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ized to do it. We simply have not the personnel. In connection with this work of handling the small-arms situation, as a branch of my office here, I have now one officer who has had experience in it before, and one other officer of the Ordnance Department who is a young officer and who has had very little experience in it, and all the other aid I have has been brought in to the assistance of the department since the beginning of the war. Therefore you can understand how much experience we have had in this kind of thing, and in order that this transaction shall be put through with proper safeguards for the interests of the United States it has been necessary to employ an audit company to represent the United States and take charge of this transfer for us.

We have inaugurated an inventory of all the machinery and equipment, which, I think, is partially completed, and, I think, already completed at one of the plants. It is in process at another plant, and a date has been fixed for its commencement at a third. Of course it takes time, but we are having it done as carefully as we can and by as good people as we can get. Now, there will, of course, be expenses connected with it, and as the $9,000,000 is entirely for payment to the British Government there must be something obtained for the expenses of the transaction, and I do not know whether any other appropriations which I have at my disposal are available or not. That is one of the kind of questions which there has not been time to determine. Everybody has a great deal more than he can possibly do every day, and, of course, every examination of the availability of appropriations, and so forth, which is a matter requiring time, is something that I can not do more than a certain limited amount of each day.

Mr. SHERLEY. Do the buildings belong to these companies?

Gen. CROZIER. The buildings, in the main, belong to the companies themselves and will remain the property of the companies.

Mr. SHERLEY. And the machinery will simply be the property of the United States to be used by the companies?

Gen. CROZIER. Yes.

CONTRACTS WITH MANUFACTURING COMPANIES.

(See pp. 875, 937.)

Mr. SHERLEY. What arrangement has been made with the companies touching the cost of manufacture and also touching the right to the machinery at the end, because it is to be presumed that they might want to keep the machinery and we might want to take the plant. Certainly nobody would want to split it up, because it would be of no value to anyone.

Gen. CROZIER. The arrangement is embodied in the contracts with each one of the three companies; they are not exactly the same, because the circumstances are a little bit different in the different companies. But the contracts amount to an agreement upon the part of the companies to manufacture these rifles, approximately two-thirds of them in one of the plants and approximately the remaining onethird divided between the two other plants upon the basis of the cost of manufacturing plus a percentage for profit, the cost being

defined to include whatever would properly go into cost; that is defined in some detail in the agreements. At one of the plants the main building is the property of another company than the arms manufacturing company; rental is paid for that building and the rental of that building is included in the cost of manufacture. The other companies, I think, own all of their buildings, and a reasonable interest on the part of the investment which is their investment will constitute a part of the cost, a part of the price which we pay for these rifles.

The CHAIRMAN, Let me understand that. You mean that in estimating the cost upon which the profit is to be calculated you include interest on the amount of money they already have invested in their plants?

Gen. CROZIER. We include the interest; that is, we reimburse them, we pay them interest on their investment in the plant, but we do not pay them interest on depreciation or any other such charge upon the machinery which the Government buys from the British Government and furnishes to them.

The CHAIRMAN. Of course, that is our own machinery?
Gen. CROZIER. Yes.

The CHAIRMAN. What I want to find out is whether in figuring this cost you include in your cost interest on the money invested before you commence to figure the price! For example, one of these companies has $1,000,000 invested, and in figuring the cost of manufacture upon which there is to be a percentage paid do you figure 2 or 3 per cent on this $1,000,000 to be added to the cost ?

Gen. CROZIER. The contract defines, as a part of the cost, the interest or value of the plant, yes; and they get the interest and 10 per cent of the interest. Mr. SHERLEY. On the value of the plant? Gen. CROZIER. Which they own; yes.

Mr. SHERLEY. But without regard to whatever investment they may have in the corporation, irrespective of the plant?

Gen. CROZIER. We do not pay any interest on their capital stock nor on the value of their capital stock, if the corporation owns other properties than those which are used for this governmental purpose. We pay no attention to that; that is excluded.

The CHAIRMAN. I do not think there is any misunderstanding; I think we had the question up at the time.we tried to figure on what the cost of powder was, and the question as to whether we should allow the Du Pont people to figure interest on the capital invested, in order to ascertain the cost, was then discussed very thoroughly, and this committee decided it should not be allowed.

Gen. CROZIER. I know that has been a much-discussed question, as to whether or not, in the matter of figuring a cost upon which some percentage is to be paid, the interest on the investment should be considered as a part of the cost and the percentage paid on that, or whether it should be excluded, assuming that the interest of itself was a sufficient return on that money and the percentage not to be assessed upon that interest. Now, this contract includes, the interest, this particular contract, and one reason for that is that the percentage is the lowest of any that we have at any time considered.

4400—17-55

The CHAIRMAN. What interest do you allow!
Gen. CROZIER. Six per cent.

The CHAIRMAN. Then they start off with the guaranty that no matter what happens they earn 6 per cent on the money actually invested in their plant?

Gen. CROZIER. Yes, sir.
The CHAIRMAN. What profit do you give them in addition!

Gen. CROZIER. Ten per cent; so that they get 6.6 per cent on the money. The interest is figured on the cost of production, and they get 10 per cent on the cost of production; they get 6 per cent and six-tenths of 1 per cent for profit.

The CHAIRMAN. They get more than that; they get more than 6.6 per cent on the money actually invested.

Gen. CROZIER. I think not, Mr. Chairman.
Mr. SHERLEY. Do you furnish the capital for running the plant !

Gen. CROZIER. We do not; but they get, as a part of the cost, in terest on the capital which is to be used as a part of the cost.

The CHAIRMAN. Is that the same interest?
Gen. CROZIER. Yes, sir.
Mr. SHERLEY. Then they get a profit on that!
Gen. CROZIER. Yes.

Mr. SHERLEY. So what it comes down to practically is 6.6 per cent profit upon all capital, whether represented in cash or in the value of buildings?

Gen. CROZIER. Yes; that is right.

The CHAIRMAN. They get more than that, General. We figured that out at one time.

Gen. CROZIER. They do not get 6.6 per cent and 10 per cent on that.

The CHAIRMAN. But they get 10 per cent on the cost of the rifles with 6.6 per cent figured in the cost of the rifles.

Gen. CROZIER. No; they get 10 per cent on the cost, with 6 per cent interest figured

into the cost. The CHAIRMAN. That makes a great deal more than 6.6 per cent on the investment. They get a profit of 10 per cent on what it costs them to do the work and in that cost they have a guaranteed return of 6 per cent on every dollar they have invested, and no manufacturing concern in the country can start on the assumption that no matter what happens they will get a 6 per cent return on money invested.

Gen. CROZIER. Well, no; I think you are right.

The CHAIRMAX. That is what you are doing, and that is why your assumption could never be justified. Here is a going concern, and no matter what happens it is bound to get a 6 per cent return on every dollar invested.

Gen. CROZIER. As far as the money is concerned that is true, but that is far less than the prospective return which is expected by manufacturers in this country. No manufacturer in this country would dream of going into business with only an assured return of 6 per cent on the money invested. Mr. GILLETT. A great many expect to get 25 per cent and more.

The CHAIRMAN. They expect that, but they must deal with the vicissitudes of commercial life, and no one can start off with the absolute assurance that they will get a return of 6 per cent.

Gen. CROZIER. You must appreciate this, Mr. Chairman: That, to a certain extent, this is especial work and they do not know how long they will have any use for the special plant necessary to turn it out, and they claim that by giving up the use of the plant to the Government in this way they lose a market for sporting arms and they lose foreign markets which they might otherwise have.

The CHAIRMAN. But they have already lost those markets and, therefore, is not that consideration eliminated ?

Gen. CROZIER. Well, no; they have done the work, but at enormous loss.

The CHAIRMAN. I know; and that must be eliminated.
Gen. CROZIER. Yes; we do not have to take care of that.
The CHAIRMAN. That happened before we got into this war?

Gen. CROZIER. That is true, and it is no part of our business to compensate them for the errors which they made.

Mr. Sisson. Let me get this in my mind: How many times do you suppose they will turn the capital over in the manufacture of rifles, say, in the current year?

Gen. CROZIER. The delivery of the rifles, perhaps, may commence in four, five, or six months from the commencement of manufacture, and thereafter a rate of delivery is provided for which naturally dif fers in the different plants, because they are of different magnitude and they expect to finish up this contract in about 14 or 15 months from the time they start.

Mr. Sisson. Do you make any cash payments during the 14 or 15 months?

Gen. CROZIER. Yes; we make a cash payment every month.

Mr. Sisson. About what would the gross payments by the Government be at the end of the contract !

Gen. CROZIER. That is something about which there has been a great deal of guessing. It has cost the British Government $42 for every rifle they have gotten—at least $42, and perhaps a little more than $42—but we hope to do a great deal better than that.

Mr. Sisson. That would be $42,000,000 ?
Gen. CROZIER. Yes.
Mr. Sisson. Then, 10 per cent of that would be $4,000,000!
The CHAIRMAN. That would be $50,000,000 for 1,250,000 rifles!
Gen. CROZIER. Yes; about 1,200,000 rifles.
Mr. SHERLEY. But that is not what we are figuring to get.
Gen. CROZIER. We are figuring to get 1,000,000.

Mr. Sisson. But, as I say, 10 per cent of the $42,000,000 would be $4,000,000?

Mr. SHERLEY. No; 10 per cent is figured in the first instance.

Mr. Sisson. Yes; it is figured in the first instance, but in round numbers it would be something like $4,000,000?

Gen. CROZIER. Yes.
Mr. Sisson. In round numbers it would be about $4,000,000!
Gen. CROZIER. Somewhere along there.

Mr. Sisson. We have $9,000,000 of our own money invested in the plant?

Gen. CROZIER. Yes.

Mr. Sisson. What would be their investment over and above the $9,000,000, about?

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Gen. CROZIER. I have not undertaken to ascertain that. That is to say, you mean what is the value of the plant?

Mr. Sisson. Yes. We have $9,000,000 invested in the plant, which is worth, of course, a certain amount of money, and the point I am making is that $9,000,000 of the value of the plant—the plant used for the manufacture of the rifles--belongs to the Government !

Gen. CROZIER. That is right.
Mr. Sisson. Then what part would belong to the manufacturer!

Gen. CROZIER. You mean what would be the value of these plants to the manufacturer?

Mr. Sisson. Yes.

Gen. CROZIER. I do not know; I have not made an ascertainment of that. However, I will say to you that in discussing the character of this kind of a contract there has been a great deal of argument, you might say, as to whether the percentage which should be allowed for profit should be a percentage on the cost of manufacture or a percentage on the capital invested, and for this particular contract, which is one of the first executed, the conclusion was reached that it would be better to have it provide for a percentage on the cost of manufacture. I know that a great deal could be said in favor of the other method—that is, fixing the profit in relation to the interest on the investment.

Mr. Sisson. For argument's sake, suppose their plant is worth $10,000,000 and the Government's investment is $9,000,000. That would represent a $19,000,000 investment. Now, if they get $4,000,000 for the manufacture of the rifles they would make 40 per cent on the capital invested?

Gen. CROZIER. Yes.

Mr. Sisson. Then, in addition to that you would pay them 6 per cent on the $10,000,000, or $600,000?

Gen. CROZIER. Of course, the 10 per cent is largely a payment for services. They contribute their organization.

Mr. Sisson. For which they get salaries?

Gen. CROZIER. Yes. The salaries which are estimated as being really contributed to this manufacture are covered; we pay proper salaries to everybody who works in connection with this manufacture.

Mr. Sisson. If you pay 10 per cent on the cost of manufacture, you would be intensely interested in the salaries which the directors or the stockholders might fix for their officers?

Gen. CROZIER. Yes.
Mr. Sisson. And the wages paid?

Gen. CROZIER. Yes; we have a voice in that under the terms of the contracts. We know what they are and we have the right of nonallowance.

Mr. Sisson. After that shall have been paid into the corporation, the corporation would be entitled to a reasonable return on the money actually invested in the plant, but would be entitled to no return on the machinery or the Government's investment?

Gen. CROZIER. Yes; that is right.

Mr. Sisson. In order to know what a reasonable return is, would it not be necessary to investigate how much they have invested in addition to the $9,000,000?

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