A Family Firm's Fight for Rags-to-Riches Contract

For more than a century, the Crane family has made money making money.

But its role as the US Treasury's sole supplier of currency paper - a blend of cottonseed fiber, Levi's jeans, underwear, and old shirts - may be coming to an end.

Treasury is scouting for other suppliers and has been investigating the firm's pricing policies. And Crane & Co., in danger of losing its grip on a 117-year-old, $75 million franchise, is fighting back.

The Massachusetts firm has marshalled the state congressional delegation, and its supporters have raised the specter of foreign-owned firms making American greenbacks.

Crane proponents paint this as a tale of a family business beset by government policies run amok. Others see it as the story of a private firm struggling to protect a special monopoly at taxpayer's expense. From whatever side one looks, it is an unfolding saga about money.

"People love their money," says Lansing Crane, a member of the sixth generation to run the firm.

"Part of that is the feel and the look of it. Why mess with success?" Crane asks.

From the government's viewpoint, there are several reasons, including compliance with the law. The 1984 Competition and Contracting Act, written after a Pentagon spending scandal, obliges federal agencies to seek competition for contracted services.

In April, the Treasury's Bureau of Printing and Engraving will take the most concrete step in that direction so far: It plans to post an Internet notice inviting companies to bid for part of the currency-paper contract. Financial incentives, it says, will be considered.

"This is such a narrow field, we need some incentives to get other firms into the business," says Larry Felix, a bureau official. "Why would any company in their right mind spend money on equipment to bid for a contract they might lose?"

But the bureau's competition-inducing "financial options" have angered Massachusetts Sen. John Kerry (D), who estimates they could run as high as $100 million. "It certainly seems anathema to ... the administration's call to reduce corporate welfare," he wrote Treasury Secretary Robert Rubin.

But the incentives, meant for equipment purchases, are drawn from bureau funds, not taxpayer dollars or congressional appropriations. And they must be repaid when the contract is over.

Even so, Senator Kerry, and the state's Sen. Edward Kennedy (D) and Rep. John Olver (D), introduced legislation this month to bar federal agencies from awarding contracts with this kind of incentive if the principal purpose is to boost competition and provide an alternative source of supply.

Crane's battle to preserve its exclusive contract comes at a time of significant change in the moneymaking business - change that industry observers say present an opportunity for Treasury to expand its stable of suppliers.

Over the past year, the Treasury has taken steps to safeguard its $100 bills against counterfeiters, including an enlarged portrait of Benjamin Franklin, a new watermark, color-shifting ink, and an invisible security thread embedded vertically in the paper. Similar security features will be introduced in lower denominated bills, requiring new manufacturing equipment.

The issue of security is often raised in the debate over currency-paper supply. Crane argues that spreading technical know-how is a risk and that more buyers of paper ingredients will push prices up.

Those who back change say more than one supplier for strategically important products lowers the security risk and that competition lowers prices.

Crane points out that in the currency-paper industry, single suppliers are the norm.

"This is a very mature business," he says. "In the UK, France, Germany, the standard is a single provider because of the small amount of paper needed and because of security issues. If you split this business up, you're going to get instability, and you don't want that with your currency supply."

He also says that his company is "not a monopoly; we're a dedicated business." In the US, there are no other firms with Crane's capabilities, and the bureau previously has had no reason to look for alternatives.

But those in favor of alternative suppliers say a sole supplier makes it difficult to gauge whether prices are fair.

Fair prices?

Crane and the Treasury negotiate prices for every contract, agreeing on a cost and profit before any work is done. After contracts are over, Treasury sends in auditors to ensure final figures jibe with original estimates.

Treasury questions about the prices Crane charged between 1988 and 1991 led to a five-year investigation. It recently asked the Justice Department to enforce a subpoena request for company records.

Crane says it has cooperated fully while Treasury has dragged its heels and never explained what it was looking for. So when Treasury issued Crane & Co. a subpoena in 1996, after five years in which Mr. Crane says the firm answered all requests, he refused to comply. "There's no impropriety on Crane's part." He contends that Treasury has been "doing the investigation part-time."

Foreign red herring

In Dalton, Mass., where 200 of Crane's 1,350 employees work on currency paper, feelings are running high - fueled in part by misinformation about Treasury plans.

"I think it stinks," fumes Barbara Scott of Duff and Del's Deli. "I can't see why they're subsidizing plants to be built overseas to make our money. If you want competition, build the plants here. Don't do it overseas and give the business to some foreign country that's liable to slit our throats sometime down the road."

Newspapers and politicians have also picked up on the foreign-competition concerns. Representative Olver calls the government's actions "insane."

The reality, however, is less incendiary. Foreign companies legally cannot make US currency paper under legislation called the Conte Amendment. Written by a former congressman from Pittsfield, Mass., where many Crane employees live, it requires that currency paper be made by US companies on US soil. Congress stipulated that the firms be 90 percent or more US-owned, but last year it eased that requirement to 50 percent or more.

That will allow companies like Portals Inc., the British firm that makes paper for the pound, to forge a joint venture with a US company to make a bid. Portals's US office is in Atlanta, Ga., House Speaker Newt Gingrich's state. Speculation over possible Crane competitors often links Portals with US company Crown Vantage, which makes security paper. Neither company would comment.

Treasury is not waiting to see the outcome of the investigation or the bill introduced by Massachusetts legislators. It is proceeding with plans to post the bid solicitation. "We'll make a business decision in the best interests of the government," Mr. Felix says.