provide effective government without unnecessary expenses and that I will do anything I can within my authority to aid the Congress, in that respect.

On the one hand, economy and efficiency are mandatory because of the urgent necessity of maintaining a healthy national economy; and, in order to maintain such an economy, our expenditures in Government must be held to the lowest level compatible with the task assigned to us by the Congress. On the other hand, it is mandatory because of equally urgent necessity of making savings wherever possible, in order to assure that money which would otherwise go into excessive overhead and waste can be used, in our case, to increase our combat effectiveness.

In other words, efficiency and economy are important in and of themselves because each dollar that we save or refrain from spending means a healthier national economy, but savings as a result of efficiency and economy are equally important as a source of money with which we can accomplish our assigned tasks.

In the past, certain organizational concepts, statutory requirements, and methods of doing business have not been conducive to the achievement of efficiency and economy. The Commission on the Organization of the Executive Branch of the Government pointed up a number of such areas that seemed to me to be proper for the consideration of the Congress. In the case of the Department of Defense, many of the recommendations have been considered by the Congress and adopted.

The amendments to the National Security Act passed by the first session of this Congress were a great step forward in providing to the Department of Defense the authority and the machinery better to do our job. In the case of these amendments, a number of the organizational provisions were applicable to the specific problems that exist in the Military Establishment, and to the specific problem of the ways. and means to organize the three military departments-the Army, the Navy, and the Air Force-into an effective team. Other provisions of the amendments permit the adoption of improved business methods.

A year ago the recommendations of the Commission on the Organization of the Executive Branch of the Government and the report of its task force on the National Security Organization focused attention upon the need for improvement in the fiscal structure and fiscal management of the National Military Establishment.

The first session of the Eighty-first Congress, in considering the amendments to the National Security Act, gave careful consideration to these recommendations and under title IV provided for the reorganization of fiscal management in the Department of Defense. These provisions made possible an over-all fiscal structure which will encourage the common use of facilities and the application of a sound management approach in all of our program areas. It was intended to provide the means for the three Departments-the Army, the Navy, and the Air Force-to work together as a team on fiscal matters. to achieve the desired goal of economy and efficiency.

More specifically, title IV

(1) Directed that a performance-type budget be adopted by the Department of Defense.

(2) Authorized the establishment of working-capital funds for the organization of inventories of the three military departments into stock funds, and for the operation of industrial and commercial-type activities as integral working units.

We are prepared to give you some illustrations of that if you want them.

(3) It authorized the establishment of departmental management funds to facilitate the carrying out of joint and special operations. (4) Provided for reports of property on a quantitative and monetary basis.

(5) It provided for the establishment of uniform terminologies, classifications, reporting systems, and accounting and internal-audit projects.

(6) Provided for the establishment of a Comptroller for the Office of the Secretary of Defense and a Comptroller in each of the three military Departments, in order that there may be an organized effort to carry out these objectives.

In other words, the provisions of this bill were designed to place the operation of the Department of Defense on a sound budget- and fiscal-management basis.

A Comptroller, Secretary McNeil, has been named for the Department of Defense, and similar designations have been made in each of the three military Departments.

Substantial progress has been made in developing a Comptroller's organization in the Department of Defense-particularly in the field of budget, accounting, and progress and statistical reporting. Plans are at the present time being developed with respect to internal auditing and management engineering. Implementation of the authority in the field of management engineering is being developed in consonance with the Department of Defense Management Committee, which has been active in this field since its creation in August 1949.

With respect to the conversion of the Department of Defense. budget to a performance-type basis, the 1951 budget for the Department of the Navy has, this year, been constructed and submitted to Congress in this form. Detailed studies are under way in the Department of the Army with a view toward conversion of its budget structure to the performance-type basis in the 1952 budget which will be submitted to the Bureau of the Budget by September 15, 1950, and on which work was started last week.

In the case of the Air Force, the basic appropriation structure for the current fiscal year was designed so as to be readily adaptable to the improved-type budget. Studies are under way in order that the most effective project structure possible can be developed for the Air Force and become operative in the coming fiscal year.

It is contemplated that working-capital accounts will be set up in the Army and Air Force, similar in operation to the naval stock fund, which has been used successfully by the Navy for a number of years, to handle the procurement, storage, and issue of standard stock, common-use items. These accounts will facilitate the interservice utilization and balancing of such stocks, reduce over-all inventory requirements, facilitate procurement of seasonal commodities at times when the market is most favorable. It will provide for better control of costs, by providing a measure of the consumption of such material. In the past the measure has been the acquisition of material.

Working-capital accounts have also been authorized for financing industrial and commercial-type operations. Such a system will simplify our method of doing business in commercial- and industrial-type activities and create a cost-conscientiousness at all echelons by focusing the attention upon the costs of production or upon the cost of rendering services. Such a system will encourage effective utilization of available facilities and make feasible the consolidation of many servicetype activities. A small pilot installation under this authority has already been established. The extension of this principle is being emphasized in order to realize its potential benefits as quickly as possible.

I think the provision of title IV which requires that property accounts be maintained on a quantitative and monetary basis is an important feature. Initial attention has been focused upon the Army and the Air Force since these departments have in the past had quantitative rather than financial accounting for property, while the Navy has for some time devoted attention toward both quantitative and financial property accounting. Tentative systems are being tested at pilot installations of the Army and Air Force. The experience gained from these tests, in conjunction with previous Navy experience, is providing the information necessary for the full and adequate development of uniform property-accounting policies and procedures for all three military Departments.

Many difficult problems still lie ahead in the task of fully implementing the authority and responsibilities set forth in title IV. The magnitude and scope of the operating programs of the Department of Defense exceed in complexity and diversity those of any of our largest industrial corporations. The conversion and installation of new and improved fiscal controls for the widespread activities of the Department is, therefore, a tremendous undertaking.

Our experience thus far, however, has justified the hope that the full implementation of title IV will help all levels of management in the Department of Defense, as well as the Bureau of the Budget and the congressional committees which review military programs, to achieve the common purpose of economy and efficiency in military operations. At this point I should like to express to the Congress my appreciation for providing the statutory basis for these fiscal improvements— and to the Comptroller General and the Director of the Bureau of the Budget each of whom has assigned competent personnel to work with our people in the development of an improved fiscal structure. should like also to mention that we are fortunate in having the assistance of talented and experienced people from private business, who, without compensation, are assisting in adapting proven principles of successful business to many of our activities in the Department of Defense.

The fiscal machinery for other departments and agencies of government is not my responsibility, but I would suggest to this committee that the requirements of the departments and agencies of the Federal Government outside of the Department of Defense might well have the benefit of provisions of title IV, other than the provision of a performance-type budget which is emphasized in S. 2054.

I wish to thank the committee for extending the invitation to me to appear before your committee, and want you to know that I am always glad to cooperate with you as you continue your studies to

promote economy and efficiency and to develop better and more. effective administrative procedures.

The CHAIRMAN. Thank you, Mr. Secretary.

I wish you could clarify, just a little, the next to the last paragraph of your prepared statement. You say:

The fiscal machinery for other departments and agencies of Government is not my responsibility, but I would suggest to this committee that the requirements of the departments and agencies of the Federal Government outside the Department of Defense might well have the benefit of the provisions of title IV, other than the provision of a performance-type budget which is emphasized in S. 2054.

Would you point out the difference, and what do you mean by the contrast between the performance-type budget and the provisions of title IV to which you refer?

Secretary JOHNSON. Mr. Chairman, if the language is confusing, I mean that I think all of the provisions for accounting and recording in title IV which we are testing and which we are proving, and which are in essence the things that successful private business use, are things which, without knowing the detail of operation of the other Government departments, I personally think fit into any department. For a department such as ours, with its diversity and ramifications exceeding, as we say in this statement, that of any business corporation in the world, a performance type of budget is an absolute necessity if the moneys intended for national defense are to go to defense.

I may make the point by an illustration. In the checking of medical services in the three services, which includes the costs of doctors, hospitals, everything, the estimate was given me with all sincerity that the cost of those services complete in the three services was about $126,000,000. On August 10, last year, the performance budget came in. Mr. McNeil had already gotten out, with my approval, and I believe over my signature, the preliminary steps that we could take, before the passage and approval of the law on August 10, to start these things going. As of now, sir, thanks to the performance budget, we know that the $126,000,000 over-all cost is in the neighborhood of $500,000,000.

As a result of that, there will be much money saved to the Government, because we were overstaffed in some of our facilities with doctors whom we badly needed in other branches of the service and to which we are bringing them before June 30. There were some 11,000 civilians employed in these hospitals that are being reduced or closed, for whom there was no need, when the country needs those people. These facilities are being made available to other people in the Government. The savings will be large. We are estimating it in the statements which we make publicly about them. I am not talking only about the saving we make in that field. I am talking about the fact that no one knew the amount was not $126,000,000, but was three or four times that amount.

A second illustration might be this. The Army had, I believe, more tonnage of surface ships than the Navy. We are not speaking of fighting craft. I am guessing now, but I think we spent about 9 months studying to find out how much it was costing us to operate two light surface-ship organizations. We do know what the Navy end of the cost is. We do not know today what the Army end of the cost is. It was obvious, with the complete duplication of management overhead, lack of coordination in filling the ships, and sending

two where one would do, that a saving of most measurable size could be accomplished. So, some weeks ago, thanks to the disclosures made by the performance budget, we were able to establish a new organization on the basis of the Military Transport Command. picked the best man in the service to run it, and put all of this under a new organization commanded by an admiral. The savings will be tremendous.

We

When you do it in that way, that new ship organization under the performance budget will be able to tell what it costs to take an item from point X to point Y, and the service that has a ship, be it the Navy, Army, or Air Force, will pay those costs. We already know that a lot of things that were shipped before are not now being shipped because it is unnecessary that they be shipped. So, we will never know exactly the amount of the waste before the performance budget made it obvious that the consolidation was necessary in order that the dollar might be in the right channel and not wasted.

We could go on to number of such items, but you will get a good many of those in the report of the first 6 months which I hope will be out at the end of the week. We are having printing-plant trouble in getting it out. It is ready.

That is an illustration that is small in comparison but which shows the point. I will not name the services, but we established in the Pentagon not long ago, as a result of a task-force study of printing plants, a consolidation because of the wastage and the lack of interest on some people's part of what it cost to do a thing. We called for putting it on a basis that, when a service sent something down to be printed, that service paid the printing ship, which has no money except the money which comes from doing these jobs and which, of course, does not operate at a profit. Someone who should have ordered 2 or 3 charts served the cause very poorly by ordering 50. When the cost of those 4- by 6-feet charts came in, where one or two would have served the purpose, each of them having to have a seal at the top and all-when the cost of those was presented to the group that had it done, nothing like that will ever happen again.

In another instance one of the services sent down and wanted a letter. If my memory serves me correct, they wanted 100 copies. They wanted 100 copies of a letter, and they wanted it done some particular way. You can estimate what the reasonable cost is of 100 letters if done on the typewriter or if done on the mimeograph. But the way it was specified it should be done, the cost was $375. The bill was sent up asking approval by printing plant No. 1 of this $375 for the 100 letters. The letters were not printed. They were done some other way that cost a relatively few cents.

That is the thing I am talking about in the performance budget. I am also talking about the working-capital set-up. It puts it on a sound business basis, where the man charged with the responsibility does not overlook doing it in the economical way, all of which is not savings for savings itself, Mr. Chairman. I want to repeat, as I said in the start, savings or economy is secondary. Our job is defense, but in doing that defense we want all the dollars to go to defense and not be wasted on that 100 letters.

The CHAIRMAN. Has the correction of these conditions been made possible by reason of the act that was passed last year giving you the authority to make these changes?