Dr. KAPLAN. Between the Department of Commerce and Dun & Bradstreet, the data on new businesses and on business failures have been kept up over the past 25 years at least, and I will be very glad to supply a table. The number of business failures immediately after World War II was phenomenally low. Conditions were such that many with little experience in keen competition were able to profit and grow immediately after the war. Now we are at a point where small business is finding the tougher going that merits attention to its long run as well as its short-term problems.

Business population and business failures, 1920–57

Sources: Department of Commerce (Business Population) and Dun & Bradstreet (Business Failures)..

Senator CLARK. I guess we would agree, would we not, that we are living in an expanding economy?

Dr. KAPLAN. Yes.

Senator CLARK. Accordingly, one would expect in an expandingeconomy small business would be able to keep its relative place in that economy. My particular interest is whether it is keeping that place or

not.

Dr. KAPLAN. It is a debatable question as to whether small busness is maintaining its position in the economy. In number of firms, it has kept up with population growth; in share of total employment, it has yielded to big business. This relationship between small and big business has its ups and downs. Immediately after World War II small business got into the peacetime act much more quickly and readily than big business. The small enterpriser did not have the vast retooling problems of big business; he was able to pick up what might be sold wherever he could find it. He could charge what the traffic would bear. Its mobility gave it a headstart, but as big business came along the situation changed.

Senator CLARK. I wonder if we can generalize. Let me enter a dis

claimer immediately. I am no expert in this field, but you are. However, I am thinking of the retail field, which we run into every time we go out to campaign, and the dissatisfaction that we feel on what might be called Main Street at the intervention of the chainstores, and the big retail establishments, and the extent to which smaller industrial concerns seem to be moving out.

Yesterday we had some very interesting testimony about the development corporation in Arkansas, where they have adopted the policy of not encouraging the movement into Arkansas of branches of national corporations. They do not actually close the door to them, but their emphasis is on trying to create and maintain local and smaller business industries. Of course, that has a good deal of social significance.

Perhaps you have seen Mr. White's book, The Organization Man. I have some concern about how many people in this country are working for somebody else with what would seem to me to be an inevitable adverse effect on democracy and the democratic process. So this is not entirely economics, but it is partially sociology and politics. Dr. KAPLAN. You have to separate the two. An economist does not live in a vacuum, and he deals with social and political economies. The question as to whether small business is holding its own is always before us, and the possibility of social changes eliminating certain forms of business is always with us. The wheelwright and blacksmith represented a very important part of small business in an earlier period. They are out. Others, in filling stations and groups, have taken their place. But the place of small business in our economic future is far from being assured, and it is in the public interest to consider means of strengthening its prospects of growth and survival.

So far as your immediate problem of financing small business is concerned, I believe that small business is not adequately equipped, under existing financing institutions, to get its share of the financial resources required to keep it healthy. In fact, in view of the larger scale at which even a small enterprise must today operate, it may have less access to financing than it had in the past. The bank of an earlier generation, let us say even as late as 1900, was a mixed bank. The banker knew the local businessmen. He took his chances with them, often invested with them. In effect, the banker was participating in the growth of the local lumber company, or the local factory of one kind or another.

Today banks are more formalized, and more restricted. Moreover, in the depression of the 1930's, protective legislation included the divorcing of banks from their investment affiliates, which occasionally had served to encourage new and smaller businesses as well as promote big ones.

In the meantime the needs even of small business have grown greatly. The type of retail business that could be started with as little as $1,500 in the 1930's is likely to require $12,000 or more if it is to put up a successful front in the present day. In manufacturing there is no such thing as putting up $3,000 to get started. That figure is running closer to $25,000 to $30,000 for the very small manufacturing business in the low-capital fields of apparel.

The scale of small enterprise has to step up with the rest of the economy—your own conception of a small business is going up to 500

employees, which would have been considered huge 20 years ago. Yet in the face of these higher requirements, channels of financing are lacking to do the kind of mixed banking which existed both in Europe and in the United States in an earlier day.

We need a special kind of financial institution to serve small business. The investment banks of this country, at least their representatives, have continually pointed to the fact that when they promote an issue of less than $10 million it is a sort of accommodation. On top of the necessary advertising, and meeting the requirements of registration with the Securities and Exchange Commission, and bearing the necessary distribtuion costs, it may sell from 50 to 60 percent of the issue. The proceeds left to the firm from such an issue are so small that it my be said that kind of equity financing is nonexistent for small business. It is true that the average bank has been more liberal in giving term loans to small business than was the case immediately before the war. Loans of up to 3 years have been rather common. Even when they have been made as 4- to 6-months loans, there have been small repayments, so there is an ability to carry on, so that for the purpose of carrying warehouse receipts, or for the purpose of getting a little more working capital over a period of time, there has been some help from commercial banks. But that does not meet the problem of major capital equipment, to keep up with technology or necessary expansion; or equity capital, to overcome inheritance taxes or financing for associates to take over a business from which the owner is retiring; or even permanent working capital to strengthen the financial position of a small firm.

Senator CLARK. Dr. Kaplan, would you move up a little bit now in terms of your concept of small business and give us your thinking on this merger movement, and what appears to be, at least in some quarters, a tendency on the part of the banks to urge the small- and littlesized business to merge with a larger competitor on the basis, first, that it is more efficient; and, secondly, that they are not really prepared to continue to give them loans, especially in those family concerns where you find they have been looking to the character of the particular individual who is perhaps getting a little older? That is giving me some concern, even in as large a community as Philadelphia, where I know there have been concerns which have been profitable for a good many years, and they are under some pressure to get out of business and sell out to a larger competitor. I believe it is correct that the rate of mergers increased substantially since World War II. Dr. KAPLAN. True, the rate of mergers did increase from the end of World War II right up to about 1951 or 1952 and the merger movement is still active, though not as great relative to total business as in the 1920's.

The reasons for merger by a small company are varied. Some of them represent a need to merge, and some of them represent a desire to merge. For most of the years since the end of World War II, there was more money to be made by many a small firm in taking a whopping price for its assets, than it was likely to get by going into battle against a tough competitive situation.

Senator CLARK. Would you not agree also in a family-owned business the inheritance tax problem was an incentive?

Dr. KAPLAN. Yes. I could put that as the next situation; that it has been necessary, in order to meet inheritance taxes, for some families to liquidate the family business. Your question calls to mind that I recently asked a responsible officer of a large packing company to give me his estimate of the number of requests or applications that had been received by that company since the end of World War II, from owners of local packing plants, sausage factories, slaughter houses and the like, offering to sell out to the big company. The estimated figure for this 1 big company was 8,000 as a total over the last 10 years. It is not always an inheritance tax problem. The very fact that the top man, the enterpriser and the spark plug, is retiring or has died, and that the business would have to be taken over by employees who do not have the savings to buy out the firm, may mean that the business will either be liquidated or eventually find its way into some larger company, because there is no other outlet.

Senator CLARK. This may be, and it is, a generalization, but there does not seem to be much of a pull to second- and third-level management in big companies to going out and becoming first-level management in small companies, does there? In other words, do we not have here, as we do in almost every other aspect of human life today, a shortage of trained personnel plus the rewards coming largely from the larger company?

Dr. KAPLAN. I am inclined to agree with your general statement. But also, several of the most successful large businesses today were established by people who had broken away from still larger businesses. In the tin-can business, for instance, the most successful competitor of American Can was formed of three of its employees who broke away to form Continental Can. When you mention names like Chevrolet, Chrysler, or Nash, you are naming men who were once employed by Ford or General Motors.

Senator CLARK. That was largely before World War II. Are there examples of that since World War II?

Dr. KAPLAN. Today it may be more difficult for a big-company man to start on a small scale. We hear of technically trained men who have moved from their employment in big business to start as partners in new fields where they can develop independently. Perhaps Carrier is an example for them. In Carrier, the big development has been since World War I. There the engineer broke away from his company because he thought he could do better with his cronies in setting up air conditioning on his own, although he had a lifetime job in the Buffalo works.

Senator CLARK. I think that is all true, and it may well be that 12 years are too short a time, but no conspicuous examples come to my mind of that situation since World War II. It may be that I am just uninformed on it.

Dr. KAPLAN. I think a number of airplane companies were little fellows until World War II and have done their biggest branching out, not in the war, but since the war.

Senator CLARK. I think that is a somewhat special situation.

Dr. KAPLAN. They are usually special situations, Senator. The question is whether enough of them are accumulating. I do not know where the big businesses of tomorrow are in little businesses today, but in the thousands of new electronics units you have as proprietors

men who were the research men for very large companies. That is how they knew there was a need for their new business and got an idea of the money possibilities in them.

Some of these are men who have worked the changes both ways. First they broke away from the big companies' employment, and then showed enough success as proprietors so that the big companies got them back again by buying their new firms. I find it very hard hard to take a generalization that says there are not people in big firms who are willing and able to break away from big firms and start something that may be successful. I do not think we have allowed enough time to judge.

Senator CLARK. I would not want to make such a generalization, but I am interested in getting your comments, and we are getting them, and they are very helpful, on the extent to which the merger movement since the end of World War II, not only in industry but in banks and in retail establishments, poses a threat of an excess concentration of power in a relatively small number of hands.

Dr. KAPLAN. We could very well be in a trend in which small business will be slipping in its relative share of the total national business. I think it is true that a larger share of the employees of business is in big business than was the case immediately at the end of World War II. I think that is true.

Senator CLARK. Having arrived at that point what, if anything, should we do about it?

Dr. KAPLAN. The one best offset to the increase in employment in big business would obviously be the effective encouragement of growth in small business, so that there will be more employment offered by small business. In that connection, it may be noted that we are having a great increase in the number of people that have joined the ranks of the self-employed, although they are not classified among business firms. In the first place there is the growth in number of professional people maintaining their own offices. There are also many who provide services on a contract basis without actually maintaining offices. Furthermore, not all of the growth in employment has been in big business. Many important new services are being rendered under Government employment which, in turn, requires expenditures by Government from private business. We must expect, however, that big business, operating in capital intensive areas where the operation requires large-scale production and large numbers of people, will probably continue to take a larger percentage of employees in business than small business takes. I think that trend will probably be a difficult one to reverse.

Senator CLARK. Could we put it a little differently and say that the increase in big business is more obvious and spectacular in manufacturing and in industry than it is in what we are now beginning to call nongoods activities?

Dr. KAPLAN. Yes, sir; that may well be the case. It is also possible that some segments of big business will find it desirable to let go to smaller suppliers or customers some activities that big business has itself carried on. It appears, for example, that a few large manufacturers have given up their direct wholesale distribution to put it in the hands of independent wholesalers. Apparently a larger percentage of the filling stations is today run by proprietors as against