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the Government actually saved money and got the rifles quicker than under the proposed arrangement, because what men can accomplish can not be limited by our views of the accomplishment of men in this day, and it seems to me there could not be any wrong in giving them an opportunity to try, if the Government stands a good chance of getting the rifles.

Gen. CROZIER. If the best advice of the Government is not to the effect that this can be a success, we should not rely on it. Here is what we must do: We must not embark on a project, any contract, or any obligation for the supply of rifles without confidence. If we go beyond that

Mr. Sisson (interposing). That is true.

Gen. CROZIER. If we go beyond that to give somebody else an opportunity, we are entering into an obligation for service rifles which we do not need, simply to give them an opportunity to do something which we do not think they can do.

Mr. Sisson. What investigation has been made of this man's ability to perform the contract ?

Gen. CROZIER. We have not made any. We answered his letter and we told him that we would be glad to consider anything that he has to present, but that we have no confidence in his ability to carry out any such project as he mentioned. That is the last we have heard.

Mr. Sisson. That, of course, simply means that nobody else would ever undertake to engage in manufacturing rifles for the Government if it is understood that only these people that you have contracted with shall ever have that opportunity irrespective of what ideas the man may have.

Gen. CROZIER. Of course, it is not a good policy ever to do a thing like that. We have told this writer that we would be glad to consider anything he might put before us that would give us a better understanding of his proposition.

Mr. SHERLEY. General, you do not mean to give the impression that the Government is prepared to discourage anybody making rifles for it, but the essential thing is the obtaining of the rifles?

Gen. CROZIER. Yes, sir.
Mr. GILLETT. Within the specified time?

Mr. SHERLEY. Of course. In order to give serious consideration to any proposal, there must be actual evidence other than a man's belief in his ability to deliver.

Gen. CROZIER. Yes, sir.

Mr. SHERLEY. Because the Government's need now for rifles within a given time is so imperative as not to permit the Government to take any chances upon getting rifles?

Gen. CROZIER. Yes, sir. We are obliged to place our orders in such a way that we will get the rifles without taking any chances. I might go a little beyond that point and express the exact view on which I have proceeded to discharge my part of the responsibilities. Having, as we necessarily must, arranged for all the rifles that we can need through a method by which we believe we can get them, I would not feel justified in calling into existence any more rifle-making capacity for the purpose of manufacturing rifles which we do not need.

CONTRACTS WITH MANUFACTURING COMPANIES.

(See pp. 864, 937.)

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Mr. SHERLEY. I think the important matter before this committee and in which Congress would be interested is whether havin ranged to get your rifles within the proper time you have ade an arrangement which is equitable both to the Government and to the manufacturers!

Gen. CROZIER. Yes, sir.

Mr. SHERLEY. That carries us back again to the discussion of the contract which you have entered into.

Gen. CROZIER. Yes, sir.

Mr. SHERLEY. Which, as I understand, represents a 10 per cent profit upon the output, and the cost of the output has figured in it as one of the elements, interest upon the investment as well as the working capital of the companies turning out the output. If it happens that the output is such as to represent a value many times over the capital invested, 10 per cent upon that output will represent many times more than 10 per cent upon the capital invested. That is true?

Gen. CROZIER. Yes, sir.

Mr. SHERLEY. That raises the question as to whether, in view of the fact that the contract is of such size as to make an output in value many times the capital invested, and also as there is no question as to the continuation of the contract and the payment of the money, the Government was warranted in paying 10 per cent, which would represent actually over a period of some 14 months, perhaps 30 or 40 or 50 per cent increment upon the capital invested.

Gen. CROZIER. Yes, sir. Those considerations have been very carefully gone over. Before executing these contracts I had hours of discussion at various sittings with the representatives of these manufacturing companies and with other business men who had no interest in the matter, except the interest of the Government, serving the Government. I think everybody appreciated the strength of the argument which you have just put forth, appreciated the difference of compensation that there would be in paying upon the basis of percentage upon the cost of output in a case where the output would be very slow, as in the case of heavy gun carriages or heavy guns, and where the output is faster, as in the case of something like smallarms ammunition. The best judgment that was available to suit this particular case was that the method that we are using a percentage on the cost of production-considering the time which will be necessary for making delivery of these rifles, was the better way.

Mr. SHERLEY. If you did not know the value of the investment of these companies upon which you are going to pay interest, you were not able to determine one of the important factors, which would be how frequently the capital was turned over. In other words, if you had a total output, in round numbers, of $40,000,000, and 10 per cent was paid upon that, it would mean $4,000,000. If the capital invested in these companies was $1,000,000, why, they would be getting a return upon that of $4,000,000; and if the capital invested was $4,000,000, they would be getting $4,000,000; and if the capital invested was $10,000,000, they would be getting $4,000,000. Manifestly,

the Government actually saved money and got the rifles quicker than under the proposed arrangement, because what men can accomplish can not be limited by our views of the accomplishment of men in this day, and it seems to me there could not be any wrong in giving them an opportunity to try, if the Government stands a good chance of out song the rifles. to be up Orrifese thinthe best advice of the Government is not to the

Gen. CROZIER. Then, there museve should not rely on it. Here is services. That would be considering the services of everybouy con

ropct any contract. cerned as measured by the salaries, whereas this 10 per cent profit for use of the organization puts a very much higher value on the services of the organization.

Mr. SHERLEY. I think that is true; but the services might justify a $4,000,000 return upon a $10,000,000 investment and yet not justify that $4,000,000 return upon a $1,000,000 investment.

Gen. CROZIER. Of course, we are accepting certain figures as being data, Mr. Sherley, that may not qualify for that dignity; but the $4,000,000 that you speak of is the result of the cost which I have stated that the British cost per rifle has exceeded. I do not like to prophesy too much about costs, but we do not expect those rifles to cost as much as that.

Mr. SHERLEY. I grant you that my own statements are necessarily arbitrary, but they are arbitrary through no fault of my own. I must take the data presented here and reach a decision as best I can. The thing that is in the minds of some of us is the equitableness of an arrangement which pays 10 per cent upon output, in view of the fact that there is no possibility of loss and that interest is figured upon the capital invested. That is the broad, basic thing, and that 10 per cent question is necessarily dependent a good deal upon how often the capital is turned over. Gen. CROZIER. Yes, sir; that is right.

The CHAIRMAN. Was there at any time during these negotiations any statement made of the amount of the investment of the companies?

Gen. CROZIER. Of the amount of the investment of the companies ? The CHAIRMAN. Yes.

Gen. CROZIER. No, sir; it was only alluded to and spoken of, and this 10 per cent profit was characterized, as it is, as profit on the cost of the output and not on the investment. But we did not undertake to arrive at the value of the plant. We would have to do it, of course, under the terms of the contract.

The CHAIRMAN. What I have in mind is this: In a plant of that character the equipment is much the most expensive part of it.

Gen. CROZIER. Yes, sir; the equipment is the most expensive part of it.

Mr. Cannon. There is a question I would like to ask right here, and I think it is apropos. I understood you to say that the 6 per cent on the capital had to be thereafter ascertained before it could be paid?

Gen. CROZIER. Yes, sir,

Mr. CANNON. Now, then, assume that the capital is $4,000,000, and that would be $240,000. Suppose it was only $1,000,000 or $500,000, and then it would be a less amount. The more capital that is invested the worse it is for the Government, and what difference

CONTRACTS WITH MANUFACTURING COMPANIES.

(See pp. 864, 937.)

Mr. SHERLEY. I think the important matter before this committee and in which Congress would be interested is whether having cent ranged to get your rifles within the proper time von horo m arrangement which is equitable both, Wilat do we care manufactureraba.. unterposing). We care because the Government ought not to pay a profit of 300 per cent on a contract like this. It would be cheaper to take the whole plant over.

Mr. SHERLEY. The question, it seems to me, is how far the element upon which you are to figure your return is capital invested, and how far it is the ability of the men and their organization who use the capital in a productive way. Now, I am not prepared to say, because I am not wise enough to say, as to what value, over and above the salaries and wages that are paid to the men in the organization, should be put on such organization, and, therefore, to what extent that should be represented in the returns. I understand, Gen. Crozier, that it is the belief of those who made the contract on behalf of the Government that 10 per cent, in a rough way, represented a fair return on the capital and the value of the organization which is in existence and which can do this thing. Now, manifestly, you can get any sort of arbitrary figures when you deal with percentages simply on capital, without valuing the organization as such.

Gen. CROZIER. Let me give you a very extreme illustration: You pay a surgeon $5,000 for an operation; his investment for plant in which to carry on that operation may not be $30,000, and he performs the operation in 24 hours. Now, what you are paying for is the man's education. You are paying for what he has organized himself. He has organized a brain, a set of nerves, knowledge, and capacity, and that is what you are paying him for. Now, you have here in this case these companies. You have, it is true, certain individuals, each of whom has a certain importance in the organization, and his importance and value as an individual is probably in some degree the measure for his salary, although that is not always the case. Sometimes it does not even constitute a very large proportion of the compensation which a member of the organization receives, but oftentimes it is based on stock in the company. Now, they have labored and gotten together an organization of employees, and they have a going concern, and all of those people who have had their fingers burned in these large munitions contracts say that the bitter part of their experience has been, not through any expense or difficulty in their plants, but through the expense and difficulty of their organizations. That is the troublesome and valuable part of their assets, and that is what is recognized in this matter of profits.

The CHAIRMAN. It has never been considered fair to compare the returns of a professional man with the returns of an industrial concern, because these organizations, or the men in them, are not as a rule holders of a large bulk of the stock to which this profit goes. The holders of the stock do not contribute that peculiar skill and ability for which you are paying on account of services.

Gen. CROZIER. That is sometimes the case.

the Government actually saved money and got the rifles quicker than under the proposed arrangement, because what men can accomplish can not be limited by our views of the accomplishment of men in this day, and it seems to me there could not be any wrong in giving them

an opportunity to try, if the Government stands a good chance of out Soin the rifles. to be up ortirese thinbe best advice of the Government is not to the Gen. CROZIER. Then, there musike, should

should not rely on it. Here is services. That would be considering the services of everybouy con

nroject any contrart. cerned as measured by the salaries, whereas this 10 per cent profit for use of the organization puts a very much higher value on the services of the organization.

Mr. SHERLEY. I think that is true; but the services might justify a $4,000,000 return upon a $10,000,000 investment and yet not justify that $4,000,000 return upon a $1,000,000 investment.

Gen. CROZIER. Of course, we are accepting certain figures as being data, Mr. Sherley, that may not qualify for that dignity; but the $4,000,000 that you speak of is the result of the cost which I have stated that the British cost per rifle has exceeded. I do not like to prophesy too much about costs, but we do not expect those rifles to cost as much as that.

Mr. SHERLEY. I grant you that my own statements are necessarily arbitrary, but they are arbitrary through no fault of my own. I must take the data presented here and reach a decision as best I can. The thing that is in the minds of some of us is the equitableness of an arrangement which pays 10 per cent upon output, in view of the fact that there is no possibility of loss and that interest is figured upon the capital invested. That is the broad, basic thing, and that 10 per cent question is necessarily dependent a good deal upon how often the capital is turned over. Gen. CROZIER. Yes, sir; that is right.

The CHAIRMAN. Was there at any time during these negotiations any statement made of the amount of the investment of the companies? Gen. CROZIER. Of the amount of the investment of the companies? The CHAIRMAN. Yes.

Gen. CROZIER. No, sir; it was only alluded to and spoken of, and this 10 per cent profit was characterized, as it is, as profit on the cost of the output and not on the investment. But we did not undertake to arrive at the value of the plant. We would have to do it, of course, under the terms of the contract.

The CHAIRMAN. What I have in mind is this: In a plant of that character the equipment is much the most expensive part of it.

Gen. CROZIER. Yes, sir; the equipment is the most expensive part of it.

Mr. Cannon. There is a question I would like to ask right here, and I think it is a propos. I understood you to say that the 6 per cent on the capital had to be thereafter ascertained before it could be paid?

Gen. CROZIER. Yes, sir.

Mr. CANNON. Now, then, assume that the capital is $4,000,000, and that would be $240,000. Suppose it was only $1,000,000 or $500,000, and then it would be a less amount. The more capital that is invested the worse it is for the Government, and what difference

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