Following is a substantial part of Admiral Hyman Rickover’s prepared statement to the Joint Economic Committee of Congress on January 28. He testified before the committee shortly after meeting with the Secretary of the Navy who told him, as Admiral Rickover put it, that “he wanted my termination with the Navy within three to six months.”
Excerpts from Admiral Rickover’s testimony follow the text of his statement.
…How to promote greater efficiency and economy in the Defense Department? As you know, I have testified often before congressional committees, including yours, on various aspects of this problem. In some cases, Congress implemented my recommendations for reforms. Eventually, however, defense contractor lobbyists have generally learned how to get around them or have them rescinded.
Former Congressman Chet Holifield, working with the House Armed Services Committee, was instrumental in enacting the Truth-In-Negotiations Act of 1962. I assisted him in that venture. Today there are still contractors that are not in compliance with the act.
In the late 1950s Senator Russell Long insisted that the statute authorizing the National Aeronautics and Space Administration, which at that time was at the forefront of advancing American technology, preserve for the American taxpayer title to inventions developed by government contractors at the public’s expense. This was consistent with the general government policy as embodied in various statutes including the Atomic Energy Act.
In 1980, Congress reversed this longstanding government policy by giving universities and small businesses title to inventions developed at government expense. Now patent lobbyists are pressing Congress to extend that giveaway practice to large contractors. This would generate more business for patent lawyers but, in the process, will promote even greater concentration of economic power in the hands of the large corporations which already get the lion’s share of the government’s research and development budgets.
In the late 1960s Senator William Proxmire, Congressman Henry Gonzalez, and former Congressman Wright Patman were instrumental in enacting legislation requiring the establishment of cost accounting standards for defense contracts and a Cost Accounting Standards Board to set these standards. In 1980 Congress eliminated the Cost Accounting Standards Board by cutting off its funding. And today, defense contractor lobbyists are promoting legislation that would give the Office of Management and Budget authority to waive or amend the standards. I predict that within a few years the standards established by the Cost Accounting Standards Board will have been watered down to the point that they will be worthless.
In the late 1960s and early 1970s Senator William Proxmire, Congressman Jack Brooks, and Congressman Joe Minish were at the verge of getting congressional approval of legislation which would strengthen the Renegotiation Board and make it an effective means of recouping for the US taxpayer any excessive profits made on defense contracts. By 1976 defense contractor lobbyists had persuaded Congress to let the Renegotiation Act expire. Three years later, in 1979, Congress cut off funding for the Renegotiation Board, which promptly went out of business. This left only the profit-limiting provisions of the Vinson-Trammell Act as legal authority for recovering excessive profits under defense contracts. In the fiscal year 1982 Defense Authorization Act, Congress rescinded the profit-limiting provisions of the Vinson-Trammell Act, leaving nothing in its place to protect the public except a few weak and wholly inadequate provisions which apply only during war or national emergency.
Perhaps it is not possible to make significant improvements in defense procurement. It is an arcane subject in which defense contractors, who have a strong financial interest in such matters, tend to be most influential.
I have attached as part of my prepared statement a list of recommendations for improving efficiency and economy in the Defense Department. Not all of my recommendations are procurement-related. The organizational structure of the Defense Department itself promotes inefficiency as do many of the policies and practices of the military….
I gave these recommendations to the Director of the Office of Management and Budget last spring when I met with him. I have seen no evidence of action within the Executive Branch to implement any of these recommendations. Once again, it will have to be Congress that takes the initiatives.
I also recommended that the Joint Economic Committee assign a high priority to addressing the problems growing out of the increasing power and influence of large corporations in our society. If our free-enterprise, capitalistic system is to survive, it is incumbent upon corporate executives to exercise greater self-restraint and to accept moral responsibility for their actions, many of which appear to be having a negative influence on our economy and our society.
A preoccupation with the so-called bottom line of profit and loss statements, coupled with a lust for expansion, is creating an environment in which fewer businessmen honor traditional values; where responsibility is increasingly disassociated from the exercise of power; where skill in financial manipulation is valued more than actual knowledge and experience in the business; where attention and effort is directed mostly to short-term considerations, regardless of longer-range consequences.
Political and economic power is increasingly being concentrated among a few large corporations and their officers—power they can apply against society, government, and individuals. Through their control of vast resources these large corporations have become, in effect, another branch of government. They often exercise the power of government, but without the checks and balances inherent in our democratic system.
With their ability to dispense money, officials of large corporations may often exercise greater power to influence society than elected or appointed government officials—but without assuming any of the responsibilities and without being subject to public scrutiny.
Woodrow Wilson warned that economic concentration could “give to a few men a control over the economic life of the country which they might abuse to the undoing of millions of men.” His stated purpose was: “To square every process of our national life again with the standards we so proudly set up at the beginning and have always carried in our hearts.” His comments are apropos today.
Many large corporations, because of their economic power and influence, have ready access to high-level government officials who, although not always familiar with the subtleties of the issues presented to them, all too often act without consulting their subordinates. This undermines the subordinates and does not always protect the interests of the taxpayer. Some large defense contractors know this and exploit it.
In the business world itself, many corporate executives, aided by shrewd, high-priced lawyers, seek to evade moral and legal liability for the companies they own and control by insulating themselves from the details.
Executives at corporate headquarters often can control their subsidiaries and draw out profits without assuming responsibility for contract obligations. This is the so-called corporate veil through which profits and cash can flow upward to corporate headquarters, but which cuts off financial or legal liability.
Where responsibility is increasingly divorced from authority, traditional business values tend to be lost. Contracts often become meaningless. It used to be that a businessman’s honor depended on his living up to his contract—a deal was a deal. Now, honoring contracts is becoming more a matter of convenience. Corporations are increasingly turning to high-priced law firms which, by legal maneuvering, obfuscation, and delay can effectively void almost any contract—probably even the Ten Commandments. Under these circumstances government contracts with some large companies are binding only to the extent the company wants to be bound.
Ever since the famous Santa Clara County versus Southern Pacific Railroad case in 1886, the Supreme Court has accorded corporations, which are considered “persons” in law, the rights of individuals under the Fourteenth Amendment.
I submit that if a corporation is to be accorded protection as a natural person under the Fourteenth Amendment, then all the obligations incumbent on “natural persons” ought also to be binding on corporations. And, since a corporation acts through its officials, they should be held personally liable for illegal corporate acts.
Woodrow Wilson explained the problem this way:
I regard the corporation as indispensable to modern business enterprise. I am not jealous of its size or might, if you will but abandon at the right points the fatuous, antiquated, and quite unnecessary fiction which treats it as a legal person; if you will but cease to deal with it by means of your law as if it were a single individual not only, but also—what every child may perceive it is not—a responsible individual.
If we are ever to get corporations to act as a “responsible individual,” to use Wilson’s phrase, we will need to attach full responsibility to the human beings who speak and act for it.
Certainly the profit motive is and should be the driving force in the capitalist system—the free-enterprise system is based on it. However, in today’s large corporations, managerial performance too often is measured solely in financial terms. In their world of financial statements, statistical reports, stock certificates, tender offers, press releases, and so on, managers of large corporations often lose sight of the men, materials, machines, and customers of the companies they control. Preoccupied with reports and numbers rather than people and things [they tend] to oversimplify operating problems and their solutions. Further, by focusing too strongly on so-called bottom-line results, corporate officials can generate pressures that cause subordinates to act in ways they would not consider proper in their personal affairs.
Under pressure to meet assigned corporate profit objectives, subordinates sometimes overstep the bounds of propriety—even the law. The corporate officials who generate these pressures, however, are hidden behind the remote corporate screen, and are rarely, if ever, held accountable for the results.
In recent years, several major Navy shipbuilders when faced with large projected cost overruns resorted to making large claims against the Navy. These large claims were greatly inflated and based on how much extra the contractor wanted rather than how much he was actually owed. Ignoring their own responsibility for poor contract performance, they generated claims which attributed all the problems to government actions and demanded hundreds of millions of dollars in extra payments—enough to recover all their cost overruns and yield the desired profit.
Sometimes the claims were many times the desired objective so that the company could appear to be accommodating the Navy by settling for a fraction of the claimed amount.
In evaluating these claims I found numerous instances of apparent fraud. I documented these instances in great detail and, in accordance with Navy directives, sent these so-called reports of fraud to my superiors, recommending that they be referred to the Justice Department for investigation. Other Navy officials made similar reports. The Navy, after carefully reviewing these reports, formally referred them to the Justice Department.
In the 1970s the Navy referred the claims of four large shipbuilders to the Justice Department for investigation. The Justice Department, however, seems incapable of dealing with sophisticated procurement fraud—or perhaps [was] undesirous of doing so. After nearly a decade of work, the status of the Justice Department’s record in these cases is as follows:
—Litton was indicted four years ago for fraud, but the Justice Department has taken no action to try the case.
—The Justice Department conducted a lengthy investigation of Lockheed claims but did not issue an indictment. By now, the statute of limitations has expired.
—After investigating General Dynamics for four years, the Department of Justice recently announced they could find no evidence of criminal intent, although the claims were almost five times what the Navy actually owed.
—The Newport News investigation was recently dealt a serious blow when the Justice Department split up the investigating team and assigned the leading investigators other work. This happened shortly after they had reported their findings in the Newport News case and had asked the department for more help to track down other promising leads.
I believe the grossly inflated claims to which the Navy was subjected during the past decade are an outgrowth of the philosophy that in some companies “anything goes” in meeting the profit objectives set by senior corporate officials.
While profit figures may be a convenient basis to assess management performance, they can be manipulated, particularly in the case of large corporations with their various businesses. Drucker, the management expert, once said: “…Any accountant worth his salt can convert any profit figure into a loss or vice versa if given control of the accounting definitions all unquestionably ‘within the limits of proper accounting practice.”‘
Through “creative” accounting, a large company can tailor its financial statements to convey to stockholders, and others, a picture quite different [from] that warranted by the company’s performance. Some large corporations have been able to generate optimistic financial reports even when they were near the point of bankruptcy.
By assuming, in their accounting, that they would be awarded large claim payments from the government, some shipbuilders, year after year, were able to report to the public increasing profits—even record profits—at the same time they have been reporting to senior defense officials hundreds of millions of dollars in potential losses. They simply assumed for financial reporting purposes that, through claims, the Navy would end up having to pay for all cost overruns.
The reason I mention these problems is to question an increasingly popular notion: namely, that the so-called forces of the marketplace are enough to motivate large corporations to act responsibly and exercise self-restraint.
Businessmen regularly complain that overregulation by government inhibits their freedom and accomplishments, yet it is the very acts of some of them that have made the regulation necessary. Adolf Berle perceptively observed that when business threatens to engulf the state, it forces the state to engulf business.
The notion that we have a self-regulating, free-market economy that will itself prompt a high standard of ethical business conduct is not realistic in today’s complex society. Those who advocate exclusive reliance on the market do disservice to capitalism, since the result is often increased government intervention, the very antithesis of their goal. On the other hand, the destruction of capitalism and the establishment of complete state control are inimical to economic and political freedom.
The survival of our capitalist system therefore depends on finding a proper middle ground between these two extremes.
I believe that businessmen must treat government regulation realistically, rather than with instinctive opposition. Much of government regulation is essential to protect the public against the recurrence of past abuses, and because it is unrealistic to expect any group to truly police itself. Businessmen must face the fact that regulation is inevitable. Blind opposition to all regulation detracts from the valid complaints business may have about the excesses of regulation.
Often the largest businesses—those least subject to the restraints of free enterprise—are the most outspoken advocates of the capitalist, free-enterprise system as an effective safeguard against these excesses. They want the public to believe that they behave in accordance with the free-enterprise system, when in fact they escape many restraints of that system. Consistently they lobby against new government regulations. They herald the virtues of competition and the marketplace as if they were small businessmen subject to these forces. Yet at the same time, they lobby for government—that is, taxpayer—assistance in the form of tax loopholes, protected markets, subsidies, guaranteed loans, contract bailouts, and so on.
Businessmen should vigorously advocate respect for law because law is the foundation of our entire society, including business. Few areas of society are as dependent on law as is business. The law protects such essential rights of business as integrity of contracts. When businessmen break the law, ignore or destroy its spirit, or use its absence to justify unethical conduct, they undermine business itself as well as their own welfare.
They should be concerned with the poor record of law enforcement as it relates to them. They should be concerned about the double standard where an ordinary citizen is punished more severely for a petty crime than corporate officials convicted of white-collar crimes involving millions of dollars….
On Spending Too Much
Senator Proxmire: …Are we spending more than we need to spend on national defense? Is it possible to spend such amounts well or is the pace of the buildup too fast?
Admiral Rickover: I think we are spending too much. I think we should be more selective in our spending. There are certain areas where it’s obvious the danger is going to come if it does come. I think we should concentrate on that. But when anyone has a large establishment, when it’s in business, it’s selflimiting because you stop making profit, but in government there’s no such limitation and there is no good scrutiny going on.
Consider the situation. The Defense Department, on the military side, they change jobs every two years, the top people. On the civilian side, they generally come in without experience. So you have sort of two groups constantly rotating and nobody ever gets time to find out what’s really going on. Therefore, it has to depend on its supporters. I think considerable money could be saved in the Defense Department. I think there are areas to cut down. I don’t want to get into details here, but you can imagine that I’ve thought about this for many years….
For example, take the number of nuclear submarines. I’ll hit right close to home. I see no reason why we have to have just as many as the Russians do. At a certain point you get where it’s sufficient. What’s the difference whether we have 100 nuclear submarines or 200? I don’t see what difference it makes. You can sink everything on the oceans several times over with the number we have and so can they. That’s the point I’m making.
The Arms Industry
Chairman Reuss: What would you think of a sunset provision whereby the government would say to the arms industry, “Look, you’ve got ten years to shape up. If you don’t, we’re going to do what France is now doing, namely, nationalize the arms industry”?
Admiral Rickover: There’s no possible means that I see under our system of government where you can go to the industry and tell them they’ve got ten years to do this or that. You can’t do that. I don’t think it’s legally possible.
Chairman Reuss: How would you approach it?
Admiral Rickover: I think you’ve got to nationalize them. I’ll tell you what that means. Take shipbuilding, which is something I’m quite familiar with…. I think you would find it ultimately much cheaper to have a lot of this work done in government yards. I’m not a proponent of doing things in government places—government shipyards—but the issue has come to such a point. Now it costs more but why does it cost more? Because the shipyards—I’m sticking to that one because I know a lot about that—the salaries they pay [are] mandated by law. They have many other regulations to which they must conform and these regulations are not binding on private industry. So the relationship—the comparison is an unfair one.
In my opinion, from what I have seen, it is just as efficient overall for the United States Government, the way industry is doing now, to build a ship ingovernment-house.
Chairman Reuss: So you’re saying don’t wait ten years?…
Admiral Rickover: Every time I have tried that—do you think the Defense Department will ever go along with anything on that? They will not. They will not. They will always protect private industry because that’s where they come from and that’s where they’re going back to.
Chairman Reuss: But your view is that the nation would be better served if the public controlled its arms industry?
Admiral Rickover: Well, I’m not saying total public control because basically, as I testified, I believe in private industry without abuse. What has happened in the arms industry, we have permitted considerable abuse and I think some of that can be changed by law, and one means—and this was recognized in World War II—we had to do work in public yards to set a mark, what it should cost. We didn’t do that and they went all overboard. Now perhaps in a roundabout way have I answered the gist of your question?
Chairman Reuss: You surely have. My time is up, but am I right in interpreting what you say as advocating a sort of TVA yardstick approach?
Admiral Rickover: That’s right.
Chairman Reuss: In which the government and various aspects of the arms industry would have its own operation?
Admiral Rickover: Yes. You can easily make a comparison. You know how much extra you have to pay the people because of government rules and you could then measure your efficiency.
Now let me give you an example. In our largest submarine building yard, the manager is there less than half the time. He’s doing other business for the company—maybe much less than that. In the next largest yard he’s also only there half the time. So it’s not his business. His job is to make money for the company. They don’t care where he is. They don’t care how the work goes. The government pays for it. There’s no incentive. There’s no real responsibility…. One large shipbuilder, the president, told me all they wanted to do in their yard building Navy ships was to make just the profit they make from a commercial work. He thought I was a damned fool and we went, as I mentioned, to the Securities and Exchange Commission and they were making about twice as much profit on the Navy business as they were on the commercial business. When confronted with that, then he gave some other reason. So that’s it.
Now I’m the only one who knows these facts and the only one that will come out here and tell you very frankly what they are.
On Nuclear Power
Senator Proxmire: What do you think the appropriate role for government is in civilian nuclear power?
Admiral Rickover: I do not believe the government should spend money fostering nuclear power. Government should have people checking on their operation. I do not believe the government should subsidize the development of commercial nuclear power. They have done enough now.
Senator Proxmire: Admiral, civilian nuclear energy has nearly come to a standstill in this country. Will it ever become a viable source of energy in the future? In our state, for example, 30 percent of the electricity is provided by nuclear power and yet I’m told they don’t have any plans at all, any prospects, of building any further nuclear facilities.
Admiral Rickover: Well, you’re asking me two different questions. I’ll try to answer them. One, I think that ultimately we will need nuclear power because we are exhausting our nonrenewable resources; that is, coal and oil. I think they will go far more rapidly than we think they will and the cost is already going up. I believe that nuclear power for commercial purposes shows itself to be more economic, but that’s a fake line of reasoning because we do not take into account the potential damage the release of radiation may do to future generations.
I’ll be philosophical. Until about two billion years ago it was impossible to have any life on earth. That is, there was so much radiation on earth you couldn’t have any life—fish or anything. Gradually, about two billion years ago, the amount of radiation on this planet and probably in the entire system reduced and made it possible for some form of life to begin and it started in the seas, I understand from what I’ve read, and that amount of radiation has been gradually decreasing because all radiation has a half-life which means ultimately there will be no radiation.
Now when we go back to using nuclear power we are creating something which nature tried to destroy to make life possible. Now that is the philosophical aspect, whether it’s nuclear power or using radiation for medical purposes or whatever. Of course, those are not bad because they don’t last long, but every time you produce radiation, you produce something that has life, in some cases for billions of years, and I think there the human race is going to wreck itself, and it’s far more important that we get control of this horrible force and try to eliminate it.
I do not believe that nuclear power is worth it if it creates radiation. Then you might ask me why do I have nuclearpowered ships? That’s a necessary evil. I would sink them all. Have I given you an answer to your question?
Senator Proxmire: You’ve certainly given me a surprising answer. I didn’t expect it and it’s very logical.
Admiral Rickover: Why wouldn’t you expect it?
Senator Proxmire: Well, I hadn’t felt that somebody who’s been as close to nuclear power as you have and who’s been so expert in it and advanced it so greatly would point out that, as you say, it destroys life….
Admiral Rickover: I’m not proud of the part I’ve played in it. I did it because it was necessary for the safety of this country. That’s why I’m such a great exponent of stopping this whole nonsense of war…attempt[s] to limit war have always failed. The lesson of history is when a war starts every nation will ultimately use whatever weapon has been available. That is the lesson learned time and again. Therefore, we must expect, if another war—a serious war—breaks out, we will use nuclear energy in some form. That’s due to the imperfection of human beings.
Senator Proxmire: What do you think is the prospect, then, of nuclear war?
Admiral Rickover: I think we will probably destroy ourselves, so what difference will it make? Some new species will come up that might be wiser. We think we are wise because we have—
Senator Proxmire: With that knowledge, it would seem to me that we could control, limit, reduce nuclear weapons. Everybody loses.
Admiral Rickover: I think from a longrange standpoint—I’m talking about humanity—the most important thing we could do is start in having an international meeting where we first outlaw nuclear weapons to start with, then we outlaw nuclear reactors too….
Senator Proxmire: So you think if we have the commitment, we can limit and reduce our arms?
Admiral Rickover: Yes. Yes. I remember the 1921 disarmament conference. That’s the one Charles Evans [Hughes] went to. The United States called that conference and it came to very significant results. There was an arms race going on. England and France and Italy were building a lot of ships and we were building a lot and it was decided and it worked and resulted in the limitation of arms. The treaty expired in 1935.
I think it would be the finest thing in the world for the President of the United States to initiate immediately another disarmament conference where we at least stop that. It can be done. They did it then. They did it for a period of fifteen years. It expired in 1935, and then by that time Hitler had come to power in Germany and there was no choice of continuing it. Had it not been for him, probably the disarmament would have gone on and decreased the amount of armaments even more. But I think this is a very propitious time, when the military expenses are eating up so much money and it’s completely unproductive, and using so much of the people’s taxes. I think this is a fine thing for the President to do and I urge you, in your capacity as a Senator, to try to do so and make me a member of it. I’ll do something. Put me in charge of it and I’ll get you some results….
March 18, 1982