have been restricted to $450,440,000 because of exhaustion of the funds authorized by section 304.

Broadly speaking, projects approved under section 303 fall into the following categories:

(a) Revolving funds for the purchase and resale of materials essential to the defense program;

(b) Contingent liabilities under procurement contracts for essential materials; and

(c) A program for the encouragement of exploration of critical and strategic minerals and metals.

Revolving funds have been provided for that type of program which because of its nature and scope had to be undertaken by the Government. For example, the natural-rubber market reacted to an abnormal American demand following Korea. A tremendous price increase occurred which to an undetermined degree was influenced by speculative purchases. In order to relieve this economically dangerous situation and to effect an orderly acquisition of natural rubber necessary for essential defense requirements, the Government became the sole importer of natural rubber. The funds provided under section 304 are used merely to provide financing during the period between the foreign purchase and resale in this country. Thus far, both purchases and resales have been made at the same price, so that no loss has been involved in the transactions. However, there is little doubt that in other cases critical and strategic materials will have to be resold at a loss.

Another type of revolving fund has been employed to encourage the production of essential materials or substitutes therefor which have been customarily imported from foreign countries. For example, the overwhelming percentage of castor beans crushed in this country has been imported. Because supply may be cut off by crop failures or enemy action, it has been determined necessary to provide for a domestic supply of raw materials for the production of castor oil. Because this will be a new type of crop in this country, it is possible that the cost of production of the castor oil might exceed the market price, making it necessary to take a loss on resale.

The second over-all type of program which has been conducted under section 303 involves Government procurement contracts to encourage the production of materials considered essential to the defense program. The Government obligations under these contracts take the form of large contingent liabilities, either for a certain amount of the contractors' production which might not be salable on the open market, or for the unamortized cost of the facility. Of course, the Government would eventually recover, in large part at least, any outlays occasioned by such commitments.

The proposed amendments to section 303 would provide additional authority to cope with problems which the expanding defense economy has brought to light.

There are two broad amendments proposed to section 303 (a). The first enlarges the President's authority in regard to the type of material which may be purchased for resale by eliminating the word "raw" from the phrase "to purchase metals, minerals, and other raw materials." The amendment thus permits the purchase of all materials defined in section 702 (b), including raw materials.

This amendment is recommended because in carrying out the defense program it has been found necessary to purchase materials other than those which could be classified as "raw materials" within a strict definition of that term. The present amendment makes it clear that materials which are purchased for resale may be either in the raw, semifinished, or finished stage.

The second group of amendments to section 303 (a) permits the purchase and resale of foreign agricultural products. This is an important enlargement of the President's authority in that the present act forbids the purchase for resale of any agricultural product, whether domestic or imported, except for the stockpile or for industrial purposes. The need for this type of authority in regard to agricultural products has been demonstrated in other fields where it has become necessary for the Government to become an importer of certain products in order either to satisfy the defense requirements for the particular product or to stabilize the domestic market, or both. Section 303 (b) has been used as authority for outright purchases of essential raw materials in foreign markets and resales thereof at a loss in the domestic market. It has also been used domestically to reactivate the production of high-cost materials essential to the defense program. The proposed amendment to this subsection is not a substantive one but merely recognizes that the general prohibition against premium prices should use as a base the existing ceiling price if one has been established for the material in question. The change is necessary for consistency with the new subsidy provisions proposed in subsection (c).

The proposed amendment to section 303 (c) provides for subsidy payments on any domestically produced material in order to continue production that would otherwise be lost due to the establishment of a generally fair and equitable price ceiling. For example, should it be determined that firms accounting for 80 or 90 percent of the total production of a certain material can remain in production and make fair profits at a price of 20 cents per pound, but that there are other producers accounting for 10 to 20 percent of the total production who are now engaged in production but who require a price of 25 or 30 cents a pound, the subsidy could be paid to such high-cost producers so that their contribution to the total supply of a vital material would not be lost. This provision is particularly important in the event that it is determined to make price roll-backs from presently established ceilings, for a substantial roll-back in most commodities would leave some high-cost producers unable to continue to operate at the new ceiling prices.

It is conceivable that under certain circumstances section 303 (c) might be used to continue production from certain mineral deposits. when previous rates of production cannot be maintained at price ceilings as a result of the continuing decline in grade of ore that is characteristic of many mineral deposits. Authority to bring into production high-cost producers not now engaged in operation, though sparingly used, is currently provided by section 303 of the act where supply of the material cannot be effectively increased at lower prices. Although the existing authority to extend various forms of financial assistance for the expansion of capacity has resulted in important additions to our productive machine, there are certain cases of neces

sary expansion which cannot be resolved by these means. For example, the Government will need additional production of some items which by their nature will have no peacetime market. If the plant necessary to produce such items is costly and of little or no postemergency use, it is difficult, if not impossible, to induce private concerns to erect such facilities even though we offer tax-amortization privileges and make sizable loans and extensive commitments to purchase the material produced. These inducements may not be strong enough in such cases. Unless the Government has the ultimate authority to build and operate such plants, we may lose or not be able to obtain that vital production.

In other cases, private businessmen will construct the necessary facilities only if they are given such extensive advantages by way of long-term loans and purchase commitments that the outlay by the Government would far exceed the costs of construction. Success of the defense production program should not be contingent upon meeting every demand. Private construction and operation are preferable, of course, but the Government should have authority to undertake construction of necessary high-risk capacity which private interests cannot or will not provide.

If such authority is granted, there can be little doubt of the most desirable type of Government agency to conduct such an operation. Our experiences in the past war supply ample testimony to the many advantages of the corporate device. The operátion is essentially a business activity rather than a governmental one and can best be conducted in business form. The need for capital investments, both for long range and for operating purposes, and the required use of revolving funds for purchases of materials, payments for services, etc., to be repaid from proceeds of sale, all point to the Government corporation as the ideal mechanism for such an operation. It is important that the President have authority to create new corporations for this purpose.

These same advantages apply with particular strength, of course, to the procurement authority in title III of the act. Flexibility and speed of operation can be achieved if the corporate device is available for purchases of defense materials for resale. Reasonable amounts of working capital, turned over repeatedly, can finance relatively extensive procurement programs both for Government use and for resale.

In summary, titles I, II, and III of the act now provide powers which are essential if we are to have enough materials and facilities for uses essential to the national defense. Without those powers we can neither produce enough to meet our defense needs nor make sure that what we do produce is not wasted on nonessentials. It is of vital importance that the authorities be extended and, if we are to get the best results, the new and supplementary powers should be granted.

With respect to impact on the supply of materials and facilities, the defense production program is in its infancy. Of the $84 billion worth of defense orders now authorized, less than half have been placed and only a small percentage of those have been filled. This tremendous backlog of orders will place increasingly severe strains on our productive resources, making it necessary to apply more drastic controls on present production and to continue to press for increased capacity to produce the things we need.

As this flood of orders sifts down to the subcontractor and basicmaterials producer, shortages will become more severe. The present controls over production and distribution of essential materials will have to be tightened for a while to make sure that production of the items of greater importance to the national defense does not lag. This will necessitate, among other things, the installation of a controlledmaterials plan similar to that used during the past war and, of course, increasing restrictions on less essential production.

The controls will have to be continued until capacity can be expanded enough to meet total continuing demands. We are trying to get this expansion in the shortest possible time.

The CHAIRMAN. Mr. Gibson, I will ask you one or two questions and not delay you too long because I know the Senators have a lot of questions they would like to ask you.

You say on page 12:

indicates that ample authority exists to meet and solve the problems of small business.

In other words, it is the opinion of the DPA that you have enough authority now to solve the problems; is that correct?

Mr. GIBSON. That is right; yes, sir.

The CHAIRMAN. I have a letter here, signed by Senators Magnuson, Kilgore, Lehman, Humphrey, and Sparkman, with reference to the introduction of a smaller war plants bill that they have and asking that we hold hearings on it immediately. Of course, unfortunately we are not in position to do that because we have this schedule right through June 1. But in this long statement they make-I will ask permission to have it printed in the record so that everybody can read it tomorrow-it says:

In the first half of 1950 small business obtained, from defense agencies, 24.8 percent of procurement awards. In January 1951 they received only 16.6 percent. Their share, in direct orders from the Government, dropped over 40 percent. That is the statement these gentlemen make to me after having held some hearings in the Small Business Committee.

They further go on and say:

More than 90 percent of military purchases are being made on a negotiated basis; less than 10 percent on advertised bids. Smaller firms are at great disadvantage in negotiating with procurement officers or in even knowing what items are to be purchased.

Do you have any comment to make on those two short statements that they made here in this lengthy letter to me? (The letter referred to follows:)

UNITED STATES SENATE,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

May 2, 1951.

Hon. BURNET R. MAYBANK, Chairman, Committee on Banking and Currency, United States Senate. DEAR SENATOR: The mobilization effort contains two ingredients which will prove deadly to small business unless effective antidotes are devised and used. First, there is the inclination on the part of procurement agencies to do business with the "big firm”—an inclination motivated by the natural desire to accelerate the job by placing 1 order instead of 10. Second, there is the irresistible impulse to staff an agency with men from big business-an impulse stimulated in part by big business itself; an impulse made irresistible by the fact that men with the required know-how are more readily obtained from the ranks of big business. The latter ingredient may prove the more deadly. Too often, the small-business man coming to Washington for a priority, a certificate of necessity or a contract,

finds across the desk from him the former employee of his most powerful competitor.

The force for destroying small business contained in these two ingredients Is so potent as to demand immediate and even drastic countermeasures. A mere Small Business Executive Committee in the Defense Production Administration cannot effectively combat the compulsion to do business with big business. In our judgment, nothing short of a revived, modernized Smaller War Plants Corporation will suffice.

To illustrate our point, we discuss briefly in the following paragraphs the effect on small business of material shortages, procurement policies, and financing practices-all permeated and aggravated by the ingredients just cited.

MATERIAL SHORTAGES

A single order, M-7, of the National Production Authority was a potential death warrant for some 10,000, of the 14,000, small aluminum fabricators of the Nation. Execution of this order has been postponed 30 days. But the life of these small manufacturers-most of them established since the end of World War II is still in jeopardy.

Were they able to obtain war contracts or subcontracts, they would have a claim on available aluminum supplies. Under present procedure, however, there is little likelihood of relief from this direction.

In 18 to 24 months there will be positive improvement in the aluminum-supply situation. By that time new plants with total capacity of 450,000 tons per year are scheduled to come into production.

Meantime the national interest demands that small aluminum users be kept alive. Collectively, they are a vital part of our producing potential. Geographically dispersed, they represent the capacity on which we might be forced to rely in the event of all-out bombing. These are the "shadow" plants which could mean the difference between victory and defeat.

What can be done from the supply side to prevent the destruction of small companies, presently fabricating aluminum articles for civilian uses, but capable of converting to war production? A significant part of the answer may be found in a thorough examination of where supplies are going.

Aluminum is going into finished articles of war, into company inventories and into Government stockpile. The latter two need thorough analysis.

Larger manufacturers have capital and borrowing power to finance a stockpiling program of their own. This, we believe, they are doing-first, to protect themselves on contracts already in hand, and second, to be in a favored position to bid on future military orders. Though the motives are understandable, they should not be condoned. Private stockpiling must be controlled-must be brought into a reasonable balance with actual need.

At the same time large manufacturers began building excessive inventories, and just when the flow of aluminum into finished war matériel reached a tempo consonant with announced goals, the Munitions Board entered the market to purchase for stockpile. This combination of demands, partly artificial, led National Production Administration to issue Order M-7-and against this. combination, small manufacturers cannot protect themselves. Their space is limited, their capital is inadequate, and banks are loath to lend to small business for inventory expansion.

Another facet of the demand combination needs mention. There is a strong suspicion among some NPA personnel that the military could do a far better job of scheduling its requirements. There is too much evidence of the voiced military attitude. "No general was ever court-martialed for having too much."

We urge That our stockpiling policies be thoroughly reviewed; that a crackdown on excess inventories be instituted; that military orders and delivery schedules be reexamined; that until new aluminum plants come into production, the possibility be considered of keeping alive small aluminum fabricators from the stockpile.

What is happening to aluminum supplies and to small users thereof as cited here, is symptomatic of what is happening in other segments of the economy. Details may differ, the principle and danger are the same.

PROCUREMENT DEFENSE CONTRACTS

In the Defense Production Act of 1950, we said: "It is the sense of the Congress that small-business enterprises be encouraged to make the greatest possible