HC UC-NRLF GIFT OF MITCHELL WAGON COMPANY RACINE, WISCONSIN OFFICE OF THE PRESIDENT MARTIN J. GILLEN A simple and practical remedy for establishing the base cost and the profits of American Prod- ucers and Supplies of war goods to the Govern- ment, with the considerations which control cost and profit. Drawn from actual experience had in furnishing war supplies to the Allies and from actual operating conditions existing in manufacturing and supplying in this country. Under the application of the remedies set forth herein this Nation will save hundreds of millions of dollars annually and at the same time, with justice and fairness to all, help stabilize and keep normal the economic conditions in this country. This Plan is respectfully submitted in the hope that it will draw forth from the Exec- utive Officers of this Government; from the members of the National Council of Defense ; of the Advisory Board and their sub-com- mittees; of the General Staff of the Army; of the Quartermaster's Department; from the Governors and the members of the State Councils of Defense; our Editors, Business Men, Farmers and Working Men, such pub- licity and welcome criticism to the writer to the end that its principles may be strength- ened or modified for the benefit of our Government, and that the suggestions and criticisms may avail in presenting to the National Council of Defense and Advisory Board the best thought of this Nation on this subject to the end that justice may be done to the Nation, to the Producer and Supplier, and to the one hundred ten mil- lions of men, women and children living in domestic life in this Nation. MARTIN J. GILLEN. Racine, Wis., May 14th, 1917. To the National Council of Defense; Advisory Board; Quartermaster's Department of the Army and Navy; and American Business Men: The writer fully appreciates the great burden that has been thrown upon the National Council of Defense, its Advisory Board and the Quarter- masters Department of the Army and Navy within the last thirty days by the sudden declaration of war and the great unpreparedness of this country, and that it will take some months to perfect their organizations to accomplish telling results in supplying the Army, Navy and our Allies ; that the actual conditions under which the above bodies are now laboring have forced them to reach out and get supplies where most available with the least loss of time, and that they have not bad the opportunity to command uniformity in their price establishment. Thus anything that is said in this communication is not critical. The writer has only the highest commendation for the mag- nificent 'and effective work done by the . National Council of Defense ; the Quartermaster's Department of the Army and Navy, aud by the Advisory Board and its Committees to date. CONSIDERATIONS BEARING ON THE ESTABLISHMENT OF PRICES. THE FIRST CONSIDERATION in establishing the price which the government should pay for its and the Allies war supplies is a price sufficient in amount that will not impede the most rapid production of goods to meet governmental requirements, at a fair profit to the producer with the thought ever uppermost that the government and Allies should be treated as the most favored customer of the producer or supplier. THE SECOND CONSIDERATION is the careful placing of all orders by the government in each producing or supplying group so as not to upset the economic conditions surrounding (a) each group of war supply producers, (b) their emploj^ees, (c) the price of raw material usand the increased production will be so small that it will not upset economic conditions surrounding each paid Group and much m)o:ney will be saved. Consideration, of course, must be given to the great producing centers of shoes, such as about Boston, St. Louis, Cincinnati and like centers, which provide great quantities of shoes for their surrounding economic belts. The increased price caused by the abnormal changes made by placing the orders with a few rather than all members of the group drives up the general cost of shoes for the one hundred ten millions of men, women and children beyond normal increases. Another illustration : Take wagons ; assume that for the next twelve months the government will require about seventy thousand units. A pre- liminary order for eight thousand was at hand two weeks ago. There are about ten big wagon factories besides those of the southeastern states. The army specifications have already been standardized to meet the factory tool equip- ment and the raw material markets of this country. The placing of the wagon orders with two or three, or possibly four, of the big wagon companies would cause those companies to go out into the open market for raw material besides the stocks they have at hand and will compel them to buy in many instances from the yards of the other wagon manufacturers. Prices will shoot up over night. Normally the wagon manufacturers of this country produce 250,000 wagons and nearly every wagon company can build the army wagon under the standardized specifications. A large amount of useless transportation on raw stock and on the shipping of the finished product to far removed points and increased prices not only to the government, but to the farmers who use annually 250,000 wagons will occur, and thus the wagon group would not have its economic con- ditions materially changed when the orders are spread over the group The in- creased production could be absorbed without such marked economic changes. The writer appreciates there will be many instances where this cannot be ap- plied but is suggesting the principles so that they may be applied where pos- sible. THE THIRD CONSIDERATION is the establishment of a committee on specifications and information, whose duty it is to immediately notify the units in each group with (a) the rules under which inspection of goods is made ; the method of cancellation of orders ; payments, supply of raw material, etc., and (b) a brief but technical description of the specifications and requirements, immediate and for the year, of the government in that particular group spread across the country, and have on file in at least eight of the principal Quarter- masters Departments across the country a copy of the specifications and blue- prints of the things required by the government which do not disclose any of the secrets of manufacturing which they wish to withhold. During the plac- ing of Orders for the first year and a half by the French, English and Russian Governments in this country, the following conditions caused the Allies to pay very heavy and unnecessary exactions in the way of profits: First: The failure of the French, British and Russian Governments to publicly and directly so arrange that the American producers could get and keep in touch in this country with their duly authorized buying com- missioners, together with a brief description of their specifications and the amounts required. Because of this failure on their part they werte forced to purchase in a very limited market. The policy of the French Commission developed finally into buying from only two sources of supplies within a given group of manufacturers or suppliers, which caused them to pay profits from thirty to one hundred percent. The British Government later corrected this condition in a limited degre'e, as did the French, by buying through J. P. Morgan & Company, but even thereafter their orders were placed in a very limited field because they were mostly placed as near the eastern, coast as possible in order to save transportation charges. The result however was a small saving in freight but excessive profits totaling many times the freight bill. Second: The French, British and Russian Governments required im- practical guarantees on their goods similar to the ones employed by our Govern- ment before this war when it was purchasing for thirty thousand troops in a limited market which it had created through the arbitrary specifications of the Army and Navy. The early guarantee of the Allies was so rigid and so out of harmony with the customs of guarantees prevailing in this country in the big American market that many high grade manufacturers did not take any orders and those that did added a good sized percentage to their cost so as not to have a loss. The remedy for this is to have inspectors who have been trained in each line of goods that is purchased, inspect supplies (a) while they are being manufactured and (b) when finished and before shipped. War use is the hardest use goods can be put to and no manufacturer can reasonably be ex- pected to guarantee them without being protected, for in the ultimate, the government must pay for the goods it requires, of the kind it specifies working under actual war conditions. The perils to goods in war conditions are so unlike those under peace conditions that this risk should be taken, over by the government . It should be furnished with honest and well made goods and it should get this through its inspectors before the goods are shipped. BY ASSUMING THIS RISK THE GOVERNMENT SAVES MILLIONS OF DOLLARS, FOR IF IT DOES NOT ACCEPT THIS RISK IT MUST PAY THE MANUFACTURER FOR CARRYING IT, AND SINCE IT IS OF SUCH A DOUBTFUL NATURE THE MANUFACTURER WILL TRY TO FIX A PERCENTAGE THAT WILL FULLY PROTECT HIM. Then too under the remedy provided below all opportunity, desire and incentive to cheat and defraud is removed. I am informed that on the war supplies furnished by the American manufacturers the French, British and Russian Governments did not have occasion to insist on collection but in few instances, and thus the American manufacturers received an additional profit to the extent of the percentage for guaranteeing protection that they added to their goods and in general it would work out the same with our own government. Fraud in manufacturing goods should be sternly punished by imprisonment and heavy confiscatory fines. Third: The fear of the cessation of hostilities or the change of war needs by the Allies added another contingent liability which each manufacturer charged to the Allies in a percentage on its goods. Our government should agree to stand all loss to the suppliers and manufacturers upon orders duly given in case of the cessation of war in the change of orders given by the government under some equitable and businesslike arrangement that can readily be furnished. Unless this is done reasonably and equitably the manu- facturer and supplier must add additional charges to protect him from loss in this regard. Again in the ultimate, whatever loss must be taken from these causes, must be assumed by the Government. In open, hard competition among seven competitors on a certain war order for France (in which the writer was personally interested), the above elements caused the American manufacturers who were bidding to so price their goods that the French Government was compelled to pay for a certain order of goods that cost the manufacturer $112,000.00 the sum of $216,000.00 or a profit of $104,000.00, which was almost one hundred per cent of the cost price. All of the above elements of doubtful liability to the manufacturer and supplier can be easily eliminated by our government with a tremendous sav- ing to it. THE FOURTH CONSIDERATION goes to the merits of the varying amounts or percentages of profit to the producers or suppliers from the stand- point of justice to our government and the economic welfare not only of the men who sell to the government but to the nation at large as it is affected. Under this section each class must be treated differently in the amount of percentage of profit allowed: First Class: (a) Those Groups of manufacturers or suppliers who do wholly at a modified price as to delivery, so as to expedite the early need of army shoes. They fall within the First Class under Consideration Four above. Another illustration is that which appeared in the advertisement of the Bethlehem Steel Company a few months ago, where they made an offer to the government to furnish supplies at cost plus, as I now remember, either five or six per cent profit. They too fall somewhat within the First Class under the Fourth Consideration above, but since the war has started it looks as though they have or will move largely into the Second Class under Considera- tion Four above. Many other illustrations of the truly patriotic business man are at hand. It is the manufacturing and supplying "slacker" that the Government must be protected against. THE SIXTH CONSIDERATION : Every American manufacturer and supplier engaged in domestic business, who is so fortunate as to be within the group which receives war orders from the government, will during the war receive a portion of his factory overhead expenses and a profit much in the nature of governmental insurance or subsidy, while (as has been the case with England, France and Germany) a large percentage of the balance of the manufacturers and suppliers in this country will be forced to limit their ac- tivities and some of them will be absolutely prescribed so as not to use labor and material which is necessary and which must be diverted to war purposes. One can readily understand how our Government must quickly and sternly divert, for instance, steel products and their accessories from domestic uses to war purposes for making munitions; machinery and equipment for rail- roads, for farm implement purposes, and the like at whatever economic sacrifice to the other less fortunate Groups. Thus the burden falls on the latter class to carry their business through war times without governmental aid and under heavy restriction. In England there is today a list of over fifty occupations, trades, businesses and groups in which men from eighteen to fifty-six years are not allowed to be employed. In that class too their wants for raw materials and supplies are made secondary, to the needs of the Gov- ernment, which in itself is a very hard and distressing burden. It must/ also be kept in mind that the agricultural classes, the war suppliers and labor generally will not be cut in price or injured in their groups and occupations. This being so, they should not unduly profit on the supplies they furnish to our Government and the Allies to whom we are furnishing the sinews of war, while their less fortunate fellow manufacturers and suppliers are being unduly limited by conditions over whic'h neither they nor the Govern- ment have control. It makes no difference whether thej burdens of prescrip- tion and limitation come by fiat of law or indirectly by the orders of the Government placed in its efforts to take care of its war needs of its citizens. The great moral fact of justice remains that this must not be a war of profit, and prices must be curbed and kept as normal as is possible during the economic changes that the country is now passing through. REMEDY OR APPLICATION OF PRINCIPLES TO THE ABOVE CONSIDERATIONS IN ORDER TO ESTABLISH THE PRICE OUR GOVERNMENT SHOULD PAY FOR ITS AVAR MATERIALS AND THE PROFIT TO BE ALLOWED TO THE MEMBERS OF THE CLASSES SET FORTH IN CONSIDERATION FOUR, REMEDY ONE: Under the First Class set forth in the Fourth Consideration on page seven, the Government should pay the manufacturer's or supplier's cost plus five per cent profit. Each of the manufacturers and suppliers of the three divisions of that Class should furnish to the Government a statement of his costs as taken from his cost records under the oath of the President, Treas- urer and the man in charge of his Cost Department, In that statement there should appear (a) the actual) cost of the raw material going into the manu- factured article with the freight, handling and carrying charges set forth which constitutes the cost of his raw material, (b) The estimated direct labor to be expended on the order, (c) The estimated overhead containing such items as power, insurance, taxes, depreciation, repairs, general factory expense, pattern expense and such labor overhead expenss as have been- cus- tomary according to the records of the books -and files of the different groups of manufacturers and suppliers. These items will constitute the cost basis upon which the percentage of profit is to be given. At the termination of the contract with the Government the supplier or manufacturer will furnish under oath of its President, Treasurer and Cost Man a statement showing the actual cost of labor, material and overhead itemized by the same method and comparable with the submitted preliminary estimate. If the cost has been less the Government shall have an advantage by way of a rebate if it has been more the Government shall pay the additional charge to the manu- facturer or supplier The contract shall be made with the supplier on the basis of his preliminary estimated cost and his payment shall be made on that basis subject to the final adjustment. Under any plan that may be determined the Government will, as it does now, pay all of the above items constituting the manufacturer's costs. The manufacturers 'and suppliers in this country operate their business on that basis and know the estimated cost of their business operations; in a word, all of the above items constituting cost are susceptible of being clearly defined by each supplier. The banks of this country do not loan money to 'manufacturers and suppliers unless they have proper cost systems by which the annual opera- tions of their business can be determined. Edward N. Hurley, Chairman of the Federal Trade Commission, on July 1, 1916, issued for the benefit of small companies a pamphlet entitled "Fundamentals of a Cost System for Manu- facturers." It followed the system which has for all practical purposes been in operation for years everywhere in this country, so there can be no excuse for any supplier or manufacturer falling to provide the Government with actual costs. THEN TOO OUR GOVERNMENT COLLECTS EVERY DOL- LAR OF ITS FEDERAL INCOME TAX FROM MANUFACTURERS AND SUPPLIERS ON THE ABOVE BASIS. FOR AT THE END OF EACH FISCAL YEAR UNDER LAW THE GOVERNMENT ACCEPTS THE SWORN STATEMENT OF THE OFFICERS OF EACH CORPORATION AND FIRM OF THIS COUNTRY AS TO ITS ANNUAL BUSINESS OPERA- TIONS SO AS TO ESTABLISH THE AMOUNT OF PROFIT UPON WHICH THE INCOME TAX IS LEVIED. ALTHOUGH THE FEDERAL INCOME TAX WILL BE GREATLY INCREASED THIS YEAR, THE SAME METHOD OF COLLECTION WILL CONTINUE. The Government has in its employ expert accountants whose duty it is to mspect the book records of the various firms and corporations of the United States to see that they are not avoiding the Federal Income Tax under their method of bookkeeping:. Then too the corporations and suppliers of this country and the Fourth Class above, to-wit: those producers or suppliers who are compelled to build new plants and make new investments to take care of the new Army, Navy or National needs, of which there, is not an ample supply in this country, such as additional ship building present temporary difficulties. The French and Russian Govern- ments met those difficulties in this country by advancing a percentage of the cost to the manufacturers and suppliers to build additional buildings and equipment; then allowed them to put a sufficient profit on the goods tb take care of the entire investment in addition to the profit that was allowed, so that the manufacturers or suppliers could scrap the entire build- ings and equipment at the termination of the war orders with total loss to the French or Russian Government and to such