Mr. MCNEIL. Over a period of time we might attain, either through greater efficiency or actual dollar savings, 10 percent, perhaps, but it could only be accomplished over a period of years. This reorganization of fiscal management will improve the operation, the efficiency of management. It makes it possible better to manage the business affairs of the Military Establishment. Chart No. 3 illustrates the types of reports that would be helpful to management.

The CHAIRMAN. That would be as applied to the present. Assume we had had this in effect for 5 or 6 years. Assuming that, it would have been possible to save a billion and a half, as reflected against the present request of $15,000,000,000 budget. Ten percent of that would be one and one-half billion..

Mr. NCNEIL. I would like to say so, sir, but I would be going too far.

The CHAIRMAN. You are not in doubt at all that there would be very substantial savings if this is given a fair chance?

Mr. MCNEIL. I am not in doubt at all. There would be substantial savings.

Chart No. 4 illustrates the present method of financing inventories, and I have used an Army example. The Navy today has a stock-fund operation. It has been operating for 54 years. It is one of the finest management tools any department has had.

This bill would provide the same facilities for the Army and Air Force. Chart No. 5 illustrates the plan of operations.

In general, we have many sources of funds financing inventories of common use or standard stock items. They are delivered to many inventory accounts. After items are delivered, they are no longer carried under dollar control. We do not know the end use of the material by dollar value, nor do we know the cost of material going into particular activities. Material is priced only when it it picked up and sold to another department, or delivered to a foreign government under an assistance act. Upon reimbursement, the funds are credited to what are known as replacing accounts. The funds then come back into the cycle for new procurement.

It is proposed to put such material under accounting and inventory control. Under the proposed plan the operation is controlled by two complete closed cycles.

The inventory is carried under a revolving stock fund. The capital of that fund includes the value of the inventory and the cash in the account. As material is issued from store, it must be paid for with appropriated moneys. Congress appropriates it for definite purposes. Therefore, the use of stores is controlled by the appropriation process.

When the material is withdrawn from store, the consuming activity pays for it, and the money goes into the cash account of the workingcapital funds.

The withdrawal of stores generates replenishment demands. Inventory control is based on established stock levels; for example, 6 months for some items, 9 months for other items. Inventory control involves the placing of orders only to maintain a certain inventory level. The orders are placed with the vendors; the material is delivered to the fund, and the vendors are paid from the working-capital account. You have completely closed cycles for over-all control.

The CHAIRMAN. The real control of that whole thing is your inventory.

Mr. MCNEIL. Inventory control plus appropriation control. The CHAIRMAN. You have to have money, but the demand comes from inventory control.

Mr. MCNEIL. That is correct, sir. Turning to working capital for industrial and commercial-type activities, chart No. 6 represents the type of operation with commercial concerns. If any activity of the Military Establishment places orders with private industry, orders are placed, delivery is made, and payment is made to the private concern, with the charge made to the budget program for which Congress made its original appropriation. It is a simple, clean transaction.

When, however, the order is placed with a Government plant, a different situation exists. The orders are placed with the plant being financed from numerous appropirations, the delivery is made, but we do not get any clean-cut charge. Appropriation accounting rather than cost accounting is emphasized in a plant.

Chart No. 7 shows some of the problems that are involved when appropriation allotments finance industrial operations. The New York shipyard is used as an example. Senator Johnson, as a matter of fact, was partly responsible for initiating this study as a reult of a report made by a subcommittee in the House in 1945, of which he was chairman.

After that report was released, we made a study of the best methods to finance industrial operations.

Chart No. 8 is another picture of the problems involved when financing industrial activities through the allotment process. Allotments from numerous sources finance the operation of industrial activities, and under the appropriation and allotment system of financing report back to each appropriation and each allotment must be made. We completely lose sight-at the appropriation level-of cost accounting and the cost of doing the job.

The CHAIRMAN. Now, is the installation of this system going to call for a very great increase in personnel in order to operate it in the three departments?

Mr. MCNEIL. Actually, it should reduce it.

The CHAIRMAN. In other words, you can take the personnel and wed them over to this system and operate it without any new personnel per se?

Mr. MCNEIL. To accomplish cost accounting today in an industrial establishment the accounting job must be done twice: Once through the allotment process to appropriations and then the cost-acounting process accomplished separately.

The CHAIRMAN. We will be asked on the floor with regard to this. Obviously, if it will not require more but probably less personnel, it will require probably less expense to operate it as compared with the present system.

Mr. MCNEIL. It should take less expense and less personnel for this operation, as well as place the accounting emphasis on cost accounting so we can commence to evaluate the cost of work being done. That feature is an important part of the reorganization of fiscal manage

ment.

Chart No. 9 illustrates how working capital can simplify industrial operations. A single fund or single account would finance all opera

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tions in a yard, with the capital account consisting of inventory, work in process, plus the cash necessary to pay bills until the industrial or commercial type activity can receive reimbursements from appropriations or from other agencies.

Chart No. 10 is very similar to the one which illustrated the operations of inventories under working capital. Again, in industrial activity, working capital consists of inventory, of jobs in process, and the cash necessary to operate until they can collect and receive reimbursement.

The Army, Navy, or Air Force, or any outside activity would place an order with an industrial or commercial activity. This activity would do the work, cost the job, and render a bill as a single item for the cost of doing the job to the appropriation and budget program concerned. The operation is clean, and would be comparable to the way we do business with private concerns.

Working capital would finance direct labor and materials, reimburse the stock fund for all items withdrawn from working capital funds or inventory accounts, cover applicable administrative expenses; all applicable costs would be included in the cost of jobs.

Under this operation we could know what it is costing to overhaul a destroyer, remove and replace a gun mount, or manufacture torpedoes. Chart No. 11 illustrates the type of operation now necessary when a joint operation is financed from numerous different appropriations, such as the operation at Bikini or smaller joint operations. Management control is diluted because reports on allotments go back to each interested organizational division. We can centralize management control during the time that the operation is taking place and account back after the operation is completed, as shown on chart No. 12, providing a means for management control and simplifying reporting at the same time.

The CHAIRMAN. Mr. McNeil, I do not think the record would be complete without giving you on behalf of the committee and the chairman an especial vote of thanks for all your fine constructive effort to help bring about these needed reforms, and which I feel sure is going to mean not only more efficiency but greater economy. The committee is greatly indepted to you for your services.

Mr. EBERSTADT. May I add a word of thanks to Mr. McNeil for helping me.

Senator BYRD. Mr. Chairman, with your permission, I would like to have included in the record at this point an article printed in the Washington Post Friday, May 6, 1949, an article in regard to the Gallup poll headed "Sentiment 20-1 for adopting proposals of Hoover group."

The CHAIRMAN. Without objection, it will be included. (The article referred to is as follows:)

[From the Washington Post, May 6, 1949]

THE GALLUP POLL

SENTIMENT 20 TO 1 FOR ADOPTING PROPOSALS OF HOOVER GROUP

(Second of two articles on public reaction to the Hoover Commission report.) (By George Gallup, director, American Institute of Public Opinion) PRINCETON, N. J., May 5.-Voters who know about the Hoover Commission report for streamlining the executive branch of government are overwhelmingly in favor of putting the recommendations into effect.

Among those familiar with the recommendations, sentiment in favor of adopting them runs 20 to 1.

As of mid-April, with the campaign to publicize the report just getting under way, 41 percent of voters polled by the American Institute of Public Opinion said they had heard about the report and 28 percent had a correct understanding of its goal to prevent waste, reduce cost, and streamline the operations of the executive branch of the Federal Government.

The poll results follow:

Have you heard or read anything about the Herbert Hoover Commission reports?

The national result and the results by education level follow:

What is your understanding, in general, of the purpose of the Hoover Commission?

The replies show that some of the people who say they have heard of the Commission are unable to explain the purpose of it. The vote falls into three categories as follows:

Correct understanding (cut costs, prevent waste, etc.)

Incorrect-

Don't know_

Total__.

Haven't heard about Commission__.

The 28 percent who were familiar with the report were asked:

Percent

28

3

10

41

59

Would you like to see Congress carry out the main suggestions of the Hoover Commission's report, or not?

The CHAIRMAN. Now, the Chairman is going to take the liberty of asking the staff to get this bill in what we hope will be more or less. final shape as soon as possible this afternoon.

I am going to try to have a meeting Tuesday morning at 10:30 to pass finally on this proposition.

Thank you all for contributing to this, I hope, happy result.

The CHAIRMAN. At this point, the following will be made a part of the proceedings:

(1) Address of Mr. Marx Leva, special assistant to the Secretary of Defense before the Joint Orientation Conference of the National Military Establishment.

(2) Organization Chart for National Security, as set forth in the National Security Act of 1947.

(3) Organization Chart for National Security, showing proposed amendments.

(4) Memorandum from Admiral Louis Denfeld, for the Joint Chiefs of Staff, dated March 25, 1949, to the Secretary of Defense.

(5) Memorandum from Secretary of Defense Forrestal, dated March 26, 1949, to the Joint Chiefs of Staff.

(6) Letter from Secretary of Defense Johnson, dated April 7, 1949, to chairman of Senate Armed Services Committee.

ADDRESS OF MARX LEVA, SPECIAL ASSISTANT TO THE SECRETARY OF DEFENSE BEFORE THE JOINT ORIENTATION CONFERENCE OF THE NATIONAL MILITARY ESTABLISHMENT, APRIL 5, 1949

I see from the program that I am supposed to make a very brief speech, covering a very simple subject—a one-word subject, in fact.

I wouldn't want to make a liar out of the fellow who prepared the program, so I'll see how well I can fit 18 months of unification into 30 minutes of talk.

My review of the progress of unification up to the present time must begin, of course, with the Unification Act which Congress passed in 1947.

The 1947 act, to borrow a few terms from the law of domestic relations, consisted of a simultaneous marriage (joining the Army and the Navy in a state of more or less happy wedlock), a divorce (separating the Air Force from the Army), and twin births (creating the over-all organization known as the National Military Establishment, and creating the Air Force as well).

Up to the present time, the divorce of the Air Force from the Army has proceeded more smoothly than has the marriage of the Army and the Navy. It may be that the explanation for this situation can be traced to the fact that the Army, which greatly desired unification, was an overardent bridegroom— while the Navy was a most reluctant bride.

In any event, this somewhat peculiar military household which Congress set up in 1947, and the steps toward unification which have been taken in the first 18 months of the household's existence, are the subjects to which I intend to address most of my remarks today.

Some time ago, when I was first invited to address this group today, I accepted the invitation and said that I would speak to the general subject I have just outlined—that is, to the subject of the Unification Act which the Eightieth Congress passed in 1947-the good points of the act, the bad points of the act, and the amendments to the act which the Eighty-first Congress seems likely to adopt.

Since the date of my acceptance, however, Secretary of Defense Forrestal has resigned, and I should like, therefore, to vary my subject slightly in order to pay tribute to the progress toward greater security for the United States which has been brought about during the 18 months that Forrestal has served as this country's first Secretary of Defense.

You will note that I have mentioned "progress toward greater security for the United States," rather than "progress toward a greater degree of unification." We have made substantial progress in both of these categories-but I have deliberately drawn a distinction between the two, for I think it is important to bear in mind that the National Military Establishment is not an end in itself, but is instead a means to an end.

The National Military Establishment exists for only one purpose-the security of the United States. A greater degree of unification is certainly one of the factors that contributes to greater national security. Let us not forget, however, that unification is merely a desirable means to an essential end. It is the end of greater national security, and not merely the means of the unification process, that has true importance.

Secretary Forrestal kept this fact in the forefront of his thinking. With great deliberateness and with infinite patience, he laid a solid foundation for unification-a foundation, as Secretary Johnson said to this group yesterday, on which others can now build with complete confidence.

In the course of laying this foundation, and in the course of making very substantial progress toward unification, Secretary Forrestal was adamant in his insistence that any step toward unification must "pay its way" by increasing, rather than diminishing, the fighting potential of the services.

It was this philosophy-rather than any feeling that the 1947 act was totally inadequate which determined Secretary Forrestal's approach to unification during the first 18 months that the Unification Act was on the books. He felt that the painstaking and back-breaking work of the first 18 months was a highly necessary condition precedent to the further and accelerated progress toward unification which the future will undoubtedly unfold.

In the field of unification, it is hard to picture progress graphically. Partially as a result of this difficulty, and partially as a result of a failure to publicize