Department of the Army, value of procurement actions by State,
July 1, 1948, to May 31, 1949

NOTE. Excludes actions under $5,000. Army data are for contracts placed through procurement offices; i. e., not including local purchases. Army data are adjusted for all changes and modifications in contracts.

The CHAIRMAN. It was stated here by one of the witnesses the day before yesterday, Mr. Ernst, that during the war 80 percent of all procurement of the National Military Establishment or the armed services went to approximately only 100 industrial large units, and that the 20 percent trickled down to the many, many thousands of others.

Would you say that those figures are in error and that the amount given to small business was larger or was under 28 percent?

Secretary MATTHEWS. I would not say that they were in error or that they were correct, as I do not have any actual personal knowledge of those figures. I would say, just from observation as a citizen, that that might have happened in the period of wartime, in a national emergency, under the circumstances that prevailed then.

However, I do not know whether Mr. Ernst meant that 20 percent went to small business through direct contracts or whether the 20 percent included what small business got by subcontracting with the bigger institutions.

The CHAIRMAN. He implied, I think, that most of the business that went to the small industrial units was by way of subcontract.

Secretary MATTHEWS. I would not expect that to be the case myself, but if you would like to have that information we will be very glad to give it for the record.

The CHAIRMAN. If it is not too inconvenient, we would certainly like to have it, Mr. Secretary.

Secretary MATTHEWS. We will supply that to you, Mr. Chairman. (The information referred to is on page 161.)

The CHAIRMAN. Do any other members have any questions? I have some other questions, but I would like to reserve them for a bit. Mr. Keating?

Mr. KEATING. Mr. Secretary, do these figures relate to the entire National Military Establishment or simply the Navy?

Secretary MATTHEWS. They relate to the entire Military Establishment.

Mr. KEATING. What you have said as to policy also relates to the entire Military Establishment?

Secretary MATTHEWS. Yes; they relate to the three Departments of the Military Establishment-the Army, the Navy, and the Air

Force.

Mr. KEATING. In other words, in a manner of speaking, you are here speaking for the Secretary of National Defense in this appearance before the committee?

Secretary MATTHEWS. Yes; I am speaking for the whole Military Establishment.

Mr. KEATING. To what extent are contracts let by bidding as against

Secretary MATTHEWS. Negotiated contracts?

Mr. KEATING. Yes.

Secretary MATTHEWS. Why, pretty largely by bidding. Of course, the law requires us to let contracts by bidding except in certain specific exceptions, and contracts are let where they can be through bids, through advertised bids.

Mr. KEATING. Do you have anything as to percentages; any figures as to percentages in that respect?

Secretary MATTHEWS. I do not have that in mind; no, Mr. Keating. We can supply that also if you wish it.

Mr. KEATING. The purpose, I take it, or one purpose, for the creation of this Department to deal with businessmen is to eliminate the so-called 5-percenter?

Secretary MATTHEWS. Well, I do not know how the 5-percenters function, Mr. Keating. I do not know whether that would—— Mr. KEATING. You never have encountered them?

Secretary MATTHEWS. I personally never have encountered them. Mr. MICHENER. You were not here during the war?

Secretary MATTHEWS. No; I was not here during the war.

Mr. KEATING. You are not familiar with the statements of a highranking officer in a sister service, the Army, with reference to the fact that he knew 300 of these 5-percenters operating in Washington?

Secretary MATTHEWS. Well, he has had longer experience in his position than I have had in mine. If that has been his experience, perhaps I have some of it ahead of me; I do not know.

Mr. KEATING. But you have not encountered it yourself?

Secretary MATTHEWS. I have not seen any trace of it so far as the Navy is concerned in my 5 weeks that I have been here.

Mr. KEATING. Is it your intent and purpose, so far as possible, if you encounter such practice, to try to eliminate it?

Secretary MATTHEWS. I would do the best I could in that respect, Mr. Keating; yes, sir.

I will say this: I do not think it is necessary to have any 5-percenters to get a fair deal in the matter of getting business with the Navy or any of the military departments.

Mr. KEATING. In other words, there is no reason why a businessman cannot deal with the appropriate department of the Army or Navy directly?

Secretary MATTHEWS. Not the slightest; and I have had some in my office, and I think I can say with propriety that they have left well satisfied, I believe, with the treatment they have received.

Mr. KEATING. Both large- and small-business men?
Secretary MATTHEWS. Large and small; yes.

Mr. KEATING. I am glad to hear your statement. Thank you. Mr. MICHENER. Mr. Secretary, does your Department make any distinction in the manner of letting contracts in times of emergency as compared to times of peace?

Secretary MATTHEWS. Do you mean do we make any distinction as to whether contracts in times of emergency are let by bids or whether they are negotiated?

Mr. MICHENER. That is just what I am getting at.

Secretary MATTHEWS. Yes; there is a distinction in that respect. In times of emergency, we are relieved of the obligation to call for bids when the national welfare requires such action. Obviously, that would have to be so.

Mr. MICHENER. Surely.

Now, the thing I am thinking of is this: In times of emergency, the prime contractor too often is nothing but a broker; he has to let all the work out to subcontractors, pretty much of it, and he is the middleman between the Government and the fellow who does the work. I am very much interested-I went through the war here-in seeing that as many contracts of the smaller type that the smallerbusiness man can handle, are so let that the small-business man may have an opportunity to develop himself rather than develop through the larger contractor whom I call the broker in that case. I hope that, with respect to the question of monopoly, attention will be given to that phase of it.

Here is just one other thing I want to ask you about: We have had a lot of discussion here, in the last week or two, in the Congress on freight absorption, a very fundamental item with respect to monopoly, and I am sure you are familiar with it. What is your attitude toward that?

Secretary MATTHEWS. Well, that is a question that is rather difficult to answer.

Generally speaking, I believe that there is merit in basing point pricing. However, the Supreme Court has said that is not proper, not legal, and it cannot be done until the Congress-you men in Congress authorizes it. You know whether Congress is going to do that.

Mr. MICHENER. I am trying to get some help. The Senate passed the O'Mahoney bill in a day; it came to the House, and the House made some amendments. The House amendments made considerable changes to the Senate bill along that particular phase of it. You do not make the policy, but you are an expert who can give us information. Do you think that we should make the Supreme Court decision the law of the land or the congressional law as it was interpreted down through the years by industry the law of the land?

Secretary MATTHEWS. I suppose my opinion would be somewhat influenced by my geographical location as a matter of residence. I

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come from Omaha, out in the Middle West, and we feel out there that the basing-point-pricing program discriminates against industry in our section of the country and causes a concentration of industry in certain points; whereas, if it were possible for the location of these industries to be located in different sections of the country, the areas in the immediate vicinity of those locations would profit by lower freight rates and it would make for more competition in that respect. Mr. MICHENER. Then, if you were establishing a policy, you would be for establishing a policy as determined by the Supreme Court. Secretary MATTHEWS. Yes. My personal opinion, if it were to be considered in that respect; that is the thing that I would favor. Mr. MICHENER. That is all.

Secretary MATTHEWS. I cannot speak for the Military Establishment, because I do not know just what the other departments would say in that connection, and that opinion is a personal opinion, as expressed.

The CHAIRMAN. Mr. Secretary, you are very brave even in answering as you did, because somebody read all the debates in the House and the Senate on the question of the absorption of freight and the basing point, and he came out with this conclusion: that it was all. like a blind man in a dark room looking for a black derby which was not there. [Laughter.]

Secretary MATTHEWS. I do not know whether I could find my derby or not, Mr. Chairman.

Mr. DENTON. Do you think that the laws you have to comply with in procuring things for the Government, that is, competitive bidding, and so forth-do you think they tend to favor large business over small business?

Secretary MATTHEWS. It is pretty hard to tell that. It is a matter that has been concerning me since I took office.

For instance, we have a situation where there was occasion to repair airplanes a number of them and I have in mind now one particular concern, an airplane factory or industry out in the Middle West. It is not large enough to handle all that order of repair work, but it can handle part of it.

Now, the law requires us, of course, to give a fair portion of our procurement requirements to small business, and yet we cannot do that at the expense of higher cost to the Government.

We cannot give business to small business, or orders to small businesses just because they are small businesses. We have to take into consideration the costs, the ultimate costs, to the Government; and to that extent, yes, if it is the policy of the Government or the Congress that we should give business to small business just because it is small business, well, the law as it exists at the present time will not permit us to do that.

Mr. DENTON. During the war, of course, we abrogated all those rules.

Secretary MATTHEWS. We had to, of course.

Mr. DENTON. And we had negotiated contracts. Have you made any studies or have you had any studies made as to whether or not small business got more business under the negotiated contract than it did under competitive bid?

Secretary MATTHEWS. I do not have the answer for that, Mr. Denton.

Mr. DENTON. I wanted to ask you another question along that line: The Army system or the military system of supervising production for the Government, where you have a contracting officer, representatives in plants, and so forth, does that tend to favor in any way large business over small business?

Secretary MATTHEWS. I have not personally had enough experience in that field to express an opinion, I think, of any value to the committee, but I would not think it would.

Mr. DENTON. Well, now, what I am trying to get at is this: Is it easier in procurement to deal with a big company than to deal with a little company?

Secretary MATTHEWS. Yes, it is. I would say that, sir. And I think, too, that the personnel of the military Departments are human, and they are overworked as it is, from what I have been able to observe since I came into office, and anything that facilitates the negotiation of these contracts and the placing of these orders and the dispatching of the business, instinctively, like any other human being, they will do; and because a big concern can take all of an order and handle it all, if they can do it at a price as low or lower than a small business concern, the natural thing for them to do would be to give the order to the big firm.

The CHAIRMAN. Well, will it be your intention to follow that situation up?

Secretary MATTHEWS. My sympathies

The CHAIRMAN. Instead of giving one huge order to one huge entity, you might tell them to split it up and give 20 orders to 20 smaller entities.

Secretary MATTHEWS. First of all, my sympathies would be to divide it up among the small people, and I think it is to our advantage to do that, because we must keep these small businesses in existence. They are necessary. They are necessary, because in time of emergency the big companies cannot produce enough to supply the entire needs of the country for national security.

The CHAIRMAN. And that would require, of course, considerable supervision on your part?

Secretary MATTHEWS. Yes.

The CHAIRMAN. Would it not be well to see that those in the lower echelons were observing your admonitions in that regard?

Secretary MATTHEWS. I have two or three instances already where I have taken action in that direction.

The CHAIRMAN. Mr. Secretary, I do not know whether you can answer this perhaps, one of your aides might if you cannot: As I understand it, if my memory serves me correctly, there are certain sections in the statutes appertaining to the armed services procurement which give you and the Secretary for Air and the Secretary of the National Military Establishment the right to preclude or proscribe against any entities, any industrial entities or manufacturers guilty of price fixing or violations of the antitrust laws.

Perhaps your aide can answer that.

Secretary MATTHEWS. You are asking me if I know there is such a provision?

The CHAIRMAN. Yes.

Secretary MATTHEWS. No, I do not.

Admiral BOYLE. There is something in the law, Public Law 413.