The Army and Economic Mobilization

By R. Elberton Smith | Go to book overview

CHAPTER XV Contract Renegotiation: Origins and Basic Procedures

The Background of Statutory Renegotiation

Statutory renegotiation of government contracts, introduced early in World War II, was the culmination of numerous efforts over a period of many years to enact legislation for the control of war profiteering. Such control had been notoriously ineffective for World War I, which was reputed to have created some twenty-three thousand new millionaires. From the armistice in 1918 to Pearl Harbor, sentiment against war profiteering was high, and approximately two hundred bills and resolutions were introduced in Congress to prevent or limit wartime profits.1 These proposals ran the gamut from graduated excess, profits taxes to plans for the outright "conscription" of capital and the complete confiscation of wartime profits. Few of these plans merited serious attention as practical measures but several were enacted into law. The Vinson-Trammel act of 1934 and the Merchant Marine Act of 1936 limited aircraft manufacturers and shipbuilders to a flat percentage rate of profit. In October 1940, at the beginning of the defense period, these partial measures were suspended and a steeply graduated excess profits tax was enacted. This legislation was the first to deal generally with the problem of profits arising out of World War II.2

By the fall of 1941 defense production had progressed to the point where unit costs for many contractors had fallen far below contract prices. In some cases it was clear that the original contract prices had been set much too high. But even when contract prices were originally close to cost, rapid improvements in organization, labor efficiency, and productive equipment effected substantial reductions in unit costs. Under the tremendously increased quantities called for by wartime contracts and supplements thereto, the spreading of overhead over larger volume caused fixed costs per unit to decline drastically.

The resulting high profit levels for many war contractors began to attract widespread attention. A series of investigations by the House Naval Affairs Committee, culminating in the celebrated Jack and Heintz case,3 demonstrated that neither excess profits taxation nor the avoidance of the cost-plus form of contract could prevent profiteering

____________________
1
H. Struve Hensel and Lt. Richard G. McClung, USNR, "Profit Limitation Controls Prior to the Present War," Law and Contemporary Problems ( Duke University School of Law), X, No. 2 (Autumn 1943), 199.
2
Ibid., pp. 202-05. The excess profits tax, of course, had as a major purpose the raising of revenue to help finance defense expenditures.
3
H. Com. on Naval Affairs, 77th Cong., 2d Sess., Hearings on H. Res. 162, Investigation of the Naval Defense Program. The Jack and Heintz case is covered by Part 1, 23 and 25 March, and 15 April 1942.

-351-

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