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SBA, I think, would be relatively unaffected by the passage of this bill.

Senator CLARK. Of course, in theory, that ought to be done by the Commerce Department, should it not, and not by an independent agency? ·

Mr. NEAL. Well, there are a lot of things that in theory should be done one way where practical administration works out another.

Senator CLARK. That is true. That, unfortunately, sometimes gets into a question of personality, which overrides sound governmental organization.

Mr. NEAL. Yes.

Senator CLARK. Do I take it—and I am putting words in your mouth, so if I am putting the wrong words please correct me that your thought would be that as far as the 85th Congress is concerned maybe the thing to do would be to extend the life of SBA for another year or two and see what happens, if we can get the national investment company plan rolling?

Mr. NEAL. Well, that certainly would be our position. We think that the privately owned, privately run national investment company is a far better vehicle for accomplishing the purposes you have in

mind than the SBA.

For example, the SBA will not-unless there is to be a tremendous change in the philosophy of this country-will not take an equity position in a business.

Senator CLARK. I do not know whether it is a change of philosophy in the country. Maybe it is just a change in philosophy of those who run the SBA. That might depend a certain amount on election

returns.

Mr. NEAL. Then you will have the Government owning a piece of a lot of little businesses.

Senator CLARK. We might get back to the RFC concept?

Mr. NEAL. I should hate to see it happen, sir.

Senator CLARK. I am sure you would, but you do not necessarily represent unanimous opinion.

Mr. NEAL. But I mean it is rather fundamental of a private economy that the government does not own parts of private economy except as it gets stuck with them in time of emergency. And that is why we had the RFC to begin with.

Senator CLARK. That is how we got the Post Office Department in the beginning, too.

Mr. NEAL. I do not think there is a proper analogy there, sir. Senator CLARK. Well, you go ahead, Mr. Neal. This is interesting, and I think it is helpful to our understanding of the problem.

Mr. NEAL. Well, the only other point I want to make is that I think that the $5 million capital called for in this bill is either an oversight or it is excessive. When the bill called for only 12 national investment companies it provided for a minimum capital of $5 million each. Then, when it was extended to cover 48 States and Territories and possessions, the $5 million minimum still stayed for each one. I think probably this is too large.

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Senator CLARK. At least for certain of the States?

Mr. NEAL. Yes. So I suggest that that minimum be considered and probably reduced.

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Senator CLARK. I think that is a good point. We ought to give that thought.

Mr. NEAL. The other point I should just make in passing is that the bill provides for the repeal of section 13 (b) 1 year after the passage of the act. Our experience is that you cannot set up national investment companies or things like them very fast, and 1 year is not long enough, and, therefore, it might be a good idea to let section 13 (b) stand with respect to any area where there is not a national investment company operating, and then let it expire with respect to that area when one does get operating.

Senator CLARK. Let me ask you, Mr. Neal, as an old Federal Reserve man, how well you think section 13 (b) has worked and to what extent it could be put to work now to solve some of the difficulties we are discussing.

I get an impression that the Federal Reserve people are extremely allergic to section 13 (b). And yet looking at it from the outside it gives every appearance of being an extremely useful provision which one would hope could be utilized a good deal more than it has been. Mr. NEAL. Section 13 (b) is deficient in certain legal respects. It permits the Federal Reserve to make direct loans or to guarantee loans only to established business for working capital purposes, and for a period not to exceed 5 years. Now, each one of those provisions is too restrictive to carry out the intent of a national investment

company.

First, you want to be able to finance new business as well as established business. With section 13 (b) you cannot do it.

You want to be able to finance fixed as well as working capital, and section 13 (b) does not permit you to finance fixed capital.

And the need for term loans for small business is in the area of 5 years and longer, which is just at the outside limit of section 13 (b). I think this helps to explain why section 13 (b) has not been more used than it has.

Senator CLARK. Would you take any position as to an amendment to section 13 (b) which would liberalize it along the lines you have been discussing?

Mr. NEAL. Well, when I was with the Federal Reserve bank I was always out of sympathy with those restrictions in section 13 (b) which I could so glibly recite, and also I felt there was a role here to be played by somebody. I believe, however, that you will get a better management drive for financing new and growing business if you have separate institutions than if you blanket them into the Federal Reserve, whose main preoccupations are in other matters.

Senator CLARK. That leads me to this question: Could you expand a little bit on why you think the Federal Reserve is the appropriate agency to launch this investment company system? I say that because it is sometimes a little difficult not only to drag a horse to water but to make him drink. The Federal Reserve management at the moment does not seem to be particularly enthusiastic about this suggestion. Mr. NEAL. Well, the Federal Reserve has many opinions within it, and sometimes the top management does not express some of the opinions that are within it.

Senator CLARK. That is a good, healthy thing; I think you will agree on that.

Mr. NEAL. Yes; I think that is a fine thing. The Federal Reserve has people in it who would know what you are talking about in this bill.

Further, it has a regional organization. It has the 12 banks. Each of these banks has a board of directors made up of bankers and businessmen largely from the region served. It has a staff of economists. It has an intimate knowledge of the conditions, the economic conditions, of the district. In fact, it just had to have that.

No other organization that I know of has all of those things I mean experienced loan officers, and so on, this background in the district, the location in the district, the close ties with business and banking.

And if the Federal Reserve wanted to, it certainly is the agency that could most easily get these organizations established, and, once established, it certainly could, without any great difficulty, supervise them.

Senator CLARK. Do you not think that most of the capital for these national investment companies would have to come from Federal Reserve member banks?

Mr. NEAL. I think so, because this is an untried field. The New England and New York development corporations, the 6 that are in existence, have managed to scrape up $1,750,000 roughly, and that is from private, nonbanking sources. That represents-plus or minus maybe $500,000-about all the money that you can get into these things.

Senator CLARK. That is just capital though, is it not?

Mr. NEAL. This is capital.

Senator CLARK. Because they tell us that the banks which are members of these development companies have extended lines of credit for loan purposes which would roughly run around 10 to 1 in capital. Mr. NEAL. What I was referring to was the nonbank sources of capital.

Senator CLARK. Yes.

Mr. NEAL. The experience we have demonstrates it is a fairly small amount. So that what I am really doing is reinforcing your supposition that the banks will probably, when you try to increase this capital, have to put up the capital-but not necessarily the Federal Reserve banks. I think if the Federal Reserve banks handled this right, they would put up virtually nothing.

Senator CLARK. But the member banks would put it up?

Mr. NEAL. They would make it a matter of pride that the member banks rather than the Federal Reserve banks put it up.

Senator CLARK. It would, generally speaking, be Federal Reserve member banks? You would not get much from the banks not members of the Federal System, would you?

Mr. NEAL. Well, you do get some from savings banks, for example, in the Northeast.

Senator CLARK. You ought to get some from insurance companies. Mr. NEAL. The insurance companies have even been able to buy the common stock of these presently operating corporations.

Senator CLARK. Yes. But your experience with the Federal Reserve would lead you to hope that because of the setup of the boards in the districts, including the membership of businessmen and nonbankers on those boards, that it would be a realistic hope that you

could get the capital for these Federal investment companies if we set it up, without expecting the Federal Reserve bank itself to put up all the money?

Mr. NEAL. Yes.

Senator CLARK. I would like to ask you a couple of questions on other subjects, but I wonder if you had completed what you wanted to say?

Mr. NEAL. With the filing of this statement, sir, I think I have covered the major points I wanted to make.

Senator CLARK. What is your view, Mr. Neal, as to whether the birth and growth rate in small business today is generally satisfactory? I know that is a big and broad question, but we have had some conflicting testimony here as to whether there is any legitimate need for concern at the high level of failures of small business in view of the fact that there seems to be also a high level of starts, also as to whether there is a growing concentration of wealth in a few large companies which would call for the intervention of some agency like the national investment companies to preserve and perhaps substantially increase the share of the economy which is operated by small business.

I wonder if the CED has any views on those broad policy questions. Mr. NEAL. Well, I cited the basic philosophical position earlier that CED believes that we need a healthy birth and growth rate of small business at all times.

Senator CLARK. Do you think we have it now?

Mr. NEAL. I think we have a birthrate for new business which by almost any reasonable standard is high.

Senator CLARK. And that would include the premise of an expanding economy?

Mr. NEAL. Yes. But I think that no matter how high that birthrate may be, it still could be higher, and, more important, I think that the growth rate of small business, the fact that a business gets established and develops an opportunity and then is not able to grow fast enough to take full advantage of the opportunity, is the real problem.

There is little problem in getting enough capital together to get started. It is where you go after you get started. And no matter how much capital you make available, more starts are going to mean more failures, because there just are not that many good ideas and good managers in the world.

But it is out of the successes that we will get our large and thriving concerns of the future, and it is that growth area which is made so difficult by, as you know, the corporate income tax-that growth area where I think the real difficulty lies.

Senator Clark. Does CEĎ take any position on the desirability of a graduated Federal corporate income tax?

Mr. NEAL. I think CED has expressed itself in its most recent policy statement, and it expressed itself as it did earlier in this statement that I referred to in 1947-as opposed to any special tax treatment of small business as a class.

Senator CLARK. Why do you say that? Is it not important to have a little countervailing power here, as Professor Galbraith would say? Mr. NEAL. This in no way detracts from CED's position as to how it feels about small business and the need to finance small business and but it does not feel this is the right way to do it.

so on,

The progressive income tax on corporations is an economic abomi

nation. There is no sound basis in economic principle for applying the "ability to pay" test to corporations. test to corporations. And CED is, above all else,

interested in applying sound economic issues.

Senator CLARK. Yes, but CED, like everybody else, would have to realize that occasionally economic abominations are social goods.

Mr. NEAL. In this case, sir, I do not think that test will stand up. I am not sure that the stockholders of the larger corporations, who will get smaller dividends, let us say, as a result of the progressive corporate tax, are any less deserving of the return on their investment than the closely held small enterprise. Remember, most of these small enterprises are closely held.

Senator CLARK. Yes. I do not think we want to get into a discussion of that. I would only point out that the policy problem is whether, if you work for a living, you ought to be better off than if you just sit back and get your dividends and interest. We could talk all day about that, and I am happy to have you have the last word, Mr. Neal.

Mr. NEAL. I resent the implication that a stockholder does not work for a living; that's all.

Senator CLARK. That is a good way to leave it.

How do you feel about a change in the estate inheritance taxes in the interest of trying to keep these small businesses going as opposed to having to sell them to raise money for estate taxes?

Mr. NEAL. That is a tax reform which I know we have discussed in CED. I think that in our earlier statement we even expressed ourselves in favor of reform along that line. This is not in our opinion class legislation because it would apply to all estate inheritance taxes. It happens it would be most favorable on small business; that's all.

Senator CLARK. One final question. Does CED take any position on the efforts to get an area redevelopment bill through the Congress? That is related to this small-business hearing because some of the State development companies, particularly—and I would think possibly the national investment companies would be concerned with giving priority to assisting areas where there is a large labor surplus, where there are depressed pockets in the economy, to get on their feet. It has been suggested-only suggested that perhaps we could combine the 2 measures in 1. Do you have any views on that?

Of course, that could well be another economic monstrosity but it might be desirable, nevertheless, to give such a priority. I speak feelingly because of my own Commonwealth of Pennsylvania where we have so many of those depressed areas.

Mr. NEAL. Well, first, may I say that CED has not expressed itself on the area redevelopment bill. But CED is cognizant of this problem, and that cognizance is evidenced by our setting up an area development division within the CED in which we shall be concerned with sound measures for promoting employment of unemployed in these pockets where they exist, and with raising low-income people in agriculture and mining where those low incomes exist.

Naturally, our predisposition as CED is to try the private route as far as you can.

Senator CLARK. Of course, we have to answer the question as to whether that has not been tried now for a good long while and has not worked for a good long while, particularly in the anthracite areas in Pennsylvania, for example.

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