Senator CLARK. Mr. Thomas, you do not anticipate making a regular profit paying dividend on your equity stock?

Mr. THOMAS. We do not contemplate paying dividends. We contemplate building up reserves for losses and those things. There will not be any dividend payment, either, to common stockholders or pre

ferred stockholders.

Senator CLARK. So the primary purpose of the company is not to make money for stockholders but to provide credit for small-business people?

Mr. THOMAS. To provide credit for small business, but at no loss. Senator CLARK. I understand.

Senator BUSH. I would just like to pursue that one more moment, because if you buy $10,000 worth of that stock that could very easily over a period of 10 years be worth $100,000. As you retire that preferred stock, then the equity all goes into this common stock; does it not?

Mr. THOMAS. No; it is wholly a nonprofit corporation. It has to be, in order to meet our State constitution, which will not permit the State to put money into a profitmaking corporation, and our supreme court has ruled that if you pay a common stockholder a dividend or a preferred stockholder a rate of interest it becomes a profit corporation. Therefore, there is no profit. Ultimately, upon liquidation, any profits would go to bondholders. Your equity people are actually making what might be called a donation.

Now, that is rather unorthodox setup, but as I say we could not find any other answer in the State of Arkansas. We could find no answer of setting up a profit corporation, because if we could the State could not participate, and we frankly do not think there is enough money available for the purchase of stocks and bonds in the State to give us adequate financing to set it up.

Senator CLARK. Senator Bush, the development witnesses from Massachusetts and from North Carolina who were here yesterday both testified that their corporations, while ostensibly in corporate form for profit, were not intended to make a profit, and indeed they urged us to help create legislation which would give them the same exemption from the Federal income taxation which their States have given them from State income taxation.

I thank you.

Senator BUSH. I am quite clear on it now. Mr. THOMAS. Now, that brings me up to a discussion of the matter you gentlemen are considering: What aid should there be to small business if there is a void in the financing of small businesses in the United States?

As I study the bill before you, S. 719, I have come to the conclusion that the motive and the recognition of the needs of small business are in that bill, but it seems to me that the procedure of education of bankers on it would be a long-drawn-out matter. I do not believe they are educated on it today. My discussions on it have not indicated that they are. In view of the fact that our development corporations are set up now in about 15 States, and from the correspondence that we are getting there are any number of States that are considering them, and if they are being locally managed and are close to the borrowers-which I think we all agree has adavantages and if they are being operated with the harmonious cooperation of bankersand we all seek that any financial organization or setup would do

better with the cooperation and interest of bankers. Since our development corporations do have that, I am recommending that you give consideration to the thought of some Government agencies doing what the State of Arkansas is doing, and that is purchase some of these bonds on a matching basis.

Senator CLARK. That might be the Small Business Administration? Mr. THOMAS. That could be the Small Business Administration. Senator CLARK. By the way, Mr. Thomas, have you had a chance to look at S. 2160, which is a more modern form of S. 719?

Mr. THOMAS. Yes.

Senator CLARK. We are working on S. 2160 rather than S. 719. Mr. THOMAS. That is right. Keep in mind that I am in accord with the spirit of S. 2160 and S. 719. It is seeking to accomplish what I think needs to be accomplished. Now, as you amended it and give an opportunity to take in the local business, here is the problem you would find some of us facing: If the Federal Reserve purchased $5 million of equity capital in Arkansas, we would be a long, long time owning it. We would be a long, long time making of it a locally owned institution, which I think everybody has indicated they favor as much as possible. In the corporations that we already have set up, if you could serve the same purpose by buying interest-bearing bonds on a matching basis in these corporations and you notice in my statement I mention safeguards, and so forth, which I think should be in any form of legislation. You have some safeguards when your local people put up all the equity capital. You have some safeguards when you purchase interest-bearing bonds on a matching basis. We take a loss if the Government takes a loss, so therefore you have us directly interested in seeing that everything is done on as businesslike a basis as possible.

Now, I have heard RFC discussed. I have the record of the RFC before me, and even though those loans were made in possibly the most distressed period the United States had ever had, and even after you take into consideration interest on the Government's money, you still made a right nice profit on your loans through RFC.

Senator CLARK. I think Senator Fulbright, the distinguished chairman of this committee, made that very clear in the statement he issued only the other day, showing that as of June 30, 1957, Senator Humphrey tells him that he adjusted net income of the RFC from lending activities will reach $333,367,683.

Senator FULBRIGHT. Not Senator Humphrey. It was actually Mr. Robbins, of the Treasury.

Senator CLARK. I beg your pardon.

Mr. THOMAS. The biggest objection I have to the Small Business Administration is it simply does not reach enough people. When you do direct lending from the Government, the borrower has a tendency to have the feeling that that is tinged with bailing him out, that he is in distress, and so on. Now, the man who borrows from you may not tell you that, but those who never come to you would tell us that is one of the reasons they do not come. So I have no criticism of its purpose and intent, and I just say that it will not reach enough of the possibilities of good small business that has growth probems that needs to be reached.

Senator CLARK. Do you have any views, Mr. Thomas, as to whether the SBA should be made permanent or its life extended or put out of business, as Mr. Maxwell recommended?

Mr. THOMAS. I have the feeling that if the Small Business Administration would have served the purpose I am talking about in regard to this that it could very well develop into the Comptroller of the Currency responsibility regarding national banks and be active in the guidance of these development corporations that are formed. Senator CLARK. So to that extent it should be permanent?

Mr. THOMAS. To that extent it should be permanent. It is possible, then, that you could utilize the Small Business Administration for your disaster loans, which in my opinion should be political decisions. I think they are more logically political decision. In that case you could use your Small Business Administration for that development. So I can see a possibility of not setting up any other agencies, just taking what you have and changing its channel a little bit to meet what seems to be a universal viewpoint.

Senator BUSH. Develop your thought about these bonds a little bit. I do not quite understand that procedure.

Mr. THOMAS. Let us say we set up a corporation with a million dollars equity capital.

Senator BUSH. In Arkansas?

Mr. THOMAS. In Arkansas. They are set up in various and sundry ways.

Senator BUSH. Let us take Arkansas as an example.

Mr. THOMAS. We have a million dollars equity capital. We immediately elect a board of directors. The board of directors will elect a president and regular officers. They lend the million dollars equity capital. Then they get an application

Senator BUSH. They lend that to industry and operators?
Mr. THOMAS. Industry and operators and various loans.
Senator BUSH. So then they have used up their money?

Mr. THOMAS. They have used up their money. They have applications for other loans, so they submit to the State of Arkansas, to its board of fiscal control, a request for a sale to them of a million. dollars in interest-bearing bonds, the interest rate to be mutually agreed upon. Back of that will be as security this million dollars in assets that have been taken for this million dollar equity loan, plus the assets of the new loan that they are going to make with the money they acquire from the sale of bonds.

Senator BUSH. The original loan becomes security?

Mr. THOMAS. That is right. So you put up a million dollars security for loans already made. So you end up with the State having on its entire million-dollar loan $2 million of assets back of a million dollars in interest-bearing bonds.

Senator BUSH. Now, then, carry on from there as to how you visualize SBA might be authorized by law to participate in that picture.

Senator CLARK. Will the Senator yield for a minute?

Senator BUSH. I would like to get this. I would like to pursue it, and then I will yield, unless you think you can develop it.

Senator CLARK. What concerns me is how he is using the word "equity." He says "equity" one minute and "loans" the next.

Senator BUSH. The equity is the original million dollars, and he then borrows a million dollars from the State.

Senator CLARK. As I understand, the original million dollars is not a contribution of stock; it is a loan.

Mr. THOMAS. NO; the million dollars is raised by the purchase of common and preferred stock, which becomes equity capital. Senator CLARK. I misunderstood you.

Senator BUSH. There is $100,000 of common and $900,000 of preferred, and the preferred gradually gets retired.

Mr. THOMAS. Then you have a million dollars equity capital standing between any bondholders and any loss. That is always there as a cushion.

Senator BUSH. Mr. Thomas, take off from there as to where you visualize the SBA or some Government agency can enter this picture.

Mr. THOMAS. All right. Now, then, we are sitting there with a million dollars of assets which we have gotten from lending this million dollars of equity capital. Then we need some more money. We have got some more loans.

Senator BUSH. You have $2 million now?

Mr. THOMAS. That is right, $2 million. Now, suppose we could apply to SBA to match the State's million or the private purchaser's or from any source locally. We ask them to take a million. So they have the State government, just like your RFC used to do. They bought bonds and preferred stock. They bought our Arkansas road bonds. It had the privilege of doing what I am talking about. The SBA now has not. So what they do then is make whatever requirements they desire to make regarding checking its assets, examinations, and so on. So they say, "Here is a corporation with a million dollars equity capital. The State is willing to put in, or individuals are willing to put in, another million, and they want us to take a million dollars of those bonds." So we issue $2 million of 4-percent bonds. The money goes into the corporation. Then what you have are the assets from your first million dollars, the loan of your first million dollars, $2 million in Washington, and that is $3 million. Then the Government, the SBA, owns $1 million of those interest-bearing bonds and the State of Arkansas or individuals $1 million. So there you have $3 million where normally we would just have $2 million.

Senator BUSH. Of which the Federal end has produced $1 million. Mr. THOMAS. $1 million, and the State has produced a million. Now, if you lend that out we have the assets of that $2 million, which makes $3 in assets we have in the corporation, but they need more money. There are more requests for loans. So we apply locally for the sale of another $1 million and apply to the SBA for the sale of another $1 million.

Senator BUSH. To match it.

Mr. THOMAS. To match it. The Government will put in nothing under my viewpoint that you do not match at home.

Senator CLARK. This would be 2 to 1?

Senator BUSH. No; it is even.

Mr. THOMAS. It is even.

Senator CLARK. One from State, 1 from private, and 1 from Fed

eral?

Mr. THOMAS. No; it is matched, because I say either the State or private. In Arkansas, we are faced with the problem of getting the money any way we can.

Senator CLARK. You cannot get the private money in Arkansas? Mr. THOMAS. We have that feeling, particularly to start with. We may develop it and expand it to where we can. People there have shown their willingness to put up $1 million without any hope of return in order to get something started for small business.

Senator CLARK. You think that is the bottom of the barrel for Arkansas?

Mr. THOMAS. Yes; that is right. In this we have had the official approval of the Arkansas State Bankers Association. They went on record in writing. We have the cooperation of the Governor. We had the full cooperation of the State chamber of commerce. We had the full cooperation of the University of Arkansas. So we have the State back of what we are attempting to do.

Now, this is the point that I would like to make to your committee for your consideration. This is a peculiar thing. The poorer the State, the more money we need for this job. States like Michigan, Pennsylvania, and New Jersey and Massachusetts have many kinds of lending corporations. They have your investment houses. While they are primarily set up for big business, they will take small issues and handle them. They are in constant contact with people locally. Senator CLARK. I would like to register a slight dissent as far as Pennsylvania is concerned.

Mr. THOMAS. I would like to make this one other point. I appreciate the Congress' interest in this subject.

Senator BUSH. Before you leave that part, may I ask one more question?

Mr. THOMAS. Yes, sir.

Senator BUSH. So you have built up an equity that totals approximately $3 million-$1 million of stock, of which $900,000 is preferred; and $1 million supplied by the State or local people; and $1 million by the Federal Government. Now, is it your proposal that that balance of contributions be maintained more or less intact in that ratio, and if conditions warrant then you would put up another $1 million worth of stock and be able to do the same thing?

Mr. VENNER. I cannot conceive the same ratio if you increase your loans, because you only have $1 million of equity to begin with.

Mr. THOMAS. We do not contemplate maintaining that ratio; we or any of the other development corporations. We must maintain a ratio of not greater than 10 to 1, and I believe your Government has recognized that ratio in many of your financial transactions.

Senator BUSH. In other words, on that $1 million of capital you could build up

Mr. THOMAS. $10 million.

Senator BUSH. You could borrow $5 million locally and $5 million from the Federal Government?

Mr. THOMAS. That is right; and that would give us $11 million. Senator BUSH. That would be the limit?

Mr. THOMAS. That would be the limit of the Federal Government. It would be the limit of bonds that we could issue to anybody, because by law it must retain a ratio of not greater than 10 to 1.