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Mr. SHERLEY. You are not a lawyer?

Mr. CUTLER. No. The contracting officers of the various departments are quite conversant with the legal questions that come up, and their opinion is embodied in that report.

Mr. SHERLEY. The details of this estimate of $65,000, under the head of employees, are a chief of division at $3,600; one assistant chief of division, $3,000; four accountants, $2,400; two accountants, $1,800; two accountants, $1,400; four stenographers, $1,200; one clerk, $1.200; and two assistant messengers, $720; a total salary list of $30,090?

Mr. CUTLER. Yes, sir.

Mr. SHERLEY. Then you have rental of quarters, $3,000; equipment, $4,000; stationery and supplies, $4,000; printing and binding, $5,000; books, periodicals, etc., $300; telegraph and telephone, $800; transportation of persons, $7,000; subsistence and other traveling expenses, $10,000; and miscellaneous, $810; making a total of $65,000. Where are you housed now?

Mr. CUTLER. We are now housed in the Commerce Building, where the Department of Commerce, or a large part of it, is housed.

Mr. SHERLEY. What assistance have you besides the five people you have mentioned?

Mr. CUTLER. None.

Mr. SHERLEY. You have no stenographers or clerks?

Mr. CUTLER. We have one stenographer working now; that is all. Mr. SHERLEY. Where do you expect to be located?

Mr. CUTLER. We have not selected a place as yet, but we realize that larger quarters will be needed if we are allowed to do the work that has devolved upon us from the various departments. We have not yet ascertained our location. It is rather difficult in Washington to say where you are going from month to month.

Mr. SHERLEY. Equipment, $1,000. Does that mean the equipment of the offices you intend to rent?

Mr. CUTLER. That is office equipment; that means tabulating machines, which are quite necessary; desks, pens, etc., all of the smallest items; typewriting machines also. We need a conference room be

cause

Mr. SHERLEY (interposing). In the event the item should be recommended by the committee and it should desire to divide it up the division here represents the view of the department touching the number of employees, their compensation, and also the expenditures that should be made?

Mr. CUTLER. Yes; if I understand you correctly. That is a very economical estimate, and that would be the minimum force we would need to do the big work that is coming to us.

Mr. SHERLEY. I wanted to ask you about that. Is it your idea that this division would need to examine into the methods of cost keeping of the various industries supplying the Government with supplies in order to be in a position to advise the Government as to whether the offers they made were fair or not?

Mr. CUTLER. Quite; and also to advise industries whether they are wrong or not in making their quotations.

Mr. SHERLEY. How big a force do you think would be necessary! The Government is going to spend something over six or seven bil

lion dollars in the next 12 months and it will spend it with all manner of people, in sums running from small ones to very large ones.

Mr. CUTLER. I did not get the first part of your question. Mr. SHERLEY. I want to know how large a force you think would be necessary to do that work, having in mind those expenditures?

Mr. CUTLER. I think that this force here would confine us to the merely basic and elemental work; but if we had enough appropriation and enough force we could do a tremendously greater work along the same lines; but this will suffice, probably, for merely keeping a supervisory eye on the entire question. I am trying to answer you in general terms.

Mr. NICHOLSON. Perhaps I can give you a little light on that. If the Government, for instance, were dealing with 10,000 business men, they would be divided up into classes; for instance, the canners throughout the country, the shipbuilding companies, and the refiners of sugar. In investigating the canning industry we might say that there were about 400 or 500, perhaps more; I do not know how many there are. I would select those who are acquainted with that industry and select a certain number of the canneries for study in different parts of the country, those canneries which represent the different prevailing conditions, and possibly 15 or 20 canneries would be selected for examination. You see, that would cover the whole industry.

Mr. SHERLEY. Am I to draw from that the conclusion that would seem to be warranted, that by taking 10 or 15 canneries you would get sufficient information touching the cost keeping of the canning industry as to enable the Government to say whether the prices were right or not?

Mr. NICHOLSON. Yes.

Mr. SHERLEY. If that be true, how do you square it with the idea that until now there has never been any uniformity, or even an attempt at it on the part of the business people, touching methods. of cost accounting, and what should and what should not be charged and what percentage?

Mr. CUTLER. That willingness on their part to act as a body proceeds purely from patriotic motives and from a desire to serve the Government at this time. Heretofore they have all worked on what I might term as truly competitive and individual lines; that is, they have tried always to get the most from the Government with the Government trying frequently to get the least from them.

Mr. SHERLEY. But I do not know that you quite catch my point. Here are Jones & Co. and Smith & Co.: they are both engaged in canning vegetables; one of them has one kind of machinery and the other another kind; one figures on a 10 per cent depreciation and the other figures on a 12 per cent depreciation, and there is a similar difference as to what shall be charged as overhead: similarly, one carries his own insurance and the other one insures. Now, as I understand you, the purpose of this work is to check up a man's method of cost keeping in order to determine whether when he says it cost him so much to make a thing it is true or not. If that be so, how can an examination of a handful of men give you information as to a thousand others whose methods may all vary one from another?

Mr. CUTLER. They advise each other that certain approved methods should be immediately put in operation in their plants. Two men in

Wisconsin growing peas are delegated by us to investigate and to advise the canners in Wisconsin that they must have uniform methods in accordance with this pamphlet here, and we assume that they are following it until such time as the prices of those individual canneries are in doubt and then we can investigate.

Mr. SHERLEY. Of course, in seeing that they have followed instruetions, you are acting as an auditor.

Mr. CUTLER. As an auditor of his bookkeeping system but not of his figures.

Mr. SHERLEY. Of course, there must be some examination of his figures in order to know whether or not he is charging a certain percentage.

Mr. CUTLER. Well, if I can see the form used in bringing the figures together, I will know whether he is proceeding on the right line, and so will you, and then the Government auditor may investigate the accuracy of the figures.

Mr. SHERLEY. The Government is doing business with thousands of people, and many of them are not associated in any voluntary or other associations so as to enable them through advice from any central source to adopt a suggestion when it is laid before any one of them. For instance, the Government is building hundreds of buildings. Is it your idea that you will be able to check up or to cause to be brought into existence such a system of cost keeping by these various builders as to enable you to know, when they make an offer of a price to do a given piece of work, whether that offer really represents cost and a certain percentage over?

Mr. CUTLER. We are confident of spreading the scientific accuracy of such a plan so that its general use will be easily ascertained by the Government, by the contracting officers of the Government before they place contracts. Does that answer you? I think we will make that a general thing throughout the United States if we are allowed to do so by reason of being able to work further.

Mr. SHERLEY. So far as it now exists, there is neither any allowing or disallowing. There is no reason why it should not be adopted by any department or by any manufacturers, if they want to do so.

Mr. CUTLER. It will rest with us to make it a general matter in the industries at such points where the contracting officers themselves do not touch. There will be some cases like this, where the contracting officer places an order, we will say, for vast quantities of bread with one manufacturer. Now, we will try to see that the other manufacturers are acquainted with this system, leaving the real contracting officer to the tuition of the Government.

Mr. SHERLEY. Now, the Federal Trade Commission was created for very much the same purpose. While their work may not be identical with this, they are certainly closely associated with it. Mr. CUTLER. You are quite right.

Mr. SHERLEY. I recall that Mr. Hurley made the statement, which was much challenged over America, that the average manufacturer did not know what it cost him to do business, and that one of the special purposes of the Federal Trade Commission was to teach those men how to run their business. Now, is it your idea, to the extent that you have indicated, to supersede that work of the Federal Trade Commission?

Mr. CUTLER. No, sir; they are no longer concerned with the bookkeeping systems. They are concerned with cost finding and the regulation of commerce, so far as it may be covered by existing law. Mr. SHERLEY. For instance, very recently we appropriated certain moneys for them to inquire into the Beef Trust. Now, in order to ascertain whether a given price for beef is warranted, they have to know what it cost the packer, and, in order to know what it costs the packer, they must know whether the packer has properly charged certain items of cost like the one that has been used as an illustration here; that is, the item of depreciation. Now, if they undertake to ascertain that data, will they not be doing to that extent the same kind of work that you are doing?

Mr. CUTLER. Yes, sir; if they did that; but they do not go that far. They ascertain the accuracy

Mr. SHERLEY (interposing). Does the Federal Trade Commission determine what it costs an industry to do a particular thing without undertaking to determine whether in its estimate of the cost it has probably charged or not charged too great a sum for depreciation? I think they will take exception to that indictment of the accuracy of their work.

Secretary REDFIELD. Here is their request [presenting letter].

Mr. CUTLER. They are primarily concerned with the accuracy of the figures as they now exist, without any relation to the form in which they may be brought together and collated.

Mr. SHERLEY. I do not quite understand this letter which has been handed to me. It reads as follows:

FEDERAL TRADE COMMISSION,
Washington, August 9, 1917.

Hon. WILLIAM C. REDFIELD, Secretary of Commerce,

Department of Commerce, Washington, D. C. DEAR MR. SECRETARY: I am inclosing herewith a copy of a communication received by the Federal Trade Commission from the President, dated July 25, 1917, for your personal attention, with the request that it be communicated to the several branches of your department, in order that all offices in the Federal departments in this city may have proper notice and information of the President's directions in the particulars covered in his letter.

Particular attention is invited to the last paragraph of the communication in the matter of establishing a uniform method of cost determination. This commission is perfecting the organization necessary to carry out this direction, and will be pleased to receive any information along these lines from any of the bureaus or offices in your department that may be pertinent to the subject. Very respectfully,

WM. J. HARRIS, Chairman.

Mr. Secretary, that alludes to the detail of certain men from that commission to meet with the other departments in the formulation of this report you spoke of?

Secretary REDFIELD. It alludes specifically to that report and in general to the assistance of all the divisions in helping them to determine the proper principles on which their studies should be based.

Mr. SHERLEY. The letter speaks of their "perfecting the organization necessary to carry out this direction." What is meant by that? Secretary REDFIELD. That refers to the President's letter. The portion that it refers to is at the bottom.

Mr. SHERLEY. This seems to say that they shall create an organiza

tion.

Secretary REDFIELD. They are to create a cost-of-production organization, which we do not deal with. We deal with the principles that underlie the work that they do. In other words, we teach the men and they practice it.

Mr. CUTLER. That is the distinction.

Secretary REDFIELD. It is like the professor in a dental school as distinguished from the dentist.

Mr. SHERLEY. I am surprised that the Federal Trade Commission should seem to have been working so long without learning their business.

Mr. CANNON. I want to make one observation: This proposition is an entirely new one to me, but it seems to me, as I have listened to you, that if you do effective work, you will need, instead of $65,000, $6,000,000 or $12,000,000. For instance, I received a circular this morning that I glanced at, from which it appears that out in my State the Council of National Defense, under the State law. seemingly with the approval of the governor, wants to seize all of the coal mines.

Secretary REDFIELD. That is a State council.

Mr. CANNON. Yes; that is a State council. Under laws already enacted the National Administration can seize all the coal mines and all the shipyards, and under the food-control bill I suppose they can seize pretty much of everything. Now, in the event this shall be done by the national authorities and by the State authorities, with all the inevitable conflicts and duplications, we will have confusion unbounded. I voted for this legislation largely because I thought that the vesting of this broad power would enable the powers that be to make reasonable arrangements. Now, to go back again, I do not know how many contracts have been made on the cost-plus basis, but I fancy a great many have been. That is necessarily so.

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Now, after that has been done, if you undertake by general rules say that you can hold up what has been done under stress and that you will fix the market, you will find that there is no market. To undertake to make this thing effective under these abnormal conditions, when things have to be done in the twinkling of an eye-conditions that ought to last only during the war, and, possibly, only during the earlier stages of the war-would be to attempt the impossible. It seems to me that you would have to have so many people watching other people that you would find great difficulty in enforc ing the selective draft. It seems to me that you could not cover the matter at all unless you have a considerable army of people to find out these things, and a large sum would be required to meet the travel expense of the people whom you would have to send here, there. and vonder.

Mr. CUTLER. We are really like a small college that by a university extension course gives tuition to vast numbers of people. If we were auditors, we would need a tremendous force, but as the promulgators of principles, we can radiate the principles over a large area with a small force. Is not that true, Mr. Secretary?

Secretary REDFIELD. Yes, that is true. I think the best answer that can be made to what Mr. Cannon has said is simply to point to the evidence of what has actually been done by five men. There is the fact, that with this force of five men we have brought that great industry into line and they have agreed to a contract which is new in the history of the Government. That has been done by five men.

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