Mr. PIKE. No; the Federal Trade Commission merely said they thought some of them were using brass knuckles. [Reading:]

It is of course conceivable that in a particular community, such an institution might fall into the hands of a group whose purpose would be to exercise arbitrary and selfish control over local business. That must and can be guarded against.

Let me repeat that the virtues of this plan, as we see it, are, first, it recognizes the essentially local character of the problem; second, it involves little, if any, expenditure of Federal funds; and third, it encourages financing through the normal business channels. We hope the committee will give this proposal serious consideration.

Let me state categorically that the Security Exchange Commission is not seeking additional powers or new fields of administrative jurisdiction. On the contrary, it seems to me that perhaps the best way to handle this whole problem would be to set up within the Government an agency which might be called the Bureau for Small Business.

I pass on the name. Any favored name would do as well. [Reading:]

This bureau could administer such minor legislation as we have suggested here, and more important, it could act as a clearing house between the various communities and make the kind of really thorough continuing studies of the small-business problem that need so badly to be made. On the basis of these studies the bureau could from time to time make recommendations to Congress. The membership of such a bureau should be selected by the President with the advice and consent of the Senate primarily from among men who have firsthand knowledge of and a genuine sympathy for small business. And the bureau should be sufficiently independent to assure that its actions and recommendations are not colored by considerations alien to the interests of small business. We recommend that this committee should give serious consideration to the prompt creation of such a bureau somewhat within the Government.

In closing, let me mention one other study which was assigned to the Securities and Exchange Commission, that of investment banking. We presented several days of testimony before this committee on that subject. We are not, however, prepared to make any specific recommendations at this time. The testimony before this committee dealt with a narrow segment of investment banking. In the course of our work at the Securities and Exchange Commission, however, we are in constant contact with the wide ramifications of the investment banking problems. We have been considering, both formally and informally, with the investment banking industry many of the problems raised by the Temporary National Economic Committee testimony which happen to fall within our statutory jurisdiction. Our rules, regulations, and orders indicate our keen awareness of the existence of these problems and our attempts to meet them. However, we have not as yet reached the point where, without further study over-all recommendations can profitably be made. In addition to the considerations which arise in connection with the preparation of rules, regulations, and orders in the normal course of our business, we have, for the past 6 months, been considering with the investment bankers, securities dealers, and securities exchanges amendments to the securities laws. Some of the problems raised in the Temporary National Economic Committee testimony have been covered in these discussions. When these discussions are over, we shall submit our joint and several proposals direct to Congress. In view of these considerations, we believe that it is in the public interest to defer any recommendations on investment banking at this time.

Mr. O'CONNELL. Commissioner, as I understood you, this plan modeled on the Baltimore plan would be, generally speaking, availed of only in cases involving business between the area of $50,000 and $1,000,000. Apparently, according to the experience in Baltimore, they weren't able to do anything for the people who were smaller than that.

Mr. PIKE. They found it fairly difficult. I don't think $50,000 need be a minimum. It is reasonable to assume that businesses which could be benefited by these plans could use smaller sums.

The point I think the Baltimore people made was that we must remember that over half of our retail business in the country-that

is, over half the retail stores-are owned by people with only $2,500 capital or less. That is an area of great competition; it is an area where people move from work to business and back to work again when they have lost their money. It is apt to be a way of life rather than a method of profit making. You are apt to find the areas of poorest judgment there, and perhaps the most unsuitable for longtime loans.

If you care to look through this monograph, you will find that as far as we could tell from sample statistical checking, if you made 10-year loans and the present mortality obtained, only about 20 percent of your grocery stores would be alive at the end of the 10 years. Some other retail establishments have about the same record.

Loans to people in that category ought to come more from the family, from people who have an interest in their getting along. We have also, let's say, the restaurant business. You all know the type of restaurant that is started by, say, two ladies who have got $5,000 as a stake and they think they ought to start a tea shop. They start a tea shop and put up attractive chintzes in the window and put gay paint on the tables and wait for customers. Their friends come in the first day, and at the end of the year they are gone and there is somebody else in there. Those people would be glad to have a loan at the time they see their business going, but they don't really come in the category where loans generally can be safely made; and under this plan you can't make too many bad loans and have your plan go.

But, remember, each one of these loans is made by an individual or two or three individuals, and when that businessman has made a loan and finds his loan has gone sour, he is likely to say, "These people assured me conditions were all right. Now I have lost my money. I don't believe I will lend any more money through the advice of this organization." They haven't been able to find good outlets in those very small areas of business.

Mr. O'CONNELL. Commissioner, you said in your statement that 20 or 30 years ago the person in need of a small amount of capital traditionally was able to obtain it either from a local bank or from a wealthy individual in the community, and that that condition had apparently changed to a substantial extent. Do you mean that from your observations the commercial banking field generally is performing a somewhat different function from that which they performed that long ago? Mr. PIKE. The statistics on that are pretty scanty. It is probably more impression than provable fact. It is true, I think, that the banks by and large are somewhat different-and I am told this by people who sort of live in the area of banking, partly here in the Government and partly in commercial banking-that this sort of loan is not as apt to be made. The loan, when made, is apt to be looked at more critically by the examiner than was the case many years ago.

Mr. O'CONNELL. I have had the same impression, and I have had it said to me it is no part of the function of the commercial bank to supply long-term credit needs, and it occurred to me that that attitude was a result of the change in function rather than a definition of a function that already existed in commercial banks.

Mr. PIKE. I think we might make one other observation here. I don't think it perhaps is entirely fair, but I am rather of the impression that in a good many areas the growth of branch banking, with absentee ownership, has had a good deal to do with the decline in the local

character loan. I am told that by people who, I think, have observed it widely. I can't prove it.

Mr. O'CONNELL. Just to give you a personal experience, I saw a letter a short time ago written by a man who was arguing as one of the virtues of branch banking that the local bank would be in a position to refuse a loan and always be able to blame it on the headquarters. He seemed to consider that absentee ownership in that connection was an advantage. It didn't impress me so at the time.

Mr. PIKE. I have had that told me by the bank managers of great Canadian banks which, as you know, spread well over the country. They are accustomed to taking money from areas where there are surplus deposits and putting it in other areas where deposits are greatly needed. I note, however, that in Canada they have a much greater concentration compared to population than we have, and I note, also, that there is a much greater interlocking of directorships between those people around the big banks and the big industries than we have here. I am inclined to think that branch banking takes away a lot of the feeling of responsibility for the community that we have had, and I think to a certain extent still have, although I am afraid it is decreasing almost every day.

Mr. O'CONNELL. And the same result would be reached in a bankholding company set-up. You are speaking of branch banking broadly, but there is a great deal of difference.

Mr. PIKE. Yes; I don't see how it could fail to happen.

Mr. MEEHAN. Mr. Pike, may I ask a question to clarify my own ideas about the essence of this proposal concerning a bureau of small business? It is not clear to me from the proposal as stated just what kind of organization that would be. Is it your idea that you would have some kind of entity consisting of a small group of individuals who would act collectively in some such manner as outlined here, or do you visualize a situation in which you would have an integration of an operation such as you suggest with an existing organization which would have facilities to bring research to bear upon the problems of small business with the idea, first, of determining what the problems are, and secondly, what might be done about particular aspects of the situation?

Mr. PIKE. I must confess, Mr. Meehan, I am about as vague as you I feel that we know so little about this problem that certainly in making the recommendation, I am not sure whether it is right or wrong not to fill in the details. I rather think to start with, any organization should be quite small, and I presume that it should be within some agency of Government already existing. I fear, as was brought out the other day when a member of the Department of Agriculture was talking about standards, that there are probably within the Government a dozen or 15 small areas where parts of this problem are being studied that don't coordinate too well with other areas.

Mr. MEEHAN. Would you say that you could dissociate the problems of small business from the problems of the economy as a whole, thinking in terms of the statement which Mr. O'Connell made a short while ago with reference to the whole area of industrial economics?

Mr. PIKE. No; I don't think they can be dissociated. I do think the problems of small business are probably more acute and have

somewhat different emphases than the problems of business as a whole, or, let's say, problems of large business. The Government's problem with large business to a great extent has been how to control it; the Government's problem with small business is how to help it and educate it. That is a broad statement, and, of course untrue, to some extent like all.

I confess that I am quite vague about how to go at it. I think that before putting in a bill someone ought to study, and I presume you should know over in Commerce better than anybody else just what facilities are at present available, whether there should be an addition, a modification, or merely rearrangement or reallocation. I just don't know.

Mr. MEEHAN. I am curious about this sentence here, too: "And the Bureau should be sufficiently independent to assure its action and recommendations are not colored by considerations alien to the interests of small business." Are you not suggesting by that that those individuals or this group have a bias in favor of small business?

Mr. PIKE. I think so, frankly. If this thing is going to do the work it should, I rather think it might be slightly prejudiced to small business without doing any great harm to the economy. In this business of making the rules and running the show, if any favoritism is to be shown, I am inclined to think it ought to be to the fellow who is working under the greater handicap. That may be all wrong but I still just think that way.

The CHAIRMAN. You have finished your statement, have you not? Mr. PIKE. Yes, sir.

The CHAIRMAN. Thank you very much, Mr. Pike.

Now, let us invite you to come around to this side of the table and you can question Senator Mead after he has finished.

STATEMENT OF SENATOR JAMES M. MEAD, OF NEW YORK

Senator MEAD. Mr. Chairman, the committee is fully aware of the various efforts which have been made from time to time within the past few years to accomplish something definite in a legislative way to facilitate the flow of credit and capital to small and intermediatesized businesses. Our distinguished chairman has repeatedly interested himself in the problem, and it has been frequently the subject of discussion in past meetings of this committee.

Additionally, the question has been actively pursued by many Members of the Senate and of the House. In addition to the hearings which have been conducted by this committee, rather exhaustive public hearings were held in 1939, and again in 1940, by a subcommittee of the Banking and Currency Committee of the Senate. At the present time Senator Murray's Special Committee to Study Small Business Problems is functioning, and much of the ground will undoubtedly be covered again, and to a good advantage. However, I am not sure that there is any particular advantage in recommending further extensive public hearings on the subject, especially on the subject of the capital and credit needs of small enterprise. Certainly some further research and investigation are desirable, but it ought to be purposeful and with certain definite conclusions in mind as the objective. It seems to me, Mr. Chairman, that the time has come when cer

tain concrete suggestions can be advanced and approved. I think there is a legislative avenue open which will not invite the opposition of the banking profession, the Federal Reserve Board, or the Reconstruction Finance Corporation, or any other public or private agencies now authorized to extend credit to bills.

Here is the situation as I see it: Small enterprises are being appealed to by the Government to add to the production drive for our defense requirements. They are being asked to act as subcontractors and to increase the flow of raw materials to bigger industries. Because the credit plight of small concerns is now largely a chronic illness, they are too often found to have antiquated equipment and a lack of sufficient capital to modernize, expand, meet pay rolls, and generally to do the job for which they are needed.

To remedy in part this deplorable condition, the Office of Production Management is working in cooperation with the Federal Reserve Banks and their branches to acquaint businessmen with the type of Federal loans now available (through defense and regular agencies) which would put them into shape for prompt production. This is of itself a commendable activity, but it is not by far anything like a permanent solution of the problem with which we are coping. The crux of the matter is that the Federal Reserve banks are tightly restricted under the provisions of section 13 (b) of the amended Federal Reserve Act. They may only make loans to be amortized over a period not to exceed 5 years (and that is hardly long-term credit) and loans or commitments to banks on loans must be limited to loans for working capital purposes only.

The R. F. C., on the other hand, seems to have considerable authority, but smaller businessmen claim that applications filed with that agency encounter delay and often, in the end, receive no more liberal consideration than they have originally been able to receive from their home-town banks.

In the last Congress, through a series of five bills, I attempted to liberalize the restrictions upon the lending powers of the Federal Reserve banks and to establish of system of R. F. C. insurance of business loans similar to that successfully employed by the F. H. A. in guaranteeing loans for the construction of homes.

In advancing these proposals, I was motivated by a desire to keep the business of industrial and commercial loans in the hands of private banks where it properly belonged. I am not going into the question at this time of why adequate credit capital is not now available at our local banks. Most of us realize that the unavailability of credit does exist, and most of us understand why that is true. If, as it is claimed, the banks are hampered in their natural desire to extend industrial loans, then we should remove the obstacles-short of removing supervisory regulations imposed in the public interest-and make the extension of loans possible in all legitimate cases.

If the banks do not then do the job of which they may reasonably be expected, the Government would obviously have another obligation to its citizens, but frankly, I am not envisioning that kind of situation. I think it would be both untimely and ill-considered to broach it at this juncture. They have shown a marked willingness to cooperate, and I do not feel that they will oppose just legislation aimed to make credit and capital more readily available.