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DEFENSE PRODUCTION ACT AMENDMENTS OF 1951

TUESDAY, MAY 29, 1951

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.

The committee met, pursuant to recess, at 11:50 a. m., in room 301, Senate Office Building, Senator Burnet R. Maybank (chairman) presiding.

Present: Senators Maybank, Sparkman, Frear, Douglas, Moody, Capehart, Bricker, Ives, and Schoeppel.

AFTERNOON SESSION

We are sorry

The CHAIRMAN. I will ask the committee to come to order. Mr. Secretary, we are pleased to have you here, sir. about the last engagement we had with you, but we were all in spirit with you that day that you went down to VMI, and if you would proceed in your own way, sir, we would be happy to hear from you at this time.

STATEMENT OF GEN. GEORGE C. MARSHALL, SECRETARY OF THE DEPARTMENT OF DEFENSE, ACCOMPANIED BY JOHN D. SMALL, CHAIRMAN OF THE MUNITIONS BOARD

Secretary MARSHALL. Mr. Chairman, I have a prepared statement to read first, if that is agreeable to you, and to the members of the committee.

I am here today to urge the extension of the Defense Production Act of 1950 for two additional years-that is, until June 30, 1953, and support the amendments to that act which are before this committee. These are matters which directly affect the Department of Defense's effort to prepare the military defenses of the Nation. It is to these special interests that I shall address my remarks.

When the Defense Production Act was enacted into law in 1950, this country was in grave danger. We realized we must be prepared to resist an immediate attack, or to await that attack through a number of years of tension. We realize, too, that our only real hope to avoid such an attack was to put ourselves in the strongest possible military posture which could be sustained by us as long as might

prove necessary.

During the past months, the dangers have increased. Every indication that we have from abroad indicates a steady build-up of our enemies, particularly in the satellite countries. Our plan for National security includes two stages: first a rapid build-up to a minimum

level of safety, and secondly, the maintenance thereafter of a level of mobilization and a capacity for immediate large expansion.

The intensity of our immediate mobilization must be in keeping with our ability to carry on during the possible years of tension. It is a trial of endurance of a character which is new to the American people, but is a trial that must be met with determination.

When the Defense Production Act of 1950 was passed, it was intended to be the keystone in our industrial mobilization. The reasons today for the continuation of that act, I think, are more compelling than the reasons for its original enactment. Then we were superimposing upon an industrial economy, already operating at high speed, the added burden of munitions production. It was realized that the shortage already existing would be increased with each passing day. It was also recognized that in order to produce first things first, and to spread the supplies thinly and equitably across our economy, certain powers would have to be exercised.

Those powers were included in the Defense Production Act of 1950. Since the passage of the act, the industrial strength of the country has been mobilized, and the production of arms begun. It is proceeding at a steadily accelerating rate. We are now only in the early stages of the defense mobilization effort which must be made. The impact of military programs upon the economy will steadily increase. The full impact will not be felt, in my opinion, until the calendar year 1952, and the winter of 1953.

Let me illustrate: The monthly rate of deliveries under our program has increased about 300 percent per annum in the past year. The total expenditures in the fiscal year 1951 will be about $19 billion, and in the fiscal year 1952, we expect them to be over $38 billion for the three military departments alone.

The CHAIRMAN. General, do you mind repeating that figure, sir? Secretary MARSHALL. The monthly rate of deliveries under our program has increased about 300 percent per annum in the past year. The total expenditures in the fiscal year 1951 will be about $19 billion, and in the fiscal year 1952, we expect them to be over $38 billion. Deliveries during fiscal 1952, including about $6.6 billion of mutual defense assistance program (MDAP) deliveries, will also be about $38 billion.

Senator CAPEHART. Mr. Secretary, does that include housekeeping
salaries, and food for the Army and Navy, or just physical things?
Secretary MARSHALL. Nonhousekeeping; hard and soft goods.
Senator CAPEHART. In other words, it is physical things.
Secretary MARSHALL. Yes.

Senator CAPEHART. Does it include food for the Army?
Mr. SMALL. Food for the Army; yes, sir.

Senator CAPEHART. But not salaries; it is strictly physical things.
Mr. SMALL. That is correct.

Senator CAPEHART. And the year ending June 30, it will be $19 billion; the year ending June 30, 1952, will be approximately $38 billion.

Secretary MARSHALL. $38 billion. These are expected deliveries arising out of past

Senator CAPEHART. If the Secretary will yield, what is the difference. between this $38 billion figure and the $60 billion that is asked for in the existing budget?

There is a difference of $22 billion.

Mr. SMALL. A substantial portion of the $60 billion will not be delivered until fiscal 1953.

Secretary MARSHALL. These are deliveries.

Senator CAPEHART. In other words, the difference of $22 billion is that which you are going to contract for which will be delivered at a later date?

Secretary MARSHALL. I am talking about deliveries now. There are other longer term items that will will not be delivered in that period.

Senator CAPEHART. You are talking about materials now that must be paid for.

Mr. SMALL. Not paid for to the extent of $60 billion during the fiscal year 1952. He says there that about $38 billion, or over $38 billion, will be delivered and paid for during fiscal 1952.

Senator CAPEHART. That was my point.

Mr. SMALL. A portion of the $60 billion will be delivered and paid for during the fiscal year 1953.

Senator CAPEHART. In other words, all the cash we need in fiscal 1952, which begins on July 1 this year, and ends on June 30 next year, will be $38 billion, plus the salaries and other expenditures of

the national defense?

Mr. SMALL. Plus the items that are not included in the categories which I have given; yes.

The CHAIRMAN. Mr. Secretary, do you prefer to complete your statement first?

Secretary MARSHALL. Whatever is your pleasure.

The CHAIRMAN. What is your desire?

Secretary MARSHALL. Well, it will be a little easier if I can finish it up, and go back to certain points.

The CHAIRMAN. Go ahead.

Secretary MARSHALL. The progress that we have been able to achieve in the production and procurement of materials and items needed to meet military requirements could not have been achieved without the statutory authority provided by the Defense Production. Act. Without it, neither materials nor productive capacity could have been obtained on time to meet our urgent needs. It would have been impossible to have placed first things first.

However, the act is due to expire June 30, 1951. If that is permitted to happen, the confusion for military programs will be hard to picture. Without the authority to allocate our materials and facilities, to afford priorities to military orders, to restrain prices of military goods from soaring, and without the incentives to the expansion of production of scarce materials and products, our mobilization efforts would largely be blocked.

The continuity of the munitions productive effort is of tremendous importance. The dependability of supply, and the growth of productive capacity, are also of primary importance. We must provide matériel for the equivalent of 24 active divisions, and in addition thereto there must be productive capacity to provide, on short notice, for 21 National Guard divisions, subject to early call, and for such additional divisions as would be activated in the early stages of total mobilization.

The problem posed by equipping 95 wings for the Air Force within the same time limit raises at once the question of urgent and competing demand for many materials and products. For example, certain types of machine tools, and electronic equipment.

The production schedules can't, in my opinion, be met unless authority exists somewhere to act, if possible, ahead of the event where shortages threaten to develop in critical items.

I would like to read that again:

The production schedules can't, in my opinion, be met unless authority exists somewhere to act, if possible, ahead of the event where shortages threaten to develop in critical items.

Similarly, in the preparation of 1,161 combat vessels by July 1, 1952, for the Navy, and naval air requirements, expansion of facilities will be needed.

Here, too, there must be the power to determine priorities in many areas of critical items which will continue to develop as bottlenecks.

It is for these reasons that the Department of Defense is intensely interested in the proposed amendments now before your committee. While the incentives to the expansion of productive facilities, through private investment, which are now present in the Defense Production Act, have assisted in stimulating industrial expansion, there remains an area in which the investment of private capital is difficult, if not impossible to justify.

I refer to the productive capacity required for things urgently needed in the defense effort, but for which there is little or no longterm civilian demand. An amendment to the Defense Production Act can close that gap by providing authority for the expansion of facilities by means similar to those carried out by the Defense Plant Corporation in World War II. Although the great bulk of financing of expansion of industrial capacity has been through private capital, there will be an urgent need for governmental authority to expand facilities in special cases.

These expansions will be of plants required to produce vitally needed things, which involve a temporary demand only, the experimental project, or the uneconomic business risk. It is easy to foresee the possible need for this authority in various areas, such as the increased production in aviation gasoline, petroleum storage facilities, refining activities, and marginal mineral production, like manganese, and titanium, to mention only a few.

It is difficult to prophesy exactly where and when each of these needs may arise, yet the authority and the means with which to meet them should be provided, we think.

The areas I have mentioned above are, as I have said, of direct concern to the Defense Establishment. There is, however, one additional area of importance in which the Department of Defense is greatly concerned, both from the point of view of the quantity of end items to be received, and also in connection with the handling of our budgets. This is the matter of obtaining some reasonable stability in prices. Our budget estimates are based on current price levels. Substantial rises in prices have the effect on our procurement program of reducing the end amount to be delivered to us.

Wholesale prices today, as measured by the Bureau of Labor Statistics, are 20 percent higher than prices 1 year ago and are more than 16 percent higher than at the time of the Korean invasion.

This sharp increase has had a serious effect upon the purchasing power of the defense procurement dollars.

Normally, unit prices for many of the items now being procured by the Department of Defense would be expected to decline at this time because of reductions in manufacturing costs which should result from increased volume of procurement. While such unit price reductions have occurred in some cases, part or all of the economies of larger scale production have been lost in an increasing number of cases because of inflationary increases in labor and raw materials costs. Thus, although unit prices have not risen in some cases, the Department of Defense has still suffered a serious cut in purchasing power as a result of the failure of anticipated price decreases to materialize. At the same time that we have been suffering from inflationary forces, defense procurement costs have been affected by a number of nonprice factors. For example, the continuing improvement in our weapons and equipment leads to changes in design and specifications that alter costs. Similarly, costs are changed by such factors as bringing new sources of supply into production, expediting deliveries, changing quantities, packaging, and so forth. Because of these various simultaneous factors, it is virtually impossible to isolate from other factors the specific effect of price increases, as such, on all the items the Department of Defense purchases. However, the Bureau of Labor statistics wholesale price index offers a good general guide to price trends affecting the Department of Defense.

Taking into account hidden increases, we believe that the best over-all estimate of the cost of inflation to the Department of Defense during the past year has been roughly equivalent to the 20 percent increase in the wholesale price index. Thus, approximately $7 billion out of the $35 billion authorized for procurement of hard and soft goods and military construction for the Department of Defense during fiscal year 1951 can be regarded as the cost of inflation.

We can produce and procure efficiently materials and items needed for defense purposes only if inflationary pressures are prevented from pushing down the value of our currency and pushing up the cost of the mobilization effort. When the maximum production impact of the defense effort hits our economy over the next year or so, its inflationary effect must be contained or else much of the industrial strength we are endeavoring to build up will have been dissipated by the increased costs that will result and the dislocations of price, wage, and profit which will ensue. To that end the proposed amendments on price, wage, and rent stabilization are directed.

The Department of Defense, as the largest single purchaser in our economy, has a vital stake in the sufficiency of our stabilization efforts to meet the challenge that will be presented in the near future by our accelerated production and procurement program. The loss of guns, tanks, and planes to a creeping inflation is just as damaging to national security as if they had been destroyed in battle or captured by a more visible and concrete enemy. In either case, it is the Nation that suffers.

In summary, it is the best judgment of the Department of Defense that the authority in this act should be continued and that the amendment of the act in certain particulars is of the greatest importance in the interest of our national security. We do not see how the military targets set and the approved schedules can be met without some such

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