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74th Congress SENATE No. 944
2d Session j [ p^j-t 7
MUNITIONS INDUSTRY "^-^
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REPORT ON GOVERNMENT
MANUFACTURE OF MUNITIONS
BY THE
SPECIAL COMMITTEE ON
INVESTIGATION OF THE MUNITIONS INDUSTKY
UNITED STATES SENATE
PURSUANT TO
S. Res. 206 (73d Congress)
A RESOLUTION TO MAKE CERTAIN INVESTIGATIONS
CONCERNING THE MANUFACTURE AND SALE
OF ARMS AND OTHER WAR MUNITIONS
June 15 (calendar day, June 19), 1936. — Ordered to be printed
UNITED STATES
GOVERNMENT PRINTING OFFICB
WASHINGTON : 1936
J^^ "^t^ '
SPECIAL COMMITTEE INVESTIGATING THE MUNITIONS INDUSTRY
GERALD P. NYE, North Dakota, Chairman
WALTER F. GEORGE, Georgia ARTHUR H. VANDENBERG, Michigan
BENNETT CHAMP CLARK, Missouri W. WARREN BARBOUR, New Jersey
HOMER T. BONE, Washington
JAMES P. POPE, Idaho
Stephen Raushenbush, Secretary
" ^ ,^ ) / -
1 ^2>(^ b
BOSTON EUBLIC LIBRARY.
CONTENTS
REPORT ON GOVERNMENT MANUFACTURE OF MUNITIONS
rage
Introductory statement 1
Considerations of policy 2
I. The relation between peacetime and wartime profits 3
II. Difficulties of regulation in peacetime and wartime 7
A. Agreements on naval bidding 7
B. Excessive profits 8
C. Prices increased with big Navy 8
D. Navy yards as yardsticks 8
E. The Navy's dependence on private yards 9
F. Influence and lobbying of shipbuilders 10
G. Attempts to limit profits 11,14
H. Wartime attitude of shipbuilders 13
I. Wartime costs, profits, and taxes 84
III. Question of extent of plant necessary for wartime needs 65
IV. Naval shipbuilding costs 69
A. Navy Department figures 69
B. Interstate Commerce Commission figures 70
V. Cost of adequate naval facilities 71
Adopted annual building program 71
Total estimated cost to put five Government shipbuilding
ways in condition to take a battleship 75
Construction of new ways for battleships, cruisers, destroyers,
and submarines 77
Estimated time required to repair existing wa3^s to bring the
quota to 16 78
Approximate dates when ships assigned to the various navy
yards under the 1933, 1934, and 1935 program may be
launched from the building waj^s now in repair in these
yards 80
Statistical data in connection with United States navy yards in
which ships are built; corrected to 1927 85
Requirements of sites for navy yards 87
Additional drafting room facilities needed if all combat ships
are designed and built in Government navy yards 88
Machine tools 89
Number of new shipbuilding ways necessary to build all war-
ships in Government navy yards 90
Standard displacement 91
Suitable Government land areas on the eastern seaboard capable
of development into shipbuilding yards 91
VI. Costs of powder and ammunition 97
VII. Cost of machine-gun plant 101
VIII. Cost of airplane facilities 103
IX. Cost of powder plant 105
X. Armor-plate plant 105
XI. Prices of projectiles, gun forgings, armor plate 107
XII. Prices at Government plant 115
XIII. Surplus war supplies 119
XIV. Recommendation s 121
ni
74th Congkess V SENATE ( Kept. 944
ed Session \ \ Part 7
MUNITIONS INDUSTRY
June 15 (calendar day, June 19), 1936. — Ordered to be printed
Mr. Nye, from the Special Committee on Investigation of the
Munitions Industry, submitted the following
REPORT ON GOVERNMENT MANUFACTURE OF
MUNITIONS
[Pursuant to S. Res. 206, 73d Cong.]
INTRODUCTORY STATEMENT
The Special Committee on Investigation of the Munitions Industry
was authorized by Senate Resolution 206 of the Seventy-third
Congress, which began —
Whereas the Influence of the commercial motive is an inevitable factor in con-
sideration involving the maintenance of the national defense; and
Whereas the influence of the commercial motive is one of the inevitable factors
often believed to stimulate and sustain wars * * *
and which directed the committee —
(d) To inquire into the desirability of creating a Government monopoly In
respect to the manufacture of armaments and munitions and other implements
of war, and to submit recom.meudations thereon.
Under the authority the committee considered not onlj the cost of
purchase and construction of certain munitions facilities, but also
many other factors bearing on the problem, such as the general social
desirability of munitions sales abroad, the activities of the munitions
companies abroad, their relations \nth governmental departments,
the price and profit experience of the Nation with these companies
during the World War, the need for adequate national defense in
peacetime as well as in wartime and the influence of the commercial
motive "in considerations involving the maintenance of national
defense."
The committee, in considering the desirability of a Government
monopoly in respect to the manufacture of munitions, "washes to incor-
porate, herewith, by this reference, its findings on the character and
lunctioning of the munitions industry, concurred in unanimously by
2 MUNITIOirS INDUSTRY
all members of the committee and submitted as part of its report on
activities and sales of the munitions companies on April 20, 1936
(S. Kept. No. 944, Part 3, 74th Cong., 2d sess.). _
The committee, in considering the naval shipbuilding aspects of this
subject, also wishes to incorporate in this report, by this reference, its
findings in that regard, concurred in unanimously by all members of
the committee, and submitted as part of its preliminary report in
naval shipbuilding on June 24, 1935 (S. Rept. No. 944, 74th Cong. 1st
sess.).
The committee, in considering the price and profit experience of this
Nation with private munitions companies during the World War, also
wishes to incorporate in this report, by this reference, its findings in
that regard, concurred in unanimously by all members of the com-
mittee, and submitted as part of its preliminary report on wartime
taxation and price control on July 29, 1935 (S. Rept. No. 944, Part 2,
74th Cong., 1st sess.).
The findings referred to above have led all members of the comniit-
tee to conclude that there should at the very least be strict regulation
of the industry.
CONSIDERATIONS OF POLICY
In discussing the desirability of Government monopoly, a duty laid
upon the committee by the Senate, more than the question of cost
must be taken into consideration, although that is a very important
item. It is necessary also to consider the effect of such a monopoly
and of the absence of such a monopoly on prices and profits in wartime
as well as in peacetime. It is necessary to consider the possibility of
effective regulation, and its cost. It is necessary to consider the effect
of such a monopoly upon the readiness of the Nation to produce
munitions in the event of war.
I. THE RELATION BETWEEN PEACETIME AND WARTIME
PROFITS
The committee did not have sufficient staff to check the peacetime
profits of the munitions companies, on individua] contracts, because
this procedure would have involved years of work by a very large body
of accountants. Several of the companies testified to large profits
on peacetime munitions work for the Government, using their own
figures, unchecked by the committee. Examples are: Bethlehem
Ship Building Co., cruiser Portland, $2,058,796, 21.8 percent profit;
cruiser Northampton, $2,200,000, 25.4 percent profit. Newport News
Shipbuilding & Dry Dock Co., cruiser Augusta, $2,800,945, and
Houston $2,800,945, 35 percent profit; aircraft carrier Ranker,
$3,050,000, 23.1 percent profit. New York Shipbuilding Co., cruiser
Chester, $2,946,706, 36.9 percent profit; cruiser Indianapolis^
$3,007,049, 33.4 percent profit. Carnegie Steel Co., armor plate,
NOD-272, profit 57.9 percent; NOD-331, profit 43.4 percent; NOD-
432, profit 42.7 percent. Bethlehem Steel Co., certain gun-forging
contracts showed 28.27, 18.47, and 18.09 percent. Sperry Gyroscope
Co. (Army auditor's figures, exhibit 4917), 108 flight indicators for
Anny Air Corps, 54.6 percent profit; 114 turn indicators, 40.4 percent
profit. Douglas Aircraft Co. (exhibit 4889), shoAved estimated costs
and profits, before commissions, of 30 percent on fighters and attack
planes for China.
The significance of these high prices and profits in war preparation
during peacetime is the probabihty that such prices and profits will be
used as the base of wartime profits and prices, and that the courts
will insist upon their use to justify high wartime profits.
This was indicated clearly in the report of the special master and
referee. District Court of United States, Eastern District of Pennsyl-
vania {U. S. Complainant v. Bethlehem Steel Corporation, etc.) in 1933.
The master used the folio-wing chain of reasoning (exhibit 4872):
The Government aimed to win the war. Bethlehem was deemed essential to
doing so. A failure to induce Bethlehem to undertake the ship-building program
covered by these contracts, followed by the taking possession by the Fleet Cor-
poration of the Bethlehem plants, could not have accomplished the desired result.
It was Bethlehem's organization that was necessary to insure success to the ship-
building program of the Fleet Corporation and, as the Grovernment did not have
power to compel performance by an unwilling organization, If Bethlehem de-
manded its price on the basis of substantial commercial profits rather than con-
tribute such services on a patriotic basis, the Government M'as obliged to take
the contracts on such basis or not at all.
The evidence shows, and the master finds, that the Fleet Corporation made the
contracts with open ej^es, although resenting the commercial attitude of Bethle-
hem and condemning Bethlehem for demanding its "pound of flesh", and did so
because of a realization of the necessity of attaining an objective with the ship-
building program which, without Bethlehem, might not be possible.
8
4 MUNITIONS INDUSTRY
The master then c[uotes the position of the Government from 823
of the bill of complaint in equity:
Complainant avers that said representations were knowingly false in that the
Bethlehem Shipbuilding Corporation, Ltd., as hereinbefore set forth, was in a
position to know what would be the approximate cost of constructing said vessels,
and the said amounts stated in said contracts were known by the said repre-
sentatives of said corporation to be greatly in excess of any costs which could
reasonably be anticipated, based upon the wage scale then in effect, and the
existing costs of material. Complainant avers that said estimates and repre-
gentations were made for the purpose of enabling the Bethlehem Shipbuilding
Corporation, Ltd., to derive excessive, unreasonable, and unconscionable profits
from said contracts.
The master also quotes the major brief for the Government (pp.
321-322):
Having perpetrated a gross fraud upon the Government in connection with
Buch contracts, it would be unconscionable to hold that notwithstanding such
fraud. Bethlehem should receive as compensation the sam.e amount which would
affora just compensation to an honest shipbuilder for doing the same work done
by it. Any such decision would mean that Bethlehem had everything to gain and
nothing to lose, finally, in attempting to defraud the Government and would
encourage dishonest contractors to take advantage of the Government under like
circumstances.
No one can say that this country is done with war or how soon a national
emergency will again exist calling for the maximum production of every shipyard
throughout the tJnited States. At such time plant requisition will again prove
impracticable. There will again be no time for haggling, and the Government will
again be obliged to depend upon the integrity and patriotism of the manufac-
turers with whom it is forced to deal. At such time there will undoubtedly
again be those who will look upon the national emergency as an opportunity to
make enormous profits for their respective companies and themselves at the ex-
Eense of the Government, and whose patriotism and sense of propriety will not,
I themselves, be sufficient to restrain them from taking full advantage of such
opportunity — in its influence upon such dealings — the decision in these proceed-
ngs will be of far more importance than the millions now involved.
In reply to this concern on the part of the Government, the master
fave judicial notice to the findings and testimony of the Senate
lunitions Committee, especially the increase of prices which followed
the big naval-construction program and the admission of the ship-
builders that they were putting up prices because of the great amount
of work available at the time. He cited the profits of 36.7 percent
on the Chester, built by New York Shipbuilding Co., and of 25.4
percent on the Northampton built by the Bethlehem Shipbuilding Co.
He foimd the average wartime profits to Bethlehem upon the con-
tracts with the Emergency Fleet Corporation to be 22.245 percent
of actual cost, and less than the peacetime profits and found no fraud
on Bethlehem's part, as charged by the United States.
The case will presumably be appealed by the Government. Mean-
while, however, the committee is impressed with the fact that the
master used figures of high profits during peacetime which were put
on record for the first time by this committee, as a means of justifying
wartime profits of over 22 percent. This sets a precedent and makes
all the high profits earned in peacetime a base which can and doubtless
will be used by the companies in wartime.
The committee is also impressed with the master's simple statement
that the Government had no means to force Bethlehem to produce
ships, and that if Bethlehem chose, as it did, to demand "its price
on the basis of substantial commercial profits rather than contribute
such ser\dces on a patriotic basis, the Government was obhged to
MUNITIONS IiroUSTRY 6
take the contracts on such basis or not at all." The committee, in
its report on wartime taxation and price control (S. Kept. 944, pt. 2,
74th Cong., 1st sess.) fomid numerous other such cases, and found
that "the apparent alternative of commandeering industry is in fact
not an available alternative."
The committee is also impressed with the Government's fear, ex-
pressed above, that a decision allo^ving high wartime profits, obtained
under duress, wi]l influence the attitude of the manufacturers with
whom the Government is forced to deal, and that "at such time
there wiR undoubtedly again be those who will look upon the national
emergency as an opportunity to make enormous profits for their
respective com.panies and themselves at the expense of the Govern-
ment, and whose patriotism and sense of propriety Avill not, in them-
selves, be sufficient to restrain them from taldng full advantage of
such opportunity."
The conmiittee feels that the way is now wide open for the munitions
companies to claim the right to make profits in wartime as high as
they did in peacetime, and that therefore strict profit control in
peacetime is essential if the Government is not to pay through its
nose in wartime. Failure to hold do^\Ti munitions profits during
peacetime will be paid for many million times over in wartime.
The committee not^s also from the master's report the situation
confronting the Government in wartime: It needs the manufacturing
plants of the Nation for its program of munitions production and has
no means of imposing that production upon them. They will, in fact,
take it at their owm price or leave it. The Government cannot afford
to have them leave it, so they get it at their ovm price. Patriotism
and sacrifice is something to talk about to the public, as the president
of Bethlehem Steel did fully, early in 1917. To the War Department
in private? they talk prices and profits, and say, in effect, "take it or
leave it", knoAN^ing that they have the Government at their mercy.
When, as in the case cited above, the Government claims that it was
forced to make contracts under duress, the master of a United States
district court points out that the Government knew at the time that
the price of over $140,000 was spent in putting that bill over.
The committee fi.nds further that New York Shipbuilding Co. was
acquired as a speculative investment by the Bragg-Smith-Cord
interests just prior to the 1933 naval awards; that the present owners
are not experienced shipbuilders and have since tried to divest them-
selves of the ownership, and that it is not a satisfactory situation to
have such an important part of our potentially necessary national
defense in the hands of people who are willing to sell it to the first
bidder. Speculators and speculation should have no place in our
national defense.
The success of the shipbuilders in securing an allocation of
$238,000,000 for shipbuilding from Public Works Administration
funds has been their most recent demonstration of power. In this
their purpose was aided by labor groups who later, when the expected
employment failed to materialize, spoke of the matter as a "double
cross" to the Navy officials who had sohcited their support for the
measure.
j Q. ATTEMPTS TO LIMIT PROFITS
The committee finds, under the head of Attempts to Limit Profits,
that the failure of the Navv Department to turn the navy yards into
effective yardsticks by which the charges of private shipyards could
be measured and kept down, has resulted in leaving the profits of the
shipbuilders practically uncontrolled.
The committee finds that the Vinson-Trammell biU of 1934 limiting
profits to 11.1 percent of cost cannot be enforced without a huge police
force of accountants and that disputes concerning its interpretation,
Bimilar to those which delayed the paj^ment of wartime taxes by the
companies for 12 years may confidently be expected.
The committee finds that the Navy's grant of adjusted price con-
tracts in 1933 with limitations on the amount of risk the Government
assimied for the benefit of the shipbuuders and in 1934 without any
12 MUNITIONS INDUSTRY
limitation on the Government burden for increased costs has resulted,
in effect, in cost-plus contracts. It finds these cost-plus contracts
more profitable than the wartime contracts when only a 10-percent
profit over cost was allowed.
The committee finds that in the case of the 1934 adjusted-price
contracts on hght cruisers, destroyer leaders, light destroyers, and
submarines, the Government has assumed all the risk of increasing
prices, and has lowered the risk for which the companies received
11.1-percent profit by an enormous amount.
The committee finds that the Navy, which has no responsibility
for enforcing the act, and which has no reUable figures about private
costs, is in a position to allow — and according to one company has
actually allowed — increased overhead charges, which can invalidate
the whole attempt by Congress to limit profits. The committee
notes that it was by the allowance of such theoretical overheads
during the war years above actual overheads that New York Ship-
building Corporation was paid $2,152,976 more by the Government
than it actually paid out itself.
The committee finds that the shipbuilding industry and its sub-
contractors and supphers have united in efforts to find ways to avoid
the incidence of this law, and that Mr. Gillmor, president of Sperry
Gyroscope, Navy supphers, told them, "If the shipbuildiers, boiler
manufacturers, and electrical manufacturers act in accordance with
uniform rules, it will be so strong I think the Income Tax Bureau wiU
have a hard time resisting it." The committee notes the unreliability
of the shipbuilders' figures as indicated by the wide differences between
their wartime reports and the audits of those reports by the Treasury
(sec. VIII). It notes also in this matter of rehabiUty the recent dis-
crepancy of ahnost $2,000,000 out of a profit of $2,900,000 in the
reports furnished by the New York Shipbuilding Co., passed on by
the National Council of Shipbuilders and circulated recently among
congressional committees by Navy officials. It also notes in this
matter the evidence tending to show that the Bath Iron Works
transferred an item of $60,000 incurred on a lighthouse tender to the
costs of the destroyer Dewey.
The committee finds that there is no enforcement of the profit
limitation law in effect untd 4 years after the beginning of a cruiser.
It finds, from wartime experience (sec. VIII) enough evidence of the
difficulty of auditing thousands of old vouchers and of properly allo-
cating overhead which the companies may have improperly saddled
onto Navy vessels, to declare that there is no effective profit-limitation
law today.
It finds the price of real enforcement of the attempts of Congress
to limit profits to be a costly policing force of accountants and auditors
who would be in the yard for at least 3 years, and a series of costly
lawsuits after those audits have been completed. It finds that the
only way to prove that a company had not improperly allocated
overheads from commercial jobs onto Navy jobs would be to audit
all the commercial jobs being done by a private yard as well as the
Navy work; in short, to audit all the work done by the yard and to
establish uniform accounting.
The committee questions whether this additional cost for auditing
and policing, plus the cost of lawsuits after such audits, on top of the
1 to 2 million dollars extra cost of private construction, and the
$300,000 spent by the Navy for inspection of the privately built
MUNITIONS INDUSTRY 13
cruisers, justify the continuance of private yards as naval contractors.
They have the appearance of being expensive luxuries.
The committee reserves decision on this phase of the matter until
the completion of its investigation of the costs of governmental
construction.
H. WARTIME ATTITUDE OF SHIPBUILDERS
The committee finds, under the head of Wartime Attitude of
Shipbuilders, that the record of the present shipbuilding companies
during the war, wherever examined, was close to being disgraceful.
They made very considerable profits. On Treasury audits they
showed up to 90 percent. They secured cost-plus contracts and
added questionable charges to the costs. They took their profits on
these ships after the wartime taxes had been repealed. They se-
cured changes in contract dates to avoid war taxes. They bought
from the Government, very cheaply, yards which had been built
expensively at Government costs. In one case this was prearranged
before the yard was built. One yard did not build necessary addi-
tions until it was threatened with being commandeered. Knowingly
exorbitant claims were filed against the Government for cancelation.
Huge bonuses were paid to officers. Profits were concealed as rentals.
After the war was over keels for $181,247,000 worth of destroyers
were laid, which was probably the largest post-war favor done by any
Government to any munitions group.
The committee finds no assurance in the wartime history of these
companies to lead it to believe that they would suddenly change their
spots in the case of another war.
After the committee's hearings on shipbuilding had closed, Gen.
Hugh Johnson, at one time connected with the War Industries Board,
later with B. M. Baruch, and later Director of the National Recovery
Administration, explained that the N. R. A. had grown out of the
plans developed by the War Department for the conduct of a future
war. It was, he stated, developed directly from the war plans and
was not shown to the industrialists for their approval until practically
completed. In view of this statement, the committee finds signifi-
cance in the testimony of a Department of Labor official concerning
the unwillingness of the New York Shipbuilding Co. to observe the
N. R. A. rules, with the result of a serious labor dispute in 1934. The
company did not raise the question of constitutionality, and all that
was involved was the q^uestion of observance or evasion of the law.
The committee finds m this evidence, taken together with the actual
wartime experience of the Government with these companies, Uttle
hope for obedience by them of more stringent wartime provisions in
the case of another emergency.
The committee especially holds that the attempts to enforce profit
limitation are being thwarted, and in view of that fact and the fact
that peacetime precedents are now being established in the course of
attempts to avoid the enforcement of profit Hmitation, and in view
of the probability that the peacetime procedure \vi\\ govern tax
cases during any war, the committee refers to section VII, Attempts
to Limit Profits of the Report on Naval Shipbuilding, and wishes to
incorporate a portion of that section in this report.
73018°— 38— pt. 7 2
14 MUNITIONS INDUSTKY
ATTEMPTS TO LIMIT PROFITS
The failure of the Navy Department to turn the navy yards into
effective j^ardsticks by which the charges of private shipyards could
be measured and kept down has resulted in leaving the profits of
the shipbuilders practically uncontrolled.
In 1933 and 1934 the companies secured contracts from the Navy
Department whereby the companies are indemnified by the Depart-
ment for rises in the cost of labor or materials. In other words, they
made the Government bear a large share of whatever risk there was
in the business.
The companies knew that the Navy Department needed the ships
and frankly stated that they were bidding so high on a fixed-price
basis as to make it impossible for the Navy to accept those prices.
(Testimony of Ferguson, p. 5468, Feb. 20; Wakeman, p. 5930, Feb.
28.) To the extent that the Navy needed those yards, this was a
very effective method of forcing the Government to bear a large share
of the risk, something it had never done before, except during the war.
The allowances for increased prices were quite unequal in various
categories of ships. In 1933 there was a limitation of 15 percent on
the amount the Government would pay for increased prices on labor
and material on light destroyers. On the two aircraft carriers, how-
ever, which were contracted for at $19,000,000 each, the limitation was
$4,000,000, or 21 percent.
In 1934 the Navy went further and took off all hmitations. The
hght cruisers, destroyer leaders, and hght destroyers, as well as the
submarines, were aU contracted on an adjusted-price basis without
any limitation on the amount of risk the Government would have to
carry for the benefit of the shipbuilders.
In 1934, before the Na%"y took off all these limitations, and by so
doing practically underMTote the companies and did the gambling for
them, the Congress had passed the Vinson-Trammell bill, which was
intended to limit the profits of the shipbuilders to 11.1 percent of
actual cost (10 percent of the total charge to the Government).
Various of the companies stated on the stand that they had in no
way opposed this bill.
Very shortly after the bill was passed the shipbuilders and the large
suppliers and Na^'y subcontractors, and later the comptrollers of these
various groups, got together in long sessions to determine how the
interpretations of the bill could be arranged to suit their interest.
The main question was how to increase costs.
It mil be remembered (sec. IV) that the Navy has no information
at all about costs in private yards. Neither the Comptroller General
nor the Treasury have examined the costs, ratios of overhead, etc.,
since the war.
The law pro%'ides that all profits over 11.1 percent shall go into the
Treasury. A ship takes from 2 to 3 years to build. Another half
year passes before adjustments resulting from the final trials are made.
Another half 3'ear elapses before the company puts the final figures of
cost and profit on its books. Three or four years have gone by at the
time the profits are reported to the Treasury on any particular ship.
The Treasury is not expected to be willing to put auditors to work
to go through 4 years of vouchers, or to analyze the accuracy of a
company's statement that 60 or 90 percent of all the overhead in its
yard should be allocated to a naval ship.
munitio:ns industry 15
There is absolutely no effective control of costs possible without
a huge poUcing system of auditors and inspectors constantly on the
premises.
Some indication of the awareness of the shipbuilding companies
of this fact is given in the abstracts of testimony quoted below
taken from the minutes of their meetings.
Mr. Powell, president of United Drydocks, pointed out that "the
thing will go along all right until somebody turns back some money."
Mr. Smith, president of the trade association, thought it important
to get unanimity on the large subject of overhead. Mr. Gillmor,
president of the Sperry Gyroscope Co., Navy supphers, said: "If
the shipbuilders, boiler manufacturers, and electrical manufacturers
act in accordance with uniform rules, it ^vill be so strong that I think
the Income Tax Bureau would have a hard time resisting it."
The Navy Department disclaims all intent to enforce this bill,
since the duty to collect the taxes is laid upon the Treasury Depart-
ment. Nevertheless, according to the minutes, Mr. Blewett, of
Newport News, informed the associated groups that the Navy had
allowed his company an increase in overhead of 10 percent on changes.
How the Navy could allow this while in complete ignorance of all the
figures concerning the company is hard to understand.
Later Mr. Ferguson, of Newport News, testified that an addition
to plant of $900,000 was being put into the overhead of the two
aircraft carriers. This is already an increase of over 2 percent in
the total of $38,000,000, or 3 percent on the expected actual cost
to the company.
If this practice of allowing larger overheads for Navy work con-
tinues, it should be noted that an additional 10-percent overhead for
Newport on the two aircraft carriers would equal $2,000,000, a sum
equal to more than 5-percent profit.
In this connection it is interesting to note (sec. VIII) that an
arbitrary allowance made by the Emergency Fleet Corporation in
1918 of an overhead of 50 percent was $2,152,976 more than that
actually paid out by the New York Shipbuilding Corporation (Jan.
21).
Presumably the Treasury would have to allow any increase claimed
overhead approved by the Navy.
The Navy has no responsibility in the matter of this profit-Umita-
tion law, but its decisions can completely invaUdate the act.
The intent of the shipbuilders to get an agreernent on a theoretical
overhead instead of an actual one can be seen in the statement by
Mr. Shick, of Bethlehem:
We should decide what we are going to do. For our own protection it would
be a good thing if we did have an understandiug so that on the completion of
these contracts the overhead rate will not be out of line. If Bethlehem had 60
percent, Newport News 50 percent, and somebody else 40 percent, they will ask
what is wrong. Therefore, it is important for the shipbuilders to have a very
clear definition as to what is direct labor if that is the base of distributing over-
head. I believe we can agree on a definition of direct labor (p. 5094).
The sliipbuilders asked the Treasury Department to allow them to
charge State income taxes and selling expenses into costs. E. I. du
Pont de Nemours asked the Treasury Department to allow these items
and also Federal income taxes and unec:rployment-insurauce costs.
16 MUNITIOifS INDUSTRY
The shipbuilders arranged to have the subcontractors charge them
no more for work than cost plus 10 percent. Instead of turning the
difference over to the Treasury, it is in effect turned over to the ship-
builder, thus giving him a larger margin of profit on which to operate.
The reliability of the shipbuilders' figures was already referred
to in section IV, w^here almost $2,000,000 in profits was not mentioned
by the shipyard in a comparison of the cost to the Government of the
Chester. On certain claims after the war, the president of New-
port News filed a bill against the Government for $14,973,165 at the
same time he was writing the president of the company that the
minimum claim was $6,635,000.
There is some exddence that Bath Iron Works transferred an item
of $60,000 incurred on a lighthouse tender and a tug to the destroyer
Dewey. 'The ability of companies to do this has a bearing on all
attempts to limit profits.
Abstracts of this e\'idence are given below. ^ ^ _ i
The discussion by the shipbuilders of the provisions of the Vinson-
Trammell bill in limiting profits to 11.1 percent of cost was referred
to during the testimony of Mr. Parker, of New York Ship (Feb. 6,
(p. 5090 seq.):
Mr. Raushenbush. Now, Mr. Parker, coming to the various meetings held
by the shipbuilders after the Vinson Act had been passed, I show you a memo-
randum, treating of a meeting held on May 8, 1934, and ask you to follow that,
Ht which were present the representatives not only of the "big three" but from
the "little three" and suppliers, such as United Dry Docks, Sperry Gyroscope,
Babcock & \\ ilcox, Worthington Pump & Machinery, Westinghouse Electric,
General Electric, Electric Boat Co., and so forth [handing paper to witness]?
That is the summary of a discussion, Is it not, that the representative officials
of the shipbuilding companies and the main suppliers had concerning the effect
of the Vinson bill on their business? Do you recognize that?
Mr. Parker. I did not attend that meeting.
Mr. Raushenbush. No; but you attended a subsequent meeting, for which
this was the basis. You have had this In your possession, have you not?
Mr. Parker. Yes.
Mr. Raushenbush. And you have studied it? The answer is "Yes"?
Mr. Parker. Yes.
Mr. Raushenbush. I turn to page 4, where there is disccussion of how much
overhead should be allowed, and discussion as to what the Treasury Department
Will do, and what the Navy Department will do. It refers to Mr. Smith. He
la president of the council, Is he not?
Mr. Parker. Yes.
Mr. Raushenbush (reading). At the top of the page, Mr. Smith says:
Yes. That is where it is going to be unless there Is a change in the law.
The Navy Department does not want to deal with It.
Mr. GiLLMOR. They do not want to get into it.
Mr. Smith. The man who drafted this bill drafted It with the purpose of
allowing some leeway.
Mr. KiNC —
of Babcock & Wilcox —
Are you going to be allowed vour actual expense? Will they allow the
actual overhead or a predetermined one?
Mr. Smith. I think you can collect your actual overhead as long as it
goes against all work.
Mr. GiLLMOR —
of Sperry Gyroscope — •
They point to this provision In the act that the contractor must make his
statement under oath.
Mr. Niven —
of General Electric —
Tliey go on to say that the books shall be open for Inspection at all times.
Mr. GiLLMOR. I believe their present Idea is to make check inspections
only.
MUNITIONS INDUSTRY 17
Mr. PowELi/- —
of United Dry Docks —
This thing will go along all right until somebody turns back some money.
Mr. GiLLMOR. I think the only thing to do is act in unison.
Mr. Smith. Supposing you do have 10-percent profit and a few dollars
left over. The industry may find itself in a situation where there are itema
of cost which could have properly gone in but were not included. It seems
to me very desirable that so far as the outstanding items of overhead are
concerned there should be unanimity of opinion.
Does not that give pretty much the tone of the general discussion? The
shipbuilders here wanted to get together and decide very definitely what pro-
portion, predetermined proportion, they would agree upon as an overhead
charge.
Mr. Parker. No, sir; I do not think that is the case at all. I think that what
the shipbuilders and the main material suppliers were trying to find out is what
the Vinson Act meant so far as their particular business is concerned.
Mr. Ratjshbnbush. Let us follow on with the rest of it through and see where
we come out.
Turn, please, to page 7, Mr. Parker. They are starting to discuss overhead,
as I understand it [reading]:
Mr. Smith. When you say "actual", I suppose you mean your actual
average —
Of General Electric —
Mr. Whitestone. No; I mean actual expenditures.
Mr. Smith. As supplied to that particular contract?
Mr. Whitestone. In the case of shipbuilding, it wiU probably apply to a
whole ship.
Mr. Smith. If you had one plant using actual and another normal
Mr. Powell. Suppose three or four yards take contracts on a competitive
basis. Then one fellow turns in actual and has a very low overhead and
he turns back a lot of money — it simply throws out your whole idea of
competitive bidding. It seems to me you have almost got to come to a
basis of agreeing with the Treasury Department on some fixed overhead.
If we could spread our overhead over 10 years, I would say it would bo
high enough. I think it would be high enough so that you would not have
to worry about your lO-i/Crcent profit. The average overhead would be
plenty liigh enough to satisfy anybody.
They are beginning the discussion, or resuming it, are they not, of trying to
agree on a fixed percentage of overhead that all companies could charge, and that
the Treasury would have to approve?
Mr. Parker. These expressions, Mr. Raushenbush, are expressions of indi-
viduals thinking of their own particular business, how this act affects their own
particular situation, but the purpose of it all was to find out how it affected
everybody, and particularly how it aQ"ected the prime contractor, the shipbuilder.
Mr. Raushenbush. Turn to page 8 in reply to that [reading]:
Mr. Smith —
President of this conference and of the council —
What is your reaction to this: You have the shipyards and the allied
groups, but your uniformity should be attained first amongst the ship-
builders themselves and then there can be some approach to uniformity
between the shipbuilders and the allied groups.
Mr. GiLLMOR. If the shipbuilders, boiler manufacturers, and electrical
manufacturers — •
That is taking in a rather large group, is it not? —
act in accordance with uniform rules, it wiU be so strong that I think the
Income Tax Bureau would have a hard time resisting it.
Is not that the reasonable idea of this whole matter, that not only the ship-
builders but the operators who have a definite interest in the work and in the
Vinson bill should get together and put up uniform rules; and is it not Mr.
GiUmor's idea that if they do that they will be so strong that the Income Tax
Bureau will have a hard time resisting it? Is that not what they are trying to
do there?
Mr. Parker. They were trying to find some way by which those elements of
actual cost would be unquestioned by the Treasury Department.
18 MUNITIONS INDUSTRY
Mr. Raushenbttsh. Now, on the next page, Mr. Parker, Mr. Bardo comments
after this statement [reading]:
If the shipbuilders, boiler manufacturers, and electrical manufacturers
act in accordance with uniform rules, it will be so strong that I think the
Income Tax Bureau would have a hard time resisting it.
Mr. Bardo comments:
They could not break It down. You have two established recognized sys-
tems of accounting in the two principal groups with which we do all our
business. We should get our accounting offices together. I do not think
we can decide anything.
Mr. Bardo, a little later, says:
I think we should get the shipbuilders together first on a uniform plan.
Mr. Smith. Homer —
of Bethlehem —
what do you think about it?
Mr. Homer. The method of determining the 10-percent profit is to be es-
tabhshed by the Treasury Department, and the obvious thing Is that the
industry will have to establish something for Its protection.
Mr. Jackson —
Worthington Pump & Machinery Corporation —
They can establish it, but the Treasury Department will have to approve it.
And the whole discussion turns, as I look at it, on whether it is possible for
the shipbuilding companies to get any agreement, and they decide that the comp-
trollers of the companies better meet together, and then you and others meet
directly a httle later, at the same place — 11 Broadwaj'. You were present for
New York Ship, together with Mr. Langell; Mr. Ferguson was present for New-
Eort News, and Mr. Shick and Mr. Harper and Mr. Rittor for Bethlehem Ship-
uilding Corporation, Ltd.
Mr. Parker. That is correct.
Mr. Rauskenbush. I do not know whether I have an extra copy of this.
I want to offer that for the record — the meeting of the shipbuilders — as Exhibit
no. 1531.
(The docTiment referred to was marked "Exhibit No. 1531" and is included in
the appendix.)
Mr. Raushenbttsh. Turn now to this meeting at M'hich you were present,
and at which the subject was gone into further, and Mr. Blewett, of Newport,
makes a comment here on which we would like to have your comment. I will
have to show j'ou this until we find our extra copy [handing paper to witness].
On page 3 of this mimeographed memorandum, Mr. Blewett says:
We have recently gone through the cost of changes. We asked a higher
overhead on the changes than on normal overhead. We asked for 20 points
higher and they granted us 10.
He means the Navy granted them 10, does he not?
Mr. Parker. I assume so, speaking of Navy changes.
Mr. Raushenbush. Speaking of Navy changes [reading]:
In other words, they admitted naval work called for higher overhead
than commercial work. If we could obtain 20 percent higher It would
cover everything such as equipment, development charges, and all items.
So far as going into a uniform cost-accounting system, that is a job of 5 or
10 years rather than a months or so.
You remember this meeting fairly well, do you not?
Mr. Parker. I do.
Mr. Raushenbush. Mr. Blewett, speaking for Newport News, was trying
constantly to make the point, was he not, that the shipbuilders should definitely
a^ree upon an overhead that was normally uniform but was very considerably
higher for Navy work than for merchant marine work? Is that not correct,
BO far as your memory goes?
Mr. Parker. Mr. Blewett was trjdng to make the Navy work bear an actual
proportion of overhead which Navy work should bear. It is a fact that with
all of the limitation of Navy work, inspection and various changes and conse-
quential damage from changes, the actual overhead applicable to Navy work is
truly higher than to other work, and when you spread that to all work on the
Bame basis. Navy, of course, gets the benefit and the other work gets some
penalt3\
Mr. Raushenbush. He was trying very definitely to get it on a fixed basis
higher than other work, 20 percent?
Mr. Parker. Yes, sir.
MUNITIONS INDUSTRY 19
Mr. Rattshenbush. He reports Newport News asked for 20 and had gotten
10 and was apparently suggesting that the other companies agree on their over-
head, too. That, of course, involved an agreement on what labor was, so that
overhead could be determined.
Here is a copy, if you want to follow it [handing paper to witness].
Mr. Smith at page 6 shows some considerable anxiety that everything is going
to be put into cost by everybody, so that some of the shipbuilders do not charge
the Government too little. Mr. Smith says:
I would not do that. This group ought to go away satisfied as to what
items get into cost. Each and every one of us should be assured that we
are going to put into cost everything that properly belongs there.
In other words, they do not leave out anything, and not, as Mr. Gillmor
said in the other meeting, so that some money does not get returned to the
Government and then the Government forces them to get into action.
Can you explain the comment on page 7 of Mr. Shick, of Bethlehem, where
Mr. Blewett said:
Didn't we have such a thing as adjusted prices during the war? We took
such things as cost of machinery and put it into an adjusted price.
To which Mr. Shick replied:
That was a cost-plus contract. You only got 10 percent of it. I can
give you an example of what happened on a gun contract. The Navy
wanted a 16-inch gun. We had to buy the equipment to machine it.
Daniels — •
that was the Secretary of the Navy, was he not?
Mr. P.'i^RKER. I suppose that is wno he is speaking of.
Mr. Raushenbtjsh (continuing reading) :
said, "All right, this is not the last order we are going to give you for 16-inch
guns. We will let you add $35,000 per gun so you can amortize this equip-
ment. We will let you amortize part of the cost through this job so you
will get paid for your new equipment, but you have to take a little chance."
They did that for the reason they did not want to say to us, "We will pay
you for this." If they did, then they would own it, but they wanted it to
stay in our possession. We were only amortizing $35,000 on that job.
Do you have any comment on that? Does it mean anything to you?
Mr. Parker. No.
Mr. Raushenbush. It seems to be an Illustration of where the Government
was paying very definitely for the equipment, but just because they did not
want to own it they let the gun people, in this case Bethlehem, charge up an
extra $35,000 per gun and amortize it immediately.
The discussion goes on at some length, and the net result of all this was that
there was an interchange of information among the companies, was there not,
as to definitions of their costs as regards direct labor and overhead?
Mr. Parker. That is correct.
Mr. Raushenbush. On page 12 Mr. Shick, of Bethlehem, makes one point:
We should decide what we are going to do. For our own protection It
would be a good thing if we did have an understanding so that on the com-
pletion of these contracts the overhead rate will not be out of line. If
Bethlehem had 60 percent, Newport News 50 percent, and somebody else
40 percent, they will ask what Is wrong? Therefore, it is important for
shipbuilders to have a very clear definition as to what is direct labor if that
is the base of distributing overhead. I beUeve we can agree on a definition
of direct labor.
After that these interchanges of Information took place, did they not?
Mr. Parker. They did.
Mr. Raushenbtjsh. So that the point of all of this was, Mr. Parker, quite
frankly, to have the shipbuilders agree on something that was not an actual
cost that came out of it— and if that was so they would not need any agree-
ment — but they agreed on a perfectly arbitrary amount of overhead, which thev
would unite on in trying to have the Treasury Department accept as a basis
for fixing profits under the Vinson Act, thereby agreeing or following out the
suggestion made by Mr. Gillmor In the earlier meeting that if they all got to-
gether they would be stronger than the Income Tax Bureau.
Mr. Parker. Not at all. That is not my understanding.
Mr. Raushenbush. If that is not true, what Is your understanding?
Mr. Parker. I never heard the theory advanced that there should be a definite
rate of overhead applied to every yard alike.
20 MUNITIONS IinJTJSTRY
Mr. Raushenbtjsh. They were certainly discussing the possibilities of It all
through here, were they not?
Mr. Parkeh. No; the only discussion that this refers to Is that the books of
each of the companies will reflect the actual and proper charges to cost that
the contract provided, so that in any one of them, if they should Inadvertently
Bubmit some cost, or by his method, or changing his method so that it would
result in a question for the whole group. But only, of course, included those
Items which are proper elements of cost.
Mr. Raushenbtjsh. What is aU this discussion about as to fixed percentage of
overhead, Mr. Blewett's idea that they asked for 20 percent for naval work; that
Is an arbitrary thing, rather than an actual one?
Mr. Parker. That is on changes, alone, Mr. Raushenbush.
Mr. Raushenbush. That is on changes?
Mr. Parker. The practice has always been on changes to fix a definite rate of
overhead.
Mr. Raushenbush. These are changes, but, still, changes often amount to a
very considerable amount in the cost of a ship, do they not?
Mr. Parker. Yes, sir.
Mr. Raushenbush. In some cases a million dollars more than what the bids
were.
Mr. Parker. What Blewett was talking about was just a rate of overhead
which was a proper rate of overhead. We already have a fixed rate of overhead
applicable to changes, fixed by the board of changes.
Mr. Raushenbush. On page 4, if you wiU foUow that
Mr. Parker. Back again?
Mr. Raushenbush. It gets into the normal overhead, and Mr. Bates, of United
Dry Docks, says:
You mean a standard or normal overhead?
Mr. Blewett. Yes.
Mr. Smith. Let me ask you this, Blewett: You say you asked for so many
points higher; would you do that on the basis of each plant saying here Is
my average overhead, we want 20 points higher for naval work taking into
account no two plants might have the same?
Mr. Blewett. Yes.
Mr. Shick. Only if you get it high enough.
Mr. Smith. That is the point where I see difficulty with the Government.
They are talking about overhead for naval Jobs rather than for changes at
that point, are they not?
Mr. Parker. No; I believe they are still referring to changes.
Mr. Raushenbush. There is no mention of changes right at that point.
Then later on in the quotation I read from the Bethlehem man he was particu-
larly talking about the general overhead rather than the changes, was he not?
Mr. Parker. I do not know what he was talking about particularly.
Mr. Raushenbush. On page 12. Look at it again. All the way through — I
do not want to bore the committee with reading the whole story, but I want to
put it into the record.
By the way, what percentage of overhead did the Navy board on changes
allow you on changes in ships before this bill went through?
Mr. Parker. It varies. Periodically the Navy makes an ftivestigation of the
actual overhead of the plant and sets a rate of overhead to be used on changes.
The rate varies with the average variance of overhead rates in the yard gener-
allv, some place between 70 and 90 percent.
!SIr. Raushenbush. Do you not make quite a lot of money on changes?
Mr. Parker. No, sir; we do not make money on changes. No one ever made
any money on changes. The consequential damages and delay due to the Inter-
ruption of work, which are never paid for, make changes the most unprofitable
part of Government work.
Mr. Raushenbush. The changes are all paid for, are they not?
Mr. Parker. The changes and the actual material, but no one can collect
consequential damages.
Mr. Raushenbush. You are taking in a lot of territory when you say no one
makes any profit on them. You mean your own company?
Mr. Parker. I mean my own company, and am sure the business of the other
companies are so closely related that their situation is identical.
Mr. Raushenbush. I will offer this as exhibit no. 1532.
(The document referred to was marked "Exhibit No. 1532" and is included in
the appendix.)
MUNITIONS INDUSTRY 21
Mr. Raushenbush. The upshot of all this was several things, was it not,
Mr. Parker? The companies got together and agreed on what they wanted to
ask of the Treasury Department, and, in addition to any informal conversations
they had with the Treasury Department, they did ask for several specific changes.
They asked the Treasury Department the allowance for the income taxes, did
they not?
Mr. Parker. I believe a brief was filed by the National Council requesting that.
Mr. Raushenbush. That is the protest of the National Council of American
Shipbuilders on rulings of the Commissioner of Internal Revenue excluding State
income tax as items of cost? There was a definite protest on that, and they
wanted selling expenses as a proper item, did they not?
Mr. Parker. Correct.
Mr. Raushenbush. They also made a point about compensation insurance.
That was all touched on in the conversations with the Treasury Department
and any other arrangements that had been made. Then we find here a letter
from the du Pont Co. as to the Vinson Act, together with comments from the
National Council of American Shipbuilders, in which the du Ponts say that in
addition to all the items that the shipbuildei's wanted charged into the costs
under the Vinson Act, they also want to have Federal income taxes. Do you
remember that?
Mr. Parker. I remember reading the letter.
Mr. Raushenbush. They wanted to charge the State Income tax in, the
Federal income tax; they wanted to charge unemployment insurance costs in.
So that they went you one better, a little bit, did they not? You people were
not asking for the inclusion of Federal income taxes any longer as an item of
cost, were you?
Mr. Parker. No.
Mr. Raushenbush. This was the du Pont idea, and they included it in a letter
to the Bureau of Internal Revenue, explaining why they wanted to have that
allowed under the Vinson Act. I offer that series of correspondence for the
record as exhibit no. 1533.
(The documents referred to were collectively marked "Exhibit No. 1533"
and are included in the appendix.)
Mr. Raushenbush. Then, Mr. Parker, you worked out yourself, did you not.
a way of handling the subcontractors under the Vinson Act, a way of seeing that
they never made more than 10-percent profit?
Mr. Parker. No; I would not say that I worked it out myself.
Mr. Raushenbush. Who else gets credit for it?
Mr. Parker. I think it is a composite idea which several people contributed to.
Mr. Raushenbush. Could you describe that very briefly, what you had in
mind when you tried to do that:
Mr. Parker. The Vinson Act, in attempting to limit the profit to 10 percent. —
and I am fully in accord with the limitation of profit — does not guarantee 10
percent nor does it prevent you from sustaining a loss of 10 percent, 20 or 60
percent. The Vinson Act, as we understand its intent, is a profit-limitation
matter, but it intends to limit the profit of the contractor and requires that
contractor to require of all his subcontractors an agreement to the same profit
limitation that the contractor subscribes to. The problem was to find a way
by which the intent of the act or the profit limitation could be passed on to the
subcontractors who were limited In profit In the same manner that the contractor
was.
It naturally occurred to several of us that if the subcontractor did not earn
in excess of 10 percent, the act was not at all detrimental to him; that under
the various codes most industries were permitted to sell at cost, and prohibited
from selling at less than cost, and it seemed that since the Vinson Act is, in
Itself, a cost-plus contract, regardless of the so-called "topside price", which is
subject to much adjustment, it is, nevertheless, in the final analysis, a cost-plus
contract, and that the contractor having a cost-plus contract on his hands, would
necessarily have to make his subcontracts on a cost-plus basis.
Mr. Raushenbush. Just explain that one point once more, why you say the
Vinson bill is a cost-plus contract. How do you figure that, Mr. Parker?
Mr. Parker. The Vinson Act is a cost-plus contract, unquestionably, because
what you finally receive is cost, as determined by the Treasury Department.
Mr. Raushenbush. Now you are talking, are you, about the bids put In under
an adjusted-price basis?
Mr. Parker. I am talking about any contract under the Vinson Act. The
amount that any contractor or subcontractor can receive under the Vinson Act
22 MUNITIONS INDUSTRY
Is his cost — that is, the maximum he can receive — is hia cost plua 10 percent
of his contract price.
Senator Bone. There is no guarantee of that in the bill, is there?
Mr. Parker. That is the maximum he can receive.
Senator Bone. I understand; but there is no guarantee of that in the bill, Is
there?
Mr. Parker. The bill provides that that is exactly what he can get as a
maximum.
Senator Bone. The bill provides that he may not get more than 10 percent?
Mr. Parker. That is right.
Senator Bone. That is the provision of the bill?
Mr. Parker. That is right.
Senator Bone. That does not guarantee him it.
Mr. Parker. Not at all. He has no guarantee of 10 percent.
Senator Bone. It is not really a cost-plus contract.
The Navy Department does not undertake to enforce the profit-
limitation section of the Naval Act (Feb. 21, p. 5593 et seq.).
Senator Clark. What I am referring to is the suggestion by Senator Vanden-
berg, where the Chairman of the Naval Affairs Committee of the Senate wrote
the Navy and called attention to this rising scale, shown by the chart, and said
that the bids submitted were absolutely exorbitant and a fraud upon the Gov-
ernment, and within a day or two the Secretary of the Navy wrote back to him
and told him he was entirely In error and the bids were entirely fair. Unless
he was able to determine these various items entering into the incraese of cost,
I do not see how he could possibly have been in a position to make that answer.
Senator Vandenberq. Captain, how can you administer the 10-percent profit
limitation which is now In the law, unless you have accurate information re-
specting the cost items, for proving anything before the 10-percent profit is
attached?
Captain DuBose. The Navy Department will make no attempt whatsoever to
ascertain or determine anything in connection M'ith this 10-percent profit. It la
Incorporated in the contracts, but it is a matter between the shipbuilder, the
contractor, and the Bureau of Internal Revenue of the Treasury Department.
Senator Vandenberq. Then the 10-percent protection in fact is no real pro-
tection, so far as the Navy Department is concerned?
Captain DuBose. I would not say that; no — because very definitely under
the law thej' limit the profit to 10 percent.
Senator Vandenberq. But if the shipbuilder put $1,000,000 into cost, which
does not belong there, then what?
Captain DuBose. The Internal Revenue people have a perfect right to ex-
amine the books of the shipbuilder.
Senator Vandenberq. Do you mean by that you rely upon the Internal Reve-
nue Department for the integrity of the 10-percent clause in the naval bill?
Captain DuBose. There is no possible way for the Navy Department to do
anything else.
Senator Vandenberq. And you do not attempt to do anything else?
Captain DuBose. And we do not attempt to do anything else except to pro-
vide in the contract the provision of law which is to be taken care of as an
administrative procedure by the Internal Revenue Department.
Senator Clark. Captain, do we understand that tlie Navy Department feela
there is no reason whatever for enforcing the law as to 10-percent profit, except
as included in the contract?
Captain DuBose. The thing, I state, was agreed upon In a conference between
the Navy Department and the Treasury Department. We did not adopt that
policy without discussion. There were conferences held between representatives
of the Navy Department and the Treasury as to how this thing could be done.
Senator Clark. But in expending the funds allotted to the Navy Department,
either by act of Congress, Public Works authority, or anybody else, the Navy
Department has no actual responsibility for determining the cost basis upon
which this 10-percent profit is to be figured? Is that what I understand?
Captain DuBosb. It has been agreed upon mutually by the Navy Department
and the Treasury that that particular duty would be taken care of by tho
Treasury for the Government and not the Navy.
MTTinTIONS IKDUSTRT 23
There was further indication that the Navy takes no responsibility
for the enforcement of profit Hmitation (Feb. 21, p. 5595, et seq.).
Senator Vandenberg. "What happens, Captain — let us make this specific and
suppose this is a lO-million-doUar cruiser which is being built under contract
at a private yard, and this provision of law limits the profit to 10 percent or
$1,000,000. Now, when this private shipyard sends you its costs, do you accept
the costs as submitted by the shipyard as valid? In other words, does the ship-
3'ard determine what the costs are?
Captain DuBose. The shipyard determines what the costs are, yes, sir;
and that infonnation is transmitted to the Secretary of the Treasury, and if he
thinks it advisable or necessary to investigate in detail, he has that right.
Senator Vandenberg. Do 3^ou know whether he ever does investigate?
Captain DxjBose. We have had no contracts with this excess-profits clause in
it — there are a few
Senator Vandenberg. So far as the Navy Department is concerned, it takes
no responsibility for the integrity of the calculation which finally leads to the
10-percent profit?
Captain DuBose. The Navy Department has nothing whatever to do with
the detailed method that a shipbuilder follows in determining his costs. He
determines his costs. He submits the statement under oath, and it la then
examined by the Treasury Department.
Senator Vandenberg. And that is satisfactory to the Navy Department, and
that ends it, when he files his costs under oath?
Captain DtjBose. It ends it as far as the Navy Department is concerned, but
it does not end it as far as the Government is concerned because the Secretary
of the Treasury has got to do something.
Senator Bone. Do you know any statutory provision which authorizes them
to go into the operating overhead on the naval contracts?
Captain DuBose. The Vinson Act provides that for all contracts placed after
the date of that act.
Senator Bone. There is nothing there to limit and circumscribe the character
of the operating overheads.
Captain DuBose. In that connection I would like to read a provision of our
contracts, bearing on that point. This is the law and is also copied in our
contracts [reading]:
That the manufacturing spaces and books of its own plant affiliates and
subdivisions shall at aU times be subject to inspection and audit by any
person designated by the Secretary of the Navy and the Secretary of the
Treasury a:id/or by a duly authorized committee of Congress.
Senator Clark. When it comes to manufacturing spaces. Captain DuBose, do
you depend on the Internal Revenue Bureau to compare the manufacturing
processes in determining costs? Is not that a highly technical matter which
belongs to the Navy Department?
Captain DuBose. The Navy Department could not possibly, without a tre-
mendous force of people, investigate and examine in detail the methods followed
by a private shipbuilder in charging for details of the work done. He submits a
bid, a lump-sum price, and that is accepted by the Navy Department, if he gets
the contract. Now, the Navy Department requires, in accordance with the law,
that upon completion of that contract the shipbuilder shall make a statement
under oath.
We also require, under our contract, that we have the right at any time to
make a detailed investigation of his methods, books, and so forth.
Senator Clark. Yes, sir; but you do not do it, as I understand.
_ Captain DuBose. I do not say we would not do it. There has been no neces-
sity or occasion so far for doing it because the limitation-on-profit provision has
been incorporated in the contracts only recently.
Senator Clark. I understand that you have not yet had an opportunity, but
I understood you to testify. Captain, that you in the Navy Department assumed
no responsibility whatever, but put the whole responsibility of determining proper
cost, on which profit was to be determined, naturally, in the hands of the Internal
Revenue Bureau, which neces.sarily, of course, would have no technical personnel.
Captain DuBose. I do not think the law determines proper course. The law
refers to profit.
24 MUIHTIOFS INDUSTRY
Further discussion on the profit limitation was had on February
20 (p. 6562 seq.) with Mr. Blewett, of Newport News, testifying:
Mr. Raushenbush. Mr. Blewett, as I understand it, from the record on page
8, you sa^ in the discussion of this matter which deals, I take it, with the matter
of the shipbuilders direct:
We have recently gone through the cost of changes. We asked a higher
overhead on the changes than our normal overhead. We asked for 20 points
higher, and they granted us 10.
Is that correct? Did the Navy grant you 10?
Mr. Blewett. Yes; we feel that Navy work demands a higher overhead than
merchant work. That is fairly understood. If you are building a barge or a
cruiser, on a barge your equipment is nothing, ana on a cruiser you have to have
equipment and personnel.
Mr. Rausenbush. You were successful on that?
Mr. Blewett. They granted us a 10-point additional overhead for that.
Mr. Raushenbush. Have they done that with other companies, or Is your
company the only one?
Mr. Blewett. I am not prepared to state.
Mr. Raushenbush. Did you recommend in the other jobs that the other com-
panies generally try to get the Navy to add that much more?
Mr. Blewett. Yes: for this reason: We never could get together on a cost-
accounting method. It would be impossible for the yards or the shipbuilding
companies in this country to agree on any one cost-accounting system. Physical
conditions prevent It. So that. In order to simplify matters, I thought If we
asked for an additional overhead it would take care of everything. We, at this
time, charge more overhead to our naval work than we do to our merchant work.
Mr. Raushenbush. Yes; I notice that.
Mr. Blewett. We charge as overhead on that about 15 percent more to our
Navy work than we do to our merchant work.
Mr. Raushenbush. It was on top of that?
Mr. Ferguson. No, sir.
Mr. Rausehnbush. The 10 percent allowed to you explains that higher over-
head, does it not?
Mr. Blewett. Yes.
Mr. Raushenbush. When did the Navy allow that extra 10 percent?
Mr. Blewett. They permitted some changes on the Ranger, hull no. 353.
Mr. Raushenbush. When?
Mr. Blewett. 1934, the summer.
Mr. Raushenbush. After the Ranger had been finished and you were doing
the accounting together.
On page 4 of the same document, let me read you this, Mr. Blewett:
Mr. Smith. Let me ask you this, Blewett, you say you asked for so many
points higher. Would you do that on the basis of each plant saying here la
my average overhead, we want 20 points higher for naval work, taking Into
account no two plants might have the same?
Mr. Blewett. Yes.
Mr. Raushenbush. That is your proposal, that all the plants ask for a uniform
Increase in overhead of 20 percent?
Mr. Blewett. Ask for an increase In overhead of 20 percent, which would
consequently result In a reduction of the common overhead, as applied to other
jobs.
Mr. Raushenbush. The merchant marine jobs would gain the benefit of
having the Navy pay a higher cost?
Mr. Blewett. That is right. The Navy would pay a higher cost because they
demand of us more overhead.
Mr. Raushenbush. And the merchant marine ships would get the benefit of
that to the extent the Navy carries that?
Mr. Blewett. They require less equipment or overhead.
The arrangements of the shipbuilders and their subcontractors
were discussed in "Exhibit 1534", entered on February 6 (p. 6100
eeq.), while Mr. Parker, of New York Ship, was on the stand.
Mr. Raushenbush. There is a memorandum here, Mr. Parker, prepared bv a
committee of which you seem to be chairman, and I want to offer it for the
record as "Exhibit No. 1534."
MUNITIONS INDUSTRY 25
(The memorandum referred to was marked "Exhibit No. 1534" and is included
in the appendix.)
Mr. Raushenbush. In that memorandum the advantages to the contractor
and the advantages to the subcontractor are fairly clearly set out. Under the
disadvantages to the subcontractor, you say:
(1) Loss of a part of the maximum profit allowed by the Vinson Act, if
it should be earned.
(2) Will require adoption by code authorities of resolutions permitting
violation of any code provisions now in effect which would prevent mem-
bers from bidding on this basis.
(3) Will disclose costs to shipbuilders currently, and perhaps create a
precedent which may be difficult to overcome in the future. A similar dis-
closure may be made under the Vinson Act, but probably at a much later
date, and with no certainty that excess profits imder individual contracts
will be made public.
Then the memorandum continues:
E. Possible general advantages. — (1) Mr. Parker fears that the Vinson
Act may lead to a new and permanent form of taxation by the Federal
Government on all profits over a certain maximum without regard for
losses which may be incurred. The general adoption of this proposed plan
of letting subcontracts may, in his opinion, either avoid this possibility
entirely or at least limit it to Government work, and then only on the
main contract without extension to subcontracts.
Do you remember that whole memorandum?
Mr. Parker. Yes, sir.
Mr. Ratjshenbush. The net result of that is, is it not, Mr. Parker, that by
making it impossible for subcontractors to turn back any amounts to the Bureau
of Internal Revenue for excess profits under the Vinson Act you have Increased
the margin between your total costs and your bid price?
Mr. Parker. The explanation of that is rather lengthy. If you wiU just bear
with me, I will give it to you.
Say, assuming you are familiar with the Vinson Act, that under any sub-
contract in excess of $10,000 the subcontractor must comply with the provi-
sions of the act and must indicate his compliance with the acceptance of it and
must certify under oath his costs.
Just shortly after the passage of the Vinson Act it was quite apparent to
us, and it was apparent m the requests for tentative proposals to be used in
bids, that the subcontractors were very fearful of the effect on them of the
Vinson Act as applied to subcontractors. Many of the subcontractors were
supplying several types of equipment. The "X" company, for instance, would
supply one piece of apparatus at $65,000. Normally and ordinarily we would
make that a separate contract. Another piece of equipment would be supplied
by the same company or the company's competitors on the basis of competitive
bids, which would amount to $110,000, and tlie result was that "X" company
got in the course of the whole contract there 8 or 10 contracts, each In excess
of $10,000, all of which would be subject, or each of which would be subject,
to the Vinson Act.
It was apparent to them that with a limited profit of 10 percent that on
maybe eight or nine contracts they might lose. The loss was all theirs. And that
on the one contract they might win, maybe 25 or 30 percent, and that would have
to be repaid, and the net which they would get out of the whole would be a
loss. Thejr were a little averse to giving us prices, or averse to quoting. And
we recognized the fact that we were going to have great difficulty in perform-
ing the contract on this basis, unless we found some solution to it. The solu-
tion, then, was just naturally that we would make this on basis of the cost,
and instead of making a contract or several contracts, or a dozen contracts, we
would make one contract for the ship as a whole. We would give to X"
company all the apparatus on the ship, on a cost-plus 11.11 basis, making one
contract out of it. So that if all lost money on one piece of apparatus, due
to operating conditions, and made money on another piece of apparatus, he
would have the benefit which we do not enjoy, of placing his losses against
his profits, and sharing a net profit, if the net profit results.
Mr. Raushenbush. Just in that connection, let me interrupt with a section of
this memorandum. Mr. Parker, where you point out the advantages to the
contractor. The first one is:
If the subcontractor should exceed the full 10-percent profit allowed by
the Vinson Act, the shipbuilder would benefit by, and the subcontractor
would lose, a part of such profit.
26 MUNITIONS INDUSTRY
Was that not really the reason why you were interested in that thing?
Mr. Parker. We were interested in that angle, for this reason: We are entering
into a contract with a definite price basis, -wdth a limited profit, taking risk on a
rising commodity and labor index, where, if we lose, it is just tough luck, and, If
we win, our profits are limited, it is like in a poker game, where you can only
keep 10 percent of your winning hands, and the losing hands are all your own. In
a very short time the poker game will get you. You cannot live under those
conditions.
We realize that if a profit is made, if we can, through operations, economies, and
efficiency of building the ship, develop a profit in excess of 10 percent, it goes to the
Government, but it was quite apparent to us that if we made arrangements with
some of the subcontractors, which include the same sort of contingencies, over a
3-year period, where they could protect themselves and would have to put in 25
or 30 percent in excess of their normal price for extraordinary contingencies, it
might develop — and we would have to pay that price — where we might create a
situation where we might lose $2,000,000 on the subcontract and subcontractors
might return $2,000,000 to the Treasury on the subcontract.
The shipbuilding companies stated on the stand that they did not
oppose the profit hmitation in the Vinson-Trammell Act of 1933
(Eugene G. Grace, Feb. 26, p. 6776).
Mr. Parker, treasurer of New York Shipbuilding, was questioned
concerning the similarity of the Vinson bill, limiting profits to 11.1
percent, and the wartime cost-plus contracts (Feb. 6, 1935, p. 5087).
Senator Clark. Did that contract during the war include provision for assess-
ing the services of your Chinese and Japanese representatives and for wines,
liquors, and cigars which you actually put into the cost?
Mr. Parker. It included all costs having to do with operating the business,
and wines and liquors in shipbuilding are just as necessary as steel in many
cases.
Senator Clark. Do I understand that the contract provided for under the
Vinson bill should include wines, liquors, and cigars?
Mr. Parker. Absolutely so.
Senator Clark. That is very Uluminating.
Some light on the impossibility of checking a company's costs and
profits is given in a report by the head of the Consolidated Returns
Audit in regard to wartime work (Jan. 22, p. 4597, seq.)
Mr. Ratjshenbush. Apparently In 1926 the revenue agents went into this
thing. I have a document here, and there are a great many pages which I want
to put in, but there is just one paragraph to which I wish to call your attention.
They say [reading]:
After a very careful study of conditions, viz, the system of bookkeeping
and record keeping, the practices of the corporation, etc., it is the opinion
of your examiners that it is an utterly impossible task to attempt to deter-
mine correct costs in connection with each contract. It is our unqualified
opinion that even a large corps of men working for an indefinite time could
not even approach accuracy. Thousands and probably hundreds of thou-
sands of vouchers, labor tickets, store requisitions, etc., would have to be
examined and reanalyzed, and the books all recast. During the war emer-
gency the plant employed in the neighborhood of 22,000 men.
I would like to offer that for the record.
(The document referred to was marked "Exhibit No. 1435" and is included
In the appendix.)
The Chairman. But there was no real effort made at that time to get away
from cost plus?
Mr. Raushenbush. There were many efforts made, but in 1926 they go back
over the whole thing and find it cannot be done.
I have here a letter which I would like to offer for the record, being addressed
to H. B. Robinson, head, Consolidated Returns Audit Division.
(The letter referred to was marked "Exhibit No. 1435" and is included in the
appendix.)
Mr. Raushenbush. That letter reads, in part, as follows [reading]:
In the course of our examination of the records of the cost inspector of
the Navy, we have noted that it has been the continued practice of the
MTJ]SnTI02<rS INDUSTRY 27
taxpayer to include everything possible in expenses (cost of construction of
ships) regardless of whether or not they represented correct costs. We have
also noted that approximately $1,037,000 has been disallowed as expense by
the Navy Department on billings to it by the taxpayer; and the items com-
posing tills amount capitalized and depreciation allowed thereon. This
necessitates the computation of volumanous detailed schedules of deprecia-
tion, spread over the years 1918 to 1921, inclusive. Of necessity, in con-
nection with the Navy dealings with the taxpayer, separate schedules of
depreciation have to be prepared for every month of every year.
They say here:
We have been informed by the commander in charge of the Navy cost-
inspection office that the corporation included in 1 month in the cost of
construction of ships a dividend in the amount of $35,000.
Is that correct, Mr. Parker? Was the attempt made to charge a dividend on
preferred stock into the cost of the Navy vessels?
Mr. Parker. It was charged to expense?
Mr. RatjShenbtjsh. Expense of the ship?
Mr. Parker. It was charged to the cost, the expense of which was prorated
to all work, and a part to naval vessels.
Mr. Raushenbush. So that you were in a position of asking the Government
to pay a certain part of your preferred-stock dividends?
Mr. Parker. Mr. Raushenbush, you may have read the first cost-plus contract
with the Navy Department, in which there was a semblance of a definition of
cost, which item provided that cost shall include all taxes. Yesterday it was
brought out by your investigator of the Revenue Department that income taxes
to the extent of some $300,000 were included.
Mr. Raushenbush. $377,000.
Newport News, which, accordmg to Mr. Blewett's statement in
Exliibit 1532, had secured an additional 10-percent allowance on
overhead from the Navy for naval work, stated that expenditure
for plant to prepare for the aircraft carriers, amounting to $900,000,
would be charged into the overhead of the carriers (p. 5312, Feb. 13).
Mr. Ferguson. In 1933, we agreed to perform the maximum amount of work
that we could in 2 years, regardless of ordinary procedures. We have attempted
to carry that out, and in doing that have made an expenditure for plant of around
$900,000, for new equipment, for modern equipment in order to carry it through.
The shipbuilding business, or the advantage to any company in the ship-
building business, lies tremendously with the character of the equipment, be-
cause the work is very large and difficult. Now, Mr. Archer Huntington, as
weU as his predecessor, has approved of keeping the plant in fine condition
instead of wanting dividends tliis year.
Mr. Raushenbush. Of course, with a contract for aircraft carriers of — what
was it? $38,000,000?
Mr. Ferguson. $38,000,000.
Mr. Raushenbush. On aircraft carriers, some expenditure would be justified.
Mr. Ferguson. You understand that that is charged not against the ships.
Mr. Raushenbush. No.
Mr. Ferguson. Of course, that is charged against plant.
Mr. Raushenbush. And gets into the overhead, does it not?
Mr. Ferguson. If we should not build any more ships requiring that equip-
ment, a lot of it would naturally be written off.
Mr. Raushenbush. But it gets into the overhead of these two aircraft car-
riers?
Mr. Ferguson. Yes; it does.
It is to be noted that an extra allowance of 10 percent as overhead,
referred to by Mr. Blewett, might amount to $2,000,000 on a contract
of $38,000,000 plus for the two aircraft carriers which Newport News
was awarded in 1933.
The rehability of the industry's figures in cases involving the Gov-
ernment was indicated by the Newport News claim for damages and
costs because of cancelation of contracts after the war (Feb. 13,p. 5340,
et seq.).
28 MUNITIONS INDUSTRY
Mr. Raushenbtjbh. Coming now to a memorandum from you to Mr. Hunting-
ton of May 15, 1924, wc definitely get into the question of the cancelation claim
you were making against two battle cruisers and the battleship Iowa. You add
up fixed overhead. Federal taxes, special plant, remainder of fee, interest on
unused plant, fixed overhead, and occupancy of plant during scrapping, a sum
i totaling $14,973,165.
Then you go ahead and say to Mr. Huntington:
We did not expect to get both fixed overhead and remainder of fee, but I
thought there was a good chance of getting a part of the fixed overhead and
tho whole of the fee. The cancelation board has recommended against giv-
ing us any part of fixed fee. We feel, however, that we are entitled to this,
60 that a minimum I would be willing to take in settlement would be rep-
resented approximately by the following —
And you add up various things totaling $6,636,000.
Now, as we gather this, Mr. Ferguson
Mr. Ferguson. I have not got that.
Mr. Raushenbtjsh (handing paper to witness). As we gather it, what you
are doing is putting in a claim against the Government of $14,973,165 and telling
Mr. Huntington that your minimum claim is $6,635,000.
Mr. Ferguson. Nothing of the kind.
Mr. Raushenbush. Will you explain that?
Mr. Ferguson. I am putting in here the things on which a claim can be based.
We made no claim for $14,000,000. The job was settled in regular order in the
Navy Department, and the complete records are there.
' Mr. Raushenbush. You sa)% "Our claim was"; that is, "Our claim against
the Government was as follows":
Mr. Ferguson. For trading purposes. We did not expect to get it or did not
expect to get within a mile of it, but the question was involved as to how our
company could be treated justly in these cancelations; and anticipated profits
1 were not waived, but anticipated profits had been disallowed, even where the
anticipated profit had been mentioned in figures by the courts, on account of
' just what I have told you. We still had a claim, and we could have carried it
through the courts.
There was also a question of our agreeing during the term of the contract
to take the proper proportion of overhead expense. That is a damage claim.
There was, in addition to that, the special plant which had been put up by U3
and the Navy Department in conjunction, and had to be settled.
While the claim could be stated to be a claim, it is just like any other trading
position, where you keep everything you can keep until you reach a point of
settlement.
If you went in with a tax, or any other case, and yielded all the talking points
you had, it would be contrary to usual practice.
Mr. Raushenbush. That is all we wanted to get, Mr. Ferguson, that you
put in a claim for $14,973,000 and did not expect to get within a mile of it, and
you told Mr. Huntington, in the same breath, you would be satisfied with
$8,300,000 less and put that in as a trading claim.
That interests us, of course, from this angle: That where there is no com-
petition between companies for the Navy work, the question of the guaranties
of the Navy Department in paying a higher claim is involved. I mean in
bidding for ships you have, or are supposed to have, competition to keep down
these trading claims to a minimum. But here you were putting in such a great
number of items, and thought the way to conduct the business was to put in for
$8,300,000 more than you expected to get or were willing to take.
Mr. Ferguson. We knew perfectly well we would not get it.
Mr. Raushenbush. I will ofi"er that memorandum for the record.
(The memorandum referred to was marked "Exhibit No. 1572" and is included
in the appendix.)
Mr. Raushenbush. There is a good deal more on that, Mr. Chairman.
Senator Bone. Can you tell us, Mr. Ferguson, which of those items were
ultimately allowed?
Mr. Ferguson. The items which were ultimately allowed were the damage
item, and a settlement was made under the contracts for what we call "plant
rental." That was appraised and adjudicated by the Navy Department, and
complete records are tliere, and also the damage item, which amounted, as I
remember it, to around $4,600,000 for their proportionate share during the life
of the contract of overhead expenses.
Senator Bone. What about the item of taxation?
Mr. Ferguson. That was not allowed in the settlement.
MUNITIONS INDUSTRY 29
Senator Bone. Just so that we do not get any confusion in our own minds
here, I am not referring to income taxes but I am referring to property tax
levied on the property by the State of Virginia, or whatever tax subdivision
levies taxes on your plant. Was that allowed? That is an overhead operating
expense.
Mr. Ferguson. Yes; the local taxes were allowed, I think.
Senator Bonb. That is what I am getting at. In other words, your State or
local taxes.
Mr. Raushenbtjsh. Now. you have stated this, Mr. Ferguson. When you
referred to $6,999,204 as being for damages; that was overhead, was it not?
Mr. Fergusox. Yes, sir.
Mr. Ratjshenbush. It is overhead you are being paid for at the rate of $100,000
a month for 46 or 47 months?
Mr. Ferguson. Yes, sir.
Mr. Raushenbush. What position were you stating for the Government pay-
ing the overhead on canceled ships, if it was not simply under the head of antici-
pated profits or to take the place of anticipated profits? You were not buildJna
on those ships during this period. You were not paying your own salary, and
you were not paying power under that Item.
Mr. Ferguson. We were. They had agreed to take their proportionate share
of the overhead expense during the life of the contracts. The contracts were
canceled. It was worked out by the Navy Department that for the time the
contracts would have extended, if completed, that they owed us their propor-
tionate share of our overhead expense, and it was settled on that basis, and the
complete record Is In the Navy Department.
Mr. Raushenbush. We know thej' gave you the overhead expense. My ques-
tion was: How much of that overhead expense was actually spent by your com-
pany? How much of that $100,000 a month?
Mr. Ferguson. It was the overhead expense actually expended.
Mr. Raushenbush. The question was interrupted. How much of the over-
head expense was expended for the purpose of those Navy vessels? You had
your ordinary business and could devote the $100,000 to that; but the question
Is: How much of that overhead was really spent on those Navy vessels on which
construction had stopped?
Mr. Ferguson. It was spent on the plant as a whole, and our ordinary busi-
ness would not at that time anything like carry the overhead. We nearly went
broke as it was.
Mr. Raushenbush. This helped out a great deal.
Mr. Ferguson. Here was this overhead which had been built up to very much
larger proportions during the war, as a result largely of these same contracts, and
a lot of plant which we still did not need, and we still had to keep our plant a
going concern, unless we shut it up and quit, and the Navy Department — who
was it settled there? Secretary Wilbur finally settled after several years of
investigation on these figures.
Mr. Raushenbush. This was not several years. This was dated August 17,
1923.
Mr. Ferguson. However long it was; 2 years.
Mr. Raushenbush. I stiU do not feel that the question has quite been answered.
We can understand how this helped the company carry itself on as a going con-
cern, to get this figure, but the question was whether any of that was spent on
naval vessels whose construction had stopped and whether it was not just a
gift by the Navy Department.
Mr. Ferguson. No, sir; it was in settlement of a canceled contract. You do
not accept a canceled contract for $70,000,000 and tell a man to go chase himself,
do you?
Mr. Raushenbush. We are interested In the way the settlement was made.
Wliy should you not be paid for the cost which you incurred up to date and not
be given anything which looks like loss of anticipated profits, $4,648,000; under
the head of Overhead another two-million-odd dollars; under the head of Plant,
which was j'our O'svn plant, the $6,999,204, except to justif}' anticipated profits;
We see no other possible explanation for it, because you were not using the plant
and 5'ou were not using the overhead for the benefit of the naval vessels.
Mr. Ferguson. I do not agree with you at all. The Navy Department worked
this out and the Treasury Department, as I remember it, permitted the $100,000
to be distributed at the rate of $100,000 a month for the 46 months. I do not
see anything strange or irregular about it.
73018°— 36— pt. 7 3
30 MUNITIONS INDUSTRY
Mr. RAfSHENBTTBH. Certainly the Treasury Department would have to allow
the distribution of income when you once got it, but the question was whether
this was not anticipated profit.
Mr. Ferguson. If that was anticipated profit, you do not think for a minute
that the Treasury Department would not put it in profits?
Mr. Ratjshenbush. They did, did they not? They allowed $100,000 a month
for anticipated profits.
Mr. Ferguson. At the rate of $100,000 a month.
Mr. Raushenbush. That is the way it comes in.
Mr. Ferguson. If it had all been put in at once, it would have given us a
very high and fictitious earning for that year.
Mr. Raushenbush. You could not put it in in a lump sum, because you were
not getting it that way.
Mr. Ferguson. They make you put it in in a lump sum frequently, when
you do not get it, if you have an agreement to get it. As a matter of fact, we
did get it in a lump sum and distributed it on our payments at $100,000 a month.
Mr. Raushenbush. To what account?
Mr. Branch. To overhead.
Mr. Raushenbush. That was allowed as a deduction from the regular over-
head?
Mr. Branch. Yes; we reduced our regular overhead by that amount.
Mr. Raushenbush. My other question still remains: As to how much of the
$100,000 which you distributed to overhead, and which carried your going plant,
was really spent on these naval vessels. If the answer to the question is you
were not building any naval vessels, the naval vessels had stopped, then it was
by way of damage, as you say, or, as we say, "anticipated profits."
Mr." Branch. It was spent by us to build under naval contracts.
Mr. Raushenbush. As an indemnity?
Mr. Branch. As an indemnity; as a settlement.
There is evidence that Bath Iron Works transferred an item_ of
$60,000 to the destroyer Dewey, thus showdng an improperly high
cost (Part 23, p. 6758).
Do you remember any difficulty you had with your auditors, or with anyone
else, regarding the putting of a sum of money or having a certain Bum of money
against the destroyer Dewey, which expense apparently was incurred on theii
negotiation? Do you recall anything of that kind?
Mr. Newell. Yes. There was a loss on two of the contracts, that, for book-
keeping purposes, was put in on that account. You people were informed, and
that whole matter was explained to them when they were in Bath. It was
simply a bookkeeping question. , ., ..
Mr. LaRouche. Here is a letter on that, which I offer for the record as exhibit
no. 1821. This appears to be a letter from you to your auditing firm.
Mr. Thebeau. I beg you pardon. I think that Is written by the chief clerk.
Mr. LaRouche. From you firm, I meant to say.
Mr. Thebeau. Yes, sir.
Mr. LaRouche. Your chief clerk in one place says [reading]:
Your attitude seemed to be that I was a little careless in not calling your
attention in my letters of September 9 and 14 to the fact that the transfer
above mentioned was included in the Dewey cost.
The transfer, as I take it, details a figure of $60,482.57, which cost was incurred
on the lighthouse tender Hickory and on a tug. Is that correct?
Mr. Newell. That was not put into the cost account of the Dewey. It was
Bipiply added on the end of the r^sum^ of the Dewey's cost account to show the
net result of the three jobs. Do I make it clear? It was not there as an item of
oost. I think that your committee must have a copy of the r^sum^ of cost of the
Dewey, that had, as a separate item and last entry on the sheet, a cost item to
which you refer, which was added to it, but it was not in any way absorbed
or put in the Dewey's account. The Dewey's account was an item all by itself.
I have seen it. I know that, because I talked with your people, when they were
In Bath, about that same thing. I said, "That does not have anything to do with
the Dewey" and it is very clear as to what it was on the sheet which was handed
to you.
(The letter referred to was marked "Exhibit No. 1821" and is Included In
the appendix.)
Mr. LaRouche. You mean by that, you are saying that that $60,000 was not at
any time entered in your books as a charge against the Deweyt
MUNITIONS INDUSTRY 31
Mr. Newell. No; it never was.
Mr. LaRouchb. I submit another letter on that subject for a number, "Ex-
hibit No. 1822." This Is a letter from your auditors. In response to the one
from your chief clerk. I will read one paragraph [reading]:
I am surprised to note the contents of your letter of the 26th. In calling
you regarding the $60,000 transfer Item, Included In the cost of the Dewey,
my concern was to make sure that the principals of your company were
familiar with the actual outcome on the Dewey.
What does he mean by that? Does he not rather strongly state that that was
transferred to the cost of the Dewey?
Mr. Thebeau. No.
Mr. Newell. No. He says it was not.
Mr. LaRouchb. It was not?
Mr. Newell. It was not In there at all.
Mr. LaRouchb (continuing reading) :
In all of Mr. Thebeau s conversations with me —
the letter continues —
he expressed great disappointment that the approximate profit on the Dewey
was only about $51,000. We, of course, knew that the costs were burdened
with the $60,000 transfer item, but none of your letters made any comment
as to the real profit from the point of view of the management, and we were
naturally Interested that the management knew the facts.
Mr. Newell. We knew It anyway.
Mr. LaRouchb. Then your answer Is that you never did at any time charge
that Into the cost of the Dewey?
Mr. Newell. Into the direct cost of the Dewey?
Mr. LaRouchb. Into the costs, direct or otherwise.
Mr. Newell. No, sir.
(The letter referred to was marked "Exhibit No. 1822", and is Included In the
appendix.
Mr. LaRouchb. I submit another letter on the same subject for Its appropriate
number, exhibit no. 1823. I think we can enter that without reading it.
Mr. Thebeau. Yes, sir.
(The letter referred to was marked "Exhibit No. 1823", and Is Included In the
appendix.)
Mr. LaRouchb. I submit this letter for a number, exhibit no. 1824, being a
letter from S. L. Eaton, chief clerk of the Bath Iron Works Corporation, to
Henry Brout & Co., 295 Madison Avenue, New York. N. Y.
(The letter referred to was marked "Exhibit No. 1826", and is Included in the
appendix.)
Mr. LaRouche. You would not say that that $60,000 Item had anything to do
with your claim for increased cost?
Mr. Newell. No, sir.
Mr. LaRouche. It had nothing to do with It?
Mr. Newell. Absolutely no.
Mr. LaRouchb. I submit a letter from you to Mr. Spear, for its appropriate
number.
(The letter referred to was marked "Exhibit No. 1825" and is included in
the appendix.)
The Chairman. Mr. LaRouohe, what Is the general direction of the matters
which you are bringing into evidence at this time?
Mr. LaRouche. Merely that there seems to be some impression gained from
this correspondence that this $60,000 was somehow transferred as a bad debt
from one job to another, with the apparent result that the data show a naval
ship, a destroyer, was burdened with a charge that was not properly assigned
to it.
The Chairman. I see.
Mr. LaRouchb. Mr. Newell says that was not the the fact.
Mr. Newell. What you reaUy mean to infer Is that we were trying to get
that $60,000 out of the Government, which was not so, and it was not in there,
and it had nothing to do with the Dewey cost or In any way had anything to
do with the building up of the amount of money which we claimed was due
us under the conditions imposed upon us by the code. Is that clear?
The Chairman. Mr. NeweU, there would have been large advantage, shortly
after that, would there not. In your being able to put a larger cost, a larger
production cost, In light of the fact that the Vinson bill, limiting the profit that
could be had from the building of ships, came along shortly thereafter?
82 MUNITIONS INDUSTEY
Mr. Newell. No; the Vinson bill did not enter into this at all. The bill
passed by Congress extending relief to contractors who were caught under the
code
The Chairman. That was not my question, as to whether the Vinson bill had
entered into the consideration. But the advantage would have been yours, if
you could have increased that showing of cost by $60,000?
Mr. Newell. I know, but we honestly could not do a thing like that. That
is Impossible and unthinkable. No; vou could not do a thing uke that. Senator.
It was absolutely A\Tong, and it could be verv easily checked.
The Chairman. Is there anything in this correspondence with which you
are dealhig, Mr. LaRouche, that indicates that that was In the mind of the
company at the time?
Mr. LaRouche. No; I am not prepared to say that the correspondence shows
clearly that that was in the minds of the officials of the company.
Mr. Newell. I can say
Mr. LaRouche. I think the letters should be in the record and should tell their
own story.
Mr. Newell. It absolutely is not that way.
The Chairman. Proceed, Mr. LaRouche.
Mr. Newell. I do not like even the thought of it. I do not think there is
anything there that makes that possible.
The Chairman. Mr. Newell, I do not see what there would be more repulsive
about your doing that — I am not wanting to give it a bill of health, by any
means — but I see nothing more repulsive in that than your organization invit-
ing improper propaganda for the purpose of instilling a fear of war to the end
that a number of contracts might be let for more ships, and that your company
did do prior to the Vinson naval building bill.
Mr. LaRouche. I think, Mr. Chairman, to shed a little further light on that,
that some of this correspondence might well be read, and pierhaps Mr. Newell
can explain it.
Your firm of auditors, Henry Brout & Co., writes on September 27, 1934
[reading]:
I am surprised to note the contents of your letter of the 26th.
This is to Mr. Eaton:
In calUng you regarding the $60,000 transfer item, included in the cost of
the Dewey, my concern was to make sure that the principals of your com-
pany were famUiar with the actual outcome on the Dewey.
Then he says further [reading]:
In all of Mr. Thebeau's conversations with me he expressed great disap-
pointment that the approximate profit on the Dewey was only about $51,000.
He says:
We, of course, knew that the costs were burdened with the $60,000 trans-
fer item * * *.
What does he mean by that?
Mr. Newell. I do not know.
Mr. LaRouche. What could he mean but that the costs on the Dexoey were
burdened with $60,000 which did not belong there?
Mr. Newell. I would think the same as you, but I do not understand that.
Maybe Mr. Thebeau can answer it.
Mr. Thebeau. The auditor might have recommended it, but that is no fair
test of it at all. With regard to our claim, we have to give a detailed account,
a sworn statement, to the commission that we fiJed the claim with, showing how
our costs have been kept, both as to material and as to labor. That is abso-
lutely all in detail when we present our claim, which we are working on now.
But that $60,000, you can see he was referring to me, and I do not recollect
now, but I know it is not charged to the Dewey, and would not be handled that
way. It is impossible to handle it that way.
Mr. LaRouche. How do you account, then, for this further language:
We, of course, knew that the costs were burdened with the $60,000
transfer item, but none of your letters made any comment as to the real
profit from the point of view of the management, and we were naturally
interested tnat the management knew the facts.
Did j'ou know the facts?
Mr. Newell. Of course, we did.
Mr. LaRouche. You did know the facts?
Mr. Newell. Yes. I do not know what the auditor means by that. I would
suggest that the committee either get the auditor down here or WTite and ask
for a WTitten interpretation of it.
MUNITIONS INDUSTKY 33
Mr. LaRotjchb. What is your explanation of the language?
Mr. Newell. It puzzles me. I have a clear picture in my mind as to the
set-up of the final cost r^sum6 of the Dewey, and that $60,000 was a separate
item in it, and It showed the net result of those three jobs, as far as net profit
on the three was concerned. Just the same as you would set it up for your income-
tax purposes. It does not have anything to do with the costs of the Dewey.
It had nothing to do with the cost of operation, whether those three Jobs were
going along together.
Mr. LaRouche. He says further — this is the auditor's letter, again [reading]:
Let me also add that I was rather shocked to read the submitted copies
of your schedule of cost of construction of July 31 and August 31. I hardly
think you meant to use our name in the item describing the transfer of
labor and overhead. It was not a very politic thing to do, especially if you
consider that the information and the theory for this methoci of treatment
v-as obtained from Mr. NeweU, who undoubtedly approved it, bearing In
mind the primary interest of the company.
Why was he so shocked?
Mr. Newell. I do not know. I do not know what he refers to.
Mr. LaRouche. He says [reading]:
I would further suggest the impropriety of making such reference in th«
corporate books. If by chance our name has been used in the books, as
authority for this or any other entry, please make the correction by dele-
tion immediately, and I would appreciate your advising me to this effect at
once. Also, please show this letter to Mr. Thebeau, since it affects the fiscal
affairs of the company.
This auditor apparently wanted no part of it.
Mr. Thebeau. I can answer that. He objected to his name being written in
the accounts, saying that he authorized this or he authorized that. That is the
point. He did not want his name written in authorizing the account.
Mr. LaRouche. Because he was shocked, according to his language?
Mr. Thebeau. That Is the way I interpret it.
Mr. LaRouche. In the way the entries had been made.
Mr. Thebeau. He might have recommended certain changes, and he objected
against the chief clerk writing his name opposite them. Auditors do not always
agree with accountants:
Mr. Newell. Why can you not ask the auditor who wrote the letter about it?
Mr. LaRouche. We thought perhaps you could throw some light on it.
Mr. Newell. I cannot tell you anything more than I have already.
Mr. LaRouche. There is just a further pertinent paragraph. Your chief
clerk, in replying to the aduiting firm says [reading]:
I am very sorry if I have done anything out of order.
What does he mean by that?
Mr. Newell. I do not know.
Mr. LaRouche. Apparently Mr. Brout, the auditor, is accusing him of having
done something improper.
Mr. Thebeau. I can answer that. He considers it improper writing hla
name opposite the entries.
Mr. LaRouche. He says:
I have tried very hard to cooperate in every way with both you and Mn
Stoler, as I think Mr. Stoler will Jtestify.
Who is Mr. Stoler?
Mr. Thebeau. He is one of the auditors for Mr. Brout.
Mr. LaRouche. (continuing reading):
I have tried equally as hard to keep accurate accounts and to place the
facts before the officials of the company at all times, and to cooperate with
them in every way.
I understand Mr. Stoler is coming here next week and at that time I
will go over aU the adjusting entries I have made with him:
The shipbuilders hold a different idea of what the Navy knows
about costs than the Navy officials. Mr. Bardo, on April 6 (Hear-
ings, Part 23, p. 6925), informed the committee that the Navy knew
the cost of building the ships.
34 MUNITIONS INDUSTRY
The wartime experience of the Government with the shipbuilding
companies was not of the character as to lead to a great desire on
the part of the committee for repetition of it. If the Government
by setting up its own yards to produce the necessary naval vessels
(other than auxiliaries) can not only build them more cheaply, but
can also thereby avoid the experiences encountered during the last
war with the shipbuilding companies, it will be highly desirable.
The shipbuilding companies will be more than occupied with build-
ing merchant vessels in the event of another war, especially since the
technique of sinking vessels has been perfected with the development
of airplane bombing. During peacetime they should confine them-
selves to the building of merchant vessels and naval auxiliaries.
The committee mshes to repeat a portion of that section of its
report on naval shipbuilding dealing with the wartime experience of
the Government in a financial way with the shipbuilding companies.
I. WARTIME COSTS, PROFITS, AND TAXES
Undoubtedly one of the greatest favors done for the private ship-
yards during the war period was expressed in the order to have ships
begun after the armistice, the keels of which had not been laid up
to that time.
The result of this order gave the companies a great amount of
work at profits which were not subject to the wartime taxes.
The work on destroyers alone, whose keels had not been laid at
the time of the armistice, was distributed as follows:
Bethlehem $90, 640, 975
New York Ship 22, 014, 041
Newport News 5, 332, 604
Wm. Cramp & Son 31, 103, 702
During the war years the large shipbuilding companies made very
considerable profits. They secured cost-plus contracts and added
questionable charges to the costs. They took profits on these ships
after the war taxes had been repealed. They secured changes m
contract dates to avoid the war taxes. They bought from the Gov-
ernment very cheaply yards which had been built at Government
costs. One yard built additions only under the threat of being com-
mandeered. Exorbitant claims were kno\\dngly filed against the
Government for cancelations. Huge bonuses were paid.
Much of this evidence is spread oi^t in exhibits not printed at the
time of the preparation of this preUminary report (June 1935).
Some indication of it, however, can be gained jfrom the following
excerpts from the testimony:
New York Ship had received an assurance from Director Schwab
(U, S. Shipping Board) that it would receive such improvements after
the war as a gift or compensation (Jan. 21, 1935, p. 4539):
Mr. Raushenbush. Before you went into the construction of that $14,000,000
south yard did you and your company make an arrangement with Director
General Schwab, of the Emergency Fleet Corporation, determining on what terms
that would be given back or be sold to the company?
Mr. Parker. There was an agreement made by which we would be permitted
to repurchase the property on the basis of an appraisal or on the basis of earnings.
Mr. Raushenbush. So that before you acceded to this threat of the Govern-
ment commandeering, an arrangement was made with Schwab, who was head
of the Emergency Fleet Corporation, determining pretty definitely the terms on
which you would get that at the end of the war. Is that not correct?
MUNITIONS INDUSTRY 35
Mr. Parker. That is right.
Mr. Raushenbush. In that connection, Mr. Chairman^ I would like to read a
letter from Charles J. Fay, of the firm of White & Case — White & Case have been
your attorneys on these matters, have they not?
Mr. Parker. Up to 1933.
Mr. Raushenbush. The letter is dated May 25, 1923, and is addressed to
James W. Talbert, of the Emergency Fleet Corporation. [Reading:]
Dear Mr. Talbert: This is to confirm the appointment you gave Mr.
Neeland and myself for Thursday morning, the 31st instant. Mr. Neeland
and I will endeavor to be on hand prom.pth^ and my thought is to be there at
9:45 a. m. (standard time). If you cannot see us at that time, we wlU wait
until you are free.
I enclose a memorandum regarding this plant-acquisition matter by the
New York Ship of the improvements made at the cost of the Fleet.
As the situation now stands, the acquisition arrangements (which was
formulated In 1918 to avoid a possible war -tax cash liability for the ways
and shop improvements which Director General Schwab intended, and pro-
posed, should be acquired by New York Ship without specific payment there-
for but in the nature of a gift for added fee or compensation) was, and is,
based on the improvements themselves, providing their valuation through
earnings.
Does not that indicate fairly clearly that this whole arrangement by which
you got the property, and in which the Emergency Fleet Corporation had sunk
$14,000, OOOj for one-naif million dollars, was determined before you went into
that supervision of the construction of the yard?
Mr. Parker. It was recognized at the time the work was undertaken that the
land belonged to the New York Shipbuilding Corporation. The facilities placed
on that land and attached to that land by the Shipping Board became a part of
the realty.
Nevertheless, there was an agreement executed by which the Government
would be paid for that on basis of the earnings, which earnings developed from
the operation of that unit.
Mr. Raushenbush. So that there was not only the threat of commandeering,
but there was a promise obtained from Mr. Schwab, as quoted, "in the nature
of a gift or added fee or compensation" before you went into this?
Mr. Parker. That was not a motive to agree. That was rather a motive to
make us avoid, because, if, by any chance, it was a fee on the construction, or
if, by any chance, it was a gift, it would have been subject to tax, and we would
be In position of having an obsolete, nonoperating plant, which would be subject
to a high rate of income tax. It would be having a bear by the tail.
Mr. Raushenbush. The arrangement was to get around the tax there, by
having that sort of an arrangement, and it should not be exactly a gift, but in
the nature of a gift or added fee or compensation.
I would like to offer the letter for the record, as exhibit no. 1417.
(The letter referred to was marked "Exhibit No. 1417" and is included in the
appendix.)
Bethlehem Shipbuilding Co. paid $12,639,000 in taxes out of a
profit for the war years of $68,205,000 (Feb. 27, 1935, p. 5809.)
Mr. Raushenbush. So that you could allocate as much as j'ou wanted of the
total taxes to be borne to any one of your hundred-odd companies, could you not?
Mr. Shick. We could, if we thought that that would be advisable to do, but
we did proportion it more or less, based on the earnings of the particular com-
panies. That was the basis of our proportion.
Mr. Raushenbush. What sort of proposition is that?
Mr. Shick. For instance, in the years 1917 to 1921, we proportioned out of
the total taxes, $12,639,000 in taxes to the Bethlehem Shipbuilding group, which
Included the six subsidiary companies.
Mr. Raushenbush. That would be in a ratio of 12 to 68 million net income
before taxes, would it not?
Mr. Shick. That is about right.
Mr. Raushenbush. That is our figure.
Mr. Schlottman. $12,069,000.
Mr. Raushenbush. On the final settlement it is $68,205,000, according to our
figures.
Mr. Schlottman. All right.
36 MUNITIONS INDUSTRY
Mr. Raushenbush. That would be about one-sixth of it, somewhere between
a fifth and a sixth, would it not?
Mr. ScHLOTTMAN. That is correct.
Bethlehem Ship during the war used a rental system which made
its profits appear lower than they actually were. The "rentals"
were larger than the plant values of the companies (Feb. 27, p. 5801
seq. and p. 6810).
Mr. Raushenbush. Mr. Shick, in examining the figures presented by you to
the committee on the net Income of Bethlehem Ship during the war years, we
checked with the Bureau of Internal Revenue and found that there were very
large rentals to other companies. Could you explain the point and purpose of
those rentals?
Mr. Shick. At the time the Bethlehem Shipbuilding was organized, in October
1917, there were certain properties that were owned by other subsidiaries of
Bethlehem, which were not grouped in the Bethlehem Shipbuilding Corporation
at that time, and until that could be done there were rentals. These properties
were rented to the Bethlehem Shipbuilding Corporation for certain years, with
an Idea of just making the distribution of the profits that were earned on ships
that were manufactured by those facilities.
Mr. Raushenbush. Were those so much rentals of property as a profit-sharing
arrangement?
Mr. Shick. There was a profit-sharing arrangement. That was the basis of it.
Mr. Raushenbush. Do you have the terms of that?
Mr. Shick. I have a synopsis of the leases here, which explains the rental of
the plant to the Bethlehem Shipbuilding Corporation, and the basis of the rental
was from November 1, 1917, to December 31, 1918, and in the case of the Hunter's
Point Drydock Co., at Hunter's Point, San Francisco, was from November 1,
1917, to December 31, 1918, and for the Potrero and Alameda works of the Union
plant, at San Francisco, from November 1, 1917, to December 12, 1924. Here is
the information [handing paper to secretary].
Mr. Raushenbush. The sheet you hand me shows what vou describe a profit-
sharing arrangement, 35 percent of aU profits up to and including $2,000,000, 15
percent of all profits in excess, and bo forth. In the case of the Potrero and Ala-
meda works, 85 percent of all profits. I will offer that for the record.
(The document referred to was marked "Exhibit No. 1641" and is included in
the appendLx.)
Mr. Raushenbush. That was a profit-sharing arrangement, somewhat, more
than a rental arrangement, was It not?
Mr. Shick. It was really a profit-sharing arrangement for the purpose of
renting those particular facilities.
Mr. Raushenbush. And the rentals paid to those particular companies were
far larger than the plant value of those companies?
Mr. Shick. No doubt that might be true, because we did not know at the time
what the earnings would be from those facilities, and in order to distribute those
to profits, that was the basis on which the rentals were made.
Mr. Raushenbush. Do you have the sum total of those rentals before you?
Mr. Shick. I do not think I have.
Mr. Raushenbush. Do you have those, Mr. Mitchell?
Mr. Mitchell. Yes, sir.
Mr. Raushenbush. You have been sworn before, Mr. Mitchell?
Mr. Mitchell. Yes, sir.
Mr. Raushenbush. Will you give those rentals by years?
Mr. Mitchell. According to the income-tax returns filed by the Bethlehem
Steel Corporation, which is a consohdation with the companies including Beth-
lehem Ship and so forth, the rentals paid by Bethlehem Ship Co. in 1918 were
$14,049,121.93; and 1919, $7,535,196.10; in 1920, $4,934,393.67; 1921, $8,881,727.63.
Mr. Raushenbush. Mr. Shick, if those rentals which you describe as a profit-
sharing arrangement were added back into this net income of Bethlehem Shif>-
buUding Corporation, the net income would be somewhat larger?
Mr. Shick. Yes; it would. In order to explain that situation, I would like
to present to the committee a consolidated profit-and-loss statement and a
consolidated balance sheet of those companies to which those rentals were paid
with the idea of showing a complete picture of the shipbuilding operations [handing
paper to secretary].
MUNITIONS INDUSTRY 37
Mr. Raushenbush. May we see to what extent that checks with the figures
which we have been able to obtain from the Bureau of Internal Revenue? Is
this after taxes, Mr. Shick?
Mr. Shick. That is the net income after taxes.
Mr. Raushenbush. After paying Federal taxes?
Mr. Shick. After paying Federal taxes.
Mr. Raushenbush. Do you have any sheets prepared showing the income
before taxes for this consolidated group?
Mr. Shick. I have it from the summary, showing it.
Mr. Raushenbush. For this consolidated group?
Mr. Shick. For this consolidated group, by dividing it between the war
years and the years after the war, shov,ang the amount of business that was
done, the net income before interest charges, but after depreciation and the
net income, profit-and-loss statement, and here is the amount of the income
and excess profits which have been deducted [indicating] so that by adding
this back to this income here [indicating] that would be the income.
Mr. Raushenbush. You have not got it by individual years, though, before
taxes? That is the usual way that the Bureau of Internal Revenue determines
the net taxable income.
Mr. Shick. We have not got it in exhibit form, but we could readily pre-
pare it.
Mr. Raushenbush. I wonder if you would check with our figures. I do not
think it would be very long. We found that by grouping these various ship-
building subsidiaries of Bethlehem Steel, we arrive at certain figures which
were reported, in fact, bv these companies themselves for each individual year,
and we would hke to get that for 1917, 1918, 1919, 1920, and 1921.
Mr. Mitchell, can you give us the information you secured from the Bureau
of Internal Revenue as to the company's original reports on these consohdated
groups of shipbuilding companies as far as invested capital and net income or
loss go for these years?
Mr. Mitchell. Yes, sir; do you want the individual companies, starting ofif
with Bethlehem Shipbuilding?
Mr. Raushenbush. No; let us group them. List the ones which you have
so that Mr. Shick can check them.
Later the question was discussed again (p. 5810).
Mr. Raushenbush. Mr. Shick, coming back a minute, I did not quite under-
stand what was the purpose of this siphoning procedure, this rental procedure,
of giving such large rentals to the other companies? Did that have something
to do with the taxation question, or what was the point of it?
Mr. Shick. It had nothing to do with taxes.
Mr. Raushenbush. What was the point of it?
Mr. Shick. It was distributing the profits over to the facilities which the
Bethlehem Shipbuilding Co. were using and on such facilities they were using
there, trying to put it back to profits, because they had the use of the facilities.
There v,-as no advantage from the taxation point of view. That is aU.
Mr. Raushenbush. Those rentals were away out of relation to any plant
investment in them?
Mr. Shick. But they were getting the earnings on those facilities from Bethle-
hem Ship. It was the proportion of the earnings of each plant that was being usedj
Mr. Raushenbush. Mr. Mitchell, do you have the plant investment of some
of the companies which got these high rentals?
Mr. Mitchell. Yes, sir; I do. From the revenue agent's report, and from
the balance sheet submitted, I have taken the net plant values, which consist
of the plant costs, less reserves for the following subsidiaries:
Union Iron Works Co. had a net plant value in 1918 of $4,982,591.63. Rental
was paid to the company for the use of plant of $11,305,216.21, which for that
year was 227 percent of the plant's value.
Union Iron Works Drydock Co. received $556,000 rent for their net plant of
$3 913 379.
Fore River Shipbuilding Co., for 1917, received $2,187,906 rental for a plant
value of $3,235,000 odd. Those figures are for 1918.
For 1919, the only plant receiving rental from Bethlehem Shipbuilding Co.
was the Union Iron Works Co. It had a net plant value for that year of $4,454,-
302. for which it was paid rental of $7,535,196, wliich was 169 percent of the plant
value.
38 MUNITIONS INDUSTRY
For 1920 its plant value was $4,142,686, and it received rental of $4,934,393,
a return of 119 percent.
1921 net plant value shown by the balance sheet was $3,609,614, for which
it received rental of $8,881,727, which was 227 percent of the plant value for that
year.
These plant-value figures are taken from the balance sheets at the beginning of
the respective years.
Mr. Raushenbush. Mr. Shlck, would you mind stating your answer to my
other question again? I did not quite understand it. Did you describe these
rentals as the proportion of the profit which those companies earned?
Mr. Shick. Those particular facilities earned.
Mr. Raushenbush. Those particular facilities earned?
Mr. Shick. Yes; which belonged to the former companies.
Mr. Raushenbush. So that rental was not the phrase at all; was It?
Mr. Shick. We used the term "rental."
Mr. Raushenbush. How much was paid in dividends to the Bethlehem Steel
by these various companies, would you say, Mr. Shick, by Bethlehem Ship-
building Co. during those years. Fore River and Union Iron Works?
Mr. Shick. It was our practice to have those companies practically pay out
all their earnings which were available over to the Bethlehem Steel Corporation
because the Bethlehem Steel Corporation was the one paying dividends to the
Btockholders. There was no reason leaving the earnings accumulate in those
companies, bo that they were paid over to the Bethlehem Steel Corporation.
Mr. Raushenbush. Do you have the dividends before you?
Mr. Shick. I do not.
Mr. Raushenbush. Do you have them, Mr. Mitchell?
Mr. Mitchell. I have them, as obtained from the revenue agent's working
papers of the income-tax unit. He analyzed the surplus for the various years,
and, according to the books, the dividends paid were as follows:
Bethlehem Shipbuilding Corporation, Ltd., paid in 1919, $1,782,500; In 1920
it paid $1,705,000; and in 1921 it paid $20,282,700— a total fOr the years 1917
to 1921 of $23,770,200.
The Fore River Shipbuilding Corporation paid In 1917, $90,000; In 1920,
$4,010,400— a total of $4,100,400.
The Union Iron Works Co. In 1917 paid $400,000; 1918, $1,130,000; 1919,
$1,400,000; 1920, $5,697,928.19; 1921, $24,000,000— a total of $32,627,928.19.
The total dividends paid by these three companies to Bethlehem Steel Co.
amounted for those years to $60,498,528.19.
After the war, Newport News filed a claim against the Government
for $14,973,165 (Ex. 1572). At the same time the president of the
company was informing the owner that the company should be satis-
fied with $6,636,000. This was "for trading purposes" (p. 5340,
Feb. 13).
Newport News also bought facihties added by the Government
during war time at a much lower cost (Feb. 13, 1935, p. 6323).
Mr. Raushenbush. Now, coming to the war-time facilities which the com-
pany got out of this, the Navy at various times advanced considerable sums
to the company, did it not, to build additional vessels?
Mr. Ferguson. Yes.
Mr. Raushenbush. Have you the figures there of how much that was?
Mr. Parker. That is the plant rental, is it not? Do you recall the question?
Mr. Ferguson. What number is it?
Mr. Raushenbush. Vfar-time facihties that the Government added.
Mr. Parker. Do you remember the number of the question?
Mr. Raushenbush. I do not think it was in a question.
Mr. Ferguson. In this Price, Waterhouse report, we find the following:
Total cost of facilities known as plant rentals A, B, and Shipping Board
special fund, $10,167,272.50—
and —
Net cost of same to the company, including estimated value of the
facihties under destroyer contracts transferred to the company In set-
tlement of canceled destroyers, $2,168,333.92 —
which leaves an —
Excess of cost over net book value thereof, $7,988,938.58.
MUNITIONS INDUSTRY 39
Does that figure accurately represent the gain in money vahie to the company
of the faciUties?
Mr. Ferguson'. No, sir.
Mr. Raushenbush. Will you explain that, please?
Mr. Ferguson. I can only e.xplain it in general terms; Mr. Branch would have
to give you the details.
Further (p. 5324):
Mr. Rauspienbush. Is there any question on that? We found this in the
Price, Waterhouse report and assumed that that v/as correct, that the company
had gained practically $8,000,000 in Its wartime facilities through advances by
the Navy Department, which it then retained.
Mr. Ferguson (examining book handed witness by secretary). I have never
seen it before, Mr. Raushenbush, and I am trying, in answer to one of your
queries, to answer it, which tells what benefit there accrued to us in response to
the taking over by purchase in final settlement of the facilities provided by the
Navy Department and the Shipping Board, and if I can get the number of the
question, I can find the answer.
Mr. Raushenbush. I do not remember having asked the question in that
orm about facilities.
Mr. Ferguson. As I understand it, you are asking me if we get the benefit
of $7,988,000.
Mr. Raushenbush. That was not one of my questions. I am asking It now.
Mr. Ferguson. My answer to that Is that we did not, but I have got to see
it. Will you repeat the question?
(The pending question, as above recorded, was read by the reporter.)
Mr. Raushenbush. The question prior to that was a reference to the Price,
Waterhouse report, showing that the total cost of facilities was $10,167,272,
and the net cost of same to the company was $2,168,333, and the excess of cost
over net book value to be $7,988,938. The question was to as the accuracy
of the Price, Waterhouse computation in that manner. Is that accurate?
Mr. Fbrguson. So far as I know it Is accurate as to the figures In the total
settlement, but I would like to say that in putting In plant for the Navy De-
partment — I do not remember the Shipping Board — it was agreed that the
Navy Department would advance 50 percent of the cost of the plant, approxi-
mately, and we would advance the other 50 percent, and In our contracts It
was provided that at the conclusion of the work this plant which had been put
in would be appraised by the Navy Department and the price to be paid by ua
for this additional plant would be fixed by them, and that was done. The
reason was that you could not tell. It was generally assumed at the beginning
that the plant would cost, as shown by the agreement, approximately at that
time twice what it would cost, lot us say, In normal times. And after the con-
tracts were terminated and these three large contracts were settled, this propo-
sition of plant appraisal was made, after years — I do not know how many.
2 or 3 or 4 years— negotiation with the Board In the Navy Department that
had cognizance of it, and the settlement was made by that Board.
Mr. Raushenbush. Let me Interrupt Just a moment, Mr. Ferguson.
Mr. Ferguson. Yes.
Mr. Raushenbush. Was not the basis of that arrangement fixed way back in
1919?
Mr. Ferguson. Yes.
Mr. Raushenbush. So that the matter was all settled then, rather than
later?
Mr. Ferguson. It was written, Mr. Raushenbush, into the contracts.
Mr. Raushenbush. Here is a letter of yours to Mr. Huntington of January
7, 1919, which I want to read in this connection on the phase of appraisal of
values:
I wired you Saturday the status of the two new battleship contracts, as
we had to get our letter In the hands of the Department today. I have
since been in telephone communication with Mr. Gauntlett — •
Who was Mr. Gauntlett?
Mr. Ferguson. He was our Washington representative.
Mr. Raushenbush. Is he the representative of any other companies?
Mr. Ferguson. Yes, sir; two or three more.
Mr. Raushenbush. Which ones?
Mr. Ferguson. He is a representative of the Aluminum Co. and the Matson
Navigation Co.
40. MUNITIONS INDUSTRY
Mr. Raushenbubh (continuing reading):
I have since been In telephone communication with Mr. Gauntlett, who
informs me that the Department will probably agree to give us these two
battleships at a cash profit of $1,250,000 each, and will agree to make the
necessary plant extensions to talie care of them, at a cost of not more than
$2,500,000.
This was after the war, was it not? This was January 27, 1919.
Mr. Fekguson. It was after the armistice, but the war, I think, officially went
on some time longer.
Senator Vandenberq. It Is still going on.
Mr. Raushenbush. Here it says about the plant extensions:
* * * the plant extensions to be turned over to us at the end of the
contracts, and if the appraised value at that time is 1}4 million, or less,
they will become our property, and if more than l}i million, we will pay
the difference between the l}i million and the appraised value, the ap-
praisers to be appointed, 1 by the Navy Department, 1 by ourselves, and
the third to be selected by those 2. I do not think that the appraised value
for the 2% million plant extensions, such as is contemplated of shipways,
piers, etc., will be as much as 1}^ million, and I instructed Mr. Gauntlett to
tell the Secretary that we will agree to this arrangement.
Then it goes on with an explanation which I would like to have you explain
[reading]:
The Department's interest In the matter lies in the fact that they are not
willing to show on the face of a contract that they are paying more than 10
percent as profit. At the present time the total cash profit of 2}i million on
the two battleships, plus the l}i million they are willing to allow us as
profit on the plant, will amount to $4,000,000, which is 10 percent of the
estimated cost of the two vessels.
Here, apparently, If this letter is correct, Mr. Ferguson, the Department was,
after the war, making an arrangement to allow more than a 10-percent profit
by giving you an Increase In your facilities which would amount to a consider-
able sum over the 10 percent. Is that letter correct that way?
Mr. Ferguson. No such arrangement was made.
Senator Clark. You indicate in that letter that the Navy Department was
just trying to beat the devil around the stump to try to allow you more than 10
percent, do you not?
Mr. Ferguson. We did not take a contract for the two battleships. Senator. ^
Senator Clark. But that was your impression at the time you wrote this
letter, that that was what the Navy Department was trying to do, to figure out a
scheme to give you additional plant facilities, to keep it from appearing on the
actual face of the contract that they were giving you more than 10-percent
profits. That was your Impression at the time of writing the letter?
Mr. Ferguson. It was; but it was not done.
Senator Clark. The only reason it did not go through was because you were
not satisfied with the arrangement?
Mr. Ferguson. No; this was preliminary to a two-battleship contract. It was
actually changed to a one-battleship contract, and the contract for the battle-
ship indicates exactly the arrangement made.
Senator Clark. Why was It that the Navy Department did not want It to
appear on the face of the record what the transaction actually was? In para-
graph 2 of this letter, Mr. Ferguson, you state:
The Department's Interest in the matter lies in the fact that they are not
willing to show on the face of a contract that they are pajdng more than
10 percent as profit.
Mr. Ferguson. Yes, sir.
Senator Clark. The arrangement suggested was In effect paying more than
10-percent profit, was it not?
Mr. Ferguson. The arrangement suggested; yes.
Senator Clark. Yes, sir. Do vou know why it was that the Navy Depart-
ment was not willing to have it shown on the face of the contract exactly what
the real transaction was?
Mr. Ferguson. All I can eay, Senator, is that the arrangement — I had for-
gotten the letter— did not go through, and I have here the contract.
Senator Clark. I understand it did not go through, Mr. Ferguson, but what
I am interested in is, on January 27, 1919, in writing to the owner of j-our com-
pany you explained tlie fact that the Navy Department was not -willing to have
it shown on the face of a contract what the real transaction was intended to be.
That is correct, is it not?
MUNITIONS INDUSTRY 41
Mr. Ferguson. I have no doubt, Senator, that it was discussed, from thia
letter, with the representatives of the Navy Department, but it was not done.
Senator Clark. Yes, sir; but it was stated to you, or at least you stated to
Mr. Huntington, that the Navy Department's interest in the matter was to cover
up what the exact transaction was to be.
Newport News attempted to have its war-time taxes lowered on the
ground that its war-time naval contracts were force contracts (Feb.
12, 1935, p. 5299, et seq.)
Mr. Ratishenbush. I am not making any recrimination about it. That ia
the inference shown by these letters.
There are some more things about this tax business which we are going into,
not to do anything more — and I hope you understand this — than to plan for
taxes for any possible future war, because the tax matter worked out in the last
war is about the only light we have guiding us for any future taxes.
We find something which interests us quite a little bit: That in 1924, appar-
ently one of your employees, Mr. Gatewood — he was the manager at that time
and still is?
Mr. Ferguson. He is manager now; at that time naval architect.
Mr. Raushenbush. This letter dated December 11, 1924, to Mr. Rearick, of
your legal staff, is signed by "W. Gatewood, manager."
Mr. Ferguson. He may have been.
Mr. Raushenbush. This is a rather long story, and I think we can shorten it
somewhat, but he got the idea, did he not, that all these somewhat profitable
contracts you had made with the Government for warships were not contracts
at all but they were force orders imposed upon you by the President?
Mr. Ferguson. They were order contracts, and our war contracts for these
vessels were under Presidential order, and so stated in the contracts.
Mr. Raushenbush. And so stated in the contracts, as you contend?
Mr. Ferguson. Yes.
Mr. Raushenbush. And Mr. Gatewood goes on in this letter to Mr. Rearick,
which I offer for appropriate number, to state:
No opportunity was afforded the taxpayer to decline to make the con-
tracts or to adjust his price to suit the excessive tax. This provision of the
act which seemed to be ex post facto even though the larger part of the
income from the contracts subject to the excessive tax would not accrue
until after the date of the act.
What he was trying to do through here, was he not, if you will remember
the situation, Mr. Ferguson, was trying to avoid the payment of taxes at the
1918 rates, the high rates by stating and making a case that these many con-
tracts you bad with the Government were not contracts but were force orders
and consequently did not come under the head of the taxes imposed on war
contracts, which were high?
Mr. Ferguson. 1 am not familiar with the letter.
Mr. Raushenbush. You are familiar with the whole company's attitude?
Mr. Ferguson. I am familiar with their attitude; yes.
Mr. Raushenbush. You know that the company took this up with its attor-
neys and then the attorneys and Mr. Montgomery made complaint to the Gov-
ernment, protest to the Government?
Mr. Ferguson. Yes.
Mr. Raushenbush. Under this, do you mean?
Mr. Ferguson. Yes.
Mr. Raushenbush. They did attempt to have all your war contracts, the
taxes on all your war contracts, thrown out on the ground that they were not
contracts but were force orders?
Mr. Ferguson. I do not know whether they attempted to have them thrown
out.
Mr. Raushenbush. You have the high taxes thrown out. We have your pro-
test by Bickford and Rearick, your counsel, before the Bureau of Internal Revenue
to that effect.
(The letter referred to was marked "Exhibit No. 1559" and is included in
the appendix.)
Mr. Raushenbush. Mr. Chairman, the point of going into this is this: The
field seems to offer some opportunities. Quite a constitutional question is
made here, not only by the company, but its attorneys, that if you are in .".
state of war, and a contract is forced on you, it is not a contract, and so if Congress
comes along and says an 80-percent tax shall be imposed on all war contracts,
42 MUNITIONS INDUSTRY
between certain dates, that that does not go for the business of some of the
companies because of their contracts being on force orders and therefore the taxes
would not apply.
And in planning taxation matters that field should be plowed one way or the
other. If I may, with the consent of the committee, I will go ahead on that for
just a moment.
We have here a letter from Mr. Bickford. He was of your counsel, was he
not?
Mr. Ferguson. General counsel at that time.
Mr. Raushenbush. To Mr. Rearick. He was special counsel for you?
Mr. Ferguson. Yes, sir.
Mr. Raushenbush. Stating in the second paragraph:
I concur with Mr. Gatewood that it is unjust and unconstitutional, but
I think it would be dangerous to urge the grounds which he assigns as they
fly too far and expand the case unnecessarily.
Mr. Raushenbush. I offer that as exhibit no. 1560.
(The letter referred to was marked "Exhibit No. 1560" and is included in the
appendix.)
Mr. Raushenbush. Following that we have a claim before the Commissioner
of Internal Revenue, and if you care to follow this from the book, or we have
copies of it here, you may. We have taken extracts out, if you care to look at
that, and it makes the whole case there. In the first paragraph it says:
Taxpayer was required to proceed with the orders without any of the
power, privileges, or profits of a contractor, therefore the provisions of the
Revenue Act of 1918 imposing an additional tax in the years 1919, 1920,
and 1921 on profits derived from "Government contracts" made between
April 6, 1917, and November 11, 1918, was not intended to and did not
apply to work performed pursuant to the mandatory orders of the President
of the United States.
The claim is then made, and the evidence is shown to the extent it can be
compiled, that these were not in any sense contracts or contractual money was
not involved, so that the 80-percent rate In the 1917-18 war contracts should
just be wiped out.
Senator Vandenbehg. I assume the Government denied that claim and subse-
quently was successful. Is that right?
Mr. Raushenbush. This is a claim made up by Mr. Montgomery, Senator,
In this matter: Protest against income and profits tax deficiencies proposed for
the years 1917 to 1921, inclusive; and the Government, in reply to your question,
did throw out the contention, but Mr. Montgomery made this statement in a
part of the brief:
It was clearly not the intention of Congress to tax at what are really
penalty rates, Income derived from the execution of the President's orders.
After making the point about these contracts not being contracts [continuing
reading]:
Section 301 (c) of the Revenue Act of 1918 was inserted by the confer-
ence committee, and in explaining it to the House, the chairman of the
Ways and Means Committee said:
"Though the 80-percent war-profits tax is eliminated for the next fiscal
year — since there are no war profits for 1919-20 — the conferees put In a
provision extending the 80-percent war-profits tax for the calendar year
1919 to catch the profits that are derived in 1919 from war contracts made
in 1918 and 1917, so that the profiteers will not get off with 80 percent
eliminated after January 1, 1919."
Mr. Montgomery goes on:
The ovvners of shipyards who were prevented from undertaking lucrative
commercial work and were commended to devote all their facilities to the
production of vessels for the Government at prices stipulated by the Gov-
ernment can hardly be considered the profiteers the conference committee
Intended to reach.
That Is the point, and the returns on the revenue agent's findings, now not
on invested capital, according to any agreement, but on the revenue agent's
findings show that for 1918 the company was getting a return of profit to in-
vested capital, as the revenue agent found it, of 76.1 percent and in 1919 of
71.5 percent.
(Document marked "Exhibit 1561" and is included in the appendix.)
Senatoi Vandenberg. How was the price fixed in one of these forced contracts?
Mr. Raushenbush. We have here one of those contracts included in the com-
pany's protest. It is a regular form contract. Mr. Ferguson can probably
MUNITIONS INDUSTRY 43
give you the actual fixing of the price. It savs "cost plus 10 percent", and
the definitions of "cost" are given, including all taxes there. We had this dis-
cussed when New York Ship was here.
Senator Vandenberg. Mr. Ferguson, when we are discussing this so-called
"force contract", are we discussing the cost-plus-10-percent contracts?
Mr. Ferguson. Some of them were cost plus 10 percent. They were all changed
to cost plus a fixed fee. Some of them were cost plus a fixed fee in the first
place. The only cost-plus- 10-percent contracts which we ever completed was
the first of a group of destroyers
Senator Clark. Vras that during the war, Mr. Fergvison?
Mr. FERGrsoN. Yes. The battle cruiser contracts were signed in 1916, and
they were cost plus 10 percent but later on changed to cost plus a fixed fee of
$2,000,000. The battleship Iowa was cost plus a fixed fee from the beginning.
A group of tankers we built for the Navy Department were cost plus a fixed
fee, plus one-half of the savings under a certain price.
Senator Vandenberg. This Is after the war, is It not?
Mr. Ferguson. No; this was during the war. It was during the war period.
I do not remember just when the battleship Iowa contract was settled.
The first contracts provided that taxes of all kinds would be included as an
Item of the cost, before the war taxes were set. The later contracts, I am quite
sure, showed that they Included taxes except Federal profit taxes.
Senator Vandenberg. The first contracts Included income taxes and every-
thing else?
Mr. Ferguson. They included taxes of all kinds.
Senator Vandenberg. What was there about a cost-plus-10-percent contract
which so invaded the ordinary contractual prerogative that it ought not to be
considered In ordinary tax practice?
Mr. Ferguson. I take it — It is a legal question with which I am not ac-
quainted — but I take it that being a Presidential order contract
Senator Vandenberg. I am not asking about the legal phase. I would not
undertake to enter that field, either. I am talking about the practical phase.
Do you not invite the Inference that if you consider a cost-plus-10-percent
contract an invasion of your ordinary contractual privileges, do you not Invite
the presumption that a 10-percent profit above all cost items is a great hard-
ship, and a great Invasion of your usual opportunity of doing a great deal better
than that?
Mr. Ferguson. No.
Senator Vandenberg. It seems to me that you do. Go ahead, Mr. Raushen-
bush.
Mr. Raushenbush. The point that you were to accomplish by these protests
which were laid before them by Mr. Montgomery and your learned attomeya
and others was simply to reduce the taxes on all the Government work during
the war, on the ground that It was a force contract? That is not to say that
10 percent was too much or too little, but that the taxes were too much. Waa
not that the point of it?
Mr. Ferguson. I presume so.
Mr. Raushenbush. Then we turn to all the changes which were made, Mr,
Ferguson, in your contracts. We find here a letter from you to Mr. Hunting-
ton, dated July 14, 1919, In which, in the second paragraph, you say:
We also discussed changing the battleships and battle cruisers to cost
plus a fixed fee, and, although we reached no conclusions, I think it likely
that we will do so. We would like to change the battle-cruiser contracts
absolutely so as to get the date of the contracts out of the war period, and
avoid the high tax on profits. The Secretary did not raise any particular
objection to $2,000,000 fixed fee on each of the two battle cruisers, and
$1,350,000 on each of the two battleships.
And it is very clearly stated, is it not, Mr. Ferguson [reading]:
We would like to change the battle-cruiser contracts absolutely so as to
get the date of the contract out of the war period, and avoid the high tax
on profits.
That was the point of changing all these contracts from a cost plus to a cost
plus a fixed fee, was it not, and getting the date on them changed to get them
out of the period when an 80-percent tax was put on contracts?
Mr. Ferguson. Contracts were entered into for battle cruisers before the war.
Then, after the war period, we changed to cost plus a fixed fee, and naturally,
if we could and if they were not war work, were not done during the period of the
war.
44 MUNITIONS INDUSTRY
Mr. Raushenbubh. You say —
so as to get the date of the contract out of the war period, and avoid the
high tax on profits.
Mr. Ferguson. Yes, sir.
Mr. Raushenbush. You are talking about Government contract work dur-
ing the war. Then on December 17, 1919, in a letter to Mr. Huntington, you
state:
Last Friday in Washington I went to see Secretary Glass, of the Treas-
ury Department, at the suggestion of Secretary Daniels, in regard to the
Federal tax on our two battle cruisers, the contracts for which were signed
on May 25, 1917, or during the war period.
This was during the war period and not before or after. These were signed
during the war period.
Mr. Ferguson. I thought they were signed in 1916.
Mr. Raushenbush. You say to Mr. Huntington —
in regard to the Federal tax on our two battle cruisers, the contracts for
which were signed on May 25, 1917, or during the war period. There is a
special war excess-profit tax on Government contracts made during the war
period, and before agreeing to any change in our contracts for the battle
cruisers, we wanted to develop whether these cruisers were to be held by
the Treasury Department to have been contracted for during the war period
as the award and the agreements relative to the construction of these
cruisers were actually settled before the war.
The Treasury Department officials appeared to be very willing to give
us an opinion as soon as we could put up our case, which we will do with
our income-tax returns for this year, if not before.
Then we go on to April 12, 1920,'ln a letter from you again to Mr. Hunting-
ton, on the second page, fourth paragraph:
We are engaged in shifting our two transports from a cost-plus-fixed-fee
basis to a fixed-price basis, which will give us a greater profit than we would
otherwise make, and I am quite sure will relieve us of a great deal of an-
noyance in having the Fleet Corporation auditors around the place.
Hero' are these transports for the Emergency Fleet Corporation?
Mr. Ferguson. These w-ere two transports we got for the Emergency Fleet
Corporation on a cost-plus basis, and those were changed, at my suggestion, to a
fixed-price basis, agreed upon between them and ourselves, and we made more
than we would have made on the original contract, and the transports cost
the Government about $1,000,000 less apiece than other transports that were
furnished on the cost-plus oasis.
Mr. Raushenbush. Others not in your company?
Mr. Ferguson. No; but in other companies.
Mr. Raushenbush. We hardly know the circumstances of the other companies.
Mr. Ferguson. I am saying that we made more money and the Government
saved $1,000,000 apiece.
Mr. Raushenbush. At the time of the shifting you state that the shifting
from a cost-plus fixed-fee basis to a fixed-price basis —
will give us a greater profit than we would otherwise make, and I am quite
sure will relieve us of a great deal of annoyance in having the Fleet Cor-
poration auditors around the place. These transports, or passenger ships
as they will now be, are getting along very well and we will launch the first
one in the summer. We have not yet shifted our 2-battleship and 2-battle-
cruiser contracts from cost-plus-1 0-percent to cost-plus-fixed-fee basis as the
Navy Department wants to do, for the reason that we have not been able
BO far to find out just how to do it and be safe.
What do you mean by "how to do it and be safe"?
Mr. Ferguson. I do not remember what I meant.
Mr. Raushenbush (continuing reading) :
I think that the best method would be to simply agree to a fixed fee as a
change under the contract instead of 10 percent and have all the rest of the
contract remain as it is.
You are still on the question of changing the base on those, are you not?
Mr. Ferguson. No, sir; that means as you make changes under the contract,
as was done, that a new contract was not made.
Mr. Raushenbush. Are you sure of that?
Mr. Ferguson. A supplemental contract, but a new contract was not made,
taking the cruisers out of the war period.
Mr. Raushenbush. Are you sure of that?
MUNITIONS INDUSTRY 45
Mr. Ferguson. Yes; I am quite sure.
Mr. Raxjshenbush. Mr. Branch?
Mr. Branch. That is correct.
Mr. Raushenbush. .Then all these attempts came to nothing?
Mr. Ferguson. It looks so.
Mr. Raushenbush. You kept after it year in and year out, apparently,
explaining to Mr. Huntington in a letter of June 1, 1920:
Last week we changed out contract with the Shipping Board for the last
two troop transports from a cost-plus-fixed-fee basis to a fixed-price basis.
Our fee was to be $350,000 for each ship plus one-half of the saving under a
certa'n estimated price. We are now to get a little over $6,100,000 per
vessel, and we think we should make about $750,000 profit on each vessel.
We have canceled the former contract and written a new contract which
we believe will take it out of the war period completely, and so we wiU not
have to pay the extra tax on war profits on its since February 23, 1920, on
these contracts. Mr. Palen negotiated this trade which I think was very
advantageous from every point of view.
Then it goes on:
In regard to the two battle cruisers, we have tentativelj agreed with the
Navy Department, as previously discussed with you, to change these con-
tracts from cost-plus- 10-percent to cost-plus-a-fixed-fee basis, the fixed fee
being agreed upon as $2,000,000 per cruiser. For almost a year the Depart-
ment has wanted us to write a new contract and particularly to change our
old contract with regard to taxes. We have refused to do this and now
will hold to our old contract, but simply agree in a letter to accept a fixed
fee of $2,000,000 for each vessel instead of 10 percent.
Why did the Navy Department want you to write a new contract there?
Do you remember that?
Mr. Ferguson. I do not remember. Presumably to cut out taxes as an item
of cost.
Senator Vandenberg. This is after the war, is it not?
Mr. Ferguson. Yes, sir.
Newport News met opposition from the Treasmy in its attempt to
shift profits to the post-war years in which tax rates were lower than
in the war years (Feb. 12, 1935 p. 5296 seq).
Mr. Raushenbush. You were aware of the fact that the Treasury Department
was opposed to your attempting to shift the profits out of the high war tax years
into the lower post-war tax years, were you not?
Mr. Brai-tch. That is true; we were conscious of it as it went along.
Mr. Raushenbush. You were not only conscious of it but you had acceptance
of it because of this confidential report to the Treasury Department concerning
this price?
Mr. Branch. I might say that I knew of the report, Mr. Raushenbush.
Mr. Raushenbush. I want to oS'er for the record "Confidential report of the
internal-revenue agent examining the Newport News books, dated March 30,
1927", which I will show you [handing paper to witness].
(The document referred to was marked "Exhibit No. 1557" and is included in
the appendix)
Mr. Raushenbush. I show you on the second page, the third paragraph, a
comment on what seems to be this practice of shifting profits around to what
the revenue agent thinks avoids the higher war taxes.
This, Mr. Cliairman, is in point upon this question: If very high war taxes are
put on, and this sort of practice is possible, then everybody who is taxed under a
high rate wiU probably wait and do their best to postpone the settlement and
postpone the taking of their profits until after the war is over, when everybody
will think taxes will drop, as they did during the last war.
The paragraph reads:
About the time of closing the books each year many memoranda are not
actually issued until January of the following year, and the auditor is told
by Mr. Ferguson (dictated often by Mr. Gatewood) how to close certain
long-term contracts. Particular reference is made to memorandum dated
January 11, 1922, pertaining to 1921 closing, regarding contracts for hulls
261 and 262, which states "no change from present instructions." This
memorandum bears initials of Mr. Gatewood. These are the contracts
where $2,283,474.88 profits were not reported until 1922, although contracts
were fully paid and work had ceased for several months prior in 1921.
73018°— 36— pt. 7 4
46 MUNITIONS INDUSTRY
Mr. Gatewood and Mr. Ferguson should each ba required to state under
each why this large amount of Income was not reported In 1920 and 1921,
when only 10 percent of expanses was taken as profits each month in those
years. Certainly at the end of 1920 they knew what percentage of the
contract was completed and should have adjusted the profits in 1920 to
show the proper income for 1920 as required by article 36 of regulations
62. Again, they should have restated thair profits at the end of 1921 when
the contract was actually closed. The same condition appears in many
other contracts, which are detailed In my report in exhibit H.
I do not wish to accuse these gentlemen of any wrong intent, or even
Intimate such, but I cannot help but feel that such action was intentional,
whatever the motive. But I have refrained from making any suggestions
of wrongdoing in my report, but I hold that the income properly belongs In
1920 and 1921 and a penalty for negligence should be added for not restat-
ing same.
Another paragraph on the third sheet states:
Mr. McMurran —
Web he the auditor at that time?
Mr. Branch. Yes, sir.
Mr. Raushenbush. Was he your predecessor, Mr. Branch?
Mr. Branch. Yes.
Mr. Raushenbush (reading):
Mr. McMurran. the auditor, declined vo come to the conference on March
12, 1927, stating that, as Mr. Gatewood had taken charge of the tax matters,
he (Gatewood) should assume full responsibility. Mr. McMurran stated
that, if he (McMurran) had been allowed to close the books, the profits
would have been reported in accordance with the income-tax law, no matter
what tax developed. I could not help noticing an apparent friction be-
tween Gatewood and the auditing department.
The letter then ends up:
The corporation Is owned and controlled by wealthy people, fully able
to pay the Federal taxes when properly determined, plus interest and
penalties.
After consideration of this letter, it may be thought that more drastic
action should be taken and fraud penalties.
That was the very thing you were talking about, was It not, Mr. Branch,
and which the Treasury Department thought should be one way and you
thought should bo another?
Mr. Branch. Yes, sir.
Mr. Raushenbush. Do you want to comment on that, Mr. Ferguson?
Mr. Ferguson. May I state in connection with 281 and 262, which were
mentioned, that they were two oil ships, the largest ever built, for the Standard
Oil Co. of New Jersey. These vessels were of new design and were much larger
than any ships that had ever been built up to that time. The guarantee on
those ships ran for 1 year after delivery.
The company was liable for the ships for a year. The income-tax people
said that the profit should be taken at the time when the money was paid.
We held that on account of the risk Involved through a year's guarantee on a
ship of a tremendous size, and different from any other oil ship, that we or anyone
else had built up to that time, that we should be protected until our guarantee
period should elapse.
In the case of other ships he refers to, they were two oil ships building for
the A. Q. W. I. interests. In that case the company became Involved in finan-
cial difficulties. We kept the ships for 6 months. We accepted the bonds,
which could not be sold. In payment for these ships. We did not wish to enter
the profits on the sliips until the bonds had been paid, or could be sold by us.
The Treasury Department ruled that we had to take the profit when we accepted
the bonds and could not wait until the bonds had been demonstrated to be good.
Mr. Raushenbush. There are some letters on that, Mr. Ferguson, which
seem to include something more than the A. G. W. I. ships.
Senator Barbour. May I ask. If I may interrupt, were the bonds good?
Mr. Fbrquson. They were eventually paid off; yes, sir; and we took the
profit when the notes represented by the bonds were paid.
Senator Vandenberq. Did the postponement of the profits into subsequent
years result in a tax advantage to the company in net result? Would it have
resulted in a tax advantage?
Mr. FEaousoN. It would have but it did not.
MUNITIOifS INDUSTRY 47
Senator Clark. How great a tax advantage, Mr. Ferguson? Can you tell
us roughly what the difference would have been between the two constructions
of the tax?
Mr. Ferguson. I beg your pardon?
Senator Clark. Can you tell us roughly what the difference in the tax would
have been under the two constructions?
Mr. Ferguson. I do not know.
Senator Clark. Do you have anything which shows that, Mr. Raushenbush?
Mr. Raushenbush. I cannot work it out exactly, but there are several letters
here showing definite attempts.
The Chairman. It would be quite interesting and the record should carry a
completed study on that, showing just what the difference would be, if you will
make note and have that prepared.
Mr. Raushenbush. All right, sir.
We have here a letter from Mr. Ferguson to Mr. H. E. Huntington, dated
January 10, 1922. Mr. Huntington was the sole owner of the company, was
he, Mr. Ferguson?
Mr. Ferguson. He and his wife.
Mr. Raushenbush. He and his wife were the sole owners of the company?
Mr. Ferguson. Yes, sir.
Mr. Raushenbush. It says in the second last paragraph:
In connection with the tax situation, we have decided not to take any
of the profit we earned last year on the big naval ship work as we do not
know at this time just what we wiU be called on to do, what disposition
wiU be made of the hulls, or whether we will have to bid on them to finish
them. * * * I am in hopes of working down our profits for last year
to such a point where our taxes wUl not be so heavy, and legally we do not
have to sliow profit for tax purposes until a job is completely finished and
all of our responsibility in connection with it ceases.
I will call your attention to this:
I am in hopes of working down our profit for last year to such a point
where our taxes will not be so heavy * * *.
Last year, being 1921, when the taxes were higher than 1922.
I offer that for the record.
(The letter referred to was marked "Exhibit No. 1558" and is included in the
appendix)
Senator Vandenberg. What is that letter?
Mr. Raushenbush. A letter from Mr. Ferguson to Mr. Huntington, and I
was calling attention to a paragraph on the last page.
In addition to that, I call your attention to a letter of February 2, 1922, again
to Mr. Huntington, signed by Mr. Ferguson. The third paragraph says:
In going over our tax situation in detail, we find that our taxes for last
year wiU be verj' much less than I have heretofore indicated to you, as the
two Standard Oil ships have guaranties which do not expire until the latter
part of this year. It is also probable that we will not take profits for last
year on any of the Government work which is canceled, as there is no way
of telling what that profit wiU be.
That is a little more inclusive than the Standard Oil ships, is it not; post-
poning the profit taking on all Government work?
Mr. Ferguson. The Government work had been suspended, or partially sus-
pended, and there was no means of teUing then what the profit would be.
Mr. Raushenbush. Do you know to what extent you had accepted It for
1921?
Mr. Ferguson. The final settlement on the Government contract was maae
in 1925.
Mr. Raushenbush. On the canceled ships, as a result of the disarmament
conference, you mean?
Mr. Ferguson. Yes.
Mr. Raushenbush. The final settlement was made, but the arrangement, I
thought you were going to say, was made In 1923. You knew you were going
to get $100,000 a month on that, did you not, from 1923 on?
Mr. Ferguson. I do not remember that.
Mr. Raushenbush. We wiU come to that matter.
I call you attention further to a letter on the question of postponing profits
of March 6, 1922, again addressed to Mr. Huntington [reading]:
Our tax return as made up for this year gives us a total Federal tax on
income of only $153,628.62. The reason for this is that we did not put in
48 MU3SriTI0NS INDUSTKY
the AGWI ships as they are still here awaiting final settlement. We wrote
off an additional $600,000 on the plant and did not put any profit on most
of our Government work, as that is in the process of being canceled, and
we do not know where we will land.
Mr. Ferguson. What date was that?
Mr. Raushenbush. This letter is dated March 6, 1922.
Mr. Ferguson. The Disarmament Conference met in 1921. It was finally
approved and ratified about 1923. In the interim, when there was just a very
small amount of work going on, we had no means of knowing what kind of a
settlement the Government was going to make.
Mr. Raushenbush. We will just check the statement about the settlement to
be made on the ships, Mr. Ferguson.
I want to call attention to the last part of this paragraph —
We did not put in the main profits of the Standard Oil ships as we have a
12 months' gu,arantee on these ships which does not expire until the latter
part of this year. Of course this will make our taxes for the year 1922 very
much larger than they would have been —
1922 was a lower tax year, 15 percent, was it not?
Mr. Ferguson. Yes, sir.
Mr. Raushenbush. And 1921 was about 40 percent.
The letter goes on [reading]:
but under the circumstances I felt justified in keeping our taxes for 1921 as
low as we legally could.
There was a letter indicating that what you were trying to do was to take the
profits in the higher tax years and put them in the lower tax years?
Mr. Ferguson. Yes.
Wines, liquors, cigars, etc., were charged into the wartime contracts
as proper expense (Feb, 6, p. 508;7):
Senator Clark. Did that contract during the war include provision for assess-
ing the services of your Chinese and Japanese representatives and for wines,
liquors, and cigars which you actually put into the cost?
Mr. Parker. It included all costs having to do with operating the business
and wines and liquors in shipbuilding are just as necessary as steel in many cases.
Senator Clark. Do I understand that the contract provided for under the
Vinson bill should include wines, liquors, and cigars?
Mr. Parker. Absolutely so.
Senator Clark. That is very illuminating.
Senator Vandenberg. In the case of those cost-plus contracts during the war,
do I understand that the items which you included in cost, and which were
subsequently eliminated, such as income taxes, and so forth, do I understand
that you were authorized to include those at the time in the first instance?
Mr. Parker. The contract, the first cost-plus contract, provided as one of the
items of cost all taxes. That seemed to be authority to include income taxes.
The subject was raised a little later (Feb. 6, p. 5088):
Senator Clark. Mr. Parker, I would like to have a little further explanation
of your very surprising statement a little while ago that wines, liquors, and
cigars were fully as important elements in the shipbuilding business as steel.
Will you just explain why it happens that wines, liquors, and cigars are just
as important in the manufacture of a ship as steel?
Mr. Parker. Senator, if I would paint a picture of what the use of wines
and liquors in the shipbuilding business is
Senator Clark. Since the Government has to pay for them, and then pay
you an additional percentage of profits on top of them, I think that picture
v.'ould be very interesting.
Mr. Parker. All right. Wines and liquors have more to do with the building
of the ship than just the champagne bottle that we push it overboard with
or the few drinks that may be passed around on a trial trip, which Congress-
men and Senators enjoy sometimes. [Laughter.]
In days of old when a trial was conducted, and I am sure we all remember
the stories we read of the issuance of grog abroad ship, particularly in a time of
stress, of storm, of extraordinary effort, that when a ship is required to go on
trial, and you have the picture of 20 men throwing big, hand-picked coal in the
furnaces, there are 5-gallon demijohns of liquor alongside them, and they have
their drinks of beer and ^^hisky just the same, and it is a matter of rule and
routine and just as much a part of the business of operating a ship under these
conditions as it is in a restaurant where the service is allowed.
MTJinTIONS INDUSTRY 49
Senator Ciahk. Is there any more necessity for dealing out liquor and beer
to these men on a trial trip than there is when the ship is in commission in the
Navy? Of course, they are sweating from shoveling coal when the ship is on
a regular cruise in the Navy, are they not? Is there any particular reason
why they should get drunk on a trial trip any more than on a regular cruise?
As a matter of fact, Mr. Parker, what this item of wines, hquors, and cigars
amounts to is this, is it not: You go on a trial trip and the shipbuilding com-
pany is permitted to invite a large number of influential or distinguished people,
some of whom may be Congressmen, Senators, or other Government officials,
and a general jamboree is held by all, with fine, rich food and fine wines ana
liquors, and the Government not only pays the bill for that, for the purpose
of making friends for the shipbuilding company, but also, under this program
arrangement, has to pay you an additional amount for the privilege of allowing
3'ou to give a party? Is not that correct?
Mr. Parker. Senator, when you go back to 1917 and 1918, that was the prac-
tice up to that time That is 18 years ago. The practices which were In existence
before the war were continued during that period, of course. But we did not
run jamboree parties in naval vessels and never do. The only people on a naval
vessel are the trial board and the representatives of the contractor and repre-
sentatives of auxiliary manufacturers. There is no general jamboree on that.
Senator Clark. I notice on naval vessels constructed after the war a very
large item set down — I forget exactly when it was, but I referred to it when
you were last here — a very large item for wines, Uquors, and cigars in the con-
struction of those vessels, set down as a part of the cost, on which the Government
was required to pay an additional commission to you.
Mr. Parker. They were Shipping Board vessels. Senator.
Senator Clark. Whether they were naval vessels or Shipping Board vessels,
the jamborees took place, did they not?
Mr. Parker. They did.
Senator Clark. You considered that part of the national-defense scheme,
did you not, Mr. Parker, to have jamborees?
Mr. Parker. WeU, it certainly had a part of it. It was the first time that
many of these Senators from the West and Congressmen from the West had ever
seen a real sliip in operation.
Senator Clark. After having taken this pleasure trip, you felt they were better
educated as to national defense, and more susceptible to suggestions of the New
York Shipbuilding Co. and other members of the "big three ? Do I understand
that to be your statement? As a matter of fact, that was the purpose of the trial
trip, was it not, Mr. Parker?
Mr. Parker. I would say that would be true from their attitude . They surely
knew more about ships after that.
Senator Clark. And also the shipbuilders, too, did they not; and had a wider
education in the matter of wines and liquors?
Mr. Parker. Yes, sir.
New York Ship did not give the Treasury the greatest degree of
cooperation in its attempt to determine taxes. A report by Treasury
officials illustrates one difficulty (Jan. 22, p. 4583 et seq.):
There is further description along the same line, and then it continues [reading]:
To verify the correctness of the taxpayer's returns, or books, it is most
essential to procure the schedules referred to and to examine the computa-
tions of earned profit on each contract that was made by the taxpayer and
appear thereon. Such schedules have been requested of the taxpayer, first
over 3 weeks ago, and photostats thereof were promised by Mr. Norman F.
Parker, assistant treasurer, almost daily after the first request.
Is that yourself, Mr. Parker?
Mr. Parker. Yes, sir.
Mr. Ratjshenbxjsh (continuing reading] :
Last Saturday, on request again for the schedules, Mr. Parker informed
us that he had been "stalling" and that we knew it, but that the corpora-
tion's counsel had advised him to delay giving the schedules to us. He
called his counsel by telephone, a Mr. Orr, connected with White & Case,
attorneys, while we were present, and explained the situation, and stated
to Mr. Orr that he beheved we were entitled to the schedules and should
get them. Mr. Orr's advice, we were informed, was not to deliver them.
50 MUNITIONS INDUSTRY
To dat«, the gituatlon remains the same, the schedules have been refused
on the advice of counsel, so we are Informed by Mr. Parker and Mr. J. T.
Wiokersham, the treasurer.
The points raised by the Solicitor have developed other points that make
It imperative, in the opinion of your examiners, after their investigation
thus far, that a reexamination be made of the Taxpayer's books for the
period extending from 1918 to 1921, inclusive.
Their Investigation thus far. with the Information we have been able to
gather, results in an increase in income over Income as determined by the
revenue agent from Trenton, who made the last examination for the period
1918 to 1921, inclusive, of approximately $8,000,000.
It Is the positive opinion of your examiners, with the information gained
thus far, that there should be recommended to the Commissioner that a
reexamination be made of all of the taxpayer's books and records for the
years 1918 to 1921, inclusive; and that the taxpayer should be duly notified
under the provisions of section 1106 of the Revenue Act of 1926 that such
investigation has been ordered.
That was just preliminary, Mr. Parker, was it not, to the examination which
was made in great detail in 1926 that resulted in this increase in taxes?
Mr. Parker. It was just at the beginning of that examination, as I recall it.
Mr. Raushenbush. Do you have any comment to make on the statement
here that you had been "stalling" under the advice of your attorneys?
Mr. Parker. None, except that that was true.
Miscellaneous items, such as securing business from Japan, were
charged into the cost of Government contracts on war vessels (Feb.
6, 1935, p. 5082):
Mr. Raushenbush. Coming back, then, to this matter of the employment of
Mr. Joyner, do you remember back that far, or have you ever had it called
to your attention, the matter of a somewhat mysterious check for $5,000 which
he apparently received back there?
Mt. Parker. What date, Mr. Raushenbush?
Mr. Raushenbush. That was back on December 31, 1920. There is an order
here to make it out for expense, and Mr. Joyner writes Mr. Wickersham [reading]:
Inserted special on expense ship. If this is improper for your purposes,
let me know. Mr. Neeland wiU t«ll you what the expense is for.
Mr. Parker. What date is that, sir?
Mr. Raushenbush. Back in 1920. What was he doing for you at that time,
if you remember, Mr. Parker?
Mr. Parker. I do not recall. I checked Mr. Joyner back for the period — may
I see that letter just a second?
Mr. Raushenbush. Yes, sir; 1920 to 1923 [handing paper to witness].
Mr. Parker. That is right. I recall it.
Mr. Raushenbush. But you do not recall?
Mt. Parker. I recall the amount and the purpose of it.
Mr. Raushenbush. What was the purpose of that?
Mr. Parker. Mr. Joyner, as stated in my letter, was engaged to be the New
York Shipbuilding Corporation representative for certain work, on a basis of
salary and commission. Through his efforts we obtained a Japanese contract for
tha construction of a naval oil tanker, Kamoi.
Senator Clark. About when was that. Mr. Parker?
Mr. Parker. About 1921 or 1922. Tne basis of his commission was not less
than 5 percent of the net profits earned by the company on that particular con-
tract. On the basis of the anticipated profits on the contract, he was paid $5,000
commission in advance. That is the check to which you refer. He actually
received, in final settlement, thirteen-thousand-some-odd dollars, which I have
noted there.
Mr. Raushenbush. If that was a commission, what was the point of putting
it In as an expense item? So that he could avoid the income tax on that? Is
that the point of that?
Mr. Parker. That is something I know nothing about.
Mr. Raushenbush. He definitely puts it in as an expense item [reading]:
Inserted special expense ship. If this Is improper let me know. Mr.
Neeland will tell you what the expense is for.
Mr. Parker. That was a matter of arrangement between Mr. Neeland and
Mr. Wickersham, the then treasurer.
MUNITIONS INDUSTRY 61
Mr. Raushenbush. It has nothing to do-
Senator Clark. Did that expense item go into overhead, Mr. Parker?
Mr. Parker. Yes, sir.
Senator Clark. That was the Japanese representative about whom we were
talking when you left here?
Mr. Parker. Yes, sir.
Senator Clark. In other words, the services in Japan in getting this tanker
contract were partly charged up to the Government for overhead on the naval
construction work which you were doing at that time?
Mr. Parker. Yes, sir.
A considerable portion of the keels of ships authorized during the
World War were not laid down until later. It was from this post-
war construction, under war-time impetus, that the shipbuilders
made considerable profits relatively free from high war-time taxes
(Feb. 6, 1935, p. 5084).
Mr. Ratjshenbubh. The question is not intended to cover in any way tha
cause of the delay, but the question is, rather, how it happened that after the
war was all over on November 11, 1918, these ships whose keels were not laid
at the time were then laid and continued and completed? Can you throw any
light on that? You have explained quite satisfactorily that you had to build a
yard, and that was the cause for that delay, but my question was the other one:
Why, after the war was over, the contracts were not canceled, but instead you
were given 10 destroyers to complete, and there were altogether 91 whose keela
were laid subsequent to November 11, 1918. Can you throw any light on that
at all?
Mr. Parker. Not at all, except that we had a contract to build ships. The
contract was not canceled, and we built them.
Mr. Raushenbush. I call the attention of the committee to the hearings in
Navy Department appropriation bill, 1933, United States House hearings.
Seventy-second Congress, on pages 66 and 67, in which these 91 destroyers, of
which New York Ship had 10 whose keels were not laid until after the war,
being ordered during the war, are listed, and offer for the record the statement
just identified by Mr. Parker in reply to question 20.
(The document referred to was marked "Exhibit No. 1530" and is included
in the appendix.)
Mr. Raushenbush. There Is an illuminating comment on that, Mr. Chairman,
by Admiral Pratt, who gives at least one reason why these destroyers, 91
destroyers, were built after the whole war was over [reading]:
Admiral Pratt. That seems like a very fair question. I cannot give you
a real, practical, definite reason why, but I should say this: That if you
start a big machine moving, such as this production is, it takes a certain
amount of time before it gets slowed up and working normally; and I should
think that that had about as much do to with it as anything. We just got
swept into it, and before we could get our breath and stabilize and get
together, there we were with our output.
The result of that is that there were 91 destroyers whose keels were not laid
at aU at the time of the armistice, but were begun afterward.
Senator Clark. The result was we had 91 destroyers which we did not need?
New York Ship bought improvements made during the war by
the Government at a cost of $14,000,000 for $500,000 (Jan. 21, 1935,
p. 4538).
Mr. Raushenbush. That still does not quite answer my question. You did
get from the Emergency Fleet Corporation about $14,000,000 worth of property
for about $500,000, did you not, and that was the exchange price there?
Mr. Parker. I won't say $14,000,000 worth of property. We got the property
which may have cost the Shipping Board $14,000,000, but its worth was less
than we paid for it.
Disallowances of Bethlehem Ship claims on war-time cost-plus con-
tracts were discussed on February 26 (p. 5817 seq. (ex. 1642) ).
Mr. Raushenbush. Mr. Sliick, on these ships which you built for the Emer-
gency Fleet Corporation in your various plants, we find some disallowances here
which we have secured from the Shipping Board on these four plans, and I bring
52 MUNITIONS INDUSTKY
up the matter not with any feeling that your company was unusual in this
respect, because I do not think it was, but as to the way that, in the hurly-burly
and excitement of war, with a great deal of pressure, things got done.
We find here a summary sheet, and several files have been examined after
the audits by the Fleet Corporation auditors, and they make a request for a
reaudit on various grounds.
I want to offer this for the record.
(The document referred to was marked "Exhibit No. 1642" and is included
in the appendix.)
Mr. Raushehbush. File no. 35:
Alterations and Forgeries to Form a Basis for a Fictitious Base Rate.
No. 37:
Marine Auxiliaries Overcharge. Overcharges whereby Bethlehem at-
tempted unjustly to defraud the Government.
No. 39:
Capital investment charged to Government. Attempt by Bethlehem to
have the Government bear almost $2,000,000 in the cost of capital invest-
ments charged to ship cost under the guise of overhead. The reaudit
eliminated $1,351,456.39 of this improper charge.
No. 41:
Interplant billings. Attempt of Bethlehem to gain a double profit on
interplant work.
And there are some more of the same kind. Then we have the detailed sheets.
Mr. Shick. Would you mind giving the total amount of these disallowances?
Mr. Raushenbush. Not at all.
Mr. Shick. I mean the amount.
Mr. Raushenbush. I was going to read them from the plant sheets, $2,218,404
Is the total according to our figures.
Then they give the items yard by yard, and one of the interesting things
here, Mr. Chairman, is that the Fleet Corporation totals their savings because
of the reaudit, and then gives a final saving, which is a good deal less, and the
only point there is that the cost of the audit, of policing the whole job, is often
very considerable. Here on this Fore River sheet there is a total saving to the
Emergency Fleet Corporation of $253,000 plus, but the only saving rea'ly to
the Emergency Fleet Corporation is $135,000. The whole cost of auditing even
a smaller job like this — a relatively small one — there is over $100,000 plus, and
BO it goes all the way through.
It cost the Government an awful lot to make those $2,218,000 savings.
On the Fore River plant the Emergency Fleet Corporation in exhibit A here
claims $253,370 plus savings. On the Sparrows Point plant, exhibit A, it is
$1,059,680. On the Moore plant it is $531,385, and on the Harlan plant $973,958.
Then they note the items that have been disallowed and consequently have
been a saving to them, and summarize them.
There was dispute between the companies and the Treasury con-
cerning their wartime income.
In the case of New York Ship the company reported net income
1917-21 of $8,444,858. The revenue agents found $24,296,957. The
final compromise settlement was $13,240,955 (Jan. 21, p. 4543)
(exhibit 1420). This settlement was not made until 10 years after
1918. ^
On its wartime cost-plus contracts the disallowances made from the
clauns of the company 1917-21 were $3,597,844 (Jan. 21, p. 4545).
During the war on the cost-plus contracts a 50-percent allowance
was made for overhead and was paid by the Government. Revenue
auditors calculated the actual overhead as $2,152,976 less than that
paid to the company by the Government (Jan. 21, p. 4551).
It was developed that a former Bethlehem official, Mr. J. W.
Powell, left the company to head the Emergency Fleet Corporation.
He received as a bonus from the company "a share in all the profits
accruing from the contract covering the building of 137 destroyers
for the United States Navy and aU vessels built for the Emergency
Fleet Corporation" (p. 5789 et seq., Feb. 26). He was later a witness
MUNITIONS INDUSTEY 53
for Bethlehem Steel in a suit against it by the Emergency Fleet
Corporation and later submitted a bill for 5 percent of the principal
which the court found due to Bethlehem. At the time of the testi-
mony he had not been paid any fee as a witness (hir. Bromley).
Mr. Powell referred to the possibility of there being no decision "for
pohtical reasons" on Marcn 9, 1934 (exhibit 1639]. His financial
mterest in the continuing contracts at issue in the suit was admitted.
Bethlehem Ship was able to profit on $32,000,000 worth of facihties
constructed by the Government at its own expense, according to the
testimony of its officials (Feb. 27, 1935, p. 5807).
Senator VANoENBEHa. What was the nature of your arrangement with the
Government under which thl,8 $32,000,000 was made available?
Mr. Schick. In the case at Squantum, which was a shipbuilding plant for tho
building of destroyers, the arrangement was that we go and engineer and build
the facility and the Government would pay the bills, which thev did._ _ We turned
over our organization and all our "know-how" to build this facility, and In
building that facility all we did was order the material, do the engineering, and
build the facility, and check the bills and approve the bills, and we turned the
bills over to the Government and they paid for them.
Senator Vandenberq. What was your compensation?
Mr. Shick. We did not make anything out of that. Our compensation was
supposed to come out of the profit which we would get from building those ships.
If we did not build the ships and had not finished them before the war, we would
not have got anything.
Senator Clark. Then you took the facilities, after they had been constructed
at Government expense, and operated them just as though they had been your
facilities?
Mr. Shick. No; those were the Government's facilities.
Senator Clark. Yes: those were the Government's facilities, but you operated
them just as though they were your own and took the earnings from those
facihties?
Mr. Shick. That was the understanding under the contract.
Senator Clark. So that that was compensation for your building the facilities,
the fact that you were going to be able to run them for your own profit after-
ward?
Mr. Shick. Absolutely.
The question of the attitude toward wartime taxation of Bethlehem
Steel Co., the owner of Bethlehem Shipbuilding Co., was considered
with Mr. Eugene G. Grace, president, on the stand (Feb. 25, p. 5754,
et seq.).
The Chairman. In another war — and we come now to a very important ques-
tion, Mr. Grace — would your associates and yourself be willing to forego the
bonuses which were paid to you and to them during the last war?
Mr. Grace. That I could not tell. That Is a question of the method of com-
pensation in our corporation for services rendered. Our system of compensa-
tion is to have the individual interested In the results of the work which he
performs.
Senator Clark. Now. Mr. Grace, do you know of any reason why a man who
is engaged in industry during a war, either as an executive or a riveter, or any-
thing else you may take, any capacity you may be pleased to use, should be given
a bonus as an incentive to extra effort, any more than a man who is In the Army?
Mr. Grace. Only as it is human nature. I should say that In the production
of a property, from my own experience in manufacturing, even If I were working
for the Government on the basis that you have outlined, that I will be made
major domo of our institution at an Army salary, to run It efficiently, to get
efficiency, to get low costs, that I would want to place the proper interests of my
workingmen on an incentive basis for production.
Senator Clark. A man who is engaged in military service during the war
certainly takes more risks than the man engaged in manufacturing.
Mr. Grace. Yes.
Senator Clark. Whether he is a general, a colonel, or a private. He certainly
puts in, as occasion may demand, overtime or anything else, and is certainly
expected to give his very best effort.
54 MUNITIONS INDUSTRY
Mr. Gbace. His services: that is true.
Senator Clark. Without any particular remuneration of anv sort except his
ordinary pay and his patriotism and idea of doing a good Job. Is there any
essential ditlerence between industry and mihtary service which makes It neces-
sary, as was done during the last war in some cases, for industrial plants to pay
bonuses running into the hundreds of thousands of aoUars for services?
Mr. Grace. I should say that the incentive method of pay In Industry is very
effective and efficient, and' I believe It applies In war just as well as any other
time.
Senator Clark. If a man is drafted, Mr. Grace, and Is compelled to fight for
the Old Flag for one dollar and a quarter a day, why should not a man engaged In
the industrial end of the game — which I agree Is very essential, whether he be an
executive or a laboring man — also make some sacrifice for the Old Flag?
Mr. Grace. Theoretically you are entirely right, of course, but can you get the
same amount of production, the same amount of effective rendering of service,
without the incentive feature put into It? I do not think so. That is all.
Senator Clark. Of course, that is a matter of opinion, Mr. Grace.
Mr. Grace. Yes, sir.
Senator Clark. I do not know a thing about making steel, but I am very well
satisfied if you will put an eagle on my shoulders I can get the boys to make steel
during a war, and very good quality of steel during a war.
Mr. Grace. Well, you probably can.
Senator Bone. Mr. Grace, taking your statement of a few minutes ago that
there should be uniformity in the rules of the game of war, you were speaking
then with respect to salaries. I mean you stated that If there was a horizontal
reduction all around, that would be acceptable. But taking that principle, that
there should be uniformity in the rules of the game of war, why, then, or how.
then, can we justify paj'Ing enormous salaries and bonuses to one group — just
pick out arbitrarily one group In society and reward them with hundreds o{
thousands of dollars a year, while all the other groups who are giving their best
to the prosecution of the war are kept right on a dead level?
ISIr. Grace. Are you speaking of the man In the service?
Senator Bone. Yes.
Mr. Grace. Versus the man In Industry?
Senator Bone. No bonuses are paid to the men In the service.
The Chairman. They asked for one after It was all over with.
Senator Bone. They are still asking for It.
Mr. Grace. And still asking for It. Whether it Is advisable to discontinue
your scheme of every day In respect to the reward for payment for services
rendered In Industry during war, during the war period, you must bear in mind
that your men are all educated, developed, to be paid for their Individual effort.
They are with our Institution. If I put Mr. Smith on this machine, and Mr.
Jones on that machine, exactly Identical in every respect, and they work 8 hours
a day, and Mr. Smith produces twice as much as Mr. Jones, is not he entitled
to more compensation? That is the theory of Incentive.
Senator Clark. If a man Is called upon to go through barbed wire entangle-
ments under heavy fire, he is doing more.
Mr. Grace. But you do not have that scheme In every-day Army life.
Senator Clark. I am not talking about the fellows who start In with a view
of making the military profession their life work. I am talking about the fellowa
who might be working for your company, and were taken and drafted and were
required for $1.25 a day to crawl out through barbed- wire entanglements, under
a barrage, and face the bombs and the poisonous gas and the bayonets of the
enemy. They do not get any overtime, and they do not get any bonuses.^
Mr. Grace. No; but maybe we ought to stop and consider a little bit their
method of pay-
Senator Clark. Yes.
Mr. Grace. The rates of pay which were given to the soldiers. I wonder if
it Is right to take a man from a $5 a day job and put him In the Army at $1 a
day. I wonder If we had not better give that man his $5, or something more,
to go Into Army service. Have we ever thought of that?
Senator Clark. Yes; I have, and I am very much in favor of some such
scheme.
Mr. Grace. Maybe that is what we ought to do.
Senator Clark. In any event, I think it would very much decrease the pos-
sibility of war and very much decrease the profits made by the munition manu-
facturers in the event of Vv^ar.
MUNITIONS INDUSTRY 66
Mr. Grace. I am inclined to think maybe we should give more consideration
to that end of it.
The Chairman. Mr. Grace, have you ever before protested that that was
not done?
Mr. Grace. Have I? No; I have not been a student of war.
The Chairman. Coming back to the original proposition, are we to under-
stand that the Government got a larger service out of you by reason of the
bonus which was paid to you during the war by your corporation?
Mr. Grace. The Government got a larger service out of me?
The Chairman. Yes.
Mr. Grace. For war purposes?
The Chairman. The Government got a larger service out of you by reason
of your ability to draw a bonus, in addition to your salary, than it would have
gotten out of you if you had had no bonus?
Mr. Grace. I do not know how I can answer that question. I am employed
on an incentive basis to perform my work. I should say that it has been an
inspiration to me.
The Chairman. The bonus has?
Mr. Grace. The bonus has been an inspiration in the work.
Senator Clark. During the war?
The Chairman. Was it an inspiration to you during the war?
Mr. Grace. Never thought of it in that time, naturallj'- not.
The Chairman. Then, are we to draw the conclusion that the Government
would have gotten the same service from you during the war, if you had had no
bonus?
Mr. Grace. If I was at the head of the Bethlehem Steel Co., at the most
nominal salary, I should have done my best for it during the war and have ren-
dered everything I had.
The Chairman. The bonus played no part in accomplishing what the United
States was after in your individual case during the war?
Mr. Grace. No; it certainly did not in my individual case.
Senator Clark. Then the bonus was not really an incentive?
Mr. Grace. I am talking about the bonus generally in the plan prevailing with
the Bethlehem Steel Co.
Senator Clark. Do you not think the rest of them are as patriotic as you are,
and the rest of the men would do the same thing?
Mr. Grace. Are you talking about these workingmen?
Senator Clark. I am talking about your whole personnel.
Mr. Grace. We would have to change our whole system of pay to our work-
ingmen, if we eliminated the incentive for them. We will have to change the
whole system of pay, and I should say that that would be very injurious in time
of war for the effect it would have on them.
Senator Clark. How much bonus did you get during the war?
Mr. Grace. I do not know.
Senator Clark. Have you any idea?
Mr. Grace. Yes; it is all here, the whole bonus schedule, the entire bonus, I
think.
Senator Clark. $1,386,000.
Mr. Grace. In what year?
Senator Clark. 1918. That seems to be the figure.
The Chairman. Before we look into 1918, would we not do well to start in
with the bonus program for 1917?
Senator Clark. I want to ask Mr. Grace one other question. Are j'ou a
member of the National Economy League?
Mr. Grace. The National Economy League?
Senator Clark. Yes, sir.
Mr. Grace. I do not think so. I do not know whether I am or not.
Senator Bone. Do you belong to the Liberty League?
Mr. Grace. Do I belong to the Liberty League? No; I think not.
Senator Bone. Any of your executives?
Mr. Grace. I do not know. Certainly not active in it. I may belong to it.
Senator Clark. The National Economy League, Mr. Grace, is an organization
that was formed to oppose any compensation to veterans of the World War or
any payment of a bonus.
Mr. Grace. I do not think I am a member of it. I do not think I am.
Senator Clark. Do you know whether your company has ever contributed to
that organization?
56 MUNITIONS INDUSTRY
Mr. Grace. I am sure they have not.
The Chairman. In a letter addressed to your corporation by the committee,
question 6 made request for information concerning bonus payments to officers
and directors of Bethlehem Shipbuilding Corporation for the year 1917. The
response, as submitted to us this morning, is as follows:
Bethlehem Shipbuilding Corporation, Ltd., was organized in October 1917
and began business on or about November 1, 1917. The information for
the entire year is given below for the same officers and directors as was
previously given for the year 1918, although during part of the year 1917
they acted in capacities other than as officers and directors of Bethlehem
Shipbuilding Corporation, Ltd.
Bonuses paid for the year 1917 to officers of Bethlehem Steel Corporation,
who were also officers of the Bethlehem Shipbuilding Corporation, Ltd., ana
of one or more of the other subsidiary companies of Bethlehem Steel Corpo-
ration, and who, respectively, received salaries of $5,000 or more per annum:
E. G. Grace, president, $1,501,532.
B. H. Jones, secretary and treasurer, $250,255.
F. A. Shick, comptroller, $200,205.
H. S. Snyder, vice president, $350,357.
The committee has averaged these four pavments and finds the average to be
$575,612.
I read on from the statement supplied by the corporation.
Bonuses paid during the year 1917 to other general officers of Bethlehem
Ship Corporation, Ltd., who were also general officers of one or more of the
other subsidiary companies, Bethlehem Steel Corporation, and who respec-
tively received salaries of $5,000 or more per year:
W. M. Tobias, purchasing agent, $150,153.
A. Foster, assistant secretary and assistant treasurer, $17,136.
J. W. Powell, vice president, $70,798.
Bonuses paid during the year 1917 to other general officers and/or em-
ployees of Bethlehem Shipbuilding Corporation, Ltd., Fore River plant,
and who respectively received salaries of $5,000 or more per year:
S. W. Wakeman, general manager, $4,279.
H. G. Smith, manager, $18,492.
H. Brown, technical manager, $15,028.
Now your exhibit, known as exhibit A, which was supplied the committee,
revealing bonuses for the year 1918, reveals the following:
E. G. Grace, president, $1,386,193.
H. S. Snyder, vice president, $323,445.
B. H. Jones, secretary and treasurer, $231,032.
F. A. Shick, comptroller, $184,826.
R. E. McMath, assistant secretary, $6,187.
E. B. HiU, treasurer, $46,206.
H. E. Lewis, vice president, $323,445.
J. N. Larkin, assistant to the president, $9,113.
J. W. PoweU, vice president, $323,445.
A. Foster, assistant secretary and treasurer, $36,714.
S. W. Wakeman, vice president, $49,142.
H. G. Smith, manager, $112,628.
H. Brown, technical manager, $112,628.
A. W. Christian, manager of materials, $7,884.
H. P. Phelps, standardization of plants, $11,263.
R. Warriner, cliief engineer, $28,157.
H. P. Frear, naval architect, $28,157.
And some few lesser ones. Let us make it complete, as there are only two
more to read:
H. G. Hageman, mechanical engineer, $5,529; and in the Fore River plant,
H. E. D. Gould, general superintendent and general manager, $9,834.
Mr. Grace, in 2 years, according to these exhibits, your return in the form of
bonus was $2,887,725. Did the corporation or the Government get an additional
service from you by reason of this $2,800,000 bonus than it would have gotten if
you had had no bonus at aU?
Mr. Grace. The method — I will have to answer that this way: The method
of paying executives of the Bethlehem Steel Corporation was authorized by the
stockholders on the basis that they would be paid a percentage of the profits
accruing in conducting the business. ^
Senator Clark. Mr. Grace, I do not think you have answered the chairman a
question. Did this $2,000,000, which vou got, bring about any additional effort
MUNITIONS I2SDUSTEY 57
on your part during the period of the war which you would not have given from
patriotic motives, under vour ordinary salary?
Mr. Ghace. I meant to say that that was not created for the purpose of
Incentive of service during wartime.
Senator Clark. No, sir; but it was continued during the war?
Mr. Grace. If you viiil go on, you will find it was existent prior to that, and
It has been existent ever since.
Senator Clark. Yes, sir; but most people during the period of the war In the
United States were on a inilltary footing and were prior to the war and during
and after the war.
Mr. Grace. That I do not know.
Senator Clark. The chairman's question was as to whether this $2,000,000
which you got personally brought about any additional Incentive for trie Gov-
ernment's purposes, turning out materials, than you would have made from
patriotic motives on ^our ordinary salary?
Mr. Grace. Certamly not.
The Chairman. What was your salary during those years?
Mr. Grace. I think $10,000.
The Chairman. We have a note here, $12,000.
Mr. Grace. Maybe 12. It was first 10 and then was increased to 12, and
remained 12 throughout the subsequent years, v.'here you have the record of the
bonus there, Mr. Chairman. You will find a continuing record of our bonus, the
results under our bonus scheme of compensation. I think that carries you all
the way up to the present years. Is not that right?
The Chairman. That Is right. For these 2 years, bringing this to a head,
the total bonuses paid appear to have been in the neighborhood of $6,000,000.
Mr. Grace. Whatever those records show. I could not say.
The Chairman. We have not had a chance to add them accurately, but that
eeems to be roughly the figure.
Senator Bone. Mr. Grace, where do the odd dollars come In on the bonus?
For instance, in the vear 1918 your bonus was $1,886,193. What are those
bonuses predicated on^ The profits?
Mr. Grace. Profits of the coi-poratlon.
Senator Bone. In other words, they are a definite fraction of the profits of
the corporation?
Mr. Grace. Of the profits of the corporation, right.
These bonuses were not allowed as part of the costs on cost-plus
contracts, accordmg to testimony of F. A. Shick, comptroller of
Bethlehem Steel (Feb. 25, p. 5760).
He also stated that the bonus system although set-up m 1904, was
not authorized by the stockholders until April 3, 1917 (p. 5763).
Mr. Shick stated in reply to questioning by Senator Clark that
the bonus system was in effect m connection with munitions for
Russia and England before the United States entered the war (p.
6766).
Mr. Grace stated that he paid $1,810,000 in taxes in 1917 and 1918,
or 66 percent of his taxable income (Feb. 26, p. 5769.)
The question of why the Navy Department continued its wartime
building after the armistice was raised on February 26 with Bethlehem
officials (p. 6782 et seq.).
Senator Bone. Now, as one of the rather interesting, and what seems to a
great many people to be a rather peculiar phase of war, of the last war, after
the armistice the Government let a contract for the building of 97 destroyers.
The war was over and many of these destroyers were prewar models, prewar
design. Can you enhghten the committee as to why the Government let that
contract?
Mr. Grace. I cannot.
Senator Bone. Bethlehem Shipbuilding Co. got 44 of these destroyers. That
is the case, is it not?
Mr. Grace. I do not know how many. I know we built a lot of destroyers
for the Government.
Senator Bone. Do you not know how many ships your company got out of
this post-war program?
68 MUNITIONS INDUSTKY
Mr. Grace. I do not. I could not remember, but we built a lot of them.
Did you say the contract was let after the war?
Senator Bone. After the armistice. The keels were laid after the armistice.
Mr. Grace. There is quite a little difference between contracts and keels.
Senator Bone, Perhaps I misstated it. The ships were built and the keela
were laid after the armistice. Instead of canceling those contracts and refrain-
ing from building those ships, the Government went ahead and had 97 of these
destroyers built after the armistice. That is correct, is it not?
Mr. Grace. That is a question for you to ask the Government, why they did it.
Senator Bone. I am wondering if you can give us any light on it.
Mr. Grace. I cannot.
Senator Bone. Your company got 44 of these destroyers at a price totaling
$82,199,916. Is the Union outiat a subsidiary of Bethlehem?
Mr. Grace. The Union Iron Works?
Senator Bone. Yes.
Mr. Grace. It is a part of our shipbuilding organization.
Senator Bone. Where are they located?
Mr. Grace. San Francisco.
Senator Bone. They got five of these destroyers, did they not?
Mr. Grace. I do not Know.
Senator Bone. The record indicates that they got five of them at a cost of
$8,341,059.
Mr. Grace. W^hatever the record says would naturally be true.
Senator Bone. For the 49 destroyers built by Bethlehem and its subsidiary or
affiliate, the Government paid a total of $90,540,976. That very astounding
performance has Interestea a great many people and made them curious as to
why the Government would actually have laid the keels and have the ships built
for 97 destroyers.
Mr. Grace. Maybe they did not have confidence the war was actually over. I
do not know.
Senator Bone. It may be. It Is hard for me to believe, but It may be that the
Navy Department had neard vaguely that the war was over, after the armistice.
Mr. Grace. It may be that they were preparing for another. I do not know
what prompted them.
Senator Bone. There may be something In that Idea. I would like to dally
with tlie thought, anyhow.
Admiral Pratt, testifying at a hearing before the House Committee on Appro-
priations, was questioned about this particular construction. One of the Con-
gressmen said he understood some oi the destroyers had been laid down after
the war ca,me to an end. He says —
Why was it that, with the experience of mass production to which you
referred a moment ago; with the realization that we were not just in desperate
need to build destroyers at the rate of so many per month or per year — why
was it that there was not at that time a slowing down, so as to take advantage
of lessons of the war, and to accomplish, in building, the highest, instead of
that which can be criticized when mass production is indulged in?
Admiral Pratt. Tlmt seems like a very fair question. I cannot give you
a real, practical, definite reason why, but I should say this: That if you start
a big machine moving, such as this production is. It takes a certain amount of
time before it gets slowed up and working normally; and I should think that
that had about as much to do with It as anything. We just got sv/ept into
it, and, before we could get our breath and stabilize and get together, there
we were with our output.
In other words, the Navy Department could not catch its breath, and that It
had plunged off Into this program of building 97 destroyers because It could not
slow down the momentum. Is there any better explanation which you can give
us?
Mr. Grace. Please do not ask me that question.
Senator Bone. You know, probably, more about this game, Mr. Grace, than
anybody else in the country.
Ivlr. Grace. But please do not ask me to interpret the policies of our Navy
Department, my dear feUow.
Senator Bone. I do not want to embarrass you, but I would like to have you
teU me outside.
Mr. Grace. I really could not even tell you outside.
Senator Bone. I can believe that.
Mr. Grace. I could not. As I say again, they may not have thought the war
was over, or were preparing for another one. I cannot tell you.
MuiriTioisrs industry 59
Senator Bone. The total expenditure for these destroyers which were laid
down and built after the war was $181,247,022, of which your company got
$90,510,975, or about 50 percent. So you ought not to complain about the Navy
Department's inability to understand its own program.
Mr. Grace. You are not inferring that we encourage the Navy Department
to go on and build something they did not want are you, I hope?
Senator Bone. Maybe you can explain whether you would or not.
Mr. Grace. Encourage them to go on?
Senator Bone. Did you discourage them from going on?
Mr. Grace. We had nothing to do with it. We executed the work the Navy
Department wanted us to do, and we are very proud for having done it. The
Navy Department had within itself the power, I assume, to cancel and stop
work on those contracts. We were not down there asking them to continue the
work. We had a contract or obligation with the United States Government,
which we were conscientiously fulfilling and were proud of our performance
under that.
Senator Bone. Let us get a little more light on this. These contracts were
awarded, and when the armistice came and the ships had not been built, you
got no word from the Navy Department canceling them, and you just went
ahead with the construction?
Mr. Grace. Certainly.
Senator Bone. Is that the picture?
Mr. Grace. I assume it is the picture.
Senator Bone. What in this picture proves, or tends to prove, or tends to dis-
prove, the suggestion on the part of the Navy Department that they wanted to
keep private shipyards going and wanted to encourage them in every way? Do
you think that experience would tend to bolster up the suggestions of the naval
officials that they want to sustain the private shipyards?
Mr. Grace. The picture which you have just given?
Senator Bone. Yes.
Mr. Grace. I do not see that that has any bearing on it. I think that Is a
question, as to whether the Navy Department or the Government want private
facilities available as to that class of work.
The war profits of Bethlehem Ship were discussed again on February
26, 1935 (p. 6777), in the course of which one report, by a Shipping
Board examiner, spoke of the Bethlehem war contracts as "uncon-
scionable and against public interest." The case was in litigation in
1935. The company representatives denied such charges entirely.
Senator Bone. Mr. Grace, there is a charge through this brief, through the
report of the special examiner of the Shipping Board, that the Bethlehem Ship-
building Corporation made unconscionable profits out of the Government during
the war. If that be the case, and that Is the charge solemnly made in a brief
and in the pleadings of this case, whether the Government ought to, in the event
of another war, subject itself to the possibihty of a repetition of that sort of
thing, is the point I want to raise. I know you think you did not make uncon-
scionable profits.
Mr. Grace. That is a question of opinion, of course. But, as I say, I see no
reason — I do not mean the word "reason" — but I think we are in agreement that
war should not be the vehicle for unconscionable profits. There is no question
about that. There is a meeting of minds on that, without argument.
Senator Bone. In the report of Mr. Adamson, the special examiner, whose
report was written in 1923, he uses this language:
Bethlehem's enormous profits may not aid in interpreting the language of
contracts, but they do show that the Bethlehem contracts were unconscion-
able and against public interest.
Mr. Grace. I think that is all being a part of the suit.
Senator Bone. He Indicates in his report that there was almost $50 per ton
f)rofit on one Bethlehem contract, and he contrasts the profits allowed to Beth-
ehem by Mr. Bullitt on three contracts, with profits allowed on contracts with
other shipbuilders. In that respect he points out in contract 300 that Bethle-
hem's profit was $49.59 per ton; contract no. 226, the profit was $43.15 per ton.
Mr. Grace. Have you Bethlehem's answer in respect to that? Have you the
findings made by the referee, Mr. Bullitt, which you speak of, there? Have you
the Bullitt report?
60 MUNITIONS INDUSTRY
Senator Bone. T am referring to Bullitt's report right here.
Mr. Grace. They are in Bullitt's finding?
Senator Bone. They are in Bullitt's finding. Contract 179, a profit of $44.88
per ton, and the other shipbuilders represented in this report were J. F. Duthic
& Co., I presume for a requisitioned ship, with a profit of $10 per ton.
Mr. Grace. I could nof tell you.
Senator Bone. American Shipbuilding Co. contract, the profits were $16.27
per ton. The American Shipbuilding Co.'s profit of $16.27 per ton has been
criticized. It is only one-third as much as Mr. Bullitt reports for Bethlehem on
contract 300, and that calls for the statement which I made yesterday in this
report of 20.6-percent profit to Bethlehem on ships built with Government funds.
Again he refers to a statement by Admiral Bowles, manager of the Division of
Steel Ship Construction, and G. S. Radford, manager of the Contract Division.
This statement is made by them:
We wish to place on record the fact that the Bethlehem Shipbuilding Cor-
poration's representatives have insisted on comparatively high prices for
these vessels; that they have only with diflaculty been persuaded to quote ua
on the types of ships referred to, and their attitude has been characterized
by the arbitrary refusal to stand behind delivery dates * * *.
While the prices we have agreed to with representatives of the Bethlehem
Shipbuilding Corporation are not satisfactory to ua, nevertheless they rep-
resent a materim reduction from the prices quoted by that corporation.
Realizing that the Nation will need these vessels, we have been actuated bv
the belief that further delay in placing the contracts should be eliminated,
and we believe we have made the best compromise possible under very
difficult conditions.
Why should the Bethlehem people quibble with the Government when war is on
over the difference between profits which other companies were getting, or
apparently getting, and the profit which you folks wanted?
Mr. Grace. I cannot analyze the shipbuilding case for you. If you wiU read
the Bethlehem side of it, like you are reading the Government side of it, you
may find what the reasons were. If you want to go Into that in complete detail,
or if you want to go into It In detail, there Is a man here prepared to do as much
of that as you want, and knows the matter from beginning to end.
Senator Bone. Is not a part of that picture reflected in the fact that the
Bethlehem Co.'s profits stepped up enormously during the war? Would not that
be the answer?
Mr. Grace. Bethlehem made a very efficient job of building ships. Thev
may have been relatively cheap ships to the Government. If we made excel-
lent cost in building them, the Government got the benefit of it through our
prices, and you will probably find that our ships, when analyzed, were as cheap
if not cheaper, to the Government than some of our competitors' ships.
Dividends paid by shipbuilding subsidiaries of Bethlehem Steel
totaled $60,498,529 (Feb. 26, p. 5811).
Mr. Shick. We used the term "rental."
Mr. Raushenbush. How much was paid in dividends to the Bethlehem Steel
by these various companies, would you say, Mr. Shlck, by Bethlehem Ship-
building Co. during those years. Fore River and Union Iron Works?
Mr. Shick. It was our practice to have those companies practically pay out
all their earning which were available, over to the Bethlehem Steel Corpora-
tion because the Bethlehem Steel Corporation was the one paying dividends to
the stockholders. There was no reason leaving the earnings accumulate in
those companies, so that they were paid over to the Bethlehem Steel Corporation.
Mr. Raushenbush. Do you have the dividends before you?
Mr. Shick. I do not.
Mr. Raushenbush. Do you have them, Mr. Mitchell?
Mr. Mitchell. I have them, as obtained from the revenue agent's working
papers of the income-tax unit. He analyzed the surplus for the various years
and according to the books the dividends paid were as follows:
Bethlehem ShipbuQding Corporation, Ltd., paid in 1919, $1,782,500; in 1920
it paid $1,705,000; and in 1921 it paid $20,282,700, a total for the years 1917 to
1921 of $23,770,200.
The Fore River Shipbuilding Corporation paid in 1917, $90,000; in 1920,
$4,010,400; a total of $4,100,400.
MTJNinOIfS INDUSTRY 61
The Union Iron Works Co. in 1917 paid $400,000; 1918, $1,130,000; 1919,
$1,400,000; 1920, $5,697,928.19; 1921, $24,000,000; a total of $32,027,928.19.
The total dividends paid by these three companies to Bethlehem Steel Co.
amounted for those years to $60,498,528.19.
One company had to be threatened during the war with comman-
deering before it undertook necessary plant construction (Jan. 21,
1935, p. 4538).
Mr. Parker. I think the record wiU show in a number of letters where we did
everything that was possible to avoid going into this program of plant construc-
tion along with ship construction.
The Chairman. How long from the time that the Government urged yi^u to
supervise the construction of that plant — how long was it before you complied?
Mr. Parker. It was a very short while, Senator, because they said, "If you
do not do it, v/ewill commandeer your land and do it ourselves." So that it did
not take very long for us to go along with them.
The Chairman. What time during the war was this?
Mr. Parker. 1918.
Senator Bone. Was that to be a Government plant?
Mr. Parker. That was to be a plant operated by the New York Shipbuilding
Corporation management.
The Chairman. But the Government was to build it?
Mr. Parker. The Government was to build it.
The Chairman. You were to supervise the building and you were to supervise
the operations after it was completed?
Mr. Parker. Yes, sir.
The Chairman. And yet the Government was forced to threaten commandeer-
ing?
Mr. Parker. That is correct.
Further difficulties in preventing improper costs during war years
were described by the district plant engineer of the Emergency Fleet
Corporation (Jan. 22, p. 4589).
Mr. Raushenbush. During this discussion Mr. Freeman, the district plant
engineer, refers to himself as "Mr. Freeman" instead of saying "I", because
this is supposedly an official report.
After summarizing, in the first three paragraphs, his functions and his duties
and obligations, he points out In paragraph 4 one of the few changes he made.
That paragraph reads:
Mr. Freeman cut down the force from 35 to 10 at the New York Sliipbuild-
ing Corporation and also discovered that there was no check on maintenance
at this yard, the cost of which was a cost against the ships in general over-
head, and on some contracts an additional 10-percent profit was allowed.
This matter was pointed out by Mr. Freeman and he was allowed to place
four engineers on maintenance. A record of maintenance, month by month,
by the New York Shipbuilding Corporation was kept in regular schedule, and
at the date of Mr. Freeman starting activities had reached an amount of
$448,805 per month, which was charged against ship construction at a time
when only the north yard was in operation, as the south yard had just
gotten started.
Then he goes on to point out how he brought maintenance down from aa
amount of $448,000 to $91,000 plus.
The fifth paragraph reads:
Matters were brought somewhat to a head by the New York Shipbuild-
ing Corporation receiving a letter dated February 20, 1920, from our resident
engineer, in which their attention was called to the fact that they were doing
considerable work in the yard and charging same to maintenance, which
was an improper charge, as it was being done without authority, and 11
items were cited on which the work was going on at that time; and the said
corporation was advised that we were requesting our resident auditors to
withhold payment on these jobs until same were approved, if they were
proper charges. On Wednesday, February 25, 1920, we were advised that
Mr. Magoon, senior vice president of the New York Shipbuilding Corpora-
tion, was in conference in the home office of tlie Fleet Corporation; and one
of the officers of the New York Shipbuilding Corporation at the yard stated
73018°— 36— pt. 7-
62 MUiTITIOifS INDUSTEY
that he was afraid to call him up as he — Mr. Magoon — was in an awful
temper about maintenance, resulting from our letter.
6. On the same day Mr. Magoon replied to our letter, stating that he was
unable to find any ruling which required him to submit regular applica-
tion for doing maintenance work for approval and that it was his present
?iurpose to proceed with maintenance work under his usual procedure. On
he same day the New York Sliipbuilding Corporation wrote to Mr. Frick,
manager of construction, Emergency Fleet Corporation, In which they state
that the jurisdiction of the plant maintenance by the district engineer's
department had been assumed as an extension of its duties in connection
with plant construction and that they ask the Fleet Corporation in said
letter to Issue instructions that will relieve the New York Shipbuilding
Corporation from all question of such supervision. It is to be noted that
these letters were written the same day as the conference above referred to
In the home office. Under date of February 28, Mr. Frick issued inetruc-
tlons to Mr. Miller to remove aU engineers in his district whose work was
confined strictly to maintenance.
Later, on however, that was changed.
I will now read from paragraph 7:
This department pointed out to various departments further irregulari-
ties that the New York Shipbuilding Corporation made In the matter of
plant construction and charged to ships. In one case we discovered one
of the old ways that had been there for 20 years had been remodeled from
wooden construction to concrete construction at an expense of approxi-
mately $126,000; same had been charged to ship construction and ap-
Earently had been paid as a ship cost. This was brought very forcibly
efore the auditing department; and said department, on their own Ini-
tiative, made an estimate of the improper cost that had already been paid
the New York Shipbuilding Corporation. An estimate of our share,
amounting to $750,000, had been improperly paid, and this amount was
held up by the auditing department as made to the New York Shipbuild-
ing Corporation. The Navy Department, hearing of this action, called a
meeting and stated that inasmuch as they were paying 50 percent of the
overhead, that they be allowed to see this list, as they also desired to hold
up funds for Improper payments, resulting In a similar amount being held
up by the Navy Department on March 3.
The proposal to have adjusted-price contracts made the basis of
wartime work was made by Mr. Homer, of Bethlehem, on February
28 (p. 5920).
Mr. Homer. The thought has occurred to me in hearing your discussion the
other day about what might be. done to take the profits out of war contracts,
excessive profits, that there Is a possibility that the committee might want to
?lve some thought to a plan of this kind as a
ake excessive profits out-
basis for operating under a plan to
Senator Bone. Might it not be said-
Mr. Homer. It Is going at It another way.
Senator Bone. Pardon me. I did not mean to interrupt.
Mr. Homer. I am talking more or less personally now, If you will pardon me.
But going at It the other way. It seems to me that excessive profits In war are
not caused by the deliberate attempt to make excess profits bul they are usually
by conditions which are unforeseen at the time that a contract Is made.
One of the major factors In that condition Is that the contractor has a fear
that he Is not adequately protected In taking a contract under conditions which
are so variable and uncertain that he may lose a tremendous amount of money
when he gets through.
If you can eliminate that fear, Senator, froma contrectyou have gone a long
way, in my personal opinion, of taking the possibility or chance of excess profits
out of contracts, munition contracts, or whatever you want, any contract, so far
as that goes. That is just a suggestion. I do not know whether It Is worth
anything or not.
Senator Bone. It might be said by some, and perhaps with some slight justifi-
cation, that even under this type of contract that the Government is the one
who does the gambling on the contract.
Mr. Homer. The Government will accept a certain amount of risk, but In the
end It will probably save money because it is helping to take the risk of the
Bubcontractor, to a certain extent. I do not beUeve that the Government
MUNITIONS INDUSTRY 63
assumes all the risk. It does not. It does not assume all the risk under our
present contracts, but It is an equitable means of adjusting things to suit
conditions.
Later (p. 6921).
Mr. Raushenbush. Before we get oflf this question of your suggestion, Mr.
Homer, about having this sort of a system apply to a wartime emergency, here
vou have, as I gather it, a system where the Government pays for material
increases and pays for increases above a certain level.
Now, if that were done during the war, and all contracts were made that
way, the Government doing the gambling on any price increases, what point
would there be in a company getting any profit? The point or profit, as I
understand it, is to compensate the company for risk, and what point would
there be in keeping a profit arrangement like that, if the Government is going
to take all the risk for which profit is usually given?
Mr. Homer. In the first place, I do not agree with you that the Government
takes all the risk.
Mr. Raushenbush. Just about all, does it not?
Mr. Homer. You mean the Government assumes a certain part of the risk
In the case of increases or decreases in prices of material and labor?
Mr. Raushenbush. That is right.
Mr. Homer. That is not all in building a ship, Mr. Raushenbush. In the first
place, there is no consideration being given to overhead expense of any kind
whatsoever in this plan, and the contractor has to assume all the risk for that.
It is merely an arbitrary basis which is taken, of 40 percent representing ma-
terial and 30 percent representing labor and something representing the rest —
30 percent.
Mr. Raushenbush. Let us talk about the rest of the 30 percent. Let us
talk about the overhead, which Is a part of It, and the rest of it Is profit. The
Government could allow, and does in fact now allow, a certain percentage of
overhead, does it not?
Mr. Homer. On what?
Mr. Raushenbush. On a ship.
Mr. Homer. In what connection?
Mr. Raushenbush. You figure that In the Vinson Act It Is supposedly a
10-percent limitation on profit, that the Government is going to allow a certain
profit on that.
Mr. Homer. We hope it will.
Mr. Raushenbush. Let us apply that to the situation which you suggested.
Mr. Homer. And it is a legitimate part of cost, is what you mean?
Mr. Raushenbush. Your only risk, I take it, is in the element of overhead,
which involves bonded indebtedness. There is no particular risk there.
Mr. Homer. The only risk Is bonded indebtedness?
Mr. Raushenbush. I am starting to subdivide the overhead, bonded indebt-
edness, taxes, and supervision. As I gathered it, roughly, what you are proposing
Is a system that the Government takes all the risk, that the plant wiU have none
of the risk.
Mr. Homer. Only a very small proportion of the risk.
Mr. Raushenbush. What is left is that on which private capital should get a
profit?
Mr. Homer. Do you not see that the Government does not take any risk In
connection with the construction of the ship?
Mr. Raushenbush. You mean if it burns or is badly damaged?
Mr. Homer. No; in building the ship you assume a risk, because you have got
to construct something. You start off with nothing, and you finish with a ship,
and it is supposed to be completed in accordance with the plans and specifications.
You are assuming a certain risk, if you do not do it, are you not?
Mr. Raushenbush. Assuming a certain amount of competence on the part of
the builders.
Mr. Homer. Your engineering "know how", your organization all the way
through, has to be suitable to do it, and you have to know how to do it, and you
have to know how to do it within the cost which you have used as a basis for
your estimate.
All this plan does is just to take away a certain part of that great risk which
a contractor runs in the face of an inflation, or any other change in the economio
conditions, which may change the basic factors on which he has established an
estimate and his price, covering a contract over 3 years.
64 MUIiflTIOiJS LNDUSTKY
The matter of the war profits of Newport News led to some con-
troversy. The Treasury cut the company's figure of invested capital
for 1917 from $10,000,000 to $3,800,000 in conformance with regula-
tions. The company did not accept this, and asked to have its taxes
determined on a basis which did not involve the figure of invested
capital. This was done. The tax dispute was not settled until 1931
(Feb. 12, 1935, p. 5292).
The income figures filed by the company varied greatly with the
reports of the revenue agents (p. 5291). For example, in 1921
the company reported taxable income of $1,366,765, and the revenue
agents found $4,043,000, an increase of 195 percent. The company
reported its tax Habihty for that year as $153,000. The revenue
agents found $1,663,830. The final settlement in compromise was
$1,303,000, more than nine times what the company reported
(p. 5291).
The revenue agent, basing on the finding of an invested capital for
1917 of $3,826,316 (disputed by the company) found a net taxable
income of $3,467,605, or 90.6 percent. In 1918, on the same Treasury
basis (disputed by the company) the profit before taxes was 76.1
percent. In 1919 it was 71.5 percent, in 1920 it was 52.1 percent.
The company entered into the records figures tending to show the
profits of the company for these years as (1917) 15.3 percent; (1918)
8.3 percent; (1919) 16.9 percent; (1920) 23.1 percent (p. 5284).
It was admitted by the company's president, Mr. Ferguson
(p. 5295), that these figures could not be considered as income-tax fig-
ures, and that, based on the company's own returns to the Treasury,
the profits were very considerably higher.
III. QUESTION OF EXTENT OF PLANT NECESSARY FOR
WARTIME NEEDS
The question of the extent to which private industry must be used
during any future war for the manufacture of arms, armaments, and
implements of war is an important one. If it is impossible or undesir-
able because of high cost to build Government plants, and to purchase
private plants sufficient to manufacture the necessary arms, ammuni-
tions, and implements of war for wartime, the problem of wartime
procurement is very different than if such Government plants can
themselves produce sufficiently for wartime needs.
Representatives of the War Department offered to the Committee on
December 21, 1934, fipires prepared for the Sixty-fourth Congress,
which indicated that it would cost $496,000,000 for plants running
on a one-shift basis to supply 1,000.000 men through the first year
of war and equip part of a second million men. On a two-shift basis,
apparently, the cost would be half, or $248,000,000. On a three-shift
basis the cost of plant might be upward of $166,000,000.
With Army and Navy appropriations in 1936 running over $900,-
000,000, the estimated cost of all the necessary plants (from $166,-
000,000 to $248,000,000) "to run 1,000,000 men through the first year
of war, equip a second miUion men and run them through as much of
that year's war as they will get into, and supply the necessary sea-
coast material", does not seem, comparatively, a disproportionate sum.
The War Department representatives also cited further figures
from this estimate as to the cost of plants required "to run 1,000,000
men through the first year of war, equip 3,000,000 more men and rim
them through as much of the first year of war as they would get into,
and supply the necessary seacoast material" on a one-shift basis, as
$927,000,000. On a two-shift basis, apparently, the cost would be
half, or $463,500,000. On a three-shift basis the cost of plant might
be upward of $309,000,000.
The War Department representatives stated that the plants
estimated for in these estimates "would be capable of fully maintain-
ing and supplying during the second and any succeeding year of war-
time prices named." They qualified the figures by pointmg out that
present cost of construction might be higher than the old estimates,
and that the estimates did not provide for tanks, armored cars,
airplanes, or gas equipment.
The question immediately arises as to the pohcy of preparing for
the wartime needs of an army of 2,000,000 men or 4,000,000 men.
Apparently it is based on our World War experience, in which milUons
of troops were sent abroad to fight. If the national policy is to stand
ready to send an army of similar size abroad again, the War Depart-
ment's estimates of cost must be duly considered. If the national
pohcy has altered as a result of experiences growing out of the World
War^ and the Nation stands ready only to support an army for use in
contmental America, the estimates must be subject to drastic
65
66 MUNITIONS INDUSTRY
revision. Presumably the equipment of 1,000,000 men would be
adequate for the defense of our shores or interests in continental
America against any possibly conceivable attempt at invasion.
In that case the first estimate, on a two-sliift basis, of $248,000,000
could be reduced by the armament thereof appUcable to the second
million men, and a figure of less than $200,000,000 for the necessary
plant to equip 1,000,000 men would probably be arrived at as a base.
In consideration of the national policy in regard to the sending
abroad of millions of men, the recent technological development of
warfare should be given due weight. Both submarines and airplanes
have been improved greatly since the World War as threats to troop
transports. The chances for the successful transportation of our
troops through hostile waters has greatly decreased since 1918.
Reversely, the chances for the successful transportation of troops into
waters adjoining this Nation have decreased.
Decision on this matter will presumably wait upon an official state-
ment of national policy. The committee meanwhile holds that under
few, if any, imaginable circumstances will this Nation again be both
willing and able to transport millions of troops to nations other than
continental America, and that therefore the problem of the desira-
bility of a Government monopoly of certain munitions resolves itself
into providing adequate plant for peacetime and wartime suppHes for
any army of not more than 1,000,000 men.
Such plant can be provided in either of two ways. At present the
War Department's plans are to use such Government arsenals as are
now available and also to call upon certain industrial plants to devote
themselves to the manufacture of such additional munitions as are
necessary. The first of three ways of providing the necessary plant
is to adopt and extend this plan, by increasing the amount of Govern-
ment-owned plant so that it %vill provide fully for the peacetime needs
of the Nation, and for a large share of the wartime needs, with the
same provisions that the War Department now has for extending
production into private plants for the rest of the wartime needs.
The second way is to provide for a governmental monopoly of certain
munitions and to produce them both on a peacetime and a wartime
basis. It is only m case this second way is chosen that a figure for
Elant approaching $200j000,000 need be considered, and this should
e subject to analysis m view of the figures developed before the
committee by the engineers and accountants of the Interstate Com-
merce Commission.
Assuming that the first way is chosen, that of increasing the present
arsenals and Navy yards so that they will provide fully for all the
peacetime needs and a large share of the wartime needs of the Nation,
the question is whether the War Department and Navy Department
can expand production into new industries as easUy and with as great
an economy in time as they can at present expand production from a
private plant manufacturing, for example, machine guns, into other
private plants not having had any experience in manufacturing such
guns. The relative merit of Government ownership of munitions
plants as against private ownership, in the important matter of
spreading into new industry in wartime, without loss of time, is not
a matter of principle but of expansion. The Government's situation
in respect to wartime needs is much the same whether the problem
is to add to the present machine-gun monopoly now under the owner-
MUNITIONS INDTJSTEY 67
ship of Colt's Patent Rapid Firearms Co., located at Hartford, Conn.,
another private plant of equal size, and whether to add to a Govern-
ment-owned machine-gmi monopoly, located at Hartford, Conn.,
another private plant of equal size.
Again, at present, "there are not private facilities equipped for the
quantity production of artillery and artillery ammunition." The
problem of expansion into private industry m wartime would not
change at all if governmental facilities were increased. The War
Department representatives pointed out that many of the processes
of manufacture of both artillery and artillery ammunition mav be
prepared with standard machines. "Both lend themselves readily to
the production of component parts in different plants and later
assembling at a central point." In other words, a large part of the
expansionin to private industry would represent no difficulties, and the
purchase of the standard macliines by the Government would be un-
unnecessary. Since the estimate for plant and mobile artillery material
of $123,000,000 on a two-shift basis ($246,0Q0,0q0 on a one-shift basis)
was the largest part, almost half, of the total estimate of $248,000,000
(two-shift basis) a great reduction in this figure can bo made by
eliminating the purchase by the Government of the standard equip-
ment necessary for machine, the great supply of shells, etc., necessary
in wartime which could be done in already existing private plants.
The War Department respresentatives expressed the opinion that tliis
standard equipment, if purchased, "would mean that in the time of
peace there would be standing idle several hundred milhon dollars
worth of machinery." On that basis the cost of the assembhng plant
and of the war standard operations would be reduced to under
$23,000,000 on a two-shift basis ($46,000,000 on a one-sliift basis).
With this arrangement the total necessary plant for running 1,000,000
men through a war would drop to under $148,000,000.
IV. NAVAL SHIPBUILDING COSTS
A. Navy Department Figures
In part 20 of the Committee's hearings, page 5567 seq. Capt. William
G. DuBose, of the Bureau of Construction and Repair of the Navy
Department, submitted to the committee certain information regard-
ing comparative costs. The Navy Department had been requested
by the committee to compile certain information on the last cruisers
for which figures were available, those awarded in 1927 and 1929.
He entered into the record (p. 5585) the costs to the Government of
vessels built in Government navy yards and those built in private
yards.
1927 cruisers. — Navy yards: Louisville, $9,331,337; Chicago, $9,635,-
747; average, $9,483,542. Private yards: Chester, $11,543,432;
Northampton, $11,689,975; Houston, $11^596,146; Augusta, $11,-
569,831; average, $11,599,846. Average difference on 1927 cruisers,
$2,116,304.
1929 cruisers. — Navy yards: New Orleans, $11,614,816; Astoria,
$10,401,977; Minneapolis, $9,257,669; average, $10,423,620. Private
yards: Portland, $11,971,794; Indianapolis, $12,602,832; average,
$12,267,313. Average difference on 1929 cruisers, $1,843,693.
According to these Navy Department figures these four cruisers
built in private yards in 1927 cost the Government $8,465,216 more
than four cruisers built in navy yards would have cost, and the two
cruisers of the 1929 type built m private yards in 1929 cost the Gov-
ernment $3,687,386 more than two crmsers of that type built in
navy yards would have cost. On the 1927-29 cruiser program, there-
fore, the private construction cost $12,162^602 more than the navy
yard costs, or enough to have built an additional cruiser of the 1927
type and still have a saving of $2,669,060, or, instead, to have built
an additional cruiser of the 1929 type and still have a saving of
$1,728,982.
The cost of inspection to the Government has not, in the Navy
figures, been added to the cost of the ships constructed in private
yards. The Secretary of the Navy informed the committee (Report
on Naval Shipbuilding, p. 156) that the inspection of ships — private
yards— had cost the Government $3,769,493 from 1927 through 1934
which is at the rate of $258,184 per $10,000,000 planned expenditure.
The committee estimated an additional cost to the Government for
inspection of $300,000 per cruiser actually built. Addition of this
$300,000 to the cost to the Government of the private-yard cruisers
in 1927 would increase the advantage of the navy yards to an average
of $2,416,304 in 1927 and of $2,143,693 in 1929. The savings on the
six cruisers if they had been built in navy yards would be increased
from $12,152,602 to $13,952,602.
69
70 MUNITIONS INDUSTRY
B. Interstate Commerce Commission Figures
On February 6, 1936, the Chief of the Bureau of Valuation, of the
I. C. C, Charles H. Spencer, entered into the record an analysis of
the comparative costs to the Government of the three 1929 cruisers
built in navy yards and one of those built in private yards in 1929,
as of June 30, 1935, for hull and machinery (ex. 4403).
Navy yards: A^ew Orleans, $11,776,400; ^.s^oria, $10,477,727;
Minneapolis, $9,775,013; average, $10,676,380. Private yards:
Indianapolis, $12,105,633. Average difference, $1,429,253.
Mr. Spencer pointed out that the overheads on the three navy yard
ships included large amounts for annual leave and holidays for labor,
on the New Orleans, $806,382; Minneapolis, $545,594; Astoria,
$322,490 ; an average of $558,000. He stated that the navy yards paid
wage rates 20 percent higher than the private yards and also gave 30
days annual leave with pay duiing the construction of these cruisers,
which leave has since been reduced to 15 days. This reduction would
decrease the cost of navy-yard ships by same part, about half of the
overhead of $558,000 per cruiser for that purpose. If this reduction
amounted to as much as $500,000 per crmser, the average difference
would be increased in the future, since the reduction of leave, from
$1,429,263 in favor of the navy yards to $1,929,253.
He stated that the above figures on costs of construction in the
navy yards include depreciation, administrative expense, but did not
include taxes (amounting on the Indianapolis to $121,545.91) or
insurance (amounting on the same cruiser to $10,792.45) or advertis-
ing, rent of office in New York, pei-sonal and reUef work, director's
fees, legal fees, commissions and royalties, interest on funded debt,
surety bonds ($23,283.45). The depreciation charge on the Indian-
apolis was $209,622 while the depreciation on the three navy yard
ships was $282 910; $341,427; $372,475.
The cost of the Indianapolis to the shipbuilding company was given
as $8,791^665, and the payments to the shipbuilding company (New
York Shipbuilding) were given as $11,788,728, the difference of
almost $3,000,000 bemg profit.
Similar figures for the Chester, awarded in 1927, and not a sister
ship of the others, were given: Cost to the shipbuilding company,
$7,877,250; payments to the shipbuilding company, $10,821,083; or
almost $3,000,000 difference, representing profit.
Mr. Spencer pointed out that if new machineiy were installed in
the navy yards the construction cost in them might be even lower
than at present.
The committee beheve that for every $12,000,000 spent on
cruisers in private yards the Government could save approximately
$2,000,000 by construction of the same cruisers in navy yards. By
transferring the cruiser construction to the navy yards it would get
one additional cruiser free for every six built.
V. COST OF ADEQUATE NAVAL FACILITIES
At the request of the committee the Interstate Commerce Com-
mission investigated the cost of construction of adequate naval
facilities and of certain munition plants. The study was under the
direction of Mr. Charles H. Spencer, head valuation engineer, and
of Mr. F. W. Amadon, his assistant. It covered a period of between
6 and 7 months and eight men were engaged on it during that time
(testimony, Feb. 6, 1936).
Their study as respects shipbuilding showed:
Cost of minimum facilities $17, P04, 860
Cost of new macliinery necessary 6, 000, 000
Total 23, 604, 860
These facilities would provide for construction in Government
yards of a larger program even than now planned (1936). It allows
for 4 major ships, 10 destroyers, and 3 submarines annually.
In view of the importance of this question and the careful study
given to it by the branch of the Government most qualified in valua-
tion work, the report is here-with incorporated in this report.
To: Special Committee Investigating the Munitions Industry, the
Honorable Gerald P. Nye, Chairman
Subject: Determination of costs of construction or purchase of suj6&-
cient Government ways to allow for a normal naval building and
repair program
Herewith report prepared in accordance with arrangements whereby
the Interstate Commerce Commission was to assign certain of its
engineers to assist the Munitions Investigating Committee by making
an appraisal of the probable cost to the Government of acquiring,
through purchase or construction, sufficient shipbuilding facihties to
carry on the construction of all combatant ships in a normal peace-
time program.
In preparing this estimate the type and total number of each kind
of ship adopted as typifying normal peace time requirements is of
the utmost importance because the total of the estimate bears a
direct relation to the program adopted. The building program under
which the Government has been operating since 1933 does not offer
a guide due to the fact that the types and number of ships authorized
during this period have been dictated by treaty restrictions.
After considerable conference and study, the following annual
program was adopted as a basis for an estimate^ cognizant of the
fact that some of the types of sliips are not pemussibie today under
the treaty governing the present building program:
ADOPTED ANNUAL BUILDING PROGRAM
Keels for four major ships.
Keels for ten destroyers.
Keels for three submarines.
71
72 MUNITIOXS INDUSTRY
A program for the next two years conforming to treaty limitations
would consist of twelve destroyers and six subrnarines each year.
Inqiiiiy at the Navy Department disclosed the fact that the Gov-
ernment na^^y yards have a total of sixteen shipbuilding ways de-
signed to accommodate the following types of ships:
Ways
Major ships 7
Destroyers 6
Submarines 3
Total 16
There is a small distinction between a destroyer way and sub-
marine way.
Tabulations in this report show sliips under construction in Gov-
ernment naxj yards far in excess of sixteen. This is accomplished
by (1) building two or more small ships on a large way; (2) using
dry docks as building wa5"s.
Dry docks are built primarily for accommodating ships undergoing
repairs and have not been considered shipbuilding facilities in this
report. The absence of naval ships from the Atlantic coast has made
the dry docks on the east coast available for new construction, but
since repair facilities as well as new construction facihties must be
provided, dry docks have been reserved for repairs and reconditioning.
The use of a large way for one or more small ships is obviously
the proper procedure when only small ships are being built, but a
large shipbuilding way suitable for a cruiser or battleship has excess
facihties over the requirements of destroyer construction and the way
is not used economically unless all facilities are employed.
All of the 16 ways in Government navy yards are not in condition
at the present time to take a ship, but 16 has been adopted as the
normal quota of Government sliipbuUding ways and estimates have
been built around this figure, and pro\'ision has been made in these
estimates to recondition those out of repair.
Having established the number of ships to be laid dowTi each year
and the number of ways available on which to build the ships, the
investigation resolved itself into an estimate of what part oi the
shipbuilding program the existing ways could handle and the probable
cost of acquiring additional ways, if necessary.
The following tabulation shows available ways in Government
navy yards, by types of ships accommodated and the number of ships
adopted as a normal annual program:
Major shlp3.
Destroyers-
Submarines.
From this tabulation it is apparent that the program adopted
exceeds the available ways in Government navy yards, and this
deficiency is much more pronounced when adjustments are made,
due to the fact that a major ship will be on the ways about two
years, a destroyer one year, and a submarine one and one-half years.
MUNITIONS INDUSTRY 73
With a program calling for four major ships a year, two years on
the way and seven ways available, one additional major way is
necessary.
In the case of ships of the destroyer class, ten laid dowTi each year,
one year on the ways, six ways available, four additional destroyer
ways, or two additional double destroyer ways, are necessary.
Three submarines are to be built each year and with one and one-
half year on the way, three ways available, two additional submarine
ways are necessary.
Smnming up the above requirements, the following are necessary:
One additional major ship way.
Four additional destroyer ship ways.
Two additional submarine ways.
Conferences with the Navy Department gave assurance that the
present navy yard area can accommodate whatever additional build-
mg ways are necessary and, also, can provide space for increased
shop facihties which may be necessary due to increasing the work
load in the various yards. In order that the situation might be more
clearly visuahzed, an inspection of the following navy yards was made
during the month of September 1935:
Portsmouth Navy Yard.
Boston Navy Yard.
New York Navy Yard.
Philadelphia Navy Yard.
Norfolk Navy Yard.
The navy yards at Charleston, Puget Sound, and Mare Island were
not visited.
AH industrial facilities in each of the navy yards were visited. The
purpose of the inspection was explained to the navy yard officials and
they were requested to express an opinion as to the sufficiency of their
present facilities and the probable necessary additional facilities in
case new ways were placed in their yard. This inspection substan-
tiated the assurances given by the Navy Department that the required
expansion could be absorbed in active Government navy yards and
that it would be unnecessary to look to private yards for additional
ways.
Conditions existing in the various yards were closely observed in
an endeavor to differentiate between additional facilities required due
to obsolescence of existing plant and those due solely to proposed
added work load to a yard on account of additional shipbuilding ways.
An attempt has been made to limit the estimate to facihties due to
more ships, but in many instances the dividing fine is not sharply
defined. Throughout the estimate there are cases where recommenda-
tions for additions have been included which are somewhat more
embracive than the proposed increased work load to a yard would
warrant, but there is no economy in operating a plant which is handi-
capped by insufficient facilities and in cases where an increase in the
production of a whole yard would result from additional facihties
somewhat greater than those made necessary by added work load,
the entire additional facilities have been recommended.
Bearing in mind that the construction of the ships in the adopted
normal program might involve the expenditure of one hundred and
fifty million to two hundred million dollars annually, any savings in
construction through the use of improved machinery and plant will be
74 MUNITIONS INDUSTRY
a Bubstantial amount. Specifications are becoming more exact,
tolerance limits are being reduced, and in many instances an amount
equaling the cost of a new shop or machine with its increased capacity
could be saved in the construction of the ships in one year's program.
Another factor which has brought pressure to bear on the adequacy
of navy yard facilities is the increase in the use of welding in ship
construction in place of riveting, and estimates have been made for
this change in operation in fitting out the yards for increased loads.
One very apparent effect of the use of welding in place of riveting is
evident m the large size units of a ship assembled prior to incorporating
in the ship on the ways. The fabrication of these large sections is now
carried on at various points throughout the yards, the only apparent
requisite as to location of this fabrication being adequate service
outlets for electricity and air, substantial foundations, and crane
facilities to transfer the complete section within the reach of cranes
serving the shipbuilding ways.
Sufficient space has been found in Government navy yards in which
to locate shipbuilding facilities far in excess of the one additional major
shipway, four destroyer ways, and two submarine ways, which are
estimated necessary in conformity vdih the program. All existing
navy yards, except New York, are capable of takmg additional ways.
This statement is based on personal observation of the navy yards
at Portsmouth, Boston, New York, Philadelphia, and Norfolk, a
study of the plan layouts of the navy yards at Charleston, Puget
Sound, and Mare Island, and conference with the Navy Department.
At the present time considerable shipbuilding is in progress in the
navy yards, especially on the east coast. The shipbuilding ways are
full in all cases, except one, and ships are also under construction in
dry docks at Boston, New York, Philadelphia, and Norfolk. The
types of ships in these dry docks are destroyers, gunboats, and
cruising cutters.
Some yards are considered principally construction yards, while
others are classified as repair yards. Portsmouth Navy Yard repre-
sents a construction yard and Norfolk Navy Yard is an example of a
large repair yard. At present the approximate disposition of the
Norfolk Navy Yard work load is 65 percent destroyer construction
(total of five), 15 percent ship repair, and 20 percent manufacturing
of arresting gears, bombs, Diesel engines, paint, metal furniture,
castings, et cetera.
The Boston Navy Yard is equipped with one destroyer way and one
marine railway. Four destroyers are under construction here at the
present time. The function of this yard is repair work, new con-
struction, and conversion of commercial vessels m time of war.
The navy yards at New York and Philadelphia do repair work and
new construction; also, various articles are manufactured at Phila-
delphia. These two yards are equipped to undertake battleship con-
struction and are the only Government yards constructing cruisers at
the present time.
The navy yard at Charleston has two destroyer ways and has not
been heavily loaded in the past. Its present allotment is one gun-
boat, one cruiser cutter, and one destroyer. This yard is used for the
construction of hghter ships of the auxiliary type.
All construction of ships at the Puget Sound Navy Yard is done in a
building dock constructed for the purpose. This dock is Usted as a
MUNITIONS INDUSTRY 75
major ship way^ although only ships of the destroyer class are allotted
here. In addition to this building way, there are two dry docks in this
yard.
At the Mare Island Navy Yard there is a cruiser way and destroyer
or submarine way. No cruisers are allotted here, but two submarines
are assigned, this being the only Government navy yard, except
Portsmouth, engaged in submarine construction. There are tv\^o dry
docks at Mare Island.
No attempt has been made to allocate the necessary additional waj^s
to the various navy yards, but the types of ships built in the yards in
the past indicate clearly in wliich direction expansion would go.
This study makes no provision for the construction of noncombatant
auxiliary boats in Government navy yards.
The fullest cooperation has been offered by the Navy Department ia
the preparation of this report.
Summary of estimated cost to equip the Government navy yards to an annual capacity
of 4 major ships, 10 destroyers, S submarines
Additional shipbuilding waya S2, 365, 000
Repairs to existing ways:
Portsmouth $53, 000
Philadelphia 445,000
Norfolk 350, 000
New York 147, 860
— 995, 860
Additional facilities, exclusive of ways:
Norfolk 490, 000
Philadelphia 2, 787, 000
New York 1, 200, 000
Boston 1, 112, 000
Portsmouth 220, 000
Charleston 170, 000
Puget Sound 2, 090, 000
Mare Island 675, 000
_— 8, 744, 000
Modernization of machine tools 5, 000, 000
Increased drafting room facilities 500, 000
17, 604, 860
Estimated cost to provide sufficient shipbuilding ways in Government navy yards to
annually lay down keels for 1 capital ship, 4 destroyers, 2 submarines
Estimated cost of a capital shipbuilding way, including pile founda-
tions, excavation and dredging, concrete superstructure, crane
runways, two 40-ton and four 10-ton bridge cranes, and service
wiring and piping (average location): 1 at $1,340,000 $1, 340, 000
Estimated cost of double destroyer building ways, including pile
foundations, excavation and dredging, concrete superstructure, 5
hammer-head cranes, and service lines (average location): 2 at
$325,000 each 650, 000
Estimated cost of a double submarine building way, including pile
and concrete foundations, superstructure, crane runways, and
cranes: 1 at $375,000 375, 000
Total cost 2, 365, 000
TOTAL ESTIMATED COST TO PUT FIVE GOVERNMENT SHIPBUILDING
WAYS IN CONDITION TO TAKE A BATTLESHIP
During October 1935 the navy yards at Norfolk, Philadelphia, and
New Yoik were requested to estimate the cost to revamp their large
building ways to fit them for battleship construction. These three
76 MUNITIONS INDUSTRY
yards are the only Governraent yards on the east coast with ways
approaching battleship dimensions.
Norfolk Navy Yard. — At Norfolk there is a crane ranway about 725
feet long, with the full quota of bridge cranes, suitable for a 600-700
ship, but at present the way is destroyer length only and has two
destroyers laid down on it.
Philadelphia Navy Yard. — At Philadelphia there are two large ways
with crane runway about 1,000 feet long and the necessary bridge
cranes.
At the present time one of these ways has the light cruiser Phila-
delphia with hull about 33 percent complete, and the other way has
tv,'o destroyers, Cassin and Shaw, wliich are to be launched Monday,
October 28, 1935. The heavy cruiser Wichita will follow these two
destroyers on the way.
New York Navy Yard. — At New York there are two large ways with
crane runways about 725 feet long and the necessary bridge cranes.
On one of these ways is the light cruiser Brooklyn, with hull about
37 percent complete as of October 1, 1935, and on the other way is the
Hght cruiser Honolulu, about 20 percent complete.
Estimated cost to put 1 large way at Norfolk Navy Yard in condition
to take a battleship $350, 000
Estimated cost to put 2 large building ways at Philadelphia
Navy Yard In condition to take battleships:
Electric service $30, 000
Turret slab tracks 15, 000
2 additional fitting-out cranes 150, 000
195, 000
Estimated cost to put 2 large building ways at New York
Navy Yard In condition to take battleships:
Extend platforms, 2 at $21,600 43,000
Additional cost to widen way no. 1 _ 88, 000
Crane repairs, elevators, walkways, floodlights, etc.:
Way no. 1 84, 170
Way no. 2 32,690
147,860
Total estimated cost to put 6 ways in condition to take a
battleship 692, 860
Comparative costs of preparing the ways in various navy yards in case only 1 or more
battleships are laid down
Estimated cost to put 1 way in condition at Norfolk Navy Yard $350, 000
Estimated cost to put 2 ways in condition at Philadelphia Navy Yard_ 195, 000
Estimated cost to put 1 way In condition at New York Navy Yard — 54, 190
Estimated cost to put second way In condition at New York Navy Yard ' 93, 670
Total for 5 ways 692, 860
> 1 way at New York Navy Yard is slightly smaller than the other.
All of the above ways are in condition to take a cruiser, except the
one at Norfolk where $350,000 will have to be expended to fit this
way for either a cruiser or a battleship.
In case the battleships exceed 725 feet in length, an additional
estimated cost of $200,000 may be necessary to extend platforms,
crane runways, et cetera in some of the navy yards.
MUI^^ITIOXS INDUSTRY
n
Estimated cost to repair the ways in Government navy yards which have not been
maintained in working condition in recent years
Portsmouth Navy Yard: Repairs to Franklin ship house and submarine
way $53,000
Philadelphia Navy Yard: Construction of the superstructure of a
double destroyer way, exclusive of hammer head cranes which are in
place 1 250, 000
Norfolk Navy Yard: Extend the cruiser way to full cruiser or battle-
ship way. This way at present is suitable" for two destroyers only.. i350, 000
Total 303, 000
* Included under cost to provide battleship ways.
Estimated cost of increased facilities, exclusive of building ways, considered necessary
if all warships are constructed in Government navy yards
[Annual building program: 1 battleship, 1 aircraft carrier, 1 heavy cruiser, 1 light cruiser, 10 destroyers, 8
submarines]
Navy yard
Estimated cost
Plant
Tools
Portsmouth . .
$220, 000
1,112.000
1, 200, OC'O
2, 787, 000
490,000
170,000
675,000
2, 090, 000
$150, 000
660,000
650,000
1, 225, 000
685,000
8.=iO, 000
430,000
660 000
Boston _
New York
Philadelphia
Norfolk
Charleston
Mare Island
Pngp.t Sniinr)
Total
8,744,000
6,000,000
CONSTRUCTION OF NEW WAYS FOR BATTLESHIPS, CRUISERS, DESTROYERS,
AND SUBMARINES
The construction features of ways for battleships, destroyers, and
submarines are quite different. The battleship and cruiser ways are
very substantial structures and are served by bridge type cranes
spanning the way, operating on_ structural steel runways, while the
ways for destroyers and submarines, wliich are practically identical,
are of hghter construction and are served by five or more revolving
cranes of a fixed type, or tv>'0 or more traveling cranes. The twin or
double destroyer way shows an economy in crane requirements over
the single destroyer way.
Standard designs for building ways have been developed by the
Navy Department, utihzing wood or concrete construction, the first
cost dictating which type shall be used. The concrete type should
be built on account of its permanency and low maintenance costs.
The type and design of the overhead crane runways at Norfolk,
Philadelphia, and New York vary only in length, thereby estabhshing
what might be termed a "standard design", and it is estimated that
this same design would be followed in case of additional major ship-
building ways' being added.
With accepted designing for building ways, crane structures, and
cranes, actual construction would follow closely the letting of contracts
for extensions to existing ways and additional ways.
^ Estimated time to construct a major ship way to a state of comple-
tion sufficient to lay a keel is twelve months, while the time for a
double destroyer or submarine way is eight months.
73018°— 36— pt. 7 6
78
MUNITIONS INDUSTRY
ESTIMATED TIME REQUIRED TO REPAIR EXISTING WATS TO BRING THE
QUOTA TO SIXTEEN
Norfolk Navy Yard. — The cruiser way in this yard was repaired
during 1934, at a cost of about $50,000, to take two destroyers. To
make this way capable of taking a cruiser or battleship, it is estimated
that it will cost an additional $350,000. This involves lengthening,
widening, and strengthening the entii-e way.
The rebuilding of the way beyond the section occupied by de-
stroyers could proceed with destroyers on the way, but the way would
be out of use during the time work was in progress on the section
now occupied by two destroyers, a length of about 325 feet. It is
estimated that the necessary repairs on this way to bring it to major
ship capacity would render it unproductive from 4 to 6 months.
If it became necessary to lengthen the existing crane runway
beyond the present 700 feet, this could be done at any time and
would not interfere with the use of the building way.
Philadelphia Navy Yard. — The two cruiser ways with their service
Unes have been thoroughly reconditioned since 1929 at a cost of
about $575,000 and are in condition to take battleships, with the
exception of a few minor repairs.
The destroyer way is out of repair and not in use. There are
five 5- and 10-ton hammerhead cranes on the site of the way, which
are serviceable, and it is estimated to cost $250,000 to put this way
in shape to take two destroyers. The way should be in condition
to take a keel six months after letting contract for the repair work.
Portsmouth Navy Yard. — The submarine way in the Franldin
ship house is out of repair and is not in use. It has not been used for
ship construction during the past ten years. The Navy Department
has taken no action on plans to recondition this structure, possibly
because of the fact that additional ways have not been required
under the present program of the Navy.
Tliis location offers an additional way at a minimum cost. It is
estimated that it will cost $53,000 to make this way and crane struc-
ture serviceable. This work should be completed four months after
letting the contract.
Ships being built at various Government navy yards exclusive of those whose keels
have not been laid
September 1935
Navy yard
In dry docks
On ways
2 destroyers
3 destroyers.
Philadelphia
4 Coast Guard cutters
1 cruiser, 2 destroyers
fl gunboat
|2 cruisers.
\2 Coast Guard cutters
Boston - -
2 destroyers (recently launched)
None -
Not used.
2 submarines.
Charleston
None
1 gunboat, 1 cnilser
None
cutter.
No ways here, 4 d^
stroyers In building
dock.
2 destroyers.
• Also two submarines at fitting our piers, 78% and 91% complete.
MUNITIONS INDUSTKY
79
Program 1935-38, alloiment of ships
Type or class
Government yards
Private yards
Total
Aircraft carrier
Cruisers
Destroyer leaders.
New York.
Destroyers.
Submarines.
Total -
[Boston..
Philadelphia.
Norfolk..:...
Charleston...
iPuget Sound-
fPortsmouth—
I Mare Island..
Bethlehem Steel Co.. 1
N. N. S. B. & D. D. Co 1
Bath Iron Works 8
Bethlehem Steel Co.' 2
Federal Shipbuilding 8
■Electric Boat 8
18
• Union plant, San Francisco.
Total
Combatant ships contracted for in 1933, 1934, and 1935 program 86
Government navy yards 40
Private yards 46
Number of keels laid since 1933 57
Government navy yards 24
Private yards 33
Ships of the 1933, 1934, and 1935 program completed since 1933: None as of
October 1935
Status of combatant ships in Government navy yards, including ships with keels
laid and new ships assigned
Navy yard
Tvpeof
boat
Name
Num-
ber
Ship laid
down
Date keel
laid
Date
launched
Percent
of hull
completed
10-1-35
Expected
date of
comple-
tion of
ship
Norfolk
Destroyer.
...do
...do-
...do
—do
—do
Tucker 1
Downs I
Bagley
Blue
874
375
386
8S7
388
405
406
41
372
873
45
404
48
40
60
50
371
370
889
890
402
405
172
173
179
180
185
186
876
?"
892
893
408
878
879
391
181
187
407
61
0. A. way.
...do
D.D.way
Dry dock.
...do-
8-15-34
8-15-34
7-31-35
9-25-35
9-25-35
62.7
62.7
13.1
11.8
11.4
32.7
51.9
49.7
8.9
19.6
36.8
64.9
54.6
57.0
12.0
12.0
91.3
78.4
15.3
14.2
66.7
60.8
8.5
8.5
48.0
44.9
10.5
6.8
65.0
7-1-36
8-1-35
11-1-36
2-1-37
Helm.
5-1-37
...do
Philadelphia..
Cruiser
Destroyer.
...do
Cruiser
Destroyer.
Cruiser
...do
Gunboat- -
Cruiser
Philadelphia 1-
Cassin L-
Shaw ».-
Wichita
C. A.way.
.-do
...do-
5-28-35
10- 1-34
10- 1-34
1-1-37
5-1-3C
8-1-36
1-1-38
New York
Honolulu
Brooklyn i
Erlei-
C. A.way-
...do
Dry dock.
9-10-35
3-12-35
1-17-34
10-1-37
4- 1-37
5-1-36
Boston.-
Destroyer-
— do
-.-do
—do
do
Conynghami.
Case '
Pier
...do -
9-19-34
9-19-34
9-14-35
9-14-35
10-1-3 '.
7-1-3S
Mugford
Ralph Talbot '
ll-l-3"i
2-1-37
-. do
Portsmouth . .
Submarine
...do
..-do
...do
...do.
..-do
Destroyer.
...do
...do-
...do
...do
—do-
...do
...do
Submarine
...do
Destroyer-
Gunboat..
Porpoise 1
Pike 1
Pier
...do
Submarine
way.
...do
10-27-33
12-20-33
7-17-35
10- 1-35
6-20-35
9-12-35
2-l-3ti
5-1-36
Plunger
Pollack
Snapper
Stingray
Gushing!
Perkins >
Patterson
2-1-37
6-1-37
k Puget Sotmd..
Building
dock.
—do
—do
—do
8-15-34
11-15-34
7-23-35
8-21-35
5-1-36
k
8-1-36
m
11-1-36
m
2-1-37
\
"Smith"!'."""!
Preston '
Henley
Pompano
Sturgeon -
Hi are Island__
O.A.Way.
...do
10-27-34
10-27-34
7-1-36
10-1-36
\
11-1-36
6-1-37
Charleston...
Charleston
Way
10^27-34
4^1-36
> 1933 contract; others since 1933.
80
MUNITIONS INDUSTRY
In addition to the above ships, the following seven cruising cutters
are under construction in navy yards, as follows:
Navy yard
Cruising
cutters
Average
per cent
complete
Oct. 1,1935
Estimated
average
date of
completion
Philadelphia
4
i
1
35.3
21.7
17.9
10- 1-38
New York
1- 1-37
1-15-37
The expected dates of completion of ships are estimates made by
the building yard.
Delays beyond dates shown probable on:
Cruiser #41 (Philadelphia) at Philadelphia.
Cruiser #48 (Honolulu) at New York.
Submarine #172 (Porpoise) at Portsmouth.
Submarine #181 (Pompano) at Mare Island.
Delays are also expected on the cutters at Philadelpliia and New
York.
APPROXIMATE DATES WHEN SHIPS ASSIGNED TO THE VARIOUS NAVY
YARDS UNDER THE 1933, 1934, AND 1935 PROGRAM MAY BE LAUNCHED
FROM THE BUILDING WAYS NOW IN REPAIR IN THESE YARDS
Norfolk Navy Yard:
One double destroyer (cruiser) way.
One destroyer way.
Capacity, three destroyers.
Keels not laid, two destroyers (#405 and #406).
The two destroyers on the cruiser way should be launched by
December 1, 1935, having been laid down August 15, 1934, and
reported 52.7 percent complete October 1, 1935. The two new de-
stroyers, (#405 and #406), recently assigned to this yard, should be
laid down on this way April 1936.
Inasmuch as no cruisers have been assigned to this yard, the fact
that the cruiser way is not in a position to take a cruiser does not handi-
cap this yard under the 1933-1935 program.
The destroyer (#386) on the destroyer way should be launched by
August 1, 1936, and the two destroyers (#405 and #406) on the cruiser
way, should be launched by April 1, 1937.
The Norfolk Navy Yard should be able to clear the ways of present
assignments by April 1937, with ways available as foUows:
Destroyer way, single, August 1, 1936.
Cruiser way, double destroyer, April 1937.
Philadelphia Navy Yard:
Two cruiser ways; destroyer way out of repair.
Capacity: Four ces'royers or two cruisers.
Keels not laid: One cruiser (#45) and one destroyer (#404).
Cruiser Wichita (#45) can follow the two destroyers (Cassin and
Shaw) on the cruiser way about November 1, 1935, \vith the launching
date about August 1, 1937.
Destroyer #404 can follow cruiser Philadelphia (#41) about August
1, 1936, and be launched about August 1, 1937.
MTJNITIOiirS INDUSTRY 81
The Philadelphia Navy Yard may have a way available for a
cruiser about August 1, 1937, and may have a way available for a
destroyer, not now assigned, alongside destroyer #404 about August
1, 1936.
If destroyer way is repaired, lay keel of destroyer #404 on this way,
thereby making the way now occupied by cruiser Philadelphia
available about August 1, 1936.
New York Navy Yard:
Two cruiser ways.
Capacity, two cruisers or four destroyers.
Keels now laid, two cruisers.
Keels not laid, one cruiser (#50).
The cruiser Brooklyn^ now on one way, should be launched by
January 1, 1937, at which time the new cruiser (#50) could be laid
down, with a probable launching about December 1, 1938.
The cruiser Honolulu (#48) now on the wavs, should be launched
by June 1, 1937.
One way available June 1, 1937 for one cruiser or two destroyers.
One way available December 1, 1938, for one cruiser or two
destroyers.
Boston Navy Yard:
One destroyer way, not now in use.
Capacity, one destroyer.
Keels not laid, two destroyers.
The destroyer way is not used for laying down ships under the
present program.
The two destroyers (#370 and #371) launched September 14, 1935,
were built in dry dock no. 2, and keels for two new destroyers (#389
and #390) were laid in dry dock no. 2 in October.
The two destroyers (#370 and #371) launched September 14, 1935,
were in dry dock one year.
It would take the one destroyer way four years at least to accom-
modate the four destroyers assigned here.
One building way is available here now but the yard prefers to
build in dry dock. The four destroyers assigned can be launched
from the dry dock two years from now, or November 1, 1937.
Two destroyers placed in dry dock and one on way, releasing dry
dock one year from now, or November 1, 1936, completing the fourth
destroyer on building way two years hence, or November 1, 1937.
One way available for destroyer on November 1, 1937, based on
building two of the present assigned destroyers in dry dock and two
on the single way.
Portsmouth Navy Yard:
Two submarine way§.
Capacitj^, two submarines.
Keels not laid, two submarines.
Keels for two submarines have been laid recently, one on July 17,
1935, and one on October 1, 1935.
Based on the construction time of the Porpoise in this yard with
fifteen months on the way, the two submarines on ways at present
should be launched by March 1, 1937, and the two new submarines
(#185 and #186) should be launched by August 1, 1938.
Two submarine ways available about August 1, 1938.
82 MUNITIONS INDUSTRY
Puget Sound Navy Yard:
One building dock.
Capacity, one crusier or four destroyers.
Keel not laid, one destroyer.
There are four destroyers in the building dock, two averaging
63 percent complete and two averaging 8.5 percent complete. The
two averaging 53 percent complete (#376 and #377) are expected to
be finished in May and August 1936, and should be in condition to
launch about January 1, 1936.
The other two destroyers in the building dock (#392 and #393)
may be launched about October 1, 1936.
This will make space available for two destroyers about January
1, 1936, but only one additional destroyer is assigned here. If this
destroyer is laid in the building dock January 1, 1936, no ship larger
than a destroyer may be laid do\vn in this dock prior to February 1,
1937, and another destroyer cannot be laid until October 1, 1936,
when destroyers #392 and #393 should be launched.
One destroyer way available January 1, 1936.
Three destroyer ways available October 1, 1936.
Mare Island Navy Yard:
One cruiser way.
One destroyer wa^ (reconstructed into double way).
Capacity, one cruiser and two destroyers, or four destroyers.
Two destroyers on cruiser way.
One destroyer on destroyer way.
Keels not laid, two submarines.
The two destroyers (#378 and #379) should be launched by Janu-
ary 1, 1936, from cruiser way.
The keel for destroyer Henley (#391) was laid on reconstructed
destroyer way October 10, 1935, and should be launched about
January 1, 1937.
The submarine Pompano (#181) was reported 5.8 percent complete
in September and 7.1 percent in October, but the keel had not been
laid November 30, 1935. Lay keel for this submarine on cruiser
way about January 1936, and launching about October 1937.
Lay keel for submarine Sturgeon (#187) alongside destroyer Henley
about July 1936, launching about January 1938.
Charleston Navy Yard:
Two destroyer ways.
Capacity, two destroyers.
Gunboat #51 on one way.
Cruising cutter #71 on one way.
Keel not laid, destroyer #407.
The gunboat (#51) should be launched about November 15, 1935,
and this will permit the keel of new destroyer (#407) being laid as
soon as plans and material are ready about July 1936, and launching
about July 1, 1937.
The keel for the cruising cutter (#71) laid August 15, 1935, should
be off the way by August 15, 1936.
One way available August 15, 1936.
One way available July 1, 1937.
MUNITIONS INDUSTRY
S3
Approximate dates when ships assigned to the various navy yards under the 193S,
1934, o,nd 1935 program may be launched from the building ways nov,' in repair in
these yards
SUMMARY
Norfolk: Available
Single destroyer wav Aug. 1, 1936
Cruiser (double deslroyer) way Apr. 1, 1937
Philadelphia:
1 cruiser way Aug. 1, 1937
1 cruiser way:
1 destroyer Aug. 1, 1936
1 destroj-er Aug. 1, 1937
If destroyer way is repaired, cruiser way will be available
Aug. 1, 1936, for cruiser.
New York:
1 cruiser way June 1,1937
1 cruiser way Dec. 1, 1938
Boston: 1 destroyer way 'Nov. 1,1937
Portsmouth: 2 submarine ways Aug. 1, 1938
Puget Sound:'
1 destroyer way Jan. 1, 1936
3 destroyer ways Oct. 1, 1936
Mare Island:
1 cruiser way Oct. 1,1937
1 destroyer way Jan. 1, 1937
1 destro3'er way Jan. 1,1938
Charleston:
1 destroyer way Aug. 15, 1936
1 destroyer way July 1, 1937
' On basis of 2 destroyers In dry doct, 2 destroyers on way.
' Puget Sound has building dock accommodating 1 major ship or four destroyers.
Expected dates of completion of ships in 1933 and 1934 program now on ways in
Government navy yards
Destroy-
ers
Subma-
rines
Cruisers
Gunboats
Jan. 1936
Feb. 1936.
1 1
March 1936
April 1936
1
May 1936
2
1
1
June 1936— -
July 19.36
3
3
Aug. 1936-
Sept. 1936 -.
Oct. 1936- -
2
4
Nov. 1936--
Dec. 1936
Jan. 1937.
' 1
Feb. 1937...
3
1
March 1937
April 1937
1
May 1037..
1
122
June 1937
July 1937
Aug. 1937..
Sept. 1937-- -
Oct. 1937
1 1
Nov. 1937
Dec. 1937..
Jan. 1938- -.
1
Feb. 1938
March 1938
Total..-.
18
6
4
2
1 Reports Indicate probable delays, extent indeterminate.
> (One.)
The Government building yards receiving the eleven awards for
war ships under the 1935 program have not reported expected dates
of completion.
84
MUNITIONS INDUSTRY
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MUJSriTIONS INDUSTRY
85
STATISTICAL DATA IN CONNECTION WITH U. S. NAVY YARDS IN WHICH
SHIPS ARE built; CORRECTED TO 1927
The data shown below is somewhat out of date in certain features
such as square-foot and cubic-foot capacitities of shop buildings but
there has been only slight changes in other items since 1927. This
tabulation presents a picture of the relative size of the industrial
part of navy yards engaged in repair and new construction of ships.
The absence of pier area at Mare Island is due to the fact the
body of water on which the navy yard is located — Mare Island Strait —
is so narrow piers cannot extend beyond the wharf or bulkhead Une.
Statistical data in connection with U. S. navy yards in which ships are built, corrected
to 1927
Navy yard
Shop buildings
Standard
gage rail-
road
tracks
(mDes)
Pier area
(square
feet)
Num-
ber Dry
Docks
Berth-
ing
space
(linear
(feet)
Condition of
shipbuilding
ways, as of Sep-
tember 1935, as
regards rated
capacity
Marine
railway
Square feet
Cubic feet
Service-
able
Not
service-
able
Portsmouth
798, 660
704. 770
1. 049, 830
1. 563, 000
1,647,115
315, 728
60S, 925
1, 141, 098
20. 209, 700
17, 256, 770
33, 352, 203
59, 626, 000
60, 604, 898
10, 149, 670
12, 100, 065
38, 218, 755
7.6
7.3
12.4
26.4
16.1
8.6
13.5
17.7
216, 099
344,986
226, 489
567, 000
226, 025
141, 100
306. 400
1
2
4
8
!
'8
2
6,770
7.370
14^380
16.440
7,600
2,285
33,800
11.900
2
1
2
2
1
2
1
8
1
1
1
New York
Philadelphia
Norfolk...
Charleston
Puget Sound
Mare Island
1
•1
1 One is a building dock used for ship construction.
' Small boats only.
Comparison of the number of months allowed in contracts to build the various types
of ships in Government and private shipbuilding yards
[Average time elapsing between date of contract and contract date of completion of 65 of the 86 ships in
the 1933 and 1934 programs]
Type of ship
Unit: Months
Govern-
ment navy
yard
Private
shipbuild-
ing com-
pany
Cruiser:
Heavy ..
38.0
86.0
88.6
Light...
87.0
Destroyer:
Heavy
80.6
Light
27.6
28.8
26.7
Submarine-
28.2
Construction periods of various types of combatant ships
Type
Symbol
Time on
ways
Total building
time
Battleship
BB
CV
CA
CL
DD
es
PQ
24 m.onths
24 months
24 months
24 months
12 months
18 months
12 months
12 months
Aircraft carrier
Heavy cruiser...
38 months.
Light cruiser..
Destroyer
30 months.
Submarine
30 months.
Gunboat
Coast Guard cutters
24 months.
86
MUNITIONS INDUSTRY
At the time of launching, ships are 60-70 percent completed.
Shipbuilding program 1933, 1934, ond 1935 — Total number of each type of eMp
contracted
Type of ship
Symbol
1933-34
1934-35
Total
Battleship
Aircraft carrier...
Cruiser:
Heavy
Light
Destroyer leader-
Destroyer
Submarine
Total.
BB
OV
OA
OL
DL
DD
83
84
In addition to above ships, there are two gunboats contracted in
1933.
Combatant ships contracted for — 1930 to date
Combatant ships under contract since 1933:
Keels laid or to be laid:
In Government navy yards 40
In private shipyards 46
Total 86
Number of ships with keel laid as of Oct. 1, 1935:
Government yards 24
Private shipyards 33
Total 57
Number of ships launched as of Oct. 1, 1935:
Government yards 4
Private shipyards 6
Total.
9
Ships completed under contract since 1933:
Government yards
Private shipyards
Total.
Average percent of hull completed at time of laying of keel as evidenced by
reports of huU completion of ships prior to laying of keel 10
Delay beyond contract date in completion of ships in Government and private yards
[Number of months between contract date of completion and estimated date of completion reported by
building yards for ships on ways In October 1935J
Qovernment yards
Private yards
Number
reporting
Lag
months
Number
reporting
Lag
months
Heavy cruisers .
1
3
5
18
2
None
2.67
2.22
2.50
2
1
5
16
None
2
Light cruisers
Submarines
2.0
Destroyers . .
L63
Gunboats
Aircraft carriers
6.0
MUNITIONS INDUSTRY 87
From October 1935, progress report of sliips in Government and
private yards. These figures will change as dates of completion
approach.
Estimated cost of shipbuilding ways
CRUISER AND BATTLESHIP WAY
ONE SHIP, LENGTH ABOUT 700'
Pile foundation : Excavation, dredging $200, 000
Superstructure: Concrete, reinforced 250, 000
Crane runway: Structural steel 500, 000
Cranes: 2, 40-ton; 4, 10-ton, overhead bridge type 140, 000
Services: Air, electricity, water, etc 250,000
1, 340, 000
DESTROYER AND SUBMARINE WAY
TWO SHIPS, LENGTH ABOUT 375'
Pile foundation: Excavation, dredging $60, 000
Concrete superstructure 80, 000
5H.H. cranes, at $25,000 (5, 10-ton, fixed tower) 125, 000
Services: Air, electricity, water, etc 60, 000
325, 000
REQUIREMENTS OF SITES FOR NAVY YARDS
1. Situation upon a good harbor of sufhcient size, depth, and accessi-
bility for vessels of the largest size and draft.
2. A favorable position with respect to the principal lines of defense.
3. A local security from water attack due to position and natural
surroundings.
4. Ample water frontage of sufficient depth and permanence and with
currents of moderate rapidity.
5. A favorable position with respect to the lines of interior communi-
cation (by rail or otherwise) with the principal sources of supply.
6. That the character of the ground shall be suitable for the construc-
tion of excavated docks and basins and for heavy structures.
7. Proximity to centers of labor and suppUes of material.
8. Healthfulness of the cKmate and its suitability for outdoor labor.
9. The existence in the vicinity of an ample supply of potable water.
The area should be suitable for eventual development and have an
area of not less than 300 acres for the navy yard proper (the manu-
facturing yard).
Waterfront should be a straight line with a length of approximately
6,000 feet.
Elevation of approximately 5 to 10 feet above mean high water at
waterfront with a level or sHghtly increasing elevation from the water.
Foundation conditions. — The soil should be of a character suitable
for the construction of dry docks and buildings and to furnish founda-
tions for heavy machinery.
Depth of water. — Depth at yard: The depth at the yard, including
the entrance to the dry docks, the berthing spaces, and anchorage,
should have a minimum depth at extreme low water of not less than
35 feet. It is very desirable that the depth should be 40 feet.
Depth to sea: The controlling depth to the sea should be not less
than 35 feet at mean low water and, if practicable, 40 feet. Where
88 MUNITIONS INDUSTRY
there is little range of tide, 45 feet would be preferable. Liberal al-
lowance should be made for the effect of heavy seas and the "squat"
of a vessel under way, reducing usable depth of water.
Tides and currents. — At the yard itself a reasonable rise and fall of
tide is not objectionable.
A swift current is very undesirable.
Berthing. — Waterfront should be such that a total of approximately
20,000 linear feet can eventually be provided, preferably by a number
of parallel piers of a length of not less than 1,000 feet.
Width of slips between piers should be not less than 300 feet and
the piers 100 feet wide.
Dredging. — The original dredging necessary to obtain the prescribed
depth is a matter affecting the cost of constructing the original yard,
while the amount of annual dredging to maintain this depth is an
operating expense.
Services necessary to provide at building ways. — Fire protection, fresh
water, sewerage, compressed air, fuel oil (possibly), electricity for
Hghting, rivet heating, power, and welding. Outlets should be located
at working spaces and ways convenient for service to any part of a
ship.
Working and storage space. — Ample space should be provided for
receiving and working material and for assembling it into larger units
before placing.
These spaces are located generally at the head of the sHp and on
the normal route of material from storage spaces or shops to the
building ways.
The area around the building way should have good drainage and
a good working surface of hard earth, cinders, macadam, or other
pavement.
ADDITIONAL DRAFTING ROOM FACILITIES NEEDED IF ALL COMBAT
SHIPS ARE DESIGNED AND BUILT IN GOVERNMENT NAVY YARDS
Drafting and designing forces are maintained at the various Gov-
ernment navy yards and private shipbuilding yards. Designs are
worked out and plans prepared and revised in these offices for ships
imder construction in yards located throughout the coimtry, the work
in any drafting office not being restricted to ships assigned to the yard
in which the office is located.
In addition to the drafting offices in the navy yards, there is a
central drafting office located at New York, where plans are prepared
for ships at various navy yards.
Also, plans for many ships are prepared in private shipbuilding
yards, such as the New York Shipbuilding Company, Newport News
Shipbuilding and Dry Dock Company, Electric Boat Company, and
the Fore River plant of the Bethlehem Steel Company.
At the Norfolk Navy Yard the number of draftsmen at the present
time totals 108, divided as follows:
Number of
Work on which engaged: draftsmen
Construction and repair 50
Mechanical 39
Ordnance 5
Public Works 14
Total 108
MUNITI02S:S IlfDUSTRY 89
During the period 1917-1918 about 150 men were accommodated in
the drafting quarters now in use at Norfolk and no increase in space is
considered necessary in case of expansion in this yard.
At the Philadelphia Navy Yard, additional space amounting to
approximately 50 per cent of the present space is requested.
At the New York Navy Yard, where about four hundred drafts-
men and designers are employed, no additional space is requested.
At the Portsmouth Nay>^ Yard about seventy-five draftsmen are
employed, and some additional space is requested.
The New York Shipbuilding Company, with three Hght cruisers
and four heavy destroyers on its ways at present, has about three
hundred and fiftv draftsmen and designers.
In the event tkat warship construction is confined to Government
navy yards, additional facihties housing the draftsmen in private
yards will have to be provided. It is not necessary that the Grafting
lorce be located at the yard where construction is ^oing on, although
a small force is necessary at aU points of construction.
Provided that aU the designing and drafting be done in Govern-
ment navy yards or at least by the Government, it is estimated that
an expenditure of $500,000 would enlarge present drafting room
facilities in the navy yards and provide additional working quarters
for draftsmen now employed at private yards. • The location of this
outside drafting force is optional because practically all the plans
have to be reviewed and approved at Washington.
MACHINE TOOLS
A survey made by the Navy Department develops that the average
age of machine tools in Government navy yards is about 19 years.
The estimated replacement value, exclusive of installation, of the
machine tools in the eight navy yards actively engaged in building
ships is somewhat in excess of 36 million dollars.
The average sum of $1,211,811 has been expended yearly since
1930 for machine tools for replacements and additions.
An inspection of the machine tools in the east coast yards revealed
crowded conditions and antiquated machines. Additional machine
shop buildings have been estimated to reheve certain navy yards of
their crowded condition, and an additional estimated sum of $5,000,-
000 has been included to cover the cost of modern up-to-date machines
with which to build the latest type warships. These ships, wdth their
welded construction and heavy alloy-steel armor, require machines
of the greatest capacity and accuracy ; and while this is all due to the
latest improvements in design and is in no sense attributable to the
assumption that the Government may take over all warship con-
sti-uction, nevertheless this estimate must provide facilities to carry
out the assumed program, and for this reason a part at least of the
normal replacement costs of machines, which should follow year after
year under an ordinary program, have been included in this estimate
as a part of the cost of the plant requhed, to start on the program at
once.
The Navy Department recommendation for the annual replacement
of machine tools for the next five years is $2,500,000, and this figure
does not take into consideration the increased Government building
program laid down in this report.
90 MUNITIONS INDUSTEY
Initial cost of machines in each navy yard and calculated replacement value
Replacement
value exclusive
of Installation
cost, machine
tools, class 6 (few
classes 4 and 5)
First cost of
machine tools,
class 6: From
Paymaster
Oeneral's re-
port, 1934
Portsmouth.
Boston
New York-..
Philadelphia.
Norfolk
Charleston.-.
Mare Island _
Puget Sound.
Pearl Harbor
Cavite
Total..
$2, 586.
4, 199,
6, 892,
5, 745,
6, 471,
1, 478,
4, C3G,
4, 623,
1, 958,
1, 348,
391.90
976. 46
400.48
498. 27
285. 81
828. 21
908. 16
132. 40
065. 27
737. 46
$2, 046,
3, 322,
5, 452.
4, 545,
6, 119,
1, 169,
3, G68,
3, G57,
1. 547,
1, 067,
196. 13
766.27
848.48
489. \\
686. 48
959. 03
440.00
641. 4a
443. 79
039. 13
39, 940, 124. 42
31, 597, 414. 88
Portable, loose, and hand tools not included above, which, when
replaced, are charged to plant overhead. Average age of machine
tools in continental yards, 19 years. Appraised value today of
machinery and machine tools in above navy yards, $5,529,487.
Funds expended for machine tools during past six years:
1930 - $1, 500, 000
1931 1, 500, 000
1932 900, 000
1933 200, 000
1934 1, 451, 220
1935 1,231, 475
1936 1, 700, 000
No surplus machine tools, purchased during war, left for distribu-
tion to the yards. The above data taken from a recent report by
Lieut. Commander Walker.
Total forces employed in U. S. navy yards, Se-ptemher 1935 and September 1918
Navy yard
Sept.
1935
Sept.
1918
Navy yard
Sept.
1935
Sept.
1918
Portsmouth
2,400
1,970
5,900
6,100
5,449
9,376
15, 026
9,001
Norfolk
4,300
1,350
4,600
4,450
8,880
Boston
Charleston..
8,533
New York
Mare Island
7,559
Philadelphia
Puget Sound
6,120
Figures for 1935 are total civilians.
Figures for 1918 (approximately war peak) are exclusive of clerks.
NUMBER OF NEW SHIPBUILDING WAYS NECESSARY TO BUILD ALL
WARSHIPS IN GOVERNMENT NAVY YARDS
In a communication to the Senate Munitions Investigation Com-
mittee, the Navy Department advised that eight additional ways
would be necessary for destroyer construction and five additional
ways for submarine construction in the event all warships are built
in Government navy yards. This estimate varies from the one
attached, which covers the cost of one major ship way, four destroyer
ways, and two submarine ways. The reason for the difference in the
two estimates is as follows:
MUNITIOITS INDUSTRY 91
The basis of the Navy Department estimate is the tentative building
program for the next two years laid down in accordance with treaty
lunitations. Under the treaty, the United States may build twenty-
four destroyers and twelve submarines, and this number of ships has
been divided equally in drawing up programs for 1936 and 1937 —
twelve destroyers and six submarines each year.
The Navy Department deducts the five existing destroyer ways
from the total number of destroyers to be built each year (twelve)
leaving seven, and allowing a year plus a small fraction over for con-
struction of a destroyer, eight additional ways are necessary.
In figuring the number of new ways for submarines, the number of
submarines (six) to be laid down each year was converted into number
of building ways by multiplying by one and one-half inasmuch as a
submarine occupies a way for this length of time. This results in
nine ways necessary, and with a total of four existing ways — nine
minus four equals five.
It should be not«d that the Navy Department has not figured on
any new major ship construction during the next two years and has
made no use of any of the seven major shipbuilding ways for the
construction of the ships under the 1936 and 1937 programs.
The attached estimate is predicated on the annual construction of
four major ships, ten destroyers, and three submarines. The period
of construction for each type of ship is the same as the Navy Depart-
ment uses and in both estimates the total number of ways in navy
yards is set at sixteen, although some are out of repair.
STANDARD DISPLACEMENT
The standard displacement of a ship is the displacement of the ship
complete, fully manned, engined, and equipped ready for sea, includ-
ing all armament and ammunition, equipment, outfit, provisions, and
fresh water for creWj miscellaneous stores and implements of eveiy
description that are mtended to be carried in war, but without fuel
or reserve feed water on board.
The word "ton", in the present treaty, except in the expression
metric tons, shall be understood to mean the ton of 2,240 pounds.
The standard displacement of a submarine is the surface displace-
ment of the vessel complete (exclusive of the water in non-water-
tight structure), fully manned, engined, and equipped ready for sea,
including all armament and ammunition, equipment, outfit, provi-
sions for crew, miscellaneous stores, and implements oi every descrip-
tion that are intended to be carried in war, but without fuel, lubricat-
ing on, fresh water or ballast water of any kind on board.
Each naval combatant vessel shall be rated at its displacement
tonnage when in the standard condition. The word "ton", except
in the expression metric tons, shall be understood to be the ton of
2,240 pounds.
SUITABLE GOVERNMENT LAND AREAS ON THE EASTERN SEABOARD
CAPABLE OF DEVELOPMENT INTO SHIPBUILDING YARDS
A description of the shipbuilding facilities of the Navy on the
eastern seacoast would not be complete \\'ithout mention at least, of
two locations entirely void of shipbuilding at present but with
possibilities for considerable development.
92 MUiflTIONS INDUSTRY
Qne of these locations is the old Squantum Destroyer Base just
south of Boston and the other is the area adjoining the South Boston
drydock in Boston Harbor, both locations being in the same naval
district as Boston Navy Yard.
Squantum Destroyer Base. — At Squantum there are no available
ways in shape to use, but there are ten building ways designed for
submarine or destroyer construction which might be put in shape to
take ships of this character. The ways are of wood trestle construc-
tion, heavily braced and planked on the inboard end and pier con-
struction at ground level on the outboard end. These ways are covered
by saw-toothed type roof, glazed, and sidewalls entirely glazed.
Small capacity cranes of about three tons serve these ways. These
cranes would not be fit to repair at the present time and heavier
cranes would be required if these ways were reconditioned for destroy-
er construction.
Large shop buildings are here, but in an unkept condition, the steel
work remaining unpainted for many years. The buildings are not
beyond repair, but a considerable sum would be necessary to recon-
dition them. All machinery has been taken from the buildings and
during the time we were on the premises, the dismantling of plate
and angle crane runways and Building No. 24 was in progress. An
old warehouse was being torn down, the salvaged material being
used in the construction of other buildings for the use of the airway
facilities at this point. The heavy cranes from plate storage yards
were being salvaged for use in Boston Navy Yard.
Insofar as room and building layout are concerned, this area is well
adapted for ship construction of the destroyer class. Thirty-five
or more destroyers were built here during the war and the period
immediately following, by the Bethlehem Shipbuilding Corporation.
In addition to the ten building ways there are the remains of what
were six wet shps. These wet slips are about 50 feet wide, in groups
of two with working platforms between, the entire number of slips
being covered by a steel frame, glazed sidewaU and roof structure.
In 1932 fire destroyed the roof and working platforms and twisted
the steel-roof structures to such an extent it would require a considera-
ble sum to put this part of the plant in a working condition.
South Boston drydock area. — There are no building ways or shops
on this site but there is ample space here for construction of the
largest type of shipbuilding ways and the necessary shop buildings
and appurtenances.
NAVY YARD, PORTSMOUTH
Toots
Addition to Elect. Mfg. Shop #79, about 60% increase $150, 000
Machine tools for above $100, 000
Enlarge foundry, 50% 70,000
Foundry equipment 50, 000
220, 000 150, 000
150, 000
Total necessary 370, 000
Desirable:
Extension to ship fitter shop 150, 000
Locomotive crane for weldments 20, 000
Desirable... 170, 000
MUNITIONS INDUSTRY 93
NAVY YARD, BOSTON Tooit
New structural shop $750, 000
Machine tools for structural shop $300, 000
Re-modeling old structural shop for pipe shop 25, 000
Machine tools, additional for pipe shop 60, 000
Plate yard 35, 000
Removal of trestle at end of v/ays 2, 000
Extend and repair piers 5 and 6 300, 000
Tools for machine shop, welding, etc 200, OOP
1, 112,000 560, 000
560, 000
Total necessary 1, 672, 000
Desirable:
Improve power plant 280, 000
Paint and oil storage 70, 000
Desirable 350, 000
NAVY YARD, NEW YORK
Covered welding platforms $300, 000
Machine tools for structural shop 250, 000
1 additional pier 325, 000
Enlarge machine shop 275, 000
Tools for machine shop 300, 000
Remodel boiler shop, etc 300, 000
Tools for boiler shop 200, 000
Welding equipment 200, 000
1. 200, 000 950, 000
950, 000
Total necessary 2, 150,000
Desirable:
Improve power plant 200, 000
Fitting out crane, 350-ton 900, 000
Miscellaneous building improvements 200, 000
Desirable- 1, 300, 000
NAVY YARD, PHILADELPHIA
Increase plate and angle storage $350, 000
Reserved material storehouse and crane 360, 000
Heavy metals storehouse and crane 500, 000
Cranes for pier 4 60, 000
New sheet metal shop 365, 000
Tools for sheet metal shop 100, 000
Enlarge machine shop 432, 000
Tools for machine shop 400, 000
Lengthen and improve pier 5 250, 000
Extension to copper and pipe shop 60, 000
Tools for copper and pipe shop 100, 000
Additional 5-15 ton crane, pier S 60, 000
Enlarge electric shop 200, 000
Tools for electric shop 100, 000
Miscellaneous small buildings, tracks, etc 60, 000
Welding equipment 275, 000
Tools for structural shop 250, 000
Covered welding platforms 100, 000
2, 787, 000 1, 225. 000
1, 225, 000
Total necessary 4, 012, 000
Desirable:
New fitting out pier 800, 000
Dry dock crane and track connection 225. OOP
Desirable 1. 025, 000
73013°— 36— pt. 7 7
94 MUNITIONS INDUSTRY
NAVT YARD, NORFOLK
Extension of railroad trackB, roads, etc $50, 000
Two traveling cranes, pier 3, and strengthening pier 200, 000
Extension of machine shop 125, 000
Tools for machine shop $326, 000
Welding equipment 90, 000
Miscellaneous small buildings 15, 000
Welding bavs at structural shop 100, 000
Tools for structural shop 270, 000
490, 000 685, 000
685, 000
Total necessary 1, 175, 000
New pier 1,000' long 1, 400, 000
Dredging for same 300, 000
Dry dock services building 75, 000
Desirable 1, 775, 000
NAVY YARD, CHARLESTON
Storehouse for reserved material $100, 000
Connect the two building ways 20, 000
Welding equipment . 60, 000
Tools for machine shop 150, 000
Tools for extended structural shop 100, 000
Tools for boiler shop, etc 60, 000
Miscellaneous buildings and services 50, 000
170, 000 350, 000
350, 000
Total necessary 520, 000
Desirable:
Storehouse for heavy materials 50, 000
Additional berthing and services 500, 000
Desirable 550, 000
NAVY YARD, MARE ISLAND
Improvements to distributing systems $300, 000
Tools for machine shop 200, 000
Welding equipment 80, 000
Welding platforms 100, 000
Tools for structural shop 150, 000
Service building south of Independence wharf 50, 000
Submarine barracks facilities 60, 000
Reserved materials storage 100, 000
Storage for heavy materialB 75, 000
675, 000 430, 000
430, 000
Total necessary - 1, 105, 000
Desirable:
Quay wall extension north to submarine wharf 250, 000
Interrupted quay wall south of Independence wharf __ 860, 000
Desirable 600, 000
MUJSTITIOXS IXDUSTEY 95
NAVY YARD, PUGET SOUND
Tools
Reserved materials storehouse . $75, 000
New combined smith and pipe shop 550, 000
Tools for smith and pipe shop $100, 000
Enlarge foundry 315, 000
Tools for foundry 76, 000
Railroad tracks, concrete roads, etc 100, 000
Welding equipment 75, 000
Welding platform.s 100, 000
Tools for structural shop 200, 000
Tools for machine shop 200, 000
Fitting out pier 950, 000
2, 090, 000 650, 000
650, 000
Total necessary 2, 740, 000
Desirable:
Storage for heavy materials 200, 000
Tools storage at heads of piers 30, 000
Desirable 230, 000
SUMMARY
Estimated cost to equip the Government navy yards to an annual capacity of:
1 battleship
1 aircraft carrier
1 heavy cruiser
1 light cruiser
10 destroyers
3 submarines
Estimated cost of the minimum facilities necessary $17, 604, 860
Estimated cost of additional fitting-out piers, cranes, berthing
spaces, etc., facilities not absolutely necessary but desirable from
the standpoint of economical operation 6, 000, 000
Total 23, 604, 860
Respectfully submitted.
F. W. Amadon.
C. H. Spenceb.
Washington, D. C, December 2S, 1935.
The Committee submits the foregoing findings of the experts from
the Interstate Commerce Commission as being substantial.
VI. COSTS OF POWDER AND AMMUNITION
In regard to powder, a,mmimition ships, and ordnance materials
generally it is very doubtful whether the War or Navy Departments
have ever tried very hard to give the private companies any real
amount of competition. This is extremely unlikely in view of the
War and Navy Department attitudes that the private manufacturers
must be kept in business. The report on naval shipbuilding (S.
Kept. No. 944, 74th Cong.) contains testimony to the effect that the
New York Navy Yard was not allowed to put in a competitive bid
on the aircraft carrier Ranger, after the specifications on that ship
had been revised, although the yard wanted to do so (p. 40). A
du Pont report (hearings, pt. IG, p. 3959) quotes a discussion with
General Ruggles of the Ordnance Department:
An order for 200,000 pounds 75nim FXH will be open to bids in a very short
time. The specifications are intended to insure procurement from the du Pont
Co. I mentioned the possibility of the naval powder factory as a competitor,
possibly repeating our experiences relative to bids for 14-inch powder 2 3'ear3
ago. General Ruggles does not anticipate a recurrence of that situation.
In connection with Franlcford Arsenal, C. L. Reierson, president
of Remington Arms Co. wrote of a conference with General Ruggles
(exhibit 1284)
He [Ruggles] says that if the cartridge companies are to do anything about
getting any of this business — provided they want it — -it should be done just as
soon as possible. He pointed out that once they [Frankford] have gotten their
production up to a point that will take care of their full requirements he will be
powerless to give the cartridge companies any business as he much prefers to
do * * *.
This attitude is further reflected in a letter from General Ruggles
to Remington Arms Co. (exhibit 1287) in regard to the rejection of a
lot of 1,000,800 rounds, part of an order for 10,000,000 rounds.
An examination of the data submitted in connection with the test of this par-
ticular lot of ammunition indicates that in the firings in the Browning water-
cooled machine gun in the first test of 800 rounds, two bullets were lodged in the
bore approximately three (3) and five (5) inches, respectively, from the breech
end. On a retest of 1,800 rounds in the same machine gun, one (1) bullet v/aa
lodged in the bore approximately three (3) inches from the breech end. _ In
other respects the ammunition appears to meet the specifications, although it ia
noted that the spread of the groups in the hang-fire test is in most cases con-
siderably larger than those obtained with Frankford Arsenal ammunition.
The defect of having a bullet lodge in the bore when a cartridge is fired is a
very serious one, in that it precludes the issue of this ammunition to the service.
Cartridges of this type would Vje dangerous to fire in the service weapons and in
our surveillance tests of the great quantity of ammunition left over from war
production we would relegate ammunition of this type to the unserviceable
class and would withdraw it from the hands of troops for breaking dov>m.
The Ordnance Department greatly regret that the defect is not one that can
be overcome by reworking the ammunition and, therefore, under the terms of the
contract the ammunition cannot be accepted. It will, therefore, be necessary for
your company to submit another lot of ammunition to replace that rejected. In
this connection it will also be necessary for you to provide the powder for the
additional lot since the Government has already furnished you powder.
97
98 MUNITIONS INDUSTRY
The department realizes that you have limited, if any, outlet for this ammuni-
tion and It has been considering how It might help reduce the loss to your com-
pany by buying from you from time to time such amounts of this ammunition
as might be used In Its own tests at a price which would relieve you of some of the
loss and still not increase the cost to the department of the tests to be made.
We have been considering the use of this ammunition in certain erosion and
other tests of machine guns. You realize, of course, that the lodgement of a
bullet In the bore of a machine gun would cause a failure of the gun to continue
fire. With ordnance personnel posted as to the defect in this ammunition there
would not be much danger because thev can be warned not to resume fire until
they have determined by Inspection if the bullet Is lodged in the bore, and, If so,
to remove the bullet. This possibility of a cartridge being fired with a bullet
already lodged in the bore Is considered too great to permit the use of this am-
munition except under the most carefully guarded conditions.
We are now in a position to say how much of this ammunition we might be
able to buy for limited tests but are maliing a study to determine this as exactly
as possible under the circumstances. We will let you know what the possi-
bilities are within a short time. We can, of course, only agree to buy this ammuni-
tion from time to time as the possibility for using it arises.
After having determined the probable amounts of this ammunition which we
may use in limited tests v/ithin the next few years, we will communicate with
yoii furthcjr so that you may determine then whether it will be more profitable
for you to hold the defective lot on the prospect of selling part of it from time
to time to the Government at a reduced price or to breali the lot down. In case
you determine it will be to your advantage to hold the lot in store on the prospect
of selling it from time to time to the Government, you will be in a position to
quote us a price at which you will sell it to us. Under the circumstances we
would be able to purchase the ammunition without advertising for competitive
bids.
The lack of effective competition in regard to powder ia illustrated
by the following letter from the director of mihtary sales of the du
Pont Co. to its foreign representative, Col. W. N. Taylor (exhibit
1355).
June 30, 1932.
♦64 — EsTHONiAN Gov't.
MS-80-A
MS-64
Colonel W. N. Taylor,
16 Place Vendome, Paris, France.
Dear Sir: We are attaching confirmation of your cable no. 991 and our reply
no. 824. We have noted carefully your cable no. 991 indicating that Esthonia
are requesting bids to be opened July 1932, on 15,000,000 cartridges, delivery
specified In autumn 1933.
The competitive prices quoted by I. C. I. and Bofors disrupt our price schedule
and made a noticeable differential in favor of the competitors insofar as made-up
ammunition is concerned. You have advised that our maximum prices must be
$1.40 per liilogram c. i. f. England insofar as I. C. I. Is concerned, which price
includes 3% commission and $1.60 per kilogram c. I. f. Belgium on sales to
Fabrique Nationale, which price includes 6% commission.
Our cablegram has authorized you to quote these prices and naturally since
they are considerably below our usual export schedule they must be considered
our minimum figure. You must realize that our price schedule on rifle powder
sales to the U. S. Government is 71 cents per pound f. o. b. Carney's Point,
excluding boxes. The prices you have quoted figures, in the instance of sales to
England, a gross selling price f. o. b. Carney's Point, including boxes, of 64}4
cents and in the instance of Belgium a price of 67.6 cents, thereby reflecting a
noticeable reduction.
Since our sales to the United States total approximately 700,000 pounds of rifle
powder annually, we cannot take the chance of this reduced figure being divulged.
Therefore, you "must arrange some plan in submitting your proposal so that you
will be absolutely satisfied that the prices quoted will be regarded with the utmost
secrecy. We wish to make ourselves very emphatic on this point, and In the
event you cannot work out the required arrangement or feel that our idea cannot
be accomplished then we must advise you not to quote.
K. K. V. Casbt, Director.
MUiriTI02irS IIJDTJSTEY
99
This letter shows that prices of 54.5 cents a pound were quoted to
England and 57. G cents a pound to Belgium, although the price to the
United States Government was 71 cents, and powder amounting to
700,000 pounds annually was being sold to the United States Govern-
ment.
In 1928 various ammunition manufacturers were interested in dis-
covering the Government's cost for manufacturing 30.06 cahber boat-
tail cartridges in comparison with their own costs. This is a standard
United States Infantry ammunition. The arrangement was that
Frankford Arsenal would receive the information concerning the cost
of manufacture in the private plants in exchange for its information
on costs. This part of the arrangement was not carried out. Frank-
ford Arsenal furnished its figures and received none in return.
The figures compiled by the manufacturers showed their costs to
be much higher than those at Frankford Arsenal, even when items
such as capital charges and taxes were added to Frankford costs.
(The discussion of this situation is contained in the hearings of the
committee, pt. 16, p. 3948 seq. and exhibits 1283-1301).
The adjusted cost figures showed per thousand (exhibit 1294).
Materials furnished by manufacturer.
Materials furnished by Government--
Labor -
Factory burden
1 percent shrinkage-
Cost at factory
Administration expense
Interest on plant investment and worliing capital---
Total cost exclusive of profit
Profit 10 percent on above, less interest
Total cost including profit
Less cost of materials furnished by Government (net)_
Selling price less 10 percent (profit) on United States
material -
Net selling price -
Add 5 percent for rejections -- -
Net selling price
Frankford
Arsenal
10.33
11.73
3.59
4.39
.18
30.22
.83
.82
31.87
3.11
23.25
1.17
22.08
1.10
23.18
Peters
10.93
11. 73
5.86
6.93
.24
35.74
.59
.73
37.09
3.63
28.99
1.17
27.82
1.39
29.21
Reming-
ton
9.20
11.73
3.10
9.73
.22
33.98
1.37
1.51
36.86
3.54
40.40
28.67
1.17
27.50
1.38
Western
10.63
11.73
5.77
9.55
37.84
.74
2.72
41.30
3.86
33.43
1.17
32.26
1.61
33.87
Win-
chester
9.83
11.73
3.83
11.73
.25
37.36
1.39
.43
39.13
3. S3
43.03
31.33
1.17
30.18
1.51
31.67
Deducting only two items from Frankford Arsenal figures (but
leaving items for taxes, depreciation, administrative expense in over-
head) not actually paid out by Frankford Arsenal, but added by
manufacturers for comparison: Interest on plant and worldng capital
$0.82; profit $1.94 ($3.11 less $1.17), total $2.76. The net selling
prices of the companies and the arsenal are: percent
Frankford Arsenal 20. 43
Peters 29. 21
Remington 2S. 88
\^'estern 33. 87
Winchester 31. 67
Higher than Frankford:
Peters 42. 9
Remington 41. 3
Western 65. 7
Winchester 55.
Average 61. 2
100 MUNITIONS INDUSTEY
Before deduction of these two unpaid items, but leaving in esti-
mated costs for depreciation, administrative expense, overhead, and
taxes, the companies are higher than Frankford by: 26.0, 24.5, 46.1,
35.3 percent; average, 32.9 percent.
These figures, available to the manufacturers, were not presented
to the Committee of the House of Representatives in 1932, but some
older figures, taken in 1926 by an accident employed by the ammuni-
tion industry, were offered instead (exhibit 1300). This was a better
investigating Government competitive with private business. The
War Department, of course, had not been supplied with the munitions
compames' figures, in spite of the agreement, and would therefore
not Shanin the evidence. The companies proposed that Frankford
Arsenal go out of the business of producing ammunition, although in
the same statement (exhibit 1300) they described Frankford Arsenal
as having —
new and up-to-date machinery was installed by the Government for increasing
the production capacity of and reducing costs at Frankford Arsenal. Machines
were rearranged and extensive conveying systems were installed. An excellent
job of mechanical engineering resulted In elimination of operations and labor
which, with the increased production now totaling about 300,000 rounds per day,
brought the costs at Frankford, when figured by their sj'stem of accounting, far
below anything that a commercial manufacturer could attain.
They neglected to say that when Frankford was figured on the
companies' own methods of accounting, including taxes, depreciation,
etc., the companies were still 32.9 percent above Frankford, and leaving
out profit and interest were 51.2 percent above Frankford.
Remington Arms Co. later furnished the committee with estimates
tending to show that its cost of manufacturing 10,000,000 rounds
would be (less material furnished by the Government) $23.62 per
thousand compared to $19.14 for Frankford Arsenal. However, this
was before profit or investment, and on September 3, 1927, Remington
had bid $30 per thousand on 10,000,000 rounds.
VII. COST OF MACHINE-GUN PLANT
The Interstate Commerce Commission engineers presented figures
showing that the cost of constructing machine-gun facihties equal to
those now available to the Government at the Hartford plant of the
Colt's Patent Fire Arms Manufacturing Co. would be (Feb. 6, 1936,
exhibit 4407):
Cost, new
Cost, less
deprecia-
tion
Plant and land
Patterns, tools, etc
Automobiles, furniture, etc
Total
$5, 715, 987
2,941,428
158, 000
8, 815, 413
$2, 587, 159
2, 941, 428
158, 000
5, 688, 58a
The cost of building an entirely new plant would be $8,815,413.
The cost of acquiring a plant in no better condition than the present
plant would be approximated by the figure $5,686,585.
No figures were compiled on possible costs of patents,
Colt's furnished the Army 97 percent of the small arms purchased
from private manufacturers in recent years (exhibit 440).
101
VIII. COST OF AIRPLANE FACILITIES
The Interstate Commerce Commission engineers presented figures
showing that the cost of constructing airplane production facilities
equal to those now available to the Government in the Pratt- Whitney
Aircraft Co. (engines and propellers) the Chance Corporation (bodies)
and United Airports, Inc. (testmg field), would be (Feb. 6, 1936,
exhibits 4404, 4405, 4406):
Engines and propellors
Bodies
Testing field and equipment
Total
Cost new
$8, 020, 891
1,358,071
1, 072, 165
8, 451, 127
Cost less de-
preciation
$4, 929, 653
1, 170, 621
993, 633
7, 093, 905
The cost of building an entirely new plant would be $8,451,127.
The cost of acquiring a plant in the condition of the present plant
would be approximated by the figure $7,093,905.
No figures were compiled on possible costs of patents.
IX. COST OF POV/DER PLANT
In Interstate Commerce Commission engineers presented figures
showing that tlic cost of constructing powder manufacturing facilities
equal to those at the Carney's Point plant of the du Pont Co. would
be (Feb. 6, 1936, exhibit 4410):
Cost new (plant, equipment and land) S2, 563, 085
Add: Acid plant 1^ 075' 000
Total 3, 63S, 085
Cost less depreciation 1^ 334^ 100
Add: Acid plant "_ 1] 075] 000
Total 2, 409, 100
The cost of building a new plant would be $3,638,085. The cost
of acquiring a plant in the condition of the present plant would be
approximated by the figure $2,409,100.
The Carney's Point plant furnishes 99.4 percent of the Army's
cannon powder and 98.6 percent of the small-arms powder and some
amount of powder for the Navy.
No figures were compiled on possible costs of patents.
Figures on the Navy Department's investment in its plant at
Indianhead, Md., were given as: Cost new (excluding land), $4,-
234,186. _ Cost less depreciation, $2,025,871. This investment in-
cludes acid plants.
X. ARMOR PLATE PLANT
(Steel company figm'es)
Officials of the three steel companies now supplying the Navy
with armor plate prepared for the committee figures on the invest-
ment in then plants devoted to armor plate. These figures were
not checked by committee accountants for lack of funds (Feb. 7.
1936). '
Bethlehem Steel Co
MldvaleCo
Carnegie Steel Co-..
Capacity,
light armor
plate
Tons
3,000
5,000
9,000
Original
investment
of value
$7, 103, 439
6, 236, 000
6, 300, 072
105
XI. PRICES OF PROJECTILES, GUN FORCINGS, ARMOR
PLATE
(Steel company figures)
^ The existence of three companies being awarded contracts for pro-
jectiles, gun forgings, and armor plate does not necessarily mean that
a competitive price situation exists among them. On naval ordnance
order 272, the bids were, in 1930 (exhibit 4494): Carnegie, $5G0 per
ton (turret armor); Midvale, $690; Bethlehem, $670.
On this award Carnegie, according to its own figures made 57.9
percent profit. The Carnegie officials were questioned whether their
prices had dropped to the Government after these high profits had
been made on this contract. (Transcript Feb. 7, 1936, p. 13746 et
seq.) It developed that the official whose duty it was to enter bids
stated that he did not know of the profits.
Question. When you make the bids, do you not know how much profit vou
have made on an earher bid of the same character?
Answer. (Mr. Cooney). No; I cannot say that I do.
Question. How can you draw bids without knowing how you would come out
on them on similar operations?
Answer. (Mr. Cooney). By comparison with other prices, competitors' prices.
It seems clear that when one company can make a profit of $203.14
per ton at $560 per ton and that the other companies bid $130 and
$110 above the low bid, there is no great competition in that instance.
In spite of tliese profits, by 1933 Carnegie was bidding $585 on turret
armor instead of $560,
A very brief examination of three of the largest suppliers of armor
plate and projectiles was held on Februaiy 7, 1'936. It developed
that these companies, in the nonnal course, had destroyed their tiles
for the war years. The examination was confined to a few matters,
the first dealing with the cost of each company's plant available for
Navy Department v.^ork.
Bethlehem Steel Co., officials ^ put the original cost of their invest-
ment in armor plant at $7,193,439, which had not been reduced by
any depreciation. They stated the capacity of such a plant at 3,000
gross tons of light armor plate. At present tliis plant is also used
for heavy gun forgings and heavy shaft forging-s. The company
officials doubted that a new plant with equal capacity could be built
for less than the original cost of this plant.
The company sold from 1925 to 1934, inclusive, steel amountiii.r to
$4,745,874 to Newport News Shipbuilding Co., $5,204,243 to S^ew
York Shipbuilding Co., and $14,799,011 to Bethlehem Shipbuildino-
Co., as well as about one million dollars' worth to other shipbuilding
companies. For these years it furnished armor plate, gun foro;ino-s'
and projectiles to the Navy Department in the amount of $7,246,175
as well as a considerable amount of steel for the navy yards.
1 Transcript of hearings, Feb. 7, 1930, p. 13551.
107
108 MUNITIONS INDUSTRY
Bethlehem had many war contracts with foreign belligerents dur-
ing the war outside of those made through the agency of J. P. Mor-
gan & Co. Through that agency there were $40,839,065 in contracts
with the French and $58,436,286 in contracts with the British.^
Bethlehem submitted costs and profits on certain armor plate
contracts, preparing the costs and profit figures especially for the
committee and using the principles the company expected to use on
contracts under the Vinson Act. One contract showed a profit of
6.58 percent, another 21.91 percent, another 5.89 percent^ another
2.21 percent. The figures were not checked by the committee's ac-
countants, nor was the system used for depreciation or general
expense. In many cases depreciation was higher than the cost of the
material.
Certain contracts for gim forgings showed a profit over cost of
28.27 percent, 18.47 percent, and 18.09 percent.
Reminded of the testimony of Mr. Eugene Grace in 1917 that a
plant running 33 percent capacit;y would produce armor plate costing
$499 per ton, while a plant running 100 percent would produce it for
$315, the Bethlehem officials were asked concerning the possibility of
a similar reduction in cost in case their plant was operated at 100
percent capacity. (From the time the cruiser building started in
1927 through 1934 the plant operated at 25 percent capacity ^ on
Government business and an additional 10 percent on commercial
steel.) The witness admitted the possibility of much lower cost on
full-time production.^ Mr. Jolinstone testified that a great decrease
in cost of production does not necessarily reflect itself in similar
lower costs to the Government —
because vou never know until after the event, after the passage of perhaps a
period of 4 or 5 years, whether you are actually going to operate at 15 percent
or 50 percent.*
Question. Does It therefore follow that when you get more orders, as you have
In recent years, and your plants fill up to a larger extent, the Government
therefore gets a big cut in the price of these things."
Mr. Johnstone. It does not reflect itself automatically.
Question. It far from reflects itself, does it not, during recent years, when
your plants have all been more full than before?
Mr. Johnstone. That is right.
Certain contracts for projectiles showed a profit over cost of 13.42
percent, a loss of 4.89 percent, a profit of 8.92 percent, a loss of 14.09
percent, a loss of 5.72 percent, a profit of 49.55 nercent. None of
these figures were checked by the committee, and the difiiculty of
guch check for purposes of the Vinson Act limiting profits of Navy
supplies to 11.1 percent was admitted : •
Mr. Raushenbush. We have not been able to check any of these costs;
as I gather It, that would be a hard thing for anybody to come In from
the outside and do without following every job practically through the fac-
tory. Is not that true?
Mr Johnstone. Certainly. Over a 10-year period to take each particular
contract and to build up the small items that naturally go into any of these
Mr. Raushenbush. You would practically have to follow it through from
lieginning to end?
^ Ex. 4414.
2 Transcript of hearings, Feb. 7, 1936, p. 18569.
'Hid.. D. 13.170.
*Jhid.. p. 18581.
^ Ibid . p. 1S5S2.
" Transcript of hearings, Feb. 7, 1986, pp. 18578-13575.
MUNITIONS INDUSTRY 109
Mr. JOHNSTONE. Certainly.
Mr. Raushenbush. I do not quite see how you people naanaged to put
these figures together of the old contracts like that without following them
through.
Mr. Johnstone. We spent probably 2 or 8 months with four or five men
assembling these figures.
Mr. Rauseenbush. Going through the past records?
Mr. JoHNSTONK That Is right. These, of course, were Just a few typical
contracts, and they were most of them within the last o or 6 years, as I
recall it.
Mr. Raushenbush. Coming back to to Vinson Act, a given contract of yours
might take 2 years to go through the mill, in some cases 3 years, perhaps.
During the time it is going through, as I understand It, there ia no Treasury
official or no Navy Dei>artment official standing there next to your own
cost accountants to watch the thing go through the mill?
Mr. Shick. That is true.
Mr. Raushenbush. So at the end of the period when they want to check
on the figures for the purpose of the Vinson Act, they would either have
to run a complete audit of the kind that had taken you so long or com-
pletely take your word on It?
Mr. SniCK. We will have figures to show what our cost was, hereafter.
Mr. Raushenbush. So far as checking it up, they would just take your
figures?
Mr. Johnstone. It will be a good deal more simple, probably, in the future
than It has been in the past, because the figures would be necessarily useful
or necessary In connection with the Vinson Act contracts and be kept
accordingly.
The Midvale Co. was Imown until 1915 as the Midvale Steel Co.
In 1915 its stock was acquired bj the Midvale Steel & Ordnance Co.
In 1923 this company was acquired by the Bethlehem Steel Co. ex-
cept for the old Midvale plant at Nicetown, Pa. This plant has
been operated since 1923 as the Midvale Co. About 61 percent of
this company's stock has been acquired by the Baldwin Locomotive
Co. The chief line of the company is special forgings. From 1930
on about 20 percent of the production has been for the military
services.'^
The company estimated that the value of its plant used for armor
plate was $6,236,000.* This is a figure before depreciation. A new
plant, built exclusively for armor plate, might be so arranged that
the cost of operation would be less than in the present plant.' This
giant can produce approximately 5,000 tons of light armor plate,
ince 1929 the company has sold armor plate to the Navy Depart-
ment costing the Government $5,115,428,* gun forgings costing
$3,685,842 and projectiles costing $3,183,373.
On a selected list of orders covering all three classes, costing the
Government $5,982,386, Midvale calculated a cost of production of
$5,429,291 and a profit of $553,095, or over 10 percent of cost. De-
preciation charged to these contracts was $1,157,591." The deprecia-
tion of the plant for the idle years (1922 to 1929, the years of the
disarmament agreement) was included in the calculation on the cost
of the orders sold to the Government from 1929 on."
Question. So tliat all during the period when we were not building ships, the
cost of that naval limitation got paid for later on when we did start building
ships? Is that not right?
1 TranscrlDt of hearlngB, Feb. 7, 1936, p. 135&3.
•Ex. 4415'.
• Transcript of hearings, p. 18590.
*Ex. 441(5;
»Ex. 4419
• Transcript of hearings, p. 13605.
78018' — 88— pt 7 8
110 munitiojs^s industry
Mr. MiLLiKEN. It is true that we carried our depreciation against the amount
of business that we received. That is the only way we could get a return for
this part of the cost.
JS^o witnesses could testify as to the evidence introduced into the
banking hearings consisting of letters signed by A. C. Dinkie, then
president of Midvale Steel & Ordnance Co. indicating that that com-
pany was delaying orders on United States production during the
war and giving British order the preference/ or concerning the
higher prices apparently charged to the United States for howitzers
Exhibits 4422-4428 indicate that Midvale Steel & Ordnance Co.
kept from the Government the infonnation in its possession that the
cost of pig iron to it was $51.29 per ton while informing the Gov-
ernment that the cost was actually $75 per ton, and as a result of this
misinformation was allowed to receive a much higher price than it
otherwise would have received on an order of 13,500 14-inch pro-
jectiles. The company, knowing the truth, nevertheless continuously
informed the Government that the price of this raw material was
46 percent higher than it actually was. On the basis of estimated
costs ^ for such shells ^^ with pig iron at $50 and at $75 the Govern-
ment's loss on this misinformation seems to have been about $300,000
on this order.
Data on Army and Navy armor-piercing projectiles" compiled
on June 5, 1920 indicate that the cost of the shells (exclusive of
amortization) was $230 on 12-inch shells sold to the Government for
$380 ; $300 on 14-inch shells sold to the Government for $580, and
$551 on 16-inch shells sold to the Government for $900. According
to this tabulation the profit on these 35,800 shells seems to have been
$8,935,900.
Evidence was introduced that the three big armor-plate companies
consulted together before accepting contracts in 1919.*
Costs for Navy turbines for New York shipyards and William
Cramp & Sons were given, showing costs of about one-fourth of the
sales prices." The Navy became mterested in the costs." William
Cramp & Sons informed Midvale that the Compensation Board was
authorizing a price of 52.25 cents per pound, as compared with the
Midvalefigure of 84.95 cents per pound, and asked for a statement of
costs to justify the higher price in case Midvale persisted in claiming
it.^ The Midvale auditor suggested accepting the 52.25 cents to
avoid further controversy.' (The actual costs as shown in exhibit
4432 were from 18.29 cents to 32.25 cents.) Mr. Milliken, the audi-
tor, stated that these were manufacturing costs.^
Close relations between the armor-plate companies during the war
years were evidenced in exhibits 4438 et scq. Mr. Neale, of Midvale
noted that Mr. Balsinger, of Carnegie, informed him that he woulci
quote $520 on a certain armor plate order "no delivery." This was
the price later quoted. i° Exhibit 4440 indicates that the companies
agreed am ong themselves as to division of Government orders. The
1 Transcript of hearings, Feb. 7. 1936, p. 13613.
"Ex." 4430.'
*Ex. 4431.
»Ex9. 4432, 4433.
•Kx. 4434.
^Ex. 4435.
«Ex. 4436.
» Transcript of Hearings, p. 1CC25.
"Ex. 4441.
MUNITIONS INDUSTRY HI
discussion of price in advance of bidding is evidenced in exhibit
4442. Further interchange of information is seen in exhibit 4443
from Balsinger, of Carnegie, to Dinkie, of Midvale. The armor
plate companies seemed to know about Navy plans before the Secre-
tary of the Navy did.^ The companies wanted to get new prices
for light armor for the cruisers after the war.* The question of
readvertising bids or modifying the old awards was involved. A.
Navy officer was quoted as saying :
What difference does it make to you If you get what you want no matter
how It Is done.'
In a conference with Navy officials the three armor-plate com-
panies refused to take the prices proj^osed by the Navy, and asked
for $60 extra per ton for light armor, "which had been agreed upon
by the other steel manufacturers." *
The Navy was interested during the war in the cost of gun
forgings, and requested that, prior to an extension order, Midvale's
accounts be opened to Government auditors.' The Midvale auditor
replied that —
In view of the fact that our costs are much lower tlian the estimate on wliich
Bale prices were established, It would seem advisable not to have our costs
examined.'
The costs for the forgings, which Mr. Milliken stated were manu-
facturing costs, were 34.13 cents per pound on 3-inch rough forgings,
23.01 cents per pound on 4-inch rough forgings, and 23.44 cents per
pound on 5-inch rough forgings.'' The company offered to accept a
reduction of 1 cent per pound. ^
Summaries of orders compiled by Midvale show that from 1923 to
1928 the Midvale and Bethlehem awards from Navy Ordnance were
constantly close, in 1928 totaling $2,080,669 for Midvale and $2,044,-
D99 for Bethlehem.^
Midvale sales of munitions included gun forgings from 1924 on,
projectiles from 1927 on and annor plate from 1930 on, totaling
$9,648,896.^° There were also sales to the shipbuilding companies.^^
Friendly relations between Carnegie and Midvale Steel and Ord-
nance were indicated in a letter from Balsinger to Dinkie.^^ Mid-
vale was interested in finding ways by which the bidding of arsenals
and Navy yards might be avoidecl.^* One bid in 1926 on four
thousand 14-inch projectiles shows Midvale bidding $102 and the
Naval Gun Factory bidding $68. On a quantity of two thousand
and five hundred 5-inch projectiles Midvale bid $27.58 and Frank-
ford Arsenal $14.95. On three thousand and one hundred 6-inch
projectiles in 1926 Midvale bid $69.75 and Frankford $31.74.
The Carnegie Steel Co. is a subsidiary of the United States Steel
Co. It furnished the committee with figures showing that the orig-
' Ex. 4444.
" Transcript of Hearlnga, p. 13633.
»Ex. 4445.
*Ex. 4446.
» Ex. 4448.
« Kx. 4440.
»Ex. 44.50.
« Ex. 4451.
•Ex. 44.-).5.
"Ex. 445G.
»Ex. 4457.
MEx. 4407.
«Ex8. 4498-^404.
112
MUNITIONS INDUSTRY
inal cost of its armor plate plant was $4,970,672 plus a real-estate
value of $364,000 and auxiliary equipment cost was $975,000.^
Cost of armor plate plant $4 970 372
Keal-estate value ~ ~ ~_ ' 3^4' qqq
Auxiliary equipment ~~ 1 ~ ~ (375' qqq
Total g^ 3Q9_ g72
This plant has an amiual capacity of 9,000 tons of li^rht armor
plate. ^
U. S. Steel Products Co. showed contracts with the British Gov-
ernment, through J. P. Morgan & Co., of $62,514,546 from 1915 to
1917 2 and $52,781,486 with the French.
Sales of steel to various shipbuilding companies, both for the com-
mercial and naval ships, amounted to $29,389,055 from 1925 to 1934.
Annor plate contracts with the Navy Department totaled $2,362,-
204 from 1930-35. Contracts for special-treatment steel with the
^avy Department totaled $10,152,076 for 1926 to 1935.3
Selected armor plate contracts showed, according to the company's
figures, as follows :
Cost
Proceeds
Profit
Percent
Profit per
ton
NOD-272..
$226, 124
1451, 399
101, 4S5
$357, 093
214,318
144, 903
$130, 969
64.919
43, 418
57.9
43.4
42.7
NOD-331.
$203. 14
NOD— 432
166. 72
159.23
These profits, according to the company's auditors were after ma-
terial and jDlant expense, general expense, taxes, and depreciation,*
Contract 2< 2 was for conning tower armor and turret armor, class
13, m 1930. Carnegie's bids for conning tower armor dropped $10
in 1933 ,fi-om the 1930 bid of $610. Turret armor, class B, rose
from $560 in 1930 and 1931 to $585 in 1934 and $595 in 1936.
Contract 331 was for turret ai-mor, class B, in 1931 at $560 per
ton. Ihe company bid and received awards for this class of armor
for $585 m 1934 and $595 in 1935.
Contract 432 was, according to the company's exhibit for several
classes of armor m 1933, bein^ $545 on class B tuiTet armor Other
bids m 1934 and 1935 show bids of $585 and $595 on this cla<^s '
C arnegie officials were questioned whether their prices had dropped
to the Government after these high profits had been made on indi-
vidual contracts.^ It developed that the official who made the bids
stated that he did not know of the profit^.
Question. When you make the bids, do you not know how much profit you
have made on a earlier bid of the same character?
Mr. CooNEY. No ; I cannot say that I do.
Question. How can you draw bids without knowing how you would come out
on them on similar operations?
Mr. Ck)0NEY. By comparison with other prices, competitor's prices.
■■ Ex. 44fi0.
2 Ex. 4462.
« Ex. 4466.
"Ex. 4468, 4469.
^Ex. 447.S.
•Transcript of Hearings, p. 13746 seq.
MUNITIONS INDUSTRY
113
It was developed that on the contract on which Came^e made
67.9 percent profit, Bethlehem bid $130 a ton above Carnegie and
Midvale bid $110 above Carnegie.^
The company furnished a typical mill cost niake-up for protec-
tive deck plates shows the total cost of the ingots as $45,983 per
ton, of rolled slabs $62,177, of rolled plates at $80,276, and of rolled
protective deck plates as $126,168.^
It showed figures on three major steel commodities u^ed in ship-
building from 1925 to 1934, inclusive.*
Heary structural shapes-
Rate per ton
Universal plates,
Rate per ton
Sheared plates.
Rate per ton
Gross tons
shipped
790, 127
904. 172
"2,"586,"9i9"
Proceeds
$30, 968, 257. 00
30 19
84, 358, 198^ 00
38.00
99, 168, 706. 00
38.42
Material and
plant expense
$27, 934, 010. 00
35.35
39, 889, 815. 00
34.16
95, 020, 383. 00
36.82
General
expense
$964, 699. 00
1.23
1, 027, 655. 00
1.14
8, 140, 407. 00
1.23
Heavy structural shapes
Rate per ton.
Universal plates
Rate per ton
Sheared plates
Rate per ton
Taxes
$303, 395. 00
.38
812, 728. 00
.35
918, 838. 00
.36
Depreciation
$1, 770, 292. 00
2. 24
1, 957, 132! 00
2.16
5, 610, 383. 00
2.17
Total cost
$30, 972, 299. 00
39.20
34, 187, 330. 00
37.81
104, 690, Oil. 00
40.56
Profit (+)
and loss (— )
-$4, 039. 00
-.01
+170, 868. 00
+.19
+5, 521, 306. 00
+2.14
The company's files showed a compilation of material for armament
purposes made by Carnegie for 1924 to July 1934. It totaled 125,854
tons *
In the winter of 1934 the War Department, accordmg to G. Elkina
Knable, manager of Carnegie Steel Co., signmg himself as 'Lt. OoL,
Ord Res.", the War Department was offering the steel companies
more favorable contracts for wartime than they had previously
considered » The miminence of the Senate munitions inquiry seems
to have held up the discussion." In 1934 Carnegie Steel Co. officials
outlined the objections to any act limiting profits to 10 percent.^
A compilation made for the president of the U. S. Steel Corpora-
tion showed that from 1925 to 1934 (six months) the production of
"armaments for war purposes" was— «
Tons
Q 274
American Bridge Co ^' ^^
American Sheet and Tin Plate ^^ ^^|
Camegie Steel „' ...r.
Columbia Steel ^' ^XX
lUlnols Steel "71 4S1
Lorain Steel q 0^,^
National Tube ^' ° ^
Total. 1^6' ^
» Transcript of Hearings, Feb. T. 1986. p. 13740.
•Ex. 4471.
•Ex. 4472.
*Ex. 4475.
•Ex. 4478.
• Ex. 4479.
»Ex. 4480.
8 Ex. 4492.
114 MUNITIONS INDUSTRY
Abstracts of bids for armor plate, projectiles and gun forgings
were submitted as exhibits 4494, 95, 96.
The relationship between the bids, awards, costs, and profits was
not entered into by the Committee further for lack of stall to check
figures.
Crucible Steel Co. reported sale of projectiles to the United States
Government between 1927 and 1935 of $6,431,447. The projectile
orders began in 1929.
XII. PRICES AT GOVERNMENT PLANT
Frankford Arsenal (Philadelphia) does not offer a yardstick to the
bids of the private steel companies on armor plate or gun forcings,
but does offer one, in some cases, on projectiles. Evidence introauced
tended to show that on the advertisements for material over $200,000
in value, Frankford Arsenal underbid the steel companies with fair
regularity (Exhibit 4495). Bethlehem officials pointed out that in
Bome cases that company had underbid Frankford, and furnished a list
of other bids, which, however, was incomplete. A tabulation was
thereupon made showing all projectile bids on which Franldord Arsenal
bid at all. It shows that Frankford was lower than all steel companies
in 35 out of 71 items in the years 1926-35. When the cost of Govern-
ment inspection of 6.6 percent is added, Frankford production cost
the Government less in 48 out of 71 items.
Item
Bethlehem
MIdvale
Crucible
Tredegar
Frank-
Year
Bid
With In-
spection
costs
Bid
With in-
spection
costs
ford,
Govern-
ment
1026
14' target
$102. 00
69.75
27.58
24.60
26.73
$68.00
6' Comm ..
31.74
6' Comm
14.95
cm..
12.76
5' AA...
13.63
1928
8', 50 Cal., ni.
3', 25 Cal., 11]
6', 25 Cal., AA
6', 25 Cal., lU.
vm
$4.75
4.75
9.26
9.45
7.37
4.49
8.33
7.63
7.81
8.05
6.35
8.34
16.45
16.63
16.68
16.60
7.55
7.50
7.33
7.25
7.21
3.84
6.26
6.63
6.41
39.00
44.00
7.21
7.36
6.74
5.26
6.62
1929
8.93
8.97
1930
$7.85
7.78
8.87
7.49
8' 23 111...
4.56
5' AA., Com
6' AA., Com
8.74
1931
8.14
y AA., Com
8.32
8.07
6'IU
$8.00
$3.52
8.03
1932
5' AA., Com
6.89
3' ni
2.43
5' AA., "A"
6' AA., "B"
19.66
19.66
6' AA., "C".
19.68
6' AA...
10.94
1933
6725 AA
7.11
7.09
7.67
7.65
7.49
6725 AA
7.43
5725 111
7.84
7.64
6738 AA.
7. 73
6738 111
7.64
S'lll...
2.89
6738 AA ....
6.67
6.43
6738 111
6.32
6725 111
6.17
6' Com
35.34
6' 111
32.44
6738 111 . .
6.97
6725 111
6.80
5738
7.30
115
116
MUNITIONS INDUSTRY
Item
Bethlehem
Midvale
Crucible
Tredegar
Year
Bid
With in-
spection
costs
Bid
With in-
spection
costs
ford,
Govern-
ment
1934....
8755 drill
$75. 00
7.40
4.19
8.20
9.25
4.10
6.00
6.80
7.89
9.25
4.10
6.60
8.55
6.70
8.75
$78.00
$62. 18
$80. CO
4.47
3.81
7.04
8.33
2.99
8.34
8.52
8.27
8.64
3.79
7.73
7.74
8.31
8.14
.60
.60
16.87
16.81
16.93
16.61
8.24
7.84
7.97
8.05
8.05
3.43
7.67
8.49
8.13
8.47
8.53
36.49
15.97
8.74
8.78
8' field gun
3' field gun
5725 AA..
4750111
3723111
5725 AA.
$(7.35)
.1738 AA
5738 111
(8. 40)
4750111.
3723111.
1936....
5725 AA.
6725 111
5738 AA.
5738 111
I'AA
I'AA
5738
5738
$17.50
17.50
5738..
5738
16.50
8.59
8.19
9.00
9.25
9.25
4.00
7.10
7.79
6.95
7.74
7.82
28. 00
16.40
8.85
8.45
17.68
5738 AA
5720 AA..
5751 111
5738 111...
4750 m
3723111
5725 AA
5738 Com
5725 AA
5738 AA....
7.70
7.75
24.95
13.90
8.30
8.00
5738 AA..
6' Com
5738 Com
5725 111
$8.84
5738 111
In 1926 the Frankford bids were about half of the Midvale bids.
After tills, Bethlehem became the main bidder against Frankford
until Crucible reentered the field in 1935. When Frankford was not
bidding the Tredegar Co., in many cases, heavily underbid the other
steel companies (exhibit 4495).
The bids do not indicate costs, except roughly, since it is the
Government's pohcy to encourage the steel companies to continue
in production of war material, and this may have had an effect on
the bids offered by Frankford Arsenal. It is to be noticed, in this
connection, that almost without exception where Tredegar, BHss, or,
in cases, Crucible entered the bidding, Frankford simply did not' bid
at all.
On the two bids in 1926, the Government saved a considerable
sum through the existence of Government plants. The first bid
(exhibit 4495) was for 4,000 14-inch target projectiles, awarded to
the Naval Gun Factory at $68 over Midvale at $102, the savino- of
$34 per shell amounted to $136,000.
MUNITIONS INDUSTRY
117
The second bid in 1926 was:
Number
Frank-
ford
Mldvale
Saving
per shell
Total
saving
6" Comm..
3,100
2,500
7, 500
10,000
$31. 74
14.95
12.76
13.62
$69. 75
27.58
24.60
26.73
$38. 01
12.63
11.84
13.11
$117,831
81, 573
88,800
249. 090
ff" r,nmm
5" ni
f" AA . .
Total..
487, 293
Frankford has not bid on heavy projectiles over 6 inch, and tho
Naval Gun Factory has bid rarely.
The bidding on the heavier projectiles has been:
Bethlehem
Mldvale
Tredegar
Crucible
Naval
Gov't
Factory
Frankford
Arsenal
14' target-.
1928
$102. 00
69.75
111.50
147. 50
101. 50
48.25
81.00
36.53
$68.00
6' Oomm
$31. 'ii
W target..
1927
$74.25
8' Comm
$144. 25
69.96
67.85
65.71
36.23
57.00
150. 7.^
146.00
47.60
24.74
75.00
142.60
81.90
16.50
75.00
45.00
19.50
75.00
$139. 00
*
14' target -
*
8' target-—
1928
14' target
67.79
8' target—
14' target-
1929
61.06
s' drill
90.70
152. 00
81.75
27.40
29.80
148. 50
8' Comm -
14' target..
1931
44.23
22.00
37.15
8' target- —
8' drill
8' Comm
146. 25
69.75
20.18
14' target-
1932
s' target -
8'/55 drill-
1933
56.29
43.23
14' target
60.52
22.35
78.00
8' target
19.42
8'/55 drill-
1934
62.18
There is, of course, little question that a plant tooled up for a
given size of standard projectUe, and receiving a stream of orders
could produce them more cheaply than a plant only receiving occa-
sional orders.
The War Department's only analysis of the price situation was
made by the Kernan Board in 1916 (S. Doc. No. 664, 64th Cong.,
2d ses3.). In that report was contamed an exhibit showing that
118
MUNITIONS INDUSTRY
arsenal costs were lower than private-plant manufacture by 18.6
percent (exhibit F). On certain items the saving by arsenal produc-
tion was very considerable.
Articles purchased
Cost
Contract Arsenal
Saving
Per cent
Field-artillery carriages, etc—
Cannon powder
12' projectiles (700 pound)
12' projectiles (600 pound)
.30 cal. cartridges
Automatic pistols
Field-artillery shells...
.45 cal. pistol cartridges
.80 cal. cartridges
Field-artillery shells and fuzes
Optical instruments
.88 cal. revolver cartridges
$54.5,
249,
171,
19i>,
315,
760,
606,
19,
2, 864,
5, 381,
26,
11,
$3S0, 906
173, 706
05, 410
1 10, 952
217, 120
619,839
449, 174
16, 410
2, 397, 600
4, 890, 676
24, 553
12, 390
$165, 060
76, 024
76, loa
79, 584
98; 500
1 10, 785
157, 342
3, 060
467, 300
490, 363
2,302
-720
According to these figures on one order for $100,000,000 of material
of this character the saving through arsenal production would be
$18,000,000.
To the cost of material produced in the private plants should be
added a charge for inspection paid for by the Government. The
Kernan Board in 1916 estimated this to be 6.6 percent.
XIIL SURPLUS WAR SUPPLIES
The War Department sells material which it no longer needs at
open competitive sales. Testimony concerning the activities of some
01 the second-hand dealers engaged in purchasing such material was
presented before the House Military Affairs Committee in 1935 and
1936. The material may be used or it may be unused. No adequate
figures have been secured on the original cost of the material sold by
the Department. Much of it consisted of supplies accumulated dur-
ing the World War, which later deteriorated. Testimony was given
before the committee that millions of pounds of powder produced at
Old Hickory had deteriorated. Some of this was sold. Some of it was
exchanged for new powder, the chemical companies using the old
powder for commercial purposes.
Information furnished by the War Department showed that ma-
terial acquired at a very considerable cost had been sold for very
little (exhibit 4838).
The testimony of Mr. Henry F. Butts, in command of the ballistic
bureau of the New York PoUce Department (Feb. 15, 1936) indicated
that occasionally the guns sold as scrap metal by the Quartermaster's
Department are repaired and converted to the use of gangsters. He
stated that in New York City there have been six killings by Thomp-
son submachine guns, and that the department has confiscated 15 to
20 of them and that four of the Browning machine rifles had been
confiscated. He testified that of the 15,000 Thompson submachine
guns manufactured only 6 or 7 thousand are left. "Up to 5 years
ago they did not have any regulation on that gun. You could walk
into a store in New York City and purchase a Thompson submachine
gun when you could not get a .38 Colt revolver."
Mr. Thomas 1. Todarelli, formerly assistant United States attorney
for the southern district of New York testified (Feb. 19, 1936) that
in 1931 a group of Cuban revolutionaries had bought from Francis
Bannerman & Sons, in addition to many rifles, 200 Vickers machine
guns, 22 Lewis machine guns, and 2 Browning automatic rifles.
From I. Silverman Bros., a New York firm, they bought 22 Lewis
machine guns. Much of this material was sent to R. F. Sedgley, in
Philadelphia, for repairs. He stated that both Bannerman and
Sedgley had promised to notify the Department of Justice if attempts
were made to purchase arms, and that both people had failed to do so
when the arms were actually purchased. "Had Sedgley, therefore,
Uved up to his promise to notify the Government, it might have been
possible for the Government to have nipped this plan in the bud at
that time. The fact of the matter is, however, that he failed to do
so, and that also led us to believe that he was aware of the fact that
these firearms were destined for the Cuban revolution."
Mr. Jacob Paley, of New York City, testified (Feb. 19, 1936)
that he occasionally purchased Government supplies and salvage
materials. In 1933 he purchased from the Schenectady depot a lot of
119
120 MUNITIONS INDUSTET
286,000 pounds of scrap steel and brass which consisted largely of
"mutilated" Marlin machine ^uns for about $1,51G. The inventory
showed that this consisted of 3,334 Marlin machine guns a,nd 500
Ilotchkiss machine guns. These were, he stated, unused. Their
original cost to the Government was "around $700", or a total cost
to the Government of over $2,000,000. The cost to him was 12 cents
apiece. Of the Marlin machine guns, 2,030 were stored in New York
City with Lucke-Kiffe Co. He did not authorize Lucke-Kift'e to
quote them for sale, but they did so. They have refused to deliver
them to liim. One hundred guns were shipped to Sedgley in
Philadelphia.
XIV. RECOMMENDATIONS
In its Report on Acti^^ties and Sales of Munitions Companies
(Kept. No. 944, pt. 3, 74th Cong., 2d sess.) the committee stated:
"The members of the Committee are all agreed that, in view of these
findings, it is essential that the worst of these practices be stopped if
it is possible to stop them, and that the nature of the foreign prac-
tices of American munitions companies and their profits on contracts
for the mihtary services of the United States should be strictly limited
and controlled.
"The Committee majority (Senators Nye, Clark, Pope, Bone) recom-
mends Government o^vnership of facilities adequate for the construc-
tion of all warships by the United States Navy Department, also all
gun forgings, projectiles, and armor plate, and of facihties adequate
lor the production of powder, rifles, pistols, and machine guns neces-
sary for the United States T\ ar Department.
"It does so because it beheves that regulation is easily evaded, and
cites the Committee's unanimxous findings on the profit limitation
in the Vinson Act of 1934 incorporated in the Committee's Report
on Naval Shipbuilding. It is convinced that a thorough examina-
tion of the books of the naval contractors subject to that act will
show greatly increased overhead and other methods of increasing
apparent costs.
"It does so also because any control over the foreign affairs of the
companies, which is essential to the estoppel of present practices,
will, in effect, amoimt to control of management, and cannot be
effected successfully under the private ownership of these companies.
"It does 80 also because of its findings that during the World
War the munitions companies insisted throughout on their pound
of flesh in the form of high profits for their production, and did
not let their patriotism stand in the way of their 'duty as trustees'
to the stockholders.
"In making its recommendations for Government ownership of
certain facilities the Committee majority believes that the War and
Navy Departments can produce from their own ranks or employ
Bufficiently able technicians to operate these plants successfully.
"The Committee majoritj has noted the pressure on the service
departments by the mumtions and shipbuilding companies for
orders and for help in foreign sales and for help in opposition to
embargoes and other disarmament measures, and wishes the Army
and Navy to be the masters in their own house, and free from outside
pressure.
"The Committee majority believes that the manufacture of the
material which it is proposed to have the Government manufacture
(powder, projectiles, guns, armor plate, gun forgings, and naval
vessels) can be carried on and improved on satisfactoiily by the staff
of the War and Navy Departments, and that the mobilization of the
war-munitions industries in wartime for the wartime production
121
122 MUNITIONS INDUGTRY
of some or all of the necessary munitions can be carried out in the
same way it is now proposed to do. Salaries for technicians should
be made comparable with those in private industry. The Govern-
ment plants should, in the event that new construction instead of
purchase is decided upon, be located as close as possible to the present
plants so that there may be a minimum of labor dislocation.
"The Committee majoritv believes the national defense will be
greatly aided by the estoppel of the practice of selling American mili-
tary inventions abroad, which can be accomplished effectively only
in this manner.
''The Committee majority points out that the Government services
already manufacture half oi the naval vessels, their guns, their rifles,
their ammunition, and, in the case of the Navy, their powder, and sees
no change in principle to extend the present practice in regard to tliia
material to the same or other material. If the Navy can manufac-
ture powder, the Army can do so as well. The Army has made
important contributions to macliine-gun development and has at
present no benefit of com.potition when it Tvishes to purchase machine
guns. The Army has sh; \vn its ability in the development of the 75
field piece. The aircraft industry is at present exempted from these
recommendations, although it is almost entirely dependent on Gov-
ernment orders or indirect subsidies, because airplane and engine
construction are still rapidly developing arts and in that way differ-
ent from the somewhat more standard articles for which it is proposed
to have the Government acquire facilities.
"The Committee also recommends that the War Department be
given sufficient appropriations to acquire the jigs, tools, and dies
necessary for installation in private plants in time of war for the
manufacture of munitions.
"The plan as proposed by the Com^mittee majority looks forward
to an adequate munitions plant to supply the peacetime needs only
of the Army and Navy^ and procurem^ent by the military services of
sufficient tools and equipment so that installation of them in private
plants may be undertaken in time of war. This will be done under
regulation or even in the absence of regulation upon the outbreak of
war. It does not plan large munitions plants. In a later report
on Government costs, figures will be presented to show that the
Navy could enlarge its facihties to produce all the ships necessary for
a considerable naval race at a cost for those facilities of as little as
$23,600,000, including sufficient machinery to modernize the yards
and produce ships even more efficiently than at present.
"The Committee majoritv does not see any danger to overproduc-
tion in Government plans smce the manufacture of the Army's guns
and rifles and the Navy's powder and sliips have not, according to
any service officials, resulted in overloading the services with materiel.
At present the munitions companies charge into their costs to the
Government all the overhead of idle plant, with resultant high costs
to the Government. Carnegie Steel Co. made profits, according to
its own figures, of 57.9, 43.4, and 42.7 percent on three typical Navy
contracts between 1930 and 1934. let on the contract on which
57.9 percent profit was made, Bethlehem Steel Co. had bid $130 a
ton above Carnegie and Midvale had bid $110 a ton above Carnegie.
It was admitted by the steel companies that their prices included
overhead for idle time. (Compare Report on Government costs.)
MUNITIONS im^u^.
The Committee majority believes that the idi«.
plate plant should be brought into use and th
own overhead can be cut down by its use.
"The Committee majority recommends strict conti^.
to profits and foreign and domestic activities for thos
industry not included in Government ownership.
"The Committee minority (Senators George, Va
Barbour), supporting all other findings of the commi
the complete nationalization of certain defense commo
it doubts the advantage from the standpoint of (1) it.
disarmament, (2) its effect upon essential national defe.
its effect upon Government costs. The Committee minorii^ uoi^eves
that if large Government plants are erected to provide these com-
modities there will be inevitable local, political pressure to maintain
these plants at full capacity production regardless of actual defense
needs,, and the result wall be to encourage armament rather than
disarmament. The Committee minority believes that if all produc-
tion be thus concentrated in Government plants, furthermore, there
will be no adequate corrolary reliance, through private manufacture,
in the event of a war emergency unless the nationalized facilities are
maintained at a needlessly extravagant and dangerous rate during
peacetime. The Committee minority believes, on the other hand,
that unless these facilities are kept on a full-time production basis
during peace years the unit cost of production will increase to a
Eoint wnich will create higher costs to the Government than would
e available through normal, private purchase. This could be
another impulse to armament rather than disarmament through
anxiety to maintain maximum arms production in order to maintain
minimum costs. In other words, the Committee minority believes
that the public welfare, from the standpoint of peace, defense, and
economy, can be better served by rigid and conclusive munitions
control than by nationaUzation, except in a few isolated instances."
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