff.

hoarding of, 276, 303, 306

migration of, 30, 55, 237, 248

organizations, 447, 716

pirating of, 276

in prewar plans, 66, 100

shortages, 264 ff., 303, 306, 424

skills, 263, 714, 715, 716

Labor, Department of, 68n, 81n

Labor, Secretary of, 100n

La Follette, Senator Robert M., Jr., 470

Land, acquisition of

costs of, 463, 494, 499

by War Department, 132, 441-44

Landing craft program, 181, 527

Landis, James M., 469

Lanham Act, 444

Latin America, 137

Lead time. See Production lead time.

Leahy, Admiral William D., 143n

Left-wing opinion, and M Day, 83

Legal concepts, wartime revolution in, 312-13

Legislative barriers to procurement

before World War I, 35, 36

removal of, studied in prewar period, 67-70

removed by World War II legislation, 220-22

Leiserson, William M., 44n

Lend Lease, 114, 451, 499

Act, passage of, 133

and material controls, 517, 571n, 606

requirements for, 133, 134, 144, 145, 147, 150,

153, 209

Letter contracts. See Preliminary contractual instruments.

Letters of intent. See Preliminary contractual instruments.

Letter orders. See Preliminary contractual instruments.

Letter purchase orders. See Preliminary contractual instruments.

Levis, William E., 104n

Limitation orders, 506, 605

Liquidated damages, and priorities, 224, 511

Lloyd, Glen A., 271, 271n, 317n, 331n, 343-44,

648n

Load, distribution of, in prewar plans

by geographical areas, 54-59

by plants, 55, 57

Logistics, 8, 172-75

Lumber industry, 377 ff., 597

Lump sum contracts, 283n

Lutes, Lt. Gen. LeRoy F., 182, 182n
INDEX 739

Maas, Rep. Melvin J., 372n

MacArthur, General Douglas, 78, 81n, 123-24

McCloy, John J., 140, 625

McCoy, Maj. Gen. Frank R., 158n

McCoy Board. See War Department Procurement

Review Board.

Machine gun, .50-caliber, 29, 206, 323-24, 336

Machine tools

and DPC contracts, 491-92, 494

and export controls, 599

in prewar planning, 56, 61-67, passim, 88

priorities for, 512-13, 521, 546n

shortages of, 43, 262, 505-06, 564-66

special controls for, 564-66

McKellar, Senator Kenneth, 353

McNarney Directive, 158n, 161, 162, 162n, 188,

191, 197, 199

Maintenance and repair

industrial, and material controls, 547, 573

of military end items, 182n, 191-92, 609

Maintenance requirements, 142, 161, 182n, 197

Malman, Leon, 613n, 620n

Mandatory exemptions from renegotiation, 355,

357

Mandatory flow-down clauses, 233. See also Controlled Materials Plan.

Mandatory orders, 222, 293, 309

Mandatory pricing. See Compulsory pricing powers.

Manganese, shortages of, 602

Manpower shortage, and Army Ground Forces, 178

Manufacturing plans, 61-62

Marginal producers, and differential prices, 313

Marginal utility, principle of, 521, 534

Marine Corps, 144

Maritime Commission, 81, 140, 155, 454, 625,

674n, 697

and material controls, 521, 522, 527, 571n, 597,

606

shipbuilding fees allowed by, 308

Market centers, 114, 224

Marshall, Gen. George C., 115, 127, 138, 143n,

157, 498

Martin, Glen L., aircraft plant, 482, 483

Masaryk, Jan, 44n

Massachusetts Institute of Technology, 99n

Material, defined, 505, 505n

Material, distinguished from matériel, 120n

Material orders (M orders), 550-51, 554n, 605

Material requirements, 87, 88, 578-85, 590

Material shortages, 28, 155, 158, 178, 453-54, 602,

715

Materials, supply and distribution of

prewar plans for, 41, 42, 55, 66, 86-93

World War II systems for, 505-610

Matériel, 120n

Maverick, Rep. Maury, 421n, 429

Maximum Price Regulations, 401, 402, 406, 406n

Maxwell, Brig. Gen. R. L., 599n

Meany, George W., 104n

Medical Department, 45, 49, 114, 235, 248, 257,

425n

Mehornay, Robert L., 417

Merchant Marine Act of 1936, 351

Merchant shipping, 141, 142n

Metals Reserve Corporation, 604

Migration of workers. See Defense migration;

Labor.

Military-civilian relations

civilian control as basic premise of IMP, 78

controversies over production controls, 111, 273

fears of military dictatorship, 83, 241, 426

military responsibility for procurement, 36, 235-

42, 426-28

Military power, and strategy, 211-12, 717

Millett, Col. John D., 557n

Ministry of supply, proposals for, 36, 235-36

Minton, Brig. Gen. Hugh C., 90n

Mobilization Day (M Day), 50, 51-52, 81-86, 92,

106, 127-28, 258n

Modification centers, AAF, 497

Monopsony, 244, 244n, 403

Monthly Progress Reports, 164, 165, 168-69

Moseley, Brig. Gen. George Van Horn, 77, 236n

Motorization of the Army, 124-26, 153, 156. See

also Trucks, Army.

Moulton, Harold G., 99n

Munich pact, 64, 127

Munitions Assignment Board, 144n

Munitions Program of 30 June 1940, 43, 209, 706,

709

adoption and composition of, 85, 126-33, 175n,

176

and facilities, 449-50

and material controls, 505, 508, 579, 603

and national industrial preparedness, 65, 67

size of, compared to major effort under IMP,

106-07, 246-47, 258, 705-06

superseded by Victory Program, 137

Murray, Senator James E., 626-27

Nathan, Robert R., 154-55, 453, 570

National Academy of Sciences, 606

National Bureau of Standards, 607

National Defense Act of 1916, 36, 42, 121n

National Defense Act of 1920

adoption of, 39

basic provisions of, 39-40, 42

modified by Congress in 1940, 108

and priorities, 508

and procurement jurisdiction, 236

and schism in War Department, 102, 108

and size of Army, 121-22, 129, 208
740 THE ARMY AND ECONOMIC MOBILIZATION

National Defense Advisory Commission

establishment and activities of, 103-04, 109-10

and facility expansion, 109-10, 439, 447, 450,

459-70, passim, 476-88, passim, 709

and priorities, 90, 110, 509-11, 514-15, 529-30

and purchasing policy, 222, 224, 262-63, 266-68,

397, 417-18

and requirements, 129-31, 145

and stockpiling program, 604

War Department relations with, 109-10

National Defense Expediting Act, 220, 246, 250-

51, 509, 510

National Electrical Manufacturers Association, 653

National Emergency

limited, declared, 101, 127

unlimited, declared, 105

National Guard, 54, 121, 126-28, 216, 445, 510

National Housing Agency, 571n, 606

National Inventors Council, 606

National Labor Relations Act, 256, 263, 267

National Resources Board, 603

Naval Consulting Board, 63

Navy, Department of the, 309, 418n

and contract settlement, 629, 631, 632-33, 642n,

652, 674n, 675

and co-ordination of procurement, 40-41, 114,

218, 293n

and facility expansion, 443, 451, 452-54, 456-

74, passim

and prewar planning, 40-41, 56, 73, 91n

and priorities, 508, 510-11, 526, 538

and requirements, 129, 137, 140, 142, 144, 147,

156, 157, 211

Navy, Secretary of the, 104, 155n, 397-98

Navy Price Adjustment Board, 286

Negotiated contract, 242-56. See also Contract

placement.

Negotiated costs, 337

Negotiated settlement. See Contract settlement.

Nelson, Donald, 103n, 140, 303, 306, 373n, 553,

557-58

and contract placement and clearance, 237-38,

251-52, 263, 267, 269, 272, 417, 426

and material controls, 514, 515, 518-19, 524-26,

530-31, 553, 557-58

Net worth, 379, 386-87, 390

Neutrality Act, 219

New Deal, 100, 125

New York area, small business survey, 423

New York Port of Embarkation, 160

Newspapers. See Public relations.

Nix, Maj. Raphael R., 90n

No-cost settlements, 643-45, 697

Normandy, 182, 189

North African Theater of Operations, 159, 160n,

161, 188, 189

Norway, 128

Novick, David, 273n, 555n, 561, 563n

Nye Committee, Senate, 75

Gates, James F., Jr., 327n, 330n

Obsolescence, of equipment, 123-24

Odlum, Floyd B., 418

Office of Agricultural Defense Relations, 103

Office of the Assistant Secretary of War. See also

Office of the Under Secretary of War; Patterson, Robert P.

early organization of, 39 ff.

low rank of officers assigned to, 110-11

reorganization of, in defense period, 106

Office of the Chief of Ordnance, Detroit, 165

Office of Civilian Supply, WPB, 571n, 571-72,

593, 593n

Office of Contract Settlement, 227, 683

Appeals Board, 642-43

field surveys, 672-73

regulations and forms, 629, 636

relations with procuring agencies, 629, 629n-30n,

648, 655

responsibilities of, 627

Office of Defense Transportation, 104n, 472, 571n,

606

Office for Emergency Management, 100, 101, 103

Office of Export Control, 599-600

Office of the Fiscal Director, 623, 680

Office of Price Administration, 155, 346, 532n, 705,

710

and Army procurement, 228-29, 233, 277, 315,

397-410

percentage of Army purchases subject to, 405,

405n

price ceilings and high profits, 340, 377-78

Office of Price Administration and Civilian Supply,

103, 397, 397n, 517

Office of Production Management

and contract placement, 224, 263, 266, 268-69,

413, 417

and facility clearance, 450-52

and military requirements, 134, 138, 140, 144-45,

157, 209

organization and functions, 103-05

and priorities, 90, 515-17, 521

and requisitioning, 600

Office of Small Business Activities, NDAC, 417

Office of Strategic Services, 144, 147

Office of the Under Secretary of War, 40, 108-09,

112, 256, 493, 495. See also Office of the Assistant Secretary of War; Patterson, Robert P.

Office of War Mobilization, 158, 625. See also Office of War Mobilization and Reconversion.

Office of War Mobilization and Reconversion, 377,

625, 649, 712

One-front war, requirements for, 163, 167-70, 210
INDEX 741

Ordnance Department, 30, 114, 235

contract placement and purchasing, 267, 288,

293-94, 323-36, 343, 382n, 419

and contract settlement, 619-20, 652, 678, 682,

697

and facility expansion, 438, 483, 494, 497, 498,

499

and material controls, 569, 601

and prewar planning, 49, 49n, 59, 62, 108, 257-

58, 260

and requirements, 130, 184, 197, 204

Overequipment, of individual soldier, 159-60

Overhead costs

allocation of, 234, 299, 320, 637, 646, 649, 651,

658, 683-84

mark-up, on labor costs, 321

reduction in, with volume production, 321-22,

327

Overman Act, 37

Overpricing. See also Renegotiation, statutory,

advantages and disadvantages of, 275, 276, 707

in aircraft fixed-price contracts, 307

appearance of, early in war program, 225, 228,

275, 351 ff.

and escalator clauses, 327

and necessity for cost coverage, 311

and pressure to avoid CPFF contracting, 281

Overseas procurement, 149, 150, 163, 227

Pacifism, and economic mobilization, 63, 73-74,

83, 100, 127

Packaging, 192n, 608

Packard Motor Company, 485

Partial payments, 5n, 628, 637, 662, 674n, 683-86

Partridge, Col. Clarence E., 184

Partridge Report, 184-85

Patents, 69, 217, 427

Patman, Rep. Wright, 420, 420n, 428, 428n

Patterson, Robert P.

and contract clearance, 269

and CPFF contracts, 293, 304, 306-07, 664

and facility expansion, 452, 481n, 485n

and Feasibility Dispute, 155-57

and fees for aircraft industry, 293-94

and priorities, 507, 512, 515-16, 522-23, 536

on renegotiation, 353-54, 355n, 357, 371, 375n,

380n

role of, in World War II, 108, 111, 112, 155n

on role of Lt. Gen. Knudsen, 507

and small business, 414-15, 417-18, 429

on termination and settlement, 619, 624, 625,

630n, 641n, 664, 687, 701

on use of Industrial Mobilization Plan, 260

and Victory Program, 135

on War Department retention of procurement,

238

Payload Plan, 160n

Payne, Frederick H., 74, 74n

Pearl Harbor, attack on, 3, 119, 138, 138n, 140,

143, 154, 157, 172, 173, 178, 185, 185n, 209

Penicillin, 175

Pentagon Building, 444

Performance factors, for contractors, 379, 380-88

Pershing, General John J., 38

Personal equipment, initial issue of, 53, 175 ff.

Personnel requirements, in procurement plans, 67

Peru, 603

Petroleum Administration for War, 571n, 606

Petroleum industry, and tax amortization, 375, 474

Petroleum products, requirements of, 202, 203n

Phillips, Col. J. L., 453-54

Pilferage, 182

Pilot models, 239

Pilot production, 61

Plancors, 485n, 490, 494

Planes. See Aircraft.

Planning Branch, OASW

establishment and early activities of, 40 ff.

interwar activities of, 48-97

role of, in defense period, 40, 107-08

Planning Committee, WPB, 453

Plant clearance, 626, 628, 686, 687, 693-94

Plant disposal, 457, 477-78, 486-87, 616

Plant Site Board, OPM, 268, 451

Plants, industrial. See Facility expansion, for

World War II.

Poland, invasion of, 101, 127, 219

Port facilities, overseas, 174, 182

Ports of embarkation, 35-36, 160, 193, 239, 444

Post Office Department, 218

Posts, camps, and stations, 123, 125, 187, 193, 200,

201, 209, 444

Powder plants, 8, 28, 437, 499

Power, electric, 66, 74, 95-96, 263

Pratt, John L., 99n, 104n

Preclusive buying, 602

Preference rating extensions, 89-90, 110, 512-13,

515, 528-37, 544-47, 556, 595

Preference ratings, 508, 510, 511-12, 516, 544-46,

547, 556, 559, 573. See also Priority ratings.

Preliminary contractual instruments, 223, 234, 247,

283n, 665

Premium prices, 250-51, 261-62, 265, 424, 428

President. See Roosevelt, Franklin Delano; Truman, Harry S.; Wilson, Woodrow.

Pretermination planning, 628-29, 635-36, 645-51

Prewar planning, 35-97, 216, 705-06

Price adjustment, under fixed-price contracts,

71-72, 229, 233, 278, 319, 325-38, 353, 672

Price Adjustment Board, ASF, 359

Price analysis, 233, 273, 279, 313-25

Price control

and military procurement, in World War II.

See Office of Price Administration,

in prewar plans, 93-95, 705

in World War I, 93-94, 602
742 THE ARMY AND ECONOMIC MOBILIZATION

Price Control Act, 398, 401

Price Control Committee, proposed, 79, 80

Price indexes, Army, 316-17, 411-12

Price policy, 67, 216, 227, 234, 270, 273-79, 281,

311, 315, 339-49, 468-70, 707-08. See also

Close pricing.

Price policy, cost reduction, as major goal of, 312,

330 ff., 349

Price squeeze, under OPA ceilings, 406-09

Pricing in War Contracts, ASF Manual, 279, 317

Prime consumers, under CMP, 571, 573

Prime contractors

and extension of priorities, 530

profit on subcontracts, 639n

role in contract settlement, 635

Prime contracts

concentration of, in large firms, 248, 413 ff., 616,

658-59, 707

nature of, 426-27

and priorities system, 511

Priorities Critical List, 90, 550, 553

general account of, 528-37

issued at request of NDAC and OPM, 510-11,

515, 516-17, 531

Priorities Directives, 529, 534 ff., 540, 544

principal issues of

5 August 1940, 509-10, 521

27 November 1940, 521, 534

August 1941, 521

12 June 1942, 524-26

30 April 1943, 527

8 October 1943, 527

Priorities organizations

Priorities Board, NDAC, 514-15, 531-32

Priorities Board, OPM, 515, 517

Priorities Committee, ANMB, 508, 513, 515, 528

Priorities Division, ANMB, 453

Priorities Division, OPM, 515, 516

Priorities Division, Planning Branch, OASW, 513

Priorities Division, Production Branch, OASW,

513 ff.

Priorities system for World War II, 427, 710-11

basic procedure under, 511 ff. compared with allocations and CMP, 550 ff., 571,

595

compliance problems under, 538-39, 543-49

and Critical List. See Priorities Critical List,

general discussion of, 507-27, 528-49

initiation and launching of, 508-11

legislation for, 509, 509n

mandatory application of, 514, 517, 537, 552-53

organizations for. See Priorities organizations,

prewar plans for, 89-90

rating structure for. See Priority ratings,

regulations for, 516, 516n, 517-18, 518n

shortcomings of, 534, 538, 540, 553

as vertical type of control system, 550

voluntary application of, 510

Priority, general concept of, 508, 510n

Priority ratings. See also Preference ratings,

automatic, 90, 532, 534, 535

blanket, 534, 535

depreciation of, 521-22, 543 ff., 553

extension of. See Preference rating extensions,

general rating structure, 509-10, 513, 519-27,

534

higher-than-routine, 539-43, 548

quantitative limitations on, 520, 521-22, 524-25,

539, 555

sequence of deliveries under, 537-39

split ratings, 526, 538-39

Procurement

basic mission and procedures of, 119, 172-73,

231-34, 239-40, 311, 705 ff.

in prewar period, 215-19

Procurement agencies, major wartime, 625-26

Procurement assignment, 35, 41, 114, 143-44, 225,

233

Procurement Assignment Board, 233

Procurement District Operating Manual, 232

Procurement districts, 54, 54n, 61, 82, 91, 91n,

105, 114, 220, 229-30, 625

Procurement Division, OASW, 40

Procurement Office Purchasing Procedures, 232

Procurement planning, 46-47, 48-72, 75, 106-08,

241, 260, 705

Procurement Policy Board, WPB, 228, 269n, 426

Procurement Policy Branch, WPB, 621-22

Procurement Regulations, Army, 223n, 230-31, 462,

621, 623, 624, 660, 687

Procurement zones, prewar system of, 54n

Production Branch, OASW, 106

Production controls, 150, 224, 505 ff., 710-11

Production Division, ASF, 513, 574 ff., 597

Production expediting, 154, 239, 507. See also Contract administration; Production controls.

Production lead time, 39, 162, 166, 174-75, 182,

211, 233, 540-41, 571, 578, 583-84

Production period, length of. See Production lead

time.

Production Planning Board, OPM, 104, 104n

Production Requirements Plan, 506, 527, 555-64,

571, 572, 573

Production scheduling, 150, 164, 506, 507, 571-72,

583, 584

Production studies, in prewar planning, 61-62, 257

Production Urgency Committees, 265, 266, 266n

Productive capacity, national, 154, 438. See also

Feasibility, productive.

Productive resources

economy of, stressed in pricing policy, 157, 279,

311, 312, 349

not recoverable by renegotiation, 330-31, 341

as ultimate cost element, 309
INDEX 743

Profit allowance

in drafting of contracts, 277, 279, 309, 317, 324,

331-34, 342, 347

flat-rate, objections to, 352-54, 459n, 622

in renegotiation, 351-69, 378-88

in settlement of contracts, 622, 637, 672-73, 699

Profit margin

and concealment of earnings, 386

under CPFF contracts, 368n

decline in, by 1945, 388-89

defined, for renegotiation, 379

variation in, required for different industries, 368

Profit motive, 217, 409, 457, 477

Profiteering, 94, 314, 324, 351, 457, 615, 708

Profits, excessive, 72, 329, 352n, 378-88

Profits, realized. See also Profit allowance; Profit

margin.

on aircraft machine gun, 323n

under CPFF aircraft contracts, 72, 293

Program control, 272-73, 571

Progress payments, 5n, 224, 226, 637, 674n

Progressive price adjustment, 278, 279, 322-38

Protective Mobilization Plan, 54, 86, 127-28, 131,

134, 136, 176

Provost Marshal General, 114

Proximity fuzes, 28

Proxy signed contracts, 70-71

Public domain, 441, 443

Public relations, 110, 344-45, 359, 469-70, 502,

630-31

Public Works Administration, 125

Purchase policy, 215 ff., 277-79, 707-08. See also

Price policy.

Purchase Policy Advisory Committee, 228

Purchases and Contracts Branch, OASW, 106, 460

Purchases Division, ASF, 227ff., 270-72, 288, 316

Purchases Policy Committee, WPB, 303

Purveyor of Public Supplies, 235

Qualitative requirements, 50-51, 174 ff.

Quality of Army equipment, 158

Quality of product, as factor in renegotiation,

381-82

Quartermaster Corps, 30, 235, 267, 289

construction responsibilities of, 438

and contract termination, 652, 678

and facility expansion, 483, 499

and material controls, 557, 568, 600n, 601

number of civilian employees in, 114

and prewar plans, 45, 49, 53, 59, 69, 107-08

and price control, 399-401, 399-400

and requirements, 136, 144, 159, 164n, 175-201,

passim

retention of advertising in emergency, 246-47,

253-57

and truck procurement, 253 ff.

Quartermaster General, The. See Quartermaster

Corps.

Railroad industry

government operation of, in World War I, 36n,

97

interwar plans for, 96-97, 97n

and tax amortization, 472, 474

Railroad weights, 608-09

Rations. See Subsistence.

Raw material exemption, 340, 376-78

Readjustment Distribution Center, 629n

Readjustment Division, ASF, 625, 631

Rearmament program, summary of, 705-06

Rebates, on commercial items, 347

Reception centers, and size tariffs, 200

Reclamation of equipment, 163, 192

Reconstruction Finance Corporation

and contract termination, 625, 679, 691n, 695-97

and renegotiation, 355-56

role under IMP, 81

role under Knudsen proposal, 477

and wartime subsidiaries, 484, 489, 490n, 604

Reconversion

and contract placement, 265

and contract settlement, 615, 686-701, 711-13

reserves for, disallowed, 372-73

Recoverable equipment, 169

Red Cross, 444

Red Tape Report, 232n

Redeployment, in Period I, 168-69

Redetermination article. See Price adjustment,

under fixed-price contracts.

Redistribution of matériel, 165, 234, 608, 609, 686

Refunds, voluntary, 347

Religious organizations, exempt from renegotiation,

378

Renegotiable sales, identification of, 366-67

Renegotiation, statutory

1942 Act, and amendments, 354-56

1943 Act, 356-58

and aircraft industry, 293, 308

as backstop against loose initial prices, 250n,

283n, 303

business objections to, 354, 357

and construction contracts, 286-87

and contract settlement, 643, 644-45

and CPFF contracts, 367-69

determination of excessive profits under, 324,

378 ff.

as deterrent to close forward pricing, 316, 333-

34, 339, 384

dual purpose of, 278, 279, 353

exemption of individual contracts from, 279,

286 ff., 332-34, 336-37, 343

exemptions from, general, 286 ff., 340, 342n, 355,

375-78

expiration of, 306-07, 354, 357

and inflation control, 330, 403

influence on company pricing, 339

measurement of profits under, 370-78
744 THE ARMY AND ECONOMIC MOBILIZATION

Renegotiation, statutory—Continued

organization for, 358-59

origins of, 227, 351-54

procedures under, 361-66

and procurement statistics, 5n

termination of, by President, 306-07, 357

Renegotiation article, 353. See also Price adjustment, under fixed-price contracts.

Renegotiation Division, ASF, 359-60

Renegotiation field offices, 361

Renegotiation manuals, 360, 360n

Renegotiation rebates, 373-75

Rentra agreements, 491-92

Reorganization Act of 1939, 100

Repair. See Maintenance and repair.

Replacement centers, 200

Replacement factors, 166, 171, 179, 183-91, 192

Replacement requirements, 150, 170, 175, 179,

182-93

Requirements, of industrial materials. See Material

requirements.

Requirements, of military end items

Army methods of determining, 172-212

basic nature of, 9-27, 119-20, 173, 208-12,

706-07

major Army programs, 119-71

in prewar planning, 51-54, 65, 82

time-phasing of, 52, 54, 65, 82, 144, 164, 169

Requirements Committee, WPB, 559, 560, 562,

572, 581

Requirements Division, ASF, 185, 187, 195, 196

Requisitioning, of supplies, 70, 221-22, 248, 405,

600

Requisitions, theater, 173, 173n

Research and development

basic step in procurement, 50, 239

contracts for, 288, 400, 408

in interwar period, 123-26, 209

and obsolescence of war matériel, 123, 520

and scientific revolution, 8, 311, 714-15

technical service responsibility for, 114

Reserve levels, 159, 163, 174, 190-91, 194. See also

Stock levels.

Reserve Officers Training Corps, 216

Reserve supplies, 35, 161, 185, 195, 208. See also

Stocks, of military items.

Reserved facilities, in prewar plans, 56, 58

Resources Division, ASF, 513

Reverse Lend Lease, 150

Revolutionary War, procurement in, 235

Richards, Brig. Gen. George J., 161

Richards Committee, 158n, 161-62, 179, 194n,

196-99, 205, 210

Rifle, infantry

semiautomatic (Garand), 29-30, 30n, 126, 128,

205, 206, 438

Springfield, M1903, 29, 124, 206

Risks, contractors'

and company pricing, 347-48

under CPFF contracts, 282-83

evaluated in renegotiation, 379, 382-86

transfer of, to government, under war contracts,

277-78

Robinson, Rear Adm. Samuel M., 535

Rocky Mountain Arsenal, 500n

Roosevelt, Franklin Delano, 125n, 127, 129, 143,

179, 457

and ANMB, 42, 524

conference with Churchill, 141

and contract clearance, 266, 451-52

and Educational Orders, 64

emergency fund of, 129

Fireside Chat, 26 May 1940, 459

and First War Powers Act, 226

and Industrial Mobilization Plan, 76, 85, 98 ff.,

705-06

land transfers by, 441

and Munitions Program of 1940, 130-32

and price controls, 397, 398

and priorities, 509, 509n, 510, 514, 524-25

production objectives of, 209-10, 226, 706-07

and aircraft schedules, 147-48

background and adoption of, 140-42

and facility requirements, 452

and Feasibility Dispute, 156, 157

and priorities, 522, 524-25

and Production Requirements Plan, 558

and requisitioning, 600

and termination of renegotiation, 357

and Victory Program, 134 ff.

Royalties, 69, 318, 427

Rubber Director, Office of the, 571

Rutherford, Brig. Gen. Harry K., 515, 535

Sadtler, Maj. William F., 540-41

Safety hazards, 28, 295-96, 499

Salaries, 386, 386n, 669

Saltzman, Maj. Gen. Charles McK., 39n

Salvage, 605, 609-10, 636

San Jacinto Ordnance Depot, 499n

Sargent, Maj. John A., 595

Scharff, Col. Maurice R., 568-69

Science, application of, to war effort, 28, 30, 706,

714-15

Scott, Col. Frank A., 35n, 38, 38n

Scrambled facilities, 477, 482, 483

Scrap, and termination inventory, 636, 687-94,

passim, 713

Seacoast defenses, 161, 510

Sears, Roebuck and Company, 99n

Second Revenue Act of 1940, 221

Second War Powers Act, 221n, 312, 358n

Secrecy, military

and production estimates, 38

and publication of Victory Program, 138
INDEX 745

Secret contracts, 400, 429

Secretary of the Navy. See Knox, Frank.

Secretary of War. See Stimson, Henry L.

Section I items, in prewar plans, 48-49, 57, 65-66,

529

Securities and Exchange Commission, 81

Selection of contractors, Army policies in, 257-66,

274

Selective service legislation, 85, 103, 133, 445

and commandeering of plants, 70, 509n, 514,

514n

enactment of, 222

mandatory orders under, 293, 309

in prewar plans, 70, 78, 80, 81, 85

Service Commands, 112, 114-15. See also Corps

Areas.

Service contracts, 289

Service troops, 178

Services of Supply, 40n

Settlement. See Contract settlement.

Severance allowances, 168

Severance pay, 670-71

Shell, functional types of, and requirements, 206

Shipping, and size of Army, 178, 178n

Shipping requirements, 136, 137, 142, 161, 168,

174

Shoes, service, 187, 199, 289

Sickel, Comdr. H. G., 453, 529

Signal Corps, 185n, 288, 424-25, 425n

complexity of items procured by, 30, 382

and contract termination, 634, 652, 682

number of civilian employees in, 114

in prewar planning, 45, 49

and progressive pricing, 336

Simplification, of production. See Specifications,

for military items.

Single agency procurement, 237

Sinking losses, 183n, 193, 195, 197, 199, 204

Site Location Board, War Department, 450, 498

Sites, for War Department facilities, 441, 499

Size tariffs, 181, 193, 199-201

Small Arms Ammunition Sub-Office, 300-301

Small Business Act, 264, 266, 418-34, passim

Small business firms, 228, 275, 474, 614

definition of, 422

difficulties of, in obtaining prime contracts, 225,

237, 250-51, 413, 418, 423

exempt from renegotiation, 340, 342, 375-76

high profits and executive compensation in, 352,

386, 386n

increased share of prime contracts, 426-34, 707

in prewar procurement plans, 59n, 60

role in Army procurement, 413-34

wide use as subcontractors, 413, 4147-415-16,

421, 423, 424

Small War Plants Branch, ASF, 420 ff.

Small war plants officers, 421, 430

Smaller War Plants Corporation, 233, 241n, 627,

632, 679

creation and activities of, 419-34, passim

Smaller War Plants Division, WPB, 419, 420

Society of Automotive Engineers, 606

Soil Conservation Service, 442

Somervell, Gen. Brehon B.

calls ASF meeting on price policy, 343

as Chief of Construction Division, OQMG, 446n

and contract termination, 632, 647

and Feasibility Dispute, 154-57

and launching of Army Supply Program, 141n,

144-46

letter to Nelson on General Johnson, 426n

and priority organization in ASF, 518

testimony on Army requirements, 212

testimony on camp construction costs, 286

testimony on military control of procurement,

238n

testimony on pricing and renegotiation, 352-54

and War Department reorganization, 40, 112,

115

South Pacific Area, 188

Soviet Union, 133, 135, 136-37

Spare parts, 294, 323

determination of requirements for, 128n, 164,

191-93, 199n

problems in supply of, 191-93

and standardization of end items, 252, 253, 255

Special Committee for Re-Study of Reserves. See

Richards Committee.

Special projects, in requirements determination,

174, 176, 181-82, 211

Special Rating Division, WPB, 543

Special Representative of the Under Secretary of

War, 359n, 623

Specifications, for military items

and conservation of materials, 51, 607

effects of changes in, 30, 280-81, 305, 305n,

385-86

freezing of, urged, 51, 223

lack of, in World War I, 35

and price comparisons, 318-19

and procurement planning, 50-51, 65, 66

and renegotiation, 382

responsibility for, 50, 233

simplification of, 51, 223

Stalin, Joseph, 136

Standard items, of equipment, 180

Standardization of military items

inhibited by competitive bidding requirement,

252-56

lacking in World War I, 35

in procurement planning, 50

Standing army, contrary to national policy, 81

Standley, Admiral William H., 105n

State, Department of, 78, 81, 690n

State laws, 69, 481-82, 483
746 THE ARMY AND ECONOMIC MOBILIZATION

State taxes, and renegotiation, 371

Statistics

lack of, in World War I, 37, 37n

and program control, 158, 507

wartime, defects of, 5, 5n

Statutes affecting procurement, 67-68

Steel industry, 340, 377-78, 484

Steel Mobilization Plan, 90ff., 551-53

Steel requirements, 91-92, 570, 573

Steel shortages, in defense period, 551-53

Stettinius, Edward R., Jr.

Chairman, War Resources Board, 99, 101

NDAC commissioner for materials, 103n

OPM priorities head, 515, 516, 521, 535

Stimson, Henry L.

letter to President on price controls, 397-98

membership in central control agencies, 100n,

104, 155n, 517n

power to construct and operate industrial plants,

220

on prewar powder shortage, 437

and Victory Program, 135, 140

Stock levels, 163, 170, 190-91, 196-98

Stockpiling. See Strategic and critical materials.

Stockpiling Act of 1946, 604

Stocks, of military items, 131, 142

authorized. See Stock levels.

control of, 149-50, 165

excessive, 159, 162, 165, 212

existing, difficulty of measuring, 149-50

prewar, 52, 65, 123-24

in requirements determination, 52, 212, 190-98,

passim

Stoddard, Lothrop, 44n

Stop-work provisions, 635-36, 649-50, 657-58

Storage, of military items. See also Depots, storage,

and supply.

facilities, 131, 193, 444

responsibility of technical services, 114

reserve equipment, 210

value of, in 1943, 159

Strategic and critical materials

attempts to import and stockpile, 87, 602-04

and Buy American legislation, 68, 87

necessity for importation of, 87, 506

redistribution of, 688

and World War I experience, 602-03

Strategic location of industry, 55, 498-99

Strategic planning

and contract termination, 614

and material requirements, 135-36, 137n, 143,

145, 156-57, 173, 182, 188, 208, 211, 239

in prewar period, 41, 81n

and priorities, 520 ff.

Strategic reserve, 161, 170, 179-80

Strategic War Materials Act, 42, 603

Strauss, Capt. Lewis L., 144n, 629n

Studebaker Corporation, 340, 646-47, 689n

Subcontracting

Army efforts to increase, 223, 261-62

excessive, in World War I, 36

and Vinson-Trammel Act, 459n

Subcontractors

and advance payments, 676

under Controlled Materials Plan, 572, 578

and expansion of facilities, 482, 483, 490, 491

freedom of prime contractors to select, 418

giant firms among, 632

included in renegotiation, 355

in prewar plans, 60

and priorities, 511, 530, 538, 550n

profits of, 339-40, 661

share of War Department expenditures, 340

and termination training, 632-33

Subcontracts

allocability of, 657, 685

first-tier, 647, 662-63

prices and profits under, 339-42, 346-47, 661

settlement of, 659-63

Submarine menace, 199, 602

Subsistence, 5n, 224

determination of requirements for, 149, 174,

175, 194n, 203n

stocks of, 159

Substitution of materials, 28, 506, 543, 605, 606-

07, 608

Suggestion systems, employees', 608

Sunflower Ordnance Plant, 496, 502n

Superagencies, in prewar plans, 41, 77-81, 102

Supplemental Appropriation Act of 1940, 121

Supplies, Classes I-V, defined, 174

Supply arms and services, 45, 114

Supply branches, 45, 114

Supply Control System

and expendable items, 202-03

general account of, 162-67

replacement of Army Supply Program by, 151

and short term purchasing, 234

and size problems, 201

and spare parts control, 192

Supply and demand studies, 162-63, 164n, 166

Supply Priorities and Allocations Board, 105, 140,

142, 144, 145, 517

Supply services, 45

Supreme Court, U.S., 617

Surety companies, 222

Surgical instruments, 175

Surplus Property Act of 1944, 604, 690n

Surplus Property Administration, 690n

Surplus Property Board, 690n

Surplus war matériel, 121, 123, 162, 163, 165, 168,

687, 713

Surplus War Property Administration, 690

Surveys, of industrial facilities, 55, 56n, 61

Synthetic rubber problem, 527
INDEX 747

Tables of allowances, 159-60, 174n, 176, 180-81,

203, 209

Tables of equipment, 181, 209

Tables of organization, 176, 181

Takeout arrangements, under DPC financing,

488-90, 494

Tanks

in President's Objectives, 141, 142n

production problems, 30

replacement factors for, 189

in World War I, 38

Target price, in incentive article, 337

Task forces, requirements for, 176

Tax amortization, 104, 106, 110, 221, 268, 373-75 and development of national productive capacity,

261, 709-10

general account of, 456-75

relation of, to DPF and EPF projects, 480, 492

Tax Court, U.S., 357, 365

Tax rates, high, effects of, 276, 287, 457-60, 475

Taxes, local, 442, 444

Teams

company pricing, 345 ff.

contract settlement, 641, 656

renegotiation, 358-65

Technical services. See also individual services by

name; Supply arms and services.

role of, under ASF, 30n, 112, 114

problems of, in early 1942, 231-32

Termination. See Contract termination.

Texas and New Orleans Railroad, 464

Theaters of operation, and requirements, 173, 173n,

187, 188, 210

Third-term issue, and revival of NDAC, 103

Time-and-material contracts, 288-89

Tolan Committee, 237, 248

Tolerances, manufacturing, 29, 318-19

Tower, Walter S., 603, 603n

Trade associations, 37, 88, 344, 631, 633

Training, of troops, 81, 183

and equipment shortages, 122-23, 156, 175n, 181, 204, 208

Training programs

for company pricing, 344-45

for contract termination and settlement, 628, 630-34

for Controlled Materials Plan, 576-77

for CPFF conversion, 310

lack of, for priority administration, 548

lack of, for Production Requirements Plan, 560

for renegotiation, 359

Transit, allowances for, 193, 195, 197, 198-99

Transition period, in prewar plans, 60-61, 79, 84- 86, 92, 95, 98

Transportation

in prewar plans, 74, 96-97

NDAC commissioner for, replaced by ODT, 104n

special requirements for, 174, 181

Transportation Corps

barge building program, 425-26

civilian employees, number of, 114

and component shortages, 597, 599n

and Consolidated Termination Program, 652

and determination of requirements, 181, 198

Treasury, U. S. Department of the, 4, 81, 398n-99n

and contract settlement, 625, 691n

and co-ordination of foreign purchases, 259

and facility expansion, 474, 482, 483, 490n

Procurement Division, 218, 224, 606

and renegotiation, 373-74, 377

and tax amortization, 373-74, 474

Treasury Decision 5000, 282, 299

Trench foot, and sock requirements, 189-90

Troop activation schedules, 179

Troop basis and computation of requirements, 136, 176-80,

183, 188, 197, 203, 206

revisions of, 151, 156, 168, 206

Troop deployment, planned, by theaters, 179, 183,

206

Troop mobilization

and facility requirements, 438

influenced by procurement plans, 66

interwar plans for, 53-54, 81-82

and matériel mobilization, 39

and matériel requirements, 135

and Selective Service Act, 85

Troop movements, 179

Trucks, Army

characteristics of (21⁄2-ton), 29

lack of, between the wars, 124

standardization of, 252 ff.

Truman, Harry S., 604. See also Truman Committee, hearings and reports.

Truman Committee, hearings and reports

on contract termination, 625

on CPFF construction, 284 ff., 502

and Industrial Mobilization Plan, 77

and renegotiation, 375, 375n, 378n

and tax amortization, 375, 474, 474n Tryon Statement, 229, 277-79, 303, 315; 330, 332

Tug boats, Army fleet of, 181n

Twaddle, Brig. Gen. Harry L., 86, 86n

Two-front war, and requirements, 170

Under Secretary of War. See Office of the Under

Secretary of War; Patterson, Robert P.

Underbidding, by high-profit contractors, 348

Unit allowances, 175 ff.

Unit costs, 351, 355, 364-65

Unit equipment, 175

Unit of fire, 203n, 205

Unit mobilization plans, 76, 106

United States Steel Corporation, 99n

University of Pennsylvania, 633
748 THE ARMY AND ECONOMIC MOBILIZATION

University training courses, 633, 633n

Uranium, defined, 580n

Value added, concept

in procurement planning, 57n

in renegotiation, 368, 382, 386

V-E Day, 167, 169

Vertical system

of contract settlement, 635, 651, 653-55

of material controls, 550, 557n, 562, 571, 574,

591-96

of partial payments, 685

Victory Program, 133-40, 142, 157, 178, 209

Victory Program Troop Basis, 178-79

Vinson-Trammel Act, 221, 282, 351, 458, 459

V-J Day

and contract termination, 310, 613

in demobilization planning, 167

effect on renegotiation organization, 374-75

V-Loan Guarantee, 681

V-Loans, 679-81, 686

Vouchers, procurement, number of, 624

VT-Loans, 681

Wadsworth, Senator James W., Jr., 199

Wage rates, and price escalation, 325-27

Wage stabilization

in prewar plans, 95

and price controls, 403, 405

Wall Street, 100

Wallace, Henry A., 517n

Walsh-Healey Act, 68-69, 263

War Assets Corporation, 690n

War Contract Board, 70

War Contracts Price Adjustment Board, 357, 358

War Contracts Subcommittee, 306

War debt, World War I, 121

War Department

civilian influence in, 110-11

largest of all government agencies, 105, 105n

organization of, 105-15

procuring arms and agencies of, 5-8

reorganization of, 9 March 1942, 112, 146, 185,

227

schism within, 102, 108, 460, 507, 513

share of total war production program, 5

War Department General Staff, 110-11, 176, 438,

534

Operations Division (OPD), 143, 173n, 176

and prewar plans, 36, 49, 50, 52, 53, 82, 86

Supply Division (G-4), 498, 508

Supply Division (G-4) and requirements, 119-

71, passim, 185, 192

War Plans Division, 131, 134, 136, 509

War Department Price Adjustment Board, 229,

356, 358, 359

War Department Procurement Review Board, 158-

62, 188, 194n, 197, 204-05, 210

War of 1812, procurement in, 235

War Food Administration, 571n, 606

War Industries Administration, proposed, 79-80.

See also War Resources Administration,

proposed.

War Industries Board, 37, 79, 88, 109, 236

War Labor Board, 324, 346

War Manpower Commission, 264

War Mobilization and Reconversion Act, 649

War Munitions Program, 142, 153n

War Policies Commission, 75, 78, 81n, 83, 100n,

384n

War Production Board

adopts Controlled Materials Plan, 569-70

comparable to planned War Resources Administration, 81, 705

and contract clearance, 266, 447, 452-55

and contract placement policy, 249, 262, 263-66

and DPC contracts, 493, 495

establishment of, 105

and feasibility problem, 154 ff., 210, 707

and industrial facilities, 447, 452-55, 465-66,

472 and material controls, 506, 517-27, passim, 598

and military requirements, 144-45, 154 ff., 172

Planning Committee, 154, 453, 525

and procurement policy, 228, 269n

on reconversion reserves, 373

and renegotiation, 358

and small business, 419 ff., 426, 430

and stop-work points, 649-50

and tax amortization, 465-66, 472

War Department liaison with, 233

War reserves, 82, 125, 168, 170, 173n

War Resources Administration, proposed, 42, 79-

81, 91-105, passim, 110, 514

War Resources Board, 99-102, 127

War Trade Administration, proposed, 599n

Warner and Swazey, 512

Warrant system, in prewar plans, 92

Warren, Lindsay, 623-24

Weiner, Joseph L., 526

Wellington, Duke of, quoted, 188

Wendover, Field, 441

Wesson, Maj. Gen. Charles M., 243n, 535n-36n

West Coast Labor Area, 264

Western Hemisphere, 3, 133, 137, 138, 211

Willys Motor Company, 255

Wilson, Woodrow, 36, 37, 236

Wolf Creek Ordnance Plant, 502n

Wolfe, Maj. Gen. Kenneth B., 304

Women's Army Corps, clothing for, 201

Wood, Brig. Gen. Robert E., 99n

Woodring, Harry H., 102

Working capital. See Financing of contractors.

Works Progress Administration, 125n, 144, 276
INDEX 749

World War I, 49, 203, 252-53

advance payments in, 674

Armistice Day, 37-38

camp construction in, 285

contract placement in, 35 ff., 55, 59n, 236

contract settlement for, 616-18

economic mobilization for, 35-39, 68

and facilities, 459 , 467

and materials, 507-08, 532, 600, 602, 603

and tax amortization, 459

World War II, formal beginning of, 101

Wright Field, 545

Yardstick costs, studied by Quartermaster Corps,

323-24

Yuma AAF Bombing Range, 441

Zone of Interior, military requirements for, 183-

84, 191, 196-98, 201, 204

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