Newton D. Baker to Woodrow Wilson

I have thought earnestly upon the question of a centralized purchasing agent for the Allies in the United States. The task is, of course, larger than any similar task ever undertaken. It involves necessarily the creation of an organization which will assemble and order, with regard to each commodity from its raw material or production state to the finished product, all the commercial and industrial information available. It will necessarily be integrated with the purchase of supplies for the public departments of the United States and the maintenance of adequate supplies and proper price levels in the United States. I believe that no one man can properly be such a purchasing agent for the reason that no matter how patriotic, disinterested and wise his determinations, the conflicts of interest will be such as to engender about him complaints and doubts which he cannot withstand. I believe, therefore, that a Board having a certain constant personnel to which are added from time to time for the consideration of special cases the persons interested in those cases and in no others, affords the best machinery.
There is already in existence as a subordinate body of the Council of National Defense the General Munitions Board, and similarly the General Supply Commission. These two bodies are studying practically the entire industrial and commercial situation in the United States and advising the War and Navy Departments upon sources of supply, priorities, and prices. If from these two bodies three or four members were selected, and to the number thus chosen were added representatives of the State and Treasury Departments, the Treasury representative being the general representative of the Allied Governments for purchases in this country, or at least the medium through which allied needs would become known for correlation with our domestic needs, such a Board would, by a mere enlargement of its present functions, be able to perform all the duties now under consideration, and its determinations made after hearing all the conflicting needs and desires of the several possible purchasing authorities would be less likely to encounter criticism than the determinations of a single individual.Basis of Price Fixing.The War and Navy Departments have attempted to make certain contracts for urgently needed ordnance supplies on the basis of cost plus. This, however, is not a rule susceptible of universal and uniform application. A plant which makes a turn-over of its product every week and receives two per cent profit on the cost of its product would be paid fifty-two times as well on its capital investment as a plant which made a product capable of but one turn-over per year on the same basis of percentage of profit on cost of product. A varying percentage of profit is, therefore, necessary to be fixed with relation to the character of work, etc.
The cost plus mode of contracting requires joint accounting and joint approval upon all items of cost and still leaves open the question of a method of price regulations of raw materials entering into product, and the question which Mr. Baruch is especially concerned to have determined is a policy of price regulation for raw materials entering into industrial products.
It has been suggested that the cost plus method could be applied to the production of raw materials. The difficulties, however, are that in dealing with minerals which are mined you find no two mines of equal richness of product or ease of mining. Labor conditions vary in different parts of the country and the wages of labor vary both absolutely and in their method of determination: in some mines a day rate; in others an hour rate; in some a ton-of-ore rate, and in some a rate per ton which varies with the market price of the smelted mineral. Any attempt to apply the cost plus principle to such a situation would inevitably lead to widely varying prices for the same product from different mines.
The needs of the Government for certain minerals are so great, and particularly when taken in conjunction with the needs of the Allied Governments for the same mineral, that competition for the residue of the available supply will greatly enhance its market value. It would seem, therefore, that some method of price fixing ought to be determined upon which will have the effect of supplying the need of the Government and Allies first, and of the general market second, at a fixed price, relying upon the excess profits tax to equalize the profits of the various and varying mines. I believe this can best be done by calling in, in each instance, those who control trade in a particular metal or raw material product and agreeing with them upon a price which will be less than the present artificially enhanced market, and which will have a tendency to go down rather than to go up. This I think possible to accomplish because in all lines of trade the prices are at present recognized to be upon an unwholesome and unsafe high level. I think it necessary to try this method because there is no other alternative, so far as I can think it out, except to seize the mines and control the raw material supply directly through the Government. This I think neither Congress or the public are ready to sanction, and I therefore recommend that Mr. Baruch be directed to try the other course. It will result in fixing a level of price below the present market, probably not so low as in justice it ought to be, but with a downward tendency, and if that process fails, Government control will be obviously necessary as the only other recourse.



The President.