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MY DEAR MR. SECRETARY: This year marks the fifteenth anniversary of the post-World War amendment to the National Defense Act-the charter of our national security. The experience of the years previous to its enactment are embodied in the comprehensive provisions of the act. It gives legislative expression for the first time to the fundamental truth that plans for the mobilization of the material resources of the country must be coordinate with plans providing for manpower. Section 5a of the act places on my office the responsibility for supervising the procurement of all military supplies, and other business of the War Department pertaining thereto; and for the assuring of adequate provision for the mobilization of matériel and industrial organizations essential to war-time needs.

The period since the enactment of this measure has been of such length as to justify the expectation that real progress should have been made in developing an organization to perform the allotted tasks; and in formulating plans, at least workable, although not complete, for an orderly and rapid production of supplies in case of war. It is now possible for me to take stock of what has been accomplished. My review of the work done convinces me that satisfactory progress has been made along lines which should guarantee to the country that our industrial war effort will furnish the necessary military supplies promptly and with a minimum of confusion. While it cannot be expected that the plans will prove perfect in every respect, I do feel that they constitute a carefully thought-out procedure for bringing to bear timely in a national emergency the vast force of our great industrial machine. We have reached the point where increased personnel must be assigned to the task in order to realize on the results already accomplished.

During the late period of economic depression some opportunity has been afforded for checking our plans for the procurement of supplies. In my previous report to you I discussed the satisfactory working of these plans during the mobilization of the Civilian ConSt. "vation Corps and the subsequent supply of its units in their work calaps. Especially during this past year the War Department and crtain other agencies of the Government have been afforded opporanity to check the progress made in preparing the country industrially for war and in improving the methods of procuring military supplies. During this period the findings of the War Policies Commission and the War Department's plan for the mobilization of industry have been under the careful scrutiny of committees of Congress, particularly the Nye Committee. These documents were also studied by a special committee, of which Mr. Baruch was chairman, appointed by the President to make recommendations toward insuring the elimination of profits due to war. It has been a year in which unusual thought has been focused on the industrial phase of national defense. I have welcomed this opportunity to review the progress made in carrying out the task assigned to my office by the National Defense Act. I was particularly glad of the opportunity to obtain the ideas of agencies of the Government outside the War Department and to study them in the process of perfecting our plans for the procurement of war-time supplies and for industrial mobilization. The deliberations of the committees of Congress have culminated in a bill (H. R. 5529), as reported by Mr. Sheppard for the Senate Military Affairs Committee. I am in hearty accord with the spirit behind this bill, despite the possible disadvantage that legislation of this nature may prove premature, in case we realize our hopes that war may be long deferred. Further study as to the details of this bill will be necessary, but I am confident that satisfactory agreement can be reached. Its enactment in suitable form will permit industrial plans to be prepared in a more definite way. If such legislation is in effect when war is declared, control measures can be put into effect without the delay incident to legislative action. I believe the results would be of ma

. terial benefit to all Government agencies concerned and would assist in making possible the rapid inauguration of the measures necessary to provide an early start for our industrial war effort.

The question of removing the profits from war is naturally one of prime importance to the Government and the people of this country. This question is so intimately linked with plans for the mobilization of industry and war procurement that I feel that I should particularly emphasize one phase of it here. It is appropriate, I believe, to state that primarily the object of war is to gain a complete victory, and that to achieve this end, in a war of major proportions, the full production effort of the country will be required. I wish to stress my deepest interest in and sympathy with any reasonable and effective effort to minimize profit in war.

While it is highly important that war profit be kept within a reasonable limit, this worthy undertaking must not be allowed to assume any form which, by unfairness to any element of our people and adverse affect on the national morale, will prevent attainment of the vital goal of producing the necessary war materials at the time needed. Time is the critical element; and our Nation must produce the munitions needed as quickly as, or more quickly than, any foe with which it might become engaged in armed conflict.

I am forced to the conclusion that this country must look to its great private industry for the supply of munitions. In order to make our national defense effective, private industry must be sufficiently flexible to adapt itself to the production of war materials soon enough after the opening of hostilities. It follows that American industry should be prepared to perform its war mission. This means that industry should be given munitions work in time of peace, for any plant that has once produced munitions is thereafter better qualified to produce the same munitions in war.

I feel impelled to emphasize the importance of obtaining legislation which will permit the War Department, in time of peace, to place educational orders, so that selected industries may actually produce, before the emergency arises, a limited amount of the kind of matériel assigned them for war manufacture. Under the present laws requiring competitive bidding, no assurance can be given that

any selected plant could receive su: educational orders. If industry is to be expected to get into quick

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production of war materials, some assistance of this nature must be given by the War Department in time of peace.

Another important element of the control of profit in war is that dealing with contracts. In former emergencies competitive bidding for the products of industry by the procurement agencies of the Government and by the civilian population sent all prices into a rapidly ascending spiral. The normal peace-time relationship between seller and buyer was reversed, so that instead of manufacturers being forced to lower prices in competition for business, they were induced, and at times almost compelled, to raise prices as normal production capacity was approached and exceeded. The urgent need of munitions, noncommercial in character, often caused the placing of ill-considered contracts, which resulted in undue profit to contractors. As a part of the program to limit the war profits of business concerns to fair and reasonable amounts, I realize the importance of developing a contract form and contractual procedure which will accomplish the desired results. To this difficult problem the Planning Branch, assisted by the Navy and other Government agencies and the voluntary efforts of representatives of labor and industry, has applied itself. Procurement planning has now progressed to the point where definite decisions should be made respecting the contractual procedure in the event of a war emergency.

Proposed forms for war contracts have been in existence for a number of years, but were never formally approved until recently. During the year, the board of officers appointed for the purpose of

standardizing the form of war contracts made an intensive study of i the forms that had been revised in 1931. Changes recommended by

this board were embodied and the forms as finally recommended have been approved. It is not intended that approval will terminate the study of war contract forms. Free comment and criticism have been invited from the supply arms and services as well as from the Navy Department. It is intended to revise these forms annually if necessary. Although the contract forms have been approved, this phase of procurement planning is still in the development stage in regard to fixing the conditions under which the various forms will be used, the method of selecting contractors for evaluated fee and adjusted-compensation contracts, the procedure for fixing the price in fixed-price negotiated contracts and the provisions to be made for contract review.

One of the most important problems which has caused some concern in the preparation of plans for industrial mobilization is the definite concentration of industry in the northeastern section of the country. This concentration has resulted in a heavy war load being placed on the procurement districts of that area. From a strategical viewpoint this is unfortunate. I have had this condition studied during the past year and I have become convinced that it will be impossible for many years, at any rate, to ameliorate the situation to any great extent. For various reasons industry has grown and developed in certain sections of the country. The War Department must of necessity accept generally the present geographical location of industry. However, I have had regulations adopted that will require the supply arms and services to utilize to the utmost the industrial facilities of other sections of the country.

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Another important project which is under my supervision is providing adequately for launching the emergency industrial construction and conversion program immediately after the war emergency has been declared. The steps, of course, include the adoption of a program, the preparation of a detailed plan, the working out of a proper construction organization, and the development of policies governing the procurement and distribution of critical building materials. Dur. ing the year my office received from the supply arms and services data showing the proposed scope and location of each major project. These projects must be coordinated and priorities established on the basis of command deci ions. This problem is now being attacked and we can confidently expect during the next year definite progress toward insuring the rapid construction and conversion of the necessary war-time facilities.

The procurement planning of the War Department has disclosed the probability of serious shortages in certain items of equipment. Requirements in the abstract are determined solely by military considerations. As a practical matter, however, the requirement figures used as a basis for war procurement must take into consideration the productive capacity of the country. Under these circumstances, requirements must, of necessity, be revised to the end that all available capacity is utilized in the production of those items most needed for the success of the military effort. Some progress has been made in the adjustment of requirements and this will be continued. Heretofore, the policy has been followed of allocating individual manufacturing facilities to particular supply arms and services. siderable number of these are allocated to supply arms and services requiring only a small part of the potential plant capacity. It is exceedingly important that this excess capacity be utilized in war. Accordingly, I have initiated steps to correct this situation. A method of procedure for dividing allocated facilities between the Army and Navy also has been put into operation. Progress is necessarily slow, but it may be anticipated that an equitable division of facilities between the Army and Navy will be achieved within a reasonable time.

The Industrial Mobilization Plan covers the necessary procurement supervision and also provides for the organization of agencies for the mobilization of all industrial elements of the Nation in support of the military program. However, the plan contemplates that these central agencies will be operated by civilian personnel appointed by and responsible to the President. It is contemplated that the Wår Department will step aside from participation in super-agency control of national resources and thereafter devote itself to its own war effort. However, there is a very important period between the declaration of war and the time when full super-agency control is attained. A plan to bridge this period has been prepared. This plan is based on the assumption that the Army and Navy Munitions Board, a permanent peace-time body, will form the nucleus for the War Industries Administration. I am glad to report that this Board has been very active during the year. It has made unusual progress in solving the problems for which it was created, as the coordinating agency between the War and Navy Departments in planning for war-time supply.

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