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THE BASIC DILEMMA

Representative SUMNERS. Doctor, do you think it is valuable to try to protect a man against the chance of going broke? Dr. THORP. I think that is one of our basic dilemmas. Oftentimes one can visualize a greater efficiency at the moment if you could plan the situation, but the very meaning of planning is that the individual is no longer left as free as he was before.

This freedom of opportunity certainly does mean that people are left free to lose their own and their mother-in-law's savings if they so desire.

Senator BORAH. The public is concerned about how he loses it, whether somebody forces him to lose it by improper practice.

Dr. THORP. That is right. There is a social problem that is involved here which requires a great deal more knowledge than we now have as to why he loses it.

Our evidence is not very good, and it is very difficult to secure such evidence because usually the case is a composite of many factors. Whether it is the individual's own incompetence, or the fact that this wasn't a really good business opportunity, or whether it is the behavior of his competitors, or perhaps his creditors have been too hard on him-one finds so many factors mixed up that from the point of view of analysis, it is not a simple problem, and we don't have enough detailed information to know the answers in any convincing way as to why most people are not able to survive longer.

The CHAIRMAN. Of course, you do know that most of these factors which you just mentioned are generally operative.

Dr. THORP. That is right. We can list a lot of factors, that is true. The CHAIRMAN. With some factors no provisions can be made by the public. We can't make provision against the incompetence of any particular individual.

Dr. THORP. I am not so sure. After all, we try to do that through our educational system.

The CHAIRMAN. That is merely training competence. If the competence isn't there in the first place, the education won't bring it about. Senator BORAH. If we would take care of those where we know how they were put out of business, we would do a very good job.

Senator KING. Hope is the mainspring of many of these business enterprises, isn't it? That is, a man has hopes he will succeed, and enters into a business enterprise which is foredoomed to failure, based upon his optimistic attitude.

Senator BORAH. He also has hopes that the Government will enact laws which will enable him to live an honest life himself and make the other fellows do the same.

Senator KING. I think that self-government is very important in a democratic government.

Senator BORAH. It isn't a democratic government when half a dozen men run it.

Senator KING. I haven't discovered that, except in Germany and in Russia, and I don't want totalitarian government introduced here.

RISE OF CORPORATIONS

Dr. THORP. I want to turn now to the different characteristics of these enterprises, and first I want to look at them from the point of view of their legal form.

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NOTE. Data for this chart are based on the number of tax returns filed with the Bureau of Internal Revenue. The year to year variations are not strictly comparable in all instances, because of changes in the methods of reporting. Data for partnerships in 1917 represent only those partnerships subject to war excess-profits tax.

I introduce a chart on the number of corporations and partnerships. (The chart referred to was marked "Exhibit No. 54" and appears on this page. The statistical data on which this chart is based are included in the appendix on p. 228.)

Dr. THORP. This is based on the records of the Bureau of Internal Revenue. Perhaps I should explain one or two things about this chart. In the first place, it should be noted that corporations are included, regardless of whether they are subsidiaries or not, since 1934; that in earlier years there were consolidated returns, and, therefore, in 1934 what had been 7,000 returns were replaced by 27,000 returns. That is a modification in the figures.

Then I should like to point out the fact that of these corporations, about 10 percent are inactive. They have no income whatsoever in the year. That is a fairly constant figure throughout the whole period of time-10 or 11 percent.

With regard to the partnership figure, this is an interesting illustration of where perfect statistics may be misleading. These are the records as the Bureau of Internal Revenue has them of the partnerships, but in this earlier period only partnerships with incomes of $6,000 had to file, and I

Senator KING (interposing). Was that gross income or net income? You said $6,000.

Dr. THORP. They are domestic partnerships having a net income of $6,000 or more without deducting salaries or interest paid to partners.

In the partnership chart probably one should disregard the figures prior to this point, 1924. This reflects changes in the system under which the records were collected rather than changes in the trend of partnerships.

Now, as to this growth of corporations, we reach a point of somewhere around 550,000 corporations at the present time, since 1910from 1910 to 1930, I should say, corporations have increased by 90 percent, while the number of firms which I showed you before increased about 45 percent. The number of corporations has increased just about twice as fast as our business population.

It is important to remember that the corporation population is in part affected by the tax structure and changes in the tax structure. Under one revenue act it may be somewhat more desirable to be a partnership than a corporation at a certain income level, and vice

versa.

Senator KING. Of the 500,000, 139-odd thousand showed a deficit, did they not?

Dr. THORP. That is substantially correct. Over a period of years one finds some years in which more corporations made a profit than have a deficit, and other years, particularly during the depression, in which a high proportion of them show a deficit.

The CHAIRMAN. Dr. Thorp, referring to exhibit No. 54, to what do you attribute the very rapid increase in the number of partnerships in the period from 1917 to 1920?

Dr. THORP. This is a statistical misconception, Senator. These are the records of partnerships from the Treasury Department, but the conditions of partnerships reporting were so different in 1917 than in 1924, that the number of partnerships on their records showed that increase. I do not believe that one can regard that as the picture at all, and perhaps it would have been better if we had not put it on the chart. This should not be taken as a picture of the growth of partnerships.

The CHAIRMAN. The internal revenue law has been changed from time to time during the period covered by this chart, and those changes in the law would necessarily affect the number of returns.

Dr. THORP. That is right. It was not until the middle of the 1920's that one could feel certain that all partnerships were reported.

The CHAIRMAN. So that actually this chart is not to be interpreted as showing any reasonable accuracy with respect to the relation between partnerships and corporations prior to 1920.

Dr. THORP. I should say even prior to 1924.

Mr. OLIPHANT. From 1925 is your partnership line significant? Dr. THORP. Yes; from 1925 on the partnership line is fairly accurate and shows a decrease in the use of the partnership method at the same time that the number of corporations was increasing.

Mr. OLIPHANT. Did you mean to make any observations on the causes of that decrease in relation to the increase of corporations?

Dr. THORP. I don't believe I have any observations that would be significant.

Senator KING. You would know whether the declining line there was the result of partnership for voluntary liquidation or whether they had merged into corporations.

Dr. THORP. I can introduce a little evidence right here that will perhaps show what has been happening. We made a study at Dun & Bradstreet for the first half of 1936, of 77,000 cases where the ownership changed in an enterprise.

In most of those cases the same legal form was continued; in other words, if the enterprise had been an individual proprietorship the new one was an individual proprietorship with some other individual owner; if it had been a partnership the new one was a partnership.

Nevertheless, as those 77,000 enterprises went through the process of change, this is what happened to the percentage of the total that was incorporated: In manufacturing, 23 percent had been corporations before the change and 38 percent were corporations afterward. In other words, there was a decided movement from proprietorships and partnerships to corporations. In wholesaling it was from 22 percent to 37 percent; in retailing from 7 percent to 8 percent. Of course, in retailing the proprietorship continues to be the dominant type of enterprise.

Senator KING. Each of those organizations continued, though, in one form or another, did it?

Dr. THORP. Yes; each one of those continued in one form or another.

EXTENT OF CORPORATE ACTIVITY

Dr. THORP. In this chart we have erdeavored to estimate the importance of corporate activity by branches of industry in 1937, and I must say at once that these are estimates in most cases. We have done the best we can and have built up figures which we hope are fairly accurate. One might misread this chart. I should like to explain that the column entitled "Percent of National Income" is merely there to show how important each of these groups is in the national income. This is not a column indicating what percentage of the national income is done by corporations. This should be read that 8.9 percent of the national income is attributed to agriculture.

(The chart referred to was marked "Exhibit No. 55" and appears on p. 96.)

The CHAIRMAN. Whether noncorporate or corporate.

Dr. THORP. Whether corporate or noncorporate. It gives one an idea of how important are the various segments of the national income. All manufacturing enterprises, corporate or noncorporate, contribute 24 percent of the national income.

The last column is the significant column. That is the percentage of business done by corporations in each one of these industry groups. The figure for agriculture is 7 percent. In five groups it runs around 90 percent or better-mining, the public utilities, manufacturing, transportation, and communication. In finance, it is 84 percent. In the very important trade group 58 percent of the business is handled by corporations.

EXHIBIT No. 55

IMPORTANCE OF CORPORATE ACTIVITY BY BRANCHES OF INDUSTRY, 1937

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I suppose I need to mention the part of government business that is done by corporations although I don't want to start any discussion about it. I might suggest merely, that we do have the corporate form with regard to cities and many local governments, and even the Federal Government does certain of its work through corporations. A rough attempt to estimate the importance of the corporate form, as far as government is concerned, places the figure at 58 percent.

Senator KING. Would you include banking, where they are operating under Federal charters, as Government business, or private?

Dr. THORP. If you mean the R. F. C. for example, that is included under Government, but of course all corporations in a sense are Government instruments in that they are created by the Govern

ment.

Senator KING. H. O. L. C. and these other organizations?
Dr. THORP. They are part of Government in this picture.

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