TESTIMONY OF MR. WILLIAM N. LAWRENCE, VICE PRESIDENT OF WILLKING INTERNATIONAL

Madame Chairman and Members of the Subcommittee, I wish to express my appreciation for the opportunity to appear before the Subcommittee to provide my views on how possible economic stockpiles might be administered and organized within the Government and to share with you some thoughts on economic stockpiling in general.

As you know, for fifteen years I was Chief of Stockpile Policy in the Office of Emergency Preparedness (and its predecessor agencies), where my principal responsibility involved the management of inventories and objectives of the Strategic and Critical Stockpile, as well as the implementation of policies relating to the three basic components of the Strategic and Critical Stockpilethe National Stockpile, the Supplemental Stockpile, and the Defense Production Act inventory.

It is my understanding that the purpose of today's hearings is to focus on administrative and organizational considerations of economic stockpiling, including examination of past and present policies and procedures for administration of the Strategic Stockpile. Therefore, I will attempt to review briefly some of the past organization and procedures for stockpile policy in the hope that this will shed some light on the Subcommittee's evaluation of economic stockpiles.

The basic authority for the defense-related stockpiling is the Strategic and Critical Stock Piling Act of 1946, which has origins stemming back to 1939. The objective of this Act was primarily to acquire and maintain stockpiles of commodities, where domestic resources are, "deficient or insufficiently developed to supply the industrial, military, and naval needs of the country for common defense." Stockpiling authority was further expanded by the Defense Production Act of 1950, which established more flexible authority for acquisition and disposal of commodities, primarily to provide incentives for expansion of domestic capacity essential to the National defense.

The Director of the Office of Emergency Preparedness, to whom I reported, was responsible for stockpile policy and for carrying out the mandates of both Acts. This Office was in turn organized under the Executive Office of the President. Significantly, the goals of stockpile policy and management were conducted separately and independently, with responsibility for actual administration of acquisitions and disposals, as well as storage, organized under the General Services Administration. This separation reflected an intent to avoid possible conflicts between apparent opposing goals. On July 1, 1973, the stockpile policy functions were reorganized under the General Services Administration, and more recently administrative and management activities (including acquisition, disposal, and storage) have been reorganized to report to the Director of the Federal Preparedness Agency, General Services Administration. Further to this discussion of Government organization, I would also like to point out that there is a long history of interagency cooperation in both the policy and management functions, which contributed substantially to what I feel was on the whole a successful stockpile policy. The most outstanding example of this cooperation was the Interagency Materials Advisory Committee, which provided a variety of insights to supply and demand, industry, and foreign policy considerations. And even more formal example, still active today, are the supply and consumption data reports on individual commodities that are provided annually by the Department of the Interior and the Department of Commerce, which are used in calculation of stockpile objectives. At this point, I would like to turn briefly to the procedural question by summarizing my own role in stockpile policy. To simplify, this responsibility largely involved the establishment of stockpile objectives for individual stockpile commodities, through a complex process of analyzing and weighing economic and market conditions, as well as industry structures, in the strategic and critical materials-particularly considering the effect of these factors upon United States supply and demand or how they might impact potential supply-demand in the event of a national emergency. This analysis was in turn weighted against the various criteria used in stockpile policy, with the ultimate goal being preparedness for a possible emergency by preventing supply-demand im

balances in the event of a mobilization. These criteria or assumptions shifted depending upon national security considerations and included such factors as the anticipated length or duration of a possible emergency, guns versus butter philosophy, the location of strategic and critical sources of supply and the dependability of these sources, expected accessibility of foreign supplies in an emergency situation, the capability to substitute one material for another, and anticipated shipping capabilities. Recommendations for acquisition of commodities below stockpile objective or disposal of surplus inventories were also part of my responsibility, with final authorization from the Congress.

Although the overall goals of stockpile policy and the principles behind determining the most desirable levels (i.e., calculating imbalances based on policy assumptions) remain the same today, the actual methodology has changed considerably, General Bray's testimony will undoubtedly cover much of the current procedures for arriving at the optimum stockpile inventory levels.

I would like to discuss for a moment the past relationship between the stra tegic and critical stockpile before turning to some of my personal views on economic stockpiling and how it might, or might not, be organized.

The Stock Piling Act requires that disposals of excess stockpile commodities be made, ". . . with due regard to the protection of the United States against avoidable loss . . . and the protection of producers, processors, and consumers against avoidable disruption of their usual markets." Yet, despite the restriction against use of the national stockpile for economic purposes, the Act also requires that purchases, "shall be made, so far as practicable, from supplies of materials in excess of the current industrial demand," implying a degree of stockpiling for economic purposes. In fact, much of the post-Korean acquisition was in this manner supportive of essential domestic materials industries that were experiencing weak demand.

Similarly, the opposite has been true, with the most recent example being the substantial contribution made to supplies during the 1973-1974 period of tight supply by disposals of stockpile materials that were excess to objective and authorized for sale. Importantly, from the standpoint of future supplies, many of these excess stockpile inventories were exhausted, or nearly exhausted, and are no longer available to the supply stream. Copper and aluminum are prominent cases that come to mind.

In each acquisition and disposal activity, precaution is taken to avoid disruption to the marketplace, as well as to achieve the most equitable method of distribution and to maximize the return to the Government. Yet, few would deny that acquisitions and disposals had a profound impact on demand, supply, and even prices.

Another direct example of direct stockpile intervention in the market can be cited in the case of nickel at the end of 1969. A lengthy strike aginst Canadian nickel producers had severely curtailed supplies during a period of relatively strong demand, forcing U.S. consumers to pay up to seven or eight times the normal producer price for nickel in the free market. Although care was taken during the strike not to interfere with the labor-management bargaining process, 20 million pounds of nickel were loaned at the end of the strike to the International Nickel Company to permit restoration of depleted inventories and inventory pipelines. The loan, which permitted a more rapid return to normal delivery schedules following the strike, was restricted to defense-related orders and was aimed at upgrading the nickel in the stockpile by contracting for higher-grade nickel cathode as repayment.

Because of the flexible authority granted under Title III, the Defense Production Act has been considered an economic stockpiling authority of sorts, since it permits acquisition and disposal of DPA inventories without Congressional approval. Sections 302 and 303 of the Act provide authority for:

(1) Loans to private business for expanding capacity, developing technical processes, or producing essential materials, including the exploration, development and mining of strategic and critical metals and minerals;

(2) To provide for purchases or commitments to purchase metals, minerals, and other materials for Government use or resale and encourage the exploration, development and mining of strategic and critical metals and minerals;

(3) To transport, store and have processed and refined any material procured; and

(4) To install additional equipment, facilities, processes, or improvements to plants, factories, and other Government-owned facilities, and to install Government-owned equipment in privately-owned plants, factories, and other

industrial facilities.

Despite this apparent attitude, the caveat for use of Defense Production Act authority has remained defense-related production or acquisition.

I would like to make one final point in this vein: that, although complex procedures have been undertaken over the years to prevent market disruption, industry has frequently argued that the existence of stockpile inventories-either in the form of their actual overhand on the market or through the threat of disposal-has on the whole acted as a deterrent to new capacity investment. Although I cannot say that I would agree completely, this consideration deserved further exploration in the light of your examination of economic stockpiling. Now, if the Members of the Subcommittee will permit, I would like to use this background of my past experience with the stockpile to briefly share with you my views on economic stockpiling. First, it is important to note that we have yet to define specifically what the goals or purposes of such a stockpile would be, although I must assume that such a stockpile would be designed for one or both of the two principal purposes:

(1) To stabilize supplies and prices of industrial commodities in the marketplace, much as the Federal Reserve Board attempts to influence the supply and cost of money; or

(2) To provide some degree of protection against supply curtailments or price-gouging in essential materials for which the United States must depend upon overseas sources, as in the case of chromium, bauxite, or manganese.

In either case, I must state to the Subcommittee that I would be opposed to stockpiling by the Government for other than defense-related purposes. In my statement today, I have attempted to demonstrate the complexities, difficulties, and even the possible ramifications of stockpile management and policy when the goals and purposes are well established-in the form of National Defenseand when the guidelines for developing the optimum stockpile objectives and inventory levels are relatively clearcut.

In economic stockpiling, however, whatever the purpose, such determinations would appear to be administratively unmanageable and would unavoidably lead to highly subjective judgments about a host of factors: for example, what constitutes supply or price stability? What levels of stocks would best achieve this stability? When and how should the stockpile manager enter the marketplace? How much would these stocks cost? Would such stocks, or even the goal of "price stability" in fact discourage new capacity, domestically and abroad, or maintenance of old production, thus compounding future shortage problems? How would such a policy affect foreign policy or even the goals of supply access in current trade negotiations? How would we best achieve a balance between Government accountability and an apparent need for secrecy in stockpile operations? Would such inventories be inflationary, or even recessionary in themselves?

I don't claim to know the answers to these questions. But I doubt seriously that any new bureacracy created to manage supplies would either. These problems, Madame Chairman and Members of the Subcommittee are best solved in and by the marketplace, in my view.

Thank you.

Chairman SULLIVAN. Thank you very much.

Mr. Lawrence, one absolute requirement of any successful stockpile is the availability of reliable data. Who and what in your opinion are the best sources of these data? Have they been employed to best advantage in your experience with the stockpile?

Mr. LAWRENCE. I would say that the sources of data that we had when I was in the stockpile operation were the Interior, Commerce, State Department, the Department of Defense, GSA itself, and many others that were on the Interdepartmental Materials Advisory Committee. I think the data sources there were as good as any you can obtain anywhere in the United States.

I must say that the methods that we used would seem somewhat crude-I mean they were all hand tabulations, and that type of thing. But the fact that they were examined by all departments and agencies, and I must say there was considerable discussion in these committee meetings as to the validity of the data, and I have no quarrel with the fact that they were there.

When we abandoned the hand method in the interest of having computers do it, I have always had a suspicion that a considerable lot of the data that was put into the computer, because of the fact that it has been so finely subdivided, was giving erroneous results. For example, I know and I hope that this has been changed since then, that the supply data that was in the computer to compute the 1-year objective was all erroneous, it was deliberately done that way, and I didn't discover it until it had been put into the computer.

What it was was a complete overstatement of supply from foreign countries. They had supply figures that never existed and never would. In other words, the supply just doesn't come to the United States in the quantities that were put in there. I am sure that has probably been rectified by now. It certainly deserves someone's attention.

Chairman SULLIVAN. A frequent criticism of the strategic stockpile, as well as any possible economic stockpile, is manipulation by special interests. How serious a problem has this been in the past operation of the strategic stockpile?

Mr. LAWRENCE. Well, there isn't any denying the fact that there was considerable manipulation in the stockpile, and particularly back in the Korean days. For example, the device that was used, and I might as well confess that I was the one that did it, on orders from higher up, was to change the objectives on lead and zinc, so we could make purchases of lead and zinc for a number of years, and obtain the sizable quantities which we didn't need.

There were other devices which could be used to manipulate them. The fact that when you were bartering surplus agricultural materials for strategic and critical materials, which was a sizable program, there were often changes made in the instructions to Agriculture in order to provide equities to all producers or participants in such a barter deal.

Chairman SULLIVAN. You indicate that there have been direct interventions in the market in several cases by the strategic stockpile managers. On the whole, how serious has this problem been of deviating from the legal purpose?

Mr. LAWRENCE. Well, I can't say that this has been detrimental to the purposes of the stockpile, although at the time, for example, when the aluminum companies in the United States were forced to buy back all of the aluminum in the stockpile, and I would say that word "force" is a good word to use, there appeared to be, and everybody said the pressure from the White House was terrible. Actually as it turned out, the disposal program of aluminum turned out to be a godsend to the aluminum companies because the demands for aluminum increased so rapidly in a certain period there that there was no opportunity to build new capacity. I think this is a good illustration of why I do not agree with industry that disposals are a deterrant to new capacity. The aluminum industry had no opportunity to build new capacity to

meet the demands and the stockpiled aluminum was there for them and they were able to take care of most of their orders.

Chairman SULLIVAN. Were the manipulations you mentioned in the stockpile objectives after Korea dictated by the White House for political reasons, or by the Defense Department, or by whom?

Mr. LAWRENCE. The Defense Department never got into that. You cannot in any way accuse them. Actually the manipulation was done at the direction of members of the Cabinet.

Chairman SULLIVAN. Done knowingly?

Mr. Lawrence, you say that interagency cooperation in making policy for the strategic stockpile has been good on the whole.

Mr. LAWRENCE. Yes.

Chairman SULLIVAN. But haven't there been some serious conflicts and disagreements within these interagency groups?

Mr. LAWRENCE. Oh, yes, a number of times new objectives were not approved, there were a number of times when disposals were not approved, that type of thing.

Chairman SULLIVAN. In fact, weren't the recommendations of an interagency group which you chaired ignored in making the 1973 decision to lower stockpile objectives?

Mr. LAWRENCE. The interagency group was abolished on orders from the White House before the establishment of the 1-year objectives.

Chairman SULLIVAN. The strategic and critical materials stockpile and related stockpiles are dedicated to national defense. Based on your experience, what role have the Secretary of Defense and the Joint Chiefs of Staff played in making stockpile policy?

Mr. LAWRENCE. Well, they always provided the input for all of the objectives over the years, up until the 1973 objectives, at which time the Department of Defense was deliberately ruled out of any connection with the objectives. They were kept out of all the deliberations.

Chairman SULLIVAN. What, in your opinion, has been the role of the Office of Management and Budget in making strategic stockpile policy?

Mr. LAWRENCE. Well, I think that they were the primary, one of the prime factors in the establishment of the 1-year objectives in

1973.

Chairman SULLIVAN. In yesterday's testimony, Mr. Lawrence, there were a number of recommendations for organizing a stockpiling agency, ranging from industry-held reserves, to a public corporation modeled on the Federal Reserve System or perhaps Comsat, to a strictly governmental agency. Based on your experience with stockpiles, what would your view be on the best way of organizing economic stockpiles? And how would such an organization achieve responsiveness while remaining as independent as possible of special interests or political pressures?

Mr. LAWRENCE. Well, there is no doubt in my mind that if it was determined by Congress that an economic stockpile was necessary, I don't think the function should be changed from the GSA. General Bray just testified he didn't think the Federal Preparedness Agency has the capability now, although I think they could be expanded.

Certainly I don't think anybody other than GSA should have anything to do with the acquisition, disposal and storage. They are al