or brothers and sisters on the farm, and that helps out during hard times. But there is one other thing that we do, and did. We were enabled in 1929, under the-if you will permit me to say so-tax laws then existing, to lay by a considerable sum for development work, and that development work we carried out during the depression and we spent something between five and six hundred thousand dollars; and five and six hundred thousand dollars in development work means that amount of employment, because in development work a comparatively small amount of material is used-it is almost a hundred percent employment and we used that during the dull times for bringing our line of machinery and product up to date.

So we had the advantage of a war chest-we didn't go out for dividends, we just want to make sure that is clear; we had a little war chest for maintaining employment, and we were in the country and in close connection with the soil and we got by and our men got by better than did many other industries much less subject to fluctuation than ours was, located in urban centers.

The CHAIRMAN. Your men lived on the soil, whereas the laid-off employees in the big city were unable to support themselves.

Mr. FLANDERS. Yes.

The CHAIRMAN. Do any of the members of the committee desire to ask any questions?

NEED FOR MORE EASILY ACCESSIBLE CAPITAL FOR SMALL INDUSTRIES

1

Mr. FRANK. Mr. Flanders, in this very important book of which you are co-author, there is an intimation that something ought to be done for the relatively small industry-you indicate, I believe, an industry having a size or needing funds in the amount of $500,000 to $5,000,000—that something ought to be done for such industries so that they could more readily obtain capital. Would you care to explain that?

Mr. FLANDERS. Anyone wanting more than $5,000,000 can get it under normal investing conditions; $1,000,000 is a feasible amount to apply for; $500,000 is a little bit difficult. Floating a stock issue or a bond issue or getting banking accommodation of long-term nature for less than $500,000 is something that we are not set-up to do, and it is the company neither very small nor with needs above the $500,000 or the million line that needs some means of long-time financing not at present available. Now the company within that range hitherto has ordinarily done its financing by saving up during good times a cash surplus and spending it during hard times. That was most difficult to do under the undistributed profits tax as it was-they are somewhat less penalized for it now, but either whether for expansion or for carrying through hard times it is still difficult for the company in the middle range. Now when it comes to expansion that is something else again; 25, 30, 40 years ago it was possible to go out in the region roundabout for anything that looked good and get additional money. It is not so easy now. The S. E. C. process is all to the good-I mean its purposes, and in general in its large results, are desirable. It has handicapped the little local financing which used to be the regular method by which these small and middle-sized companies either were originally started or got their additional

1 See hearings on this subject, Hearings, Part IX.

capital as they grew. There is a real element of risk involved in it. That element of risk is pretty, pretty large, and it isn't so easy for local folk to take a chance, nor do they want to, in this comparatively small thing, even though they know there is a chance there.

Twenty-five and thirty years ago people were taking chances willingly; it was in the air. There were successes all about of people who had taken chances; there were failures as well, but the spirit of taking a chance was in the air and the financing of most of the small and middle-sized companies was a matter of willingly taking chances. I don't know whether you get what I mean by the spirit of risk and enterprise being in the air or not, but it has gone out of the air now. We don't breathe that air quite as naturally as we did 25 to 30 or 40 years ago. The S. E. C. is partly responsible for it, by putting the finger on the risks and calling attention to them, partly responsible for it by putting a larger financial load on the small industries than on the large.

Mr. FRANK. I should like to pursue that with you for a moment. On that latter point you are misinformed. You might be interested to know that aside from the fact that there are certain exemptions for some small issues, what is more important, we have a great number of issues of small character which have been registered with S. E. C. It is true that the cost of registration is relatively larger, but it is fractionally small as compared with the cost of flotation. We have this very large number of registered issues where that expense has been incurred and where the issues have been unsold, so that the lack of salability cannot be ascribed to the cost of registration.

Mr. FLANDERS. I don't think I made clear the point I was trying to make. In times past the inventor put his faith in a man. Here is our region up here in the country; here is a group of two or three or four men. The people around about know these men to be men of ingenuity, men of integrity, men of energy, and they have put their faith and their money in a man, and that is quite a different process from the disembodied corporation of unknown personalities of which you judge on the basis of certain certified figures spread out before you. The CHAIRMAN. Then I assume that you would be very much inclined to agree with Senator Borah and me that it is of great importance that the corporation laws be so drafted as to make it possible for men to place the same faith in the corporation which they formerly used to place in the man.

Mr. FLANDERS. I don't know the mechanism, sir, but on the end I agree with you 100 percent.

The CHAIRMAN. I am very happy to have you say that.

Mr. FRANK. Have you any suggestion, Mr. Flanders, as to how to meet this most important problem of obtaining long-term financing for the small enterprise which, as you say, finds it difficult now to obtain funds for expansion?

Mr. FLANDERS. Well, I should dislike to open up too wide one phase of that subject because it is not the subject we are talking about, and that is the necessity for having visible profit coming out of new enterprise to which people can look and see as visible successes of risked money. I am talking about more or less intangible things, but they are real; profit is under a cloud, the success story is unpopular-these are on the intangibles; we need more success stories to revive the spirit of business enterprise, and I want again to draw the distinction between

business enterprise and financial speculation. We are all the time mixing those two things up, and if you who make the laws of the country and we who are engaged in business can each of us in our part do all we can to hamper harmful financial speculation and to leave the road open for enterprise and production and distribution, we are going to make a better business climate in this country for increased employment.

One of the things we sometimes forget is this, that new business enterprise surely provides new employment, it doesn't surely provide profit; profit is its ultimate end, but the thing that is sure is increased employment; the profit may be, it may not be. But every expansion of a business enterprise is an expansion of employment, and it must be a serious matter for us to provide the proper business atmosphere and the proper business weather for business ventures, not financial ventures pure and simple, but business ventures. That is our prime responsibility today.

Now

you asked

asked me, I think, a more specific question and I didn't answer it at all but talked about something else. Do you want to ask your question again?

Mr. FRANK. I don't care to press it, I know that you are a very reflective person and this morning you have indicated undue modesty by restricting your remarks to your immediate experiences. I thought perhaps you might make some helpful suggestions as to specific devices by which the small business enterprise which today finds difficulty in obtaining funds for expansion could obtain such funds on a long-term basis.

Mr. FLANDERS. That is a matter which I have been interested in, have made inquiries about at banks and in other ways, not, I will say, for my own company because we have been well treated. When you look at the problem in detail of this company or that company or the other company, the bank's analysis of the problem in the case of a bank with good management, willing to take some risks, which is what a bank must do as well as anybody else (a bank which lends only on safe risks isn't 100 percent safe, isn't performing its function) but the bank's analysis is liable to look to any of us, I think, as thorough and conclusive for that particular instance. Yet after you look at a hundred or a thousand of those particular instances you are still left with the feeling that some function has not been performed. Now that function previously was performed by private lenders who had confidence in men. It was performed in part by the country bank which was halfway between the city bank and the private lender, and the country bank also had confidence in men-I don't mean necessarily the country bank in a small town like mine, but in a small city. Now what we are trying to do is a difficult thing to do; we are trying to say to the lending institution that you must go by rules and not get into trouble by following your individual judgments of men, you must go by rules, and in so doing we have left this middle area unfilled between that which by the rules is a hundred percent safe to do as a bank and that which is unsafe to do.

Now, I don't know how to fill in that gap. I see the gap but I don't know how to fill it in. It used to be filled in by individuals, risk-taking individuals, or by the small bank which took risks which it is now not allowed to take. In there is an unfilled gap, and I haven't any good suggestions to offer this morning as to how to fill that gap, but I know it is there.

The CHAIRMAN. You haven't developed the cause of that gap, have you? You made some reference to rules and regulations.

Mr. FLANDERS. Yes. Well, the cause of that gap is, I think, clear to all of us. There were mistakes made in years past in that gap, and banks failed and rules are made and those rules are being followed, and the rules are pretty stiff because the banks are insured by the Federal Deposit Insurance Corporation. It is necessary to follow rules. The whole thing is safer, the whole banking situation is safer than it ever was, and yet the field for enterpirise has been restricted. The CHAIRMAN. You don't wish us to infer that in your opinion the laws which have made the banking structure more safe have been the cause of this gap?

Mr. FLANDERS. Yes; they have been one of the causes of this gap. The CHAIRMAN. That is a different matter. You now say one of the causes. That is what I was hoping you would say.

Mr. FLANDERS. You are getting me into territory in which I am not an expert. I am only telling you now what I see as someone off on the sidelines looking into a territory where he doesn't belong, and I think perhaps it might be better to keep me on the stuff I know something about.

The CHAIRMAN. Before we dismiss you from that, I might just ask this one question, whether you think that it would be very far wrong to suggest that one of the primary causes of this gap has been the progressive concentration of control over the industrial system which makes it very difficult for a man to compete with this collective unit of which you were speaking a moment ago. In other words, a small banker in a small town isn't going to finance an enterprise which will compete with a large national corporation as readily as he would have financed an ordinary applicant 25 or 30 years ago.

Mr. FLANDERS. I presume that may be so, Senator O'Mahoney. There have been no cases of that that have come into my experience. Dr. LUBIN. Mr. Chairman, I would like to ask Mr. Flanders this one question. It has particular bearing upon rules and regulations that have been made to control banking and investment. I wonder how far, in your opinion, the disappearance of this risk-taking spirit which formerly was personified in confidence in individual peoplehow far that risk-taking spirit has disappeared as the result of the fact that some of these individuals have proven themselves unfit to be trusted. How far has the fact that now the public knows when dishonesty exists, because of these regulations, been a factor?

Mr. FLANDERS. I think if we look back to the times of our childhood, we will remember an immense amount of rascality, if our mind goes that way, which became public. My recollection is that there was just as much of defalcation and dishonesty in the nineties and the early nineteen hundreds as there is today, if anything perhaps a little more of it, and perhaps a little more condoned, but it was not concealed in those days, but the recognition of that thing was a part of the risk. I don't think we are having any worse men in business or any worse things shown up now than we had 30 and 40, 50 years ago. I don't think we are any worse. In fact, I think on the whole we are better, standards are a bit higher.

The CHAIRMAN. Mr. Dienner, I think we have carried Mr. Flanders very far afield from your outline. If there are no other questions, the witness is excused.

Your next witness.

Mr. DIENNER. Mr. Chairman, we shall turn to Mr. Graham, who is president of the Motor Improvements Corporation. Mr. Graham, will you take the stand.

The CHAIRMAN. Mr. Graham, do you solemnly swear the testimony you are about to give in this proceeding shall be the truth, the whole truth and nothing but the truth, so help you God?

Mr. GRAHAM. I do.

TESTIMONY OF JOHN A. GRAHAM, PRESIDENT, MOTOR

IMPROVEMENTS, INC., NEWARK, N. J.

Mr. DIENNER. Mr. Graham, I understand you are president of Motor Improvements, Inc.

Mr. GRAHAM. Yes, sir.

Mr. DIENNER. And how long have you been president of that company?

Mr. GRAHAM. Since April 13, 1925.

Mr. DIENNER. Explain what the business of that company is.

FORMATION OF COMPANY TO ESTABLISH NEW INDUSTRY

Mr. GRAHAM. The business of that company-it was originally organized for the purpose of establishing a new industry, oil filters, filtering the oil of an internal combustion engine as the oil circulated. The idea was presented by an inventor who had in a preliminary way conducted experiments that showed him that under certain conditions, he could perform that function, but he hadn't worked it out and hadn't applied it, and he came to a group of men in Newark and New York who became interested in the problem, and in 1923 a company was organized. At that time the filtration of oil which had been tried by several inventors and proven a failure, was accomplished, and it was up to our company first to prove the principle; secondly, to apply it, because when you go to deal with an automobile motor, you find so many variables that what applies to one will not apply to all. So that the work of application before we could go out and attempt to interest the automobile engineer was quite a task and required the expenditure of an immense amount of money.

After the development was proved practical, then the job of introduction came in. The automotive engineers are about the hardestheaded group of engineers that there is in the country, and one of the policies of the automobile maker is not to put an extra nickel in the car until two things can be proven: First, that it will cut down the construction costs of the car; and secondly, it will increase the utility and decrease the upkeep cost on the automobile.

So we had a difficult job in that respect and before those three stages were accomplished, the initial investment in the company had been spent and it was necessary for the original subscribers of stock to invest more money. The company was originally organized for $400,000 cash, and before I came into the company two series of notes of $200,000 each had been subscribed for, so that at that time there was an investment of $800,000 before any money began to come back.

It is a little difficult for me to follow three experts and talk about patents, but one nice thing developed yesterday, that the last pre