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Washington, D. C. The committee met, pursuant to recess, at 10 a. m., in room 301, Senate Office Building, Senator Burnet' R. Maybank (chairman) presiding

Present: Senators Maybank, Frear, and Douglas. Also present: Senator Benton. The CHAIRMAN. I will ask the committee to come to order. I want to make this statement for the record : Senator O'Mahoney was supposed to follow. Senator Lucas as a witness today, but because of the special meeting of the Appropriations Committee this morning to try and pass a contingent resolution, he will be unable to attend this meeting. In view of the fact that all appropriations expire at the end of this week, the members of this committee who are members of the Appropriations Committee, must necessarily attend the session of that committee today.

Senator O'Mahoney asked me to state that he felt that it was absolutely essential that he be at the Appropriations Committee, and when we are through with this meeting I am going there myself. He did want me to publish in the record a letter from him, and he said that he would like to testify at some time when we resumed the hearings.

I will have the letter of Senator O'Mahoney filed. It refers to the study that the Joint Economic Committee had made, of which he is chairman. It also refers to the testimony taken in July. (The letter referred to follows:)


June 27, 1950. Hon. BURNET R. MAYBANK,

United States Senate, Washington; D. C. DEAR SENATOR MAYBANK : There is transmitted herewith a marked copy of hearings on investment conducted by a subcommittee of the Joint Committee on the Economic Report, together with a marked copy of the report made by this subcommittee, recommending the enactment of special legislation to provide capital and credit facilities for small business.

It was upon the basis of these hearings and this recommendation that I introduced S. 2975, which together with several other bills, including S. 3625, the so-called one-package bill, embodying the President's recommendations are now the subject of hearings by the Committee on Banking and Currency.

I am sure you will be interested in the evidence which was presented to us in support of the establishment of investment banks or capital banks, designed to extend private facilities for channeling private capital into the expansion of private business. Sincerely yours,



(The marked copy referred to will be found in the files of the committee.)

The CHAIRMAN. Senator Lucas, we are indeed happy to have you here. We know you have a lot to do and we know there are many meetings this morning. We would be happy to have you do whatever you wish, Senator.

Senator Lucas. Thank you, Mr. Chairman.



Senator Lucas. I shall read only a few pages of this manuscript which I have prepared to submit to the committee, then I shall ask unanimous consent to incorporate the remainder of the manuscript into the record.

The CHAIRMAN. Senator, I want to say, first of all, for the Senators who could not be here because of the important Appropriations Committee meeting; Senator Sparkman, who at this time is testifying before the Expenditures Committee on the FNMA legislation–Senator Frear is on his way here they have all told me that they look forward with great interest to reading your manuscript, as they are deeply interested in the legislation which you have introduced. They have also asked me to express their regrets for not being able to be present this morning.

I, myself, am sorry to have called this meeting, but it was arranged for last week before we knew that this appropriations matter that is so important to everybody in the United States was to be held this morning.

Will you please proceed, Senator?

Senator Lucas. Mr. Chairman, I am thoroughly cognizant of the manifold duties of the members of this committee, and I thoroughly understand why many of them cannot be here. I do hope, however, that they find time to eventually read the manuscript.

The ČHAIRMAN. Senator, I will say this: The committee has decided that we will commence these hearings again after we get through with the appropriations bill and after the Fourth of July. There is one other thing we have to do in this committee and that is to pass some sort of bill in connection with the FNMA mortgage situation, which is serious. We are going to hold those hearings on the 12th, 13th, and 14th, because Mr. Foley and some of the other officials will be out of the city until that time. But immediately upon the completion of the FNMA legislation that is now before this committee we are going to resume the hearings, and we will be glad to have you come back, if you wish. In the meantime I am certain the committee members are going to read with a great deal of interest whatever you have

Senator Lucas. I want to thank the distinguished members of your committee for inviting me to testify on Senate bill 3625, introduced by the distinguished chairman of the committee, Senator Maybank, together with Senator O’Mahoney, Senator Sparkman, and myself.

This bill is directed at two major problems. First, the unavailability of capital for small-business enterprise, and, secondly, the disadvantageous competitive position of small business resulting

to say

from the technological advances of the last few decades. I shall discuss these two major problems separately.

The proof seems conclusive that small- and independent-business enterprises are facing insurmountable difficulties in obtaining adequate and essential financial assistance on reasonable terms. I have no doubt that witnesses will appear before your committee who will deny that main premise. These witnesses will hasten to point out that any sound business enterprise today is able to obtain adequate financial aid merely by making its needs known to existing private banking and lending institutions. In my opinion, those who take this view are overlooking many significant facts.

Numerous objective surveys, conducted by congressional committees and private organizations over the last few years, have come to the single conclusion that our small independent-business enterprises, as a group, cannot obtain adequate financing on reasonable terms. This conclusion was reached very recently by a subcommittee of the Joint Committee on the Economic Report. This subcommittee, in its report on March 23 of this year, made the following statement:

From the evidence submitted to the subcommittee, it seems clear that one of the important questions facing the American people today is to determine what steps can and should be taken to preserve an open door for investment in little and local business in terms of ownership as well as in terms of debt. That problem is paramount to the development of a steadily expanding economy.

This is found on page 7, Senate Document 149, title: "Volume and Stability of Private Investment, Joint Committee on Economic Report.”

The Research and Policy Committee for the Committee on Economic Development, a private research organization, has come to the same conclusion. This organization includes among its members Paul Hoffman, Administrator of the ECA; Marion B. Folsom, treasurer of the Eastman Kodak Co., and Eris A. Johnston, former president of the United States Chamber of Commerce. This private research committee in an official report has summed up the needs of small business in these words:

One of the fundamental needs of small- and medium-sized business is more adequate financing. From a long-run standpoint, the financing of small- and medium-sized business has appeared to become aggressively more difficult * small business needs more long-term credit * (p. 30, Meeting the Special Problem of Small Business, a statement of national policy, Committee for Economic Development).

Those who come before this committee and testify that small business can attain its financial needs merely by asking must be prepared to refute the large volume of evidence upon which the conclusions of these public and private studies are based. Those who would deny that there is any need for positive action by Congress must also be prepared to explain away several other significant facts.

The records of the Securities and Exchange Commission leave no question in anybody's mind that the average small-business enterprise is unable to obtain capital through the marketing of its securities. Underwriters are hesitant to deal in unknown securities, and the public is reluctant to purchase them. The records of the Securities and Exchange Commission show that a very small percentage of the stocks which small companies register with it ever find a market.

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Also, high underwriters' fees discourage small companies from: raising capital through security issues. Underwriters' fees in many cases amount to as much as 20 percent of every dollar's worth of securities marketed.

Proof of that can be found in the SEC Study for 1944; the total cost of small flotations of common stock is 21.6 percent of the expected proceeds. The cost of registering with the SEC is about 1 percent. The greater part of the remaining cost is for underwriters' fees.

The difficulties in the way of security financing by small businesses are summed up very clearly in a recent publication of the Committee for Economic Development under the caption "Small Business: Its place and Problems." This publication states on page 136:

Flotation of the securities of small business through regular investment channels is practically impossible or prohibitively high in cost.

Capital is usually available to small firms only on the most rigid terms; interest rates are high and maturities are short. The interest rates charged by commercial lending institutions on small-business loans are frequently two and three times as large as the interest rates paid by large borrowers. This is still true, even though the risk is greater in the case of a loan to a large borrower than it is in the case of a small-business loan.

Loans by member banks of the Federal Reserve in 1942: (a) borrowers with assets over $5,000,000; interest rates averaged 1.8 percent, and () borrowers with assets under $50,000; interest rate averaged 5.5 percent.

Mr. Chairman, I shall move away for a moment from the manuscript to comment briefly upon this last example. It seems to me that those figures demonstrate beyond the shadow of a doubt the need for legislation dealing with small-business loans.

Here are borrowers whose assets are tremendous and whose loans are great receiving capital at the interest rate averaging 1.8 percent, while the borrowers whose assets are under $50,000 are required to pay an average of 5.5 percent. There is something radically wrong between those two figures that ought to be corrected by proper legislation.

The CHAIRMAN. Those figures would clearly show the profits of the company would be the difference in the interest rates.

Senator Lucas. Small-business enterprises are continuously faced with difficulty in obtaining capital on a long-term basis. Many private banking institutions as a general policy prefer short-term loans with maturity dates of less than a year: Mr. Roy Foulke of Dun & Bradstreet, in a statement before the Senate Small Business Committee in 1943 on the financial needs of small- and intermediate-sized busi

nesses, said:


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Under the existing set-up of our economic structure, we find no organized source or sources to provide long-term money.

The recent studies which I have already mentioned show that this problem still exists.

These are some of the considerations which prompted me on January 30 to introduce S. 2947, the main features of which have since been combined into the bill which your committee is now considering. However, there are other important considerations which we should

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