BIG BROTHER AS A HOLDING COMPANY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-01315R000300440002-2
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 9
• Document Creation Date: December 16, 2016
• Document Release Date: October 15, 2004
• Sequence Number: 2
• Publication Date: November 30, 1968
• Content Type: MAGAZINE

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"The contract state of the postwar world must be viewed as a
drastic innovation full of unfamiliar portents .... Instead of fighting
`creeping socialism,' private industry on an enormous scale has be-
come the agent of a fundamentally new economic system which at
once resembles traditional private enterprise and the corporate
state of fascism." ---H. L. NIEBURG, In the Name of Science
[IT'S A SIGN OF THE TIMES]
CCORDING TO OUR COMPUTER," SAYS Robert Allan
Jr., head of Litton Industries' Greek project,
"there's less than 800 weeks before the present
trend will be irreversible. . . . The need for food
and the lack of capacity of technology in ... underdeveloped
nations will be overwhelming.... It's time that we got to work
omit." To listen to Litton executives and to read their annual
reports, one might suppose that Litton was some enormous
social welfare agency rather than a multibillion-dollar defense
contractor. In reality, it is both of these and more.
Litton Industries produces S&H Green Stamps and Stouffer
Foods, missile guidance systems and nuclear attack sub-
marines. It runs important programs of the War on Poverty
at home. And abroad it recently secured an $800 million
contract-to which Mr. Allan's statement referred-with
the Greek military junta for the economic development of the
whole geographical region of Western Peloponnesus and
Crete. Litton is the perfect example of the new corporation
extending itself beyond the limits that have divided the private
oligarchies of business from the realms of responsibility
traditionally reserved to government.
Already a new crop of names has appeared to describe this
development, among them "New Industrial State" and
"Contract State," as well as the older and more restricted
term, "Military-Industrial Complex." The shape of the new
social and economic system that is emerging from behind
these labels is as distant from the classical image of "free
enterprise" capitalism as is Allan's statement from anything
that one might expect to hear from a Calvin Coolidge, much
.less a Henry Ford.
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Among the corporate bearers of this brave new American
future, Litton stands out as something of a paradigm and
archetype foreshadowing the shape of things to come. It is
not just the new corporation, but the Now Corporation. It
has gathered about itself the full mystique of modernity:
advanced technology, the "systems engineering" approach
(a product of military contracting), electronics and space. And
the mystique has paid off phenomenally well, with a corporate
growth rate which Business Week says may well be the fastest
in the history of U.S. business.
In 1953, when a group headed by Charles "Tex" Thornton
bought Litton, then a small electronics firm, for $1.5 million,,
the company showed $3 million in sales. This year its worth
has grown to a fantastic $1.8 billion level, making it the
44th largest industrial corporation in the U.S., ranking ahead
of such traditional giants as Alcoa Aluminum, Coca-Cola and
Dow Chemical. The aura of futuristic competence that sur-
rounds and powers Litton's conglomerate explosion is rein-
forced by the higher circles of the business world: Fortune, the
Social Register of the business establishment, describes Litton
,as "the very symbol of all that is modern in U.S. management
and calls its guiding captains "as brilliant a group as can be
found at the head of any corporation in the world."
It is perhaps natural that the guiding forces of American
society, frustrated by the nation's stubborn social ills which
appear to be insoluble by traditional means, should turn to
the methodology of military-space development as the Way
to Get Things Done. Unable to confront the real moral and
political dimensions of its economic and social crisis, the
American leadership defines the crisis as basically a technical
problem. and is immensely comforted thereby: the technical
problem is large, to be sure, but it is one that can be handled
without any serious reassessment of American values and
institutions-and without the social upheaval that might be
necessary to restructure them. If engineers employed by private
corporations on contract to the government can put men on
the moon, it is reasoned, surely they can cure the social and
economic crisis at home.
The social engineering approach to race and poverty is
merely the logical extension of the pervasive liberal doctrine of
pragmatic America and the "end of ideology." As John F. Ken-
nedy, whom many look on as the last national statesman to
bear the torch of idealism, affirmed in his famous Yale
address in 1962: "What is at stake is not. some grand warfare
of rival ideologies which will sweep the country with passion,
but the practical management of a modern economy. What
we need is ... more basic discussion of the sophisticated and
technical issues involved in keeping a great economic ma-
chinery moving ahead."
The domestic upheavals in the years following President
Kennedy's address have torn to shreds the mythology of the
crisis-free welfare state. But the mythology of salvation through
the application of technology by the Great Partnership be-
tween government and the private corporations has not only
survived, it has risen to a new intensity of apocalyptic promise.
The theme recurs across the political spectrum, though
Democrats may call it a domestic Marshall Plan while
Republicans and Wallacites more candidly emphasize Incen-
tives to Business.' And if the extension of the contract state
means further entrance of a military-social-industrial complex
into governance of American society, maybe it is just the right
outfit for the job.
rTTON INDUSTRIES WAS Ai-it VIKai wiyvcauu.. w .C.~., ~. .
one of the poverty program's multimillion-dollar
job corps camps-whose large urban centers are now
L run completely by private enterprise-and was an early
promoter of the "military systems" approach for other areas of
national policy. As the idea has caught on, proposals have
proliferated. General Bernard Adolph Schriever, special Ad-
ministration consultant on housing and urban development pro-
grams, has already suggested that aerospace's management
process be applied to these programs, and aerospace industrial
teams have begun pushing for contracts in such areas as urban
traffic management and water conservation (California's waste
disposal program is in the process of being handed over to Aero-
jet-General). Litton, for its part, has offered to contract whole
local school systems, promising to put them on a sound
footing and to run them smoothly and economically-a logical
step since it is already a major textbook publisher and runs a
college of its own in Michigan. It is a proposal that may well
appeal to harried parents and tax-ridden homeowners.
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Litton industries has been the corporate success story of the
postwar period just because it is the perfect product of the
times, custom-made to fit the outlines of the new order. For
the same reason, it is a perfect image of the economic develop-
ments of this period: the vast expansion of the military budget
during the Cold War and the largest corporate merger wave
in U.S. history.
While the notion or a military-industrial complex has gained
currency in recent years, the technological underpinning of the
new intimacy between government and business has gone
largely unnoticed. Yet fully 70 per cent of all research and
development being done in the United States today (about $16
billion worth), is paid for by the federal government, whereas
a little more than 20 years ago it supported almost none at
all. The significance of this for the civilian economy was spelled
out recently by Litton's number two man, Roy Ash, in explain-
ing his company's relation to the military sector. Since "almost
all new products have their first application in military uses,"
said Ash, "we always want at least 25 per cent of our business
in defense and space."
Ash's statement and the facts behind it reflect the final
collapse of the cornerstone of old-fashioned capitalism. In the
old days private corporations would develop technological
innovations at their own expense, risking the outlay with a
view to being rewarded by future returns from the competitive
marketplace. This was the very essence of entrepreneurship.
I lowever, technical research has now become extremely expen-
sive, and because of the gentlemanly pace of competition
among the monopolistic giants of the American economy, these
corporations are no longer forced by fear of rivals to risk such
investments. So they have become accustomed to getting the
government to pick up the tab before they move. These corpo-
rations have grown economically lazy, in part because they
really can live better on the largess of the so-called welfare
state. One of the factors that has made it possible for them to
pry such huge sums of research money out of the government
has been the unprecedented increase in the concentration of
economic-and with it, political-power in tli~ last decade.
This tremendous concentration movement in the economy
has been spearheaded by the advance of the "conglomerate"
corporations, formed by the acquisition of companies oper-
ating in diverse markets. Litton is the star of this movement,
with enterprises in 18 distinct industrial categories.
To an uninitiated observer of the conglomerate phenomenon,
Litton's fantastic rise has a' distinctly mystifying air about
it, like some kind of psychic levitation. For despite all the hulla-
baloo about new technologies and go-go management, Litton
can point to no revolutionary innovation which has benefited
the civilian economy and represents a tangible basis for its
surging nonmilitary growth (about two-thirds of Litton's
present sales, according to Roy Ash, are in civilian fields).
One has alily to think of Xerox and Polaroid, where jet-
powered corporate growth and revolutionizing technology
have gone hand in hand, to bring the contrast into focus. It is
not that Litton produces nothing innovative or useful (if inertial
guidance systems for missiles and fighter planes can be consid-
ered useful), but rather that nothing Litton has marketed seems
to warrant its unparalleled record of corporate expansion. In-
deed, most of Litton's technological innovations were already
being developed in the 70 and more businesses which Litton
has acquired-before they became part of the parent firm. ,
Yet to be mystified by this is merely to confuse what
Thorstein Veblen called the "business system" with the
industrial system-that is, to mistake the system of developing
and implementing technologies to meet human needs for the
system of making a bucl: off them. Litton's success is a function
almost entirely of a brilliant, if sleight of hand, business
strategy, with the U.S. government as silent partner. If the
constituents of its success seem somewhat insubstantial to the
ordinary man, the cash it has made is real. And in the "business
system," it is the cash that counts.
To mastermind such a success in the business world, as in
the theater, one must learn to live in an attenuated universe
where the fictitious is more tangible than the real. At a very
early age, Tex Thornton, the brains behind Litton, learned
just that.
[GROWING UP WITH TEX]
"Tex Thornton-good abilities along a few lines but not a
good all round man; Is unprincipled, ruthless and is universally
disliked; cannot be trusted."
-FROM A CONFIDENTIAL MEMO PREPARED BY A MEM13ER OF THE
PRESTIGIOUS WALL STREET ACCOUNTING FIRM OF HASKINS &
SELLS; MARKED AS AN EXHIBIT IN THE STEELE VS. LITTON CASE.
EX THORNTON IS THE PARADIGM new corporate manager
of the paradigm new corporation. His career follows
the now well trodden path from civilian Washington
to the military to the corporate elite.
Thirty years ago Tex Thornton was a $1400-a-year clerk
in Washington; today he is a university trustee, a member of
the President's Advisory Commission on Civil Disorders (the
Kerner Commission) and head of its special Advisory Panel
on Private Enterprise. He was one of a handful 'of nominees
considered to succeed Robert McNamara as secretary of
Defense, and according to a Washington Post columnist he is-
with typical military-industrial bipartisanship- presently being
considered by Richard Nixon for that job. He has already
achieved the coveted seat next to the President at White I louse
business meetings. In addition to being chairman of the board
of Litton, he is an "interlocking director" of such giants as
TWA, Lehman Corporation, General Mills, the Western
Bancorporation (a bank holding company for the Bank of
America interests) and Union Oil. Needless to say, in Thorn-
ton's new circles being a millionaire is not at all unusual, but
he has already made $80 million and is aiming for the status
of centimillionaire. If the market for Litton stock holds up, he
will soon make it. Tex Thornton has conic a long way, and
the Horatio Alger award he received in 1964 was shrewdly given.
Soon after Tex was born in a small north central Texas
town, his father ran off, leaving his mother to drill him in the
manly art of finance. When he was just twelve, she was
already encouraging him to use his earnings from odd jobs
to buy land, instead of frittering his money away like a kid. He
eventually accumulated nearly 40 acres. By the time Tex was
fourteen, every store in town would accept his personal check.
And he was all of nineteen when he launched his first real
business venture: a combination gas station and Chrysler-
Plymouth dealership.
Later, setting his sights always higher, he enrolled in Texas
Technological College, starting first in engineering, but switch-
ing quickly to business administration-after all, the engineer
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works for the businessman. He quit Texas Tech in his junior
year and took off for Washington to check out the action in
the School of Life. In Washington he returned to college and
got his Bachelor of Commercial Science in 1937. His first job
was as a clerk in the Department of the Interior.
For four years Tex was unable to find that combination of
business-military-political influence which he needed to power
his ascent. When he did find it, its name was Robert Lovett,
Wall Street banker and assistant secretary of War. Lovett was
not just a run-of-the-mill Wall Street banker, either; he was
destined to become-in the euphemism of such a scholar as
Arthur Schlesinger Jr.-one of the co-chairmen of the Amer-
ican establishment. Highly impressed with the twenty-eight-
year-old Tex, Lovett suggested that he join the Army (it was
pre-Pearl Harbor 1941) as a second lieutenant. Apparently a
brilliant officer, Thornton received his first promotion within
48 hours. A series of such jet-assisted takeoffs made him one
of the youngest full colonels in the U.S. Army, a(One point with
as. many as 2800. officers working for him around the world.
Like the present secretary of Defense, Clark Clifford, whose
military career had a striking resemblance to Thornton's (see
RAMPARTS, August 24, 1968], Tex never left his desk. Yet the
War Department honored him with a Legion of Merit, a Com-
mendation Ribbon with two oakle-af clusters, along with a
Distinguished Service Medal that Tex still wears on his lapel.
"It's the kind of thing a guy would wear," observes one of his
detractors, "if he wanted you to think he had been a big com-
bat hero during the war."
It was at this point that Tex's instinct for the Combination
manifested itself. The federal government, with an assist from
banker Lovett, had gathered, as if for Tex's own benefit, an
array of managerial talent which, if offered in the right package
on the business market, could command a premium price. So
Tex organized nine of his subordinates into a team-later
known as the Whiz Kids-and offered it to Henry Ford II
with price tags of around $10,000 a year each on the nine, and
$16,000 on himself, the commanding officer. With Lovett's
blessing, Tex sold his package. Ford did not do too badly on
the deal, gaining four future divisional bosses and two presi-
dents of the company, including Robert Strange McNamara
who was later to become-on Robert Lovett's nomination-
secretary of Defense.
T THIRTY-TWO TEX HAD BECOME director of planning for
one of the giants of U.S. industry. Within only a few
years, however, Thornton's ambition brought him
into collision with his superiors at Ford. So he offered
his services to Hughes Aircraft. Apparently, Thornton was not
exactly welcomed with open arms. Noah Dietrich, then financial
head of the company, strongly objected to hiring him. But with
the help of two of Tex's old Army buddies, Generals George
and Eaker, who were on the board, Dietrich was overruled. As
assistant general manager Tex took command of operations
and hired his future right-hand man, Roy Ash-a Bank of
America statistician with no accountancy training-to be
assistant comptroller. Ash had been one of Thornton's sub-
ordinates during the war.
Hughes' business, especially with the newly independent
Air Force, boomed. In 1948, Hughes did a total of $2 million
in sales. By 1953, when Thornton left Hughes, the figure
was $200 million. The biggest boost came from the Korean
War and an exclusive contract to produce a special Fire
Control System (a device to regulate the firing of aircraft guns).
The contract with the government for the control system was
on a "fixed price, redeterminable" basis; that is, a price was
agreed on at the outset which could be "redetermined" if costs
increased. Based on the ongoing costs of material, Hughes
,received periodic "progress payments."
Thornton and Ash were very anxious to have Hughes Air-
craft make a profit on this contract-a little too anxious, it
would seem. According to sworn court testimony which con-
vinced the jury in the case of Steele vs. Litton Industries
(although the judge suspended the verdict on a legal point), and
.a number of other suits and counter-suits, the following
picture emerges:
Hughes Aircraft's accounting department was unable to
keep track of the costs under the fire control contract and began
falsifying the affidavits they were required to submit to the
government regularly, stating the current costs. Thornton and
Ash found out about this, but far from stopping the procedure,
they encouraged it. James 0. White, one of the company's
accountants, gave the following testimony:
Q: In substance, did somebody tell you that Mr. Thornton
had said that, "We want to file false affidavits"?
A: In substance, yes.
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Q: Who was this?
A: Ash.
Q: What did he say?
A: He said, "Tex wants to get the money and we're to do
it any way we can to get it."
Another means of cheating the government was artfully
described as "midnight requisitions." Clerical personnel were
called in after-hours and on weekends and told to fill out
'millions of dollars worth of phony requisitions. Again James
White's testimony explains:
"They [the requisitions] were filled out by people who had
no knowledge of the facts, who had not used the parts, who
had not withdrawn them from stores. They were put into the
records as though they had. They were made to look as though
they had been proper. They were backdated. They were made
to look as though they had been handled by factory people
instead of office people, dirtied, in other words, to make them
look old and genuine as having come through the shop. They
were complete forgeries."
Eventually a group of five CPA's revolted and refused to
continue these procedures for fear of losing their certificates.
When they told Thornton they would resign, he told them to
be quiet and be "good company men." They went to General
Harold George, nominally head of the company, but his po-
sition was that, "This is something . . . generally indulged
in by other military contractors," and he "didn't think there
was anything out of order."
The CPA's resigned after taking their case to the Hughes
directors. But Secretary of the Air Force Harold Talbott had al-
ready learned of the indiscreet management at Hughes and had
given Howard Hughes himself an ultimatum: "Either change
your management or sell the company. By God, I'll give
you 90 days."
On September 1, 1953, Howard Hughes locked Thornton
and Ash out of their offices. By February of 1954, Hughes
Aircraft had paid back some $43 million to the Air Force
which had been "misappropriated" during the stay of Thorn-
ton and Ash.
I Hl? LOCKOUT AT HUGHES WAS TEX Thornton's lucky
day. For at the same time as he was being kicked
t out, there was a massive walkout of disgruntled top
.- engineers and executives, men who went on to found
such stars of the conglomerate aerospace field as TRW and
Teledyne. Tex managed not only to lose himself in the exiting
crowd but also to take some talent with him. Emmett Steele,
with an ingratiating personality and invaluable contacts in the
Pentagon, was to become his sales manager, and Hugh Jamie-
son his top engineer.
Meanwhile, Charles V. Litton, owner of Litton Industries,
having suffered a family tragedy, was ready to sell his small
electronics firm. And Thornton and his team were on the
lookout for just such a deal. However, Litton apparently
regarded Thornton as untrustworthy and was reluctant to
sell to him. At one point he even broke off negotiations. Ac-
cording to Litton, it was Jamieson and Steele who finally
convinced him to sell. (This was a key point in the breach of
promise suits which the two later brought against Tex for
allegedly defrauding them of their original shares of founders'
stock. Jamieson, who had agreed to testify in Steele's case as
well, suddenly settled out of court for a sum estimated at any-
where from $3 million to $20 million.)
With Litton ready to sell, all that Tex needed was cash to
consummate the deal, and that meant a trip back to Robert
Lovett's milieu and the giant investment banking house of
Lehman. Joe Thomas, Lehman's partner and a fellow Texan,
provided $1.5 million to buy Litton, in exchange for 75,000 of
the original 575,000 shares. Common stock cost Lehman's
investors ten cents a share. During the next decade and a half
it sold for as much as $150. It was no doubt one of the best
deals the Lehmans had cut since they helped finance the
slave South's cotton crop during the Civil War.
"... It was obviously only a question of time before some smart
fellows would start building companies not around the logical
progression of 'a business but around what would beef up the
numbers." -"ADAM SMITH," The Money Game
HEN TEX THORNTON AND COMPANY took over
Litton, it was essentially a laboratory production
office, a very modest enterprise. After four years
under the new management, Litton's annual sales
had risen from $3 million to $100 million-and that was just
the beginning.
The traditional conception of the growth of a business
brings to mind images of the firm selling more of its products,
creating new ones, and building new plants to produce more
to sell. Only a fraction of Litton's growth, in fact, was achieved
in this way. Of the $97 million increase during Tex's first four
years, for example, sales from Charlie Litton's original -firm
accounted for only $11 million. The rest of the increase in
sales resulted from the acquisition of some 17 previously
existing companies and their incorporation into a new overall
financial superstructure: "Litton Industries, Inc." As Thornton
explains, "We had to grow fast. There wasn't time to learn a
business, train people, develop markets. .. .We bought time, a
market, a product line, plant, research team, sales force. it
would have taken years to duplicate this from scratch."
Buying, not building, was the formula of Litton's growth. To
understand how a small firm with limited resources can buy
itself into bigness, one must understand how corporate growth
can feed on itself. For the very act of merger creates new power
to merge on an even larger scale through its effect on the
value of the corporation's stock.
The value of the stock and therefore of the corporation is
not determined by adding up the values of tangible assets: cash
reserves, inventories, equipment, plant and so forth. The value
of the stock is determined by what people are willing to pay
for it, and they will pay more now if they expect its value to
rise in the future. Of course these are not just expectations of
expectations, but are ultimately derived from an assessment of
the potential for real growth of corporate assets and earnings.
Expectations, however, are by nature intuitive, and intuition
can be influenced by all kinds of intangible factors. Jack Drey-
fus, head of one of the biggest mutual funds on Wall Street,
once commented wryly on the subjective "glamour" factors
which have gone into making the stock of corporations like
Litton highly valued on the market, by offering his own
prescription for such a success: "Take a nice little company
that's been making shoelaces for 40 years and sells at a re-
spectable six-times-earnings ratio. Change the name from
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LITTON INDUSTRIES ANNUAL REPORT 1963
Shoelaces Inc. to Electronics and Silicon Furth-Burners, In
today's market, the words 'electronics' and 'silicon' are worth
15 times earnings. However, the real play comes from the
word 'furth-burners,' which no one understands. A word that
no one understands entitles you to double your entire score.
Therefore, we have six times earnings for the shoelace business
and 15 times earnings for electronics and silicon, or a total of
21 times earnings. Multiply this by two for furth-burners and
we now have a score of 42 times earnings for the new company."
The key to conglomerate growth is the fact that a company's
stock can be-and ordinarily is-the "money" that is used
to purchase another corporation. So a smart businessman can
make the process come full circle. By successfully creating a
glamorous "growth image" on the stock market that excites
expectations of real future growth, he can drive the value of
his stock up. This then gives him new "money" with which to
buy real assets in the form of another corporation: in other
words, his business can grow in fact and nOt just on paper,
thereby confirming the expectations he aroused and further
strengthening the image. And so the circle becomes a spiral of
increasing growth.
It is small wonder, then, that creating a glamour image is a
major preoccupation of conglomerate managements like Lit-
ton's. Indeed, Litton was a pioneer in converting the tradi-
tionally staid Annual Report to Stockholders into a high-class
Advertisement for Myself. Litton's reports look more like cata-
logues from Pasadena's Huntington Museum of Art than
informational materials from a major industrial corporation.
Abraham J. Briloff described it in the Financial Analysts
Journal: "Litton's 1967 report is, as you undoubtedly know, a
most beautiful document . . . which symbolizes the ethics of
20th century commercial life in the New Industrial State .. .
distorted in my view is the series of graphs most beautifully
set to type at page 55 of the annual report. . . . The curves
which the eye is invited to make are optical illusions capable
of inducing inappropriate investment decisions."
Another art which is employed in the production of a
glamour image is creative accounting. This important tech-
nique of the Big Growth game is made possible by the loose-
ness of the principles under which firms are audited. The usual
methods are not as crude as those that were used at Hughes
Aircraft, but their effects can be pretty significant.
As the pseudonymous "Adam Smith" notes in The Money
Game, "Numbers imply precision, so it's a bit hard to get used
to the idea that a company's net profit could vary by 100 per
cent depending on which bunch of accountants you call in,
especially when the market is going to take that earnings
number and create trends, growth rates, and little flashing
lights in computers from it. And all this without any kind of
skulduggery you could get sent to jail for." An explanation for
this legal generosity was given by the real Adam Smith, the
18th century prophet of the free enterprise system. The very
purpose of government, he wrote, was "to secure wealth, and
to defend the rich from the poor."
77 HE SPREAD BETWEEN ONE SET of figures and another
can be the difference between a real glamour stock and
a merely good performer, as evidenced by Litton's
1967 report, which with one flick of the accounting
wrist boosted the figure for the increase in the corporation's
earnings over the previous year from 15 to 26 per cent. This
was accomplished by ignoring the pre-merger earnings of
newly-acquired companies when estimating the increase. And
this is only one of the gambits available to merger oriented
firms. As "Adam Smith" observes, "If you are busy buying
and selling companies, every time they pass through your
accounting firm you get the chance to try to describe artistically
some of the assets its earnings, to capitalize costs that have
previously been expensed, and in general to create what Wail
Street is looking for, which is a neat pattern of constantly
growing earnings."
Conglomerates are so obviously based on highly speculative,
not to say shady, principles that even the Wall Street Journal
has been prompted to take off its gold-rimmed rose-colored
glasses for an instant and ask a few probing questions about
them: how much of their growth is based on improved pro-
ducts and efficiencies and how much reflects the attractive
arithmetic of acquisition and the temptations of empire
building? ... Can they be managed efficiently?
This last question has an especially poignant ring for Litton's
supermanagers. In 1968, Litton's second quarter report ad-
mitted a disastrous 30 per cent earnings drop (Litton's stock
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price plunmwted nearly 50 per cent at the news), reflecting
managerial errors so gross that not even the most creative
accounting techniques could cover them up.
The mistakes affected several of Litton's divisions, including
its business furniture, Royfax duplicators, Monroe calculators,
and its Royal typewriter line. But the biggest error of all pro-
vided the clue to the overall pattern of Litton's debacle. The
Litton shipyard, which had been accustomed to it rich diet
of cost-plus contracts at the government trough(" Your chances
of losing money" under such contracts, admits a Litton
executive, "are not too great"), had for the first time hid
competitively on a package basis for the construction of auto-
mated merchant vessels-a civilian contract under which you
don't get to come back for more money if you can't make it
at the agreed-upon price. The result of this market test was
that Litton underestimated the costs, submitted a bid that was
too low, and instead of netting a profit, had to write off a loss
of S8 million.
In what must rank as the understatement of the year, For-
tune, after noting that the key to Litton's setback was its
inability to stand the test of the relatively competitive civilian
market, observed: "The requirements for profitability in
government work are less exacting than those of the private
marketplace." They certainly are.
Under government contracts there is a decided lack of com-
petitive strictures. Little or no capital is risked by the corporation.
If it makes errors of judgment, timing, cost analysis and so forth,
there are no competitors to take advantage of its mistakes.
And it has an enormously understanding buyer. If costs are
underestimated, they can always be adjusted up through
contract renegotiation. One former Litton executive with
responsibilities in this area estimated that as a matter of
normal practice, Litton in the course of production and de-
velopment renegotiated its contracts to one and a half times the
original price-a nice margin for inept planning and mis-
management.
In short, its vulnerable, soap-bubble growth strategy could
never have carried Litton so far had it not possessed the ability,
though a small firm at the outset, to get a front-line position in
the prime military contract game and latch'on to that secret
fuel which alone can. launch space age corporations towards
the moon: the financial largess of the state.
... the creation of the U.S. Air Force as a separate military
service . . . may have had more important consequences for
U.S. industry than any other event in recent decades."
-FORTUNE, SEPTEMBER 1968
1717 III: ,IIiGII POINT OF LITTON'S Close connections in
Washington was reached during the reign of Tex
Thornton's one time subordinate, Robert McNamara,
as secretary of Defense. Thornton, who was often a
breakfast guest at the Pentagon, claims never to have talked
business with the secretary during those visits. But, as the
executive of another corporation in the contract field ob-
served in a RAMPARTS interview, "A clever man would
merely let it be known that he was having breakfast with
McNamara every other morning. When talking to procure-
ment officers and the like, he wouldn't even have to mention
McNaniara's name."
The subtle but far-reaching significance of good connections
was pointed out by the leading student of the military-indus-
trial complex, Professor H. L. Nieburg: "Officials in the lower
reaches of the government bureaucracy (both civilian and
military) charged with administration of contracts, find them-
selves dealing with private corporate officials who often were
their own former bosses and continue as companions of present
bosses and congressional leaders who watchdog the agencies. A
contract negotiator or supervisor must deal with men who can
determine his career prospects; through contacts, these indus-
trial contractors may cause him to be passed over or transferred
to a minor position in some remote bureaucratic corner, some-
times with a ceremonial drumming before it congressional
committee."
Among Litton's vice presidents are Joseph Iniirie, a former
undersecretary of the Air Force, and John I-l. Rubel, a former
assistant secretary of Defense (a key member of the McNa-
mara team). But what may be Litton's most important con-
nection is Tex's close friendship with George Mahon, chairman
of the vital House Appropriations Committee. Mahon's Texas
district lies near Thornton's home town, and Tex has been
friendly with him since the Whiz Kid days at Ford. According
to the previously quoted executive, Mahon "is a very dedicated
public servant, but he doesn't know how to handle the power
he has. This friendship [between Mahon and Thornton] has
had more to do with the growth of Litton's military contracts
than any other factor. Tex has played Mahon like a fiddle."
But political strings are only half the story. More than any-
thing else, it is the defense contracting system itself, as it
evolved after World War 11, which has created the new and
sinister relationship between the giant corporations and
the state.
Following the profiteering scandals of World War 1, which
revealed that American business had milked the American
taxpayer by "sliding" price policies on military contracts, and
had spent the lives of many American soldiers by producing
cheap, shoddy equipment, the practice of competitive bidding
on government contracts was instituted to simulate the open
market. The two armed services developed their own "in-
house" design and production capabilities which served to
measure and check outside performances. Under the pressures
of the Second World War, contracting procedures on aircraft,
ordnance and ammunition reverted to the cost-plus basis
which had inspired the earlier scandals. Then a series of de-
velopments after the war produced the current unprecedented
state of affairs.
First, as part of a movement heralded as a return to "free
enterprise," plants, factories and facilities built by the govern-
ment during the war were either sold to private corporations,
usually at a fraction of their original cost, or were leased at
nominal fees to contractors, to use for military contracts. This
largely deprived the government of the performance "yard-
stick" of its in-house facilities.
Second, the Air Force was established as an independent
military service. Naturally, it did not have the already built
in-house capabilities of the other two services, so it hired
out the entire process of designing, producing and even
maintaining weapons systems, instead of presenting its own
designs to contractors for production. This necessitated a
cost-plus contractual basis, since no prearranged price could
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he fixed for so indeterminate it process. In addition, the Air
Force's prime contracting coi jv,rations, now responsible for
complete weapons systems, had to establish, in the words of
one Congressional Report, "procurement organizations and
methods which proximate those of the government." These
prime contractors were thus in a position to force subcontract-
ing small companies out of business, acquire their proprietary
information, make or break geographical regions and decide
it host of other critical issues of national import, without even
the quasi-democratic checks imposed on the federal bureauc-
racy. No wonder H. L. Nieburg has warned of the ominous
erosion of public control by the giant aerospace companies
and has dubbed the whole relationship "the contract state."
Once established, prime systems contracting quickly spread
to the other services. A losing battle with the Air Force for
responsibility for missile program development taught the
Army that its extensive in-house capabilities and technical
independence were it distinct disadvantage. For in the political
struggle over missile development, the Air Force's corporate
prime contractors constituted a powerful lobby in Congress
against which all the in-house expertise of the Army was of
no avail. A quick learner when the future of its bureaucracy is
at stake, the Army began to disband its in-house facilities and
to surrender its jurisdictional and discretionary capacities to
private industry and the latter's impressive political power. For
any corporation in advanced technologies on the way up, prime
contracting soon became the indispensable order of the day.
- --~ ROM THE OUTSET, THE NEW Tex Thornton team at
Litton had its eyes on the really big electronic
equipment and systems markets. They were determined
not to be pikers and they knew their way up the federal
escalator, but they needed a break. In 1954, a team of Litton
scientists headed by Dr. Henry Singleton appeared ready r^
give them one. He outlined a project for miniaturizing an
inertial navigator and guidance system. Perfecting such a sys-
tem was of paramount importance to the military, for it would
be the only kind of navigational system that could not be
electronically jammed. Further, a missile guided by such a
navigator would not emit signals that would disclose its
whereabouts. The military had already set out the objectives
of such a system and various working devices had been pro-
duced, but they all weighed from 500 to 1000 pounds, too
heavy for aircraft and missiles. Thus, Singleton was proposing
an innovation that would revolutionize the field.
All that was needed to attempt to develop the system was
capital. Of course the Litton management, well oriented
towards the new age, had no intention of putting up their own
money, or of raising it through old-fashioned loans or investors.
For to raise capital in that way would entail risks and obli-
gations. What Litton really needed was a banker who would
not seek repayment of capital (with interest) if the investment
bore no fruit, and if the project should come through, who
would not insist on reaping any return on his investment.
Could there he such a banker? Litton thought so.
With nothing but a wooden mock-up of the proposed
navigator and a ten-cents-a-mile expense account for its
station wagon, the Litton sales team set out to sell a miniatur-
ized inertial navigation system to the Army Air Corps. In 1956,
they finally convinced the purchasing agents at Fort Huachuca,
Arizona, to finance the development of a prototype. For its
proposal, Litton got a fixed price redeterminable contract
for $214,902.
With the Fort I luachuca contract safely tucked away in
their display kits, Litton salesmen then rnade the rounds of
various other government agencies and aerospace firms, stress-
ing the advantages of getting in on the ground floor with
contracts for the navigators while the opportunity lasted. In
1957, Litton contracted to produce for Grumman, the chief
Navy aircraft supplier, 68 of the navigators for Navy planes. By
1959, this contract was worth some $7,400,000. In subsequent
months, Litton used its new foot in the door with Grumman
to sell them additional items, until their total contracts amount-
ed to it full $10 million.
According to the Steele case testimony of John McDonald,
then head of Litton's electronics division's contract negoti-
ations, Litton's engineers did successfully achieve the new
revolutionary design. But Litton never delivered the prototype
navigator to the Army, which had originally paid for it; in-
stead, it used the design to fulfill its contract with Grumman
Aircraft. All the Army got was it bagful of disassembled parts.
In 1960, the Army purchasing officials canceled Litton's
contract "for the convenience of the government."
As for Litton, it had won for itself a tremendous future
contracting position for electronics and guidance systems in
missiles, planes and even ships, on which all the federal give-
aways on costs and profits would be multiplied a thousand-
fold. No longer a little laboratory but a real comer in the field,
Litton was now ready for a really golden opportunity: a major
subcontract for the guidance system of the F-104 Starfighter
jet. And when-Germany decided to incorporate 700 F-104's
into its postwar Luftwaffe, Litton bought two German com-
panies just to produce the guidance systems for their version
of the plane. Unfortunately, the Luftwaffes Starfighter turned
out to be, in the words of Business Week, "an essentially
American product that now bears the blackest name in the
history of German aviation." At least 83 of the planes crashed,
killing 42 pilots and forcing Litton to modify the guidance
system. Some time later a further. modified version of Litton's
navigator was installed in America's newest fighter plane, the
ill-fated F-111, McNamara's notorious pet project and one of
the costliest boondoggles of all time. The prime Navy con-
tractor for that plane: Grumman Aircraft.
[CONTRACTING A MODERN INDUSTRY]
"The aerospace industry, with its intimate contacts in the
Department of Defense, is making its move now to take over lire
entire maritime industry in the United States. Unless the mari-
time industry recognizes its real enemy, the military-industrial
power of the aerospace industry will succed."
-FROM A FULL PAGE AD IN THE NEW YORK TIMES, OCTOBER 24,
1966, PLACED BY THE CHAIRMAN OF THE BOARD OF'THE
NOW DEFUNCT SAPPHIRE STEAMSHIP LiNES,
lf-IHE AMERICAN MARITIME INDUSTRY had been ailing
badly since World War H. Even the captive business
of the U.S. Navy and a big federal subsidy on non-
military business (paying the difference, up to 50 per
cent, between U.S. shipbuilders' inflated prices and those of
foreign rivals) couldn't sustain sales. The Swedes and the
Japanese had surpassed them technologically, and protective
government assistance had merely allowed the gap to widen. So
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in the early 1960's, the U.S. Navy, which bought 80 per cent
of the industry's output anyway, decided to act.
The Navy-then the last holdout-decided to adopt the Air
Force's "total package" or "weapons system" approach: a
single shipyard would be given a supercontract to design a ship
and build a fleet of them. The extraordinary scope of the order
would require the contractor to build a new shipyard with
modern assembly line features unavailable in then current
U.S. shipyards. And because the contract was for a total
package, the contractor would have to plan everything from
the skills of the crew to the maintenance requirements.
Of course no one in the maritime industry at that time was
even remotely equipped to handle this kind of operation. In
essence, it was a plan to vault over these moribund corpor-
ations, arriving in one jump at a new technological level by
turning the shipbuilding business over to the only corporations
who were already equipped for the "systems" approach: in
a word, aerospace. And among the aerospace corporations,
those fortunate enough to have had a head start in the mari-
time field would naturally be ahead of the game.
The Navy did not announce its decision to adopt this new
approach until after 1963. But long before the announcement
came, Litton somehow managed to get a sniff of what was
in the wind. As Roy Ash explained, "We saw some develop-
ments coming and thought we could be a part of them. One
thing we foresaw was an expansion of the practice-it was
already established in the Air Force and for Navy aircraft-of
turning to industry for help in developing total weapons
systems." So in 1961, Litton picked up Ingalls, an ailing ship-
yard with $60 million in annual sales, for $8 million and an
agreement to pay $9 million in debts to the Navy. Ingalls got
a number of contracts over the next few years-for one
amphibious assault ship here, six cargo ships there.
Then in November 1965, the big deal went up for grabs:
McNamara announced approval of a large integrated system
of Fast Deployment Logistics (FDL) ships. These "floating
warehouses"-perhaps as many as 30 of them-would be
stationed strategically around the world, ready to move
quickly into "trouble spots" to back up U.$. troops with
ammunition, C-rations, tanks, etc. The FDL was the first ship
to be handled under the Navy's new weapons system approach.
Several shipbuilding companies were in the initial bidding
for the contracts, but they all either dropped out or were
eliminated. The final stage of bidding included three aerospace
giants: Litton, General Dynamics and Lockheed. Each got
$5 million in contracts to finish plans for the FDL and the
yard. Of course each would need a site for its yard. Accord-
ing to the Wall Street Journal, climate ruled out New England
and the steep cost of steel and highly unionized labor made the
West Coast undesirable. That left the U.S. domestic colony
of cheap labor: the South.
Litton, of course, luckily already had a location in the South,
in Pascagoula, Mississippi: Ingalls shipyard, to be exact. But
they still needed to find a way to finance the new yard, which
according to informed sources at the time would cost $100
million to build. And this time the federal government was not
putting up the money. But there are state governments too.
Already the largest employer in Mississippi, Litton went
1 d h tened to take their new
e
t
in the world and hand it back to Ingalls on lease at a minimal
price. Governor Johnson called a special legislative session in
order to pass a $130 million bond issue (the extra $30 million
was interest). In October 1967, the bond issue was approved by
Mississippi voters.
Of course the people of Mississippi would "own" the
leased-out shipyard, though they would not reap the profits
from or control its operation. For their $130 million investment
they would get an estimated 12,000 jobs, at Pascagoula wages
and under special "long-term" union contracts ("yellow dog"
is such an old-fashioned phrase). Litton also rewarded its
Mississippi friends by writing into its contract the latest in
sophisticated legal loopholes to help the shipyard bosses keep
blacks out of the good jobs for as long as possible.
Yet, despite all this stage setting, Litton still had not been
awarded the contract. So they set 200 experts to work on a
winning design, under complicated and difficult new CF-CD
(Contract Formulation; Contract Definition) procedures
that had been worked out by McNamara's assistant secretary
of Defense, John H. Rubel.
Once again, Litton was in luck: in the interim Rubel had
shuttled over from the Defense Department to head the Litton
team working on the bid. Having helped toss the plum in the
air, lie was right on the spot to catch it. Unfortunately, how-
ever, just as Litton won its $2 billion prize, the project hit a
snag. Congress refused, first in 1967 and again this year, to
appropriate the money for the FDL's. In the Senate debate
even Richard Russell, chairman of the Armed Services Corn-
mittee, expressed concern that the ocean-going bases might
contribute to "an impression that the U.S. has assumed the
function of policing the world and can be thought to be at
least considering intervention in any kind of strife or com-
motion occurring in any nation of the world." Of course, an
embittered Litton backer might note that military land bases
may have a special place in Senator Russell's heart, since he
has blessed the construction of 19 of them in his home state.
But do not fear for Litton; it is an unwritten law of the
contract state that what the Navy brings to birth it does not
allow to die. The Navy will see that Litton, its answer to the
decrepitude of the U.S. maritime industry, is well taken care
of. Since the first congressional slash, the Navy has already
salved Litton's wounds with at least $1.2 billion in new contracts.
And Litton's now modernized shipbuilding enterprise,
which has already become the largest producer of automated
cargo ships in the world, can still, like the older maritime
companies, mark up its price to civilian buyers 50 per cent
above the prevailing world market price and have the difference
paid by U.S. taxpayers-through the nose. Litton's relation-
ship with the Navy was summed up quite well by Senator
Stuart Symington: ". . . Litton has got the whole bag now."
Part Two of this article, appearing in the next issue, describes
the most recent-andfar-reaching-developments in the odyssey
of Litton Industries and the contract state, the further supplant-
ing of the political process in the governance of American
society. Chapters in this episode include the disturbing stories of
Contracting International Development (in fascist Greece) and
Contracting Poverty ( "welfare"and the education of the poor).
r
a
straight to the state capita an
yard to Tampa, Florida, if they did not get cooperation. Researchers on this story: Jan Austin, Lee Webb, Peter Wiley.
Mississippi quickly agreed to build the most modern shipyard
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52 RAMPARTS