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does it make to us whether it is $1,000,000 or $10,000,000 invested? We would have to pay this 6 per cent on that $1,000,000, and the more frequently they turned it over the better it would be for the Government, because it would be on a small capital.
The CHAIRMAN. They have a small capital and a very great output. If it was $1,000,000 plus an output of $30,000,000, they get
per cent on $1,000,000 to start with, and then they get 10 per cent on the $30,000,000.
Mr. Cannon. On the output. Now, what do we care
The CHAIRMAN (interposing). 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 CHAIRMAN. I want to ask you another question that may be discussed: What part did the advisory commission of the Council of National Defense have in determining the terms of this contract?
Gen. CROZIER. The representatives of the advisory commission were intimately connected with all of the discussions, and the terms arrived at were reached with the advice and approval and concurrence of the advisory commission.
Mr. SHERLEY. What members of the advisory commission!
Gen. CROZIER. The one who had most to do with this particular subject was Mr. Scott, the chairman of the munitions board under the commission-Mr. Frank A. Scott.
Mr. GILLETT. Have you any idea whether the investment of these people upon which they are going to get, we will suppose, $4,000,000 whether it is $1,000,000 or $20,000,000!
Gen. CROZIER. I am inclined to think that it will be somewhere between $10,000,000 and $20,000,000.
Mr. Sisson. You spoke of paying for services and for organization and plant, or for a going plant. Now, that organization takes care of its own salaries that are paid, and they are included in the cost of the output. In other words, if you have a going concern, you have pay rolls and salaries. You pay the men for their services, and that is figured in the cost of the rifles, rifles being the output here?
Gen. CROZIER. Yes, sir.
Mr. Sisson. Therefore, in the cost of the rifle, which you estimate at, perhaps, about $40
Gen. CROZIER (interposing). No, sir; I will not say that. I will say that that is somewhere near what it cost the British Government.
Mr. Sisson. I understood that the cost to the British Government was about $42.
Gen. CROZIER. Yes, sir.
Mr. Sisson. Well, I am taking that as an arbitrary figure, and you can put it at $30 or $35 for the purposes of my question. We will not quarrel about the price. I will put it at $30.
Gen. CROZIER. All I want to know is that I am not on record as stating that I think these rifles will cost $40 apiece.
Mr. Sisson. Now, I think the committee is entitled and I think Congress is entitled to know these facts. If the manufacturing cost of the rifle is $30, in the cost of that rifle, the wages and salaries of the men constituting that organization are figured. That $30 per rifle pays for the services of the men and for the organization, because those men constitute the organization. The president of the concern may get $50,000 a year, he may get $100.000 a year, and, unless you shall undertake to fix his salary, he gets what his expert services are worth. He gets the surgeon's fee for the organization, to use your illustration. Now, what else is there, except capital invested, upon which the Government should pay a profit?
Gen. CROZIER. There is the organization itself as distinct from the individuals composing it. The value of the organization is something which is in addition to the aggregate of the salaries of all the individuals composing it.
Mr. Sisson. If I should have stock in a concern, I have my money invested in it, and I would expect to make a return on the stock, and
if I did not have anything to do with the management of it, that would be all that I would be entitled to.
Gen. CROZIER. That is right.
Mr. Sisson. If, in addition to being a stockholder, I am an official and give my expert services, give my time, and give my surgical knowledge, if you want to put it that way, to the plant, I put a valuation on those services, and we will suppose it is $25,000 a year. We will say arbitrarily that I am paid $25,000 a year to take charge of that work, but that $25,000 is figured in the expenses of the organization which is engaged in the manufacture of the rifles for which the Government pays. Now, in addition to that, it is highly important, it seems to me, that, before we enter arbitrarily into a 10 per cent profit plan on the cost, we know something about the value of the plant engaged in the manufacture of the rifles, after you pay for those expert services, because that is what it takes to get an organization.
Gen. CROZIER. We will take the money invested in the plant. That is represented either by a physical valuation or by bonds, mortgages, or something of that kind, and the owners of the plant, of course, are the stockholders. They are not the bondholders. The owners of the plant are endeavoring to operate it for the profit they are entitled to, figuring in a proper and legitimate interest on the value. They could get that by investing their money in various other things regarded as safe. Now, in addition to that, there is the enterprise. What are they entitled to as stockholders? The aggregate of the stockholders, or the ownership of the aggregate of the stock, or the majority, at all events, is the directing power. That is the control of the organization. They may delegate it; they may employ persons, and oftentimes do, to conduct the business.
Sometimes they employ themselves to conduct its operations, but the ownership is the control or the power to say what shall be done. The aggregate of that stock can send the company to ruin perfectly easy, because the owner of it can elect the directors, and they are the underlying power which controls the operations of the corporation. They, therefore, are entitled to a return for such success as the corporation may achieve, if there is no other way, by judiciously voting for directors and exercising good judgment in putting in good directors. Their's is the power, their's is the responsibility, their's is the loss, if the thing meets with disaster, and their's is the profit, if it should meet with success. Now, they have brought together an expensive and intricate organization, requiring time for its building up, requiring courage for embarking upon it, and ability to do it well. The people who have that power and have that responsibility are the owners and they are entitled to a return. That is a different kind of return from that which is paid in salaries. That is, the return of the stockholder
Mr. Sisson (interposing). However, in all business concerns the value of the stock is represented by the dividends you get out of it or hope to get out of it. Now, when they get a reasonable return on the stock investment, and the skill displayed in the manufacture of the article itself is figured in the cost of the article--after paying that reasonable return and after paying for that skill, what particular sanctity is there about the organization which would entitle them to more than a fair return on the investment?
Gen. CROZIER. I do not think there is any sanctity about it. I think what we ought to do is to try to arrive as nearly as we can at the degree of return which that kind of an organization gives to the country. The best information I can get on that subject is that they usually get a good deal more than 10 per cent, as we are paying these people.
The CHAIRMAN. These people have not, judging by their own experience.
Gen. CROZIER. That has been an educational process of which we get the benefit.
Mr. Sisson. One more question: For example, this takes care of all sorts of bad management; it takes care of enormous salaries, because you propose to pay 10 per cent on the cost of the production. Therefore, you are not necessarily tending toward skillful management, nor toward an economical or efficient organization, because the men engaged in the manufacture of the rifles and in the fullfilment of these particular contracts know as a certainty that they are going to get their return on the cost of the manufacture of the article, irrespective of what is paid for wages, irrespective of what is paid for labor, irrespective of what is paid for salaries, and irrespective of what is paid for material, etc., because they will get 10 per cent on the cost of the article.
Gen. CROZIER. This kind of contract
Mr. Sisson (interposing). How will you protect the Government against all sorts of robbery under that contract? It may not be intentional robbery; it may be the natural acquisitive desire implanted in all human beings, but how will you protect the Government against enormous wages, enormous salaries, and enormous payments for material?
Gen. CROZIER. This kind of contract is subject to the criticisms that you have indicated, and there may not be a perfect answer to what you say. The reliance that we have is, first, the entrance into the methods of management with the right of control, the right of consent to wages and salaries, and to the prices paid for material; the right to the advantage of any reduction of the price of any class of material that the Government can obtain through any arrangements, such as arrangements with steel producers, copper producers, etc. Now, that still does not cover the general subject of carelessness, the subject of inefficiency, and the subject of expensive operation, because that does not hurt the people conducting the manufactory, but the reliance for protecting the interests of the Government on that score is, first, the reputation of those companies; they are in this business, and they will continue in this business; they have been in it for a good many years, except one of them, and that one has been engaged in other similar business. They have their business reputations to maintain, and they have got to make their living hereafter. Now, there is a certain character which they have for conducting business efficiently. It is true that they have engaged in some transactions comparatively recently which have not indicated all kinds of efficiency, but I think that such troubles as these companies have had are not traceable to inefficiency in the management of their plants, but they are due to the mistakes of the people who put up the money, generally speaking. So we have hired their demonstrated
capacity--a capacity demonstrated over a long series of years. Then, we have a certain rivalry between them.
Those companies are in a way joined together in this matter with the Government, but we are dealing with them independently. We expect a certain amount of cooperation in production and interchangeability in production to as high a degree as we can get it, and we hope for a friendliness of that kind. But these companies have been in the past business rivals and will remain such, and they have something at stake, each one as against the other, in making this an efficient and economical manufacturing cost. The manufacturing cost in each plant will be made public. We will make it perfectly well known, and the companies have an interest in not making a discreditable showing with reference to one another. Now, there is another thing which might be a safeguard, and that is that these contracts stipulate that there shall be the right of cancellaion at any time the Government chosses to cancel the contracts. We can cancel them at any time.
Mr. Sisson. But you would be up against it on that proposition after you entered into the contract, because these are the only concerns that are manufacturing these rifles. You will have to have the rifles, and, therefore, you can not afford to cancel the contracts.
Mr. SHERLEY. But when the demand for rifles ceased
Mr. Sisson (interposing). When the demand ceases, we need not worry at all.
Mr. SHERLEY. We might worry if we were tied up in a contract with them for this total amount of rifles and did not need them.
Mr. Sisson. Unless you know how much of this plant belongs to the Government, and we estimate that it is about $20,000,000 for which we will pay about $9,000,000
Gen. CROZIER (interposing). It is about $18,000,000, for which we will pay $9,000,000.
Mr. Sisson. $18,000,000 for which we will pay about $9,000,000. Now, $18,000,000 will put up a considerable plant. If the plant consists largely of machinery which the Government owns, and they simply house it or furnish the land on which it is erected, then, the amount of their own money invested in it will be largely a banking proposition, because there will be no trouble in getting the banks to advance money on contracts of this kind. Therefore, they would not have to have much of their own money invested in the plant, and as the work progresses the Government makes monthly payments, out of which they pay the organization.
Gen. CROZIER. Yes, sir.
Mr. Sisson. Now, it is highly important, it seems to me, as a business proposition to the Government, that the Government should know something about the value of the plant before it enters into the contract. It seems important that the Government should know something about the value of the plant that belongs to the stockholders of the plant. Otherwise, we buy a pig in a sack, and at the end of the contract, if they have had only a small amount of money invested, they will have made an unconscionable profit, and every man engaged in it would have been getting a large salary, or a better salary than formerly, during these war times. I do not