costly machines. I asked what happened to that machinery when it needed replacement.

The statement was that we simply got it through maintenance and operation accounts but it never was capitalized.

Now, that is the process whereby the military is enabled to go into civilian type business without the Congress and Appropriations Committee realizing they go in there. If they can buy this capital equipment through maintenance and operations accounts. So the question is whether the accounting system now is such so you can catch these capital goods items and question whether their purchase is advisable.

GOVERNMENT COMPETITION IN BUSINESS

Mr. MCGUIRE. We are in this program and we are on both sides of the fence on this commercial and industrial competition.

Representative CURTIS. Yes, on the other side I was going to ask you to explain something for that, is this business of getting out of a lot of business you are already in?

I know that a lot is being done on that.

I will say that I think the Congress here in this instance is at fault-this is my judgment-in hampering your attempts to get out of some of the civilian operation.

Mr. MCGUIRE. Any new start must be reported to my office.

We have tightened up on what is a new start in this program under the direction of the Bureau of the Budget. This is fundamentally a Bureau of the Budget program, as you know. The specific point you are making, would be the replacement of, let us say, a new cylindrical grinding machine. I am not 100 percent sure I would get at that one, but I do get at it indirectly in this way. I have recently come across several of these cases where a department wants to buy. It is required that they screen the idle machine tool list that we have and we raise the question: What kind of thing is this being used for? and do we have one in inventory that will satisfy our need? There have been many instances of that lately.

We have also had several instances where we stopped procurement of tools because we felt we had adequate tools in packages which we were breaking up. We are seeking to do this, due to our past requirements changes. This results in more production than we can foresee requirements. We are trying to retain only that equipment for which a firm requirement exists.

A great example of this is the Michoud Ordnance plant package for tank engine production. We had a greater mobilization capacity for tank engines than we would need. So we disbanded this plant, diverted the tools to facilities where we needed more efficient tools or else disposed of them.

I am not always in a position to catch this kind of thing. I cannot assure you I will catch every one. I am exposed to it. I think we ought to probably get in it deeper.

Representative CURTIS. I think it would form just like warehousing, and I am very pleased with your figures on that, warehouse space is a good checkpoint to find out overall inventory.

Mr. MCGUIRE. That is right.

Representative CURTIS. So this area of expenditures for these goods, for these things, in industry, would be capitalized and called capital goods, is a good checkpoint.

Mr. MCGUIRE. I have never understood as a businessman coming in here where it is proper for the Government to be in business, why we do not capitalize these tools and really set aside the reserves so that we can replace a tool when it becomes inefficient-I am sure that Congress wants us to have the best, they have well demonstrated that— that we can sell the old tool and buy a new one.

Now, we have made some steps in this direction in encouraging the services to go into this so that we can offset the sales price of the new tools with the returns of the old tools. This is encouraging them. I am not speaking in terms of hundred-year-old pieces of equipment.

Representative CURTIS. That is the efficiency in the other direction, from another line, but I think it should be a matter of cost accounting.

Also, if this were set up on good cost accounting, the military would see very conclusively that they cannot

Mr. MCGUIRE. I think it would make it easy for us to get funds from Congress because they would recognize the machine was worn out or inefficient.

Representative CURTIS. One gentleman said in St. Louis the Army probably could make automobiles cheaper than General Motors because they do not have to pay taxes.

Of course, he had not even included his salary as a cost item in his estimates.

Mr. MCGUIRE. Let us not make this suggestion.

MOBILIZATION RESERVE

Representative CURTIS. He said, "The Army would have to pay him anyway."

I think if we got some good cost accounting in here on the capital goods, it would be very helpful. Now, my final observation for further comment, and I think you have developed it to some degree, you have talked about the mobilization reserve. In that, of course, we do not necessarily have items that we have inventoried but we check whether we have the production capacity. In other words, there is no sense in grinding something off the production line and storing it if we know that we have the capacity to produce it within a month's notice.

Mr. MCGUIRE. I would like to see if I can skirt this.

This is a complicated subject. Obviously, we are talking about mechanics. This is getting into high security areas.

Representative CURTIS. I do not want you to get into that.

Mr. MCGUIRE. Fundamentally, what we are trying to achieve with our mobilization reserve is a reserve that will give us capability to execute a mission immediately and replenish the attrition during that

mission.

Now, we take into account the pipeline time-how long do you have to take to get a bullet you shoot replaced?

It is obvious if we get into a limited war and we shoot half our bullets we depreciate our position to fight a general war if that should be a factor or if the limited war spread out to greater areas.

So we must consider the production capability.

We are attempting, and I think we are succeeding, in not putting into war mobilization reserves, everything that everybody under any circumstances might conceive of. There are certain long leadtime items you might have more of but short leadtime items you practically have none of, because you can replace them or get them off the shelves of industry.

Representative CURTIS. You are talking exactly of what I was concerned about because I think some of the items in the garbage pails, as I described it, have been purchased unnecessarily from an unrealistic standpoint.

Someone mentioned some friction tape. It happend to be listed on the disposal list as N-1 but they examined it and it was N-1 all right, from the standpoint of never being used, but it was 8 years old and therefore of no use.

I was thinking in regard to that point.

Mr. MCGUIRE. I am glad you brought this up. We have also put some work in on the business of the turnover of these stocks. There are certain of these stocks that are perishable.

Now, you have to have, depending on the item, a variable system. Under the former so-called sanctity of the mobilization reserve, you could not segregate the variables.

There are certain items that you can take a calculated risk on a replacement basis to turn them over. We have this problem in food. Representative CURTIS. That is what the trouble with the hamburgers was.

I will pinpoint what this is and then close up. You see, we have brought out the discrepancy again between the services in their mobilization reserves.

Surely if an item, handtools or whatever it is, is regarded as being all right as a turnover item or short lead item or long lead item, there ought to be some similarity in the various services. Yet here is the percentage distribution of GSSM inventory held by military services by retention categories. Here in mobilization, Army 4 percent; Navy 17; Air Force 1; Marine Corps 19.

In the economic reserve there is likewise a great discrepancy: Army, 4; Navy Reserve, 3; Air Force, 15; Marine Corps, 22.

Mr. MCGUIRE. I think those figures are ours that we developed for the purpose of correcting the thing you are talking about.

Representative CURTIS. Let me make this very clear. A great deal of the information that this committee has is the result of the fine work that you people have been doing, particularly in the past year or so. We certainly want to commend you for it.

Yes, we are throwing a lot of the figures back at you and I know you people evolved them just to point out the things we have been discussing.

Mr. MCGUIRE. I was trying to give you the reason. I will not tell you today that we have completely solved this problem, but I think that we can say that within the foreseeable future, and I mean in the

fairly soon, quick future, that this one is really going to be nailed down tight.

The services recognize this.

This is the healthy aspect of what we are trying to do here.

I am particularly grateful, for the approach that this committee has taken and I think it should be commented on, that instead of making them a horror case story you have used them intelligently. When these people learn that when they get the facts out on the table so that you can examine them, that they are not going to get murdered, you will get more facts out of them.

We have been preaching this and I am glad to be backed up on this promise.

Representative CURTIS. In our technique, the committee technique, it is bound to bring this out as if it was a horror type thing. Naturally, you illustrate a point by what turns out to be an extreme example. Mr. MCGUIRE. Fortunately, in business, I did not have a committee investigating our inventory.

Representative CURTIS. That is the difference. Maybe we ought to end on that note.

In the private enterprise system, if we keep the marketplace free, competition performs that function because the company that does not use good techniques goes broke.

Mr. MCGUIRE. That is correct.

Representative CURTIS. Unfortunately, in this process with all the good will in the world and I think that is true of most of our military personnel, capable people, dedicated people, but they are in a system where there are not these automatic checks. Somehow or other we have to dig into them to find out how we can supply a check that will be second best, it will always be second best, in my opinion, to the marketplace system. Any time we can put it back into the marketplace we should save if we keep that marketplace competitive, rather than putting a uniform on it or have the Federal Government do it. through the budget process. Let us put it this way, with all of the criticisms that are coming out, we have a system, a military systemmilitary supply system that I am satisfied is head and shoulders above any of our enemies.

All we are trying to do is to make it that much better and continue to perfect it.

I want to thank you, gentlemen.

Mr. MCGUIRE. Thank you very much.

Representative CURTIS. The committee will stand adjourned until tomorrow at 10 o'clock.

(Whereupon, at 5:20 p.m., the committee recessed to reconvene at 10 a.m., Saturday, January 30, 1960.)

IMPACT OF DEFENSE PROCUREMENT

SATURDAY, JANUARY 30, 1960

U.S. SENATE,

SUBCOMMITTEE ON DEFENSE PROCUREMENT OF THE

JOINT ECONOMIC COMMITTEE,

Washington, D.C.

The subcommittee met, pursuant to recess, at 10 a.m., in room G-308, New Senate Office Building, Hon. Paul H. Douglas (chairman of the committee) presiding.

Present: Senators Douglas (chairman), and Sparkman, Representative Curtis.

The CHAIRMAN. The committee will please come to order.

STATEMENT OF PERRY M. SHOEMAKER, PRESIDENT, LACKAWANNA RAILROAD, REPRESENTING THE COMMITTEE OF HOOVER COMMISSION TASK FORCE MEMBERS; ACCOMPANIED BY GEN. ROBERT E. WOOD, CHAIRMAN, HOOVER COMMISSION TASK FORCE ON USE AND DISPOSAL OF SURPLUS PROPERTY; AND FRANK UPMAN, JR., EXECUTIVE SECRETARY OF THE COMMITTEE OF HOOVER COMMISSION TASK FORCE MEMBERS

The CHAIRMAN. We are very happy to have with us today Mr. Perry M. Shoemaker, president of the Lackawanna Railroad, and Gen. Robert E. Wood, longtime president and executive officer, but now retired chairman of the board of Sears, Roebuck & Co.

These gentlemen were chairmen of committees and subcommittees of the Hoover Commission, dealing with the organization of the Defense Department and specializing in the field of supply.

I understand Mr. Shoemaker is going to speak first.

Mr. Shoemaker, I remember your excellent testimony before the Appropriations Committee in 1957 as a representative of the U.S. Chamber of Commerce. Your testimony was at that time forthright, courageous, and to the point.

I hoped that in that year we could strengthen the O'Mahoney amend

ment.

We were both in agreement on that point, but we were unsuccessful. I think you may proceed in your testimony as you see fit. Perhaps you can paraphrase it so that it will give us more time for questions. I particularly want you to point out how far we have actually progressed in this matter and what you think we should do from here on.

We had a very glowing picture yesterday afternoon from the Assistant Secretary in charge of logistics and supply and the general im

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