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CONTRACTS FOR MANUFACTURE OF RIFLES.

(See p. 859.)

The CHAIRMAN. Mr. Scott, in connection with the contracts for the manufacture of rifles made with the Winchester Repeating Arms Co., the Remington Arms-Union Metallic Cartridge Co., and the Remington Arms Co. of Delaware, those contracts, as I understand it, were made upon the advice of the Munitions Board?

Mr. F. A. SCOTT. There was a memorandum agreed upon between

The CHAIRMAN (interposing). Will you answer yes or no? Can you state whether or not they were made on the advice of the Munitions Board? You should know whether they were or not. If they were not, we want to know the facts.

Mr. F. A. SCOTT. I do not think, Mr. Chairman, that I quite understand what you are speaking of.

The CHAIRMAN. The statement was made that contracts were made with those three companies for the manufacture of rifles, and the statement is also made that they were made upon the advice of the Munitions Board.

Mr. F. A. SCOTT. Well, I can say that they were made with the knowledge of the members of the Munitions Board

The CHAIRMAN (interposing). Upon your recommendation?

Mr. F. A. SCOTT (continuing). And that the members of the Munitions Board concurred in them. Now, you are asking a technical question, and I might want to look at the record.

The CHAIRMAN. I want to know what the facts are.

Mr. F. A. SCOTT. You ask whether they were made on the recommendation of the board, and I want to see whether they did recommend it, because I, as chairman, might have concurred in it

The CHAIRMAN (interposing). I am not trying to draw any fine distinction, but I want to know the facts. Are you familiar with those contracts?

Mr. F. A. SCOTT. I was familiar with them at the time.

The CHAIRMAN. Did you participate in the negotiations relative to fixing the terms of the contracts?

Mr. F. A. SCOTT. To some extent, but not all the way through. The CHAIRMAN. Did any member of your board have any more to do with it than you did?

Mr. F. A. SCOTT. No, sir: I think not.

The CHAIRMAN. To what extent were you connected with it?

Mr. F. A. SCOTT. That was some three months ago, Mr. Chairman, and you will have to give me a minute or two to think about it. The CHAIRMAN. I want the facts about it.

Mr. F. A. SCOTT. I have, perhaps, a faulty memory, and I will have to take a few minutes to think what the facts were. Those contracts that you refer to, Mr. Chairman, were only concluded a few weeks ago, but the facts, about which you are asking, it may be, took place many weeks ago.

The CHAIRMAN. I will state the facts as I know them, and then you can answer them.

Mr. F. A. SCOTT. Yes, sir; if you will remind me of the facts, I will answer.

The CHAIRMAN. These were contracts made with those companies, wherein the machinery was owned by the British GovernmentMr. F. A. SCOTT (interposing). That is what I started to tell you about.

The CHAIRMAN. The negotiations resulted in an agreement that the United States should purchase the machinery, and then contracts were made with those three companies for the manufacture of rifles. Those contracts provided for the payment of cost plus 10 per cent, and included in the manufacturing cost was an item of 6 per cent upon the capital invested by the companies. Now, can you state how it was determined that 10 per cent upon the manufacturing cost was a reasonable profit to the manufacturers, or these companies?

Mr. A. F. SCOTT. Well, it was fixed by the lowest percentage that the manufacturer was willing to accept. As I recall the circumstances of the negotiation of these contracts, the manufacturers were entirely unwilling to manufacture the rifles at any flat price. Each of them had had contracts with the British or Russian Governments, on every one of which they had lost money and which they had been compelled to adjust with those governments. They were very much frightened at other business of that kind, and were unwilling to enter into any contract for rifles with our Government at any fixed price per rifle. Therefore, the Chief of Ordnance, who was the contracting party, and so far as I participated in it-I participated in it as an assistant in the negotiations with the Chief of Ordnance, or his representative as I say, the Chief of Ordnance was compelled to make a bargain with those manufacturers on the best basis that he could obtain. My recollection of the terms of the bargain is that they were to receive 10 per cent on the cost of manufacture, and they were to receive 6 per cent on the value of that part of their plants that was employed, the buildings especially.

The CHAIRMAN. On that part of the plant actually used?

Mr. F. A. SCOTT. Yes, sir; actually used in the fulfillment of these particular contracts. In two plants the part of the plant to be used under the contract was only a part of the entire plants, the other part of the plants being used for other purposes, either in the manufacture of commercial rifles and guns, or for ammunition and other articles made by those companies. But there was one company, the Remington Co. of Eddystone, which, as I recall

The CHAIRMAN (interposing). Is that the Remington Co. of Delaware?

Mr. F. A. SCOTT. Yes, sir: the Remington Co. of Delaware operating a plant at Eddystone, Pa. My recollection is that they did not own their buildings, but rented them, and therefore they were paid that rental instead of interest on the value of their buildings. Now, I have not seen those contracts for many weeks, and I may not remember the details of them accurately. Do you want me to deal with the question of purchasing the machinery?

The CHAIRMAN. No; we have gone into that. What we are interested in is how the price to the companies was reached, or upon what basis it was fixed. I do not know whether you meant that to be your answer to the question, but you stated that it was the best bargain you could make with the companies. Do I understand that you want that to stand as your answer?

Mr. F. A. SCOTT. Yes, sir; I do mean that. I mean that that contract, as I recall the circumstances of its making, represented the very best bargain that was obtainable between those companies and the United States Government at that time.

The CHAIRMAN. And because it was the best bargain, was the contract made, regardless of the reasonableness of the price to the Government?

Mr. F. A. SCOTT. No, sir; that contract will produce for this Government rifles at a lower cost than the rifles that have been required. by any Government participating in this war.

The CHAIRMAN. That does not mean anything.
Mr. F. A. SCOTT. That means a good bargain.

The CHAIRMAN. No; it does not. The prices that the allied Governments have been paying for the production of things are not at all a measure of what are reasonable prices for such commodities, and the best illustration of that is the fact that your War Industries Board, or some similar organization, is to take in hand the work of seeing that the allies purchase at a reasonable price.

Mr. F. A. SCOTT. Well, you can not overlook the fact that at the time the contracts for the allies' rifles were made in this country, there was no such tremendous advance in the cost of machinery, raw materials, or labor.

The CHAIRMAN. You can not take the prices the allied Governments paid as the basis for determining what are reasonable prices.. Mr. F. A. SCOTT. But you can, if you go back to the time that the contracts were made, and I am calling attention to the fact that they were made at a time when prices were not so high.

The CHAIRMAN. Is that your only basis for the belief that the prices were reasonable-that is, that they were less than those the allied Governments had paid?

Mr. F. A. SCOTT. No, sir. I should say that the best basis for that belief is the fact that these contracts will produce rifles at a reasonable cost for the Ordnance Department, if they carry out the terms of those contracts.

The CHAIRMAN. I am not talking about the cost of manufacture at all, but I am talking about the prices, and the prices include, not only the cost of manufacture, but a profit of 10 per cent.

Mr. F. A. SCOTT. I will state it another way.

The CHAIRMAN. What the committee is interested in knowing is how it was determined that, from the standpoint of the Government, a 10 per cent profit was a reasonable profit to pay those manufacturers. We want to know how that conclusion was reached?

Mr. F. A. SCOTT. I am of the opinion that if you called before your committe manufacturers in metal working lines

The CHAIRMAN (interposing). I want to know the basis for it, or how that conclusion was reached.

Mr. F. A. SCOTT. Mr. Chairman, I have got to know who is to make the statement. If you are to make it, and I am to concur in itThe CHAIRMAN (interposing). You can make your statement in answer to my question.

Mr. F. A. SCOTT. You asked me how we determined that 10 per cent was a fair basis of compensation to the manufacturers of the rifles, plus 6 per cent on so much of the buildings of their plants, or the value of the buildings, that were employed in that use of the Gov

ernment while carrying forward those contracts. It was because the normal profit on such an article would be considerably in excess of the amount which will be produced by those terms.

The CHAIRMAN. I did not catch that.

Mr. F. A. SCOTT. It was the opinion of those gentlemen who were working on the contracts that the percentages agreed upon in the contracts were fair, because they were considerably less than that percentage of profit which is ordinarily obtained by manufacturers of such articles.

The CHAIRMAN. That would be true if they owned the plants, but here is a case where the Government owns all the machinery and furnishes it to the companies. The Government has invested in those plants $18,000,000.

Mr. F. A. SCOTT. That is not all the plants, Mr. Chairman.

The CHAIRMAN. I know that it is not all of the plants. Was there any information as to the amount of capital the companies had inrested in the plants?

Mr. F. A. SCOTT. The amount of the capital that the company has invested in that part of the plant that applies to this contract is what will determine the item on which they will receive 6 per cent.

The CHAIRMAN. That is true, but was there any information as to what that amounted to?

Mr. F. A. SCOTT. So far as I know, the Ordnance Department had no inventory of that at that time, and it is now engaged in inventorying the plants to determine that item.

The CHAIRMAN. Is there any information as to the amount of capital that would be required in addition to that invested in that part of the plants utilized under these contracts?

Mr. F. A. SCOTT. My recollection is that there was a discussion of the amount which would be involved in the purchase of raw material and in the pay rolls.

The CHAIRMAN. Can you state what it is?

Mr. F. A. SCOTT. No, sir. This was many weeks ago. I might, if allowed to read over the contract and to refresh my memory. The CHAIRMAN. Would you mind looking this up to see if you can give any information about it tomorrow?

Mr. F. A. SCOTT. Those items are not in the contract, Mr. Chair

man.

The CHAIRMAN. I thought perhaps you might have some memorandum of it.

Mr. F. A. SCOTT. No, sir: I do not think so.

The CHAIRMAN. Do you know anyone who has that information? The Chief of Ordnance did not have it, and said so.

Mr. F. A. Scort. I do not think it exists; but if those questions were asked at the time, they were answered and the subject passed. So far as I know, no record was made of that at the moment.

The CHAIRMAN. Those contracts will aggregate between thirty and forty million dollars.

Mr. F. A. SCOTT. They are for 1,000,000 rifles, divided according to the size of the respective plants.

The CHAIRMAN. They would aggregate between thirty and forty million dollars.

Mr. F. A. SCOTT. They are at cost, plus those percentages.

The CHAIRMAN. The testimony before this committee by the Chief of Ordnance is that it will be between those figures, not knowing exactly how much it will be.

Mr. F. A. SCOTT. He may be right.

The CHAIRMAN. That 10 per cent on the cost must bear some relation to the capital used by the companies.

Mr. F. A. SCOTT. Yes, sir.

The CHAIRMAN. And this relationship to the capital used by the companies would be the determining factor in deciding whether it was a reasonable or unreasonable profit. For instance, suppose those companies utilized $1,000,000 in the manufacture and they should get a profit of three or four million dollars on this 10 per cent basis, would that be considered a reasonable figure for the Government to pay?

Mr. F. A. SCOTT. My impression is that the parts of the plants that would have to be utilized in carrying forward these contracts would aggregate somewhere between fifteen and twenty million dollars. It is a very large transaction. The manufacture of 1,000,000 rifles is a tremendous undertaking.

The CHAIRMAN. What the committee desires to obtain is all of the information bearing on it that is in the possession of the Government going to show whether or not the arrangement made is a reasonable one from the standpoint of the Government. We can not do that unless those who conducted the negotiations furnish the information. Now, you say that all those companies lost money on the contracts they had with the foreign Governments?

Mr. F. A. SCOTT. Yes, sir.

The CHAIRMAN. Do you know what proportion the output of the Winchester Repeating Arms Co. under these contracts will bear to their total output?

Mr. F. A. SCOTT. I do not think I understand the question. Do you mean what proportion these rifles will bear to the total output? The CHAIRMAN. Yes.

Mr. F. A. Scorr. No, sir: I do not know that.

The CHAIRMAN. For 11 years the Winchester Repeating Arms Co. has been paying dividends of 55 per cent.

Mr. F. A. SCOTT. I think I can explain that. I see what you are arriving at.

The CHAIRMAN. If you could state what percentage of its output would be covered by these contracts

Mr. F. A. SCOTT (interposing). The dividends that a company pays are determined by two factors, its earnings and the amount of its capital stock outstanding. The Winchester Repeating Arms Co.. I think, has a capital stock of $1,000,000, but it has an investment of many millions of dollars. That investment of many millions of dollars is used to earn money which is paid in the form of dividends on this $1,000,000 of capital. Assuming that it had a capital stock of $1,000,000 with an investment of $20,000,000, you can see that 55 per cent on that million dollars would be quite another story if it were turned into a percentage on $20,000,000.

The CHAIRMAN. That is very true, but what their investment is is a question that there is no information about here. I do not know whether you have it or not?

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