studies of individual small business enterprises which have failed or have gotten into serious financial difficulty reveal that the majority of such situations arose because of inexperience, or inadequacy in one or more of the wide range of managerial skills required for successful operations.

It is evident that a large number of small-business men have not had sufficient training for the increasingly complex task of managing an expanding business. A businessman, to be successful today, requires a broad training in the fundamentals of business management. He must be familiar with the theory and practice of marketing, accounting for purposes of management and financial control, personnel management, production engineering, credit practices, and law and government regulations. He must be able to solve problems, in many cases without the aid of specialized professional assistance, in all of these fields. Frequently, the small-business man is a one-talent man-an excellent salesman, an inventive genius, or a production specialist. Often he has a limited knowledge of the other aspects of his business and is unacquainted with, does not fully appreciate the need for, or cannot afford specialized services or aids. This in large measure accounts for the high mortality rate of small businesses. On the other hand, we are all familiar with conspicuous examples of ingenious businessmen who, in spite of all handicaps, have developed their small concerns into large enterprises in a comparatively short time.

The acknowledged existence of management problems among our millions of small-business concerns does not disprove their need for special and additional financing facilities. It does, however, emphasize that, in addition to the provision of financial facilities, greater efforts should be made to remedy the deficiencies of small business management and to provide needed aids and specialized management counsel. This has been recognized in the legislation which is before

you.

Several financing institutions have been organized within the past 6 years, such as the Industrial Development Bank of Canada, the Industrial and Commercial Finance Corporation of England, and the American Research & Development Corp. of Boston, to provide predominantly small business concerns with equity capital and longterm credit. From experience, each one has found that the financing need of the enterprises with which it has dealt is closely associated with the need for managerial and technical assistance. In other words, one without the other does not, in the majority of instances, constitute an adequate solution of the financing problem of the concerns which come to the attention of these institutions.

Commercial bank lending: The commercial banking system, by and large, has been doing an outstanding job of meeting the short- and intermediate-term credit needs of small business. No one who is acquainted with the facts would deny this. The National Bureau of Economic Research, a private, nonprofit research organization, undertook during the late thirties an exhaustive study of business financing practices and the major sources of business funds. The study was financed in part by a grant of funds from the Association of Reserve City Bankers. I should like to quote one of the major findings of that study, Business Finance and Banking, by N. H. Jacoby and R. J. Saulnier, 1947.

Senator SPARKMAN. Mr. McCabe, that is the same book to which the chairman referred, is it not?

Mr. MCCABE. The same thing.

the "typical" short-term borrower [from commercial banks] around 1940 could be described as a small- or medium-sized manufacturing or trading concern, of somewhat less than average profitability. Of the total amount of bank credit used by business around 1940, some 70-80 percent is estimated to have been used by companies with assets of less than $5,000,000.

Commenting on changes in bank lending practices over the period preceding World War II, the National Bureau's report goes on to

say:

Banks showed increasing responsiveness to the credit needs of small- and medium-sized businesses, which provided the bulk of their demand for credit at all times. Because enterprises of these sizes fared badly during the thirties, the extension of credit to them called increasingly for methods designed to provide greater security for the lending agency and to minimize risks of default and loss. The adjustments which commercial banks made to meet these credit needs more effectively were marked by a willingness to write loans on terms more attractive to such borrowers (for example, term loans with installment amortization and revolving credits supplying a reasonable guaranty of working capital facilities over periods longer than customary), and by the use of a wider range of security devices (such as the assignment of receivables, liens on incomeproducing equipment, the trust receipt, and the field warehouse receipts).

The findings of a comprehensive survey of commercial and industrial loans to business, outstanding at Federal Reserve member banks on November 20, 1946, are also of special interest. This survey revealed that 76 percent of the number, and 22 percent of the dollar volume, of all business loans of member banks were to small business. Small business was defined on the basis of total assets as follows: Manufacturing and mining concerns, total assets of less than $750,000; wholesale trade, less than $250,000; retail trade, utilities and transportation, service, construction, less than $50,000.

This survey further revealed that approximately one-fifth of these small-business loans were what bankers call term loans-loans repayable on an installment basis with maturities at time of making of more than 1 year. Large, as well as small, banks were found to be actively engaged in lending money to small business on a term as well as a commercial credit basis.

In view of the greater risks involved in lending money to small business and the relatively higher costs of analyzing credit applications and servicing loans of small amount, the findings of the survey would indicate that the banking system has been active in cultivating small business customers.

These findings relate to a time now nearly 311⁄2 years ago when large companies were borrowing heavily for reconversion needs. Since that time many of the larger loans have been paid off from retained earnings or have been refinanced, in some cases with new credits, through other financial sources such as insurance companies or the capital markets.

In the past few years, an increasing number of banks have set up special small-business loan departments, and recently several of our very large city banks have instituted new programs to expand their specialized services to small business. I have no doubt that a survey today of bank lending to business would show that the commercial

banks are now doing a more effective job of providing credit to small business than was revealed by the system's 1946 survey.

While we commend the commercial banking system for its financing of the short- and intermediate-term credit requirements of smalland medium-sized business, we must recognize the fact that while banks make a great many loans to small business, they are not able to accommodate all small-business needs. There are many financial needs of businesses, both large and small, that are not bankable, namely, equity capital and long-term credit needs. Commercial banks have a primary responsibility to their depositors for maintaining loan and investment portfolios in a sound condition. They cannot undertake business financing which involves undue elements of risk, undue investigational or administrative expense, or the freezing of their funds for relatively long periods of time. In the case of larger businesses, financial requirements which are not bankable may be met from other sources, such as insurance companies and the capital markets; in the case of small business, nonbank sources of funds are less accessible.

Taxation: There is no denying the fact that the problem of smallbusiness financing has been complicated by the structure and rates of Federal and State taxes. As I said last August in a statement on the equity capital situation, prepared at the request of a subcommittee of this committee, there never seems to be a convenient time for a fundamental review of the tax structure.

The CHAIRMAN. That is a serious situation now. I am glad to hear you say that there is a need for a study of the tax situation with respect to small business in general, even when we are going into deficit financing. But the strongest part of that statement, to my way of thinking, is that taxation alone cannot remedy the situation; you have to go forward. You have to have some legislation passed of a positive nature. You just cannot cure it all, as some people think, by taxes; is that right?

Mr. MCCABE. No, sir; I do not think you can do it all by taxes. Senator SPARKMAN. But at the same time we do not want to take any emphasis from the independence of tax relief, do we?

Mr. MCCABE. That is right, sir.

Senator SPARKMAN. And I certainly like your statement there, which I think all of us have found to be true throughout the years, that there never seems to be a convenient time to review and revise our outmoded tax structure.

Mr. MCCABE. That is right, sir.

Senator SPARKMAN. I think one of the most forward steps we can take in giving relief to small business is to take the time and to make it convenient to revise our tax structure, which in many respects has become quite obsolescent.

Mr. MCCABE. I could not emphasize too strongly my feelings of concurrence in the point of view you have expressed, Senator. Senator SPARKMAN. Full concurrence.

Mr. MCCABE. Full concurrence.

Senator SPARKMAN. I just wanted to be sure it was full concurrence; no minority report.

Mr. MCCABE. I feel that time should be taken out by the appropriate committees of the Congress to conduct a fundamental study of our

tax structure.

The CHAIRMAN. We are all in agreement that there should be a fundamental study but what do you think about the tax bill? You heard the Treasury Department's witness say here this morning that it would at least be of some assistance to small business. What is your judgment?

Mr. MCCABE. Senator Maybank, I have not made a careful study of the tax bill.

The CHAIRMAN. Has the Board given any study to it?

Mr. MCCABE. Not as yet.

The CHAIRMAN. Do they intend to?

Mr. MCCABE. Only as we are generally interested in the subject. We do not know what the tax bill will be. It was only recently reported out of the Ways and Means Committee of the House and the House has yet to act upon that, and then the Finance Committee of the Senate has to act upon it.

Senator BENTON. I am sure Mr. McCabe would agree, Mr. Chairman, that a 5-year loss carry-forward provision instead of the present 2 years is an encouragement to new enterprise and to capital. Mr. MCCABE. I remember in the Committee for Economic Develop

ment

Senator BENTON. That was one of the recommendations.

Mr. MCCABE. That was one of the recommendations. Since we were both actively engaged in that I think we could reasonably subscribe to the recommendations.

Senator BENTON. Did you follow my discussion on depreciation? Mr. MCCABE. I followed it.

Senator BENTON. Do you not think there is a great opportunity to use that, just as an illustration, for the kind of things that need review and restudy as against this 37-year background?

Mr. MCCABE. I heartily agree that it needs study. In fact, I think all forms of our tax structure should be studied.

I will say this in fairness to the Treasury: I recall that in 1948 they came forth with a great many constructive suggestions for improving the tax structure. At that time I think it was one of the most convenient times we have ever had to have a complete overhaul of the tax structure. In looking back if we had grasped that opportunity to carry forward the kind of study I think we should have made it would have been extremely helpful.

The problem is a little more difficult today with deficit financing. Yet I agree with Senator Sparkman that I think the study should be initiated and carried forward vigorously because conditions may be different in the next year or year and a half.

Senator SPARKMAN. You heard of the fellow who was wounded and explaining how he was wounded; he said he was zigging when he should have been zagging. We were reducing when we should have been revising; were we not?

Mr. MCCABE. That is right.

Senator BENTON. If I may make one other comment, Mr. Chairman, I think what Mr. McCabe is after is the recognition of and agreement on goals we are going to work toward in the provisions on taxes. To take the depreciation discussion again, if we knew the goal we wanted in 1955 or 1960 and could lay out a program to get there; I am not suggesting that necessarily against à 37-year background we sweep everything into the wastebacket and start all over

again, but if we know what our policy should be we then could do a better job of laying out a program for getting there at some future date.

Mr. MCCABE. That is right.

In 1948, when we had a substantial surplus, Congress elected to reduce taxes without revamping the tax structure. Now, faced with deficit financing Congress naturally does not want to do anything that will cause even a temporary loss of Treasury revenue. Therefore, a fundamental study that would lead to a reform of the tax system tends to be neglected and postponed.

While some of the difficulties which small business concerns face in attempting to obtain equity capital would be alleviated in part by a basic revision of the present tax structure, I would not want to leave the impression that tax revision alone would eliminate the occasion for the measures that are now before this committee.

Affirmative view of small-business financing needs: Those who feel that there is a real need for some additional facilities or institutions to provide more effectively for the financing needs of small- and medium-sized business are usually the first to admit that they do not have satisfactory statistical proof of the extent of this need. To obtain such proof would require a specific financial analysis of smalland medium-sized business concerns throughout the country.

However, we do have such qualitative evidence as the policy statement on small business of the Committee for Economic Development (1947); the report of the Tulsa Chamber of Commerce (1948), on the number and functioning of the so-called industrial foundations to help small business, and the testimony presented to the subcommittee of the Joint Committee on the Economic Report (1949), pointing to the existence of unsolved financing problems in the small-business area. This evidence indicates that small- and medium-sized business concerns encounter serious difficulties in obtaining outside equity capital and long-term credit needed for expanding productive facilities, broadening the market for their products and services, and launching new projects. The evidence also suggests that very small concerns sometimes meet with difficulties in financing their short-term workingcapital requirements.

While the financing need of small business is often referred to broadly as a need for easier availability of bank credit, I am inclined to think that it is primarily a need for equity capital and long-term credit, either singly or in some combination. In many of the cases that have come to the System's attention where small-business concerns have complained of credit shortages, close inspection of these businesses has revealed that where there was an actual financial need it usually was for additional equity capital.

The small-business financing problem is, however, too complex to be characterized simply as one of insufficient equity capital or long-term credit. There are many small-business concerns whose requirements for short-term credit are so small that the commercial banker cannot afford the expense of processing and servicing them in the same manner as larger business loans. Such small-business loans, if granted at all, may often be handled in the personal-loan department, in which case the small-business man frequently does not obtain needed financial counsel and advice which would accompany a more complete analysis