Special Message to the Congress on the Problems of Small Business.

To the Congress of the United States:

I wish to bring to the attention of the Congress some major problems of small and independent businesses, and propose several important steps which should be taken to help them solve these problems through their own efforts.

In my January Economic Report, I stressed the need for a constantly expanding economy. Expansion of our economy is required to provide full markets for the rising productive capacity of our factories and farms. It is needed to provide adequate employment opportunities for our growing labor force. It is essential if we are to continue to play a strong part in working for peace.

Measured by any standard of the past, to be sure, we are now enjoying prosperous times. Output is high. Profits are rising. Business is generally optimistic. These are good signs. They reflect the fundamental strength of our economic system; its power to rally from the reversal of last year.

But while our business system is thriving, it is not growing fast enough. While employment remains at a high level, we are not creating all the new jobs necessary each year to absorb the growth in our labor force. Despite the upturn in business, we now have more unemployment than we had a year ago. The output of our farms and factories and the investment programs of business must not stand still, even at high levels; they must steadily expand.

I am fully aware that there are no simple or easy answers to the problem of assuring a stable and expanding economy. The efforts to improve the functioning of our economic system must be constant and tireless.

I have often stressed the key role that small and independent business must play in providing jobs, in promoting the vigorous competition necessary for the future growth of our economy, and in preserving our economic and political freedoms.

In some industries, it is true, large productive units can make the most effective use of modern technology. The American people value the benefits of mass production. Without prosperous, forward-looking big business, with its sights adjusted to the growing needs of an expanding economy, we cannot have the degree of prosperity that is within our power.

But we should not forget that the task of economic expansion requires using all the resources of this great Nation. Of the nearly four million business concerns in our country, more than 90 percent are usually classified as small. These small concerns provide jobs for over 20 million people--roughly half of private non-farm employment. If we are to have an expanding competitive economy, small business must provide its share of the additional jobs needed. In doing so, it will not only create new payrolls for workers; it will also enlarge markets generally for business and agriculture.

Small businesses serve a necessary function in developing and pioneering new ideas and techniques. Most large efficient firms began as small businesses. They were started by men with big ideas but small capital. Our economy would become soft and slothful were this vitalizing force to be impaired.

The drive to do something new is strongest among those who cannot easily maintain themselves by doing what is already customary. It is strongest among those who have to work hard to hold their own and who feel keenly the urge to grow.

Vigorous small businesses are essential to effective competition. Competition stimulates efficiency. It prods inventive genius. It helps to keep prices at the lowest levels consistent with a fair and adequate return to business, and to maintain consumer buying.

A program to promote expansion of opportunity for small business thus plays a vital role in invigorating competition and encouraging technical progress and economic expansion.

The Government can and should promote conditions under which well-managed small businesses have ample opportunities for growth. This does not mean that anyone who may wish to start a business should be given financial assistance. Neither should the Government guarantee the success of any individual enterprise. Such a policy would rob small business of its basic characteristics of initiative and self-reliance.

The Government's first responsibility to small business is to promote a stable and prosperous economy. Every successful effort toward general economic stability will specially benefit small business. Last year we observed the striking vulnerability of small business to even a mild business downturn. Sales and profits of small concerns declined much more than those of large corporations. No special program will provide adequate assistance to small business unless we achieve reasonable economic stability.

Another major responsibility of the Government is to prevent monopolistic and unfair trade practices and to curb undesirable concentration of economic power. Our antitrust laws have done much to help smaller business retain its independence. These laws and their enforcement should be improved. Encouragement of small and independent business, however, is one of our strongest weapons against monopoly.

To encourage the growth of small business, specific and positive measures are needed to help overcome two handicaps affecting even the most efficient and vigorous smaller concerns. The first of these handicaps is the cost and difficulty of getting new capital. The second is the cost and difficulty of keeping abreast of new techniques of production and management.

A generation or more ago, local financial institutions and investors ordinarily took care of the capital needs of expanding small businesses. Then as now, the original funds usually came, for the most part, from the owner's personal savings. If the business weathered its initial period of losses, additional money was frequently forthcoming from friends or relatives; or the local banker might well provide substantial financing-almost as a partner--for small ventures with good prospects. With an outlook for further profitable expansion, the small businessman often could obtain long-term capital aid from wealthy individuals or from larger financial institutions. In this way, the vigorous smaller concern could make use of its opportunities for growth.

With the increased mechanization of industry, the capital needs of small business have greatly increased. Adequate venture capital, however, is no longer available from traditional sources. This is not because there is any shortage of savings. There are ample savings; the problem is to channel them into the hands of small businessmen who need more capital to expand their operations.

Due to our remarkable gains in raising the level of incomes and in improving their distribution, the bulk of personal savings today are made by people of moderate means. They prefer to put their savings into insurance, savings accounts, or Government bonds, or into the purchase of their own homes. Wealthier people, better able to take risks, usually prefer securities of large established concerns. Large firms rarely offer their surplus cash to small businesses, except in exchange for control.

Nor do small businesses fare much better at the hands of the financial institutions through which the bulk of those savings pass. Most commercial banks of necessity grant loans to smaller concerns only if the security is ample and then usually only for relatively short periods. A few of the largest banks whose resources permit adequate diversification have successfully engaged in long-term lending to small business on a large scale. But their facilities are available in relatively few communities and the demand is still largely unfilled.

Insurance companies and investment trusts do engage in long-term and equity financing, but principally in the well-seasoned securities of large corporations.

Floating securities on the open market is virtually out of the question for small or medium-sized businesses.

It is clear, therefore, that our financial institutions are not meeting the expansion needs of small business. This gap should he filled.

In my January Tax Message to the Congress, I proposed some changes in the revenue laws for the benefit of all business and particularly to equalize the opportunity of small business. Additional tax changes of this character are not now feasible and, in any case, could be only a partial solution to the financial problems of small business.

In addition to these financing handicaps, smaller business often has real difficulty in obtaining or developing information on new techniques in production and management. Larger concerns can afford their own research facilities and can employ skilled staffs to advise them on recent developments in purchasing, production, labor relations, financing, accounting, marketing, and other specialized fields. Most small businessmen lack experience in many of these areas, and cannot afford the heavy overhead costs required to hire full-time staffs to assist them.

In the modern economic system the margin between success and failure is often measured by the ability of the businessman to keep step with his competitor in applying new techniques and methods. The small businessman too frequently has to substitute long hours for the latest and most efficient methods. Freedom of enterprise should mean not only the opportunity for every man to go into business for himself--to be his own boss--but also the privilege of ready access to the best information on managerial and production techniques for his business. Competition works most effectively and the interests of the public are best served by assuring the highest possible efficiency in small as well as large operations.

After careful consideration of these problems, I am proposing that the Federal Government take five major steps to reduce the handicaps under which small business now operates and to broaden the opportunities for further vigorous expansion.

First, to help meet the credit and capital needs of very small business concerns, I propose legislation to .provide for the insurance, on a self-sustaining basis, of bank loans up to $25,000 and repayable within five years. The great bulk of the loans insured under this plan would probably be under $5,000, but the authority to insure loans should not be limited to that figure.

This insurance would be quite similar to the present Federal insurance of loans for home improvements, which has proved highly successful since its establishment in 1934. Each bank would pass upon loan applications and the loans it approved would be insured against loss, subject only to compliance with Federally-prescribed standards. No prior approval of individual loans by any Government officer would be required. Banks would, however, bear a portion of the risk on each loan, and thus would have a positive inducement to exercise sound judgment in their lending policies.

Thus, local banks, without undue risk or expense, could apply their own funds and knowledge to serve more adequately the financial requirements of small local business concerns. This insurance would be particularly helpful to very small business concerns with good earning prospects which cannot yet effectively use large amounts of long-term capital. An insurance premium would be fixed adequate to cover all probable expenses and losses. Except for the initial appropriations to establish the insurance fund, ultimately repayable to the Treasury, no Federal expenditures would be involved.

Second, to increase the availability of venture capital to small and independent enterprises with somewhat larger financing requirements, I propose that the Federal Government be authorized to promote and charter national investment companies. These companies would be established and owned by private investors and institutions, but, as in the case of national banks and Federal savings and loan associations, the Federal Government would have the responsibility of enforcing observance of sound financial practices.

The major purpose of these companies would be to provide equity capital and long-term loans for efficiently-managed businesses unable to finance themselves on reasonable terms through the organized securities markets. They should also be authorized to participate, to the fullest extent possible, in the administration of the new program for insuring bank loans to very small business. In addition, they should make managerial aids and technical services available to smaller businesses in general.

These companies would be limited in their financing to small and independent enterprises. Thus, they are designed to fill the most serious remaining gap in the business financial structure. They would pool the savings of individual investors and financial institutions, and provide a channel through which they could be more safely invested in small business ventures. Many such investors and institutions could not properly invest directly in individual small and independent businesses, but they could purchase the securities of the new investment companies. The more substantial resources of these companies would permit them to hire competent staffs and to reduce the risks by investing in a wide range of separate enterprises. Thus the new companies not only would provide a sound outlet for these savings, but also would supply a badly needed source of capital for small business.

Each investment company would work in close cooperation with banks in the region which it serves. It could participate jointly with local banks in financing businesses with good earnings prospects, in cases where legal loan limits or lending policies prevent the banks from providing all the funds required, or where the business needs more equity capital which banks cannot legally provide. In view of these prospective benefits for the banks, their customers and their communities, I am sure that most progressive bankers will want to take an active part in establishing the investment companies.

This program will represent a pioneer undertaking in this country. In its early years, therefore, our approach will necessarily be experimental. To help launch the program, the Federal Government should provide positive incentives and aids to the new investment companies. Thus, tax provisions should recognize their special character, particularly by permitting them to build up adequate reserves. Also, in order to assure sufficient funds in their early years, the Federal Reserve banks and their member banks should be authorized to invest in the stock of the companies.

Third, to make sure that the Reconstruction Finance Corporation will have adequate authority to take care of the legitimate credit requirements of business when private financing is unavailable--through these two programs or otherwise--I am proposing that its lending powers be broadened in several important respects. The Corporation should be permitted to relax its collateral requirements on loans to small businesses, if management abilities and potential earnings of the borrower afford reasonable expectation of repayment. This amendment will merely give the Corporation the same discretion which many bankers already successfully exercise. The Corporation should also be authorized to increase its participation with private banks on such loans. In addition, I again recommend that the present 10-year maximum maturity on all types of business loans be increased to at least 15 years.

The two new programs which I have already recommended to strengthen the private financial system should materially reduce the need for reliance on RFC. The basic statute of the Corporation now prohibits it from making any loan unless the borrower cannot obtain financing on reasonable terms from private sources. This prohibition should be extended to any financing which is obtainable from the proposed new investment companies.

As the last line of defense, however, the Corporation should be equipped to handle all reasonable demands for credit which private institutions are unable or unwilling to provide. Our experience last year, when a relatively minor down-turn in business was accompanied by a 100 percent increase in applications for RFC loans, illustrates the fundamental importance of not only retaining but strengthening this backstop for our financial structure.

Fourth, to help smaller businesses become more efficient, I propose strengthening and improvement of the technical and managerial aids now provided by the Department of Commerce. Specifically, I recommend that the Secretary of Commerce be authorized to establish a clearing-house to collect, disseminate and exchange scientific, engineering, and managerial information. I also propose that new authority be provided for him to undertake research on technical problems of interest to small business, including developmental work on new products and processes. In these new programs, as well as in existing business and technical programs of the Department of Commerce, the Secretary should be directed to give special emphasis to the requirements of small business.

These proposals would apply in the business field some of the lessons we have learned through our long and successful experience in promoting the use of modern methods in agriculture. Our farmers, though they cannot individually afford research laboratories, are able through Government assistance to obtain current information and to adopt new techniques. So far as is feasible, we should organize similarly effective services for our smaller business enterprises.

Fifth, to assure the most effective and coordinated direction of our aids to small and independent business, I recommend that, with one exception, general responsibility for each of these new programs be placed in the Secretary of Commerce. In addition, and for the same reason, supervision over the Reconstruction Finance Corporation should be entrusted to the Secretary of Commerce. I expect to submit a Reorganization Plan in the near future to accomplish the RFC transfer.

It is most desirable that we group these functions together under common supervision. This would simplify Government administration. More important, it would make it easier for the small businessman to take advantage of the various types of Federal assistance already available or newly provided.

The Department of Commerce is the agency now charged with major responsibility for promoting the development of American business and industry. It will be able to discharge these responsibilities more effectively if it supervises both financial and non-financial aids to business. The advantages of combining these two types of assistance in the same agency have already been successfully demonstrated in the fields of agriculture and housing. Moreover, by concentrating in the Secretary of Commerce the supervision of the principal services to small business, we can more effectively mobilize the variety of resources available to the Government in meeting these problems.

In the case of the national investment companies, however, it appears appropriate that supervision be placed in the Board of Governors of the Federal Reserve System. These are to be private companies. It is essential to integrate their operations with those of other private financial institutions. Moreover, the Federal Reserve Board and the twelve Federal Reserve banks already have the personnel and facilities necessary for the effective supervision and examination of these national investment companies.

At the same time, the success of the national investment company program requires that it be tied in closely with the programs of assistance to small business under the supervision of the Secretary of Commerce. Therefore, the Secretary of Commerce should be authorized to assist in the promotion of these companies and to advise the Federal Reserve Board on how the investment companies can best contribute to accomplishing the objectives of the Government's small business program.

To simplify the Government's financial and nonfinancial aids to business, I repeat my previous recommendation that the authority of the Federal Reserve banks to make industrial loans to business be terminated. This program has long been largely inactive. The funds made available for it, amounting to $139 million, would be returned to the Treasury.

To put this five-point program into effect will cost the Federal Government very little. It will yield the Nation great returns. It will do so by lessening the obstacles that impede the progress of small and independent business and by providing incentives which encourage its expansion. It will promote the broad opportunity and vigorous competition which are the basis of our system of free enterprise. Thus, while retaining in the hands of private enterprise full responsibility for ownership and management, it will help to stimulate the flow of investment necessary for our continued prosperity.

I, therefore, urge the enactment of legislation to carry out these recommendations before the adjournment of the 81st Congress.

HARRY S. TRUMAN