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STUDY OF MONOPOLY POWER

FRIDAY, JULY 15, 1949

HOUSE OF REPRESENTATIVES,

SPECIAL SUBCOMMITTEE ON THE STUDY OF MONOPOLY POWER, OF THE COMMITTEE ON THE JUDICIARY, Washington, D. C. The special committee met, pursuant to adjournment, at 10:05 a. m., in room 346, Old House Office Building, Hon. Emanuel Celler (chairman) presiding.

Present: Representatives Celler, Bryson, Denton, Michener, and Keating.

The CHAIRMAN. The meeting of this committee will come to order. We have with us the Honorable Francis P. Matthews, Secretary of the Navy, and I am sure that he will have a very, very important message for us. We will be very happy to hear you at this time, Mr. Matthews.

STATEMENT OF HON. FRANCIS P. MATTHEWS, SECRETARY, DEPARTMENT OF THE NAVY; ACCOMPANIED BY REAR ADM. J. D. BOYLE, ASSISTANT CHIEF, OFFICE OF NAVAL MATERIAL, DIRECTOR, PROCUREMENT POLICY DIVISION; REAR ADM. GEORGE L. RUSSELL, JUDGE ADVOCATE GENERAL; AND LEONARD NIEDERLEHNER, COUNSEL, MUNITIONS BOARD

Secretary MATTHEWS. Mr. Chairman and members of the committee, I have a prepared statement that I would like to present, to begin with, and then if there are any questions, we will do the best we can to answer them.

It is a privilege indeed to appear before your committee in response to the invitation to the Secretary of Defense, Louis Johnson, who, because of urgent prior commitments, is unable to appear today.

My statement represents the views of the National Military Establishment, and I speak for all three of the military departments. Recognizing the breadth of your present study, I believe that, in keeping with your invitation, I should confine myself to those areas in which the problems of small business and big business affect the military departments-principally in the area of procurement of supplies, in many cases in rather large quantities. I believe that the broader aspects of your study, particularly the relations between business and government generally, and the particular topics set forth in your invitation-the history, causes, extent, effects, and remedies of monopoly power-can be discussed better by other agencies of the Government, and no doubt have been covered to your satisfaction by

the Attorney General, particularly the present state of the law and its effectiveness.

Representing one establishment in the executive branch, I should, of course, assure you of our recognition of the basic premise upon which any discussion of monopoly in the Government program under the antitrust laws is based. We all recognize that a concentration of more and more economic power in fewer and fewer business enterprises, requiring a greater and greater increase in government supervision of industry might finally drive us into some sort of corporate state, which from the point of view of the preservation of our basic freedoms might be seized by a small group of ruthless men to destroy or impair those basic freedoms.

From this premise we must, of course, conclude that any activity by any one of the executive agencies must be carried on in concert with the over-all program of the Government, regardless of the particular responsibilities of individual agencies.

The peculiar area of interest of the National Military Establishment in this vast problem is, of course, in the field of procurement. Those of us who are engaged in the business of national defense realize that a sound program of preparedness calls for the utilization of our entire productive business system-big business and little businessand participation in time of peace is essential if we are to expect full participation in time of war in the common effort for defense by all segments of business.

In addition to recognition of small business as a basic bulwark against the dangers of statism from the over-all point of view of the Government, the Military Establishment recognizes that hundreds of thousands of small businesses scattered throughout the country are a vast source of potential industrial expansion in the event of national emergency. And beyond volume of production, small businesses furnish the advantages of flexibility and geographic dispersion of industrial production.

Small businesses are noted for their versatility; that is, their ability to shift rapidly to the production of new items. Without the necessity of large-scale retooling and reconversion, in many cases during the war small businesses were able to convert to the production of items, supplementing usual sources of mass production. Drawing to the limit upon the established source of a particular item, there were cases where only 90 percent of requirements could be met. It was frequently the flexible small business that produced the last 10 percent of the item-the amount that was needed to guarantee the success of a particular manufacturing operation.

Small plants are important factors in obtaining geographic dispersions of industry, particularly into small cities and towns. This dispersion, of course, from a military point of view, results in a lesser vulnerability from potential enemy action and results, of course, in an increase in local ownership and management of plants, the very opposite of concentration of economic power.

"Small business" is a difficult term to define since what is small in one industry is large in another and vice versa. The only existing expression of congressional intent at the present time appears in section 18 of the Selective Service Act, dealing with mandatory orders to industry, which section the President, fortunately, has not found

it necessary to invoke. A portion of this definition is accepted as the basis for the present development of our policies and programs. Briefly, the determination of what is a small business is based upon three criteria:

(1) Its position in the trade or industry of which it is a part is not dominant;

(2) The number of its employees does not exceed 500; and (3) It is independently owned and operated.

In the evaluation of bids, it is easy to apply a standard based upon the number of employees of both parent and subsidiary concerns. The criterion of dominance in the particular trade or industry would be, of course, extremely difficult to apply.

We are compiling statistics on the volume of business placed with small businesses on the basis of information certified by bidders on military requirements in relation to the number of employees employed by the bidder. On the basis of the standards applied, our statistics. indicate that approximately 72 percent of all purchase actions of the National Military Establishment and 29 percent of the dollar volume go to small business. I have a chart attached to my prepared statement which indicates the details for Army, Navy, and Air Force

procurement.

The CHAIRMAN. At this point would you care to put that into the record, Mr. Secretary?

Secretary MATTHEWS. The chart, you mean?

The CHAIRMAN. Yes.

Secretary MATTHEWS. Yes; that will be part of the record.

The CHAIRMAN. All right.

(The chart referred to follows:)

Proportion of National Military Establishment procurement placed with small business, July 1, 1948, through Apr. 30, 1949

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Excluded from the data above are the number of actions and dollar volume of interdepartmental profurement (i. e., purchases from Bureau of Federal Supply Schedules, etc.).

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.

Navy data do not include changes or modifications in definitive contracts, but do take into account Cancellations and modifications of letters of intent.

Air Force data are adjusted for increases in original contract amounts but not adjustments downward for decreases or cancellations.

Secretary MATTHEWS. We think these statistics, based on those factors which can be evaluated, show that small business is getting a considerable share of our defense program expenditures, and that the Military Establishment is not an important factor in peacetime in causing a concentration of economic power. Although the record is already encouraging, there are further steps which we intend to take to aid the participation of small business in our procurement

program. We recognize that small business may have difficulty in knowing what the Miltary Establishment is buying, who does the buying, and where it is done. This information is available to any businessman who wants to sell to the Military Establishment. Special small business liaison officials have been appointed in the procurement offices of all technical services and bureaus and all field procurement offices. Their job will be to help small business with its problems. The Munitions Board is responsible for coordinating this work.

Provisions have been made by the three military departments to make widely available all invitations to bid, and information on awards and on purchases to be negotiated.

I have also attached to my prepared statement a statement of policy relating to the utilization of small business which has been adopted by the Munitions Board for the National Military Establishment.

Mobilization planning efforts include studies and plans to assist business, and particularly small business, in their participation in procurement activities in the event of an emergency. These studies will include the determination of what should be the role of the Government in supervising subcontracting and the relationships between contractors and subcontractors under expanded procurement programs. Vast volumes of Government business are subcontracted and small business participates to a large degree through subcontracts, especially those companies which are capable of manufacturing parts and components.

The practical aspect of mobilization planning, of course, is the development of relationships between current procurement and conditions which may be visualized under emergency circumstances. These relationships are being developed wherever practicable. Implementation of mobilization planning can be expected to be most effective where current procurement is expanded to emergency volumes on the basis of procedures with which both business and government have an opportunity to become familiar in time of peace.

The widest participation by business and, therefore, competition in the meeting of Government needs is our goal. Competitive bidding in response to advertised bids-the basic method of doing business under the terms of the Armed Services Procurement Act-is a powerful factor in the preservation of opportunity for small business. Negotiation is permitted under this statute under only specified special conditions and pursuant to determination and justification of negotiation.

Many activities of the Military Establishment benefit business as a whole, including small business. Work is proceeding on standardization of specifications, contract forms, inspection and procurement methods, and many other technical problems, with a view not only to the furthering of Government interests, but also to making deals with the Government as easy as possible; and from the long-range point of view, improving military and industrial relations.

The Military Establishment favors competition and considers that every opportunity to compete should be given to all business. Free competition is the antithesis of monopoly. The industrial potential which serves us in time of war results from the ability of American

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