a hundred years, not just since the war, since the World War, but for more than a hundred years it has been engaged in making machinery by which the individual workman turns out more product. Not only has that been true of machine tools; it has been true in textile machinery, it has been true in agricultural machinery, it has been true in every line of production machinery, that for more than a hundred years, not just since 1920, we have been continuously engaged in the process of improving the output of the individual worker.

Now from time to time we run into difficulties, but in that hundredyear period the net result has been beneficial and in the last 10-year period perhaps we are not so clear on the picture; on the hundred-year picture it is clear.

MORE JOBS CREATED THAN DISPLACED BY PATENTED DEVICES

The CHAIRMAN. When you say beneficial, what do you mean in terms of jobs? What I have in mind, Mr. Flanders, simply stating it, is this. Through this hundred-year period-we will treat the 10year period afterward, as you differentiated it-have your company and its predecessors in machine tools created more jobs than they have displaced?

Mr. FLANDERS. Immensely more.

The CHAIRMAN. Now on what do you base that statement?

Mr. FLANDERS. The industries which have spread out from our work (I don't mean just simply this chart, but the great mass of things that these machines have made) were not in existence; they relate to goods which no one dreamed of; they relate to things like this microphone which no one could even imagine, and the people who make these microphones have completely new jobs. I haven't any statistics at hand, I can't say whether a greater percentage of the population now is gainfully employed than was the case in 1834 when this began, but of this I am sure, that in 1834 they were engaged in making a bare living and in 1939 they are engaged in making for themselves very much more than a bare living, very much more than food and clothes and shelter, and it is the development of which our company has been a part which has made that thing possible.

The CHAIRMAN. Now about the 10-year period which you differentiated a moment ago.

Mr. FLANDERS. The 10-year period seems to me by no means a period in which our distresses have come from labor-saving machinery. Now when I start to talk on this line I am completely off of the patent question, and I don't know whether I should be or not, but we went through in the period from the middle twenties on to the middle thirties a time when the primary activity of a large part of the capital of the country was engaged not in production and distribution, but in the manufacture and sale of paper titles to wealth, and I don't believe that that is a socially useful service. I believe it was at that time a disruptive, socially disruptive occupation, and there is no likeness, no connection between financial speculation and the production and distribution of goods, and I believe we want to be very careful that in applying proper controls and correctives to the production and distribution of securities that we don't at the same time apply improper and dangerous barriers to the production and distribution of goods and services.

The CHAIRMAN. I am afraid I misunderstood you, Mr. Flanders. I thought that you were indicating that in the 10-year period there was a different effect upon employment from that which was noticeable during the previous 100 years.

Mr. FLANDERS. Let me make the connection which I didn't establish. My belief is that there has been no change in the principle, in the effects of the application of improved machinery to employment and production and the standard of living since the war as distinguished from the period before the World War, but that something else has come in which has disturbed us and that that is the cause of our difficulties and that we are not looking at the right thing when we try to find that cause in improved machinery, we are not looking at the right thing, we should be looking at this other thing.

The CHAIRMAN. Then you really mean that the difference in the 10-year period from the 100-year period is due to other causes altogether?

Mr. FLANDERS. Yes; that is it, other causes altogether.

The CHAIRMAN. Do you export any of your machine tools?

Mr. FLANDERS. We exported last year about 60 percent of our machine tools.

The CHAIRMAN. Where did they go?

Mr. FLANDERS. They went largely to England, Russia, and France. The CHAIRMAN. Was there any difference noticeable in the amount of exportation to those three countries recently?

Mr. FLANDERS. They were largely concerned with war preparations. The domestic demand is not good.

The CHAIRMAN. How about France?

Mr. FLANDERS. France is interesting. France has been a poor market for modern production machinery until this last year. Then the shorter hours introduced by the Premier-you know, previous to Daladier

The CHAIRMAN (interposing). Premier Blum.

Mr. FLANDERS. Introduced under Premier Blum stopped off or interfered with production, particularly war preparations, to such an extent that for the first time the French are keenly interested in production machinery, and they are now buyng it. That is just a matter of interest.

The CHAIRMAN. I was going to ask just another question. With respect to the stability of employment which is available to workers in a field like yours or in a plant like yours which is located in the country, what happens to your workers when a depression comes and your market falls off?

Mr. FLANDERS. We are favorably located so far as the workers are concerned. Our industry is the worst in the whole list of industries. for which records are kept. In the 1929 depression there was only one subject to more fluctuations than ours, and that was locomotive building, in which, owing to certain technical corrections in the index they had a minus production one month. Ours wasn't quite so bad as that. On the face of it, it looks as if somebody shipped a locomotive back to Baldwin. [Laughter.] But except for that we have the worst ups and downs of any industry. Located as we are, in the country, a very large proportion of our men have gardens and hens and some of them have cows, some of them have pretty nearly full-fledged farms. Most of them have fathers and mothers or uncles and aunts

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, Henrings, 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.

Here is

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. 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 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 individua! 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.