section (c) which makes any excess payment a loan, bearing interest, and I think that the effect of subsection (c) will be to keep those estimates down because of the interest-bearing feature.

However, there is also the opposite consideration, that this committee has, or some members of it have, expressed at public hearings that there is a very distinct public interest in having these payments made promptly so that contractors will be in a position to provide further employment by entering other works. I think that that is one that is a matter or question of policy. I put it in, in a way which seemed to me to protect the interests of the Government fully, but if the word "minimum" should be inserted I do not think it will hamper us unduly. (See appendix, p. 141.)

The final provision of this draft is merely a provision embodying what has already been granted in connection with the "V" loans, and that is authority to any of the Federal Reserve banks to act on behalf of the various departments and agencies of fiscal agents. The "V" loan program has been carried out through the Federal Reserve banks and it is the intention of the War Department, if this legislation is enacted, to carry out its loan program in connection with terminations as closely as possible with the manner in which the "V" loan program, which has been very successful, has been carried out, and that last provision merely confirms the authority of the Federal Reserve banks to act as fiscal agents of the War Department.

The CHAIRMAN. You are doing that at the present time, are you not?

Colonel CUTTER. That is what we are doing at the present time. The CHAIRMAN. That is what I thought.

Colonel CUTTER. That is an explanation of what has been done. This draft has been prepared only since the committee met this morning. We have had not a chance, of course, to discuss it widely. It has not been consented to by anybody except as it has been done in this room before this subcommittee, and I do not think it can be said to be binding upon anybody except those who appeared before the committee to testify.

The CHAIRMAN. Have you completed your statement?

Colonel CUTTER. I have completed my explanation. I will be very glad to answer any questions.

The CHAIRMAN. Thank you very much. You have made a good explanation of the bill for us.

Colonel CUTTER. Colonel Mechem is very much more familiar with the "V" loan situation than I am, and I think he would like to add just a little bit, if he might.

The CHAIRMAN. Colonel Mechem, will you come around?

STATEMENT OF COL. JOHN C. MECHEM, CHIEF OF THE SPECIAL FINANCIAL SERVICES DIVISION, OFFICE OF THE FISCAL DIRECTOR, ARMY SERVICE FORCES

The CHAIRMAN. We would like for you to tell us what you think of this bill and how it affects your department of the Army?

Colonel MECHEM. Mr. Durham, I have been concerned in my division of the Army for some 3 years now with the financing of contractors who require Government aid, and so this ties in very closely with what we are doing.

88467-437

It has seemed to us that when the War Department enters into a contract with a contractor, which contract contains a termination clause, and when the Government for its own purposes terminates that contract and a legal claim under the contract arises from such termination, it is not only the right but it is the obligation of the War Department, first, to see that those claims are settled as promptly as possible, and, secondly, in view of the fact that all claims cannot be settled immediately to do whatever it can do to help the contractor finance that claim until the Government can get around to paying it. We are doing nothing, sir, except trying to finance our own claims, claims against the War Department.

1

We think, Mr. Durham, that as far as the guaranteed loans are concerned, we are not asking for a single thing that we don't already have, but there has been doubt cast upon our legal ability, our legal right, to make these loans when a fellow's contracts are all canceled, because our authority comes from the Executive Order 9112, the authority for which, in turn comes from the War Powers Act, and it is all predicated upon war-production contracts.

Can it be said that when a fellow's contracts are all canceled his operations are then necessary for the prosecution of the war? That is what the lawyers tell us, and so far as the portion of this law is concerned that deals with that, it is merely to enable us to do for a fellow whose contract is canceled tomorrow what we can now do for a fellow whose contract has not been canceled.

What difference is there, Mr. Durham, between a fellow who gets his guaranteed loan today and has his contract canceled tomorrow, and the fellow who has his contract canceled tomorrow and then comes in the day after tomorrow and asks for the loan? There is no difference in principle at all. Such a fellow should not be prejudiced.

We are going to have a great many cases where contractors have faithfully and loyally and patriotically used their own money for the production of the war contracts and have not asked for loans and then when they get those contracts canceled, they find that they are going to have to have help in carrying those claims.

The CHAIRMAN. Even after the War Department has terminated the contract, you have got, under your guaranteed-loan system, to be in a position to extend that advanced loan.

Colonel MECHEM. That is right. If we make a loan now to a fellow who has contracts, if we set up such a loan now, he can borrow after his contracts have been canceled and all we are doing is to try to correct and cure this little legal difficulty which might preclude us from doing it for a fellow who at the moment of the loan had no production contracts at all.

The CHAIRMAN. In other words, if this contract were terminated and he wanted to take other war work and you were not in a position to advance him a loan, because of the fact that his other contract was terminated and he wanted to take another Government contract for the war effort, you would not be in a position

Colonel MECHEM (interposing). He would be, after he got another war contract, but suppose he is going back to peacetime business. The CHAIRMAN. If he is going back to peacetime business, you would

not.

Colonel MECHEM. No; we fear that we would not. That is the sole purpose of this act, as far as we are concerned, as far as the guaranteed loan is concerned.

Mr. BURTON. You mean by that, Colonel, that your principal interest is for arranging for those who are going back to peacetime work after the termination of the contract?

Colonel MECHEM. No; I don't. There are two reasons why we are so anxious to have this legislation at this time:

First of all, it is going to set at rest the minds of contractors who, as you know, are so worried as to what is going to happen to them when their contracts are canceled.

And, secondly, it is going to diminish to and decrease, if not end, the inflationary tendency of contractors to come in now and borrow more money than they really need in the hope that they will have it available in the event of the cancelation of their contracts, when so much of their own working capital is tied up in inventory and receivables.

The CHAIRMAN. Does that complete your statement, Colonel?

Colonel MECHEM. It is not a formal statement, Mr. Durham. I will be glad to answer any questions that you want to ask me, if I can. The CHAIRMAN. We appreciate your coming before the committee. We have someone here from the Navy Department.

STATEMENT OF JOHN KENNEY, ASSISTANT CHIEF, PROCUREMENT LEGAL DIVISION, OFFICE OF THE UNDER SECRETARY OF THE NAVY

Mr. KENNEY. The subcommittee, I believe, has already received our comments?

The CHAIRMAN. We got that this morning from Under Secretary Forrestal.

Mr. KENNEY. Since I have been here, I have examined the proposed amendment to the revised draft, upon which Mr. Forrestal commented, and wish to state that the Navy Department has no objection. to the statute as now amended.

The CHAIRMAN. You feel that this bill, as drawn at the present time, is satisfactory to the Navy?

Mr. KENNEY. It is satisfactory to the Navy Department.

The CHAIRMAN. We thank you for making that settlement and coming before the committee.

Is there anyone else here to be heard at the present time?

Mr. Morgan, do you care to make a statement about this piece of legislation?

Mr. MORGAN. No, sir.

The CHAIRMAN. Is there anyone else to be heard on this matter? (No reponse.)

You people have been very helpful to the committee in trying to work out and solve this problem here.

(Whereupon, at 4: 35 p. m., the committee adjourned, subject to the call of the Chair.)

(Note suggested amendment, exhibit 7.)

(The following are appendices referred to in the testimony :)

APPENDIX 1

TERMINATION OF ORDNANCE CONTRACTS-1918

By J. Donald Edwards, Division of Historical Studies of Wartime Problems, Bureau of Labor Statistics

FOREWORD

This report, one of the studies of post-war problems now being prepared by the Bureau of Labor Statistics, is the first of a series on the cancelation of Government war contracts. It discusses the cancelation clauses in War Department ordnance contracts and the effects of post-armistice termination upon industry and labor. Many of the same problems are likely to recur at the close of this war.

During World War I, as at the present time, the War Department had no generally acceptable or widely used termination clause. The clauses used and procedures followed did not take account of the problem of employment, recognize the need for the resettlement of manpower, or provide a well-defined policy for the rapid settlement of contracts so as to maintain the liquidity of industrial firms. Lacking such provisions, there were protracted delays while the Department developed new administrative procedures. Manufacturers with informal contracts experienced further delays until the Dent Act of March 1919 validated such commitments.

At the time of the armistice in 1918 it was the announced policy of the War Department to delay cancelation of contracts wherever labor disturbances would result. In actual practice, however, local administrators speeded the cancelation of contracts, and few, if any, terminations were retarded because of the labor situation.

World War I post-armistice developments suggest many considerations for today's post-war program. These include:

1. Early definition of a cancelation policy supported by a simple, well-organized claim adjustment procedure, which does not exist at present.

2. Immediate enactment of enabling legislation to validate informal contracts; to provide for speedy settlement of claims; to assist industry through the difficulties that follow cancelation; and to insure continued employment for labor.

TERMINATION OF ORDNANCE CONTRACTS, 1918

THE PROBLEM

When the United States entered World War I it was not equipped to fight. The whole period of the war was spent in overcoming this deficiency. From April 1917 to November 11, 1918, the War Department acquired weapons and supplies valued at more than $14,000,000,000, of which $4,000,000,000, or about 30 percent, went for ordnance-the guns, the tanks, and the ammunition.1

At the time of the armistice the War Department had outstanding more than 24,000 contracts calling for production valued at more than 7.5 billion dollars. Ordnance accounted for 13,000 of these contracts, with a production value of $4,000,000,000, or more than 50 percent of the War Department's total obligations.2

The armistice came unexpectedly. Military plans were ready and contracts let for greater production in 1919 than in 1918. After the armistice there was no longer any need for the war materials and no place to store them if they were produced. Moreover, an economy drive swept the country; the continuation of unnecessary production was equally unpopular with the public, Congress, and the administration. The War Department quickly stopped production under its contracts.

TERMINATION CLAUSES

Termination or cancelation provisions agreed to jointly between the Government and the contractor for the discontinuance of military production "in the

1 Crowell, J. Franklin, Government War Contracts, Carnegie Endowment for International Peace, Preliminary Economic Studies of the War No. 25, Oxford University Press, 1920, p. 288. Higher estimates ranging from 28,000 upwards are cited in Final Report of the Board of Contract Adjustment and in Crowell, Benedict, and Wilson, Robert F., Demobilization, Yale University Press, 1921. Report of the Chief of Ordnance, 1919, p. 30. 2 Crowell, J. Franklin, op. cit., pp. 63, 96. Report of the Chief of Ordnance, 1919, p. 30. 3 Ibid., p. 30.

public interest" are the subject of this discussion. Provisions for cancelation in case of "breach by contractor" are not treated.

The almost universal use of cancelation clauses in ordnance contracts facilitated their termination. During 1917 and 1918, all "continuing process" ordnance contracts-those calling for production of materials similar to the products usually manufactured by the contractor-contained cancelation provisions. "Experimental" contracts-those calling for a product which the contractor was not acustomed to manufacture-frequently omitted termination clauses. When the experimental contract was followed by a mass-production contract, or in some cases when it was followed by a second experimental contract, however, the new contract contained some cancelation provision. Usually the termination provisions in the first contract with such a clause, were repeated without change in subsequent contracts for the particular product with the same contractor.

No termination clause was used widely enough during 1917 and 1918 to be called typical. Instead, termination clauses ranged from the very simple to the complex. Simple clauses merely authorized the Government to cancel "in the public interest" whenever necessary. Complex clauses, in addition to the authorization to cancel, carried intricate definitions of the obligations of both the Government and the contractor in case of cancelation. Both simple and complex clauses required the Government to give the contractor advance notice of intent to cancel. Thirty days' notice was usually specified.

Had the war continued, complex termination provisions would have become more prevalent. A new standard contract to be used for all War Department purchases was developed in September 1918.5 It contained the most complex termination provisions used during the war. A copy of this clause is attached in exhibit I. Even this clause appears simple, however, when compared with the termination provisions in use today.

As applied by the Ordnance Department, the cancelation provisions of the standard contract of October 1918 can be summarized as follows:

1. The Government could cancel whenever the Chief of Ordnance thought it necessary.

2. In event of cancelation, the Government would pay the contractor for articles delivered, for expenditures incurred toward completion of the contract, for depreciation or amortization of plant and facilities.

3. At the Government's option, the contractor would assign subcontracts to the Government after cancelation.

4. The Government could take over the contractor's plant and complete the contract after either cancelation in the public interest or breach of contract by the manufacturer.

Under the pressure of wartime conditions contractors made little or no objection to cancelation provisions. But they found that conformity with these provisions and with the Government's technical requirements was difficult, delayed settlement, and was expensive. The result was that during the post-armistice period the War Department found it difficult to let contracts containing cancelation clauses. The Department finally gave procuring officers discretionary authority for "the omisison or modification of the clause relative to cancelation and termination of the contract before completion." 996 From the Government's viewpoint at that time, such omission was of small moment since the procuring departments had the legal right to cancel contracts whether or not the latter carried a termination clause."

CANCELATION OF CONTRACTS

Immediately after the armistice, the War Department sent out notices to all contractors requesting them to suspend production under their war contracts. This was a request for patriotic cooperation; it was not based upon legal authority. Contractors responded promptly. Production ceased. Suspension was tem

9

4 Relative to Contracts, House Committee on Military Affairs, hearings on H. R. 13274, pp. 11-12.

Supply Circular No. 88, War Department, Purchase, Storage and Traffic Division General Staff, September 7, 1918.

National Archives, War Department, Quartermaster Corps, file 160.4, folder: Contracts (Raw Materials). Letter from Award and Contract Branch to Motors and Vehicles Division. National Archives, War Department, Quartermaster Corps, file 164.1, folder: Cancellations or Annulments, November-December 1918.

8 Final Report of the Board of Contract Adjustment, 1920, p. 4.

National Archives, War Department, Quartermaster Corps, file 160.4, Laws, Rulings, Opinions, etc., November 1918.