The Army and Economic Mobilization

By R. Elberton Smith | Go to book overview

CHAPTER XX
Private Industrial Expansion Under Tax Amortization

Background of the Amortization Law

Few if any Army contractors at the beginning of the defense period had the plant, equipment, and workers essential to the production and delivery of munitions called for by the war contracts ultimately received and fulfilled. By the spring of 1941, with the progressive expansion of Army, Navy, and Maritime requirements and the United States' assumption of the rote of arsenal of democracy under the Lend-Lease Act, it was evident that the cumulative new requirements far exceeded the productive capacity envisaged in the peacetime facility allocation plans. Tremendous additions to the nation's total plant capacity, as well as greater utilization of existing plants, were found essential to the expanded procurement program.

Most of the additional productive capacity eventually developed by Army contractors was financed directly or indirectly by the War Department. The conversion and expansion of existing plants, the creation of new facilities including machinery and equipment--and the augmentation and training of labor forces were accomplished with funds provided by the War Department, or by government lending agencies and the nation's banking system under War Department sponsorship. The bulk of these funds was made available to contractors under contract terms and collateral arrangements which covered all costs of production, including facility costs. All labor, management, and material costs were covered by lump-sum or unit prices in the case of fixeprice contracts, and by authorized, costs and fees under cost-plus-a-fixed-fee contracts. Facility costs were covered either by special loans or grants or by estimated amortization allowances in contract prices for end items-- depending on whether the facilities were government owned or under private ownership.

At the beginning of the defense period there were many reasons for attempting to obtain a maximum of the needed industrial expansion through private financing. In mid-1940 the Army did not have unlimited funds for investment in plant expansion. The War Department's newly acquired Expediting Funds were inadequate even to construct the specialized facilities needed for producing powder and ammunition. Much of the required new industrial plant and equipment would be of a general and heterogeneous nature similar to existing privately owned capacity, and in any case would have to be operated by private firms. Realism suggested that the best way-to obtain the widespread expansion needed in all sectors of the economy was to enlist the initiative and know-how of private enterprise. This could be done with a minimum of govern-

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