The Army and Economic Mobilization

By R. Elberton Smith | Go to book overview

CHAPTER XIII Pricing Fixed-Price Contracts

The administration of its fixed-price contracts for World War II forced the Army to come to grips most completely with the basic issues of wartime pricing policy. As the nation moved rapidly through the defense period into a wartime economy, many of the functions of the traditional price system were supplanted to an unprecendented degree by direct controls. The allocation of basic industrial materials, to facilitate both the creation of industrial capacity and the production of finished munitions, was accomplished increasingly by administrative decisions and procedures stemming directly from the character of national war production objectives. The maintenance of the general price level for civilian-type products as well as for materials and supplies entering jointly into civilian and war goods was accomplished chiefly by controls set up and administered by the Office of Price Administration. The organization of production and the application and modification of technology within productive establishments were determined increasingly by criteria of engineering efficiency and feasibility, the necessities of conservation and substitution, the rapidity of invention resulting from the forced draft of scientific research and development, and other factors directing the use of real resources independently of considerations of price.

This independence of basic economic decisions from price considerations was, however, only partial, and it varied in degree from sector to sector of the total economy depending upon the necessity and practicability of alternative methods of control. After Pearl Harbor, when the supreme mandate upon the procuring agencies was the provision of adequate munitions in time to win the war, the role of price in placing most prime contracts was seemingly relegated to a minor position. But there was one pricing consideration so fundamental and all-pervasive for all military procurement that it was simply taken for granted. This was the requirement that prices in military contracts be adequate at all times to cover costs and permit the effective prosecution of the war production program. It was this requirement, rather than the "greed of munitions makers" or an unexplainable accumulation of one-directional errors, which resulted in the development of widespread overpricing in the year following America's entry into the war.

The CPFF contract may be regarded in this context as a device to outflank the formal problem of advance price determination while guaranteeing the coverage of all costs. Loosely negotiated fixed-price contracts achieved a substantially similar guarantee while at the same time observing the formality of advance agreement upon price. But neither the evasion nor the purely nominal discharge of the traditional requirement that contract prices be determined in ad-

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