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UNREVISED

A STUDY AND INVESTIGATION OF THE
NATIONAL DEFENSE PROGRAM IN ITS
RELATION TO SMALL BUSINESS

HEARINGS
BEFORE THE

SELECT COMMITTEE TO CONDUCT A STUDY AND
INVESTIGATION OF THE NATIONAL DEFENSE
PKOGBAM IN ITS RELATION TO SMALL
BUSINESS IN THE UNITED STATES
HOUSE OF REPRESENTATIVES
SEVENTY-NINTH CONGRESS
FIRST SESSION
ON

H. Res. 64
A RESOLUTION AUTHORIZING AN INVESTIGATION
OF THE NATIONAL DEFENSE PROGRAM IN
ITS RELATION TO SMALL BUSINESS

PART 1
F I N A N C I A L P R O B L E M S O F S M A L L BUSINESSJ I

WASHINGTON, D. C., MARCH 20 AND 21, 1945
Printed for the use of the Select Committee to Conduct a Study and
Investigation of the National Defense Program in Its
Relation to Small Business in the United States

20702




UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1945

SPECIAL COM MITTEE TO CONDUCT A STUDY AND INVESTIGATION
OP THE NATIONAL DEFENSE PROGRAM IN ITS RELATION TO
SMALL BUSINESS IN THE UNITED STATES
WRIGHT P ATM AN, Tetas, Chairman
J. W . ROBINSON, TJfah
EUGENE J. KKOOH, New York
HENRY M. JACKSON, Washington
ESTES KEFAUVER, Tennessee




LEONARD W. HALL, New York
WALTER C. PLOESER, Missouri
WILLIAM H. STEVENSON, Wisconsin
EVAN HOWELL, Illinois

GBOBÚK 3. BenM.»*. Encuite Attittani
DAK W. EAMVOOD, CkUf Invtxiffaior
W M . J. DKKGAH, JFT., Int*4iigatoT
CA*LO O . CAMBRA, Inuttigalor
CLABBNCS D . ERTARRR, cUrk

Í
>

CONTENTS
Statement of—
Pa««
Bailey, Hon. Cleveland, Member of Congress, Third District of West
Virginia
28
Fichtner, Charles C., vice president and treasurer, Wales-Strippit
Corporation, Buffalo, N. Y
—
6
Lehman, Charles H., business counsel, New York City, N. Y
43
Porter, G. Harvey, executive vice president, Industrial Corporation,
Baltimore, Md
32
Sabath, Hon. Adolph J. Member of Congress and Chairman, Rules
Committee, House of Representatives.
5
Exhibit A.—Question by House Small Business Committee relating to
article Wartime Earnings of Small Business by F. C. Dirks, Division
of Research and Statistics, Federal Reserve Board
44
Exhibit B.—Analysis and comment by C. C. Fichtner, vice president and
treasurer, Wales-Strippit Corporation, Buffalo, N. Y., on article Wartime Earnings of Small Business by F. C. Dirks._
57




xn

FINANCIAL PROBLEMS OF SMALL BUSINESS
TUESDAY, MARCH 20, 1945
H O U S E OF REPRESENTATIVES,
SELECT COMMITTEE ON SMALL BUSINESS,

Washington, D. C.
The select committee met, pursuant to notice, at 10:30 a. m., in
room 1011, New House Office Building, Hon. Wright Patman (chairman) presiding.
Present: Representatives Patman (chairman), Jackson, Kefauver,
Hall, Ploeser, Howell, and Stevenson.
Also present: Representative Adolph J. Sabath and Dan W . Eastwood, chief investigator for the select committee.
The CHAIRMAN. The committee will come to order.
While the other committee members are coming in, I would like
to read a statement that I prepared for this hearing.
We open today a series of committee hearings on the subject of
financial problems of small business.
Naturally, we do not expect to cover this vast subject in the 3
days of hearing time we propose to use for this purpose during the
present week.
We do hope, however, during the hearings this week, to receive
testimony which will lay before us a rather broad picture of the
manifold financial problems now confronting small business and
likely to confront it in the immediate post-war period.
We have received numerous protests from small businessmen as to
the adverse effect which the interpretation of our renegotiation laws
have had upon their own establishments.
Contract termination problems have been called to our attention
also, but possibly due to the fact that our war production economy
is still running at full blast we have not received as many of these
contract termination complaints as we have of another sort.
During the past 90 days, the Small Business Committee has received upward of 400 communications from individual small manufacturers and distributors protesting against certain provisions in our
present tax laws or the manner in which these laws are construed by
the Federal agencies. Such a volume of protest mail cannot go ignored
by this committee which is specifically charged bv the Congress with
an investigation into the problems of small Business. For that
reason, we are prepared to hear testimony on that score if offered to
us.
In June 1942 the Congress adopted the Smaller War Plants Corportion Act (Public Law 603) of which Senator Murray and I
were the joint authors. This act was unanimously endorsed by both
the House Small Business Committee and the Senate Small Business




1

2

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Committee and was passed without opposition by both Houses of the
Congress as a war emergency measure to aid small manufacturers.
Another bill of which Senator MuFray and I were also the joint
authors was adopted about that same time at the suggestion of the
two small business committees. That bill provided that the R. F. C.
could loan money on merchandise which had been frozen, the sale of
which was forbidden except by special permission or a Government
priority. The automobile dealers of this Nation have told lis many
times that this particular bill saved their industry from extinction
and saved many of them personally from bankruntcv.
It is not too early for us now to once again look alicad to what will
confront small business in the closing years of this terrible war and to
try to visualize what financial problems these people will have to meet
in the immediate difficult reconversion years which will follow the end
of the war.
The Smaller War Plants Corporation has received much justifiable
praise for its splendid contribution to the financial stability of our
small manufacturers during wartime and for its other equally important services rondered in securing contracts for these small firms
which could not afford salesmen and lobbyists here in Washington
on their behalf during wartime.
We note, however, an increasing number of letters from those,
especially those in the banking fraternity, who fear that the Congress
may decide to continue the Smaller War Plants Corporation after the
war as a permanent financing agency to aid small business. These
objectors take the position that private financial institutions stand
ready and willing to handle the job of financing all competent and
qualified small business after the war; that continuance of a separate
governmental agency for that purpose is not necessary; and that such
an agency's operations after the war would have a detrimental effect
upon their own institutional operations.
We hope and propose to hear testimony from these people during
these or subsequent nearings on this subject.
First, however, we wish to hear from those who are close to the
problems of the small manufacturer and the distributor and have had
an opportunity to observe them first hand or through personal
experience.
Later, when we have taken this testimony from individual businessmen and students of the small-business financial problem, we shall ask
the banking profession and the officials of the various Government
lending agencies to supply us with their views also,
I cannot refrain from calling attention at this time to a news article
which I recently noticed which, to my mind, gives evidence of the
contrasting financial subsidy bestowed upon large business in comparison with that granted to small business.
Every small businessman knows how difficult it is for him to prevail
upon his banker to lend him working-capital funds for a period longer
than the customary 90-day period. Every small businessman knows
that his banker likes to be paid from 4 percent interest on upward for
this accommodation.
For a small businessman to be granted a working-capital credit for
as long as a year's duration or to be offered a bank loan to retire outstanding long-term indebtedness would be nothing short of a miracle.
Yet 1 noticed the other day that two large New York City banks




3

FINANCIAL PROBLEM'S OF SMALL BUSINESS

had combined to make a loan of $4,000,000 to a large chain store at
an interest rate of three-fourths of 1 percent. Now, this was not a
short-term loan. It was made repayable over a period of 6 years
with only token payments on account being asked for during the first
five and a half years. Also, this was not, in the strictest sense of the
word, a "working capital" loan. Its announced purpose was to enable
the borrower to retire outstanding debentures which carried a much
higher rate of interest.
I commend those New York City banks for making available this
kind of long-term credit to business. I wonder, however, why it is
that competent and qualified small firms cannot ever get this same
kind of accommodation.
Several months ago, I was delighted to receive a prospectus from
the American Bankers Association announcing the creation of the
Post-War Small Business Credit Commission, an organization of
member bankers to aid small business firms with their financial
requirements. I have followed the progress of this enlightened movement with keen interest. I am hopeful that Mr. John M. Hanes,
well-known banker and chairman of this commission, will give us the
benefit of his thinking on this subject before these hearings are concluded entirely.
I have been distressed, however, to learn only recently that apparently small business is not taking advantage of this fine plan. At
last reports coming to me only a week ago, I was amazed to learn
that not a single loan application under this program was under consideration by the New York regional pool organized for this purpose
which has an announced capital for small-business-loan purposes of
$100,000,000.
I do not wish to presume further upon the time of the committee
&nd our witnesses with my own personal views on this grave question,
but I should like to point out in conclusion that we cannot ignore
situations wherein our smaller firms are required to pay higher taxes
proportionate to their net incomes than are their larger competitors;
nor can we condone a situation where small business which is competent and qualified has to pay excessive interest rates for capital,
working or otherwise, and cannot secure this working capital for lon&
-enough term periods to enable it to compete on an equal financial
footing with larger firms.
If the Smaller War Plants Corporation has accomplished no other
good end than to highlight the benefits which low interest rates and
long-term working capital loans can bring to small business, it has, in
my opinion, served an eminently useful purpose.
Whether we continue the existence of such an agency after the war
depends, to my mind, largely upon the degree of sincere evidence that
private financial institutions can present to the Congress as to their
intent and willingness to really buckle down and take care of this vital
job of small business financing.
The Congress will readjust the tax structure to aid small business
as far as is humanly possible. Of that, I have no great doubt. The
thing of which I personally want concrete assurance is that small
business is to be given something more than mere lip service by private
institutions in the matter of adequate financial assistance on fair rates
and terms. In the absence of such assurance, I personally would
favor the continuation of the Federal Government in the field of small
business finance.



4

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. Hall, would you like to make a statement for the record on this
hearing?
Mr. HALL. Mr. Chairman, I am happy that you have decided to
hold these hearings at this time. It seems to me they are none too
soon because I believe in June of this year the present law with respect
to the Smaller War Plants Corporation expires and the Congress must
take some action to extend the life of that Corporation before that
time.
Personally, I have been a little bit alarmed by some of the legislation which was introduced last year pertaining to the Smaller War
Plants Corporation. It seems to me that perhaps some of the members of the other House wanted to make the Smaller War Plants
Corporation another sprawling bureaucracy. They did not want to
keep it within the limits for which it was created by your first bill and
if that bill, which was introduced last year, had passed we would simply
have had another bureaucracy attempting to wet nurse small business
in the United States.
I am ccrtainly opposed to that and while I think we should continue
the Corporation's existence, I do hope that some way can be worked
out whereby private institutions will see the light and render financial
assistance to small business.
I might say too, Mr. Chairman, that I compliment you on the work
that has been done because there is no doubt in my mind that this
committee and the committee in the Senate did bring about a situation in this country where the small plants did get a real share in the
war manufacturing activities in the United States and by getting their
chance to do that work they proved they were able and had the capacity to serve a real purpose and do real work in the war effort of the
United States.
The CHAIRMAN. Before we hear our first witness, would you like to
make a statement for the rccord, Mr. Kefauver?
First, however, may I say that what I have done I have done in the
name of the committee. * The bills introduced in my name were introduced at the request of the committee and I have enjoyed the fine
cooperation of the members on both sides, Republicans and Democrats.
Air. KEFAUVER. I wish to join with Mr. Hall in congratulating the
chairman in beginning hearings on the active consideration of problems of financial assistance to small business. I think the situation
is becoming acute and as time goes on, the problem will be even more
acute.
But I have made the observation, Mr. Chairman, in connection
with the contract-termination law, that I have had several small
businesses that have had contracts to terminate and those contracts
are not being paid as quickly as it was contemplated by Congress
when the contract-termination law was passed.
There is also a place where either private or public institutions have
got to step in and help the small businesses to bridge the gap.
I think it is quite well that this committee focus attention on the
various and sundry problems that small businesses are going to have
in further carrying out their part in the war effort and also in helping
them to bridge the gap when they come to the point where their contracts are terminated and in getting reconverted back into private
production.




5

FINANCIAL PROBLEM'S OF SMALL BUSINESS

I hope that tlio committee will give people in various parts of the
country an opportunity to be heard on this most important problem.
I think that is all I have to say.
The CHAIRMAN. Mr. Ploeser, would you like to make a statement
for the record before we call our first witness?
Mr. -PLOESER. If I may, I will insert it in the record.
The CHAIRMAN. All right, sir, you may do that.
Mr. Jackson, do you have a statement?
Mr. JACKSON. At this time I would merely like to state that I want
to concur in what has been said by mv colleagues regarding the work
of our chairman. I think he is to be complimented in taking up
this subject matter at this time.
We are getting to the point veiy rapidly where small business will
be facing a serious problem in connection with reconversion. As a
matter of fact, in some particular fields of small business at tliis
time they are right in the throes of reconversion. I think we have
a wonderful opportunity and I want to congratulate the chairman in
taking the initiative at this time.
The CHAIRMAN. I appreciate your kindly thoughts but the chairman is working with the committee and I am just carrying out your
will and wishes.
Mr. JACKSON, I appreciate that.
The CHAIRMAN. M I \ Howell.
Mr. H O W E L L . I will insert a statement in the record later.
The CHAIRMAN. Very well.
We are honored this morning by having in this heiring the dean
of the House who has served longer than any other Member of the
Congress and he is a real true and sincere friend of small business
and always has been. He is the chairman of the Rules Committee
of the House and is our good friend and I think if he wants to say
anything we would like to hear from him first.
Mr. Sabath.
STATEMENT OF HON. ADOLPH J. SABATH, MEMBER OF CONGRESS
FROM ILLINOIS
Mr. SABATH. Unfortunately I am not prepared for I have been
attending another meeting.
The CHAIRMAN. That is all right. You may prepare and file
anything you want to later.
Mr. SABATH. M y attention was called to this meeting and I want
to say that the House has real confidence in this committee and hopes
and expects that you gentlemen will do everything in your power to
aid small business. The big fellows do not need our assistance.
They take care of themselves.
I would like to leave this thought with you, as to whether it would
not be proper for the small businessmen to have an organization here
or somewhere to look after their interests. I notice every day in the
papers that the National Manufacturers Association and the Chamber
of Commerce and others, through their organizations, are working*
But the little fellow has very few friends, it seems to me, and he
should organize and be able to bring forward his trials and tribulations.
He needs assistance.
70702-—45—pt. 1




2

6

FINANCIAL PROBLEM'S OF SMALL BUSINESS

As to the reconversion, I will say this: that the big fellows are doing
it now at the expense of the Government. They know how to go
about it but the little fellow does not, so I am mighty glad that you
have staTted and I know you will continue. You have a real task
before you.
I want to congratulate you and I hope that you will go as far as
Jou can in protecting the rights and interests of the helpless small
u^incss.
That is all I want to say.
The CHAIRMAN. Thank you. Wo appreciate your coming to the
hearing.
Mr. Eastwood, will you introduce tho first witness?
Mr. EASTWOOD. Mr. Chairman, the witness today is C. C. Fichtner,
vice president and treasurer of the Wales-Strippit Corporation,
Buffalo, N. Y . This is a successful small manufacturing concern that
has made a fino record in war work.
Mr. Fichtner also at one timo was with the Department of Commerce as head of the Division of Regional Economy and ho is an
economist and businessman, which is something of a rare combination.
Mr. Fichtner.
The CHAIRMAN. Mr. Fichtner, would you give your name and residence and official position to the reporter, please, for identification
purposes?
STATEMENT OF CHARLES C. FICHTNER, VICE PRESIDENT AND
TREASURER OF THE WALES-STRIPPIT CORPORATION, BUFFALO, N. Y.
Mr. FICHTNER. Mr. Chairman and members of the committee, my
name is Charles C. Fichtner. I am vice president and treasurer of
the Wales-Strippit Corporation of North Tonawanda with offices in
Buffalo, N. Y . We manufacture sheet-metal fabricating equipment
which, during the war, has found an important place in the aircraft
industry.
The CHAIRMAN. Would you like to proceed first without interruption, or would you like for the committee members to interrogate you
as you go along?
Sir. FICHTNER. A S the committee desires.
The C H A I R M A N . D O you have a prepared statement?
M r . FICHTNER. I have a statement, yes.

The CHAIRMAN. Suppose you proceed and if the committee members want to interrupt you and ask questions that will be all right.
Mr. FICHTNER. That will be all right.
The CHAIRMAN. Very well, please proceed.
Mr. FICHTNER. Tho views expressed at this hearing are the result
of discussions with a number of manufacturers, bankers, and lawyers
in the Buffalo area. T o acknowledge their contributions I wish to
insert a list of their names in the record, if I may.
The CHAIRMAN. Certainly you may have that privilege. That is
the group you have been conferring with?
Mr. FICHTNER. Yes. We have had about three informal meetings
to discuss these problems. I, however, assume full responsibility for
my statements.




7 FINANCIAL PROBLEM'S OF SMALL BUSINESS

( T h e names referred to are as follows:)
Ralph M. Andrews, executive vice president, Buffalo Chamber of Commerce,
Buffalo, N. Y.
Joseph A. Archbald, president, Jewett Refrigerator Co., 2 Letchworth Street,
Buffalo, N. Y.
Chauncey Bacon, president, A. B. C. Welding Corporation, Niagara Falls,
N. Y.
Ernest Becker, president, Sponge Aire Seat Co., Inc., 166 Chandler Street,
Buffalo, N. Y.
James L. Burke, secretary-treasurer, Swift Lubricator Co., Elmira, N. Y.
Edward H. Butler, publisher, Buffalo Evening News, 218 Main Street, Buffalo,
H. P. Faust, president, R. G. Wright Co., Inc., 2933 Main Street, Buffalo, N.Y.
Whitworth Ferguson, president, Ferguson Electric Construction Co., 204 Oak
Street, Buffalo, N. Y.
Burton L. Gale, Jr., vice president, Manufacturers <c Traders Trust Co., 284
f
Main Street, Buffalo, N. Y.
Thomas S. Hemenway, president, Metal Alloy & Specialties Co., Inc., 1875
Elmwood Avenue, Bufflao, N. \.
Maynard G. Hess, manager, Friend Manufacturing Co., Gasport,N. Y.
Geoffrey J. Letchworth, Jr., assistant treasurer, Barcalo Manufacturing Co.,
225 Louisiana Street, Buffalo, N . Y .
*
Robert Millonzi, attorney, Diebold & Diebold, 438 Main Street, Buffalo, N. Y.
(director, Hub Industries; Smith Metal Co.; Ford Bros. Co.; Merritt Machinery
Co.).
J. Eugene McMahon, attorney, 1028 Liberty Bank Building, Buffalo, N. Y.
(Silver Creek Precision Corporation).
George A. Newbury, attorney, Babcock, Hollister. Newbury <fc Russ, M & T
Trust Building, Buffalo, N. Y. (president, Buffalo Chamber of Commerce).
John R. Oishei, president, Trico Products Corporation, 817 Washington Street,
Buffalo, N. Y.
Joseph B. Rittling, Rittling, Inc., 133 Elk Street, Buffalo, N. Y.
Thomas Spellers, president, General Engineering Co., 785 Hertel Avenue,
Buffalo, N. Y.
Charles Turner, vice president, Buffalo Bolt Co., East Avenue, North Tonawanda, N. Y.
Herman J. Walz, vice president and treasurer, Walz & Krenzer, Rochester,
N. Y.
Oliver A. Weppner, vice president, Marine Trust Co., Main and Seneca Streets,
Buffalo, N . Y .
Neil Willard, president, Willard Machine Co., 73 Forest Avenue, Buffalo, N. Y.
Lyndon Wilson, vice president and treasurer, General Engineering Co., 785
Hertel Avenue, Buffalo, N. Y.
M r . FICHTNER. Consideration of the p r o b l e m of financing m a n u facturing enterprise of small and intermediate size is particularly i m p o r t a n t at this time because, after the war, the attainment of full
e m p l o y m e n t m u s t rely t o a v e r y considerable extent o n these businesses. Small business has, as has been p o i n t e d o u t , seldom b e e n
able to satisfy its capital and credit needs adequately. U n d e r w a r t i m e conditions, difficulties h a v e been increased b y high taxes,
renegotiation " t a k e a w a y " and rising d e m a n d s on fixed and working
working capital.
T h e principal financial handicap of small business, i t seems t o m e ,
is a shortage of investment o r longer term capital. I n d e e d , one definition of a small manufacturing business is o n e that does n o t h a v e
r e a d y access to the organized investment markets. T h i s handicap
has been growing because of the shrinkage in the disposition or s u p p l y
o f local private venture capital going into small business and the
r e d u c e d margin of retainable profits available f o r reinvestment i n the
enterprise.




8

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Historically, new small manufacturing enterprises in this country
have been started by men with an idea, courage, and a small amount of
personal savings. If the business succeeded, it grew by reinvestment
of its profits. In the automobile industry, for example, it is said that
SO percent of the tangible capital originated in the earnings of the
companies themselves.
Reinvestment of profits to supply investment capital is sound practice in a free competitive economy; the existence of a profit indicates a
public demand for the goods and services produced. Business profit
also proves an ability of management to produce those goods at a
social cost in manpower, material, and equipment lower than the
value placed upon those products by consumers. Socially, therefore,
it is desirable to expand profitable businesses and to discourage or
liquidate unprofitable businesses.
In the nineteenth century, business profits wrere high and industrial expansion was rapid. In recent decades, business profits have
tended to decline with a consequent reduction in the ability of small
business tQ finance itself. Smaller businesses, moreover, appear in
fields where entry requires littlo capital and hence where severe competition results in more pressure on profit margins. At the same time,
the problem of narrowing profit margins, or operating losses, can
frequently be solved by reducing costs through increased mechanization. Thus, there has been witnessed a rising amount of investment
ler factory worker and per unit output. T o achieve that economy,
lowever, funds must first be obtained. Access to cost-reducing investment is more readily available to large concerns than to lesser known
smaller plants. Consequently, there has developed a vicious cycle
bearing heavily against the smaller manufacturer through no fault of
his own.
Local sources of outside capital have also tended to dry up. The
consequences of the 1929 crash in security values, and of tax laws,
have made local capitalists reluctant to commit funds to new manufacturing enterprises. The investments in small plants are not marketable; the prospect of even largo profits becomes a minor inducement to a rich man in an era of high personal tax rates. Local securities dealers since 1929 have disappeared in major proportions. The
national investment banking machinery of Wall Street, as is well
known, cannot afford to underwrite and sell small issues.
Commercial bank credit, on the other hand, has been more readily
available to small firms. Nonetheless, even in this field, small firms
have paid a higher rate of interest and have been denied credit with
a higher degree of frequency than larger firms. There are adequate
reasons for that denial of credit at low rates in many cases. Many
small firms have tended to misuse commercial bank credits for fixed
asset purposes. Again, the higher costs of servicing smaller loans,
the higher risks that are inherent in smaller enterprises and the understandable desire of bankers for a high depee of liquidity have all
been deterrents. On the other hand, the denial of commercial loans
to small business in certain instances lias not beon related to their
credit rating. The denial has probably been due to the inability of
the small business to present its case in an accurate light, to the conservatism of the bank or its lack of vision as to the future potentialities
of a particular new business and probably also to undue fear of bankexaminer criticism.




9

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Any solution to the financial problems of small manufacturing
enterprise must make substantial amounts of investment capital
available to small firms after the war without, at the same time, encouraging inefficient enterprises. The solution should not involve the
Government unnecessarily in direct financing or in the administration
of industrial properties. The solution, whatever it may be, must
avoid duplication of services now available in existing financial
institutions.
It is needless to point out to the members of this committee the
various financial needs of the typical small business. Working
capital, intermediate capital, and long-term capital are well understood types of funds and the broad classes of their sources, equity or
ownership money, as contrasted with borrowed money, are familiar
concepts. As to sources, I think it is highly desirable that the management of a business have a real choice between equity financing
on the one hand and borrowing money on the other. If it is a business
which is vulnerable to the ups and downs of the business cycle, as are
so many small manufacturing concerns, particularly in tho metalworking field such as my company where we are either prince or pauper, tho company might wish and probably should obtain funds for
expansion solely through the issue of stocks, common or preferred.
On the other hand, there is a situation in which a controlling
ownership of a company does not wish to lose control by selling
voting stock. In order to retain control, an undue amount of borrowing may unbalance the capital structure. There is an excellent
study on that subject published by the Harvard Business School on
the Polaroid Corporation. The financial policy of that company has
been based on a desire to retain freedom of action by the management
of the company. The men who projected tho company, seeing in it
tremendous possibilities of future growth, naturally wish to capitalize
on their early labors.
If private enterprise is to be encouraged, financial and tax controls
should not force such concerns to remain small merely to retain
control and thus to deny to the consuming public an abundance of
new products at low cost.
T o repeat, the financial problem of smaller and intermediate size
manufacturers seems to be one of acquiring and maintaining adequate
investment capital in the business. The problem is not of public
interest merely because of concern for manufacturers as individuals.
It is of public interest, however, in terms of full employment, in terms
of an expanding economy which can come only from a high rate of
new investment in sound ventures, and in terms of maximum production of consumers' and producers' goods at steadily lower prices.
The four major sources historically of investment capital are (1)
local banks; (2) sale of securities; (3) local private capital, and (4)
reinvestment of earnings. These sources are now either restricted or
closed to small business. It does not seem practical under present
conditions to seek to reopen all these sources.
Our banking system in the past has done much to build our industrial system by making capital loans but at a terrific cost to the public
in the form of bank panics and periodic financial collapse resulting
from frozen assets. The furnishing of investment capital b y commercial banks directly, or indirectly by loans on securities, is held by many
to be outside their proper functions. So far as working capital




10

FINANCIAL PROBLEM'S OF SMALL BUSINESS

loans to financo payrolls, inventories, and receivables are concerned,
it is reasonable to expect that commercial banks can and will fully
service all worthy enterprises, large and small. It should be emphasized, however, that short term bank credit is not the major
financial need of smaller manufacturers, except possibly in isolated
cases.
Public sale of securities through the Wall Street investment banking
machinery can supply investment funds only when the business has
grown to a size beyond that of the class of business with which we are
here concerned.
As to tho second source, there has been too much romanticism
about starting a small business and rapidly expanding it to the point
that it earns a Wall Street connection. That has been the Horatio
Alger story of small business in this country, not substantiated by too
many actual cases. Many otherwise promising enterprises are
wrecked upon the rocks of inadequate financial reserves in storms
of depression beforo they reach the size necessary to command
investment banker connections.
Mechanics, engineers, entrepreneurs will continue to launch businesses on their savings. Revival of outside local investment in new
small business to supplement these personal savings can probably be
greatly stimulated only by tax revision. The wealthy individual today
can probably make more net with much greater safety by a highly
conservative investment that he can by investing in a small business
that may possibly pay 20 percent dividends. The lack of marketability of investment in small concerns also lessens the present
attractions of capital gains taxed at only 25 percent.
Finally, the major source of equity capital throughout American
industrial history—reinvestment of earnings—also can be broadened
only by tax revision. Therefore, the financial problem of smaller
manufacturing would seem to reduce itself under existing conditions
to the tax question and for the remainder of my time I should like to
address myself to that subject.
The C H A I R M A N . G O right ahead, sir. We will be glad to have your
views.
Mr. FICHTNER. The wartime tax structure, by severely taxing any
increase in earnings above the pre-war average, has not permitted
smaller industrial plants to strengthen their finances in a degree that
would seem necessary to meet their post-war obligations. The
present tax laws tend to prevent the birth and growth of small
businesses. Thus, they tend to maintain pre-war competitive
relationships and to remove the traditional challenge of new, growing
enterprises to established business monopoly.
The Congress in the Revenue Act of 1942 recognized the need of
special adjustments to offset the serious discriminatory effects on
growing enterprises. Among the devices designed to alleviate discrimination were the 80 percent ceiling on total taxable income and
the relief provisions of section 722. Even with these adjustments,
however, the excess-profits tax treats smaller, growing enterprises
more severely than large, established corporations.
It is important that small business be relieved of discriminatory
burdens as soon as the war is over. The excess-profits tax should be
repealed either immediately on the cessation of hostilities or a short
time thereafter. After the defeat of Germany, for example, the date




11

FINANCIAL PROBLEM'S OF SMALL BUSINESS

of repeal could bo specified in advance as becoming effective, say,
with the cessation of hostilities with Japan.
During this interim post-war period, the excess-profits tax should
be revised in order to lighten the burden on small, growing enterprises. These revisions should probably include (1) a decrease in the
excess-profits tax rate, and (2) an increase in the specific credit from
the present level of $10,000 to $25,000.
In addition to these revisions, other modifications in the tax structure are needed to encourage the formation and growth of small
businesses. For purposes of discussion these proposed modifications
may be summarized under two headings: (1) Revisions applying
particularly to the period of transition from war production to peacetime production; and (2) revisions designed to aid small business
after the transition to peacetime production has been completed.
T A X REVISIONS TO FACILITATE THE TRANSITION FROM WAR TO PEACETIME PRODUCTION

Large numbers of small businesses will be confronted with acute
cash and working capital shortages immediately on the cessation of
their war production. A study of the National Industrial Conference
Board of the metal trades companies shows a very serious situation in
their working-capital position.
Unless steps are taken to provide liquid funds to these enterprises
at this time, the transition period will be needlessly painful ana protracted. At best, the resumption of peacetime production by many
business enterprises, especially small enterprises, will bo delayed. In
some acute mstances, shortages of funds may actually result in insolvency. These financial problems on the part of small businesses will,
of course, have serious repercussions on the level of employment and
national income during the transition period. In the interest of
maintaining independent enterprise, it would seem preferable that corporations be allowed to establish post-war reserves through wise tax
revision rather than throw too heavy a burden of financing small business on the Government.
The post-war financial problems of business have not been ignored
by the Congress. The present tax law contains several provisions
which can be utilized after the war to provide cash ana working
capital. Most important among these provisions are (1) the carrybacks of net operating losses and unused excess-profits credits, and
(2) the post-war refund of 10 percent of excess-profits taxes.
CARRT-BACK

PROVISIONS

The carry-back provisions are designed both to alleviate the
inequities of the annual accounting period on the basis of which income
and excess-profits taxes are levied and to provide business with the
reserves needed for the transition to peacetime production. They
allow losses and deficiencies in income below a corporation's normal
profits allowance under the excess-profits tax to be carried back and
offset against income and excess profits earned in the two preceding
years. Any taxes paid on income and excess profits, so offset in the
preceding 2 years are refunded to the taxpayer. Thus, in effect, the
wartime tax burden is levied on the income of a period of years rather
than on the income of a single year.




12

FINANCIAL PROBLEM'S OF SMALL BUSINESS

.The carry-backs are of great potential value to all businesses with
fluctuating incomes or with serious reconversion problems. Since
tho incomes of small business tend to fluctuate more over a much
wider range than those of large corporations—they do not have the
stability resulting from diversification of sources of income—the
carry-backs will be of particular value to small enterprises. In their
present form, however, they contain one, and possibly a second,
crippling defect.
under the existing law the carry-back refunds will not be made with
sufficient promptness to relievo the working capital stringencies that
will confront thousands of small firms in the acute transition years.
Tho present law provides that the taxpayer may file a claim for a
carry-back refund at the time he files his tax return showing a loss or
an unused profits credit.
Thus, the claim for a refund on a loss or unused credit incurred in,
say, 1945, ordinarily would not be submitted until March 1946. The
refund ordinarily would not be received by the taxpayer until some
indefinite period after March 1946, even though the taxpayer would
need tho refund to offset his losses and abnormal reconversion expenditures during 1945. The receipt of funds might be 12 or 18 months
after the need for them.
The delay in making these refunds, which is inevitable under the
present law, may be a matter of life and death to many small
businesses.
The seriousness of this situation is currently recognized. Recent
reports indicate that the problem is being seriously considered both by
the Joint Committee on Internal Revenue Taxation and by the technical staff of the Treasury Department. Indeed, the Treasury has
already made informal recommendations for legislation to alleviate
working capital shortages resulting from delayed refunds under the
carry-back provisions. The Treasury has proposed that taxpayers
accumulating deficits or subnormal earnings be allowed to postpone
current tax payments in the amount of their estimated refunds
accruing under the carry-back provisions as a result of current deficits
or subnormal earnings.
That is, if a taxpayer suffers a deficit in 1945, he would be allowed,
under this proposal, to postpone payments on his 1944 tax liabilities,
which payments would ordinarily be made in 1945, up to the estimated amount of his currently accruing carry-back refund.
The effect, of course, would be to permit him to retain cash in the
business.
The enactment of this recommendation in the immediate future is
urgently recommended. Most industry groups which have studied
the problem have recommended this revision; it also has, I believe,
the support of organized labor and agriculture. It is also urged that
if the revision is to be of maximum benefit to small businesses, such,
businesses must be given adequate assurance that all reasonable requests for postponement of tax payments under the proposed revision
will be granted in the field. As in most areas of Federal taxation,
the administration and regulation of the tax law in the field must be
based on an understanding of special financial needs of small business
if such provision is to be helpful.
A corollary of this recommendation would be to incorporate the
loss carry-back principle into the Renegotiation Act for a period extending back to April 28, 1942, and to continue until the transition




13

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Íjeriod is completed. Although renegotiation is not a part of the tax
aw, smaller manufacturers on war production have probably suffered
more in a marginal sense through renegotiation procedures, deemed by
many to be arbitrary, than from the excess-profits tax.
This is particularly true in industries subject to wide fluctuations
of earnings over a period of years, a phenomenon which is characteristic of smaller industrial units. The failure to give adequate consideration to this factor in renegotiation determinations has made
many small enterprises vulnerable to the recessions which will corne
in the transition period.
Figures on renegotiation are not published but from available
information it would seem that profits after renegotiation but before
taxes are slightly lower on the smaller firms than on the larger firm3.
This fact would indicate that, in general, in adequate consideration
has been given to the more wridely fluctuating income of the small
manufacturers in renegotiation.
"Excessive profits" taken away by renegotiation will in many cases
prove not to have been profits at all after the costs, properly chargeable to wartime income, have been realized.
Mr. KEFAUVER. Excuse me, sir. You -mean the percentage of
profits? That is what you referred to?
Mr. FICHTNER. The profits on sales after renegotiation take-away
but before taxes is the percent I had in mind. There is not a great
difference in net remaining but the percent left to the smaller group
is slightly less than that left to the larger. The reasons may be that
the principles used in applying renegotiation assessments are somewhat similar to those used in determining the excess-profits tax,
namely, the amount of capital invested or pre-war average earnings.
Both of those criteria for the judging of excossive profits seem to me
inherently to discriminate against the smaller concern.
The smaller manufacturers produce by use of labor and management ingenuity rather than by a large amount of capital assets. He
does not have, therefore, as large an invested capital base relative to
sales as the large concern. Similarly, before the war, the record
shows that the small manufacturer had a much lower level of earnings,
both absolutely and relatively, than the large manufacturer. By
using pre-war standards the method of defining excess profits and excessive profits in renegotiation both naturally discriminate against
the smaller enterprise.
Mr. H A L L . Realizing Congress has placed a limit of § 5 0 0 , 0 0 0 , 1
believe it is, on renegotiation which is the ceiling below-which they
will not go, what percentage of small business in your mind Í3 affected
by renegotiation?
Mr. FICHTNER. There are quite a number of plants with less than
250 employees, which is one definition of small manufacturing, that
produce more thon 8 5 0 0 , 0 0 0 in sales and a large number of them with
5 0 0 employees or less which produce more than 8 5 0 0 , 0 0 0 .
Mr. HALL. But certainly that limitation placed by Congress does
eliminate a number of small businesses.
M r . FICHTNER. T h a t i s c o r r e c t .

Mr. HALL. I was wondering if you had any idea how many are
eliminated?
Mr. FICHTNER. The higher exemption has been very helpful in 1943
and 1944 as contrasted with 1942 to the smallest manufacturers.
7165S-—45—pt. 1




3

14

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. H A L L . I asked that because you are stressing the renegotiation problem and I agree with you, but it seems to me that a tremendous amount of small business is not affected by that at all.
Mr. FICHTNER. Not since the exemption of $ 5 0 0 , 0 0 0 . There remain thousands of small manufacturers still subject to renegotiation
wiio will be faced with inadequate reserves to prepare for post-war
reconversion.
The impairment of reserves by renegotiation is particularly a problem in the machine-tool industry which is an industry of relatively
small units. It is a problem because such companies tend to fall in
the prince or pauper category. We have, during the war years, produced in this country about 8 5 0 , 0 0 0 machine-tool units, or more than
we would normally produce in 15 or 20 years of normal production.
It is not known what the market for machine tools is going to be after
the war but there is considerable fear expressed that the machine-tool
industry may have sold itself out of a market for the next decade.
If machinery companies are negotiated down to an 8- or 9-percent
base, which is a typical figure before taxes, many are not going to have
the reserves to carry them through. It is short-sighted statesmanship
to crucify the machine-tool industry in that manner because, as we
have seen in this war, it is our first line of defense in modern warfare,
no less important than our Navy. Without machine tools, a nation
cannot be strong in a military sense. As a matter of national defense,
we should adopt policies to preserve and foster our machine-tool industry and they have been conspicuous sufferers under renegotiation.
Mr. HALL. I am wondering, Mr. Chairman, if there is not some way
we could find out how many war plants come within the limitation of
$500,000.

The CHAIRMAN. We will make an effort to determine that.
Mr. EASTWOOD. Can you find out for us, Mr. Fichtner—or we
can undertake to find it out ourselves.
Mr. FICHTNER. The Price Adjustment Board, in charge of renegotiation, is reluctant to supply figures to contractors but it would be
helpful to know what the experience has been by various industries
and by size groups within each industry.
Mr. PLOESER. Mr. Fichtner, if it is any addition to your statement which I think is very interesting and informative, I can remember back in 1938 and 1939, just prior to war, when friends of mine
who were trying to finance in the machine-tool industry simply could
not get any help at all; and yet that became the core on which we
built our entire defense and, as we all know, the machine-tool industry
had to be virtually financed by the Government through contract
support.
It seems to me there is a great danger of returning quickly to that
same status.
Mr. FICHTNER. The same observation might apply to the tool and
die industry. During the 1930's, the number of skilled workers in
that industry tended to diminish. New apprentices did not tend to
come in and we are still suffering from that shortage. It is to be
hoped that our vocational education programs will never permit
that class of skilled worker again to decline to a dangerously low
level in terms of national defense.




15

FINANCIAL PROBLEM'S OF SMALL BUSINESS

The second potential defect in the carry-back provisions is the
danger that they may be repealed before the transition period has
ended. A. repeal of these provisions prior to this time would have
disastrous effects on many small enterprises.
THE

POST-WAR

REFUND

OF 10

PERCENT

OF

EXCESS-PROFITS

TAXES

The post-war refund of 10 percent of excess-profits taxes suffers
from a defect similar in nature to that of the carry-back provisions.
The taxpayer is now authorized to receive a certificate or bond representing his right to this refund. But these bonds are nonnegotiable
until the cessation of hostilities, and mature in a staggered number of
years thereafter. Consequently, they will be of no help in meeting
working-capital problems until the official declaration of the cessation
of hostilities. For many firms, however, reconversion problems will,
arise before the war is over. Indeed such problems have already
arisen for many small firms. I know of at least two firms in Buffalo
that are in very serious financial shape as the result of cut-backs in
January.
The working-capital problems of such enterprises could be solved in
part if means were devised to provide ready cash in place of nonnegotiable post-war bonds to those firms which could demonstrate
that their reconversion period had already begun. A revision of the
tax law to make this possible has recently been reported to be under
consideration by the Treasury and the Joint Committee on Internal
Revenue Taxation. Such a revision is strongly recommended.
It should be noted that both of these recommended modifications
in the tax law follow a single basic principle. They would make available to the taxpayer funds to which he has a clear right under the
present law at a time these funds are needed. They would thus
greatly facilitate a rapid transition to peacetime production. Moreover, their beneficial effects would be attained without leaving business
vulnerable to the charge that it has benefited from hidden Government
subsidies.
TAX

REVISIONS

DESIGNED TO AID SMALL BUSINESS A F T E R T H E T R A N SITION PERIOD IS COMPLETED

Revisions under this heading can be divided into two categories:
(1) General revisions in the ta.x structure needed to provide fair tax
treatment to business income in general and to venture capital; and
(2) special provisions designed to aid new enterprises and small
businesses.
General revisions in the tax structure and in tax administration
needed to provide fair tax treatment to business income in general
and to venture capital can be presented in 11 points.
(1) The excess-profits tax should not be retained as part of the
permanent peacetime tax structure. It should be repealed either
on the cessation of hostilities or shortly thereafter. If it is retained
after the cessation of hostilities, adjustments should be made to
lighten the burden of the tax on small, growing enterprises.
(2) The 2-year carry-back of unused excess-profits credits should
be retained during the 2 taxable years following the war.




16

FINANCIAL PROBLEM'S OF SMALL BUSINESS

For many small corporations the period of transition following the
war will be particularly hazardous and their survival may depend upon
the immediate availability of funds and the adjustment of their tax
burdens to allow for abnormal incomes.
Unless the Congress otherwise provides, the 2-year credit carryback will expire with the repeal of the excess-profits tax. I was
asked yesterday by a Government economist working on post-war
plans which the metal trades would prefer, the repeal of the excessprofits tax together with the repeal of the 2-year carry-back or the
retention of the excess-profits tax with the retention of the 2-year
.carry-back. That is, of course, an unwelcome choice.
What the metal industries would like to have is the repeal of the
excess-profits tax with the retention of the carry-back. Forced to
make the choice as presented, I think we should prefer to keep the
excess-profits tax in order to have the 2-year carry-back, so important
would that feature be to our post-war planning and to the fluctuating
fortunes of the industry.
Mr. PLOESER. That is the last choice with you.
Mr. FICHTNER. That is the choice that would follow after the one
that I am recommending.
Mr. PLOESER. That is the last resort.
Mr. FICHTNER. The last resort would be to repeal the carry-back.
Mr. PLOESER. I did not want your statement to be rntezpreted to
mean that that would be acceptable.
M r . FICHTNER. Thank, y o u , sir.

If this tax should be repealed before the post-war transition to
peacetime production and marketing is completed, tragic consequences would ensue for numerous small enterprises if they could not take
advantage of the unused credit carry-backs to which they are fairly
entitled.
Moreover, many enterprises which would not exercise the privilege
of the carry-back of unused credits, because their fears of subnormal
incoues were not realized, would be encouraged boldly to plan
for increased production, sales and employment. We hope not to
have losses to carry back. With a contingent asset in the carry-back
privilege, however, we would be encouraged to spend the necessary
sums to rebuild our marketing organization to peacetime business.
It is very comforting to know if you do go in the red that you have
something against which to offset that loss although at the same time,
you hope you do not realize the loss. It is a psychological buttress
to confidence in forward business planning. It would be effective in
assuring business expansion and full employment after the war.
(3) The capital-stock tax and declared value excess-profits tax
should be repealed as soon as possible. There is no reason at all to
wait. Loss of revenue to the Treasury is not significant and would
automatically be offset by other tax revenue. These taxes place a
discriminatory burden on the small business and are almost universally
recognized as being inequitable and discriminatory.
(4) The corporate income tax—and here I depart from most publicized income-tax plans—should be retained with rates adjusted to
post-war budgetary needs.
At moderate rates the tax will not retard the rise of small enterprises and would leave a reasonable income for reinvestment in the
business. The present tax rates progress from 25 to 40 percent,




17 FINANCIAL PROBLEM'S OF SMALL BUSINESS

reaching the maximum for corporations with incomes in excess of
$50,000. These rates are onerous for smaller corporations struggling
to accumulate reserves for future needs.
Moreover, with no access to capital markets, smaller concerns
must depend on reinvestment of net earnings for growth. While no
special exemptions for small business are recommended, the following
illustrative graduated scale of rates applicable to all corporations can
be recommended on the lower brackets of income.
Taxable corporate income:
Up to $20,000
$20,000 to $39,999.
$40,000 to $49,999.
(pUUjUUU to Vi ajìjìJiJ
$60,000 tu $79,999.
$80,000 to $99,999-_
More than $100,000.

Corporate tax rafe
(percent)

15
20
25
30
35
40

I use the 40-percent rate because that is the rate now in effect and
if it is fiscally possible, of course, the rate should be lowered. There
is talk, I understand, of a 35 percent normal and surtax combination
rate; 25 or 20 percent would be less restrictive to business expansion.
Everything depends on Treasury estimates of yields. Small manufacturers, however, have more interest in a Government budget under
control than in low rates, as such, attended by inflationary dangers.
Mr. P L O E S E R . I Do understand you to say you do not advocate
exempting the low bracket, for instance possibly the first $20,000 of
profit from any income tax at all?
Mr. FICHTNER. On the normal tax; no. I think small businesses
want to pay their fair share of taxes. The exemption suggested
earlier was on the excess-profits tax.
Mr. PLOESER. Y O U do not advocate any exemption? It applies
to the first earnings of any size business and does not apply only to
small business?
Mr. FICHTNER. That is right.
Mr. PLOESER. It does become an incentive of small business?
Mr. FICHTNER. Taxes are part of the cost of carrying on a business
and should be considered in that light. These suggested rates, of
course, would apply to the incomes of all corporations, to General
Motors and U. S. Steel as well as to smaller corporations. The graduated rates in the first $100,000 of corporate income would not be as
significant to large concerns as to smaller companies.
Mr. PLOESER. That is right.
Mr. FICHTNER. ( 5 ) To eliminate so far as feasible, the so-called
double taxation of dividends as corporate and as individual income,
and to equalize the taxation of corporation and unincorporated
enterprises, it is proposed that corporations should be given the
privilege, to be exercised voluntarily, to be taxed as partnerships.
We have seen, during wartime taxation, when there was such a wide
deviation between taxation on partnerships and on corporations a
hasty and ill-considered movement to disincorporate and to assume
the partnership form. The form of doing business should not depend
so largely on tax avoidance. This suggestion would remove those
inequities that recur with such changes in the tax law.
Mr. PLOESER. H O W would you make it optional?
Mr. F I C H T N E R . I recognize, of course, that in management-owned
companies with only a limited number of stockholders would the




18

FINANCIAL PROBLEM'S OF SMALL BUSINESS

exercise of the privilege be feasible. Therefore, it becomes a small
and independent business recommendation. If it is tried in a large
company with a large number of stockholders, some of whom are in a
high personal income-tax bracket and others in a low income-tax
bracket, it might precipitate controversy. Practically speaking, it
becomes a privilege wThich would be exercised only by the smaller
closely held corporations, and then only under certain conditions.
Mr. PLOESER. D O you want to apply that even where the corporation might have stockholders who were not active participants in the
business?
Mr. FICHTNER. Yes; as stated, that would be the case.
Mr. HALL. Some of our biggest corporations are closely held.
Would 3rou grant them the same privilege?
Mr. FICHTNER. The rates on their income might be as great or
greater taxed as a partnership as under corporate taxation, depending
upon the tax structure after the war, the level of personal incomes,
and the extent to which earnings were kept in the business. In any
case, the law now permits a big business to be carried on as an individual enterprise or as a partnership if the owners choose those forms.
(6) The present carry-over of business losses should be lengthened
to a period of at least 6 years. The purpose is to get away from the
annual accounting period. Corporations might make big profits in,
say, 2 or 3 years out of 10 and suffer losses the remainder of the
decade. Unless business losses incurred in a given year can be
carried forward and deducted from profits earned in subsequent years
before these profits dre taxed, effective tax rates over a period of years
on enterprises with fluctuating incomes will be greatly in excess of
the statutory tax rate.
(7) Greater flexibility should be allowed in charging off depreciation expenses and research and development costs.
Present Treasury regulations require a rigid allocation of depreciation charges and of many research and development expenses to
specific accounting periods. Greater flexibility in writing off these
items would have important beneficial effects in many business situations and would remove much friction in the administration of the
tax law.
In a period of relatively stable tax rates, the interest of the Treasury
would not be seriously harmed by greater flexibility in these respects
so long as the total deductions are limited to the actual costs incurred
b y the taxpayer.
(8) The minimum individual income tax rate should be reduced to
15 percent or to about the level as the proposed minimum corporate
tax rate. T o encourage risk taking b y individuals in the middle and
upper income brackets, and to stimulate the free play of entrepreneurial
ability by hope of adequate reward, rates in those brackets should be
lowered as much as possible.
The total taxes collected from persons of high incomes are not a
major but only a minor part of our total tax revenue but those are the
people who can afford to assume the speculative risks of investment
in new small business(9) Efforts to simplify the income tax and the withholding of taxes
at the source should be continued. Attention should be directed at
tax evasion in small businesses and professions characterized by cash
transactions and inadequate records for tax audit.




19

FINANCIAL PROBLEM'S OF SMALL BUSINESS

(10) The determination and payment of tax refunds should be
completed as quickly as possibly.
(11) Recognition should be given to the necessity of adequate salaries for the administration of smaller enterprises. The assumption
of the administration of the law in the field seems to be that the size
of salaries is logically to be correlated with the volume of business,
which is unsound. In a large business with a high subdivision of
executive labor, the administration of a narrow department or func-r
tion may not require experience or judgment of a high order. In a
small business, the executive may need rare judgment and experience
in many functional fields.
Indeed, higher salaries might well be allowed for tax purposes for
executives with multiple managerial functions in a small business than
for executives with narrow functions in a highly organized, largevolume concern. Small concerns should not be placed at a disadvantage in securing managerial ability and other skills to meet their
requirements.
The present environment which provides large salaries in large corporations is a seriously limiting factor in the launching of new enterprises by competent individuals. It is of social importance, if we
decide that we want an active, small enterprise economy in this country, that the best talent in the Nation should not be unduly encouraged
to direct itself to the large corporations because that is where the large
salaries or large incomes exist.
I have been interested to learn that the Harvard Business School
has taken a position on that. Dean Donham and Dean David both
feel, I understand, that the tendency of their better men to seek jobs
with the large corporations has not been in accord with the development
of a spirit of venture on American business. Both of these gentlemen
have now taken a very keen interest in anything that can be done to
encourage the graduates of Harvard (Business School to start small
businesses on their own.
The C H A I R M A N . In connection with that and under the G . I. bill
of rights, a number of veterans may pool their Government guaranties
and loan privileges for the purpose of going into a small business.
For instance, suppose that they want to get up a concern with a
million dollars' capital. Two hundred and fifty veterans could get
together and they would have a borrowing capacity of $ 4 , 0 0 0 each or
$1,000,000; and that would be a Government guaranty to the extent
of one-half but, of course, they would have to have some kind of a
working interest in the concern.
Can you not in that see some possibility of aiding these veterans in
engaging in small business when they return?
Mr. FICHTNER. Veterans will no doubt start many new small
businesses after the war and association together to raise capital is
sound.
The C H A I R M A N . I do not think that has been given very much
consideration. I have not seen anything about it in the newspapers
or magazines.
Mr. F I C H T N E R . Very few types of manufacturing concerns could
be started on $ 4 , 0 0 0 .
The C H A I R M A N . I am talking about pooling it.
Mr. K E F A U V E R . If ten of them get together, they pan have $ 4 0 , 0 0 0 .
Mr. F I C H T N E R . When you get that amount you can start a small
manufacturing plant.



20

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. HALL. When you refer to restrictions, you are referring to
the salaries they will allow when they go over your books?
Mr. FICHTNER. That is right.
There is another source of controversy with auditors in the field.
So maii}^ small plants are controlled by the officers and directors who,
therefore, vote salaries to themselves. Wherever that situation
exists the auditor is naturally suspicious and begins to disallow
salaries.
Mr. HALL. Are you speaking of your own auditor?
Mr. FICHTNER. ' N O , I mean the Internal Revenue auditor. The
same situation does not exist in large private concerns; salaries of
hundreds of thousands of dollars to officers apparently are seldom
questioned.
These revisions may not provide sufficient tax relief to permit the
establishment and growth of small business on the scale needed to
maintain adequate levels of employment and a healthy competitive
structure in industry. If additional relief is needed, they could take
several forms such as (1) a specific exemption from corporate taxes for
newly formed, independent enterprises; (2) special tax relief limited to
newly formed, independent businesses undertaking the development of
radically new industrial innovations; and (3) special credits on individual income taxes designed to encourage persons in the upper incometax brackets to assume the risks of equity investment in new enterprises.
The latter approach can be regarded as an alternative measurs under
control to the previous suggestion of lowering the high personal rates
in the upper brackets.
All of these possibilities offer considerable attractions, but they
also present substantial difficulties in administration, and I|make no
specific recommendations concerning them.
T o summarize: Federal taxation has been weighted too heavily
against risk-taking and against the birth and growth of smaller enterprises. The tax structure has become highly complex. It imposes
burdens which smaller enterprise cannot long endure in time of peace.
T o provide a Federal tax environment in which smaller enterprise may
have the opportunity to become established and grow to provide
greater employment, invite investment and produce more goods at
lower prices to consumers, fundamental revisions are required in the
tax structure and in tax administration. Many small manufacturers
complain that tax administration is their major difficulty because it
is approached in the maimer of a hunter seeking his quarry.
The tax program which I have proposed is, in the main, a post-war
program. It is designed to provide meritorious small business with
equity capital by reinvestment of earnings. Some of the elements
could be introduced after the end of the German war and not wait
for the cessation of hostilities with Japan.
Moreover, the taxpayers should be informed in advance of the
pssential features of taxation which will become effective after the
end of the war so that they may plan their production and employment to accomplish the transition to peacetime conditions as smoothly
and speedily as possible. Thank you.
The CHAIRMAN., Have you finished your statement, Mr. Fichtner?
M r . FICHTNER. Yes, M r . Chairman.




21

FINANCIAL PROBLEM'S OF SMALL BUSINESS

The CHAIRMAN. Thank you very much, Mr. Jackson?
Mr. JACKSON. Have you considered the effect of your tax proposals
on the over-all tax picture after the war? It has been estimated, for
instance, that our Budget will run between 20 and 25 billion dollars,
speaking of the Budget of the Federal Government. D o you think
that the reductions and modifications you have suggested will have a
substantial effect on the amount of income that we will need for the
operation of the Federal Government?
Mr. FICHTNER. Since the tax revenue is a product of rate times the
income of business, I would hope that after a brief period the tax
revenue product would be larger than if the tax rates were not adjusted.
In other words, with a vigorous, expanding economy, the Treasury
revenue will be maximized. If the present high tax rates are retained,
the Treasury, will not get the $25,000,000,000 you speak of.
The CHAIRMAN. I wonder if the witness can be back in the morning?
Could you return conveniently tomorrow morning?
M r . FICHTNER. Yes, M r . Chairman.

The CHAIRMAN. I think a number of the committee members
would like to ask questions, and if it would be agreeable to you,
would it be agreeable for him to return tomorrow morning, Mr.
Jackson?
M r . JACKSON. Certainly.

The CHAIRMAN. Then we will recess at this time to meet promptly
at 10:30 tomorrow morning and to adjourn at 11:45. That will give
the members an opportunity to do their correspondence before they
come here and time at the conclusion of the hearing to get to the floor
of the House.
I have conferred with Mr. Hall, the ranking member on the minority side, and we think it will be all right to continue these hearings
from day to day until we recess, beginning at 10:30 each day and
adjourning at 11:45.
With that understanding, we will continue the hearings from day to
day and if you will be back here tomorrow morning, Mr. Fichtner,
we will appreciate it. Thank you for your very fine and comprehensive statement. It has been very instructive.
Mr. FICHTNER. Here is one item I would like to insert in the
record. I have been doing some consulting work for the Smaller War
Plants Corporation. Mr. Maverick wishes me to state that my expressions are my own personal views and that my statement is made by
me personally and not on behalf of the Corporation.
T h e CHAIRMAN. All right, sir.

(Statement submitted by Mr. Fichtner is as follows:)
MARCH

19,

1945.

To: Mr. John Blair.
From: Maverick, Chairman and General Manager.
Subject: Mr7 Fichtner's Statement on Tax Program.
Please see that Mr. Fichtner makes this simple statement when he testifies:
" I am a consultant of the Smaller War Plants Corporation and have done some
research, but this represents my own personal views and this statement is being
made personally and not on behalf of the Corporation."
FARRELL.

The CHAIRMAN. Without objection, we will stand in recess until
10:30 tomorrow morning.
(Whereupon, at 11:50 a. m., the committee adjourned until 10:30
a. m., Wednesday, March 21, 1945.)
T1653—45—pt. X-




i




26 FINANCIAL PROBLEM'S OF SMALL BUSINESS
WEDNESDAY,

M A R C H

21,

1945

H O U S E OF REPRESENTATIVES,
SELECT COMMITTEE ON SMALL BUSINESS,

Washington, A <7.
The select committee mot, pursuant to adjournment, at 10:30 a. m.,
in room 1011, New House Office Building, Hon. Wright Patman
(chairman) presiding.
Present: Representatives Patman (chairman), Kefauver, Keogh,
Jackson, Hall, Howell, and Stevenson.
Also present: Dan W. Eastwrood, chief investigator for the select
committee.
The CHAIRMAN. Mr. Fichtner, did you want to supplement the
statement you made yesterday?
Mr. FICHTNER. N O , sir; I have no further statement.
The CHAIRMAN. Mr. Hall, would you like to ask some questions?
Mr. HALL. I was wondering, in the event you did not have renegotiation, wouldn't, under our present tax schedule, the Government
take practically the same amount in taxes that they now take under
renegotiation?
Mr. FICHTNER. That varies, of course, with the business. As I
stated yesterday, the data on the wrliole subject of renegotiation are
not available to araw accurate conclusions. There are so many small
manufacturers in the metal-working trades that are paying the 95
excess-profits tax rate and reaching the 80-percent over-all limitation
that it is true that taxes would take a major part of their excessive
profits.
In our case, wTe made, as I recall, in 1943, 16.6 percent on sales.
We, of course, are subject to the 80 percent rate. Then we were
renegotiated down so that after taxes and renegotiation we had just
about 2 percent on sales. In other words, taxes and renegotiation
cut us from 16.6 to 2 cents on the dollar.
Mr. HALL. In your own case, did you figure out what would have
happened if you did not have renegotiation and were just subject to
the present tax rate?
Mr. FICHTNER. W e would have 20 percent of 16.6, or 3.3 percent.
Mr. HALL. It would have allowed you about 1 percent more if you
had not had renegotiation but had just taxes?
Mr. FICHTNER. That is right. That is not a serious cash drain.
Being a small company, however, it took away about 15 percent of
our equity capital and 10 percent of our working capital. After the
tax credit the net repayment amounted to 10 percent of working
capital and 15 percent of equity capital, which reflects my major




23

24

FINANCIAL PROBLEM'S OF SMALL BUSINESS

thesis yesterday that small firms lmve difficulty in effecting reinvestment to build up post-war reserves to meet the possibility of a sharp
recession in the readjustment period.
Another point, and one that is quito serious, is that in the process
of renegotiation, the excess-profits tax base to which tho company is
ent i tied to carry back for 2 years is reduced by tho amount of the excess
profits on gross renegotiation determinations. That contingent asset
is thereby greatly diminished and thus lessens the confidence with
which management will make its future plans for the transition period.
I think that is the most serious consequence to tho small company's
financial position in the renegotiation procedure.
Mr. IIALL. Since yesterday, have you been able to make any determination as to how many of the smaller firms are not affected by renegotiation by reason of the ceiling of $500,000 put on by the Congress?
Mr. FICHTNER. I must liavo to talk off the record on that because
these figures were supplied on that basis. However, I think the committee might well ask the Price Adjustment Board to supply data and
if such data were supplied for public information with a break-down
by industries and by size of companies within the industry, I am sure
that most manufacturers would bo very eager to study the information.
I have no reason to believe that renegotiation has not been conducted with the utmost fairness but the t}rpical small manufacturer
or at least those with whom I have discussed tho subject, feel that in
the exercise of this very drastic governmental power, there should be
8omo objective standards to which management could compare its
experience. Tlioy might bo convinced that they were being treated
fairly, if these standards were made known.
It may be that the renegotiation process has been eminently fair.
I hesitate to say that it has not, generally speaking, but I do believe
that the absence of objective standards has been disturbing.
Mr. HALL. The same rule of thumb, however, was used by the
renegotiation people in all cases, was it not?
Mr. FICHTNKH. There is a feeling among manufacturers in our area
that some of the services are quite fair and others are quite tough.
Mr. HALL. In what way?
Mr. FICHTNEH. That if one is renegotiated by one branch of the
service the result is one set of figures; and if one deals with another
branch of the service, the application of the power is much more
extreme.
Mr. HALL. If you can, will you tell us just how these two different
results are arrived at?
Mr. FICHTNER. A S I understand it, the Renegotiation Act sets up a
list of rather general criteria; the contribution that the companies
have made in the war effort, the efficiency of the manufacturing
process, the amount of risk taken, and so forth. Those are generfd
criteria which must be interpreted with a large dose of horse sense, or
judgment.
I think what most manufacturers w^ould like to see is some percentage bracket set up, classified b y industries within which those
criteria would be applied. For example, the machine-tool industries
traditionally have a rather wide profit margin, necessarily so because
they experience wide fluctuations of business from year to year.
Their profits in good years must be set aside as reserves to absorb




25

FINANCIAL PROBLEM'S OF SMALL BUSINESS

losses in a long succession of bad years. If the machine-tool companies are regarded as earning an excessive profit in tho war years
and are renegotiated down to a "norm/* they may have their losses
to take for 4 or 5 bad years out of capital rather than reserves. The
application of renegotiation is probably not so fair to such companies
as in the case of a food manufacturer, for example, that has fairly
steady earnings year after year over a long period of time.
In other words, it is a difference between a capital goods company
and a consumers goods company.
Mr. HALL. And they use the same rule-of-thumb in applying the
renegotiation in both cases?
Mr. FICHTNER. I should like to have more information as to just
what the standards are. Many machinery manufacturers contend
that renegotiation does not leave them with reserves needed by
prudent management.
Mr. HALL. You said you had some figures to give off the record.
Can you give us any idea of the percentage of small businesses which
are not renegotiated by reason of the fact that the Congress.put a
ceiling of $ 5 0 0 , 0 0 0 below which the Government will not renegotiate?
Mr. K E F A U V E R . IS this to be off the record?
Mr. HALL. The witness said he would like to give it off the record.
As far as I am concerned, it can be on the record.
Mr. KEFAUVER. Mr. Fichtner, is there any reason why this information cannot be placed in the record?
Mr. FICHTNER. I think the clearance of the Price Adjustment Board
should be obtained before any figures are published, because they
were supplied as restricted material.
Mr. KEFAUVER. Then this will be off the record until we can get
the necessary clearance.
(Discussion here off the record.)
Mr. KEFAUVER. D o you have any other questions. Mr. Hall?
M r . HALL.

NO.

Mr. FICHTNER. It is my* understanding that the renegotiation
process docs not attempt to take into consideration the fact that
smaller companies might need additional reserves as compared to
large companies after the war.
Mr. K E F A U V E R . D O you have any question, Mr. Howell?
Mr. H O W E L L . I was just wondering about this one point on which
I am not exactly certain in my own mind.
This $ 5 0 0 , 0 0 0 exemption
that is given to small businesses, is that for a year's volume'or on one
specific contract?
Mr. FICHTNER. We supply equipment which is never ordered in
lots of perhaps more than $ 7 5 , 0 0 0 , so we are renegotiated on an
over-all annual basis. Our separate contracts are not broken down.
For companies supplying standard items at fixed prices it usually
applies to the yearly volume of sales.
Mr. HOWELL. I have in mind a specific business that handles a
series of contracts. The gross amount on one contract, we will say,
was § 1 2 5 , 0 0 0 and the next one was about § 1 5 0 , 0 0 0 and I know that
their experience in connection with renegotiation was just exactly as
you have described it, a small business with very little working capital
and a great need for reserves, and they were not permitted to set up
anything in the way of reserves and furthermore, they wére given to
understand in advance that if the profit showed anything more than




26

FINANCIAL PROBLEM'S OF SMALL BUSINESS

around 8 percent that they were certain to be renegotiated and so they
used this power of renegotiation, to which you referred, more or less
as a threat at the time the contracts were entered into. Therefore,
if the small businessmen accept a contract in the performance of its
public duty, the duty of the business to contribute all it can to the war
effort, they make them accept those contracts almost solely on the
basis of just performing it without any consideration as to the effect
it is going to have on their business in the years to come.
Mr. F I C H T N E R . Does it not come down to the theory of what is
profit? Profit, it seems to me, can never be judged in a brief space
of time like 1 accounting year.
Mr. H O W E L L . That is quite true.
Mr. FICHTNER. Therefore, what is boing renegotiated away from
many companies that are in the fluctuating capital goods field is
something that mav not be profit at all because when they go to the
expense of getting back into peacetime production, the cost of which
is properly chargeable' to wartime operations, the renegotiation
"take-away" will turn into a loss. Considering the whole war and
readjustment period, there is not much doubt that "profit has been
taken out of war." M y fear is that many war producers will not
break even and may go broke.
That is the reason that I proposed yesterday that some application
of the theory of carry-back be applied to renegotiation so that if a
company did 1 ose heavily in getting back into peacetime production,
these amounts in the way of excessive profits now seized annually by
the rencgotiators could be applied to those losses. If war producers
do not sustain a loss then, of course, the Government would keep the
renegotiation take-away, as it should, because profits have been
proved excessive.
Mr. H O W E L L . I quite agree with you on that theory because it is
inaccurate, really, to limit these little companies to approximately
8 percent and I think generally that is the amount that is determined
upon on any ono contract or any scries of contracts because of the very
reason that you point out now and that you mentioned yesterday
because you cannot call it a profit when their contracts cease and they
begin to reconvert to peacetime production when they will probably
disappear entirely and probably some effort should be made by the
renegotiation agencies, as well as the Department of Internal Revenue,
to provida some sort of cushion for these businesses. Otherwise,
many of them might fail when they get into the reconversion period.
Mr. F I C H T N E R . Of course, 8 percent as a figure seems quite adequate as a profit. Most business would be gratified with 8 percent
as a normal profit. The percent is before taxes and manufacturers
now pay 80 percent taxes, leaving them with about 2 percent. It is
difficult to build reserves on 2 percent to plan to make post-war jobs,
even though no dividends are paid.
Mr. K E F A U V E R . Gentlemen, we have several Members of Congress
here and I want to say for your benefit we will give all of you gentlemen an opportunity to make a statement following this witness.
Mr. Stevenson, do you have any questions?
Mr. STEVENSON. I do not have any question; no.
Mr. K E F A U V E R . Mr. Keogh?
M r . KEDGH, N o .
K E F A U V E R . Mr.

Mr.




Eastwood?

27

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. EASTWOOD. I wonder if you could answer briefly this question.
Yesterday you mentioned that Congress recognized the discriminatory
effect on going enterprises of the Revenue Act of 1942 and that
Congress inserted a relief provision to alleviate this discrimination
by the provisions of section 722. What has been.your experience
with corporations who have applied for relief under section 722 by
requesting equalizing adjustments of this base? D o you think that
generally the Internal Revenue Bureau has been hesitant to provide
this relief that Congress has provided, particularly for small firms?
Can you answer that " Y e s " or " N o " ?
Mr. FICHTNER. Quite a number of companies in the Buffalo are filed
applications under section 722. We have filed one. Most of them
have not had any relief as vet. I learned of one instance where a
small refund was given but later it was called back because of some
regulation in the administration of section 722.
I feel that the principle is eminently sound but up to the present
time I do not think the relief obtained by small manufacturers has
been significant. I am hopeful that in the future it might be more
significant. After renegotiation, however, it should be pointed out
that the area of excess profits to readjust become much smaller.
Mr. EASTWOOD. A S you testified yesterday, - the small firm does
not have very much in the way of reserve and if these relief provisions
were followed out it would be possible that it would not have to go
into the capital markets to get much, if any, money if this had been
expedited by the Treasury Department.
Mr. FICHTNER. It would have been very helpful. Small manufacturers will have to rely for long-term capital expansion prettv
largely on tax adjustments. Section 722 is one. The points that 1
brought out yesterday are in addition because they not only give
them a sound source of long-term capital but I think will attract to
them a great deal of local capital which is not now forthcoming.
Mr. KEFAUVER. Mr. Fichtner, we have quite a number of questions that we wanted to ask you, and we greatly appreciate the study
you have given the matter that this committee has unde^ onsideration. I wonder if we could submit these questions to you later and
if you would answer any that you see fit or that you can answer.
Mr. FICHTNER. I will be glad to; yes.
Mr. K E F A U V E R . I should like to ask you only one question, Mr.
Fichtner, and that is this: You have explained the difficulty of small
businesses securing long-term capital. D o you thiuk the presently
available means of capital for small businesses is going to be sufficient
to enable small businesses to reconvert and get started in peacetime
production without the necessity, in some cases, of having the assistance of some governmental loaning agency?
Mr. FICHTNER. I think the revision of the tux structure is crucial.
Mr. KEFAUVER. That is, of course, looking toward the future.
Mr. FICHTNER. If the tax structure is revised, I am rather confident that small business will be able to go ahead on its own to a
large extent. There will be isolated cases, of course, and particularly
in such matters as reconversion loans, where I think the Government
will have to step into a very considerable extent. That is really a
part of war finance in which the Government always has to take a
large hand.
Mr. KEFAUVER. That is not strictly a long-term loan.




28

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. FICHTNER. No; that is simply unfreezing war inventories.
Mr. KEFAUVKR. So, in the field of reconversion loans, you feel that
the Government will have to supplement the existing facilities?
Mr. FICHTNER. By "reconversion loan," do you mean termination
loans?
Mr. KEFAUVKR. Termination loans.
Mr. FICHTNER. Yes. The present arrangement, I tliink, is quite
essential to keep working capital from being frozen.
Mr. IVEFAUVER. Mr. Fichtner, we are very grateful to you for being
here, and the committee appreciates the time and attention you have
given to the problem. Your testimony will be very valuable to the
committee in its work.
M r . FICHTNER. T h a n k y o u .

Mr. IVEFAUVER. Gentlemen, before calling our next witness, we
always like to give Members of Congress an opportunity to be heard
whenever they can favor us with their attendance at the sessions of
this committee. Mr. Bailey, a colleague from West Virginia, is
present.
Mr. Bailey, did you have a statement to make?
Mr. BAILEY. Yes, Mr. Chairman. How much time might I have?
Mr. IVEFAUVER. We have several witnesses. If you want to make
an extended statement, we will see that it is inserted in the record; but
how much time will your statement take?
Mr, BAILEY. I think about 15 or 20 minutes. I do not want to
impose upon the committee.
Air. IVEFAUVER. Mr. Bailey, suppose you proceed, and then if we
see that your statement is going to run too long, we can give you
authority" to extend your remarks in the record. How would that be?
Mr. BAILEY. It seems to me I have heard that expression before.
Mr. KEFAUVKR. We have a number of other witnesses, but give us
the high spots of your testimony.
STATEMENT OF HON. CLEVELAND BAILEY, A REPRESENTATIVE
IN CONGRESS FROM WEST VIRGINIA
Mr. BAILEY. Mr. Chairman and gentlemen of the committee, I have
for presentation to the committee today some three separate matters,
one of them of Nation-wide importance and the other two might be
considered as somewhat sectional.
The first matter that I wish to discuss is under the caption " T h e
Little Businessman and Insurance Rates."
The gentlemen of the committee will remember that some month
or 6 weeks ago Congress approved the insurance moratorium bill.
Mr. IVEFAUVER. Mr. Bailey, for the purpose of the record, you are
talking about the bill recently passed in the House of Representatives
which is to give a 2-year moratorium before the Federal Government
begins to take certain supervision and regulation of insurance companies under the recent Supreme Court case holding that the business
of insurance is interstate commerce?
Mr. BAILEY. That is true, Mr. Chairman.
Mr. HALL. Isn't it true, too, that before that bill was passed there
was an understanding on the part of the legislative leaders and on
the part of the President that that bill would be signed granting that
moratorium?




29

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. BAILEY. The bill was not passed in the form in which the
agreement was reached.
Mr. KEFAUVER. Mr. Bailey, we do not want to rehash this insurance matter, as the bill has already passed tho House. We do not
want to detail the merits or demerits of that legislation, but we would
be glad to have your observations about what this committee can do
about any problem you have.
Mr. BAILEY. M y observation, Mr. Chairman, would be this—without going into the detail of what I presented in opposition to the bill
on the floor of the House—that I want to call the attention of the
committee to the discrimination in rates. I presented facts on the
floor or endeavored to do so, but, on account of the limited time
granted me, I was unable to present all of the facts to show the
discrimination between classes of insurance.
For instance, I cited an example in my home capital city of Charleston, W . Va., wherein a company was operating under a blanket policy
covering all their property in all 48 of the States, and under that
blanket policy, the rate was 10 cents on $100. Under a rate-making
bureau set up in the adjoining State of Ohio, rates were made for other
businesses not covered by these blanket policies; and in the building
adjoining the one owned by this large company operating under a
blanket policy, a small businessman occupied this building. His rates
are made in tins bureau at Columbus, Ohio, and were $1.57 compared
to a 10-cent rate under the blanket policy for the Nation-wide concern.
I submit the proposition that whoever was charged with looking
after the interest of the little businessman failed him miserably in this
instance, .because it is a safe assumption that the little businessman
must carry insurance for his own protection. He is forced to c a n y
it if he gets any financing outside of his own ability to finance his
business. It is not a matter of choice with him.
It is a matter of protection and he should be protected against these
discriminatory rates.
Mr. KEOGH. Mr. Bailey is conscious of the fact that this is not a
legislative committee; is he not?
Mr. KEFATJV*ER. Yes; I am sure Mr. Bailey understands that.
Mr. BAILEY. Yes; it is more a committee for compilation of information; is it not?
Mr. KEFAUVER* M r . Bailey, on the insurance matter—I just received a note that we had M r / P o r t e r here yesterday and we asked
him to come back today and he cannot come back tomorrow—on the
insurance matter, could you give us any details that you have and
attach any correspondence that you want to which will bring out this
point?
Mr. BAILEY. Yes; I could. M a y I take a couple of minutes to
present these other matters?
Mr. KEFAUVER. W e will grant you that permission.
Mr. BAILEY. This matter I would like to present under the heading
of " Glass industry and reciprocal trade agreements."
I have here, Mr. Chairman, a communication from one of the industries in m y district, the West Virginia Glass Specialty Co., Inc., of
Weston, W . Va.
Mr. KEOGH. How many employees has it, Mr. Bailey?
Mr. BAILEY. About 240,1 believe.
71658—45—pt. 1




5

30

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. KEOGII. DO you know what the specialty line of its business is?
MR. BAILEY. NO; I could not tell you that. It is a going concern,

however.
I am going to submit the letter to be placed in the record. Their
letter is a protest against a rumor or information that has come to
them that there will be an attempt made to change the differential
granted to the President on tariff rates in the reciprocal trade agreements. If I am correct, I believe at the present time the President
has the leeway of, say, 50 percent. That is right, is it not?
Mr. KEFAUVER. Mr. Bailey, we would have to refer to the reciprocal trade agreement. I am not familiar with what it is in that field.
Mr. BAILEY. I think that is right. They have an intimation that
Congress is going to be asked to giant the President even greater
differentials, and they are protesting that. They said if the reciprocal trade agreements are to be renegotiated they would like to insist
on the differential remaining where it is or even lower.
I want to add a little bit about the glass industry. One of the
greatest handicaps to little business, as I see it, in this country, is
the domestic situation, which is the exorbitant freight rates. Just
before the outbreak of the Second World War, this very concern and
two or three other glass industries in my district produced evidence
to show me that Belgium could produce a window glass and lay it
down on the wharf in New York cheaper than the company in Clarksburg, W. Va., could pay the freight rate to New York. That is a
question of freight rates.
Mr. KEFAUVER. The question you raise is not a sectional differential but a differential as to this industry?
Mr. BAILEY. That is right. The glass industry, compared with
some of the other industries in this Nation, is very small. I would
not attempt to even say what percentage of the over-all business of
the Nation it is, but they do have an argument; and naturally there
are several of the industries located in my district and they are
anxious, of course, that I call this to the attention of the Committee
on Small Business, because they consider themselves a small business.
Mr. KEOGH. Mr. Bailey, may I ask if you submitted the views
with respect to the reciprocal treaty to the Committee on Ways and
Means?
Mr. BAILEY. No; I have not. I just got this information a couple
of days ago.
The other point I want to mention is an informal communication
sent me by the hardware industry, and I have about a dozen communications from hardware dealers in the Third West Virginia
District, and I would also like to submit this as a statement.
Mr. KEFAUVER. Without objection, it will be included in the
record.
Mr. BAILEY. I might say here that it is stated:
The present Federal administration has assured small business that its rights
and interests will be protected.
The retail hardware trade, which mainly serves the agricultural communities,
is a typically small retail business.
The exemption from Federal taxation which is granted consumer cooperatives
that are engaged in the sale of supplies and equipment to consumers who are
likewise customers or prospective customers of retail hardware stores is a type of
discriminative class legislation which unfairly fosters the growth of such cooperatives, thereby threatening the future existence of the smaller retailers with whom
they compete.




31

FINANCIAL PROBLEM'S OF SMALL BUSINESS

I do not intend to go further into the matter. They are protesting
the agricultural cooperatives, and they have to live just the same as
the others.
Mr. STEVENSON. I think every Member of Congress has received
dozens of those complaints.
M r . BAILEY. Y e s .

M r . Chairman, if y o u w o u l d care to p u t it in

the record I would like to present it.

M r . KEFAUVER. W e will b e glad to extend y o u r remarks in the

record.
(The matter submitted by Mr. Bailey is as follows:)
WESTON, W . VA.,
H o n . CLEVELAND

March 17, 1945.

BAILEY,

Third Congressional District, West Virginia,
Washington, D. C.
D E A R S I R : We are writing in regards to the Reciprocal Trade Agreements Act
coming up for renewal in June of this year.
The present Trade Agreements Act gives the President the power to reduce or
increase tariff 50 percent. Some publications have even stated that the administration is hopeful that the tariff will be taken entirely out of the hands of Congress.
This is contrary to our belief. We believe that the tariff control should be vested
in Congress. Congress should approve all trade agreements as they are made,
since it is held responsible by the people for any serious wrongs that may result
from their operation.
The glass industry, which is one of the leading industries in the United States,
has suffered deeply in the past through low protective tariff. In order to adequately maintain and safeguard American standards and employment, it is vital
that our domestic commodities and the manufacturers be protected by a high
tariff from cheaply manufactured imported goods. As important as the tariff isF
we earnestly feel the full authority on the matter should be placed in Congress.
If the Trade Agreements Act must be extended we sincerely hope it will be
altered or rectified in such a manner that Congress must approve all changes in
tariff and all trade agreements.
Your support and aid to this end will be greatly appreciated.
Yours very truly,
W E S T VIRGINIA GLASS SPECIALTY
J O H N P E R T Z , Bales Manager.

JANUARY
Hon.

CLEVELAND

M.

CO.,

INC.,

23,

1945.

BATLEY,

House of Representatives, Washington, D. C.;
STATEMENT BY THE NATIONAL RETAIL HARDWARE

ASSOCIATION

1. The present Federal administration has assured small business that ita
rights and interests will be protected.
2. The retail hardware trade, which mainly serves the agricultural communities,
is a typically small retail business.
3. The exemption from Federal taxation which is granted consumer cooperatives
that are engaged in the sale of supplies and equipment to consumers who are
likewise customers or prospective customers of retail hardware stores is a type of
discriminative class legislation which unfairly fosters the growth of such cooperatives, thereby threatening the future existence of the smaller retailers with
whom they compete.
4. The officers of the National Retail Hardware Association, on behalf of its
more than 16,000 members, take this means of reminding the Congress of the
administration's promise to protect small business.
They ask that this promise be speedily reflected in the following actions:
(a) Revision of the Internal Revenue Code to abolish the speoial tax exemptions
now granted to cooperatives which are engaged in the sale of supplies and equipment at retail to consumers.
(b) Pending such revision that the Congress insist that the Bureau of Internal
Revenue thoroughly audit the tax returns and operating procedures of retail




32

FINANCIAL PROBLEM'S OF SMALL BUSINESS

oonsumcr cooperatives to determine that every such organization claiming
exemption is complying with the requirements as at present set forth in section
101 (102) of the Internal Revenue Code.
I approve the above statement.
LATHAM HARDWABE,

Buckhannon, IF. VA.

Mr. HALL. I do not think we want to get into the insurance picture.
It is settled.
Mr. BAILEY. Suppose I present a new bill?
Mr. IIALL. I did not understand that we were going into that
question before the recess surely.
Mr. KEFAUVER. Mr. Bailey, if you will submit to us the statement
you would like to include, we will consider it in executive session
and consider whether that is a subject matter that has pertinency to
the hearings we are now conducting.
Mr. BAILEY. All right, Mr. Chairman. Thank you for hearing
me. Maybe I did not have any business coming here but I have
gotten some things off my chest, anyway.
Mr. KEFAUVER. Mr. Eastwood, will you call the next witness?
Mr. EASTWOOD. Mr. Chairman, our next witness is Mr. G. Harvey
Porter, the executive vice president of the Industrial Corporation of
Baltimore, and although I have some knowledge of the corporation's
activities, I think possibly it would be more helpful if Mr* Porter
himself would describe the operation of the corporation.
Mr. KEFAUVER. Yes. Will you state your connection and tell us
something about the company you represent and then just make your
statement in your own way, Mr. Porter?
STATEMENT OF G. HARVEY PORTER, EXECUTIVE VICE PRESIDENT,
INDUSTRIAL CORPORATION, BALTIMORE, MD,
Mr. PORTER. M y name is G. Harvey Porter, executive vice president of the Industrial Corporation of ^Baltimore, Md.
I have divided this briefly into two subheads, one, the experience
that we have had briefly, and the second, the lessons that have come
out of that in a 30-year period that might be helpful on this subject.
Mr. KEFAUVER. Mr. Porter, before you go into your analysis of
problems we are considering, would you tell us something about the
Industrial Corporation of which you are executive vice president?
What type of business are you in?
Mr. PORTER. I was going to take that in sequence. M y statement
was going to cover that.
Mr. KEFAUVER. All right; go right ahead.
Mr. PORTER. It constitutes, of course, merely one example of
p^mething that has been done. It does not go beyond the experience
in Baltimore. It does, however, cover a 30-year period and the
origin of the corporation was after an industrial survey of the city
of Baltimore as to what the needs of the city were to increase its
mamifacturing business as that would affect normally small businesses
being brought to the area, and so forth.
A recommendation of the survey was that a group be formed to
aid in securing or assisting in securing the financial requirements of
these businesses. First of all, businesses that were established in




33

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Baltimore and that could expand and could be increased for more
employment and secondly, those industries in other cities that could
be well and soundly relocated in Baltimore and the third objective
was to take new ventures that seemed to have promise and to stimulate the financing and formation of those units in Baltimore.
The sponsors of the industrial survey of Baltimore which was made,
however, by an outside independent group, was the power company
which was looking into the possibility of increasing Baltimore's
potential business. The purpose of the organization 1 have stated.
The organization was done by securing a representative board of
directors out of banking, industry, real estate, insurance, retail
businesses, professions, engineering, accounting, legal, and so forth,
and a board of 31 directors was secured in that way which operated
entirely without any compensation.
It was a semicivic objective. 8100,000 in capital was raised through
businessmen or through institutions that wanted to subscribe. It
was not held out as being an investment in any way, but merely a
fund needed to back up and assist this effort in Baltimore, and to
give it working capital.
The original idea was to have these funds to put into businesses, to
secure their formation or to prime the pump of the thing and get other
people interested.
So, for the first 5 years, the corporations and the things that they
first of all carefully investigated and then determined to help or assist
would take a nominal investment. If S100,000 were required, mavbe
they would put in $5,000 or if $25,000 were required, maybe tLey
would put in $2,500 but just some nominal amount to back the thing
that they said they believed was all right.
Mr. ¿EOGH. When was that corporation formed?
M r . PORTER. I n January 1915.

Later, in 1919, after the war, it was determined to get an additional
$100,000 because these funds had been used in starting ventures before
the war and during the war, and so another $100,000 was obtained.
To complete this picture while we are at it and so we won't forget it,
about 3 or 4 years ago it was obvious that the money was not any
factor in the work that we were doing; that the essential thing we
were doing was rendering management and advisory counsel to businesses in their problems and in their best methods of getting capital
and that our funds were no factor in the $22,000,000 of money that
we had secured through outside sources in the period of the first 25
years for small business and, therefore, our capital was reduced in the
period of some 26 or 27 years. Naturally, a lot of the original investors had died and their interests had gone through estates and gotten
into other hands so our corporation bought back at cash value all of
the outstanding stock except about $40,000 worth that remained in
our board of directors' hands and we stopped any supplying of funds
directly because we found it unnecessary in our experience.
Mr. K E O G H . Will you tell me how the corporation operates now?
What is its source of income?
Mr. PORTER. I will come to that. Can I just digress for a second
and talk about what the base is that we consider small business and,
therefore, the field in which we operate? That is all I am trying to
describe now.
M r . KEOGH.




Yes.

34

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. PORTER. Small business is a relative term. It varies in each
industry and, therefore, while some of the cases that we have handed
may seem to be rather large units, they have been relatively small in
their respective industries, so that you cannot divide it by number
of employees or amount of capital in a particular case, but merely
those people who do not have access to normal sources of finance
because of their nature and size.
As to the method in which the corporation obtains its income,
which I think was what you had in mind, I will be specific about that
because that has not changed in the 30 years. We have really followed
this pattern and I have it exactly.
We secure, first of all, the unbiased and uncolored facts with relation to each business seeking financial assistance through us. When a
project comes to the Industrial Corporation, we first of all make a
study of it without any cost to that project to determine whether we
believe we can assist it or secure its needs.
In other words, we cull out at our own expense the matter of the
likelihood of being able to help it. In other words, if it has little
foundation, somebody trying to capitalize a job for themselves with
little experience or little need for the industry, only setting up other
competition that would bo harmful to established people, we do not
undertake that thing because we do not believe it would add any
sound business units to the community.
If we do, howrever, determine to go into it we then ask them to pay
the expense of an investigation of whatever extent it may need, we
appraise the cost of that investigation in advance and in addition we
will receive a fee of a nominal amount for. the funds secured for that
company when these funds are received. In addition, we receive
revenues for services in following up the management of the projects
in certain cases.
As I said, we then make a thorough investigation including the
angles mentioned, sales and marketing, and so forth, and diagnose
those to determine the logical source from which to secure the moneys
required by that corporation.
In other words, we have no fixed sources of financing. We believe
that there are ample sources of private financing of small business in
the great majority of ventures. We feel that the things made available through the Federal Reserve and the Reconstruction Finance
Corporation prior to the wTar and the Smaller War Plants Corporation
during the war were very excellent adjuncts to that.
We have operated in securing funds through all of those sources in
addition to private sources but we believe from our experience that
the majority of small business needs can be obtained from existing
private sources and that, of course, includes the range of banking,
investment bankers, private capital, and insurance companies, savings
banks, and all the other sources that you know. We think that the
important thing is the matter of determining where they should be
gotten, presenting the complete and intelligent balanced facts to those
sources with some help in the negotiation of those funds because of
the lack of experience of the small business people in how to go
about it.
We think also that many a case comes to us from a bank because
90 percent of the cases will drift in through the fellow who goes to the
bank because lie wants money and looks at that as the logical public




35

FINANCIAL PROBLEM'S OF SMALL BUSINESS

source, is told they are not in a position to do that particular thing,
and then he may be referred to our corporation. In many cases, we
have merely gotten those things in shape for financing, always taking
them back to that bank and many times have secured the funds required through better presentation; but the thing that I have not
stressed and which is basic to the whole thing is that the classification
and needs of small business in financing should be the stress on tho
needs of small business for management, for better management, for
better counsel, for arranging of their products so that they are bankable
and financeable and the real problem is to give them help and service
in some way to that end because the majority of sound ventures can
finance themselves.
We follow through after we diagnose the problem by acting with
them in negotiating for tho funds required and finally, we follow
through with services to those industries, service oftentimes required
b y the investor to supervise their operations and the carrying out of
the policies that they established and said could be done.
Briefly, the results of the corporation's operations in its first 25
years—I have not taken any statistics since then because we have
been in a war period and a different cycle—were that we secured
approximately 822,000,000 of new money in refinancing of small
businesses in that period of time, 25 years in Baltimore and that area.
Mr. KEFAUVER. That is new business and additional capital?
Mr. PORTER. That is right, additional capital and refinancing
which is, in effect, the replacing of capital that may be due to the
fact that during the depression companies had gotten into difficulty.
Mr. EASTWOOD. Mr. Porter, is that $ 2 2 , 0 0 0 , 0 0 0 just equity capital,
or does it include bank loans?
Mr. PORTER. That would include everything that we had brought
in the way of credit or capital to businesses.
Mr. EASTWOOD. Can you break that down?
Mr. PORTER. I can send that to you. I did not bring any figures
because I thought it would be boring because principles are essential.
In other words, what are the lessons in this 30-year experience?
I personally have been with the corporation 23 years of these 30
years. I have, during that period, been privileged to study all of
the other operations in other cities that have been in any way similar
to ours or for the same purpose. I have sat on a number of committees and different groups that have studied the thing in order to
try to bring Baltimore anything that we had not gotten out of our
own experience, so I am somewhat familiar with all of the things that
"have been done in the country.
As to statistics during that period of time, we have paid a little
bit over 2 percent return on our capital, maintained our capital and
paid a little over 2 percent return on that to the stockholders, which
-was a tremendous surprise to them because the money was not put
u p with that thought. In other words, our belief is if you are going
to advise other people how they are going to run their business you
should keep your own in balance.
The lessons are these to us: That ample private funds are normally
available to small businesses. That would certainly not be true during
the war period. You would have to supplement those to the extent
that those businesses are made to expand and need increased amounts.
The second thing is that new cash is not always the best solution
«of a small business problem. It is the universal thing that small



39

FINANCIAL PROBLEM'S OF SMALL BUSINESS

business wants and seeks but it is not always the best solution because
to put more cash into something that is merely losing money when
you have not changed the trend of its operation is only going to go
in the same direction and is only sending good money after bad.
The third thing is that while we believe the present pools of funds
that are made available through normal bank credit and have been
announced recently are a perfectly sound thing because they tend to
concentrate interest and attention of bank funds for their availability to small business we believe that the establishing of private
funds such as we originally did, a little private fund of local money,
is a somewhat dangerous thing because it tends to discourage itself
in a short time with the losses that you have to take.
In other words, you poison the pool in a sense by the fact that
you have got to take losses with profits in those things and it soon
becomes discredited and we do not feel from our experience that our
fund ever was functioning in a way that was sound or through which
we produced. We thought it was the care with which we approached
the problems, the intelligence with which we selected the logical
sources to finance and the care with which we followed them up.
I will outline the source of our funds and how we have been able
to maintain them.
Finally, we do not believe that Federal funds, as such, should be
needed to any great extent in peacetimes for small business, and to
make an exception to that idea, I wish to say I am not talking about
a transitional period which was mentioned before, because that is a
special problem after the war and will have to be dealt with in a
practical manner, but in normal times we believe that statistics will
show that by far the preponderant majority of funds that small business has gotten and through which industry has been built up in this
country during our lifetime has been supplied from private sources
and that it is still available.
I would like to mention at that point there has been great discouragement to small business financing by the S. E. C. regulation
starting at $100,000 because that did impose on those businesses
undue costs of capital. The one thing we have always done is to
try to keep the costs of capital to the business down to a minimum
because they think that is essential and we think that has made
artificial and improper costs and we have gone on record in the belief
that nobody in the country would really lose if that were raised to
$1,000,000. That is our own idea.
I am familiar with the fact that there is some attempt to change
that and to raise it up to $300,000, but we have long ago said that up
to $1,000,000 in actual cases there would be no damage done.
Mr. K E O G H . Y O U are referring to exempting them from the registration requirements?
Mr. PORTER. That is right, of the S. E. C. It would merely be
more red herring to say that the tax burden is a hardship but I won't
burden you with that.
Finally, we think there is one thing that is* overlooked by the majority of agencies, and I must say that includes the normal sources of
financing and that would have to include banking investors, and so
forth, and that is the fact that the best judgment with regard to the
supplying of funds for a small business has to do with the honest future
outlook of that business based on its past experience, true, but looking




37

FINANCIAL PROBLEM'S OF SMALL BUSINESS

beyond and around the corner. So many people constantly try to
look back as the only foundation for supplying capital.
I realize that is the easiest thing to do. I realize that is the conservative thing to do and still it does not always prove conservative
because sometimes the trend of those businesses at that particular time
is just about to go absolutely down so that we try, with all our experience, to consider the past and the future in our organization and our
organization includes experienced men in all these different fields.
The sources of our funds have been these: We receive nothing for
the preliminary investigation. We receive a fee to cover the costs of
investigation when we determine we think we can do something with
it. If the company receives the funds it is seeking, we receive a nominal amount from the funds received by them, no advance payments
or anything; and finally we receive fees for counseling services for
those corporations as they go on and sometimes that will last for a
period of a few months, sometimes for a year and in some cases it has
lasted for 5 to 7 years where we have been a useful part of continuing
that particular company so that I sum up finally, before you give me
any other questions, with the idea that by all odds experience has
proven that counsel rather than cash is the first essential and that full
information which can be gotten in advance if you know all your
sources of research and experience and also that the job cannot be
regimented. You cannot lay down any pattern. You cannot set up
an}r fixed form to solve these things. Each one must be judged on its
own merits and needs.
Thank you.
Mr. KEFAUVER. Mr. Porter, undoubtedly the service you have
rendered has been of great assistance to both established businesses in
the Baltimore area and to securing new businesses for that area but
Baltimore is a city with a population of more than a million people.
Flow about any city like LaCrosse, Wis., from which the distinguished
member, Mr. Stevenson, comes or Everett, Wash., from which Mr.
Jackson hails, cities of 40,000 or 50,000? They do not have the finances or the people to establish an organization like yours to counsel
small businesses.
Mr. PORTER. That is a very interesting question, and I am glad
you brought it up.
Mr. KEFAUVER. What can they do?
Mr. PORTER. Three years ago, I think it was, I appeared before the
New England Council who were studying what to do in'that area up
there of many different-sized cities. We suggested at the time that
if you will take New England as a whole there probably need be only
one corporation such as ours in that area, completely staffed to carry
itself but that in Providence and in New Haven and in Hartford and
that in the other areas up there, there should be similar groups of
public-mined citizens to join themselves into a committee to lend
their time and effort with maybe only one individual on the pay roll to
assist in these problems and when they came to the point of investigation, that that nearby city or regional office wTould be the logical place
to draw on for experience and, in other words, to pool the research
organization in the major centers of the country and to deal with
every city on its own basis because there is no substitute for local
knowledge of the approach to financing small business. If a man
cannot get his financing at home, there is something wrong with him.




38

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Therefore, the problem must come right back to the individual's
community and there has to be a committee in that area that knows
the industry and knows the problem and then he can seek the financing.
It may be that they would have to go to another city in case the
resources of that city were not sufficient. They might have to seek
funds through other banks and, of course, the American Bankers
Association program now is contemplating that need of dealing through
their correspondent banks.
Mr. KEFAUVER. In saying that local financing can, in most cases,
be secured, do you include termination financing and reconversion
financing?
Mr. PORTER. N O , sir. I have said that I thought that was a war
aftermath and would have to be dealt with on that basis.
Mr. K E F A U V E R . SO I feel that it is the duty of the Government to
assist with that type of financing and that it would have to be continued?
Mr. PORTER. I do not think I am qualified to answer that. After
all, I have said my perspective is Baltimore and that area. We have
served cities within 100 miles of Baltimore because they are easy to
reach.
Mr. KEFAUVER. M r . Keogli, do you have any questions?
Mr. KEOGH. I would like to ask Mr. Porter a question in connection
with that. M r . Porter, out of your 23 years' experience in this work,
do you know a sufficient number of instances where small business,
otherwise economically justified, was unable to obtain capital funds
from private sources? D o you know enough instances like that to
justify the Government stepping in and supplementing private sources?
Mr. PORTER. M y direct answer is " N o , " and may I give my
reason?
M R KEOGH. I would like to have it.
Mr. P O R T E R . Y O U especially brought in the perspective of 2 3 years.
In the course of things that are submitted to us, and of course they
run into hundreds and thousands while wo only have dealt specifically
with perhaps several hundred in that period, our observation has been
that things we turned down were, 2 or 3 years later, out and our
judgment was vindicated in the majority of cases. In other words,
there has been no need for other sources than the regular existing
sources of the country to supply capital for the sound projects.
I also said earlier in my testimony that we did use the Federal
Reserve baiik,.we did use the R . F. C. and we did secure funds from
those at a time when we could not get them from existing bank and
private sources so I cannot damn the Federal funds that have been
made available. I can only say that they have been very much in
the minority.
Mr. KEFAUVER. But you think those three agencies you mentioned
should still be there to help with the minority of the problems where
you cannot secure proper financing?
Mr, P O R T E R . I think with the reawakening, if I may put it that
way, of the banks of the country through the American Bankers
Association's efforts and the investment bankers to the fact that
small business does need their help, which I do not think they have
ever given much thought to in any volume, I think that they may
supplement much of that and I will be specific. W e did not know
what a 5-year term loan was before this war out of a bank. Therefore, we had to go to the Federal Reserve or the R . F . C. to get it



39

FINANCIAL PROBLEM'S OF SMALL BUSINESS

and small business does need term loans, if they cannot get capital
because they must use the money over a period of time. Obviously,
if they were qualified to get current bank service they would get it
in a bank. Therefore, now that the banks have, during the war,
had so much experience in supplying term loans and are now publicizing that as a source I think that a great amount of the money
that used to be supplied by the Federal Reserve bank and the R. F. C.
will be now supplied by the regular banks.
Mr. EASTWOOD. Isn't it true that investment bankers could not
participate in small financing because of the excessive costs of creating an issue? In other words, they were obliged to put the percentage
of their dealer's mark-up on the front of their S. E. C. prospectus and
that looked excessive to an investor in the case of a small issue where
the originating costs were proportionately high.
Mr. PORTER. That is absolutely a fact since S. E. C. Prior to
that, I do not think that they needed to do it because there was plenty
of business for them without it and nobody came down to the level of
wanting to worry with the difficult cases. I do not think we would
have been formed had the established sources done it. I think we were
merely an answer to a need and the fact we have survived 30 years
doing it is evidence of the fact there has been some need for our work.
Mr. KEOGH. Mr. Porter, you laid considerable stress upon the
need of what might be described as competent management, especially
in small instances. Have you given any thought as to how the
Congress might assist in generating or creating that type of competent
management which your experience indicates is necessary?
Mr. PORTER. I think unless the cities are aroused—you will have
to interpret how Congress could arouse the cities—but I think unless
the cities are aroused to the fact that that is a local need, that there
is some nucleus there to do it, it won't get very much stimulus. I
think it needs to bo done on a national basis. I think consideration
is being given to that by both banks and investment bankers but I
would warn that by the same token, the industrial corporation was
never a part of the local chamber of commerce or the Association of
Commerce while at the same time our functions and objects were
semicivic in that we did not hold profit as our first motive but the
bringing of industry, the matter of running our business with the
money to keep it going without capital or of subscriptions. I do not
think the thing that we have done could have been done by the
Association of Commerce because the people do not look to the
Association of Commerce for the type of service we render and by
the same token they do not look to the Federal Government for
business advice. It becomes sort of a private enterprise. You look
to your legal counsel for advice on legal matters. You look to your
banks for financial things and, therefore, I think it would be a mistake
for the Government to establish any agency that tried to do that thing
because they would discourage many of the men on my board of
directors.
I have 12 manufacturers on my board but the board is composed
now, instead of 31, of 21 members and originally we only had 6 manufacturers. We changed that to 12 because we found the manufacturers understood the problems of manufacturers, were sympathetic
and would help with them more than other types we had on the board»
Originally, we ha<J 4 bank presidents and we had 4 investment bankers
Now we have 1 bank president and he constitutes all we need in-tha*



40

FINANCIAL PROBLEM'S OF SMALL BUSINESS

way been uso wo try to got to the people who try to understand and
help with the problem and I think it has to be a private agency.
Mr. STEVENSON. I appreciate the broad view which Mr. Porter
has given us here which shows what can be done in your large cities
but after this war, an attempt is going to be made to bring better business into the country and into the small cities and not little business
into the bigger cities. We want to get the people away from the big
cities and we want to get the money out into the country so how would
a group such as you represent be formed to help get the people out of
Baltimore into the small towns of Maryland?
Mr. POUTER, Of course, that is your problem but, sir, not to be
facetious there are two elements in the thing that you mention.
One of the virtues of that stems from the standpoint of its value as
a place for manufacture, for living, for production of goods and
distribution, and so forth, and the small centers have many advantages
for that type of thing and there are types of industries that are much
better located but it has a second element which is the financing and
that must be kept perfectly separate, that cannot be added to the
mere enthusiasm of wanting to do it because I do not believe there
is very much that is sound in the way of donations of tax exemption
and a lot for the company to build the place on. Those things are
trivial in the long cycle of the soundness of that business. If it
cannot afford to pay its way, it is a warning that it may not be a
good addition and, therefore, when you come to the matter of where
that company is going to get its working capital requirements or
capital investments, that must be dealt with responsibly under our
present system of government, free enterprise, separately. Therefore,
you do need a committee in your area to give special time and thought
and it must be very competent and a very influential group who must
lend their time and effort to try to solve that problem and secure the
funds that may be needed because in this country, as we have developed, enterprises have been developed around individuals and while
some of them have gotten to look institutional and formidable, if you
go back you will find they were based on the energy of some individual
and a good sound idea. It is always there. It is not hard to seek
out. If it is not evident, we are afraid to back that enterprise. I
mean if there is not a driving power, a source of management, we
try to find it and add it to that picture but you do need, sir, in your
own city and in every other small city in the country someone who
gives special thought to how you are going to get the funds to finance
it.
Mr. STEVENSON. My point is that such a group as you represent
could wrell take over an entire State; could it pot?
Mr. PORTER. That is true, sir.
Mr. STEVENSON. And recommend to any small business who
wanted to settle in Maryland and you could give the same advice?
Mr. PORTER. That is true. We have done that without announcing it. While wo.are in Baltimore, we have served Cumberland
and Easton and other cities.
Mr. K E O G H . Mr. Porter, in response to my question as to what, if
anything, Congress could do to arouse the people with respect to the
need for competent management you indicated that our problem was
to arouse the cities. If I recognize the trend accurately, I think
that the only way the cities want to be aroused by us is to have us
relieve them of their problems too.



41

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. PORTER. I think I was carelcss in saying cities. I should have
said the interested leadership in the metropolitan areas because they
are different. I did not mean the corporate city.
Mr. K E O G H . I am wondering if that trend on the part of the
States and the local subdivisions, of forever turning to Washington
for assistance in their own fundamental problems does not result, not
in arousing them, but rather anesthetizing them.
Mr. PORTER. I think so. I have been begging, if I may put it
that way and I won't name them, but I have been begging certain
private groups in the country to go out front and take a position on the
formation of these things in the major cities 011 a national basis where
they would bring it to the attention of all the same class of people in
each group in a city who were selfishly interested in seeing it formed
and I believe that would be the best way to do it and I hope it will
still be done in that way and I believe, sir, if it was done the Federal
Government would be relieved of taking any specific action.
Mr. K E O G H . YOU do believe, do you not, Mr. Porter, that it is
advisable for the Government to have in existence during these normal
or during what we hope will be normal peacetime years some supplementary source of capital funds for economically justifiable small
business?
Mr. PORTER. I think this, sir, and I will say "yes" but I must add
that I think the type of thing that the Federal Reserve and R. F. C.
did prior to the war was a sound addition. I believe there will be less
need for that with the awakening of the other sources but I would not
eliminate anything because it is always an escape gap for the thing
plus the fact that the second you try to do that you arouse a lot of
the attitude of "what is the difference." I mean you arouse opposition
between two sides or groups. The statistics will show that by far the
greater amount of capital and credit comes to small business through
private SDtirces.
Mr. K E O G H . D O you think that the Federal Reserve System and
the Reconstruction Finance Corporation were sufficiently smallbusiness minded to be of definite and constructive help?
Mr. PORTER. Particularly the R. F. C.
Mr. K E F A U V E R . Was the R . F. C. small-business minded until the
Smaller War Plants Corporation came along and channeled some small
loans into the R. F. C.? Wasn't it the Smaller War Plants Corporation that really came along to render financial assistance to small
business rather than the R. F. C.?
Mr. PORTER. The R. C. F. did a tremendous amount.
Mr. K E F A U V E R . Maybe we are talking about different kinds of
small businesses. I am talking about the smaller small businesses.
Mr. PORTER. I think you are saying that the record will show that
the S. W. P. C. had supplied small loans.
Mr. K E O G H . I do not believe that is what Mr. Kefauver meant.
The Smaller War Plants Corporation seemed to be the force that
impelled the R. F. C. to make more small-business loans.
Mr. PORTER. I would not know, sir. You must remember that
by the same token that we, during the war, have devoted our attention to a lot of collateral things but we have not had to do nearly as
much toward supplying capital because if a company had work on
contract they had ample money. That will come back in great
wealth when the war is over and they again have to base those things
on a private basis.



42

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. KEOGH. And I presume your own organization is prepared to
render assistance and advice with respect to conversion problems?
Mr. PORTER. Yes. We follow the cycle around. I mean whatever
business is doing and now there is one thing that I have not brought
out and I would like to put that in. While we were formed for the
purpose of aiding manufacturers, we have not limited our activity to
that alone, but we have been active in the field of distribution and real
estate and other tilings and we have had problems that have gone all
the way across the board. We were formed, by the very name, for
industry, but our experience and our staff has been broadened to
handle problems of small business.
Mr. KEFAUVER. Mr. Porter, I wanted to ask this question. We
have gotten a good many complaints that during normal times it
might be possible for a large business to get investment capital at a
reasonable rate of interest or a low rate of interest but it has been very
difficult for the small businesses to do that and the large companies
have been in a better situation by virtue of the fact that where there
isn't private means of obtaining capital at low rates of interest there
were Government agencies from whom they could obtain capital and
in perhaps some instances that has inspired or maybe forced the
private lending agencies to give them capital at low rates of interest.
D o you feel that the situation is such now that in the post-war period
small businesses are going to be able to get their investment capital at
low rates of interest which they can afford to pay?
Mr. PORTER. I think there will always be. I think the cost of
financing small business will be larger by the very nature of the
competence of the people. There are more people in the market who
have wide distribution and ready market building because the only
solution is marketability.
Mr. KEFAUVER. The record shows, I believe, that in a great many
instances private lenders have been willing to come in provided some
Government agency like the Smaller War Plants Corporation would
participate with them.
M r . PORTER.

Yes.

Mr. KEFAUVER. Whereas they were unable to assume the burden
alone but they felt, in the first place, if a Government agency was
willing to bear part of the burden maybe their supervision and maybe
the inspection they made would be something of a recommendation
that the loan was worthy and then, of course, in some instances the
loans have been more than the private lending agency would want to
assume, so don't you think that on that philosophy the supplemental
governmental lending agency has been of some benefit to small
business?
Mr. PORTER. Certainly, during the war, but I believe your question
"was as to whether after the war?
M r . KEFAUVER.

Yes.

Mr. PORTER. You can hardly avoid the practical fact of the
influence of that kind of thing in encouraging money to come in, and
so forth, but, at the same time as I stated originally, I believe there
are ample private sources that would solve it if that were not available.
Mr. JACKSON. Even prior to the.war, wasn't that one of the largest
sources for small business, the R. F. C. participating with the banks?
Mr. PORTER. That is right.
Mr. JACKSON. WTiat percentage of the people you have assisted,
M r . Porter, have failed? D o you have any record of that?



43

FINANCIAL PROBLEM'S OF SMALL BUSINESS

Mr. PORTER. No; I do not have any percentage on that. The
interesting thing about our situation is that we take them at that
point and reestablish them and cull out the things that are unsound
and get them back on their feet. That cannot be universal but by far
the majority of things, because we choose them so carefully and follow
them up, can be reorganized and continued and, of course, some of
the largest corporations here are a result of failures along the road.
Mr. KEFAUVER. We are very grateful to you, Mr. Porter, and we
appreciate your statement. Mr. Eastwood has some points he thinks
you could give us information on and he informs me he will send you
some questions he would like you to answer.
Mr. STEVENSON. I would like to see some such committee cover the
whole State of Wisconsin, as far as I am concerned.
Mr. KEFAUVER. We want to give anyone who wishes to make a
statement an opportunity to do so. Is there anyone here who would
like to make a statement for the benefit of the committee?
Mr. L E H M A N . I would like to, if I may.
Mr. KEFAUVER. What is your concern, Mr. Lehman?
Mr. LEHMAN. I am a business counsel in New York.
Mr. K E F A U V E R . Could you be here in the morning at 1 0 : 3 0 ?
Mr. L E H M A N . I could stay over but I have appointments in New
York tomorrow.
Mr. KEFAUVER. How long will your statement take?
Mr. LEHMAN. It will only take about 2 minutes.
Mr. KEFAUVER. We could give you 5 minutes, Mr. Lehman. The
Congress is now in session. If I had known you wanted to make a
statement we probably could have worked you in earlier. Identify
yourself for the record and tell the organization you represent.
STATEMENT OF CHARLES H. LEHMAN, BUSINESS COUNSEL, NEW
YORK, N. Y.
Mr. L E H M A N . I represent no organization. I represent merely
businessmen as counsel.
Mr. KEFAUVER. What is your full name?
Mr. LEHMAN. Charles H. Lehman.
Mr. K E F A U V E R . Who are you with?
Mr. LEHMAN. I am in my own business as a business counsel.
Mr. KEFAUVER. We will be glad to have you make your statement, but try to finish it in 5 minutes, please.
Mr. LEHMAN. Yes; I will do it in less than 5 minutes.
Since the beginning of the war period and the small business problems, I have followed through as I am counsel to a large number of
small industries, all of which have been affected in some way by this
war effort. I have divided them into three parts, the present situation
and condition of small industries under our present war economy.
Next would be the situation under the conversion period and the
third under our normal civilian period.
I have submitted to your committee informally, through Mr. Eastwood, some ideas on financing of industry during the normal period.
I am talking about small industry without recourse to Government
financing and Mr. Eastwood informs me that there will be some meetings in New York later of this committee at which time I will be prepared to submit, through responsible institutions and as far as ideas
and methods on financing to private industry instead of calling upon



44

FINANCIAL PROBLEM'S OF SMALL BUSINESS

governmental agencies for the financing of going small businesses, not
for the institution of small industry or the starting up of any new
projects which is outside of my particular line of work or studies but
my idea would bo also that during the studies of this committee we
study the disadvantages that small businesses have now in trying to
conform to the requirements of some of our present Government
agencies in priorities, some of the problems that they have in the committees of industry which meet and in which various problems of the
general industry are discussed but small business is at a great disadvantage because they are not informed of what goes on at these
industry committee meetings which is a very, very serious disadvantage to small business attempting to carry on at the present time.
During the conversion period, that is another complete course of
study which we have made as business counsel in New York, independently however, and that I will be veiy happy, if I am permitted at
your New York meeting, to submit a brief on or a formal statement.
That is all.
Mr. K E F A U V E R . Wo would like to have you attend the New York
meeting and submit your formal statement at that time, Mr. Lehman.
Air. L E H M A N . Thank you.
Mr. K E F A U V E R . D O you have anything else to add now?
M r . LEHMAN.

NO.

Mr. K E F A U V E R . Is there anyone else who would like to have the
opportunity of testifying tomorrow? (No response.)
On tomorrow we had arranged to have Dean Donham appear who
is head of the Graduate School of Business Administration of Harvard
University but, because of a conflicting engagement, he is not going
to be able to testify so the scheduled meeting for tomorrow will not
be held. The members will receive further notice as to the next
meeting.
The meeting is now adjourned.
(Whereupon, at 12:10 p. m., the committee adjourned, subject to
call of the Chair.)
(The following was submitted for the record:)
EXHIBIT
HOUSE

A

OP R E P R E S E N T A T I V E S OP THE U N I T E D S T A T E S ,
S E L E C T C O M M I T T E E ON S M A L L B U S I N E S S ,

Washington, D. C., March £0, 1945.

Mr.

C.

C.

FICHTNER,

Vice President and Treasurer, Wales-Strippit Corporation, Buffalo, N. Y.
M R . F I C H T N E R : Pursuant to permission granted by the chairman for
submission to you of additional questions relative to the financial problems of
small business, we should like to submit the following question to you for reply
at your convenience:
Question. An article entitled "Wartime Earnings of Small Business" was
published in the Federal Reserve Bulletin for January 1945. This article,
by F. C. Dirks of the Division of Research and Statistics, has been reprinted
and apparently given wide publicity. The theme of this article is apparently
expressed in the first paragraph in it from which we quote as follows:
"In most manufacturing and trade lines the position of small and medium
size concerns has improved rapidly during the war, and in fact more sharply
than that of the larger companies."
DEAR




45 FINANCIAL PROBLEM'S OF SMALL BUSINESS

Are you familiar with Mr. Dirks' article and the conclusions it reaches? If so,
would you be kind enough to submit us your comments with respect to the
article?
Sincerely yours,
DAK \V. EASTWOOD,

Chief Investigator, House Committee on Small Business.
P. S. A copy of Mr. Dirks' article is attached for your ready reference.
[From Federal Reserve Bulletin for January 1945]

WARTIME EARNINGS OF SMALL BUSINESS
(By F. C. Dirks, Division of Research and Statistics)
An important factor in the outlook for small business concerns after the war is
the effect of the wartime experience on their financial position. In most manufacturing .and tradeJines the position of small- and medium-size concerns has
improved rapidly during the war» and in fact more sharply than that of the larger
companies. This has not been uniformly true; many one-man businesses have
been interrupted by the owners' service with the armed forces, and some of the
businesses which have continued in operation have been adversely affected by
wartime restrictions on certain civilian activities.1 With the possible exception
of the very small firms, however, unfavorable experience docs not appear to have
been typical of the small-business picture.
Previous information on small-business finance has been very limited. The
data in this article are part of a more comprehensive compilation made with a
view'to securing specific information on the effect of wart ime experience on the
financial position of business, both large and small. This is in the form of financial
statements covering the years 1940-43 for nearly 2,000 concerns—l,2f>0 in manufacturing and G81 in trade—ranging in size of total assets from about $10,000 to
over $1,000,000,000 and distributed among 130 lines of manufacturing and trade.
Statements for small- and medium-size concerns were secured from bank credit
files under a cooperative arrangement between the Robert Morris Associates and
the Federal Reserve System, while statements for large manufacturing companies
were obtained from Moody's Manuals.
The present article summarizes the evidence as regards sales and earnings during
the war. A comparative analysis of changes in assets and liabilities is in preparation.
SUMMARY OP WARTIME EARNINGS« EXPEIUENCE

The general picture that emerges from the data for these 2,000 concerns is that
in most manufacturing and trare lines, the earnings experience of small- and
medium-size businesses has been better'during the war than that of the larger
companies. This comparison may not apply to the very small firms—those with
less than $50,000 assets and fewer than 10 or 20 employees —for in this area the
sample statistics are too limited to be conclusive.
Looking at earnings before income taxes, the comparatively greater increase in
small company earnings from 1040 to 1943 was clearcut among manufacturing
industries, part icularly those with a large w ar interest. Here, all sizes of business
experienced large increases in sales, those of the smaller concerns being exceptionally large and accompanied by rapidly widening profit margins per dollar of salest
Although in HMO the earnings (before income taxes) of small- and medium-size
concerns had represented a lower percentage of net worth than obtained for
the larger companies, the wartime improvement brought them to a level much
higher than that of large companies. The sample of 147 small manufacturers,
with assets under $250,000 each, had pretax earnings in 1943 averaging 56 percent
of net worth, as compared to 28 percent earned by 333 large companies with
assets over $10,000,000. In the field of trade, earnings have risen less sharply
and the pattern by size classes has been less regular, with earnings before taxes
generally increasing more for small wholesalers and for large retailers than for
concerns in other size classes.
i See, forexa-nple, the analysis by the Department of Commerce of "Small Retail Store Mortality," Eco*
nomic Series No. 22 (June 1943) and "Impact of the War upon Smaller Manufacturing Plants,"Surv ey of
Current Business (July and September 1043).




46

FINANCIAL PROBLEM'S OF SMALL BUSINESS

The effect of Federal income and excess-profits taxes, both before and during
the war, has been less severe on the earnings of the smaller concerns than on the
larger ones. For manufacturers with assets under $250,000, income taxes
have absorbed 10 to 15 jwrcent less of pretax earnings than in the case of large
manufacturers; in wholesale and retail trade, the difference by size of concern has
averaged over 25 percent. To a large extent, this experience reflects the more
favorable treatment accorded smaller companies by the tax law.
The combined result of differences in sales, in profit margins, and in effective
tax rates has been that net profit (after taxes) in 1943 was a higher percentage
of net worth among small companies than among medium-size companies, and
the latter in turn had higher profit rates than the large companies. This result
has obtained in trade as well as in manufacturing, and in war lines as well as
civilian lines. It contrasts with the common impression that the concentration
of prime war contracts among large companies has benefited them inordinately.
In view of the attention sometimes given to contingency reserves, it is worth
noting that the accounting treatment of these reserves does not appreciably affect
the earnings comparisons between small and large companies.
RELEVANCE OF THE PRESENT ANALYSIS TO NEEDS OF SMALL BUSINESS

In drawing inferences from the present statistics for manufacturing and trade
concerns, there are two limitations of scope which need to be borne in mind.
These relate to size of business and pre-war financial status. As regards the
former, the sample is broad enough to be statistically significant from the very
largest companies down to those with assets of about $250,000. Below this size
the sample thins out rapidly, and it includes only 36 concerns with assets under
$50,000. Thus most of the discussion about "small business1' in this article should
be understood to refer to concerns with assets of between $50,000 and $250,000.
In some instances, manufacturing companies with assets up to $1,000,000 are
included also in the "small" category.
Underrepresentation of the firms with assets under $50,000—which are called
here "very small"—is a major gap as regards retail trade, since such firms accounted in 1939 for about 64 percent of all retail sales. In wholesale trade and
in manufacturing they were relatively less important, accounting for about 20
and 7 percent, respectively» of all sales. The corresponding percentages were
somewhat lower in 1941, the reference year for classifying the size of concerns in
the present sample.
As regards pre-war financial status, the statistics include comparatively few
firms reporting a deficit for 1940. Both among large and among smaller businesses, the proportion of the sample with a deficit in 1940 wras less than the proportion of all corporations reporting no taxable income to the Bureau of Internal
Revenue. This "bias" is probably not of major importance except for the group
of concerns with assets under $250,000. In this group, the fact that only 13
percent of the sample were running deficits at the beginning of the war, in contrast
to 49 percent of all comparably small corporations3—and an unknown percent of
small unincorporated firms—means that the present statistics definitely do not
represent a cross section of all small business. Whether the trend of the sample
statistics also is not representative of all small business, is another question. It
is shown later in this article that the trend of wartime sales and earnings of the
sample firms which had deficits in 1940 was not much different from that of firms
which had net income.
The underrepresentation of previously unprofitable business in the sample
statistics brings up a distinction that is highly important in using these data to
gauge the post-war financial needs of small business. In 1940 a majority of all
small corporations in manufacturing and trade lines reported a net profit (after
taxes) which, in relation to the owners' equity, compared very favorably with
that of larger companies. The problem of financing these firms which are established and operating profitably is one that is presumably soluble by private financial institutions, without loss to investors and without aid from the Government.
The comparisons in this article make it evident that small size in a business is not
»As reported for income tax pun>oses. Dae to differences In accounting practice in statements prepared
for tax purposes and for bank credit, tho above percentages probably overstate the actual disparity between
the sample and all comparably small companies.




47

FINANCIAL PROBLEM'S OF SMALL BUSINESS

itself such an obstacle as to preclude profitable operations, and the effect of war«
time experience has probably been to lessen whatever financing problem inay have
existed among the more healthy small firms before the war. This is an important
fact which has not always been appreciated in discussions of small business finance.
The data in the present article have only limited relevance for the other part of
small business, which reported no net income even in a year of favorable business
activity such as 1940. This may represent a more or less pathological area in
which private financial institutions may understandably have been reluctant to
provide (or to continue providing) credit. The problem of financing such business, however, is not a problem entirely peculiar to small business as such; it is
a problem of distressed business in general, large as well as small. Since the
basic situation here is likely to be one of unsatisfactory costs in relation to sales,
this part of small business presents a special and distinct problem from that of the
more or less healthy part. While the wartime experience may well have lessened
the proportion of small business still in the unprofitable category, the problem may
recrudesce after the war. High rates of mortality among small business firms
have historically prevailed among newly established firms, and the initiation of
many new enterprises is likely to mean a considerable increase in the number of
unprofitable small businesses.
TRENDS IN

SALES

While there has been considerable variation in the trend of sales as among
different industries, and also considerable variation among individual groups of
companies within each industry, the average wartime expansion in sales has been
about the same for small as for large businesses.' This is shown in table 1 which
summarizes the sales increases over the 3-year period of 1940-43 for 1,260
manfacturing concerns and 681 trade concerns.
In more industries than not, however, the greatest increases in sales occurred
among the smaller concerns. In the list of 28 major industries in table 2, there
are 15 in which the greatest sales increase occurred among small concerns, 8
industries where it occurred among medium-size companies, and only 5 where the
increase was greatest for large companies. Comparison of the percentage increases shown in the table for each size group indicates that the superior advance
of small companies in the first group of 15 industries was larger, and hence statistically more significant, than that of the medium and large companies in the
second and third groups.
TABLE

1.—Percentage increase in sales, 1940-43, for sample of manufacturing and
trade concerns, by size of business 1
Manufacturing
Asset size (in dollars)

Number of
concerns

Trade

Percentage
increase
In sales

Number of
concerns

Percentage
increase
in sales

Under 50,000
50,000 to 100,000
100,000 to 250,000

14
33
100

50
150
115

22
51
140

58
81
53

Under H million
H to 1 million...
1 to 5 million
5 to 10 million
10 million and over—

147
290
389
95
333

117
116
120
107
121

213
260
161
24
23

56
45
62
47
55

1,260

121

681

55

i The classification of business in terms of total assets in thLs and following tables Indicates size as of the
end of 1941.
* Possible exceptions to this statement are the average increases for the two smallest size classes shown In
the table. It is doubtful how typical the averages for these classes are because of the very small percentage
of firms sampled. (See table 9.)




48
TABLE

F I N A N C I A L PROBLEM'S OF SMALL BUSINESS

2.—Percentage inaease in sales, 1940 to 1943, for sample of manufacturing
and trade concerns, by industry and size of business
Asset size (In millions of
dollars)
Industry
10 and
over

Under 1
Manufacturing:
1. Greatest sales increase among small concerns:
Textile mill products
Apparel
Pal er and products
Chemicals and products
Stone, clay, and glass products
Steel and products
Electrical equij ment
Machinery
Transportation equipment
2. Greatest sales increase among medium-size concerns:
Food
Lumber and furniture
Primine and rublishing
3. Greatest sales increaso among largo concerns:
Ueveroges
Leather and products
Petroleum and rubber

1 to 10

116
78
79
95
105
131
474
318
701

99
60
43
72
28
102
334
259
381

44
75
46
99
195
183
246

89
55
44

98
61
51

82
54
42

89
53
62

54
59
77

148
66
86

Under J4 H to 1
Trade:
1. Greatest sales increaso among small concerns:
Wholesale: Food, beverages, tobacco
Steel and products
Elcctrieal equipment
Machinery and equipment
Retail: Automobiles
Furniture
2. Greatest sales increase among modium-size concerns:
Wholesale: Paper and products
Automotive..
Retail: Food, beverages
Department stores, dry goods,<apparel
Lumber, fuel, ice
3. Greatest sales increase among large concerns:
Wholesale: Lumber, coal
Textile products, apparol

93
53
74
181
-67
30
62
-39
47
55
31
26

.101

104

1 and
over

63
47
-4

<9

-76

0)

07
-25
87

(0
(0

S9

4

70
14
92

G
G

54
60
47

80

76
105

62

» I C S than 5 companies tabulated.
JS
NOTE.—A different definition of small, medium, and large is used for trado than for manufacturing, In
recognition of ttic greater proportion of the trade business done by concerns with small assets and the com*
parative scarcity of concerns in the largest asset classes.

An important aspect brought out by table 2 is that the more rapid expansion of
small companies occurred in war industries—chemicals and metal products—as
well as in civilian goods industries. This suggests that the concentration of
prime war contracts among large companies has not been entirely adverse to the
smaller companies as has sometimes been supposed. Apparently, subcontracting
of war business together with continued output of civilian goods has sufficed, on
the average, to keep the smaller companies more fully occupied than in 1940.
Another interesting aspect of the wartime experience concerns the possibility
that concentration of war contracts among large companies may have given them
an initial advantage, and that it was only through special Government efforts that
jsinall companies were subsequently able to expand their business. This possibility is suggested by the index numbers of sales for individual years shown in
table 3. Expressed in terms of 1940 as 100, it appears that sales of the smaller
manufacturing companies were relatively lower in 1941 and 1942 than sales of the
larger companies, but by 1943 they had virtually caught up. Upon examining
the figures for individual industries, however, it becomes evident that the lag in
small company expansion was not associated with the allocation of war contracts.
The lag pattern for small companies appeared in the predominately civilian
industries of food, textile mill products, apparel, luniHer, printing, and stone,
clay, and glass products; but it did not obtain in such war industries as chemicals,




49 FINANCIAL PROBLEM'S OF SMALL BUSINESS

steel and steel products, and machinery. In the latter groups, the smaller companies exhibited higher rates of growth from the outset. Among companies
making transportation equipment there appeared to be no significant difference
in growth, except that the large auto companies expanded Jess rapidly than others.
TABLE

3.-~Salest 1941-43, for sample of manufacturing and trade concerns
[Indexes, l&iO^lOOj

Industry and asset size
(assets in millions of dollars)

19J2

1943

127
133
140
139

Manufacturing:
Under K
K to 1
1 to 5
5 to 10
10 and over..
Wholesale trade:
UnderK---K to 1

M I

159
174
1S2
183
175

217
220
207

143
130
145

171
151

18
3

124
123

12ti

1 to5_

21 r,
221

160

Industry and asset si/e
(asscls in millions of dollars)
Wholesale trade— Continued.
5 to 10
10 and over
Retail trade:
Under M
H to 1
1 to 5
5 to 10
10 and over

104!

1942

134 145
> 135 « 157
122
119
120

117
119

109
116
139
137
144

1943

141
» 184
118
132
160

151
153

i Represents less than 5 companies.

In the case of wholesale trade, all sizes of business experienced their largest
percentage gains in 1941, with companies in the two largest-size classes showing
somewhat greater increases but probably not significantly so.4 In the case of
wholesalers of metal products, sales of medium and large companies fell off in
1942 and 1943, while sales of the smaller wholesalers continued to rise. In the
field of retail trade small food and apparel stores lagged slightly behind the larger
companies in 1941, while small furniture stores experienced more rapid increases
than larger ones. The 1942 slump of small retailers, revealed by the sales indexes in table 3, is due to the greater importance of automobile dealers among
the small companies than among the large,
PROFIT M A R G I N S ON SALES

During the war the amount of net profit per dollar of sales has risen considerably
more among small industrial concerns than among medium and large-size c o m panies. Since Federal income and excess-profits taxes have exerted a major
influence on the level of profit, and since taxes differ from other costs in not being
subject in the same degree to managerial control, it is useful to discuss their
effect separately from other costs. The term "profit margin" is used here to
designate the percentage of earnings before income taxes to sales.
TABLE

4.—Earnings before income taxes as percentage of sales, 1940 and 194$, for

sample of manufacturing and trade concerns

Manufacturing Wholesale trade
Asset size (in millions of dollars)

Under H
H to 1.
5 to 10
10 and over

-

1940
2.7
3.1
5.9
8,1
11.6

1943
8.1
9.0
10.3
12.4
11. G

1940

1943

1.6
1.8
2.4
4.2
»3,1

3.5
4.1
6.4
6.0
* 11.1

Retail trade
1940
2.5
2.6
3.5
2.9
3.3

1943
6.0
7.6
8.9
8.0
5.4

» Represents less than 5 companies.

Accompanying the increase in sales of manufacturing and trade companies during the war, profit margins have on the average tended to widen. This is reflected
in table 4, which shows profit before taxes as a percentage of sales for the years
1940 and 1943. Among wholesale and retail groups, the proportionate advance of
profit margins fcver the period has not been consistently different for small than for
large companies. In manufacturing, however, profit margins increased about
* Only 14 companies were sampled from these 2-size classes.




50

F I N A N C I A L PROBLEM'S OF SMALL BUSINESS

three times for the small companies, and progressively less among medium- and
larger-size companies; for those with assets over $10,000,000, pretax earnings
averaged the same percentage of sales in 1943 as in 1940.
A small part of this difference by size of business has been attributable to lack
of uniformity in accounting. Large companies, more than small ones, appear to
have followed the practice of earmarking a part of wartime earnings for costs and
losses which are not yet incurred but may ultimately be attributable to the wartime experience. In relation to sales, allocations to contingency and other special
war reserves in 1943 averaged 0.9 of 1 percent for the larger size of manufacturers
shown in table 4, and 0.2 of 1 percent for the smallest. This factor is evidently
not a major element in the earnings comparisons.
Underlying this net result for the 3-year period as a whole, are significant yearto-year differences between war industries and civilian goods industries. In such
war lines as chemicals and metal products profit margins of large companies
declined after 1941, while those of medium-size companies declined after 1942, and
some small concerns continued to increase their profit margins through 1943.
The result was that margins of the large companies in most war industries were
lower in 1943 than 1940, in contrast to the considerable increase experienced
among small companies. This difference in trend by size of company was not
evident in such civilian goods lines as food, apparel, leather, and printing, where
profit margins of both small and large companies continued to widen through
1943, although the increase was considerably greater in the case of small companies.
In other industries such as lumber, paper, and textile mill products, no consistent
pattern is discernible as between small and large companies.
The fact that profit margins per dollar of sales have tended to widen during
the war means that the increase in dollar volume of sales was not accompanied
by a proportionate increase in all costs and expenses (not counting income taxes).
In this tendency, the economies of fuller utilization of facilities have probably
been a prevalent factor, augmented in some lines by a reduction in selling expenses
and in others by rising prices. In the latter connection it appears significant
that the principal instances of narrower profit margins occurred among the
medium- and larger-size companies in war industries, where the pricing process
was one of negotiation and renegotiation that emphasized increasingly a governmental policy of limiting the profits in war contracts.5
E A R N I N G S I N R E L A T I O N TO N E T

WORTH

Because of differences in type of product and in the degree of integration, the
description of earnings as a percentage of sales is not always a meaningful way
of indicating whether earnings are "high" or "low." More meaningful is the
relation of earnings to net worth, since this reflects the success of business management in its particular objective of earning a return on the invested capital of the
owners.® This capital consists partly of amounts paid in and reflected in balance
sheet figures for stock, and partly of reinvested earnings from past periods, which
are called surplus. This distinction between stock and surplus is not without
exception, nor does their sum necessarily represent the liquidation value of the
owners' equity. The sum of stock and surplusi called net worth, is however a
reasonably satisfactory basis for relative comparisons of profit.
During the war there has been little change in outstanding capital stock of most
industrial companies. In manufacturing some relatively large increases of stock
by war concerns have been more or less offset by numerous small requirements
of preferred stock in civilian lines. In wholesale trade there have been scattered
increases among some groups of companies. Sizable additions to invested capital
were made in the form of reinvested profits in both manufacturing and trade,
however, especially among smaller companies. As a reáult, net worth of small
manufacturing and trade companies increased 25 to 50 percent from 1940 to 1943;
the increases were progressively smaller among medium and large companies,
averaging around 12 percent for those with assets over $10,000,000.
Notwithstanding the larger increases of net worth among small manufacturing
companies, the combination of more rapidly expanding sales and wider profit
margins during the war has resulted in pushing up the earning capacity of small
manufacturing business much more than that of large manufacturing.*7 This is
• War contracts or subcontracts of less than $100,000 were not subject to renegotiation.
* An exception to this statement Is the case of small firms in which earnings arc largely a return <?n personal skill or competence. Unfortunately there is considerable diversity of accounting practice among
unincorporated business with respect to tho owners' compensation; in many cases it is not deducted in
reckoning net profit. Unincorporated firms comprise about 25 percent of the sample concerns with assets
under M-mlllfon dollars.
' The term "capacity" is used here in the sense^of earnings attributable to business operations, before
taking account of Income taxes which are outside managerial control. No reference is intended to potential
earnings.




51

F I N A N C I A L PROBLEM'S OF S M A L L BUSINESS

shown in the first two columns of table 5. In wholesale and retail trade, the
rate of earnings (before taxes) on net worth in 1943 appeared about the same for
email as for large concerns.
TABLE

5.—Earnings before income taxes as percentage of net worth, 1940 and 1948,
for sample of manufacturing and trade concerns 1
Wholesale
trade

Manufacturing
Asset size (in millions of dollars)
1940
12.1
9.0
13.3
14.4
14,1

Under H
5 to 10
10 and over

1943

1940
11.7
0.7
11.0
12.6
»5.1

55.6
40.6
40.6
37.1
23.0

1943

Retail trade

31.6
28.4
33.3
22.4
9 31,3

1940
11.5
10.0
10.5
10.3
21.1

1943
20.8
30.6
37.9
37.7
27.9

i Earnings stated as percentage of net worth at beginning of year.
¡Represents less than 5 companies.
EFFECTS OF CORPORATE INCOME

TAXES

The Federal income-tax law as appl*ed to corporations has been amended
repeatedly with a view to drawing on excessive profits from war production to
finance Treasury war expenditures. In this process smaller concerns have been
subject in effect to lower tax rates than large concerns and this policy has permitted more of the increasing earnings to filter through as net profit. The normal
and surtax rates payable since 1940 by companies with taxable incomes under
$50,000 have been below those payable by larger companies; also growing companies and those with total assets under $5,000,000 have had a smaller proportion
of their taxable income subject to the excess-profits tax.8 Unincorporated businesses, of course, have not formally been subject to Federal income taxes, although the personal tax of partners appears to be reported as an expense on the
financial statements of some firms, ana in other cases a careful appraisal of the
relative tax burden of unincoiporated and incorporated business would require
that account be taken of the difference in incidence of personal taxes.
These differences in the tax law* are reflected in the percentages of taxes to
retax earnings which are shown in table C for concerns reporting net income,
t will be observed that the difference in average effective rates for small and
large companies in 1943 was less in manufacturing than m trade. This reflects
the very large increase in pretax earnings of small manufacturing companies—
about 540 percent—which has made a substantial portion of their income subject
to excess-profits taxes. Apparently, the rise in earnings before taxes of 265 and
185 percent, respectively, for the smaller wholesale and retail trade firms over the
3-year period has meant that a smaller proportion of their income was subject to
excess-profits taxes.

f

TABLE

6.—Income taxes as percentage of earnings before taxes, 1940 and 1943, for

sample of manufacturing ana trade concerns with net income
Manufacturing Wholesale trade

Retail trade

Asset size (in millions of dollars)
1940
Under H

—

10 and over

-

-

14.4
23.0
26.9
26.5
26.6

1913
£7.4
63.4
71.5
72.6
65.7

1940

1943

7.7
38.6
19.5
49.8
25.9
65.3
30.4
63.0
* IS. 8 »74.1

1940
12.6
17.9
25.4
26.2
23.4

\m
3S.0
57.4
71.5
66.3
66.4

i Represento less than 6 companies.
• In 1942 and 1043, for example, the normal tax rate was 15 percent for corporations with net income under
$5,000, and was graduated upward to 24 percent for those with Incomes over $50,000. Surtax rates were 10
percent for corporations with income under $25,000 and were graduated to 16 percent for those with incomes
over $50,000. With respect to excess-profits taxes, companies using the In vested capital method were allowed
an "excess profits credit" of 8 percent on the first $5,000,000 of invested capital, but lower percentages on
amounts above this sum. Companies using the "base period" method were allowed a credit greater than
the base period average if their income had an upward trend. In addition, a specific exemption was ¿lowed
on thefirst$5,000 of income falling in the excess-profits bracket.




FINANCIAL PROBLEM'S OF SMALL BUSINESS

52

THE DA L A N C E : NET PROFIT

Tlu; comparative increase in not profit after taxes for small and large industrial
businesses reflects the combined effect of the differences described above for sales,
profit mat gins, and average tax rates. As appears from table 7, the over-all
result has been a significantly larger increase during the war in net profit for small
companies than for large, in wholesale and retail trade as well as in manufacturing.
If chargcs for special reserves were counted with net profit, the percentage increases would be higher for all sizes of business without appreciably affecting the
relative status of each size.
Among individual industries and for individual years the results differ as between war products and civilian goods industries in somewhat the same way as
was re-marked for profit margins on sales. That is, in civilian-goods lines profits
of small companies increased more or less steadily from 1940 to 1943, whereas
those of large companies declined slightly after 1941. In some lines of war industries. such as machinery, electrical equipment, and transportation equipment
profits of ¿mall companies increased steadily throughout the period, while in other
lines, such as chemical and steel products, small-company profits in 1942 and 1943
were below the 1941 level, although still above 1940. Large-company profits
(in war industries) declined after 1941, and by 1943 were generally below the level
of 1940. Thus large-company profit trends were less favorable in war- than in
civilian-industries and, in all lines, the large companies averaged less well than the
smaller companies.
TABLE

7.—Percentage increase in net profit (after taxes), 1940-43, for sample of
manufacturing and trade concerns
Manufacturing

Wholesale
trade

Under 50.000
50,000 to 100,000....
100,000 to 250,000...

410
574
178

109
197
132

135
106
97

Under M million...
H to 1 million
1 to 5 million
5 to 10 million
10 million and over.

225
212
53
19
4

144
123
72
9

102
98
65
96

Asset site (in dollars)

» 11
1

Retail
trade

1»

i Represents less than 5 companies.

In wholesale and retail trade, distinctions among major lines tended to follow
the pattern of sales. The small companies in food and textile lines had steadily
rising profits from 1940 to 1943 while those in certain durable goods lines, where
sales fell off after 1941 or 1942, experienced somewhat lower profits. With few
exceptions, however, small-company profits averaged higher in 1943 than in 1940,this was true even among automobile wholesalers and retailers. As indicated by
the average figures for broad groups in table 7, profits of the larger trade concerns
did not increase to the same extent.
In general, the significance of mere percentage increases over time is more or less
conditioned by the relative level from which the increase is measured. That is,
the concerns with the largest percentage increases in wartime earnings do not
necessarily have the most favorable earnings experience, relative to invested
capital. 'For the present sample of nearly 2,000 concerns, however, the figures in
table S indicate that net profit in 1940 was on the whole as large in relation to net
worth for the smaller concerns as for the larger. The greater subsequent increase
in profit among the smaller concerns has thus meant considerably higher rates of
return on their net worth. In the manufacturing and wholesale trade group,
there is some suggestion that profit rates may not have been quite so favorable
for the very small concerns as for those slightly larger, but the size of the sample
makes this a tentative rather than definitive conclusion.




53 FINANCIAL PROBLEM'S OF SMALL BUSINESS
TABLE

$.—Net profit (after taxes) as percentage of net worth, 1940 and 1948, for
sample of manufacturing and trade concerns1
Manufacturing
Asset size (in dollars)

Wholesale trade

1940

\m

Under 50,000
¿0,000 to 100,000
100,000 to 250,000

7.7
10.7
10.3

28.3
41.4
20.8

9.0
14.2
10.2

Under \i million
H to 1 million
1 to 5 million
< to 10 million
5
10 million and over

10.2
7.0
0.5
10.5
10.4

23.7
17.0
11.0
10,2
9.6

(25.1) 10.7
(18.8) 7.7
(12.7) 8.0
(11.0) 8.8
(10.8) 4.1

(*)

îwo 1943

Retail trade

mo

1943

12.2
28.0
17.9

24,2
12.5
0.0

41.0
19.3
14.8

19.4
14.2
11.5
8.3
8.1

(19.4) 10.0
(14.4) 8.1
(11.8) 7.7
(9.0) 7.3
(8.0) 8.7

16.6
13.0
10.8
12.7
9.4

(3>

(»)

UG.8)

813
(12.6)
(11.0)

* Profit stated as percentage of net worth at beginning of year.
* Figures in parentheses represent 1943 profit plus current allocations to reserves, as percentage of net
worth plus reserves.

Inspection of the figures for individual industries shows that in all but four of the
28 industries in which comparisons by size are possible, the smaller concerns
experienced a higher rate of return on net worth than did the medium-and largersize companies. In the four exceptions—manufacturers of beverages, chemicals,
stone and clay products, and wholesalers ,of steel products—the differences are
small enough to be attributable to sampling variation.
In view of the prevalence of allocations to contingency reserves, especially
among the larger companies, there is considerable interest in seeing how these
afreet the profit comparisons. If current allocations to such reserves are added to
reported net profit, and if the accumulated reserves are counted as surplus in computing n$t worth, the rates of earnings on net worth for 1943 are as shown by the
figures in parentheses in table 8. The effect of the adjustment is more noticeable among the large manufacturing and trade concerns than among the smaller,
but it is evidently not a major factor in the over-all picture.
APPENDIX
N O T E ON SCOPE OF T H E SAMPLE STATISTICS

The foregoing analysis of wartime sales and earnings of nearly 2,000 companies
has brought out several findings of major importance in assessing the financial
position of small business. The fact that some of these findii gs may be unexpected, raises a question as to the scope and representativeness of the present
statistics.
On the whole the present data appear reasonably representative of the over-all
situation in manufacturing and trade with the exception of the two areas mentioned
at the outset of this article. These are the very small firms with assets below
S50,000, and the sizable body of sirall companies which reported a net deficit in
1940. The following comparisons indicate the limits of the present statistics in
these two areas.
In proportion to the sales of all manufacturing and trade corporations which
submitted balance sheets to the Bureau of Internal Revenue in 1940, the sales of
the present sample w ere distributed by industry and size of company as shown in
table 9. As regards mere size of sample, the sampling proportions appear adequate for companies with assets above $250,000 in the three broad groups—manufacturing, wholesale, and retail trade—with the exception of wholesalers in the
largest-size class. When the classification is broken dow^n by major industry,
however, there are several instances where the absolute size of sample in individual classes is so small—less than 10 companies—as to be somewhat unstable.
The much smaller percentage sampling obtained for concerns with assets under
5250,000 is likely to entail considerable sampling variation in any ratios computed




54

FINANCIAL PROBLEM'S OF SMALL BUSINESS

for individual industries. This means that in interpreting the figures for any one
industry, too much importance must not be ascribed to smalt differences or to
occasional erratic fluctuations in the experience of particular size groups. However, when consistent differences by size are obtained among whole groups of industries, as has been the case for the earnings experience discussed in this article,
it may be concluded that the consistency of results more than offsets the sampling
uncertainties, and some confidence can be placed in the representativeness of
the findings.
9.—Relative size of sample in 1940: Sales of the sample concerns as percentage
of sales of all manufacturing and trade corporations submitting balance sheets to
Bureau of Internal Revenue

TABLE

Asset size
In thousands of dollars

Industry

In millions of dollars

Under
50

50 to
100

100 to
250

M toi

0.1
.1
.04

0.3
.4
.1

1.0
1.4
.7

3.3
4.2
3.6

Manufacturing.
Wholesale trade
Retail trade
Major manufacturing lines:
Food
Beverages
Tobacco
Textile mill products
Apparel
Leather and products
Lumber and furniture
Paper and products
Printing nnd publishing
Chemical? and products
Petroleum and rubber
Ptoue, clay, and glass
Pte^l and products
Nonferrous metals..
Electrical equipment.——...
Machinery
Autos and parts
Other transportation equipment..

1 to 5 5 to 10 10 and
over
13.6
9.0
18.8

10.1
8.0
10.1

0.8

}

10.9
8.0

.5
.8
.8
.5
.0
.8
.7
1.S
.2
.5

....

4.2
2.1
3.1
6.5
11.2
2.8
1.2
3.1
3.1
1.8
1.4
3.3

14.9
25.2
42.5
3.9
16.2
10.2
10.3
7.9
5.0
13.1

.6

4. i
1.5
3.7

9.4
9.4
9.6-

74.0
1.9
18.4
71.7
88.6
81.5
} 55,6
112.4
25.1
78.0
27.5
57.3
77.9
57.9
73.2
136.5
62.0
74.7
f 8S.3
I 71.1

NOTF.—The percentages shown for the smaller sizes somewhat understate, and the percentages shown
for the larger size overstate, the relative size of the sample owine to the use of consolidated statements for
the sample study whereas statements submitted to Bureau of Internal Revenue were unconsolidated.
Representation of the largest size of manufacturing is also overstated through the inclusion of some mining
Activity in the consolidated statements of petroleum, steel, and nonferrous metal companies.

Associated with the matter of sampling variation is the inadequate coverage
of the sample for very small concerns and for deficit concerns. The percentage
sample would appear not too seriously thin in the group with assets between
$100,000 and $250,000; while the absolute number of statements tabulated in
several individual lines is too small to be stable, the total of 240 is sufficiently
large and diversified by industry to be reasonably typical for such broad groupings
as all manufacturing, wholesale, and retail trade. However, the group with
assets between $50,000 and $100,000, containing only 84 concerns, is probably
subject to considerable sampling variation, and little reliability can be attributed
to the experience of the 36 concerns with assets under $50,000.» This limitation
is not of great importance in the case of manufacturing, where only 7 percent of
the total sales is by firms (unincorporated as well as incorporated) with assets
under $50,000. In retail trade, however, where nearly two-thirds of all sales are
by such firms, it is a different matter. It is therefore important to bear in mind
that the present analysis contains little evidence on the wartime experience of
the very small concerns.10
* These are offhand Judgments and» for careful estimating on some subjects, they would need to be Supported with analysis cf t*ie variance in experience among individual companies.
«•The size of firms with assets under $50,000, which are called here very small may be described alternatively in terms of sales volume or number of employees. The $50,000 asset size corresponds approximately in manufacturing to annual sales of $100,000 and 20 employees, in wholesale trade to sales of $200,000
and 10 employees, and in retail trade to sales of $150,000 and 15 employees. These figures relate to all
manufacturing and trade inthe aggregate, as of 1039; there is, of course, considerable variation among individual lines and from year t o year in the relation of assets to sales and to number of employees.




55

F I N A N C I A L PROBLEM'S OF SMALL BUSINESS

As a rough check on the representativeness of the sample for the present discussion of earnings, table 10 presents an interesting comparison of tnc percentages in 1940 of earnings (before taxes) to net worth, as reported by all corporations with taxable income submitting balance sheets to the Bureau of Internal
Revenue, and by the present sample reporting income to banks for credit purposes. Representativeness of the sample in 1940 is not necessarily equivalent to
representativeness in subsequent years, but it creates a presumption in that
direction.
Two points in the comparison deserve especial mention. Among all corporations in the three smallest-size groups, there was very little difference in the rate
of profits earned by very small firms as compared with the next larger sizes.
Unevenness in representing these three classes in the sample statistics for "under
one-fourth million" therefore did not detract from the correctness of the sample
profit rate in 1940. Second, there is no evidence of the sample being biased in
the direction of having better than average experience in 1940. In fact, in more
instances than not, the sample average was slightly below the average for all corporations. This is the more significant in view of the incentive for corporations
to minimize income for tax purposes, while stating it optimistically for purposes
of bank credit.11 On the whole, considering the variation in representation by
individual industries, the earnings ratios for sample companies with net income
are probably as close to the averages for all companies with net income as might
be expected in an unbiased sample.
10.—Earnings of sample compared with all corporations: Earnings before
income taxes in 1940 as percentage of net worth, for the sample concerns with net
incomet and for all manufacturing and trade corporations with net income 1

TABLE

Manufacturing .

Wholesale trade

Retail trade

Asset size (in dollars)
All

Sample

AU

Sample

S ampio

15.7 I
15.0 \
15.5 1

14.9

14.8 I
12.7 \
12.1 I

H to 1 million
1 to 5 million
5 to 10 million
10 million and over

15.9
10.0
15.0
12.7

12.7
14.8
14.6
14.2

14.0
14.6
9.5

13.8

11.0 ]
10.9 y
10.9 I

12.2

10.1
11.8
12.1
5.1

Under $50,000
$50,1)00 to $100.000
$100,000 to $250,000

tL$

AU

10.6
11.8
9.3
12.5

11.3
10.9
li 8
11.8

»Earnings stated as percentage of net worth at end of year.

In this connection it is worth adding that about one-fourth of the sample statistics for concerns under $250,000 represent unincorporated firms. The use of
earnings before taxes in comparing the sample with all corporations in table 10
avoids the difference in fax status by type of organization, but earlier tables on net
profit after taxes reflected, of course, the fact tliat part of small business is not
subject to corporate income taxes. The present sample reflects this inadequately,
since it includes aisproportionately few unincorporated firms.
II.—Deficit concerns in sample and in all corporations: Percentage of concerns with net deficit in 1940t for the sample concerns, and for all manufacturing
and trade corporations

TABLE

Manufacturing
Asset size (In dollars)

All

Sample

Wholesale trade
All

Sample

Retail trade
All

Sample

Under ,50,000
50,000 to 100,000
100,000 to 250,000

61
37
2S

7
15
16

54
30
21

11
6
14

59
31
23

8
6
10

Under U million
H to 1 million
1 to 5 million
5 to 10 million,.

49
21
14
10
7

15
17
11
5
3

43
14
11
7
11

12
6
6
0
0

51
17
13
14
9

9
12
6
14
0

Another factor tending slightly to exaggerate the rate of return for the sample as compared to all corporations is the definition of net worth. This includes intangibles in the case of all corporations, but hot in
the case of the sample.




56

FINANCIAL PROBLEM'S OF SMALL BUSINESS

The third respect in which the scope of the present statistics is limited ia the
Froportion of the sample that was incurring a deficit at the beginning of the war.
n the entire population of manufacturing and trade corporations, it appears from
table 11, the proportion of concerns with unfavorable earnings experience in 1940
varied inversely with the size of business. (Presumably the experience of unincorporated firms varied in much the saine way.) The table shows that the present
sample includes disproportionately few deficit concerns in all size classes, and the
disparity is most marked in the case of small businesses.
Furthermore, in most of the size and industry classes represented in the table
the average rate of deficit, expressed as a percent of net worth at the end of the
year, appears to be less adverse among the sample concerns than among comparable sizes of all corporations. Table 12 shows that this disparity is most substantial in the area of business with assets under one-fourth million dollars. That
the sample appears not to include statements for businesses with larger deficits,
may reflect in part the sampling requirement that each statement included should
be continuous throughout the war period. These two characteristics of the sample—the inclusion of relatively few deficit companies and their less-than-average
rates of deficit—mean that the tables and the discussion of earnings in this article
cover primarily that part of small, medium, and large business which was in a
more or less healthy condition in 1940.
12.—Deficit rate in sample compared with all corporations: Deficit in 1940
as percentage of net worth, for the sample concerns with deficits, and for all manufacturing and trade corporations with no net income 1

TABLE

Manufacturing

Retail trade

Wholesale trade

Asset size (in millions of dollars)
All
Under H
M toi
1 t<,.r>
6 to 10
10 and over

Sample
24
11
8

fi
2

11
10
8
3
4

All

Sample
19
8
7
5

U

(')
(')

6
C
7

All

Sample
18
10
7
3
10

(*)

4
5
8
7

* Deficit stated as percentage of net worth at end of year.
> No deficit companies in sample.

What the wartime trend has been for concerns which were unable to operate
profitably in 1940, is problematic. To the extent that the deficit condition in
1940 reflected managerial difficulties, these firms may have been unable to secure
war business. On the other hand, the wartime shortage of goods has doubtless
been a factor tending in many instances to lighten competitive pressure and to
ease the problem of sales outlets. That the smaller concerns with poor pre-war
earnings experience have shared in the wartime trends discussed in this article,
is indicated tentatively by the figures in table 13, which shows separately the
experience of the sample companies with deficits in 1940 and those with net
income in 1940.
As regards sales, the small concerns with a deficit in 1940 averaged considerably
larger increases over the 3-year period 1940-43 than the concerns with better prewar earnings. The margin of superiority shown by the sample in this respect
appears sufficiently large and consistent to be significant. With respect to net
profit, also, the sample of concerns with pre-war deficits exhibit very favorable
wartime trends. The fact that in manufacturing the average return in 1943 for
the smaller "deficit'* concerns was higher than for the firms with pre-war profit,
while this did not obtain for the trade samples, is indicative of considerable variance in degree of earnings advance.




57 FINANCIAL PROBLEM'S OF S M A L L BUSINESS
TABLE 13.—Comparison of sates increase and return on net worth for 173 concerns

with deficit in 1940 and for 1,412 concerns with net profit in 1940

with
173 conccrns with deficit in 1040 1,412 conccrns 1940 net profit in

Industry and asset size (assets in
millions of dollars)

Manufacturing:
Under X
H to l
1 to 10
Wholesale trade:
Under H
H to 1
1 to 10
Retail trade:
Under H
Ktol
1 to 10

PerPercentage recentturn on net
age inworth
Num- crease
in
ber
sales,
1940
1943
1940
to
1943

Number

PerPercentage re*
centturn on net
age inworth
crease
in
sales,
1910
1940
1943
to
m3

22
49
47

152
148
114

-10.9
-10.1
-6.4

27.0
15.4
11.0

125
247
437

112
111
116

32.8
9.8
10.8

19.7
15.0
10.4

16
11
5

91
84
103

—6.2
-6.3
-6.8

8.3
9.0
10.8

117
163
94

C
O
49
54

12.8
8.1
8.6

18.6
13.6
9.0

7
10
6

65
21
67

-3.9
—4.6
-7.4

7.5
8.8
12.8

73
76
80

17
34
G
O

10.7
9.3
8.0

16.1
12.6
10.7

NOTE.—The rate of return on net worth Is not entirely comparable as between concerns with deficit
earnings and those with net income. Many deficit concerns have a net worth that Is less than the book
value of their capital stock, owing to the fact that surplus has become a negative figure. The rate of n tura
on such a net worth may be misleading unless it is clearly understood that this is not the same thing as
return on capital originally invested by the owners.

This supplementary analysis of the sample statistics at the fringe of their scope
suggests that the very favorable experience observed in this review of the smaller
healthy concerns may also have been shared by many of the very small firms and
by those which were not so healthy in 1940. Because of the limited scope of the
data, however, this evidence cannot be accepted as more than suggestive.

EXHIBIT B
WALES-STRIPPIT CORPORATION,
M r . DAN W . EASTWOOD,

Buffalo, AT. F., March 22, 1945.

Chief Investigator, House Committee on Small Business,
Washington, D. C.
DEAR M R . EASTWOOD: Replying to your letter of the 20th, I am indeed familiar
with the article by Mr. Dirks in the Federal Reserve Bulletin for January 1945, and
I appreciate very much the opportunity to comment on the article and its
arent conclusions.
submit herewith several pages of analysis and comment on the Dirks article
which you are at liberty to publish as a supplement to my verbal testimony of
yestèrday and the day previous if you so desire.
Sincerely yours.




C . C . FICHTNER,

Vice President and Treasurer.

58

F I N A N C I A L PROBLEM'S OF SMALL BUSINESS
{Published in the Federal Reserve Bulletin, January 1945, pp. lfr-26]

WARTIME EARNINGS OF SMALL BUSINESS
(By F. C. Dirks)
ANALYSIS AND COMMENT

(By Charles. C, Fichtner, vice president and treasurer, Wales-Strippit Corporation,
Buffalo, N. Y.)
The effect of Dirks' article on the reader is to create the impression that the
wartime earnings of smaller manufacturers have been more favorable than the
earnings experience of large concerns. If the intent of the article's adroit phraseology were to persuade member bankers throughout the Nation to grant more
favorable consideration to the loan applications of smaller manufacturers, the
careful construction of an impression in sum much greater than the total of its
factual parts might be condoned as a counterweight to the reluctance of some
bankers to recognize promptly that many new and smaller enterprises have
earned a meritorious credit standing by excellent management during the war
years. If the study is to be used as evidence of a generally favorable financial
situation among smaller manufacturing establishments or as a guide to public
policy, protest must be filed as to its principal conclusion—that "in most manufacturing and trade lines the position of small- and medium-size concerns has
improved rapidly during the war, and in fact more sharply than that of the larger
companies." This and other -generalizations are unwarranted within the nature
of the sample which is, in addition, too small to be representative. The manipulation of the data (the use of percentages, for example, to measure changes in
percentages) has the effect of leaving a distorted impression of the facts. Careful
interpretation of the article's own data, inadequate as they are, does not support
the favorable interpretation placed on the finances of small manufacturers.
Before the inferences of this study, which if not erroneous are at least questionable, become the basis of policy, more comprehensive and representative information must be gathered in the field of small business finance.
DEFICIENCIES IN THE ROBERT MORRIS ASSOCIATES SAMPLE

Mr. Dirks, in the appendix to the article, has given many reasons why methods
used in the study do not yield a basis for generalized statements about the whole
of small business. In addition to his own reasons, there are additional factors
which show that the sample is unrepresentative of small business.
The number of companies included in the analysis as representing small business
is wholly inadequate. This is readily admitted in the article (p. 17) where it is
stated that while "the sample is broad enough to be statistically significant from
the very largest companies down to those with assets of about $250,000, below
this size the sample thins out rapidly, and it includes only 36 concerns with
assets under $50,000."
After making this admission as to inadequacy of data for drawing significant
conclusions as to small business, the statement follows that "most of the discussion about 'small business' in this article should be understood to refer to
concerns with assets of between $50,000 and $250,000." And then, further to
confess the unreliability of the sample data from small business, it is admitted
that "in some instances manufacturing companies with assets up to $1,000,000
are included also in the 'small' category." In spite of this transfer of larger
concerns to the "small" category, presumably to strengthen statistical weakness,
no information is provided as to how many such companies were included in the
"small" category or how they were selected.
FALLACIOUS ASSUMPTION

Furthermore, from the point of view of the small businessman, the fallacy
seems to have been incurred of assuming that because manufacturing and wholesale businesses of under $50,000 total assets accounted in 1939 for relatively
minor proportions (20 percent and 7 percent respectively) of the sales in their
industries, the thinness of the sample for such companies is thereby compensated
for. This easy generalizing from a meager sample as to financial needs cannot
be of much consolation or promise to the large numbers of small manufacturers
and distributors (those with less than $50,000 of assets) comprising, by number
in 1940, 63 percent of all manufacturers and 68 percent of all wholesalers. Thus,




59

FINANCIAL PROBLEM'S OF SMALL BUSINESS

the author's ready admission of underrepresentation in its sample of retail firms
with assets under $50,000 (those called "very small"), extends also to manufacturing and wholesale concerns of similar size. In other words, concerns of
this size, compribing the bulk of all companies in their field of operation, cannot
be typified by a handful of carefully selected companies.
SAMPLE HIGHLY

SELECTIVE

Aside from the fact that the sample is far too small for any definite conclusions
to be drawn about small business as a whole, a further serious deficiency lies in
the fact that the subject companies are highly selective as to favorable credit
connections and financial operating results. These facts are also set forth in the
author's analysis, but apparently without invalidating the data for its purpose
of drafting broad conclusions regarding financial condition of all small business.
When it is considered that "statements for small- and medium-size companies
were secured from bank credit files under a cooperative arrangment between the
Robert Morris Associates and the Federal Reserve System," it may be concluded
that such companies are well above the average in financial and credit ratings.
Banks, in general, will lend money only to good risks, therefore the only firms
which could have fallen into the sample were those with fairly high credit ratings.
This is borne out by table 11 in the appendix which shows the proportion of
deficit concerns in the sample as compared with all corporations in 1940. The
earning power of the firms in the sample is far better than the earning power of
the firms in the whole population.
INADEQUATE REPRESENTATION

OP U N I N C O R P O R A T E D

ENTERPRISES

Another examination of the original list will show an inadequate representation
of unincorporated concerns. Of the approximately 225,000 manufacturing businesses in the country only about 80,000 are incorporated and of the 1,450,000 trade
concerns only about 125,000 are incorporated. The sample has a much greater
proportion of incorporated firms than unincorporated and since there are great
differences between these two forms of organization in the way cost and profits
are figured, any biased sample in this direction might present a totally false
picture of the financial condition of small business as a whole.
The author attempts to show the representativeness of the sample by relating
the earning power of the firms in the sample to the earning power of the firms in
the whole population in 1940. He arrives at the conclusion that the comparative
earning ratios are relatively the same and, therefore, the sample is representative
on this item for 1940 although it may not be for 1943. This reasoning has been
shown to be fallacious in sampling technique in recent years sincj a biased sample
may have many characteristics in common with the population as a whole and
still yield biased results in the particular characteristic that is needed. The only
adequate analysis of small businesses' earning power must be based on an unbiased
sample of firms and not on a biased sample which is rationalized to represent the
w hole population.
Finally, the author, in table 12 of the appendix, attempts to show that deficit
concerns in 1940 show more favorable earning ratios in 1943 than did concerns
showing a profit in 1940, and therefore even if the sample is biased in favor of
profit concerns, the conclusions would also hold for deficit concerns. From a
sampling point of view and as far as Smaller War Plants Corporation is concerned
this argument is somewhat irrelevant. In the first place, the fact that a concern
lost money in 1940, a pre-war year, has very little relationship to its earning power
in 1943, a war year of total production and ceiling prioes set to yield a fair margin
of profit. There is little argument with the statement that small business, in
general, is making money during the war as well as is large business. If a small
concern has been operating on a deficit for a number of years it owes money and
must pay it back, or if a small firm had a chance of making profit on war contracts
and needed an expansion of fixed assets, for which money had to be borrowed to
carry out the contract, the ratio of net profit to working capital has little significance as related to financial soundness.
The serious defects of an extremely limited number and a highly selected group
of concerns preclude their use in exemplifying recent trends in financial position
of small business generally.




60

F I N A N C I A L PROBLEM'S OF SMALL BUSINESS
LAG PATTEHN OK SMALL BUSINESS

Although tho validity of the sample of smaller manufacturing establishments
is extremely questionable, tables 1 and 3 indicate that the sales expansion of
small business in 1941 and 1942 lagged behind that of large. This circumstance
underlay the repeated reorganization of the Contracts Distribution Division of
War Production Board and the founding of the Smaler War Plants Corporation.
In 1943, happily, the volume of business of smaller units was brought to a level
only slightly below that of large business. Tables 1 and 3, therefore, hardly
justify the statement on page 18 that "the average wartime expansion in sales has
been about the same for small as for large businesses," except in the limited sense
of comparison of 1943 sales with 1940 sales.
To state that "the greatest increases in sales occurred among the smaller concerns" gives a misleading impression in that the statement is based on percentages
and not on absolute increases of volume of business. Whether this is "statistically
more significant" is questionable. The gain in weight of an infant from 6 pounds
at birth to 24 pounds at age one is 300 percent, but a gain of a 4-vear old child
from 50 pounds to 75 pounds would be only 50 percent, and yet at the latter age,
perhaps the increase in weight would be biologically more significant. There is no
indication in the study, moreover, that the business infants of 1940 as classified in
the article were not still classified as infants in 1943 although in fact they may
have progressed to a higher asset size classification.
INTERPRETATION NOT SUPPORTED BY DATA

In the paragraph beginning on page 18 the possibility that the catching up of
smaller with large manufacturers in sales expansion in 1943 after lagging earlier
in the war period might have been due to "special Government efforts" is said to
be refuted by contrasting "war industries" with "predominately civilian industries." In the war industries, it is stated that "the smaller companies exhibited
higher rates of growth from the outset." As this statement has an important
bearing on public policy, its validity merits careful examination. In the Morris
Associates sample, machinery companies may be taken as typical of "war industries." The basic data on machinery industries show for companies of assets less
than $1,000,000 the following record of sales expansion:
Nonelectric machinery

Electrical machinery

Assets (millions of dollars)
Under H
(11 companies)

M-i

(14 companies)

Under M
(none)

W-l
(12 companies)

(Sales in thousands of dollars)
IMO
1941...
1942
1943

2,272
3,992
6,800
18,800

10,146
17,029
25,885
33,146

9,7.50
14,020
28,0S2
55,965

From this sample of 37 small companies typical of war industries, the total sales
expansion from 1940 to 1943 was $85,749,000 of which $47,150,000, or 55 percent,
occurred from 1942 to 1943. Less than half of the total rise in sales occurred in
1941 and 1942. Thus, it is clear that as:de from the danger of drawing sweeping
conclusions from an inadequate sample, the data do not bear out the interpretation
of the lag pattern presented in the Dirk's article.
MISLEADING IMPRESSION OP PROFITS OF SMALL BUSINESS

A misleading impression is also given by the discussion beginning on page 20,
"During the war* the amount of net profit per dollar of sales has risen considerably
more among small industrial concerns than among medium and large-size companies." The percentage rise in the percentage margin of small manufacturing
supports the statement but it is only by consulting table 4 that the reader will
realize that in 1940 the profit margin on sales of small business was 67 percent
below that of large business and that even in 1943 was 30 percent below the rate
of profit of large business.




61

FINANCIAL PROBLEM'S OF SMALL BUSINESS

GENERALISATION ON PROFITS NOT SUPPORTED IN MACHINERY (METAL-WORDING)
INDUSTRY

The misleading impression of greater financial success of small manufacturing
as compared with large is furthered by the following statement: "Metal products
profit margins of large companies declined after 1941, while those of mediumsize companies declined after 1942, and small concerns continued to increase their
profit margins through 1943. The result was that .margins of the large companies
m most war industnes were lower in 1943 than in 1940, in contrast to the considerable increase experienced among small companies." The conclusion
obviously sought in this quotation from the article may be tested from the data.
The ratio of net profit to sales in the Morris Associates data on 11 companies in
the nonelectric machinery class rose from 6 to 10 percent between 1940 and 1943
whereas the profit ratio of 15 largest companies rose from 8 to 17 percent. The
decline from 1942 to 1943 was far greater for the smallest companies than for the
largest. The profit ratio to sales of 11 small iron and steel products companies rose
from 5 to 11 percent while the profit rate of 12 large companies rose from 8 to 17
percent in the same period. These examples from important war industry groups
illustrate how an entirely false impression of small-business finance has been
given by the generalizations cited.
The study does not piesent information on net profit after taxes and renegotiation to sales, although it does present the percentages of net profit on net worth
and the percentage changes between 1940 and 1943 according to size classes.
Net profit after taxes on the volume of business is one of the most significant
factors in the financial management of a small business because its growth must
come from that source. Unlike large concerns, the smaller manufacturer does
not have access to investment banking assistance to meet longer term capital
needs. The article gives the impression that narrower profit margins have been
realized among larger-size companies in war industries than among small companies.
That this is an inaccurate impression is demonstrated by the Morris Associates
data on thé following important war industry fields.
Net profit {after taxe») to sales
Iron and steel products Nonelectric machinery
12 large
11 small
12 large
11 small
com pan ici, companies, companies, companies,
un fier J* $5,000,000 to una<*r M $5,000,000 to
$10,000,000
million
$10,000,000
million
Pifceni
3.7
5.0
4.1
3.4

Forcent
6.5
ft. 6
5.0
ao

PtrtaU '
5.6
5.7
2.1

Ptrttni
4.1
8.3
5.4
3.4

RENEGOTIATION

There is an implication in the Article that the large asset concerns are the ones
chiefly affected by renegotiation. In view of the volume of business taken on by
small-asset concerns and the tendency to measure excessive profits for renegotiation in terms of pre-war profits levels (lower for small business than for large) and
in relation to invested capital (prejudicial by its very nature to small-asset concerns), many smaller firms have had their financial condition very seriously affected by the renegotiation procedures. After renegotiation of 1942 and 1943
business,''manufacturers having less than $1,000,000 sales volume were left with a
smaller margin of profit on sales than were companies in the $5,000,000 to
$10,000,000 sales bracket. There is no available evidence that renegotiation has
dealt less harshly with small companies than with large in spite of the greater risk
and wide fluctuation in yearly income among small business units which should
justify wider profit margins during war years.
It is difficult to agree with the article's theory that the rate of profit on net
worth is more meaningful than the percentage of sales. Either measure along is
inadequate. .Applied to small manufacturing units, the measuring of profit by a
ratio to net worth is extremely misleading because labor and management.




62

FINANCIAL PROBLEMS OF SMALL BUSINESS

rather than large invested capital, produce the results typically in small scale
enterprise.
A company employing relatively little capital and requiring a relatively largo
amount of labor and managerial skill usually operates most effectively as a smaller
unit. Ono that requires a relatively largo amount of capital and hence a relatively
small amount of labor, usually operates most efficiently as a large-scale unit.
This is well illustrated in the contrast between women's shoe (small scale) and
men's shoe (large scale) manufacture. To measuie earnings .of enterprises, which
organically use widely different proportions of the factors of production, by
the rate of profit on net worth or invested capital is by itself not a valid basis foV
relativo comparison of profits. The measure tends to give an inflated picture of
profitability of smaller manufacturers as indicated in table 5 of the Dirks article.
Such an interpietation is erroneous. Because of this factor and also because of
the risk inherent in small manufacturing enterprise, new capital would be more
readily attracted to concerns of more than $10,000,000 with an earnings rate of
28.0 percent than to those of less than one-fourth million dollars in spite of the
earnings rate (before income taxes) of 55.6 percent.
Exception is taken, therefore, to the following statement on page 21: "Notwithstanding the larger increases of net worth among smaller manufacturing companies, the combination of more rapidly expanding sales and wider profit margins
during the war has resulted in pushing up the earning capacity of small manufacturing business much more than that of large manufacturing." The total impression is greater than the parts of the sentence will support. The phraseology
is calculated to suggest that net worth of small business has expanded enormously
whereas it can be true only in terms of relative percentages. The article gives no
data on comparative net worth changes. Basic data are available, however, on
changes in working capital.
SMALL BUSINESS M A N A G E M E N T NOT CONFIDENT OF ITS F I N A N C I A L STRENGTH

In 147 concerns with assets under one-fourth million dollars net working capital
from 1940 to 1943 increased $4,757,000 whereas in 95 concerns with assets of
five to ten million dollars working capital increased $79,730,000 in the same period.
The huge additions to the working capital of large firms are less percentagewise
tlian the little increases for small firms but are more significant in terms of strength
to weather the shocks of recession. That the managements of the large firms
entertain this view of their financial strength is indicated by dividend disbursements during the period of $84,000,000, or 105 percent of the increase of working
capital, as compared with only $3,000,000 of dividends in the small classification,
or only 60 percent of the increase in net working capital. Both large and small
firms have increased their finances; the smaller concerns, however, have far less
working capital to sales, have been able to distribute relatively less of their earnings
in dividends and show that they are far less confident of the financial ability to
cope with future difficulties.
SMALL B U S I N E S S A D V E R S E L Y A F F E C T E D B Y T A X

STRUCTURE

The Dirks article seeks to establish the thought that smaller concerns have been
"subject to lower tax rat^s than large. Competent tax authorities believe that
the contrary is true. The measures of excess profits, invested capital, and average
earnings, all tend to discriminate against smaller, concerns. The typically wide
fluctuations of earnings of smaller concerns result in a relatively heavier tax over
a period of years. The tax structure, as table 6 indicates, has absorbed a substantial portion of the earnings of the smaller manufacturing enterprises.
The foregoing instances are not a compendium of all the faulty generalizations
from inadequate evidence in the article. The piece is a remarkable tour de force
In that by phrase and sentence, statements are extremaly guarded and careful,
but by juxtaposition and combination they combine into a portrait of small business which, while flattering, would perhaps be unrecognizable by its subject.
. Mr. Dirks began his article by stating, "Previous information on small business
finance has been very limited"; this reviewer reluctantly must conclude that accurate information on small business finance is still very, veiy limited.

X