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Full text of "Investigation of concentration of economic power; monograph no. 1[-43]"

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^^3d SeSfon^^l SENATE COMMITTEE PRINT 

INVESTIGATION OF CONCENTRATION 
OF ECONOMIC POWER 



TEMPORARY NATIONAL ECONOMIC 
COMMIHEE 

A STUDY MADE UNDER THE AUSPICES OF THE DEPART- 
MENT OF COMMERCE AND THE SECURITIES AND EX- 
CHANGE COMMISSION FOR THE TEMPORARY NATIONAL 
ECONOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS, 
THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION 
NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING 
AND DIRECTING A SELECT COMMITTEE TO MAKE A 
FULL AND COMPLETE STUDY AND INVESTIGATION 
WITH RESPECT TO THE CONCENTRATION OF ECONOMIC 
POWER IN, ^ND FINANCIAL CONTROL OVER. 
PRODUCTION AND DISTRIBUTION 
OF GOODS AND SERVICES 



MONOGRAPH No. 17 
PROBLEMS OF SMALL BUSINESS 



Printed for the use of the 
Temporary National Economic Committee 




UNITED STATES 

GOVERNMENT PRINTING OFFICE 

WASHINGTON : 1941 



TEMPORARY NATIONAL ECONOMIC COMMITTEE 

(Created pursuant to Public Res. 113, 75th Cong.) 

JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman 

HATTON W. SUMNERS, Representative from Texas, Vice Chairman 

WILLIAM H. KINO, Senator from Utah 

WALLACE H. WHITE, Jr., Senator from Maine 

CLYDE WILLIAMS, Representative from Missouri 

B. CARROLL REECE, Representative from Tennessee 

THURMAN W. ARNOLD, Assistant Attorney General- 

♦WENDELL BERQE, Special Assistant to the Attorney General 

Representing the Department of Justice 

JEROME N. FRANK, Chairman 

♦SUMNER T. PIKE, Commissioner 

Representing the Securities and Exchange Commission 

GARLAND S. FERGUSON, Commissioner 

•EWIN L. DAVIS, Chairman 

Representing the Federal Trade Commission 

ISADOR LUBIN, Commissioner of Labor Statistics 

•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics 

Representing the Department of Labor 

JOSEPH J. O'CONNELL, Jr., Special Assistant to the General Counsel 

•CHARLES L. KADES, Special Assistant to the General Counsel 

ReDresenting the Department of the Treasury 



Representing the Department of Commerce 

* * • 

LEON HENDERSON, Economic Coordinator 

DEWEY ANDERSON, Executive Secretary 

THEODORE J. KREPS, Economic Adviser 



•Alternates. 



Monograph No. 17 
PROBLEMS OF SMALL BUSINESS 

JOHN H. COVER NATHANAELH. ENQLE 

EARL D. STRONG PETER R. NEHEMKIS, Jk. 

WILLIAM SAUNDERS HAROLD VATTER 

HAROLD H. WEIN 
U 



ACKNOWLEDGMENT 

This monograph was written by 

JOHN H. COVER 

Chief Economic Analyst, Department of Commerce 

NATHANAEL H. ENGLE 

Assistant Director, Bureau of Foreign and Domestic Commerce 

Department of Commerce 

EARL D. STRONG 

Head, Department of Economics 

Grinnell College 
PETER R. NEHEMKIS, Jr. 
Special Counsel, Securities and Exchange Commission 

and 

WILLIAM SAUNDERS 

HAROLD VATTER 

HAROLD H. WEIN 

Industrial Economics Division 

Department of Commerce 

The Temporar}^ National Economic Committee is greatly indebted 
to these authors for this contribution to the literature of the subject 
under review. 

The status of the materials in this volume is precisely the same as that 
other carefully prepared testim,ony when given by individual witnesses; 
it is information submitted for Committee deliberation . No matter what 
the official capacity of the witness or author may be, the publication of 
his testimony, report, or monograph by the Committee in no way signifies 
nor implies assent to, or approval of, any of the facts, opinions, or recom- 
mendations, nor acceptance thereof in whole or in part by the members 
of the Temporary National Economic Committee, individually or col- 
lectively. Sole and undivided responsibility for every statement in 
such testintony, reports, or monographs rests entirely upon the respective 
uuthors. 

(Signed) Joseph C. O'MAHONEy, 
Chairman, Temporary National Economic Committee. 



TABLE OF CONTENTS 



Page 

Letter of transmittal xvil 

Foreword xix 

PART I 
HIGH MORTALITY— FACTS AND FACTORS 

CHAPTER I 

Business revival 3 

Use of terms 4 

CHAPTER II 

Business mortality in retail, craft, and service enterprise 7 

Comparison of longevity 7 

Mortality rank 11 

Grocery store survivals 15 

Other retail, craft, and service groups 18 

Infant mortality 20 

Variations with time . 25 

Size of community 29 

Life span and net worth 31 

Life span and sales 33 

Population per store ^ 36 

Form of organization 40 

Life expectancy ^ 41 

CHAPTER III 

Business mortality in manufacturing 45 

Longevity 45 

Shifts with time 47 

Size of community 47 

Life span and net worth 48 

Form of organization 49 

CHAPTER IV 

Comparison of mortality experience of various types of business 51 

Longevity 51 

Changes with time 55 

Life span and net worth 56 

Form of organization 59 

CHAPTER V 

Changes in business population 63 

Birth rates compared - 65 

Tendencies in business growth . 66 

Failures 67 

Short-period movement 69 

Cycles of failures 71 

CHAPTER VI 

Business migration 73 

Factors in industrial movement 75 

Concentration 78 

Prospectus . -- 78 

V 



VI TABLE OF CONTENTS 

CHAPTER VII 

Page 

Managerial competency as a factor in business mortality 81 

Training and experience 81 

Age of manager 84 

Personality ' 85 

Accounting records :.. 85 

CHAPTER VIII 

Adequacy of capital 87 

Fraud . ^ 87 

Investment ---- 88 

Source of capital _._ 91 

Use of capital 95 

CHAPTER IX 

Control of assets and liabilities . 97 

Fixed assets 98 

Receivables 99 

Current assets 99 

Realized assets 100 

Secured liabilities 102 

Installment debts 103 

Finance company obligations 103 

Obligations to wholesalers 103 

Indebtedness for rent 103 

CHAPTER X 

Control of costs of operation 105 

Overhead costs 105 

Overhead and sales 105 

Rent ^ 106 

Rent and sales 106 

Pay roll . ^ 107 

Pay roll and sales ^^ 108 

Proprietor withdrawals and sales 108 

Costs and prices : Margins 109 

Inventory _ 112 

CHAPTER XI 

Control of sales, of markets, and of product 115 

Sales volume . fl5 

Salfes effort 115 

Cost of selling 117 

Location . 118 

Channels of distribution 121 

Competition 122 

Products - 124 

CHAPTER XII 

Credit as a factor in business mortality , 127 

Credit risks ' 127 

Credit losses 128 

The creditor and insolvency '_ ^ 133 

CHAPTER XIII 

Personal affairs complicating management difficulties 135 

Incidence of personal factors . - 135 

Illness and its costs - 135 



TABLE OF CONTENTS VII 

CHAPTER XIV 

Page 

Government regulation as a factor in business mortality , ^ 139 

Purposes of Government regulation 140 

Types of regulation 140 

Control of entry iiito or expansion of business •-_ 141 

Monopoly and practices Jn restraint of trade 141 

Interstate and intrastate commerce 144 

Regulation of marketing devices and practices 146 

Regulation of price policies and practices . _ 148 

Government aid to business ' 150 

Gilt-edge invitations 150 

Summary 1 153 

PART II 

MARKET SECURITY AND PRICE STABILITY (SOME PHASES 
OF COMPETITION IN DISTRIBUTION) 

Foreword to part II ~ 157 

CHAPTER XV 

The struggle for marketing control 1 159 

Changing channels 159 

Traditional methods , 159 

' The new era - — 159 

Marketing functions , 159 

Present pattern of marketing 160 

Contestants in the struggle for control 161 

Wholesalers ' 161 

Manufacturers -- 162 

Retailers — 162 

Nature of the struggle - 163 

Competitive devices ■■- 163 

Legislative action 163 

Trade association activitj"^ 164 

Effect of the struggle on size - — 166 

Size of manufacturing establishments- _ 1^6 

Size of wholesalers' estabUshments — 167 

Grocery trade : 168 

Drug wholesalers 169 

Dry-goods wholesalers 170 

Hardware wholesalers 170 

Electrical-goods wholesalers — 171 

Trends in size of retailing establishments - , 172 

Changes in average size of store 173 

Trends in size since 1929 , ^ ■- 174 

New developments in types of retailing :_ 176 

Chain stores -- 176 

Super markets 179 

Department stores 180 

Mail-order houses - t — 182 

Consumer cooperatives 182 

The independent retailer- 183 

Profits in manufacturing, wholesaling, and retailing 184 

Summary and conclusion 187 



VIII TABLE OF CONTENTS 

CHAPTER XVI 

Page 

Resale price, maintenance — an economic summary 189 

Definition and classification 189^ 

Why proponents want legalization of resale price maintenance 189 

Retailers 189 

Wholesalers , 191 

Manufacturers of branded goods . 191 

Economic and social reasons for resale price maintenance _. 192 

Arguments against resale price maintenance.^ : 193 

Resale price maintenance laws in the United States 196 

Difficulties and limitations encountered in the practice of price 

maintenance .°_ 199 

Interrelationship with other factors 202 

Conclusions 203 

PART III 

ADEQUATE LONG-TERM AND SHORT-TERM FINANCING 

CHAPTER XVII 

Capital and credit problems of small business 207 

The financial position of small business 207 

Short- and long-term debt , 209 

Present equity ^ 210 

The economic position of small business 21 1 

Net income ^~ 213 

Share of the market 216 

Turn-over . 218 

Cost of capital and credit 219 

Trade credit 221 

Banking policy and the needs of small business 222 

Equity capital _•_. 227 

Present governmental aids 227 

Reconstruction Finance Corporation 228 

Reconstruction Finance Corporation procedure 229 

Results 229 

Federal Reserve loans to industry L . 231 

Provisions of section 13b - 231 

Regulation "S" . 231 

Loans and commitments made 232 

Results claimed for the Federal Reserve industrial loan 

program . 234 

Comparison of Reconstruction Finance Corporation and 

Federal Reserve loans to industry 234 

Suggested aids • 236 

Equity capital proposals . , 237 

Direct loan proposals 237 

Insurance proposals 238 

Summary and conclusions 239 

CHAPTER XVIII 

The financial problem of small business 245 

Introduction 245 

Definition of terms 246 

The number of small enterprises 248 

Number of business units 248 

Numerical distribution of business units according to size 248 

Marginal and part-time enterprises 249 

The non-employing enterprises 249 

The employing enterprises 249 

Distribution in manufacturing 250 

Distribution of corporations 250 



TABLE OF CONTENTS IX 

The financial problem of small business — ^Continued Page 

Prevalence and characteristics of smal 1 business 251 

Trade- . - . - 251 

Service -.. 252 

Construction 253 

Manufacturing 253 

Mining and quarrying , : 255 

Transportation and public utilities 256 

Economic contributions of small business . 256 

Service to the consumer 256 

Contributions to big business • 256 

Competition with big business 257 

Contribution to gainful employment , 258 

The financial position of small business 260 

Capital, credit, and small business , 261 

Summary of findings 261 

Sources of equitv capital- 262 

Individuals-"- 262 

Investment banking 262 

Investment trusts- -_ 262 

Sources of credit 265 

The commercial banks 265 

The Federal Credit agencies . 269 

The accounts financing companies 270 

The factor 272 

The trade credit 274 

Others 276 

Conclusion 276 

Appendix I: Statistics . 281 

Preface : Sources of information 281 

Estimated total number of business establishments 282 

Business units distributed by size 283 

Size measured by total assets 283 

Size measured by number of employees 284 

Size measured by value of product 285 

The habitat of small business 286 

Economic contributions of small business 288 

Appendix II: Field studies 303 

Explanatory note 303 

New England area: Fall River, Mass_ 303 

Consumer income 303 

The textile industry 304 

The new industries drive 305 

Retail business . :. 307 

Banks and bank credits 309 

Non-bank money lending 311 

Middle Eastern area: Scranton- Wilkes Barre, Pa 312 

Some of the financing devices employed in the community 312 

Factoring in the silk industry il 314 

Community attempts at capital relief 316 

Capital for new enterprises -_; 317 

Great Lakes area: Detroit, Mich 318 

Equity and venture capital 318 

The credit situation 319 

Summary of 67 case studies 321 

Some specific cases 322 

Middle Western area: Omaha, Nebr 324 

Manufacturing in Omaha , 324 

The cash basis in enterprise 325 

The commercial banking situation 325 

The problem of succession . 327 

Omaha's community business fund 327 



X TABLE OF CONTENTS 

Appendix II: Field studies — Continued Page 

Rocky Mountain area: Denver, Colo ; 328 

The multiplicity of sttiall banks 328 

Summary of the capital and credit needs of 81 concerns 329 

Some Denver case studies 330 

Concerns financed by manufacturers 332 

Pacific Northwest area: Seattle, Wash., and Portland, Oreg 333 

The waning big-business base 334 

The bases for new developments 334 

Manufacturing , 335 

The need for capital loans -.. 336 

Seattle: The banking situation ._ 337 

Portland : Influence of branch banking 340 

Substitute forms of financing 340 

Experience of a community fund 341 

Southwestern area: Dallas-Houston, Tex 341 

Economic basis of the boom 342 

Need of new manufacturing 343 

Abundance of regional savings — , 343 

Investment of regional savings 343 

Limitations upon commercial credits 345 

Some illustrative cases 345 

Appendix III : Special studies . 347 

A medium-size finance company 347 

A finance company of major size ^ 350 

An investment company and intermediate-size business 353 

An experiment in venture financing 356 

Viewpoint of a conservative commercial banker 365 

Legislative proposals 364 

Index - — 371 



SCHEDULE OF TABLES AND CHARTS 

PART I 

TABLES 

Page 

1. Life span combined retail groups — percent of concerns discontinuing 

at given age : — . _ 8 

2. Life span of retail grocery stores — percent of concerns discontinuing 

at given age _, 9 

3. Life span of retail drug stores — percent of concerns discontinuing at 

given age 10 

4. Life span of restaurants — percent of concerns discontinuing at given 

age '.- 10 

5. Length of life of retail firms in three Minnesota cities — 1926-30 11 

6. Survival of retail enterprises in 32 county-seat towns — 1915 and 1935__ 12 

7. Life span of retail enterprises established in Poughkeepsie between 

1844and 1926 , 13 

8. Business mortality of retailers commencing business in 1927 in 

142 Colorado towns ^ 13 

9. Business mortality of retailers in 142 Colorado towns, 1926-35 — 

classified by 10 retail trades 14 

10. Mortality of retailers in 11 trades in 255 Illinois towns 14 

1 1 . Business mortality of retailers in Colorado and Illinois 15 

12. Percent distribution of 1,169 independent grocery stores according to 

date of present ownership — Buffalo i 16 

13. Accumulated percentage of deaths by year periods, grocery stores in 

Austiji,Tex. (1880-1932) 17 

14. Mortality of independent grocery stores in Fort Wayne 17 

15. Turnover, closing, and opening rates for chain grocery stores in 

Boston, 1929-32 ^ 18 

16. Length of life of specific crafts established in Poughkeepsie between 

1844and 1926 19 

17. Length of life of specific kinds of service enterprises established in 

Poughkeepsie between 1844 and 1926 19 

18. Rate of turn-over of meat markets and combination stores in Chicago. 20 

19. Percentage distribution of stores in business in Chicago in 1933 20 

20. Infant mortality as percent of entrances of preceding period grocery 

stores, Austin, Tex , 21 

21. Relation of infant mortality to total mortality by periods, from 1882 

to 1932 — Grocery stores, Austin, Tex^ 22 

22. Changes in numibers of individually owned retail meat stores in 

Chicago 22 

23. First year mortality of retail meat markets, Chicago 23 

24. Chicago retail meat stores entering each year classified according to 

length of 1 ife — percentage discontinuing in each successive year. _ 23 

25. Buffalo grocery store entrances each year classified according to 

length of life — percentage discontinuing in each successive year 24 

26. Buffalo drug store entrances each year classified according to length of 

life- — percentage discontinuing in each successive year 24 

27. Buffalo hardware store entrances each year classified according to 

length of life — percentage discontinuing in each successive year_- 25 

28. Length of life of retail business enterprises in • Poughkeepsie in 3 

30-year periods, 1844-1933 — cumulative percentage distribution.. 25 

29. Closures during period as percent of stores at beginning of period — 

Austin 26 

30. Turn-over of grocery, drug, hardware, aad shoe firms, Buffalo 27 

31. Mortality of firms in the hardware, shoe, drug, and grocery trades, 

Pittsburgh 27 

XI 



XII SCHEDULE OF TABLES AND CHARTS 

Page 

32. Effect of decline period of depressions upon infant mortality — grocery 

stores, Austin, Tex _ 28 

33. Effect of recovery period of depressions upon infant mortality — gro- 

cery stores, Austin, Tex — 28 

34. Infant closures as percent of total closures during six depressions — 

grocery stores, Austin, Tex... 28 

35. Variations in first year mortality 29 

36 Business mortality of retailers in 10 trades in 142 Colorado towns, 

1926-35 30 

37. Turn-over or mortality of retail stores in 11 trades in 255 Illinois 

towns, arranged according to size of towns, July 1925, to July 1930. 30 

38. Number of retail firms in three Minnesota cities , 31 

39. Five-year turn-over ratios of retail firms in three Minnesota cities, 

classified by net worth, 1926-30 32 

40. Life span of Chicago meat stores, classified by net worth, 1920 32 

41. Sales per independent grocery stores in 1929 according to years of 

ownership 33 

42. Number, of independent grocery stores, percent of total stores and 

percent of total sales by size of business 1929, 1933, and 1935 — 
Buffalo 34 

43. Sales of independent grocery stores identical in address, 1929, 1933, 

and 1935, as a percentage of 1929 sales, by size of business in 1929, 
Buffalo 35 

44. Coinparison of size and longevity of different types of enterprise — 

Poughkeepsie _. . 36 

45. Comparison of size! and longevity of different kinds of business — 

Poughkeepsie. ._- 36 

46. Comparison of population with stores in existence, Austin, Tex . _ 37 

47. Numbers of Chicago retail meat stores by type of operation 38 

48. Number of retailers in 10 trades in 142 Colorado towns per 1,000 

population, 1926 and 1935 : 39 

49. Average number of retail stores for each 10,000 people in 1925 and 

1930 for 11 retail trades in 154 Illinois towns 39 

50. Number of inhabitants of Fort Wayne in proportion to the number 

of retail grocery stores each year, 1915-30 and 1889-1904 40 

51. Comparison of length of life of corporations and all forms of retail 

enterprises, Poughkeepsie, 1844-1927 41 

52. Life expectancy in Pittsburgh (1925-33) 42 

53. Life expectancy in Buffalo (1920-28) 42 

54. Probability of a store's remaining in business an additional year 

beyond any given age — Buffalo, 1920-28 L 43 

55. Life expectancy in Austin — survivals out of 1,368 retail grocery 

stores 43 

56. Life expectancy — retail grocery stores in Austin, Tex. — age to be 

expected, on an average 43 

57. Life expectancy of individually owned, Chicago retail meat stores 

(computed according to their experience between 1920 and 1933)-- 44 

58. Length of life of manufacturing enterprises in Poughkeepsie between 

1844 and 1926 46 

.59. Length of life of manufacturing enterprises in Poughkeepsie between 

1844 and 1926 46 

60. Length of life of business enterprises in Poughkeepsie in three periods, 

1844-1933 ---- 47 

61. Number of manufacturing firms in three Minnesota cities — classified 

by net worth, 1930 48 

62. Number of manufacturing firms closed in three Minnesota cities — 

classified by net worth, 1926-30 48 

63. Form of organization — Poughkeepsie manufacturing enterprises 49 

64. Length of life of corporations compared with all forms of Poughkeepsie 

manufacturing concerns, 1844-1927 - 49 

65. Length of life of wholesale enterprises in Poughkeepsie, 1844-1927 51 

66. Mortalitv by tvpe of business, Minneapolis, St. Paul, and Duluth, 

1926-30 ■- 52 

67. Average life span by type of business, Minneapolis, St. Paul, and 

Duhith, 1926-30-, 52 

68. Percentage distribution of closing and of opening enterprises, Minne- 

sota, cities, 1926-30 . 52 



SCHEDULE OF TABLES AND CHARTS XIII 

Page 

69. Length of life of business enterprises established in Poughkeepsie 

between 1844 and 1926 53 

70. Length of life of business enterprises established in Poughkeepsie 

between 1844 and 1926 . 53 

71. Business enterprises established in Poughkeepsie between 1844 and 

1916 and lasting more thaij 20 years 54 

72. Number of geople per business establishment — Poughkeepsie 55 

73. Length of life of business enterprises in Poughkeepsie in three 30-year 

periods, 1844-1933 55 

74. Number of business firms in three Minnesota cities classified by type 

and net worth, 1930 I 56 

75. Average life of business firms in three Minnesota cities classified by 

net worth, 1926-30 r.. 56 

76. Number of business firms closed and opened in three Minnesota 

cities classified by type and net worth, 1926-30 58 

77. Five-year turn-over ratios of business firms in three Minnesota cities 

classified by type and net worth, 1926-30_ 59 

78. Form of organization, Poughkeepsie 60 

79. Comparison of length of life of corporations and all forms of business 

enterprises, Poughkeepsie, 1844-1927 60 

80. Percentage distribution of types of organization before and after 

change (first 6 months of 1936) 61 

81. Changes in retail population by quarters — January 1936-September 

1937 63 

82. Business disappearances and business failures, by major divisions of 

industry, January 1936-September 1937 64 

83. Distribution of business births and deaths by industrial divisions 

(data for first 6 months of 1936) 64 

84. Relative changes in enterprises by industrial divisions (data for first 

6 months of 1936) . . 64 

85. Probable birth rate ranking of divisions of industry (data for first 6 

months of 1936) .. . 65 

86. United States business population 66 

87. Changing percentages of all concerns represented by new and dis- 

continuing enterprises 66 

88. Commercial failures: Number and assets and liabilities 67 

89. Failures by divisions of industrv — yearly totals 1938 and 1937 68 

90. Bankruptcy liquidations — 1920'to 1937 69 

91. Insolvency index 1895-1938 — apparent annual number of failures 

for each 1 0,000 listed commercial enterprises 70 

92. Fluctuations in tenancy (square feet of rental area changes between 

Oct. 1, 1938, and May 1, 1939) ^ 70-71 

93. Vital statistics for 13 durable and 11 semidurable goods industries 

1929 and 1933 78 

94. Comparison of number of Poughkeepsie business concerns in homes 

and in separate building, 1873-76 84 

95. Accounting records of New Jersey and Boston bankrupt firms 86 

96. Percentage of Chicago meat stores in each capital-rating group and 

percentage continuing in business over 5 years - 89 

97. Individual investment of operations in year of first entry into business, 

1904-36 -_._.. ... 1 . 91 

98. Percentage of amounts of total liabilities in particulai; debt cate- 

gories — individual proprietors 93 

99. Sources of original capital. New Jersey and Boston bankrupts 94 

100. Proportion of personal loans for business purposes 94 

101. Business borrowers from Pennsylvania personal finance companies 95 

102. Ratio comparisons of successful and failed concerns — piano manu- 

facture , 97 

103. Scheduled assets of 570 bankrupt enterprises (excluding real estate). 98 

104. Scheduled assets of 11 failed drug stores compared to realized assets 

and disposition of realized assets, St. Louis, 1925-31 101 

105. Scheduled liabilities of 570 bankrupt Boston enterprises (excluding 

collateral and real-estate mortgages) 102 

106. Percentage of all proprietors with particular types of indebtedness. _ 104 

107. Percentage of amounts of total liabilities in particular debt cate- 

gories — individual proprietors 104 



XIV SCHEDULE OF TABLES AND CHARTS 

Page 

108. Percentage total overhead of total net sales 105 

109. Percentage business rent of total net sales ; 107 

1 10. Percentage pay roll of total net sales 108 

111. Percentage withdrawals of total net' sales — individual proprietors 109 

112. Variations in weekly amounts sold to different types of retailers — 

the experience of a meat wholesaler in a large city 116 

113. Number of customers, number of orders, and total dollar sales of 

three branch houses for 5-year period, 1926-30 116 

114. Customer mortality — percentage lost and rate of customer turn-over. 117 

115. Functional distribution of expenses: A typical wholesale unit, 1929_ 117 

116. Profitableness of diflFerent customers classified by amount purchased 

weekly 118 

117. The size of the headquarters city and its relationship to sales volume, 

expenses, and earnings.- 120 

1 18. Proportions gf different products sold to small and large buyers — four 

wholesalers, 1932 . .. 124 

119. Relationship of product expense to volume per item and per interview 

(in percentages of average) . 125 

120. Comparison of insolvent and successful firms — cotton textile industry. 128 

121. Average credit losses of Philadelphia and Louisville grocers, 1928— 

credit losses as percentage of credit sales classified by amount total 

sales 129 

122. Bad-debt losses as percent of total credit sales 130 

123. Number and amount of bad debt losses (three branch houses — 5-year 

period)-.. 130 

124. Number and amount of bad debt losses according to length of service 

life 131 

1 25 . Customer characteristics according to type of business 131 

126. Customer characteristics according to size of store . 132 

127. Customer characteristics according to size of first-month purchases.. 132 

128. Chain stores and independent markets compared... 1 133 

129. Percentage of bankrupt concerns affected by adverse domestic and 

personal factors.. 135 

130. Cost of illness in 34 New Jersey cases 135 

PART 11 

TABLES 

1. Grocery wholesalers — general line . . 169 

2. Drug wholesalers — general line.. • 170 

3. Pry-goods wholesalers— general lines ._,, 171 

4. Hardware wholesalers — general line ^ .. 171 

5. Electrical-goods wholesalers — general line _. 172 

6. General summary of retail trade, 1929, 1933, 1935 174 

7. Percentage of distribution of retail stores and sales, by size of- store, 

1929, 193S, 1935- . 174 

8. Trends in retailing as shown by department-store sales, stocks, and 

collections; mail order; variety store; rural store; and automobile 
sales, 192^37 178 

9. Number of chain stores and full-year sales, 1922, 1926, 1928 178 

10. Department-store sales, 192&-38 182 

11. Net operating results, percentage of sales, in department stores, 

ly30-37: r 182 

12. Profit as percentage of total capital wholesale, retail, and manufac- 

turing corporations, 1924-28 185 

13. Manufacturing corporations — profit as percentage of total capital 

selected industries, 1924-28 . _ . . . 186 

14. Wholesaling corporations — profit as percentage of total capital 

selected trades, 1924-28 186 

15. Retailing corporation — profit as percentage of total capital selected 

trades, 1924-28 . 187 



SCHEDULE OP TABLES AND CHARTS XV 

PART III 

TABLES 

Page 

1. Aggregate volume of working capital in manufactunng industries 208 

2. Current ratios for corporations in all manufacturing combined, in 

manufacturing textiles and their products, and in trade, 1932 and 

1936 . 209 

3. Ratio of current liabilities to total borrowed capital for corporations 

in all manufacturing, in manufacturing textiles and their products, 

and in trade, 1932 and 1936 209 

4. Ratio of equity to total assets for all manufacttlring corporations, 

1932 and 1936--.- 210 

5. Percentage changes in equity ratios for manufacturing corporations.- 211 

6. Failures by industrial groups and size of liabilities . 212 

7. Proportion of smallest corporations to total corporations, 1931-36 213 

8. Proportion of smallest and largest deficit corporations to total cor- 

porations in each group 213 

9. Relationship of smallest deficit corporations to total corporations with 

and without net income ^^ 214 

10. Ratio of compiled net profit (after tax) t6 net worth (average equity) 

manufacturing industries — average, 1931-36 . 214 

11. Ratio of compiled net profit (after tax) to net worth (average equfty) 

in three manufacturing industries — average, 1 93 1-36 215 

12. Ratio of compiled net profit (after tax) to net worth (average equity) 

all corporations, average, 1931-36 216 

13. Stores and sales by size of stores — 1935 217 

14. Gross sales (or gross receipts from operations) all manufacturing cor- 

porations submitting balance sheets, 1932 and 1935 ^ 217 

15. Turn-over ratio in manufacturing corporations submitting balance 

sheets, 1932 and 1935 218 

16. Average size of commercial loans made at different rates by groups of 

banks 219 

17. Expense of security flotation by size of issue (first 6 months of 1937) . _ 220 

18. Distribution of commercial loans by interest rate charged (September 

1-15, 1938) 220 

19. Interest income from loans of national banks (as percentages of total 

loans) 220 

20. Business loans of agencies whose charges exceed normal banking 

rates 22 1 

21. Applications for funds rejected by banks 223 

22. Reasons given by banks for refusal of loans 224 

23. Borrowing establishments classified by size and credit ratios, showing 

the percentages that reported credit difficultv in each size and ratio 
group, 1 933 1 225 

24. Total loans and authorizations of the R. F. C. to business enterprises, 

February 2, 1932, to June 30, 1939 230 

25. Applications received and approved by Federal Reserve System, 

1934-39..... 232 

APPENDIX I 



1-A, 1-B, 1-C. Estimated total number of business estabhshments 282-283 

2. Size-group distribution of corporations in manufacturing, trade, serv- 

ice, construction, and mining and quarrying, by total assets, 1936.. 284 

3. Size-group distribution of 1,809,819 employing organizations, by num- 

ber of employees on last day dr last pay roll of March 1 938 285 

4. Size distribution of 166,794 manufacturing estabhshments, by value of 

product in 1937 ^._. . 285 

5. Number of units, capital assets, and gross sales of small, intermediate, 

and large business corporations in major divisions of industry, 1936_ 286 

6. Number of units, capital assets, and gross sales of small, intermediate, 

and large business corporations in subdivisions of manufacturing, 

1936 287-288 



XVI SCHEDULE OF TABLES AND CHARTS 

Page 

7. Number of workers employed per $100,000 of value added by manu- 

facture in small, intermediate, and large manufacturing establish- 
ments, classified according to size of annual value of product, 1937. _ 288 

8. Investment in capital assets by small, intermediate, and large manu- 

facturing corporations, classified according to size of total assets, 

1936 -- 289 

9. Debt and types of debt, for 290,118 business corporations, by total 

assets size groups, 1936 289 

10. Surplus and undivided profits, less deficits, and combined net profit or 

loss, for 290,118 business corporations, classified by size of total 
assets, 1 936 - . 290 

11. Total number of business establishments in relation to total popula- 

tion of the United States, 1901-38 290 

12. Estimated receivables of all consumer credit agencies in the United 

States, at the close of each year, 1923-37, by major classes of 
creditors ^ 291 

13. Turn-over in the number of active business establishments, ;and 

business discontinuances involving losses, 1930-36 291 

14. Number and percentage of srhall, intermediate, and large business 

corporations earning net income classified by size of total assets, 
1932-36 , 291 

15. Costs of flotation of 350 security issues registered under the securities 

act of 1933 during 1936 and 1937; classified by size of security issue. 292 

16. Sales record of securities registered in 662 statements under the 

Securities Act of 1933 on Forms A-1 and AO-1 between July 27, 
1933, and June 30, 1938; by quarterly periods of effective regis- 
tration -- 293 

17. Sales record of securities registered in 662 statements under the 

Securities Act of 1933 on Forms A-1 and AO-1 between July 27, 
1933, and June 30, 1938; by industry and size of issue 294 

18. Data on loans and advances made by Federal Reserve banks under 

section 13b of the Federal Reserve Act 296 

19. Applications for industrial advances (including commitments) ap- 

proved by Federal Reserve banks under section 13b, classified 
according to size; June 19, 1934, to December 29, 1937 297 

20. Applications f(Tr industrial advances (including commitments) under 

section 13b, classified according to business and industiies; June 

19, 1934, to December 29, 1937 298 

21. Amount of business loans authorized by Reconstruction Finance 

Corporation under section 5d, section 5, and under the act of April 

13, 1934; 1934-February 29, 1940 ... 299 

22. Number and amount of business loans authorized by Reconstruction 

Finance Corporation, classified according to size; as of February 

29, 1940 300 

23. Number and amount of business loans disbursed by Reconstruction 

Finance Corporation, by size of loan; as of February 29, 1940 300 

24. Number of business enterprises to which loans were authorized bj'' 

Reconstruction Finance Corporation, together with amounts 
authorized and disbursed, classified by industries; as of February 
29, 1940 301 

CHARTS 

I. Trend of retail sales, 1929-39 (inclusive) 173 

II. Stores and sales by size of business groups, 1929-1933-1935 175 

III. Trends in retailing, 1929-38 177 

IV. Chain-store sales proportions, 1929-37 ^ . 177 

V. Department-store sales, 1929-40 (unadjusted) -_ 181 

VI. Relation of operating expense and sales volume, data for 1933 181 

VII. Mail-order and store sales, 1929-40 ISa 



LETTER OF TRANSMITTAL 

Hon. Joseph C. O'Mahoney, 

Chairman, Temporary National Economic Committee, 

Washington, D. C. 

My Dear Senator: By request of the Subcommittee on Printing 
and Review of the Temporary National Economic Committee, these- 
materials on small business are collected together in one volume. 
They comprise detailed but scattered probings into special phases of 
certain small-business problems. 

Under the title, "Some Problems of Small Business," are included 
studies on "High Mortality, Facts and Factors" (pt. I); /'Market 
Security and Price Stability" (pt. II); and "Adequate Long-Term and 
Short-Term Financing" (pt. III). Part I represents an exliaustive 
compilation of the available segments of information on business- 
mortality. Part II gives a highly sketchy and fragmentary analysis 
of the struggle for marketing control together with a brief summary of 
certain facts on resale price maintenance. A deeper probing of the 
efforts of small business to control price-cutting was not undertaken 
because of the fortunate circumstance that the Federal Trade Com- 
mission undertook as a part of its regular activities in 1939 to make 
an elaborate field study of the problem. It wiU soon publish an 
authoritative report. Part III presents two studies on the financial 
problems of small business, one summarizing the available fragments 
of information on the problem, the other, that of the Securities and 
Exchange Commission, breaking wholly new ground by giving the 
results of an actual field study. 

The careful reader will note that the reports, in some respects, come 
to opposite findings and to varying conclusions. No effort was made 
to reconcile differences either between the research workers or their- 
results. The subject at issue has given rise to no small amount of 
well-grounded differences of opinion and judgment, differences reflect- 
ing independent, self-reliant thinking of too substantial a value, at 
least in governmental research work, to risk curbing in the interests of 
uniformity and consistency of findings and recommendation. 

Respectfully submitted. 

Theodore J. Kreps, 

Economic Adviser. 

September 10, 1940. 

XVII 



FOREWORD 

In some industries, obstacles to the establishment of a business 
•enterprise are apparently insurmountable. In others, entrance is 
easy enough but survival is the real difficulty. This report brings 
together in one spot the many fragments of information now available 
concerning the problem of business mortality. Its two main sections 
relate to the causes of business failure and the degree of survival which 
results therefrom. 

The material makes it very clear that business mortality is a prob- 
lem of major proportions. In study after study, in industry after 
industry, in area after area, the record is the same. The chance of a 
newcomer becoming an established member of the business commu- 
nity is sadly slight. He carries on until his funds are exhausted, and 
then disappears from the scene. His place is taken by another hopeful, 
certain that he has abilities which will permit him to succeed where 
his predecessor has failed. 

Perhaps the high rate of turn-over is the price which must be paid 
for the maintenance of freedom of enterprise. The fact remains 
that it is a price, and there may be ways of reducing its incidence. 
Consideration of the record here presented should yield clues as to 
possible steps which can be taken, without disturbing the bfl«ic 
purpose of a free economy. 

Basic information relative to these problems is extremely meager. 
We are dependent upon studies of small fragments of the business 
population, with few tests as to their representativeness even of the 
smaller business enterprise. However fragmentary, the effort is 
made here to piece them together. A further difficulty is that, aU 
too often, we have no record of the characteristics of the total popula- 
tion with which to compare the nature of the cases of failure. 

Valuable assistance in assembling information was given Dr. Cover 
by Miss Glory F. von Hellens and Mr, Rudolph Matthes. 

WiLLARD L. Thorp. 

Washington, D. C, March 1, 1940. 

XIX 



\ 



PART I 

HIGH MORTALITY— FACTS AND FACTOR 



CHAPTER I 
BUSINESS SURVIVAL 

Survival in the struggle of business enterprises for existence is pre- 
carious, and the rate of turn-over amazingly high. Establishment of 
a concern and the entrance of an individual into business are usually 
accompanied by the naive optimism of inexperience. Unaware of 
the odds against them, and largely ignorant of the weapons of trade^ 
prospective proprietors march stolidly to the ambush. 

Resultant business mortality frequently destroys the morale of the 
enterpriser, liquidates the investment, undermines the working capital 
structure of the creditor, and seriously raises the question of the 
adequacy of our economic control. 

Since discussion of the causal factors involved is offered in subse- 
quent chapters, it is sufficient in this connection to emphasize the 
regularity of failure over more than a half century of business history. 
It is not a new experience, nor the result of a current emergency. 
Neither is it primarily a phenomenon of cyclical depressions. A 
descriptive phrase which might indicate the persistence of business- 
dissolution is the stability of mortality. 

Some variation in experience occurs in different sections of the 
country, in different fields of business, and under changing business 
conditions, but the long-time trend of disillusionment is impressively 
constant. 

Some illustrations are pertinent. 

Should conditions of business averaging the experience of the last 
50 years prevail, about 7 of each 10 new grocery stores opening today 
will survive into their second year. Only 4 of the 10 may expect tO' 
celebrate their fourth birthday. However, for the stores surviving 2 
years, prospects of continuing through 2 more years are brighter. 
With infant diseases successfully thwarted, twjo-thirds of these stores 
should span the 4-year period. 

Only 1 of every 100 grocery stores entering business may expect to 
attain the very old age of 35 years. «But of the stor^ that already 
have enjoyed 10 years of life, 6 of each 100 should live through 35 
years. 

Manufacturing and wholesaling enterprises survive, on an average, 
for longer periods than retail, craft, or service concerns. 

One study of mortality in the Middle West records the average life 
span of manufacturers as 8 years, ranging from 63-year graybeards 
in the printing industry to the ephemera of the music and radio field, 
less than 3 years. Among wholesalers, with an average span of 7.5 
years, the range was less — from 30 years in the printing and paper 
industry to 3 years in construction machinery. Retailers survived,, 
on an average, 6 years, with lumber concerns averaging almost 14. 
years, building supplies only 2.5 years. 

3 



^ CXDNCENTRATION OF ECONOMIC POWER 

In Poughkeepsie, records of 70 years disclose the survival of only 
10 percent of all establishments for a period exceeding 20 years. 
Wholesalers' life span averaged 16.7 years, manufacturers 12.6 years, 
and retailers 9.9 years; craft and service groups had still lower survival 
rates. 

A study based upon United States census data for the city of Buffalo 
disclosed that of retail grocery stores surviving under the same owner- 
ship at least from 1929 until 1935, only 8 percent were established in 
1929. Of those not recorded as in business in 1933 or 1935, 36 percent 
were established under the designated ownership during 1928 and 
1929 — an illustration of infant mortality. 

More than 50 years of retail grocery turn-over records of Austm, 
Tex., indicate that first- and second-year closures constituted almost 
51 percent of all discontinuances. 

From Pittsburgh records of the period, 1925-34, almost a complete 
turn-over of establisliments would be expected in the retail grocery 
trade in 5 years. Eleven years would be required in the drug field, 
6 in the shoe- trade, and 10 in the hardware retail business. 

Rapid population growth in a community appears to oveistimulate 
entrance into business with resultant high turn-over rate. However, 
viewed over a long period of time, it is probable that the number of 
customers per store is increasing. 

During a period of decline in business, since new proprietors tend 
to postpone entry and liquidations are delayed as long as possible, 
closures tend to decline. During a recovery period, with more 
optimism displayed by potential owners and with a large group of 
delinquents failing to reestablish solvency, closures increase. Changes 
in numbers and rates vary with the incidence of the depression and 
with the relative stability of each particular trade group. 

The corporate form of organization is relatively more successful in 
survival, particularly during the early years of business. Most cor- 
porate units are larger than individual proprietorships or partner- 
ships, and the size and credit factors may yield an advantage in the 
conduct of business. However, it is possible that this advantage dis- 
appears after about 5 years of existence, since larger sized individual 
proprietorships tend to survive, as well. The average life of all fail- 
ing firms in three Midwest communities was 6.6 years^ Those es- 
tablishments with net worth of less than $2,000 survived, on an aver- 
age, 5.2 years, and those \v4th investment of from $2,000 to $10,000, 
9.4 3'ears. Life spans were longer for firms of higher net worth, 
reaching an average of 33 years for firms with half a million or more 
investment. From Buffalo records it is suggested that the survival 
rate of the larger firms is greater than of the smaller, due not so much 
to the growth of small firms into large concerns as to the elimination 
of the weaker small units. 

USE OF TERMS 

The term "survival" is used to indicate continued existence of an es- 
tablishment beyond the life of another enterprise, or through a 
particular event such as a business depression, or a specific date. 

Mortality indicates cessation of a business or of a group of con- 
cerns. Business mortality rate, or turn-over, denotes the proportion 



OONCENTKATION OF ECONOMIC POWER 5 

of decedent establishments to all business enterprises or other given 
base. 

Discontinuance, disappearance, closure, and demise are inclusive 
terms used in connection with cessation of a business, with no com- 
mitment as to method or cause. An establishment may hnve dis- 
continued or closed due to circumstances as widely divergent as fail- 
ure or the retirement of a successful proprietor. If information is 
sought in a directory, the name of a concern once listed may have 
disappeared, or be missing, subsequently. 

Insolvency is the condition of a concern unable to pay all debts at 
a particular time. 

Liquidation is the process of discontinuing business by disposal of 
assets and complete or partial satisfaction of claims. 

Failure is used principally to indicate withdrawal from business as 
the result of inability to make a profit. The Dun & Bradstreet 
connotation requires some loss to creditors. 

■ Baiikruptcy is a Federal legal process by which a debtor is declared 
insolvent, his assets seized and distributed among liis creditors, after 
which he is formally discharged of further liability. 

Receiversliip is a legal device for the management and conserva- 
tion of business property over which there is >a dispute; a receiver 
appointed by and responsible to a court endeavors to reestablish or 
protect solvency and to defend the interests of investors and creditors. 

Establislunent, concern, and enterprise are general terms referring 
to business units, as distinct from the terms "firm, proprietorship, 
partnership or corporation," which bave legal ownership connotations. 



CHAPTER II 

BUSINESS MORTALITY IN RETAIL, CRAFT, AND SERVICE 

ENTERPRISE 

Entry into many fields of retailing is so easily accomplished and the 
competitive struggle so severe that a continuous seething occurs in 
the cauldron of trade. Prospective, undiscerning proprietors appear 
to be ready to step into the place of fallen comrades. 

No study of variations in the length of life enjoyed by American 
business has been made for the country as a whole, and, of the local 
estimates, concentration has been upon the retail field. Manj^ 
problems arise in following the identity and experience of the indi- 
vidual firms and in deriving comparisons of separately conducted 
studies of mortality. 

Among the principal problems involved in analyzing the case 
histories of firms as a basis for calculating life span are -the following: 
(a) Change in name of the enterprise; (b) change in the form of 
organization, such as from partnership to corporation, sometimes 
under the same proprietorship; and (c) change of location of the 
estabHshment including migration to a different community. 

Additional difi&culties in attempting comparison of independent 
studies of mortality include: (a) Varied sources and classification of 
records; (b)' period of time represented ; (c) date of entry into business 
of the failing concerns; (d) geographical or industrial area studied; 
(e) methods of procedure and of analysis used; and (/) representative- 
ness of samples employed. 

These problems are discussed and limitations suggested as specific 
evidence is presented. 

Of 23 studies made of local experience which include estimates of 
longevity, 2 ^ cover periods of more than 50 years ; the others concen- 
trate upon recent turn-over records. 

COMPARISON OF LONGEVITY 

To the extent that local studies in scattered communities of the 
United States represent the general experience, approximately 30 
percent of retail firms discontinue business within their first year. 
An additional 14 percent dissolve before reaching their second 
anniversary. 

A summary, presented in table 1, records the results of three studies 
presenting certain similarities, but having sufficient variation in 
content and method to illustrate the need for care in interpretation. 

'Solon Ayers: A Study of Mortality of Retail Grpcery Stores in Austin, Tex., from 1880 to 1932. (Manu- 
script of University of Texas, Master's Thesis.) 

7 



CONCENTRATION OF ECONOMIC POWEK 

Table 1. — Life span combined retail groups 
[Percent of concerns discontinuing at given ago] 



Years of life 


Pough- 

keepsie 

(1844-1933) 


Colorado 

towns 
(1027-32) 


Illinois 

towns 

(1926-30) 

27.9 
14.7 
13.1 


Years of life 


Pough- 

keepsie 

(1844- 1933) 


Colorado, 

towns 
(1927-32) 


Illinois 

towns 

(1926-30) 


1 

2 - 


29.6 
14.2 
9.4 


40.8 
14.3 
6.7 


4 

5.. - 


6.2 
4.9 


5.9 
4.3 


3. J 


3 -- 





The Poughkeepsie,' N. Y., experience indicates that of concerns 
entering business at any time within the period 1844-1933, 29.6 per- 
cent were not discovered in the directory 1 year later and therefore 
disappeared as enterprises sometime between the taking of the direc- 
tory census in which they were listed and the next census. It is 
possible, of course, that some of these firms may have dissolved in 
the short period between the census and the publication of the di- 
rectory. Similarly, other concerns may have entered busmcss imme- 
diately after a particular census but received first listing in the directory 
following the next census, a period exceeding a year. 

First-year mortality in 142 towns, of Colorado,^ for retailers entering 
business in 1927, claimed 40.8 percent of all entrants; that is, 1928 
directories did not list almost 41 percent of the retail concerns appear- 
ing for the first time in the 1927 issue. 

Illinois * life-span data cover retail concerns establishing business in 
1926 in 2 typical towns, 1 representing a population classification of 
7,000 to 15,000 persons, and the other a group, 2,000 to 5,000. In this 
study the data were obtained from the rating books of R. G. Dun & 
Co., now Dun & Bradstreet. 

The wide variation in the first-year mortality experience of the Colo- 
rado towns as compared with the Illinois communities and the town 
of Poughkeepsie is not associated with business conditions. Both 1927 
and 1928 were regarded as good business years in Colorado. In con- 
trast, mortality in the second year, which was 1929, was in close cor- 
respondence with the second-year mortalitv in Illinois, the year 1928, 
while third-year mortality, 1930, in Colori.do was about one-half the 
third-year discontinuance in Illinois, 1929. 

The divergence probably should be charged to some of the difiicul- 
ties mentioned briefly before. Their importance in invalidating com- 
parison is evident from the following summary: 

(a) Successive city directories were consulted in the Poughkeepsie 
and Colorado studies, records of Dun & Bradstreet in the Illinois 
project. Since the objective in each case was to trace the establish- 
ment rather than the proprietor, discrepancies may have occurred 
with changes in name, form of organization, or address. The Pough- 
keepsie Directory was not published annually in 7 years, scattered 
through the period. It is probable that the Dun & Bradstreet records 
are fairly complete, but the purpose of such records is the providing 
of credit reports to clients, and some enterprises may escape considera- 
tion, particularly the smaller concerns. 

' R. O. Hutchinson and A. R. and Mabel Newcomer: Study in Business Mortality^ American Economic 
Review vol. XXVIII, No. 3, September 1938, pp. 497-514. 

' E. T: Hallas: Mortality of Retail Stores in Colorado, University of Denver Business Study No. 82, 
1936, p. 9. 

* Paul D. Converse: Business Mortality of Illinois Retail Stores from 1925 to 1930, University of Illinois, 
Bureau of Business Research, Bull. No. 41. 



CONCENTRATION OF ECONOMIC POWER 



9 



(b) As against an aggregate of experience of more than 80 years in 
Poughkeepsie — each year's entries traced in successive years — only 1 
year's entries are considered in Colorado and in Illinois. 

(c) The Poughkeepsie data cover the city and such adjacent areas 
as are considered an integral part of the community. One hundred 
and forty-two towns, excluding Denver, are represented in the Colo- 
rado study; and two typical towns, exclusive of Chicago, in the 
Illinois report. 

(d) Both Poughkeepsie and Illinois records include all types of 
independent retail establishments. However, while the former traced 
the longevity of 10,000 concerns, the latter covers only 61. In the 
Colorado study, 539 enterprises were included, but only the 10 leading 
retail trades. 

Differences in the elements of other studies are still greater, making 
comparison even more unwarranted, and emphasizing the neglect of 
this important field of dynamic economics. 

Since the general classification of retail trade includes so many 
branches of enterprise, it might be assumed that a comparison of 
individual trades would be simpler. But even the important grocery 
group is difficult of definition, for though records segregate exclusive 
meat markets and delicatessens, there still remain groceries with and 
without meat departments. And drug stores range in activity from 
the limited-commodity apothecary to the outlet approaching the 
miscellany of a variety store, and to the establishment with fountain 
and restaurant service as Inajor merchandising activities. 

In table 2 a comparison is offered of the grocery mortality rates in 
Poughl^eepsie, Colorado, and Buffalo,^ N. Y. Data upon turn-over of 
new enterprises are not available for Illinois grocers. 

Table 2. — Life span of retail grocery stores 
[Percent of concerns discontinuing at given age] 



Years of life 


Pough- 
keepsie 
(1844-1933) 


Colorado 

towns 
(1927-32) 


Buffalo 
(1919-27) 


Years of life 


Pough- 
keepsie 
(1844-1933) 


Colorado 

towns 
(1927-32) 


Buffalo 
(1919-27) 


1 


29.4 
14.8 
10.2 
6.2 


27.3 
12.5 
10.2 
7.0 


60.3 
11.9 
5.4 
2.8 


5 -. 


4.2 
2.7 
3.4 
2.5 


4.7 
2.4 
6.2 

.8 


1.5 


2 


6 


.8 


3 


7 


.6 


4 


8 


.2 









In this instance Buffalo experience differs materially in its first year 
mortality. Within the period, the rate of discontinuance ranged from 
54.9 percent in 1921 to 67.8 percent in 1926, the former a depression, 
the latter a "good business" year. The Buffalo data are from direc- 
tories, and as in the other cases, an effort was made to trace the con- 
tinuity of Ufe of establishments rather than of proprietors. 

It is possible that the explanation of the heavy mortality within 
the concerns' first year is associated with the industrial nature of the 
community. Such information as is available from a Chicago ^ study 
of combination grocery and meat stores does not support the conten- 
tion that it is largely industrial status that determines turn-over rate. 
For the period 1921-32, the average first year discontinuance in 
Chicago was about 25 percent of entrances. Therefore, assuming that 

* Edmond D. McGarry: Mortality in Retail Trade; University of Buffalo, Bureau of Business and 
Social Research, 1930. 

'Howard C.Greer: Business Mortality Among Retail Meat Stores in Chicago Between 1920 and 1933, 
Journal of Business, University of Chicago, vol. i:^, No. 3, July 1936, pp. 189-209. 



10 



CONCENTRATION OF ECONOMIC POWEH 



methodology and data are comparable, it is logical to conclude that 
the period was particularly stressful for Buffalo. 

In attempting to trace the longevity of drug stores we are limited 
to reports for BujEfalo and the Colorado towns. Again we are dealing 
with a complicated problem. The Buffalo data cover the discon- 
tinuance of establishments entering each year in the period 1919-27, 
Colorado information covers only the life span of those concerns 
starting in 1927. However, while the 1919 Buffalo entries, could be 
followed for 9 years, until 1928, and the 1920 entries for 8 years, the 
enterprises starting in 1927 could be checked for only the first year of 
life. 

Table 3. — Life span of retail drug stores 

[P-^cent of concerns discontinuing at given age] 



Years of life 


BuSalo 
(1919-27) 


Colorado 

towns 
(1927-35) 


Years of life 


Buffalo 
(1919-27) 


Colorado 

towns 
(1927-35) 


1 . - - 


26.6 
9.0 
8.3 
5.6 


30.8 
23.0 

7.7 




6 


2.5 

3.4 

2.2 

.3 


7.T 


2 : 


6 





3 


7 





4 - - 


8 












Forty-five percent of Buffalo drug stores inaugurating business in 
1927, discontinued within a year. This rate should be contrasted 
with the average Buffalo rate of 26.6 percent recorded in table 3, the 
extremely low mortality for new Buffalo enterprises entering in 
1920 — 3.1 percent — and the Colorado . rate of 30.8 percent. It is 
probable that this wide range of rates in the Buffalo data is due to 
the small numbers of drug stores entering each year. And the vaUdity 
of the Colorado figures for general purposes should be questioned on 
the same ground; for, though 142 towns were included, only 13 drug- 
stores were established in 1927. 

Turn-over of restaurants is relatively high in all available tabula- 
tions. For new concerns, however, we are limited, to the comparison 
of rates for Poughkeepsie and Colorado towns. Again it is important 
to observe that each year's entries are traced in the Poughkeepsie 
data, but in the Colorado record only those concerns starting in 1927. 
A total of 170 restaurants were included in the Colorado study, 409 
in Poughkeepsie. 

It is interesting to note in table 4 the differences in the mortality 
in the first 2 years. In the long-time experience of Poughkeepsie 
48 percent of restaurants discontinued within the first 2 years ; in the 
Colorado period, 71 percent of restaurants entering in 1927 quit by 
1929. The differences are in large part compensated by the seventh 
year, when 84 percent of the Poughkeepsie and 88 percent of the 
Colorado restaurants had dissolved. 

Table 4. — Life span of restaurants 
[Percent of concerns discontinuing at given age] 



Years of life 


Pough- 
keepsie 
(1844-1926) 


Colorado 

towns 
(1927-35) 


Years of life 


Pough- 
keepsie 
(1844-1926) 


Colorado 

towns 
(1927-35) 


1 


35.0 
13.0 
11.0 
8.1 


55.5 
15.6 
4.0 
6.3 


6 


4.6 
4.2 
5.9 
2.4 


3.4 


2 


6 -.. 


2.3 


3 


7 


2.3 


4 


8 












OONCENTEATION OF ECONOMIC POWER 



11 



MORTALITY RANK 

Were inclusive information available for the country as a whole 
and for representative areas and communities, a summary of the 
relative mortality rank of various trades would be helpful to persons 
planning to establish enterprises in analyzing opportunities and 
obstacles, to creditors in developing policies, and to business groups 
and governments in devising plans for aiding stabilization. 

As with previous comparisons, there is, unfortunately, no quantita- 
tive basis for an accurate rating. But some evidence is available 
leading to general conclusions. 

In three important trades, the order, beginning with the highest 
first-year mortality, is groceries, drug stores, hardware stores. How- 
ever, local analyses do not place the turn-over rates of these three as 
greater than other trades. The order in Poughkeepsie, where drug 
and hardware records are not separately treated, is confectionery 
stores, m.eat markets, cigar stores, and grocery stores. Colorado 
towns yielded the following store order: Furniture, meat, general, 
garage, grocery, drug, clothing, hardware, and dry goods. ^ 

In table 5, the longevity of retailers in three Minnesota ^ cities is 
presented as average survivals, first as a turn-over ratio and then as 
an average life span. The wide differences in rates and age of the 
"long life" groups as between the Twin Cities and Duluth is striking. 
In the former, records of approximately 5,500 firms were included, in 
Duluth, more than 1,000. As a possible explanation, the relatively 
stationary population, and "changes in the character of trade" in 
Duluth are suggested. The 5-year turn-over ratio is expressed as 
"the number of closings — during the 5-year period, 1926-30, per 
hundred in operation at the end of 1930." "It should be remem.bered 
that the death rate here calculated is not an annual rate but covers a, 
5-year period." 

The Minnesota study traced the "firm," or proprietorship, survival,, 
rather than the "establishment" point of view followed by the other 
reports referred to previously. Rating records and credit files of 
R. G. Dun & Co. were the basic sources. It is believed that many 
short-lived enterprises, and "less well-organized types of establish- 
ments" were omitted. 

Table 5. — Length of life of retail firms in S Minnesota cities, 1926-30 



Type 



Short life: 

Building supplies ^ 

Stationery and art 

Automobiles 

Electrical 

Novelty 

Food 

Fruit and vegetables- 
Groceries 

Clothing and textiles 

Women's clothing 

Long life: 

Lumber. 

Jewelry 

Hardware .-. 

Shoes 

Drugs. __ 

Office equipment 



5-year turn-over ratio 



Minneap- 
olis and 
St. Paul 



203.3 
183.2 
126.7 
101.2 
93.4 
92.6 
121.9 
95.5 
70.6 
91.8 

36.5 
40.1 
45.3 

47.7 
60.7 
51.6 



Duluth 



220.0 
165.2 
160.0 
111.1 
131.1 
188.5 
117.8 
94.1 
181.5 

158.3 
93.1 
75,9 
75.4 
63.1 
85.8 



Average life in years 



Minneap- 
olis and 
St. Paul 



2.5 
2.7 
3.9 
4.9 
5.4 
5.4 
4.1 
5.2 
7.1 
5.5 

13.7 
12.4 
10.8 
10.5 
9.9 
9.7 



Duluth 



2.3 
3.0 
3.1 
4.6 
3.8 
2.6 
4.2 
6.3 
2.8 

3.2 
5.4 
6.6 
6. ft 
7.9 
5.8 



1 E. A. Heilman: Mortality of Business Firms in Minneapolis, St. Paul, and Duluth, 1926-30. University 
of Minnesota Press, 1933. 



12 



CONCENTRATION OF ECONOMIC P9WE0R 



If referring to table 6, a careful distinction must be made, Previous 
discussion has made use only of those records which disclosed the 
date of entry into business as well as of the date of closing. In the 
report of retail survivals in 32 county seat towns,* the figures for 
1915 and 1935 refer to all concerns then in business regardless of life 
span. There were 671 grocery stores operating in 1915 and 898 
operating in 1935. However, of the latter figure, though an increase 
of 227 over 1935, only 67 were of the original 671. This 20-year 
survival, representing 10 percent of grocery and of shoe stores, and 
25 percent of drug stores, was only 7 percent of general and depart- 
ment stores, and 4 percent of women's wear stores. 

Table 6. — Survival of retail enterprises in 32 county seat towns, 1915 and 1936 





Grocery 
stores 


General 
and de- 
partment 
stores 


Drug 
stores 


Men's 

clothing 

stores 


Dry 

goods 
stores 


Hard- 
ware 
stores 


Shoe 
stores 


Women's 
wear 
stores 


1916 

1936 — 

Survivors 


671 

898 

67 


217 

118 

16 


143 
138 
36 


128" 
87 
16 


124 
55 
16 


no 

SO 

24 


88 
59 
10 


22 

73 

1 







In Chicago,^ of the retail food dealers who were liquidating through 
bankruptcy in 1930-31, 62 percent had failed within 5 years. The 
same was true for 55 percent of the retail clothing concerns, 80 per- 
cent of the grocers, 68 percent of the ladies' ready-to-wear firms, and 
44 percent of the men's furnishings stores. 

Table 7 records the cordposite mortaUty experience for 82 years of 
certain retail trades in Poughkeepsie. Only those concerns whose 
entrance year could be determined are included; and the continuance 
of the establishment rather than of particular proprietors was empha- 
sized. Since specific retaU trades were chosen for detailed considera- 
tion primarily with reference to their importance in employment as 
reported by the United States census, drug stores were not included. 
Moreover, the number of drug establishments are relatively small in 
a community of this size. Other establishments, such as restaurants, 
are included among service outlets in table 17. Restaurant mortahty 
in the first 2 years closely corresponds to the experience of meat 
markets, but suryival of the markets is more favorable beginning 
with the third year. Only 12 percent of the restaurants survived 
more than 10 years, as contrasted with almost 22 percent of the meat 
markets. , ; 

' Dun & Bradstreet: Offered in testimony of Willard L. Thorp and appearing in pt. 1, pp. 129-131, and 
235, hearings before the Temporary National Economic Committee, Congress of the United States, 76th 
Cong. i 

• John H. Cover: Business and Personal Failure and Readjustment in Chicago; Studies in Business Ad* 
ministf ation, the School of Business, the University of Chicago, August 1933. 



CONCENTRATION OF ECONOMIC POWER 



13 



Table 7. — Life span of retail enterprises established in Poughkeepsie between 1844 

and 1926 



Number of enterprises - 



Grocery 

-stores 



1,218 



Confec- 
tionery 
stores 



325 



Meat 
markets 



323 



Cigar 
stores 



230 



All retail 
stores 



Percent of concerns discontinuing at given age 



Years of life: 

1.. 

2 

3 

4 

5. 

6 

7 

8 

9 

10 

Over 10.. 
Total.. 



29.4 


44.0 


35.0 


33.5 


14.8 


16.6 


12.7 


ilo 


10.2 


11.7 


7.4 


10.9 


6.0 


4.3 


5.3 


10.4 


4.2 


4.9 


4.6 


4.3 


2.7 


4.6 


5.0 


6.5 


3.4 


1.8 


2.8 


2.2 


2.5 


2.5 


2.5 


3.0 


2.1 


1.2 


1.2 


.9 


2.4 


1.3 


1.9 


1.3 


22.3 


8.0 


21.7 


13.9 


100.0 


100.0 


100.0 


100.0 



29.6 
14.2 
9.4 
6.2 
4.9 
4.1 
3.1 
2.6 
2.1 
2.0 
21,8 
100.0 



From the figures of table 8 have been calculated the Colorado entries 
in the first 4 tables. The cumulative approach of table 8 ttaces 
the demise from year to year of the concerns established in 1927 
Of the total of 539 retailers starting business in that year 80 percent 
had succumbed by 1935. One of the obstacles to placing very much 
credence m the significance of the percentages, is the small number 
of enterprises represented in som.e of the trades. Of the 10 categories, 
6 had 20 dealers or less. Of 12 hardware stores starting in 1927, 4 
survived in 1935, and of 13 drug stores entering in 1927, 4 remained 
in operation in 1935. 

Table 8. — Business mortality of retailers commencing business in 1927 in 142 

Colorado towns 



Retail trade 



Dealers 

com- 
mencing 
business 
in 1927, 
number 



year 
1927= 
100 
per- 
cent 



Cumulative percentages of dealers commencing 
business in 1927 gone in successive years 



1928 1929 1930 1931 1932 1933 1934 1935 



Clothing 

Drugs 

Dry goods 

Furniture 

Oarages 

General stores 

Groceries : 

Hardware 

Meat 

Restaurants... 

Total... 



20 
13 
13 
15 

115 
20 

128 
12 
30 

170 



100 
100 
100 
100 
100 
100 
100 
100 
100 
100 



25.0 
30.8 
23.1 
60.0 
34.8 
35.0 
27.3 
25.0 
60.0 
55.5 



40.0 
63.8 
38.5 
80.0 
49.6 
40.0 
39.8 
33.3 
73.3 
71.1 



50.0 
61.5 
53.8 
80.0 
56.5 
45.0 
50.0 
50.0 
73.3 
75.1 



65.0 
61.5 
63.8 
80.0 
62.6 
50.0 
57.0 
58.3 
80.0 
80.4 



65.0 
69.2 
61.5 
80.0 
69.6 
50.0 
61.7 
66.7 
80.0 
83.8 



66.0 
69.2 
69.2 
80.0 
74.8 
60.0 
64.1 
66.7 
80.0 
86.1 



80.0 
69.2 
76.9 
80.0 
79.1 
65.0 
70.3 
66.7 
83.3 
88.4 



80.0 
69.2 
76.9 
80.0 
80.9 
70.0 
71.1 
66.7 
83.3 
88.4 



539 



100 



40. 



55.1 



61.8 



67.7 



72.0 



73.3 



79.2 



80.0 



For contrast with the previous table, table 9 is offered at this point 
as typical of m,ost available summaries of mortality estimates. In 
this instance, all retail establishments in the trades indicated w*jfe 
recorded from, the 1926 directories. These concerns were then sought 
in subsequent directories. 



202652— 41— No. 17- 



14 



CONCENTRATION OF ECONOMIC PQWER 



It is logical to expect a lower mortality rate for experienced than 
for new concerns, and evidence that this expectation is realized is 
presented in subsequent discussion. In addition, the total number of 
concerns in business is much larger than the number just starting, 
and the percentage change is necessarily smaller. The total of con- 
cerns listed in table 9 is 3,587, of table 8, only 539. The first year 
ratft of mortality based upon all retail establishments in business is 
15.7 percent as contrasted with 40.8 percent for new enterprises. 

Table 9. — Business mortality of retailers in 14^ Colorado towns, 1926-36, classified 

by 10 retail trades 



RetaU trade 


Dealers 
in busi- 
ness in 

1926, 
number 


Base 
year 
1926= 
100 per- 
cent 


Cumulative percentages of dealers in business in 1926 
gone in successive years 




1927 


1928 


1929 


1930 


1931 


1932 


1933 


1934 


1935 


Clothing 


239 
304 
168 
154 
605 
302 
997 
188 
129 
601 


100 
100 
100 
100 
100 
100 
100 
100 
100 
100 


14.2 
10.2 
8.3 
9.7 
13.4 
11.9 
16.2 
5.3 
20.9 
32.3 


23.3 
18.7 
16.7 
20.1 
29.9 
19.2 
30.5 
12.2 
36.4 
47.3 


30.6 
24.0 
26.8 
27.3 
36.6 
26.6 
40.2 
18.1 
44.2 
56.9 


40.1 
27.6 
36.9 
33.1 
41.8 
31.1 
46.3 
22.9 
65.0 
63.6 


46.4 
34.2 
42.9 
34.4 
46.4 
37.4 
51.4 
27.7 
58.9 
67.3 


61.9 
37:2 
45.2 
38.3 
49.8 
39.4 
64.4 
31.4 
62.0 
70.1 


64.8 
40.5 
60.0 
41.6 
62.7 
42.4 
57.5 
36.1 
63.6 
72.8 


61.1 
46.4 
66.6 
45.4 
67.0 
48.3 
63.8 
39.9 
67.4 
77.0 


62.3 


Drugs 


46.7 


Dry goods ' 


57.7 


Furniture 


48.0 


Garages 


68.8 


General stores - 


60.1 


Groceries . 


66.5 


Hardware 


41.0 


Meat . 


67.4 


Restaurants 


77.4 






Total 


3, 587 


100 


15.7 


28.6 


36.6 


42.8 


47.7 


60.9 


63.9 


69.2 


60.6 







Also based upon all concerns in business rather than new firms is 
the Illinois ^° summary in table 10, where the combined experience of 
255 towns is given for 11 retail groups. The group showing high 
turn-over rates includes restaurants, garages, grocery, and meat stores; 
they represented 69.5 percent of the total of 9,718 stores. 



Table 10. — Mortality of retailers in 


11 trades in 


265 Illinois towns 




Betail trade 


Dealers in busi- 
ness July 1926 


Cumulative percentages of deal- 
ers in busmess in July 1925, 
gone in July of each year 


Num- 
ber 


Per- 
cent- 
age 


1926 


1927 


1928 


1929 


1930 


Furniture 


367 

3,646 

533 

304 

' 442 

1,596 

531 

31 

758 

633 

978 


100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 


8.7 
17.6 
14.1 
7.9 
5.2 
17.2 
7.0 
9.7 
14.4 
8.8 
28.5 


18.5 
28.5 
26.0 
16.6 
12.0 
30.6 
11.3 
19.4 
22.8 
17.6 
44.5 


24.5 
38.0 
33.2 
24.0 
17.0 
39.9 
16.4 
22.6 
29.6 
25.7 
53.7 


30.2 
43.8 
41.1 
31.6 
23.8 
44.8 
20.3 
29.0 
35.4 
30.4 
60.6 


36.2 


Grocery -. 


49.5 


Meat - 


46.3 




36.5 


Hardware - - .■ 


27.8 


Garages 


61.0 


Drugs 


24.3 


Department stores.. 


38.7 


General stores 


40.5 


Clothidg 


36.2 


Restautants .. 


64.7 






Total 


9,718 


100 


15.9 


26.7 


35.2 


41.0 


46.3 







The Colorado study did not treat department stores as a separate 
group. Otherwise 10 trades and services are available for comparison 
with lUinois results. This is directly facilitated in table 11. The 

i« Paul D. Converse: Business Mortality of Illinois Retail Stores from 1926 to 1930, University of Illinois, 
Bureau of Business Research, Bulletin No. 41. 



CONCENTB \TION OF ECONOMIC POWER 



15 



principal differences are the sources; the Colorado data were obtained 
from successive directories, the Illinois material from Dun & Brad- 
street rating books. It is probable that the latter records were to a 
degree incomplete particularly as to small concerns and restaurants, 
but relatively more complete than had Chicago been included. 

Certainly the composite experience of all trades was closely similar 
in the two States. It is suggested that the dissimilarities in the 
clothing-store picture is due t() the relatively greater number of larger 
towns in Illinois. The high mortality of these concerns in Colorado 
may be related to the increased transportation facilities opening to 
rural population the offerings of the city. 

In the high turn-over group in both States are restaurants, meat 
stores, grocery stores, and garages; the lower exit group includes hard- 
ware, furniture, and drug stores. 

Table 11. — Business mortality of retailers in Colorado and Illinois 



Betail trade 



Clothing 

Drags 

Dry goods 

Furniture 

Garages 

General stores 

Groceries 

Hardware 

Meat 

Restaurants.. 

Total... 



State 



(■Colorado 
\Illinois.. 
fColorado 
\Illinois.. 
Color^o 
Illinois... 
/Colorado 
I Illinois.. 
/Colorado 
\niinois... 
fColorado 
\IIlinois.. 
/Colorado 
iniinois... 
fColorado 
Iniinois... 
fColorado. 
iniinois... 
fColorado 
Iniinois... 

fColorado. 
iniinois... 



Number 



239 
533 
304 
631 
168 
304 
154 
367 
605 

1,595 
302 
758 
997 

3,646 
188 
442 
129 
533 
501 
978 



3,587 
9,718 



Dealers in 
business 
in Colo- 
rado in 
1926, in 
Elinois 
in 1925 



1926=100 
percent 

for Colo- 
rado 

1925=100 

percent for 
Illinois 



100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 
100 



100 
100 



Cumulative percentages of dealers in busi- 
ness in base years, gone in successive 
years 



1 year 



14.2 

8.8 

1,0.2 

7.0 

8.3 

7.9 

9.7 

8.7 

13.4 

17.2 

11.9 

14.4 

15.2 

17.5 

6.3 

5.2 

20.9 

14.1 

32.3 

28.6 



15.7 
15.9 



2 years 



24.3 
17.6 
18.7 
11.3 
16.7 
16.5 
20.1 
18.6 
29.9 
30.5 
19.2 
22.8 
30.5 
28.5 
12.2 
12.0 
36.4 
25.0 
47.3 
44.6 



28.6 
26.7 



3 years 



30.6 
26.7 
24.0 
16.4 
26.8 
24.0 
27.3 
24.5 
36.6 
39.9 
26.5 
29.6 
40.2 
38.0 
18.1 
17.0 
44.2 
33.2 
56.9 
63.7 



36.5 
35.2 



4 years 



40.1 
30.4 
27.6 
20.3 
36.9 
31.6 
33.1 
30.2 
41.8 
44.8 
31.1 
36.4 
46.3 
43.8 
22.9 
23.8 
65.0 
41.1 
63.5 
60.6 



42.8 
41.0 



5 years 



46.4 
36.2 
34.2 
24.3 
4i2.9 
35.5 
34.4 
36.2 
46.4 
61.0 
37.4 
40.6 
61.4 
49.6 
27.7 
27.8 
68.9 
46.3 
67.3 
64.7 



47.7 
46.3 



GROCERY STORE SURVIVALS 

In drawing comparisons of cities and trades, life span of grocery 
outlets has been discussed and data presented in tables 2, and 5 to 10, 
particularly with respect to information regarding Poughkeepsie and 
Buffalo, N. Y., and towns of Illinois and Colorado. 

Additional contributions to our information regarding survival of 
grocery establishments include census reports for Buffalo, directory 
lists for Austin, Tex., a comparison of two periods in Fort Wayne in 
one of which chain-grocery stores were competitors, and a 4-year 
record of chain-grocery store turn-over in Boston. 



16 



OONCENTEATION OF ECONOMIC POWER 



Census tabulations for Buffalo '^ cover the 3 years 1929, 1933, 
and 1935, and represent the continuance of enterprises under the 
same ownership and at the same address. Although changes in 
address are probably infrequent and affect a small proportion, it is a 
factor to be recognized. In addition, the legal, or ownership, classi- 
fication is used in this instance, as distinct from the establishment as 
an entity. 

Buffalo independent grocery stores continuing in 1933 represented 
47.1 percent of those enumerated for 1929.^ By 1935 only 28.8 
percent of those recorded in 1929 remained. Of the 1933 independent 
grocers listed, 52.7 percent remained in 1935. 

In table 12 are recorded the dates on which listed establishments 
"came under present ownership." In many instances these firms 
were originally established under present ownership but in other cases 
were acquired by present owners in the first year recorded. For 
instance, as recorded in column two, 7.8 percent of the enterprises 
reporting in each of the years 1929, 1933, and 1935 came under 
present management in 1929, whereas almost 1 percent were acquired 
in 1927 and only about 1 percent have continued under present 
ownership since 1890. In the third column is recorded the experience 
of stores reported in 1929 but not subsequently. In contrast to the 
distribution in column two, it is interesting to note that more than 
47 percent of those not reporting subsequent to 1929 came under 
present ownership between 1927 and 1929. Of the firms represented 
in column two, about one-fourth had been in business more than 10 
years in 1929, and more than one-half had been under present owner- 
ship for 6 years. 

Infant mortality is illustrated in column three in the percentagcb of 
the last 3 years; although some of these firms may have continued in 
business until just before the 1933 census, the figures still give point 
to the large proportion of new proprietors who discontinued business. 

Table 12. — Percent distribution of 1,169 independent grocery stores according to 
date of present ownership ^ — Buffalo 



Year of present ownership 



Before 1890. 
1890 to 1899. 
1900 to 1«04. 
1905 to 1'909 
1910 to 1914. 
1916 to 1919 
1920...*— 

1921... 

1922 

1923 



Three-year 


Stores 


identical 


recorded 


1929, 1933, 


in 1929 


and 1935 


only 


1.1 
2.6 




1.2 


2.4 


1.8 


3.7 


1.8 


6.7 


4.2 


9.1 


5.6 


6.7 


6.0 


6.9 


2.0 


6.0 


4.2 


7.6 


6.6 



Year of present ownership 



1924 

1925 

1926 

1927 

1928...J 

1929 

Not included 

Total- 



Stores 

recorded 

in 1929 

only 



6.0 
6.0 




100.2 



> This table Ineludes stoles identical in ownership and address for the years 1929, 1933, and 1935, together 
with stores wMdi repotted in 1929 only. 

.11 Edmona D. McGarry, The Structure and Stability of Retail Trade in Buffalo, 1929, 1933, and 1935— 
Grocery Stores; Statfstical Survey, the University of Bufialo, Bureau of Business and Social Research, 
Vol. XIV, No. 7A, March 1939. 



OONCENTEATION OF ECONOMIC POWER 



17 



The source of information for grocery mortality in Austin, ^^ Tex., 
was the local directory. As indicated in table 13, the data were avail- 
able at 2-year intervals, so that many stores surviving less than 2 
years are likely to have been missed if they were established subsequent 
to the publication of one directory and were discontinued prior to the 
listing for the next. Stores which closed within the 2-year period are 
counted as having existed the entire interdirectory period. 

Austin grocery store mortality accounted for almost 48 percent of 
all concerns in business within the first 2 years of their establishment, 
and of 83 percent within 10 years. 



Table 13. — Accumulated percentage of deaths hy year periods, grocery stores in 

Austin, Tex., 1880 to 19S2 

Accumu' 
lated per- 

Number of years — Continued. deaths 

19 94.2 

22 - 94.9 

24 . 96.2 

26 97. 1 

28 - 98.0 

29.-_ 98. 1 

31 98.2 

33 : 98.8 

35 - 98.9 



AccumU' 
lated per- 
centageof 

Number of years: deaths 

2 47.7 

4 - 64.6 

6 74.1 

8 - 79.3 

10 82.8 

12 .. 85.5 

14 89.6 

16 91.6 

17 - 93.7 



An interesting comparison of individually owned grocery stores in 
Fort Wayne,^3Ind., was made for two periods, 1890-1904 and 1916-30. 
The percentage of firms discontinuing business after a given number 
of years in existence are presented in table 14. 

Table 14. — Mortality of independent grocery stores entering business in Fort Wayne 



Number of years 


191fr-30 
percent 
closing 


1890-1904 
percent 
closing 


Number of years 


1916-30 
percent 
closing 


1890-1904 
percent 
closing 


1 


40.3 
12.1 
7.4 
5.5 
3.0 


38.7 
13.2 
5.4 
4.8 
2.6 


.6.. 
7.. 
8.. 
9.. 




1.4 

.7 
.5 
.3 


1.6 


2 




1.4 


3 . -. . 




1.8 


4.. ., 




1.8 


6 











In the earlier period, 499 grocery stores entered business; in the 
recent period, 942. Apparently, no important change in the rate of 
mortality has occurred. This fact is particularly significant, since 
chain-store competition developed in 1916 with the establishment 
of the first grocery chain unit in Fort Wayne and increased to a 
maximum of 73 chain stores in 1928. 

In an examination of the Boston^* Directory for the period, 1928-33, 
the data of table 15 were revealed for chain-store units in the grocery 
trade. 

i2Solon Ayers: A Study of Mortality of Retail Grocery Stores in Austin, Tex., from 1880 to 1932 (manu- 
script of University of Texas, Master's Thesis). 

i» Russell L. Furst: "Relationships Between the Numbers of Chain and Individually Owned Grocery 
Stores in Fort Wayne," University of Chicago Journal of Business, vol. V, No. 4, pt. I. 

'< Charles F. Phillips: Chain Store Mortality, University of Chicago, Journal of Business, vol. VXI, 
No. 4, October 1934. 



18 



CONCENTRATION OF ECONOMIC POWER 



Table 15. — Turn-over, closing, and opening rates for chain grocery stores in Boston, 

1929-32 



Year 


Stores 
at first 
of year 

1 


Num- 
ber 
closed 
in year 

2 


Num- 
ber 
added 
in year 

3 


Net 
change 

4 


Number 
stores in 
business 
during 
year 

5 


Turn- 
over 
rate, 
2 to 5 

6 


Closing 
rate, 
2tol 

7 


Opening 
rate, 
3tol 

8 


Average 
number 

stores 
during 

year 

9 


Turn* 
over, 
2 to 9 

10 


1929 

1930 


781 
797 
781 
769 


107 
86 
74 
56 


123 
70 
62 
49 


16 

-16 

12 

-7 


904 

867 
853 
818 


11.8 
9.9 
8.7 
6.8 


13.7 
10.8 
9.5 
7.3 


15.7 
8.8 
7.9 
6.4 


779.0 
789.0 
775.0 
765.5 


13.7 
10.9 


1931 


9.5 


1932 


7.3 






Total.... 


3,128 


323 


304 


-19 


3,442 


9.4 


10.3 


9.7 


3, 108. 5 


10.4 



OTHER RETAIL, CRAFT, AND SERVICE GROUPS 

The high mortaUty of restaurants and garages has been mentioned 
in earlier comparisons. In table 8, 9, 10, and 11 they were included 
among retail establishments. Additional data are available for 
Poughkeepsie, covering several service and craft groups, and for 
Chicago comparing meat stores with combination grocery and meat 
outlets. 

Selecting 3 years as a test period of survival, it is found that Pough- 
keepsie barber shops established in the period 1844 to 1926 had a 
record of almost 56 percent survival, exceeded only by express service, 
with 61 percent. Confectionery stores had a survival of only 28 
percent beyond 3 years; grocery stores, 45.6 percent; meat markets, 
44.9 percent; cigar stores, 42.6 percent; and restaurants 41 percent, 
as listed in table 7. 

In tables 16 and 17, respectively, are recorded the length of life of 
craft and of service enterprises in Poughkeepsie. An additional 
indication of the relative stability of barber shops is the survival 
beyond 10 years of almost one-third of the concerns. 

It will be observed that the basis of calculation is again the total 
number of stores in business, and that entrance and mortality rates are 
relative to all, rather than new stores. 

Using the record of 1929 as an example, it is apparent that the 
figure "16," in column 4, is obtained by subtracting the figure "107" 
in column 2 from the 123 of column 3. Similarly, the total 904, of 
column 5, is the summation of the 781 of column 1 and the 123 of 
colurnn 3. 

The three mortality rates, then, are as foUows: Column 7 records 
the proportion of the stores existing at the beginning of the year which 
closed during that year. In column 6 the number of discontinuing 
concerns is expressed as a ratio of the maximum number existing in 
the particular year. Taking into account existing, closing, and new 
enterprises, column 10 presents a ratio of closing establishments to 
the total stores when the numbers at different periods within the year 
are averaged. 

Comparison of columns 7 and 8 indicates the relative decrease, 
after the first year, of the chain-store population. 



CONCENTRATION OF ECONOMIC POWER 



19 



Table 16. — Length of life of specific crafts established in Poughkeepsie between 
1844 and 1926, not counting change in proprietorship as a new business 





Shoemakers 


Barbers 


Tailors 


All crafts 




331 


278 


263 


1,315 








Percentage distribution 


Years of life: 

1 


30.2 
15.1 
9.4 
5.1 
4.2 
3.9 
3.6 
1.8 
1.8 
2.7 
22.1 


25.9 
10.1 
8.3 
7.5 
5.4 
3.2 
1.1 
2.2 
2.2 
1.1 
33.1 


37.3 
14.5 
8.7 
4.9 
5.7 
5.3 
1.1 
2.3 
1.1 
1.9 
17.1 


30.7 


2 


14.7 


3 


9.7 


4 ^ - 


5.6 


5 


5.3 


6 — - 

7 - 


3.7 
3.0 


8 


2.6 


9 


1.9 


10 


1.9 


Over 10 - 


20.9 






Total ; 


100.0 


100.0 


100.0 


100.0 







Table 17. — Length of life of specific kinds of service enterprises established in Pough- 
keepsie between 1844 o,nd 1926, not counting change in proprietorship as a new 
business 





Saloons 


Restau- 
rants 


Express 
service 


All service 
enterprises 


Number of enterprises 


641 


409 


175 


2,618 








Percentage distribution 


Years of life: 

1 


36.7 
15.1 
9.2 
6.6 
4.5 
3.9 
3.7 
2.8 
2.5 
2.2 
12.8 


35.0 
13.0 
11.0 
8.1 
4.6 
4.2 
5.9 
2.4 
1.7 
2.0 
12.2 


21.1 
9.7 
8.6 
6.3 
5.7 
2.3 
5.7 
3.4 
6.3 
3.4 

27.4 


32.7 


2 


13.0 


3 


9.4 


4 


6.7 


5 


5.1 


6 . 


3.9 


7 


3.5 


8 


2.6 


9 


2.3 


10 - 


2.0 


Over 10 . . - 


18.8 






Total 


100.0 


100 


100.0 


100.0 







The rates of turn-over of Chicago ^^ meat markets and of stores with 
meat and other commodities are entered in table 18. In each instance 
the average number of entrances and of discontinuances is expressed 
as a percentage of the total number of stores in business in that year. 
A slower rate of turn-over appears in the later years, particularly of 
combination stores. There is an interesting difference in thfe rates in 
the depression years 1921 and 1930. 

» Howard C. Greer: Business Mortality Among Retail Meat Stores In Chicago Between 1920 and 1933, 
Journal of Business, University of Chicago, vol. IX, No. 3, July 1936, pp. 189-209. 



20 



CJONCENTKATION OF ECONOMIC POWER 



Table 18. — Rate of turn-over of meat markets and combination stores in Chicago 
[Percent of number in business in given year] 



Year ending July 1 


Meat 
markets 


Combina- 
tion 
stores 

--* 


All stores 


Year ending July 1 


Meat 
markets 


Combina- 
tion 
stores 


All stores 


1921 . 


29.6 
21.0 
17.6 
16.5 
14.7 
18.9 
19.9 
17.0 


30.6 
25.2 
20.9 
18.3 
17.3 
18.9 
19.8 
18.4 


30.2 
23.5 
19.5 
17.5 
16.2 
18.9 
19.8 
17.7 


1929. 

19.30 

1931 


18.1 
19.8 
15.4 
17.4 
16.0 


18.7 
18.7 
16.2 
13.5 
11.8 


18.4 


1922 . 


19.2 


1923 


15.8 


1924 

1925 .- 


1932 

1933 

Average 


15.4 
13.8 


1926 

1927 




18.6 


19.1 


18.9 


1928 









In table 19 stores in existence in 1933 are distributed in accordance 
with their present age. For instance, 18.4 percent of the meat markets 
in business in 1933 had existed less than 1 year, while only 12.7 per- 
cent of the combination stores were such recent entrants into business. 
However, survival of concerns which had weathered the infant frailties 
showed little disparity between the two groups. 

Table 19. — Percentage distribution of stores in business in Chicago in 1933, according 
to number of years in business 



Number years in business 



Meat markets 



Simple 



Cumula- 
tive 



Combination stores 



Simple 



Cumula- 
tive 



AH meat markets 



Simple 



Cumula- 
tive 



Less than 1 year... 

1 to 2 years 

2 to 3 years 

3 to 4 years 

4 to 5 years 

5 to 6 years 

6 to 7 years 

7 to 8 years 

8 to 9 years... 

9 to 10 years 

10 to 11 years 

11 to 12 years 

12 to 13 years 

More than 13 years 

Average age.. 



18.4 
12.1 
9.-7 
9.5 
7.7 
8.2 
6.1 
4.6 
4.8 
3.0 
3.8 
2.4 
1.7 
8.0 



18.4 
30.5 
40.2 
49.7 
57.4 
65.6 
71.7 
76.3 
81.1 
84.1 
87.9 
90.3 
92.0 
100.0 



12.7 
12.5 
10.9 
10.6 
7.6 
8.1 
6.9 
6.1 
4.6 
3.5 
2.8 
2.6 
1.8 
9.3 



12.7 
25.2 
36.1 
46.7 
54.3 
62.4 
69.3 
75.4 
80.0 
83.5 
86.3 
88.9 
90.7 
100.0 



15.3 
12.3 
10.4 
10.1 
7.7 
8.1 
6.5 
5.4 
4.7 
3.2 
3.2 
2.6 
1.8 
8.7 



15.3 
27.6 
38.0 
48.1 
55.8 
63.9 
70.4 
75.8 
80.5 
83.7 
86.9 
89.5 
91.3 
100.0 



5.4 years 



5.8 years 



5.6 years 



INFANT MORTALITY 

In previous illustrations of mortality, the large rate of turn-over in 
the first, and even in the second, year of business existence was noted. 
The proportion discontinuing epch year may vary by industry, or 
region, or economic period, but the battle for life is, in general, more 
difficult in the early years. 

Our discussion of factors in business mortality discloses many of the 
reasons for infant death, in large part related to inadequate nourish- 
ment and inexpert nursing. As a result, turn-over is closely asso- 
ciated with rate of entry into business. Or, as expressed by Thorp,'* 
mortality is a function of entry. With reahzation of this relation, 
and with evidence of the large mortality so soon after initiation of a 
business, attention can be focused upon devices for reducing the 

w Willard L. Thorp; "Trend of Failures !n the Distribution Field," an address before the Tenth Boston 
Conference on Distribution; quoted in a release by the Bureau of Foreign and Domestic Commerce, Business 
Information Section, Ootob«r 1938. 



CONCENTRATION OF ECONOMIC POWER 



21 



number of entries. An effort in this direction is made in a separate 
section. 

High first- and second-year mortality rates are evidenced on a 
comparable basis in tables 7, 16, and 17. The order of first-year 
turn-over in Poughkeepsie experience, beginning with the highest 
mt>rtality rate is as follows: Confectionery stores, tailors, saloons 
(drinking places), restaurants, meat markets, cigar stores, shoe- 
makers, grocery stores, barbers, and express service. As contrasted 
with 44 percent first-year discontinuances for confectionery stores, 
express companies lost only 21 percent of their numbers in the first 
year. It is difficult to estimate to what extent this local rank may 
represent the composite picture of the United States. It is probable 
that grocery stores would stand higher on the list. Drug-store 
mortality, it is recalled, was not analyzed separately for Poughkeepsie. 

Probably the most readily available evidence of the trend of infant 
mortality over a period of years is presented in a record of retail 
grocery store mortality in Austin, Tex.^^ The source of information 
was the classified lists of the city directories. Unfortunately the 
directories were published at 2-year intervals, except for the special 
editions of 1898, 1910, and 1930, and, therefore, first-year discontinu- 
ances cannot be estimated. In addition, it is possible for a store to 
exist nearly 2 years without appearing in the record. Concerns 
closing within the 2 -year period were counted as having lived the 
entire interdirectory period. 

For the whole period, 1880-1932, there was an apparent declining 
tendency in the infant mortalitv of Austin groceries. In the sub- 
periods, 1882-1900, 1901-20, and 1921-32, the mortality rates within 
the first 2 years of life were 54.2, 48.1, and 41.3 percent, respectively. 
This ratio of 2-year closures to the numbers of entering bui^iness is 
summarized for directory periods in table 20. The average infant- 
mortality rate was 47.7 percent. In only three periods did this rate 
fall below 40 percent, and in each instance this was a depression year: 
1914, 1922, and 1929. 

Table 20. — Infant mortality as percent of entrances of preceding period, grocery 

stores, Austin, Tex. 



Period 


Infant 

mortality 

rate 


Period 


Infant 

mortality 

rate 


Period 


Infant 

mortality 

rate 


1882 to 1883 


Percent 
58.7 
72.7 
41.4 
61.1 
51.5 
4.^5 
67.2 
47.4 
69.4 


1899 to 1900... . 


Percent 
50.0 
42.2 
66.0 
46.6 
52.1 
42.6 
42.8 
35.2 
60.9 


1917 to 1918 


Percent 
50.0 


1884 to 1885 


1901 to 1903 


1919 to 1920 


63.2 


1880 to 1887 


1904 to 1905. 


1921 to 1922 


37.1 


1888 to 1889 


1906 to 1907... 


1923 to 1924 .. . ..... 


47.8 


1890 to 1891 


1908 to 1909 


1925 to 1927 


47.4 


1892 to 1893 . 


1910 


1928 to 1929 . 


41.4 


J894 to 1895 


1911 to 1912 .. 


1930 . 


28.2 


1896 to 1897. 


1913 to 1914 


1931 to 1932 


46.4 


1898....- 


1916 to 1916 













One significant fact to be derived from table 21 is that, on the 
average, infant closures make up almost 51 percent of total closures. 



'' Solon Ayers: Op. cit. 



22 



CONCENTEATION OF ECONOMIC POWER 



Tabi^jh; 21. — Relation of infant mortality to total mortality, by periods from 1882 to 
1932, grocery stores, Austin, Tex. 









Infant 








Infant 




Total 


Infant 


mortality 




Total 


Infant 


mortality 


Period 


mortality 


mortality 


as percent 


Period 


mortality 


mortality 


as percent 




(percent) 


(percent) 


of total 
mortality 




(percent) 


(percent) 


of total 
mortality 


1882 to 1883 


39 


27 


69 


1908 to 1909 


69 


37 


53 


1884 to 1885 . . 


30 
31 
51 


24 
24 
33 


80 

77 
64 


1910 . ... . 


44 
51 
38 


26 
31 
19 


59 


1886 to 1887 


1911 to 1912 

1913 to 1914 


60 


1888 to 1889 


50 


1890 to 1891 


32 


17 


53 


1915 to 1916 


61 


28 


46 


1892 to 1893 


35 


15 


43 


1917 to 1918 


59 


28 


47 


1894 to 1895 


41 


24 


58 


1919 to 1920 .- 


60 


33 


55 


1896 to 1897 


32 


18 


56 


1921 to 1922 


52 


23 


44 


1898 


34 
27 


19 
16 


56 
59 


1923 to 1924 

1925 to 1927 


62 
52 


33 

37 


53 


1899 to 1900 


48 


1901 to 1903 


46 


19 


41 


1928 to 1929 


63 


36 


57 


1904 to 1905 


60 
40 


28 
23 


56 
57 


1930..-- 


58 
60 


20 
25 


34 


1906 to 1907 


1931 to 1932 


40 



In 1931-32 60 percent of all grocery stores discontinued, while 
one-fourth of the enterprises entering business in 1930 were recorded 
as closing. The resultant ratio of 40 indicates that turn-over of new 
stores in that period was only 40 percent as great as for all stores in 
business. This proportion was the smallest in the 50-year period. 

An interesting general picture of the relation of entries to discon- 
tinuances for Chicago '^ independent meat stores is obtained from 
table 22. In 1921 there were fewer entrances than exits, new enter- 
prises accounting for about 24 percent of aU stores in business, and 
discontinuances reaching more than 37 percent of the aggregate. For 
the 13 years represented, the proportions of new and of retiring 
concerns were about equal, over 23 percent. 

Table 22. — Changes in numbers of individually owned retail meat stores in Chicago 





Number 

of 
entrances 


Total 
number 
in busi- 
ness in 

year 


Number 

of 
closures 


Number 
at end 
of year 


Net 
increase 

or 
decrease 


Percent to total 




Entrances 


Closures 


Year ending July 1 — 

1920 








4,818 
4,172 
4,213 
4,451 
4,839 
5,407 
5,499 
5,519 
5,599 
6,351 
5.084 
4,991 
4,916 
4,883 








1921 


1,160 

1,338 

1,316 

1,417 

1,611 

1.372 

1,386 

1,288 

959 

944 

844 

817 

748 


5,978 
5,510 
6,529 
6,868 
6,450 
6,779 
6,885 
6,807 
6,658 
6,295 
5,928 
6,808 
5,664 


1,806 

1,297 

1,078 

1,029 

1,043 

1,280 

1,366 

1,208 

1,207 

1.211 

937 

892 

781 


-646' 

41 

238 

388 

568 

92 

20 

80 

-248 

-267 

-93 

-75 

-33 


24.1 


37 4 


1922 


32. 1 310 


1923 


31.2 
31.8 
33.3 
25.4 
26.2 
23.3 
17.1 
17.6 
16.6 
16.4 
15.2 


25 6 


19.J4 


23.1 


1925 


21.5 


1926 . . - 


23.7 


1927 


24.8 


1928. 


21.9 


1929 


21.5 


1930 


22.6 


1931 


18.4 


1932. "... 


17.9 


1933 


15.9 






Average . . .. 


1,169 


6, 158 


1,164 


4,994 




23.4 


23.3 









Differences in the first-year mortahty of straight meat markets and 
of those combined with other commodities, usually groceries, are 
indicated in table 23. Greer suggests that the slight advantage of the 
conibinatioh st res may be due to larger capital investment and 
superior management, a conclusion supported by other studies of 

'•Howard C. Greer: "Business? Mortality Among Retail Meat Stores in Chicago Between 1920 and 
1933,' Journal of Business, University of Chicago, vol. IX, No, 3, July 1936, pp. 189-209. 



CONCENTRATION OF ECONOMIC POWEil 



23 



survival. However, for the 12-year period, the average rates were 
similar. 

The turn-over rates of tables 22 and 23 should not be confused. 
In the last column of table 22 discontinuances are expressed as per- 
centages of the total numbers in business at*the end of the year, while 
in table 23 the percentages represent the proportions of new firms 
closing within their first year. 

Table 23. — First-year mortality of retail meat markets, Chicago 
[Discontinuances as percentage of total entries] 



Year of entrance ' 


Straight 

meat 
markets 


Combina- 
tion 
stores 


Year of entrance ' 


Straight 

meat 
markets 


Combina- 
tion 
stores 


1921 


31.6 
23.6 
23.8 
21.4 
23.1 
25.8 
24.3 


35.3 
30.4 
27.9 
26.4 
23.8 
24.4 
26.4 


1928 


20.1 
23.9 
20.2 
30.9 
31.3 


19.1 


1922 


1929. 


22.8 


1923 


1930 


13.3 


1924 


1931 


22.6 


1925 


1932 


22.3 




Average 




1927 


25.0 


24.6 









' Year ending July 1. 

In table 24 new meat markets are classified in accordance with the 
year of their discontinuance. Since the study was completed with the 
year 1933, mortality of concerns entering in that year was not traced, 
and the record of those entering in the previous years was brought to a 
close. Therefore, only the survivors of the 1921 entries could be 
followed through 12 years. 

An interesting feature of the Chicago meat store experience is the 
large mortality in each of the first 3 years. On an average, one-fourth 
discontinued within 1 year of establishing in business, and one-fifth 
during the second year. In most other instances cited the first-year 
closures were relatively higher and the second-year perhaps one-half 
as great. In fact the third year average mortality of the meat stores 
closely approximates the second year turn-over of Poughkeepsie gro- 
cery stores, which lost 29.4 percent of their. number in the first year. 

Table 24. — Chicago retail meat stores entering each year classified according to 

length of life 

[Percentage discontinuing in each successive year] 



Year of entrance ' 




■a 
n 


§ 
^ 


S3 


g 

s 


.a 


S3 

1 

> 


5 




g 


5 

S 

> 


S3 

1 


a 

.9 


1921. 

1922 

1923 


33.9 
27.7 
26.1 
24.2 
23.4 
25.0 
25.4 
19.6 
23.3 
16.6 
26.8 
26.7 


21.7 
21.4 
18.6 
21.2 
25.6 
19.9 
19.7 
21.7 
18.2 
20.3 
13.4 


12.1 
12.6 
18.1 
17.3 
14.8 
15.8 
16. V 
14.1 
12.8 
10.7 


6.6 
8.6 
7.0 
7.7 
8.0 
9.0 
6.9 
7.5 
6.6 


5.1 
6.3 

4.8 
6.6 
6.1 
5.8 
5.0 
6.0 


3.5 

4.1 
4.4 
4.8 
3.8 
2.5 
3.4 


2.6 
3.2 
3.6 
3.1 
2.5 
2.7 


2.8 
2.6 
3.0 
1.6 
1.5 


1.4 
1.9 
1.6 
2.3 


1.2 
1.2 
.,8 


0.8 
1.0 


0.8 


7.5 
9.3 
12.0 


1924 


11.1 


1925 








14.2 


1926 . . 










19.3 


1927 












22.9 


1928 














31.0 


1929 
















39.0 


1930 -. . . 


















62.4 


1931 




















59.8 


1932 






















73.3 




























Averages: 

Simple 

Cumula- 
tive 


24.9 
24.9 


20.2 
45.1 


14.5 
69.6 


7.5 
67.1 


5.7 
72.8 


3.8 
76.6 


2.9 
79.5 


2.3 
81.8 


1.8 
83.6 


1.1 

84.7 


.9 
85.6 


.8 
86.4 


13.6 
100.0 



' Year ending July 1. 



24 



OONGENTKATION OF BOONOMIC POWER 



It will be recalled that grocery store turn-over in Buffalo appeared 
to be unusually high as compared with other communities for which 
data were available, and that no difinite reason could be foimd for its 
unique position. In table 25 the infant mortality record may be 
constrasted with the datu of tables 7, 16, 17, and 24. While the 
Buffalo ^^ experience is high for the first year, the second year dis- 
continuances are relatively not so excessive; however, the closures in 
subsequent years continue comparable to experience elsewhere, 
suggesting that grocery stores in Buffalo are on the whole short-lived. 

Similar comparisons for Buffalo ^^ are offered for drug stores in 
table 26 and for hardware outlets in table 27. Contrasts are striking. 
The average rates of discontinuance, within the first year, of new 
grocery stores is 60 percent, of hardware stores, almost 35 percent, 
and of drug stores, approximately 27 percent. Of the establishments 
entering business in 1919, the proportions continuing after 1928, the 
ninth year, are as follows: Groceries, 5 percent; hardware, 13.1 per- 
cent; drug, 28.5 percent. Certainly a prospective proprietor should 
consider carefully the odds against him before entering the retail 
grocery field in Buffalo. 

Table 25. — Bxiffalo grocery store entrances, each year classified according to length of 

life 

[Percentage discontinuing in each successive year] 



Years of 
entrance 


First 


Second 


Third 


Fourth 


Fifth 


Sixth 


Seventh 


Eighth 


Ninth 


Percentage con- 
tinuing after — 


1919. 

1920 

1921. 


61.1 
55.7 
54.9 
61.2 
58.8 
61.8 
60.0 
67.8 
57.5 
60.3 


14.3 
15.2 
16.7 
14.2 
13.0 
11.9 
16.3 
7.0 


6.2 
9.1 
8.6 
5.1 
5.9 
10.0 
5.2 


5.0 
4 8 
4.6 
2.9 
5.3 
3.9 


2.3 
2.7 
3.0 
4.1 
Z8 


1.9 
1.2 
2.4 
2.4 


1.3 
2.8 
2.4 


0.8 
1.9 


2.1 


9 years, 5.0. 
8 years, 6.6. 
7 years, 7.4. 


1922 






6 years, 10.1. 


1923 








5 years, 14.2. 


1924 










4 years, 12.4. 


1925 












3 years. 18.5. 


1926 .... 














? years, 25.2. 


1927 
















1 year, 42.6. 


1919-27...... 


11.9 


5.4 


2.8 


1.6 


,8 


.6 


.2 


.2 


Continuing 
after 1927, 
16.3. 



Table 26. — Buffalo drug store entrances each year classiHed according to length of 

life 

[Percentage discontinuing in each successive yearj 



1 ears of 
catrance 


First 


Second 


Third 


Fourth 


Fifth 


Sixth 


Seventh 


Eighth 


Ninth 


Percentage con- 
tinuing after— 


1919 

1920 

1921 


28.5 
3.1 
20.8 
26.0 
20.4 
35.7 
39.0 
18.2 
45.1 
26.6 


4.8 
12.5 

8.3 
12.0 

8.2 

2.4 
12.2 
18.2 


9.6 
6.3 
12.6 
14.0 
10.2 
9.6 
9.8 


9.5 
9.4 
4.2 
4.0 
12.2 
9.5 


4.8 
3.1 


2.0 
10.2- 


9.5 
6.2 
8.3 
10.0 


4.8 
9.4 
12.5 



3.1 





9 years, 28.5. 
8 years, 46.9. 
7 vears, 33.3. 


1922 






6 years, 32.0. 


1923... 








5 years, 38.8. 


1924 










4 years, 42.8. 


1925 












3 vears, 39.0. 


1926 














2 years, 63.6. 


1927 
















1 year, 54.9. 


1919-27 


9.0 


8.3 


6.6 


2.5 


3.4 


2.2 


.3 





Continuing 
after 1927, 
42.1. 



i» Edmund D. McQarry: Mortality in Retail Trade; University of Buffalo, Bureau of Business and Social 
Eesearcb, 1930. 



OONCENTRATION OF EOONOMIC POWER 25 

Table 27. — Buffalo hardware store entrances each year classified according to length of 

life 

[Percentage discontinuing in each successive year] 



Years of 
entrance 


First 


Second 


Third 


Fourth 


- Fifth 


Sixth 


Seventh 


Eighth 


Ninth 


Percentage iv. u- 
tinuing after— 


1919 - 

1920 

1921 


47.8 
20.8 
42.3 
21.0 
31.7 
40.7 
52.2 
29.4 
25.0 
34.5 


4.3 

20.8 

30.7 
5.3 
4.9 

14.8 
8.7 

20.6 


17.4 
8.3 
7.7 
5.3 

12.2 
7.4 
8.7 


4.3 
8.3 

3.9 
5.3 
2.4 
3.7 


13.1 



5.-3 





8.3 



5.3 








4.2 





9 years, 13.1. 
8 years, 29.3. 
7 years, 15.4, 
6 years, 62.5, 
5 years. 48.8 . 
4 years, 33.4 
3 years, 30 4. 
2 years, 50.',-. 
1 year, 75.0 
Continuin^f 

after If^y, 

39.5. 


1922 






1923 








1924 










1925 












1926 














1927..- 
















1919-27 


12.3 


7.5 


2.9 


1.7 


1.2 





.4 






VARIATIONS WITH TIME 

Reference to the fluctuations in numbers of enterprises and to the 
increase of business population is made in another section. It is im- 
portant at this point, however, to observe mortality experience in the 
retail field in relation to changes in business welfare. 

But, in order to emphasize that closures are not related solely tO' 
depressions, the survival experience of retail establishments in Pough- 
keepsie ^° was examined for three 30-year periods, an interval far 
longer than any cycle period. 

The period from 1844 to 1873, as observed in table 28, experienced 
the largest relative mortality in infant years, due, it is thought, to 
unwarranted commercial expansion following the rapid populatiort 
growth of the community. As with the growth of industry, distrib- 
utive enterprise attempts to estimate consumer needs based upon 
population growth, the increase of purchasing power, and alterations 
m specific demand. In a competitive system overexpansion is a 
common experience due to the many individual estimates of the poten- 
tial aggregate demand, and the optimistic assumptions as to the pro- 
portion of the aggregate business which each enterpriser hopes to 
garner. 

Table 28. — Length of life of retail-husiness enterprises in Poughkeepsie in three 
30-year periods, 18 44-1 983 

[Cumulative percentage distribution] 



Years of Ufe 


1844-73 


1874-1903 


1904-33 


Years of life 


1844-73 


1874-1903 


1904-33 


1 or less '... 


34 
60 


27 
40 


30 
44 




60 
40 


49 
61 


63 
47 


2Qr'less 


Overs. 




1 



Far more significant as a causal factor in mortaUty, is the over- 
optimism of the proprietor regarding the short-run period. With 
smaU operating capital, obhgations are incurred in all phases of busi- 
ness, from store space to inventory. The impact of a depression, or 

«" R. Q. Hutchinson, and A. R. and Mabel Newcomer: "Study In Business Mortality," American Eco- 
nomic Review, vol. XXVni, No. 3, September 1938, pp. 497-614. 



26 



OONCENTRATION OF ECONOMIC POWER 



of a fortuitous event, or even of an unusually heavy seasonal decline, 
find many operators unable to weather the storm. 

In turn, the creditor probably has shared the optimism of his cus- 
tomer, and, in addition, perhaps, has extended assistance beyond his 
conservative judgment as a move to forestall his competitors. In a 
stringent period, he needs fluid assets and becomes concerned about 
his debtors; pressure to liquidate obligations results. But in many 
instances the debtor is unable to respond. Frequently, moreover, 
the creditor postpones pressure as long as possible with the hope of 
tiding the debtor over the emergency and of retaining his good will 
for future business relations. These facts help to explain the lag of 
closures behind the impact of business recession which is so evident 
in some of the data presented here. 

Bankruptcy records of the Chicago ^^ area were studied to trace the 
experience of firms seeking formal liquidation in 1930. Assuming 
1922 as a good year, from a cychcal point of view, to enter business, 
the intervening period was 8 years. It was found that the following 
percentages of the cases in retail trade failed prior to their eiglith year: 
Pood, 78; clothing, 66; grocers, 86; ladies' ready-to-wear, 73; and 
men's furnishings, 50. Twenty-two percent of all firms had weathered 
the 1921 depression, but had succumbed subsequently. 

Since liquidation is postponed as long as possible, increases in com- 
mercial failure tend to reach maxima after improvement in business 
is imder way. Similarly, the day of reckoning is postponed through 
duU summers in the hope of compensating autumn and hoUday trade. 
Year-end liquidations occur with n. rush.. January and December 
rank high, August and September low, both in numbers of bank- 
ruptcies and in Uabilities. 

Discontinuances of retail groceries in Austin,^^ Tex., from 1880 to 
1932, averaged 33 percent of the number of estabUshments in business. 
The results by periods, recorded to the tally of city directories, are 
given in table 29. 

Table 29. — Closures during period as percent of stores at beginning of period — 

Austin 



Percent of 
Period : closures 

1880-81 -- 53.2 

1882-83 47.0 

1884-85.-- 39.0 

1886-87 29.5 

1888-89 -- 39.8 

1890-91 29.1 

1892-93 31.5 

1894^95 34.7 

1896-97 27.8 

1898 29.5 

1899-1900- 23.8 

1901-03 35.1 

1904-05- 32.0 

1906-07 - 29.4 

1908-09 41.3 



Percent of 
Period — Continued. closures 

1910 29.6 

1911-12 31.1 

1913-14 22.8 

1915-16 34.9 

1917-18 34.7 

1919-20 34.7 

1921-22 29.7 

1923-24 32.3 

1925-27 ---- -- 38.0 

1928-29 29. 1 

1930 - 26.0 

1931-32 : 27.6 



Average 33. 



" John H. Cover: Business and Personal Failure and Readjustment in Chicago; Studies in Business 
Administration, the School of Business, University of Chicago, August 1933. 

" Solon Avers: A Study of Mortality of Retail Grocery Store in Austin, Tex., from 1880 to 19.32 (manu- 
script of University of Texas master's thesis). 



CONCENTRATION OP ECONOMIC POWER 
In commenting upon these fluctuations, Mr. Ayers concludes: 



27 



Thus we see that during the decline period of a depression there is a strong 
tendency for closures to decrease and that during the recovery period of a depres- 
sion there is a strong tendency for closures to increase. The close connection 
between depressions and closures is further iseen in the fact that six out of the 
total of nine decreases in closures, 1884, 1897, 1907, 1914, 1922, and 1929, occurred 
during the decline period of depressions, and that five out of eight increases in 
closures occurred during recovery period after the depressions of 1893, 1897, 1907, 
1914, and 1922. In other words, there are practically no increases or decreases 
in closures that are not directly connected, chronologically if not causally, with 
depressions. 

The differences in withdrawals in individual years as related to the 
number of stores in existence is illustrated in table 30, with data from 
Buffalo.23 

Table 30. — Turn-over of grocery, drug, hardware, and shoe firms — Buffalo 
[Number withdrawing each year as a percentage of total stores engaged in business during the year] 





Percentage withdrawals ' 


Year 


Percentage withdrawals 


Year 


Gro- 
cery 


Drug 


Hard- 
ware 


Shoes 


Gro- 
cery 


Drug 


Hard- 
ware 


Shoes 


1918 -. 


29.6 
37.0 
32.8 
32.8 
39.1 


6.7 
14.9 

7.2 
14.1 
12.1 


18.5 
17.2 
14.2 
21.2 
16.2 


19.0 
15.3 
22.8 
14.1 
26.3 


1923 


38.8 
36.3 
34.9 
42.2 
34.1 


11.8 
14.3 
11.7 
11.6 
19.2 


18.7 
11.4 
18.7 
13.7 
12.9 


30 4 


1919 


1924 


28 


1920 


1925 ... . 


17 7 


1921... 


1926 


20 2 


1922 


1927 


22 5 









' The number of firms going out of business each year is stated as a percentage of the total number in 
business that year. 

Following the depression of late 1920 and of 1921, there were high 
closure rates for grocery stores from 1922 to 1924. The reactiofjs of 
shoe, drug, and hardware enterprises appeared to be more immedime; 
drug and hardware outlets show high relative withdrawals in 1921, 
while shoe-store closures were extensive in 1920 and again from 1922 
through 1924. 

There appears little similarity in the experience of Pittsburgh^ and 
Buffalo for the 3 years which are identical. Possibly the small pro- 
portion of Pittsburgh closures following the depression of 1929 is in 
part accounted for by the selective carry-over from the previous 
depression and the more conservative policy of creditors. 

Table 31. — Mortality of firms in the hardware, shoe, drug, and grocery trades — 

Pittsburgh 



[Number withdrawing each year as a percentage of total stores engaged in business during the year] 




Percentage withdrawals 


Year 


Percentage withdrawals 


Year 


Hard- 
ware 


Shoe 


Drug 


Gro- 
cery 


Hard- 
ware 


Shoe 


Drug 


Gro- 
cery 


1925 


14.6 
12.1 
6.2 
13.3 
12.7 


20.5 
18.4 
11.6 
14.4 
16.3 


9.8 
11.2 
12.9 
11.0 
10.2 


23.6 
22.6 
22.5 
19.4 
21.8 


1930 


10.6 
8.0 
6.0 

10.4 
8.1 


18.4 
13.5 
14.1 
14.3 
21.1 


9.4 
6.6 
6.3 
8.7 
9.2 


18.4 


1926 


1931 


16.7 


1927 


1932 


17 2 


1928.. 


1933 


18.2 


1929 


1934 . 


21.3 









23 Edmund D. McGarry: Mortality in Ketail Trade; University of Buffalo, Bureau of Business and Social 
Research, vol. XIV, No. 7A, March 1939. 

21 A. E. Boer: "Mortality Costs in Retail Trades," Journal of Marketing, vol. II, No. 1, July 1937, 
pp. 52-60. 



28 



OONGENTRATION OF ECONOMIC PpWEil 



In table 31 are the mortality rates for each year of the interval for 
the hardware, shoe, drug, arid grocery trades. The figures are com- 
puted as percentages of the number actually engaged in business and 
withdrawing in the year indicated. It required approximately 10 
years, 6 years, 11 years, and 5 years to effect a complete turn-over 
of firms in the hardware, shoe, drug, and grocery trades, respectively. 
The average ratio of withdrawals are as follows: Hardware, 10.1 per- 
cent; shoe, 16.3 percent; drug, 9.4 percent; grocery, 20.2 percent. 

The 1919-27 experience of Buffalo^* grocery stores is summarized 
in table 25. For the whole period, the average mortalitjr rate for the 
first year in business was 60.3 percent of entrances, while the range 
was from 54.9 percent in the depression year, 1921, to 67.8 percent 
in the "good business" year of 1926. In the last column to the right 
of the table is an indication of survival after a given number of years. 
For instance, 42.5 percent of groceries established in 1927 continued 
business beyond that year; since 57.5 percent closed within the first 
year, all new-iestablislmients are accounted for. An opportunity was 
available to check for 2 years the enterprises established in 1926; 
all but 25.2 percent had closed by the end of 1927. 

The infant mortality rate of Austin grocery stores decreased sharply 
during six of the seven depressions in the 50-year period considered, as 
illustrated by table 32. 

Table 32. — Effect of decline period of depressions upon infant mortality — grocery- 
stores, Austin, Tex. 



Decrease in infant 
rate — Continued. 

1921-22 

1928-29.^ - 



mortality 



16. 1 
6.0 



Decrease in infant mortality rate : 

1892-93 6.0 

1896-97 9.8 

1906-07 10.5 

1913-14 7.6 

In the period directly following depressions, however, the infant 
mortahty rate shows a sharp increase in five of the six depressions. 
The 1929 depression was not included because it was considered as not 
having closed by 1932, when the Austin report was completed. The 
increase in rate after depressions is shown in table 33. 

Table 33. — Effect of recovery period of depressions upon infant mortality — grocery 

stores, Austin, Tex. 

Increase in infant mortality 



Increase in infant mortality rate: 

1894-95 11.7 

1898 12.0 

1908-09 6.6 



m 
rate — Continued. 

1915-16 25. 7 

1923-24 10 7 



Table 34 supports the contention that infant mortality adds 
momentum to the decline of total mortality in the recovery period 
following a depression. 



Table 34 


— Infant 


closures as percent of total closures during 6 dep 
grocery stores, Austin, Tex. 


ressions — 


Period 


Total mor- 
tality 


Infant mor- 
tality 


Infant mor- 
tality as 
percent of 
total mor- 
tality 


Period 


Total mor- 
tality 


Infant mor- 
tality 


Infant mor- 
tality as 
percent of 
total mor- 
tality 


1884-85 

1896-97 

190ft-07 


30 
32 
40 


24 
18 
23 


80 
66 
57 


1913-14 

1921-22 

1928-29 


38 
52 
63 


19 
23 
36 


50 
44 
67 



» Edmund D. McQarry: Op. cit. 



OONCENTRATION OP ECONOMIC POWER 



29 



Closures have little apparent effect upon entrances ; but entrances do 
influence closures. In large piart, certainly in the retail field, discon- 
tinuances are related to the entry of new establishments, and a period 
with an increase of new enterprises is likely to be followed immediately 
by a period of high mortality. 

SIZE OF COMMUNITY 

Although it is possible that retail establishments in small com- 
munities have longer life spans, on the average, than concerns in the 
same trades in cities, there appears to be no conclusive evidence to 
verify this contention. As is usual in economic and social problems, 
so many factors unite in establishing tendencies that it is diflficult to 
dissociate one thread from the composite fabric. 

In analyzing the results of his study of discontinuances in 255 
Illinois ^^ towns. Converse suggests the possible advantage of the 
small-town merchant, but warns, ''A part of this difference, however, 
may be due to the difference of definition used in this study." The 
city of Chicago was not included. 

Similarly, while tendencies in the aggregate may suggest an ad- 
vantage to smaller communities in Colorado,^^Hallas comments: "It 
is doubtful, however, that the finding of this study will adequately 
support any generalizations concerning mortality of retail stores in 
small towns as compared with that obtaining in the larger towns and 
cities." As in the Illinois study, the Colorado analysis did not 
include the largest city, Denver. 

As evidence of the absence of convincing data, comparisons are 
offered iu table 35. In each trade, the smallest first-year mortality 
is placec at the top, and the higher rates follow progressively. If 
the studi ^e were strictly comparable and the size of community»were 
the controlling factor, the order in each instance should place Colo- 
rado first and Illinois second. It is apparent that the low Illinois 
relatives for drug and hardware stores have little connection with 
size of community. 

Table d5.— Variations in first year mortality 
Percent of con- 

Retail grocery: cemscionng 

Illinois 17.5 

Fort Wayne 21.6 

Louisville 25.0 

Colorado 27.8 

Buffalo 1 36.0 

Retail drug: 

Illinois 7.0 

Buffalo.. 12.6 

Chicago 15.5 

Colorado 30. 8 

For further discrepancies, tabulations of closures by size of com- 
munity are presented for Colorado in table 36, and for Illinois in 
table 37. They are not directly comparable; it is difficult to corre- 
late the population groups. But it is apparent that the ill'nois 
study has a larger proportion of large communities than the Colorado 

28 Paul D. Converse, "Business Mortality of Illinois Retail Stores from 1925 to 1930," University of Illi- 
nois, Bureau of Business Research, Bull. No. 41. 

" E. T. Hallas, "Mortality of Retail Stores in Colorido," University of Denver Business Study No. 82, 
1930, p. 9. 



Percent of con- 
Retail hardware: cems closing 

Illinois 5. 2 

Buffalo 16.3 

Colorado 25.0 

Restaurants : 

Illinois ^ 28. 5 

Kansas City ^ 50. 

Colorado 55.5 



2fi2652 — 41 — No. 17- 



30 



CONCENTRATION OF ECONOMIC POWER 



study. Wliile 19 percent of the Colorado communities have popu- 
lations of 2,000, 31 percent of the Illinois towns are in this group. 
Of establishments, Colorado has 60 percent of the total in towns 
exceeding 2,000 of population, Illinois, 82 percent. 

Limiting our attention to a comparison within each State, agiain 
there are conflicting results. A slight advantage might appear to 
rest with smaller towns in Colorado, but the mid-group, 1,000 to 2,000, 
has the lowest first-year mortality. In contrast, the cities of Illinois 
seem to show an advantage over the towns, but not significantly. 

Among the items reducing the plausibility of a definite advantage 
is one purely mechanical in nature- — the use of rates with small num- 
bers. For example, in the 100 Illinois towns with population under 
400, only 2 clothing stores existed in July 1925. One store, or 50 
percent, discontinued in 1927. The second closed in 1928, recording 
a 100-percent mortality within 3 years. Although this calculation is 
mathematically correct, its influence upon the total estimate is 
spurious, and resulting comparisons are unsound. 

Table 36. — Business mortality of retailers in 10 trades in 142 Colorado towns, 
1926-35, classified by size of towns 





Number 
of towns 


Dealers in busi- 
ness in 1926 


Cumulative 


percentage of dealers in business in 1926 
in successive years 


gone 


Size of town 


Number 


Base 
year 
1926= 
100 per- 
cent 


1927 


1928 


1929 


1930 


1931 


1932 1933 


1934 


1935 


Under 500 

500 and under 
1,000 


43 

43 

29 

12 
15 


334 

533 

594 

450 
1,676 


100 

100 

100 

100 
100 


12.9 

16.5 

11.4 

15.8 
17.5 


21.3 

31.7 

26.1 

29.3 
30.8 


33.5 

33.8 

34.0 

36.2 
38.9 


42.8 

40.3 

41.4 

42.4 
44.8 


46.1 

40.9 

47.8 

48.7 
48.8 


49.7 

48.2 

50.7 

52.0 
51.9 


53.2 

52.3 

53.0 

55.1 
54.6 


57.5 

58.3 

56.7 

62.2 
59.9 


62.3 
59.5 


1,000 and under 
2,000 - . 


58.8 


2,000 and under 
5,000 


63.6 


6,000 and over.- 


61.6 


Total 


142 


3,587 


100 


15.7 


28.6 


36.5 


42.8 


47.7 


50.9 


53.9 


59.2 


60.6 



Table 37. — Turn-over or mortality of retail stores in 11 trades in 255 Illinois towns, 
arranged according to size of towns, July 1925 to July 1930 



Size of town 


Number 
of towns 
studied 
in each 
group 


Dealers in busi- 
ness July 1925 


Cumulative percentages of dealers in 
business in July 1925 gone in July of 
each year 




Num- 
ber 


Per- 
cent 


1926 


1927 


1928 


1929 


1930 


Under 400 


100 
75 
50 
25 
5 


619 
1.059 
2,120 
3,111 
2,809 


100 
100 
100 
100 
100 


17.8 
17.2 
15.6 
16.5 
14.5 


30.7 
25.4 
27.2 
26.9 
25.7 


36.8 
35.3 
32.8 
36.9 
34.6 


42.6 
41.5 
39.7 
43.5 
38.7 


47.2 


400 to 1,000 - 


46.8 


2,000 to 6,000- 


44.9 


7,000 to 15,000 


49.3 


Over 35,000 c.- 


43.7 


Total - 


255 


9,718 


100 


15.9 


26.7 


35.2 


41.0 


46.3 











Problems and obstacles involved in the comparison of various studies 
as recorded in the introductory treatment of retail-store mortality 
apply to the data of table 35. The illusion resulting from percentage 
comparisons has just been cited. Brief mention of other differences 
is appropriate. 



CONCENTRATION OF ECONOMIC POWER 



31 



The percentages refer to the proportions of concerns discontinuing 
to all establishments of that trade in business at the particular time. 
This made it necessary to exclude Poughkeepsie relatives which refer 
to the proportions of new firms closing. Sources of data are of 
importance. The Colorado records were based upon directory lasts; 
Illinois information was obtained from the files of Dun & Bradstreet. 
Colorado and Illinois figures represent the composite experience of 
towns within each State, excluding in each instance the largest city, 
while only individual cities were covered in the other studies. In 
addition, there are variations in periods of time, classifications of 
trades, geographical areas, and in industrial concentrations. 



LIFE SPAN AND NET WORTH 

A general impression prevails that the larger concern has a distinct 
advantage over the sm.aller in surviving business vicissitudes. Accu- 
rate measurement of this relationship is impossible. Corporation 
reports are available, and com.mercial ratings for the larger establish- 
ments, but information regarding capital investments in small concerns 
is fugitive and fortuitous. 

The significance of capital as a factor in survival is discussed in the 
section of this report on Factors in Business Mortality, where evidence 
is presented that not alone do the large enterprises appear to have an 
advantage in survival, but, in addition, that small concerns do not, 
in general, grow into large organizations. 

An approach to an estimate of capital investro.ent is the net worth of 
firms based upon credit ratings. In com^piling the information for 
table 38, the data for Minneapolis,28 St. Paul, and Duluth were 
obtained from the rating books of R. G. Dun & Co. for 1930. It is 
obvious that not alone are retail concerns attempting to operate with 
small capital, but that business enterprises of ah kinds are pre- 
ponderantly small in Minnesota. As disclosed in the last column, 
almost two-thirds have net worth of less than $2,000, or are unclassified. 
An additional bias factor is the inclusion in individual proprietorships 
and partnerships of private properties; an effort has been made to 
correct this bias in ratings exceeding $5,000. 



Table 38.- 



-Numher of retail firms in 3 Minnesota cities, classified by net worth, 
1930 



Net worth 


Number of 
retailers 


Percentage of 
retail firms 


Percentage of 

all business 

firms in given 

group 


$500,000 and over... 


42 

177 

872 

1,587 

5,497 


0.5 
2.1 
10.7 
19.4 
67.3 


1.6 


$75,000 to $500,000 .... 


4.3 


$10,000 to $75,000 


13.1 


$2,000 to $10,000. 


16.8 


Less than $2,000 or unclassified , 


65.2 


Total 


8,175 


100.0 


100.0 







The turn-over ratios of retail firms in the Minnesota com.munitie8 
were computed for the period 1926-30. The figures in table 39 repre- 
sent the nuro.ber of closing concerns in the 5-year period expressed as 

25 E. A. Heilman: Mortality of Business Firms in Minneapolis, St. Paul, ana Duluth, 1926-3C University 
of Minnesota Press, 1933. 



32 



CONCENTRATION OF ECONOMIC POWER 



percentages of the total number in business in 1930. The next to the 
last figure, for instance, indicates that for every 100 retailers in 
business in 1930 with net worth of less than $2,000, 105 had closed 
during the 5 years. 

Although the small numbers of firms represented in the higher net 
worth groups do not warrant reliance upon the percentages calculated 
for these classifications, it is probable that the general picture is 
significant. 

Table 39. — 5-year turn-over ratios ' of retail firms in 3 Minnesota cities, classified 
by net worth, 1926-30 



Net worth 



Number of re- 
tailers closing 
as percent of 
number in 
business in 
1930 



Number of re- 
tailers in busi- 
ness, 1930 



Number of re- 
tailers closing, 
1926-30 



$600,000 and over 

$75,000 to $500,000 - 

$10,000 to $75,000..- 

$2,000 to $10,000--- 

Less than $2,000 or unclassified. 



7.1 

18.1 

25.0 

55.0 

105.0 



42 

177 

872 

1,587 

5,497 



3 

32 

218. 

871 

5 77i 



Average- 
Total--.. 



84.4 



8,175 



6,897- 



« Ratio of the number closed in the 5-year period to the number in business in 1930. 

More directly comparable, since only one kind of retail outlet is 
included, is the life span of Chicago ^* failing meat stores, classified 
by the amount of initial investment. Table 40 is constructed to in- 
dicate the apparent relation of life span to the capital investment at 
the time of starting business. All concerns had failed in business. 

While no rating was available for more than one-fifth of the con- 
cerns, of those with known capital rating at organization, 48.5 per- 
cent had less than $1,000. In general, stores with more capital showed 
greater stamina than those with lesser investment; 43 percent of those 
with more than $10,000 survived more than 5 years as contrasted 
with only about 18 percent of those with less than $500. Age in years 
is recorded in the final column, with a gradually reduced longevity 
from almost 6 years on an average for the top capital group to less 
than 3 for the lowest investment category. 



Table 40.— Li/ 


e span of Chicago meat stores, classified by net worth, 


1920 


Initial capital 

rating m 

thousands of 

dollars 


Percentage 

of total in 

each group, 

1920 


Percentage 
in business 
in 1920 con- 
tinuing 
more than 
5 years 


Average 

length of 

life, stores in 

business in 

1920 


initial capital 

rating in 

thousands of 

dollars 


Percentage 

of total in 

each group, 

1920 


Percentage 
in business 
in 1920 con- 
tinuing 
more than 
5 years 


Average 

length of 

life, stores 

in business 

In 1920 


Above 10 

6tol0 

3 to 5 

2to3 

ito2 


3.8 
4.1 
6.7 
6.0 
9.3 


43.4 
33.7 
32.3 

28.7 
30.9 


5.9 
4.8 
4.5 
4.3 
4.2 


^<tol 

Under H.--- 

No rating 

All stores 


12.7 
35.8 
21.6 
100.0 


26.6 
17.8 
23.4 
24.6 


3.7 
2.7 
3.5 
3.6 



" Howard C. Greer: Business Mortality among Retail Meat Stores in Chicago Between 1920 and 1933, 
Journal of Business, University of Chicago, vol. IX, No. 3, July 1936. 



CONCENTRATION OF ECONOMIC POWER 



33 



LIFE SPAN AND SALES 

A census study of independent retail grocers in Buffalo '° yields 
evidence that it is the larger store which tends to survive, not that 
older stores necessarily grow, but that smaller stores are eliminated. 

The analysis did not indicate significant differences as related to 
length of ownership in the extent to which sales declined or losses 
were recovered during cyclical fluctuations. A comparison of the 
average sales of grocery stores is made in table 41. The years in 
which the store was founded or acquired by the recording owners is 
given in the first column. In the second column, the average sales 
are reported for the concerns which continued under identical owner- 
ship and at the same address through the 3 years of census inquiry. 
In the third column me the sales figures for establishments reporting 
in 1929 and 1933 but not in 1935; a- d in the next column are the 
sales averages for stores reporting only in 1929. 

In discussing the data of table 41, McGarry comments as follows: 

The right hand column of this table containing the total stores recorded in 
■each age group clearly indicates that in general the longer the present owner has 
been operating the store, the greater the sales tend to be. The stores which were 
operated by the present owner before 1910 had the largest sales per store, while 
those which had been under present ownership only since 1925 had the smallest. 
This tendency for the older stores to have greater sales is evident in all'^three 
groups under consideration, although there are wider variations in the average 
size of store from year to year among the group which reported in 1929 only 
than in either the 2- or the 3-year identicals. The stores which survived and were 
reported in 1929, 1933, and 1935 were in general larger (except among the oldest 
groups) than the 2-year identicals, and the 2-year identicals were in turn larger 
than those which reported only in 1929. 

Table 41. — Sales per independent grocery store in 1929 according to years of 

ownership ^ — Buffalo 



Year of present ownership 


Stores iden- 
tical in 
1929, 1933, 
1935 


Stores iden- 
tical in 
1929, 1933 


Stores re- 
porting in 
1929 only 


Total stores 
recorded 


Before 1890 • 


$21, 568 
25, 576 
16, 696 
24, 600 
15, 615 
18,249 
21, 472 
19, 623 
19, 875 
22,119 
19,090 
19,665 
15, 707 
18, 182 
17, 922 
11, 026 


$68,921 

} 51,257 

27, 831 
29,404 
8,544 
24, 379 
18, 025 

16, 932 
16, 301 

17, 220 
12,006 
17,996 
10, 848 
14, 782 
17, 153 




$39, 325 


1890 to 1899 


f 


} 27,731 


1900 to 1904.... 


1 $15, 042 
17, 794 
14,113 
11,015 
27,537 
8,467 
9,800 
9,048 
11,290 
7,645 
11,747 
12, 445 
8,066 
7,424 


1905 to 1909.... 


23, 145 


1910 to 1914 .:. 


17,887 


1915 to 1919.... . 


14,288 


1920 


24, 264 


1921 


17, 567 


1922.... 


15, 770 


1923 . 


16,309 


1924 


16,230 


1925 


13,863 


1926 


13,972 


1927. 


14,592 


1928 


11, 369 


1929 


9,203 







' Tables 41 and 42 include stores ideutical in ownership and address for the years 1929, 1933, and 1935, and 
the years 1929 and 1933, together with stores which reported in 1929 only. 

s" Edmond D. McGarry: The Structure and Stability of Retail Trade in Buffalo, 1929, 1933, and 1935— 
Grocery Stores; Statistical Survey, University of Buffalo, Bureau of Business and Social Research, vol. 
XIV, No. 7A, March 1939. 



34 



OONCENTRATION OF ECONOMIC POWER 



Since sales values quoted in table 41 are for the year 1929, the 
various columns are directly comparable. However, with the rapid 
decline of prices from 1929 to 1933, direct comparisons of sales for 
these 2 years are not feasible; decline in the dollar value of sales of 
stores would be expected irrespective of size. The fehift into lower 
brackets is pictured in table 42. 

Table 42. — Number of independent grocery stores, percent of total stores, and percent 
of total sales by size of business 1929, 1933, and 1935 — Buffalo 



Stores with sales of— 


Num 


ber of stores 


Percent of total stores 


Percent of total sales 


1929 


1933 


1935 


1929 


1933 


1935 


1929 


1933 


1935 


$0 to $4,999 


396 
363 

248 
228 

n3 

68 
52 
38 
27 
10 
29 
13 
13 
11 


624 

344 

190 

107 

69 

38 

18 

20 

9 

3 

10 

1 

10 

6 


715 

365 

204 

137 

91 

66 

25 

18 

12 

13 

4 

• 7 

12 

5 


24.6 

22.6 

15.4 

14.2 

7.0 

4.2 

3.2 

2.4 

1.7 

.6 

1.8 

.8 

.8 

.7 


43.1 

23.7 

13.1 

7.4 

4.8 

2.6 

1.2 

1.4 

.6 

.2 

.7 

.1 

.6 

.4 


43.0 

23.7 

13.1 

7.4 

4.8 

2.6 

1.2 

1.4 

.6 

.2 

.7 

.1 

.6 

.4 


4.6 
10.1 
11.8 
16.2 
9.7 
7.1 
6.6 
5.5 
4.4 
1.8 
6.1 
3.3 
4.0 
10.0 


9.7 

16.8 

15.6 

12.6 

10.4 

7.1 

4.0 

5.1 

2.6 

1.0 

3.7 

} 6.2 

5.3 


8.6 


$5,000 to $9.999 


14.9 


$10,000 to $14,999 


14.0 


$15,000 to $19,999 


13.1 


$20,000 to $24,999- 


11.3 


$25,000 to $29,999 


8.5 


$30,000 to $34,999 - 


4.5 


$35,000 to $39,999 


3.8 


$40,000 to $44,999 


2.8 


$45,000 to $49,999.. 


3.5 


$50,000 to $59,999 


1.2 


$60,000 to $69,999 


8.3 


$70,000 to $99,999 


$100,000 and over 


6.6 






Total 


1,609 


1,449 


1,664 


100.0 


100.0 


100.0 


100.0 


100.0 


100.0 




■" 



McGarry analyzes the data as follows: 

Slightly less than half of the stores reporting in 1929 had sales of less than 
$10,000, but by 1933 two-thirds of the stores had fallen into this group. At the 
same time the percentages of stores in all brackets above $10,000 had declined, the 
number of stores with sales of over $50,000 declining from 4.1 percent of the total 
to 1.8 percent. No significant change took place in the percentage of stores in 
these groups between 1933 and 1935. 

Although the number of stores, 66, with sales of over $50,000 in 1929 constitutea 
less than 5 percent of the total, they accounted for 23.4 percent of the independent 
sales of that year. In 1933 the number, of stores in this bracket had been reduced 
to less than half (27) and they accounted for only 15.2 percent of the total sales. 
These sales figures are almost exactly reversed for stores with sales of less than 
$10,000. This classification, which in 1929 (759 stores) accounted for 14.6 per- 
cent of total sales, in 1933 (968 stores) accounted for 26.5 percent of the sales. 
The percentage of total sales in all brackets above $30,000 declined between 1929 
and 1933, but the process was largely reversed between 1933 and 1935, so that most 
of these brackets had gains. 

The shift of business toward lower brackets between 1929 and 1933 was obvi- 
ously due in large part to declines in prices, so that a store might well have supplied 
the same amount of goods and yet have fallen into a lower bracket. At the same 
time it must be recalled that a larger proportion of the total grocery business was 
be^ng done by chain stores, so that on the whole independents were losing in 
physical volume as well as in dollar sales. 

In the United States as a whole for the year 1933, 64 percent of all 
retail stores recoi-ded sales not exceeding $10,000; this group accounted 
for 13.8 percent of total retail sales for the country. The average 
per capita sales were valued at $204.^^ 

Changes in sales value are illustrated in table 43, in which sales of 
identical stores are traced from 1929 to 1933 and 1935. 



'-' Wm. H. Meserole- Small-Scale Retailing, U. S. Department of Commerce. Bureau of Foreign and 
Domestic Commerce, Domestic Commerce Series No. 100, 1938. 



OONCENTKATION OP BOONOMIC POWER 



35 



Table 43.— Sales of independent grocery stores identical in address, 1929, 1933, 
and 1935, as a percentage of 1929 sales, by size of business in 1929 — Buffalo 



Stores with sales of— 


Number 
of stores 
rf pre- 
sented 


Sales volume 
compared with 
1929 as 100 per- 
cent 


Stores with sales of— 


Number 
of stores 
repre- 
sented 


Sales volume 
compared with 
1929 as 100 per- 
cent 




1933 


1935 


1933 


1935 


$0 to $4,999 


102 
137 

ms 

108 
60 
38 
31 
17 


92.9 
66.3 
49.3 
57.1 
51.7 
64.3 
61.5 
75.3 


92.1 
84.0 
51.1 
62.8 
58.5 
63.4 
63.3 
73.6 


$40,000 to $44,999 

$45,000 to $49,999 

'^50,000 to $54,999. 

.$55,000 to"$o9,999 

$60,000 toI$99,999_ 

$100,000 and over 

Total 


17 
4 

U 
9 

10 
4 


54.3 
53.1 
55.6 
58.8 
80.9 
44.4 


66.5 


$5,000 to $9,999 


63.9 


$10,000 to $14,999 

$15,000 to $19,999 

$20,000 to $24,999.. 

$2r,,000 to $29,999....... 

$30,000 to $34,999.. 

$35,000 to $39,999 


63.2 
57.4 
69.4 
31.5 


656 


60.3 


62.5 







The average sales volume of 1933 for identical stores was 60.3 per- 
cent of the 1929 value; the 1935 average had increased only to 62.5 
percent. 

In discussing these relatives, McGarry says: 

A comparison of the change in sales of stores between 1933 and 1935 indicates 
that in general those size groups which fell the lowest in 1933 made the greatest 
come-back in 1935. In other words the more drastic changes at the bottom of the 
depression were ameliorated. In spite of these changes in extremes, however, 
most groups maintained their same relative positions as in 1933. Thus stores 
with less than $10,000 sales continued with a high percent of their 1929 sales, while 
stores with 1929 sales of between $10,000 and $25,000, although increasing their 
sales materially, still reported a smaller proportion of 1929 sales than most other 
groups. Stores in groups between $25,000 and $45,000 maintained higher than 
average proportion of their 1929 records. Unlike the situation in 1933, stores in 
groups between $45,000 and $55,000 reached higher than average proportions of 
their 1929 sales. 

The relatively high ratio of 1933 sales for stores in size groups of less than $10,000 
may be explained by the fact that these were a highly selected group, since of the 
total stores included in these two groups in 1929, only 25.8 percent and 37.7 
percent reported in the two later census years. The drastic decline in sales of such 
small stores evidently caused many of them to cease operations. Thus the small 
stores which were able to continue under these adverse conditions were in general 
those which maintained a relatively high percentage of their 1929 sales. 

It is signijBcant that a larger proportion of stores with sales between $25,000 
and $45,000 continued in operation throughout the .period than of most other 
groups. The fact that this group of stores also maintained high sales records 
throughout the period indicates that they have greater stability than those which 
are smaller or than those which are very larg^. A possible explanation for this is 
that stores of this size are located in trading subcenters and have been gaining 
ground at the expense of the smaller stores which are more prevalently isolated in 
residential districts, and the very large stores which are located in the downtown 
district. This would follow the theory that, with increased price advertising, 
housewives have tended to shop for their groceries in nearby subcenter^ having a 
number of stores rather than making their purchases in isolated neighborhood 
stores or in the larger stores downtown. 

Since sales data of Poughlceepsie '^ concerns were not available, 
average gross sales in 1935 for the United States were adopted as 
indicative of size, as in tables 44 and 45. In addition, average num- 
bers of employees for the United States are used in table 44. 

The advantage of size appears in the data of table 45, and, with the 
exception of service establishments — express and barber — in table 45. 
The roughness of the measure employed does not permit a comparison 
of commodity and service enterprises. 

32 R. G. Hutchinson and X. R. and Mabel Newcomer: "Study in Business Mortality," American Eco- 
nomic Review, vol. XXVIII, No. 3, September 1938, pp. 497-514. 



36 



OONCENTRATION OF ECONOMIC POWER 



Table 44. — Comparison of size and longevity of different types of enterprise- 

Poughkeepsie 



Type of enterprise 


Average 

gross sales 

1935, 

United 

States 

total 1 


Average 

nxmiber of 

employees 

1935, 

United 

States 

total' 


Proportion 
of Pough- 
keepsie con- 
cerns sur- 
viving more 
than 3 
years, 
1844-1927 


Wholesale 


$242, 160 

24, 970 

6,939 


7.3 
2.7 
1.7 


56.3 


Retail 


45.0 


Service . . . 


43.2 







1 Data from U. S. Department of Commerce, Census of Business, 1935. 

Table 45. — Comparison of size and longevity of different kinds of business — 

Poughkeepsie 



Kind of business 


Average 

gross sales 

1935, 

United 

States 

total 1 


Proportion 
of Pough- 
keepsie con- 
cerns sur- 
viving more 
than 3 
years, 
1844-1927 


Kind of business 


Average 
gross sales 
1935, 
United 
States 
total 1 


Proportion 
of Pough- 
keepsie con- 
cerns sur- 
viving more 
than 3 
years, 
1844-1927 


Grocery store 


$17, 876 
17, 360 
12, 793 
11,805 


45.6 
44.9 
41.0 
42.6 


Saloon 2. 

Confectionery store 

Express service. 

Barber shop 


$7, 346 
5,663 
4,468 
1,728 


39.0 


Meat market 


27.7 


Restaurant... 

Cigar store. 


60.6 
65.7 









1 Data from U. S. Department of Commerce, Census of Business, 1935. 
' "Drinking places" in 1935 census. 



POPULA-TION PER STORE 

Since data are not available permitting a study of the relation of 
success to the actual number of customers patronizing each establish- 
ment, general population figures have been used. It is estimated 
that the average patronage per retail store in the United States in 
1933 was 80.4 persons.^* 

The population figures used for the Poughkeepsie ^* estimates are 
for the city and four satellite towns. It was assumed that increases 
between census years were in equal amounts each year. . The number 
of persons per retail establishment in Poughkeepsie varied as follows : 
1843, 96; 1873, 78; 1903, 97; 1933, 72. 

The authors- of the Poughkeepsie study feel that the life span is 
related to local changes in population growth; that "rapid increases 
in population stimulate a too rapid growth of business enterprises and 
that a relatively stable population discourages new business." This 
conclusion is related, of course, to the choice of periods, and while 
general application is limited by the rapid changes within the mer- 
chandising field, such as the development of chain stores and super 
markets. Also, it is apparent that there is no necessary relation 
between population per $tore and the actual patronage of a particular 
store. 

>i William H. Meserole: Small-Scale Retailing, U. S. Department of Commerce, Bureau of Foreign an4 
Domestic Commerce, Domestic Commerce Series No. 100, 1938. 
* R. Q. Hutchinson and A. R. and Mabel Newcomer: Op. cit. 



OONCENTRATIQN OF ECONOMIC POWER 



37 



In Buffalo ^^ the population per grocery store for the entire city for 
1929 averaged 292. The range for census tracts, small areas selected 
by the census for enumeration purposes, was from 148 to 2,929; in the 
latter area, there was only 1 store; in the former, 44 stores. Thirty 
tracts had ratios of less than 300 persons to a store, while 9 tracts had 
more than 500. A circumstance affecting the direct comparability is 
the difference in nature of patronage, some outlets drawing from a 
widely dispersed clientele though located in a shopping center with 
small resident population. In 3 areas without shopping centers and 
with small population per store, the consumer incomes were low; 
tracts with large population per store were high-income centers. 

Changes in the number of persons per grocery store in Austin ^^ from 
1879 to 1932 are given in table 46. Although fluctuations occur as 
the number of stores is temporarily decreased, the trend has been 
definitely toward a larger per-store population. An important 
limitation of this statement is the absence of information regarding 
the trade territory covered. Smce the population data relate to the 
city directory, there is available no evidence of the extent of patronage 
beyond city limits, as transportation, delivery, and mail facilities 
improved, or as enterprises were established in adjacent areas to 
compete with city suppliers. 

Table 46. — Comparison of population ^ with stores in existence — Austin, Tex. 



Year 


Popula- 
tion 


Number 
of stores 


Number 
of per- 
sons per 
store 


Year 


Popula- 
tion 


Number 
of stores 


Number 
of per- 
sons per 
store 


1879 


7,263 
8,409 
10,500 
13, 698 
16, 101 
U, 888 
17,004 
19,368 
19, 819 
19,687 
20,970 
21, 736 
23, 861 
27,800 


79 
83 
77 
105 
128 
110 
111 
118 
115 
115 
113 
131 
135 
136 


92 
101 
136 
131 
127 
135 
153 
164 
172 
171 
186 
166 
177 
204 


1907... 


28,123 

29, 273 

30, 791 
33, 566 
35,000 
45, 747 
46,990 
47, 409 
49, 565 
55, 728 
58, 755 
55,000 
53, 118 
58, 697 


167 
149 
164 
166 
175 
170 
173 
175 
192 
208 
216 
224 
217 
235 


168 


1881 


1909 


196 


1883 


1910 


187 


1885 


1912 


202 


1887... 


1914 .. 


227 


1889 


1916 


269 


1891 . 


1918... 

1920 


272 


1893 


271 


1895.. 


1922 . 


258 


1897 


1924... 


268 


1898 


1927 


272 


1900 


1929 


246 


1903.. 


1930 . 


2'«5 


1905 


1932 


250 









1 Population f.gurps are taken from the city directories. 

Meat stores per thousand of population are recorded for Chicago ^^ 
in table 47. The variation seems to occur with changes in business 
conditions, declining with depressions. Preceding estimates were in 
terms of persons per store, whereas table 47 records stores per 1,000 
persons. In this table, then, the figures would become larger with an 
increase in the number of stores. Between 1929 and 1933, chain-store 
units increased steadily relative to population, while independent 
stores declined. The final column shows the steady increase in the 
proportion of chain units to total retail meat stores. 

" Edmond D. McGarry: "The Structure and Stability of Retail Trade in Buffalo, 1929; 1933, and 1935." 
'8 Solon Ayers: A Study of Mortality of Retail Orocei-y Stores in Austin, Tex., from 1880 to 1932. 
" Howard C. Greer:;"Business Mortality Among Retail Meat Stores in Chicago Between 1920 and 1933," 
Journal of Business, University of Chicago, vol. IX, No. 3, July 1936. 



38 OONCENTRATION OF ECONOMIC POWEH 

Table 47. — Numbers of Chicago retail meat stores, by type of operation 
fFigures in totals and per thousand of population] 





Individually owned 
stores 


Chain-store units ' 


All retail meat stores 


Percent- 
age chain 
units to 
total 
stores 


Year (July 1) 


Total 
number 


Per thou- 
sand 
popu- 
lation 


Total 
number 


Per thou- 
sand 
popu- 
lation 


Total 
number 


Per thou- 
sand 
popu- 
lation 


1920 


4,818 
4,172 
4,213 
4,451 
4,839 
5,407 
6,499 
5,519 
5,599 
5,351 
5,084 
4,991 
4,916 
4,883 


1.78 
1.47 
1.45 
1.50 
1.59 
1.75 
1.74 
1.71 
1.70 
1.59 
1.51 
1.46 
1.43 
1.40 












1921 












1922 












1923 












1924 












1925 












1926 












1927 












1928 












1929 


220 
320 
340 
390 
460 


0.07 
.09 
.10 
.11 
.13 


5,571 
5,404 
5.331 
5,306 
5,343 


1.66 
i.'eo 
1.56 
1.54 
1.53 


3.9 


1930 


5.9 


1931 


6.4 


1932 


7.4 


1933 


8.6 







I Data on chain-store units partly estimated; not available for years prior to 1929. 

A record of the number of retail stores per 1,000 of population in 
1926 and 1935 for Colorado ^^ towns is given in table 48. 

Store densities were less in 1935 than in 1926 for clothing, drug, 
dry goods, furniture, hardware, meat, and general stores. While 
grocery stores .remained fairly constant, garages and restaurants 
increased relative to population in all towns. The number of inde- 
pendent retail meat stores per 1,000 persons would appear to be 
smaller in Colorado towns than in the city of Chicago. It is possible 
that meat departments of grocery and general stores coro.pensate. 

In our discussion of the general opinion that chances of survival 
were greater in smaller communities, we indicated the lack of evidence. 
It would appear from table 48 that the number of stores related to 
population may be greater in the smaller towns ; or in other words, 
that the population per store is less in the smaller towns. To the 
extent that total available patronage is a factor in survival, this 
fact would not support the contention mentioned above. 

Converse ^^ found a close direct relationship between changes in 
population and changes in the number of retail dealers in comparing 
the 2 years 1925 and 1930. The average number of stores related 
to population of 154 towns is presented in table 49. It is necessary, 
in comparing Illinois rates with those of Colorado and Chicago, to 
move the decimal points in table 49 one digit to the left, since the 
population unit is 10,000 persons, not 1,000, as in tables 47 and 48. 

In both 1925 and 1930 the Chicago meat-store population rate ^yas 
more than three times the ratio of the Illinois largest population 
grouping. 

Ignoring the difference in years, the only directly comparable 
population groups in table 48 and 49 are the towns with from 2,000 
to 5,000 inhabitants. But in this group several rates appear to be 
out of line with other tendencies. For instance, the grocery rates 
are lower for Colorado in this population group than in any of the 

38 E. T. Hallas: "Mortality of Retail Stores in Colorado," University of Denver Business Study No. 82, 
1936, p.- 9. 

'« Paul D. Converse, Business Mortality of Illinois Retail Stores from 1925 to 1930, University" of Illinois, 
Bureau of Business Research, Bull. No. 41. 



CONCENTRATION OP ECONOMIC POWER 



39 



lower or higher population classifications. It is probable that a 
mechanical element is present here affecting rates, perhaps the small 
number of towns, and of stores represented. 

Table 48. — Number of retailers in 10 trades in 14^ Colorado towns per 1,000 popu- 
lation, 1926 and 1935, according to size of towns 

GROUP I. 43 TOWNS WITH POPULATION UNDEB 500 



Year 


Cloth 
ing 


Drugs 


Dry 

goods 


Furni- 
ture 


Garages 


General 
store 


Gro- 
ceries 


Hard- 
ware 


Meat 


Restau- 
rants 


1926 


0.4 
.1 


2.4 
2.4 


1.1 

.7 


0.4 
.3 


4.2 
4.6 


4.9 
3.4 


4.1 
4.1 


1.6 
1.0 


1.0 
.6 


2.8 


1935 


3.6 











GROUP II. 43 TOWNS WITH POPULATION OF 500 TO 1,000 



1926 


0.7 
.3 


1.8 
1.8 


0.7 
.8 


0.5 
.3 


4.0 
4.4 


3.2 
2.3 


3.2 
3.7 


1.4 
1.1 


0.7 

.4 


2.3 


1936 


3.3 







GROUP III. 29 TOWNS WITH POPULATION OF 1,000 TO 2,000 



1926 


0.9 
.6 


1.4 
1.3 


0.8 
.8 


0.7 
.3 


3.2 
3.6 


1.7 
1.1 


3.1 
3.4 


1.1 

1.1 


0.7 
.5 


2.2 


1935 


3.5 







GROUP IV. 12 TOWNS WITH POPULATION OF 2,000 TO 5,000 



1926 


0.8 

.5 


1.0 
.9 


0.9 
.7 


0.6 

.6 


2.7 
2.9 


0.5 
.3 


2.7 
2.8 


0.7 

.7 


0.6 
.4 


1.4 


1935 


3.0 







GROUP V. 16 TOWNS WITH POPULATION OF 6,000 AND OVER 



1926 i.. 


0.7 
.5 


0.7 
.6 


0.4 
.2 


0.4 
.4 


1.9 
1.8 


0.2 
.1 


3.7 
3.5 


0.3 
.3 


0.3 
.2 


1.3 


1935 


2.1 







ALL TOWNS 



1926 


0.7 
.4 


1.0 
.9 


0.6 
•4 


0.5 
.4 


2.6 
2.6 


0.9 
.6 


3.5 
3.5 


0.6 
.5 


0.4 
.3 


1.6 


1935 


2.6 







Table 49. — Average number of retail stores for each 10,000 people in 1925 and 19S0 
for 11 retail trades in 154 Illinois towns 









Town groups 


Trades 


all towns 


400 to 1,000 1 
population 


2,000 to 5.000 
population 


7.000 to 15,000 
population 


Over 35,000 
population 




1925 


1930 


1926 


1930 


1925 


1930 


1925 


1930 


1925 


1930 


Grocery 


43.3 
17.7 
11.2 
6.5 
6.4 
6.2 
6.1 
4.7 
4.4 
3.7 
.4 


37.3 
17.3 
12.8 
5.3 
4.8 
6.0 
4.7 
4.3 
4.1 
3.0 
.4 


33.1 

40.5 

23.0 

5.5 

41.6 

14.3 

12.2 

17.3 

7.2 

4.8 

.2 


31.2 
41.9 
24.4 

5.2 
34.4 
12.6 

8.6 
16.0 

7.0 

3.2 
.0 


38.8 
22.4 
12.7 
7.8 
8.6 
7.6 
6.9 
7.4 
6.6 
7.7 
.3 


31.5 

23.8 

14.1 

6.6 

6.6 

7.3 

■6.3 

7.0 

6.3 

6.4 

.3 


47.7 
18.2 
10.1 
7.2 
4.8 
6.6 
6.1 
3.5 
4.5 
3.7 
.6 


38.8 
16.1 
10.6 
6.4 
3.4 
6.3 
3.6 
2.9 
4.1 
3.0 
.6 


43.5 

11.2 

9.4 

6.3 

.8 

4.7 

5.7 

2.4 

3.1 

1.4 

.3 


39.9 


Garages 


11.4 


Restaurants • 


12.2 


Clothing 


4.6 


General stores 


.7 


Drugs 


6.0 


Meat.— 


4.9 


Hardware 


2.3 


Furniture 


3.2 


Dry goods 


1.2 


Department stores 


.3 






Total 


110.6 


100.0 


199.7 


184.5 


125.8 


114.1 


111.0 


93.8 


87.8 


85.6 







1 Population data for 1 town were not obtainable. 



40 



CXDNCENTEATION OP ECONOMIC POWER 



The number of stores per 1,000 of population in the 30 towns studied 
by the Federal Trade Commission ^° in 1931 average 9.8. The average 
for independent stores was 7.9, for chain units, 1.9. Farmington, 
Maine, had the highest independent ratio, 12.7, although 11 of the 30 
towns had ratios of 10 or greater. Cullman, Ala., had the highest 
chain ratio, 3.6; the only other town exceeding a chain ratio of 3 wa& 
Albemarle, N. C. 

The potential patronage per grocery store in Fort Wayne,'*^ Ind., for 
two periods, 1915-30, and 1889-1904, is listed m table 50. The 
population figures are for census years, 1889, 1899, 1919, and 1929, 
with intervening years estimated on an assumption of regular increase 
each year. Since the number of persons per store is recorded here, 
table 50 is directly comparable with table 46. In the early period 
Fort Wayne stores had more than twice the per capita of the Austin 
grocers, but the difference narrowed in the later period. 

Table 50. — Number of inhabitants of Fort Wayne in proportion to the number of 
retail grocery stores each year, 1915-SO and 1889-1904 



Average number of persons per 
store:- 

1915- 376 

1916 - 391 

1917 387 

1918 380 

1919 399 

1920- 359 

1921 466 

1922 374 

1923 367 

1924 327 

1925 342 

1926 .--- 334 

1927 337 

1928 350 

1929 358 

1930 - 347 



Average number of persons per 
store — Continued. 

1889 283' 

1890 289 

1891 263 

1892 262 

1893 249 

1894 268 

1895 263 

1896 279' 

1897 284 

1898 ---. 300 

1899.--__ 307 

1900 309 

1901 309 

1902 330 

1903 347 

1904 355 



Average ■. 368 Average 294 

Variations in trades covered, years recorded, community population 
classifications used, and sources of estimates make a serious effort at 
comparison futile. It is possible that the average number of persons 
per store is greater currently than a few generations ago, and perhaps 
the number per store is greater in large than in small communities. It 
is well known that the population rate is different for different kinds of 
stores. It is evident that the reduction in the number of stores follow- 
ing a depression will automatically increase the population per store. 
However, in all these spotty items there is no evidence that life span 
has altered as a result of a change of population rate. 



FORM OF ORGANIZATION 

Since a very small proportion of retail enterprises are corporations, 
it is of little profit to compare life spans in terms of the form of 
organization. On the other hand, the large proportion of total 
business acquired by chain organizations in a number of cities, and 

«i Federal Trade Commission, Chain Stores: The Chain Store in the Small Town. S. Doc. 93, 73d 
Cong., 1934. 

" Russell L. Furst: "Relationships Between the Numbers of Chain and Individually Owned Grocery 
Stores in Fort Wayne," University of Chicago Journal of Business, vol. V, No. 4, pt. I. 



CONCENTRATION OF ECONOMIC POWEE 



41 



particularly in the drug, grocery, and tobacco fields, offers a future 
opportunity for a detailed analysis of competition. As indicated in 
our section on factors in business mortality, there is frequent fluctua- 
tion in the number of chain units opened and closed, related largely to 
business conditions but currently perhaps even more directly to the 
development of a new competitive device, the supermarket. In the 
latter case, discontiuuance of a unit is in reality a form of expansion 
through merger, and not a formal discontinuance. 

The form of organization for Poughkeepsie *^ retail establishments 
was recorded for 6,230 concerns. The relative unimportance of the 
corporation in this community is apparent in the following summary: 
The individual proprietorships constituted 77.2 percent of the total; 
partnerships accounted for 11.4 percent; corporations, 2.8 percent; 
and all other forms, 8.6 percent. 

Longevity was estimated for 4,998 Poughkeepsie retail concerns. 
Only 117 of these concerns were incorporated; recognizing the limi- 
tations of the small number involved for the whole period, 1844- 
1927, the comparison of table 51 is still of interest. The apparent 
advantage of the corporation may be due to a stronger capital posi- 
tion, to more adequate management, and to advantages in purchasing 
and merchandising. 

Table 51. — Comparison of length of life of corporations and all forms of retail 
enterprises, Poughkeepsie, 1844-1927 

cumulativ'e percentage distribution 



Years of life 


All con- 
cerns 


Corpora- 
tions 


Years of life 


All con- 
cerns 


Corpora- 
tions 


1 or less 


30 

44 
53 
59 
64 
68 
72 


20 
32 
44 
52 
58 
63 
65 


8 or less . 


74 
76 
78 
22 


66 


2 or less - 


9 or less 


68 


3 or less 




69 


4 or less 


Over 10 


31 


5 or less 


Number of cases 




6 or less 


4,998 


117 


7 or less ... 











LIFE EXPECTANCY 

Based upon survival experience^ several estimates have been made 
of the probability of continuance m business beyond a given number 
of years. 

In table 52, life expectancy for four retail trades is given, based upon 
Pittsburgh*^ experience for a 10-year period. Of every 100 drug 
firms having opportunity for survival in the second year in business, 
69 successfully continued. In the hardware field 72 of each 100 
survived; in the grocery field, only 53. 

In general, the life expectancy increases with the age of the enter- 
prise, heavy mortality occurring in early years. Throughout the 
survival period, the expectancy for grocery stores is lower than for 
the other groups. 

A similar record for Buffalo ** for the period 1920-28 is summarized 
in table 53. Only 40 of each 100 grocers continued in the second 
year, as compared with 53 in Pittsburgh; of course, the difference in 

<2 R. G. Hutchinson and A. R. and Mabel Newcomer: "Study in Business Mortality," American 
Economic Review, vol. XXVIII, No. 3, September 1938, pp. 497-514. 
" A. E. Boer: "Mortality Costs in Retail Trades," Journal Marketing, vol. II, No. 1, July 1937, pp. 52-60 
« Edmond D. McGarry: Mortality in Retail Trade, University of Buffalo, 1930. 



42 



t^ONCENTEATION OF BOONOMIC POWEH 



the period studied must be considered, the Pittsburgh data covering 
1925 to 1933. 





Table 


52. — lAfe expectancy in Pittsburgh, 


1925-33 








Years 




1 


2 


3 


4 


5 


6 


7 


8 


9 


10 


Grocery 


100 
100 
100 
100 


53 
69 
72 
61 


42 
63 
56 
50 


34 
60 
SO 
45 


30 
55 
44 
39 


26 
48 
42 
38 


23 
43 
39 
35 


21 
38 
39 
27 


19 
32 
31 
27 


17 


Drug 


30 


Hardware.- 

Shoe 


21 
21 







Table 53. — Lije expectancy in Buffalo,^ 1920-28 





Years 




1 


2 


3 


4 


5 


6 


7 


8 


9 


10 


Grocery., 


100 
100 
100 
100 


40.0 
73.4 
65.5 
66.2 


26.2 
65.4 
50.7 
42.2 


19.3 
55.2 
41.0 
32.6 


15.1 
50.0 
38.1 
25.8 


12.7 
47.1 
36.1 
23.2 


10.2 
41.7 
27.2 
19.1 


7.9 
38.9 
20.5 
17.5 


6.9 

•39.6 
'21.3 
>20.5 


6.0 


Drug 1.-- 


'28.6 


Hardware.-- 


'13.0 


Shoes - 


'21.1 







' In computing the percentages the numbers of firms which had opportunities of surviving for various 
numbers of years are taken as denominators, and the numbers of firms which did survive for the various 
lengths of time in question are taken as the numerators. As an example of the method employed, take the 
computation for the 9-year length of life, for which the grocery-store figure shown in table 53 is 6.9 percent. 
In 1919, 519 new firms entered the grocery business; 9 years later, or in 1927, 37 of these 519 firms were still 
in business. In 1920, 515 new firms entered the grocery business; 9 years later, or in 1928, 34 of these were 
still listed. The entrants during these 2 years of the 11-year period being studied are the only stores in- 
cluded in our count which could have lasted for 9 years. The total number of entrants for these 2 years is 
619 firms plus 515 firms, or 1,034 firms. The number of these entrants which remained in business by 1927 
or 1928 Is 71, or 6.9 percent of 1,034. 

s Only a small number of stores is included in the count for these years; hence the Instability of the figures 
given. 

Based upon the survival experience summarized in table 53, in 
table 54 there have been formulated the probabilities of continued 
existence. 

It is evident that the first year in the life of any type of store is the 
most precarious. A change in the probability of life in accordance 
with the age of the store may be computed. For instance, of 100 
stores entering the grocery business in any year, 40 may be expected 
to continue a second year. Twenty-six of these forty, or about 65 
percent, wUl probably be Hsted a third year, and of the 26, about 19, 
or 73 percent, a fourth year. Table 54 represents not the actual Hfe 
expectancy but rather the change in life expectancy with each addi- 
tional year's life. 

The increase in "additional year expectancy" between the first and 
second year is greater in the case of grocery stores than for any other 
type of store studied (from 40.0 to 65.5 percent). 

Of the same nature is the material from the Austin ^ study as given 
in table 55, covering retail grocery stores. Fifty-two percent of the 
concerns listed continued into their second year. 

«« Solon Ayers: A Study of Mortality of Retail Grocery Stores In Austin, Tex., from 1880 to 1082 (Uni- 
versity of Texas, master's thesis). 



OONCENTRATION OF ECONOMIC POWER 



43 



Table 54. — Probability of a store's remaining in business an additional year beyond 
any given age — Buffalo, 1920-28 



Qiyen age — years 



Grocery... 

Drug 

Hardware 
Shoes 



40.0 
73.0 
65.5 
66.0 



65.5 
89.1 
77.4 
75.1 



73.7 
84.4 
80.9 
77.2 



78.2 
90.6 
92.9 
79.1 



84.1 
94.2 
94.7 



80.3 



76.3 
82.3 



77.4 
93.3 
76.4 
01.6 



Table 55. — Life expectancy in Austin — Survivals out of 1,368 retail grocery stores 



Number of years : 

2 

4 

6 

8 

10 



12. 

14. 
16. 
17. 



715 

465 

322 

239 

179 

147 

98 

74 

52 



Number of years: 
19 ---. 



22. 
24. 
26. 
28. 
29. 
31. 
33. 
35. 



46 

37 

26 

18 

11 

10 

9 

5 

4 



In table 56 the calculated "chances" of continued existence are 
recorded for Austin grocers. Based upon the experience of the 
period, 1880-1932, the probability of continuing a given number of 
je&Ts, knowing present age, is given as related percentages. For 
instance, at organization, or age zero, the chances of continuing in 
business for 2 years is 52.3 out of a hundred, or 52.3 percent. At age 
2 years, the chances of continuing 2 more years, or until the age of 4, 
is 67.9 percent; this may be contrasted with the probabihty of 4 years 
of life at organization, which is only 35.4 out of a hundred. 

Table 56. — Life expectancy, retail grocery stores in Austin, Tex. 



Age at- 


Age to be expected, on an average 


tained 


2 


4 


6 


8 


10 


12 


14 


16 


17 


19 


22 


24 


26 

2.3 
6>1 
0.2 

! 9 

14.8 
17.3 
21.1 
29.0 
37.5 
60.0 
61.4 
60.0 
77.3 


28 

2.0 

4.1 

7.4 

■ 8.6 

10.4 

11.7 

14.5 

20.0 

26.2 

32.4 

36.6 

42.3 

67.8 

73.3 


29 

2.0 

4.1 

6.8 

8.4 

10. 1 

11.6 

14.3 

19.2 

24.5 

30.3 

33.3 

37.9 

53.1 

66.6 

90.0 


31 


33 


35 




2 


62.3 


36.4 
67.9 


26.9 
60. S 
76.8 


20.7 
41.0 
60.5 
79.4 


17.2 
27.1 
50.7 
66.8 
83.7 


14.6 
2\ 1 
41. « 
66.3 
69.3 
82.1 


10.4 

21. C 
30.3 
40.3 
60.0 
69.8 
73.1 


8.4 

24.9 
32.3 
48.0 
48.4 
59.7 
fil.2 


6.3 
12.7 
18.8 
21.1 
36.9 
39.4 
44.8 
62.7 
78.8 


6.8 
11.5 
17.0 
20. ■« 
27.1 
32.8 
40.9 
67.7 
71.4 
90.0 


5.1 
10.4 
15.5 
^0.1 
^4.3 
29.3 
35.9 
60.7 
61.7 
78.7 
88.1 


3.8 
7.9 

JO .. 

18. H 
22.6 
27.7 
38.3 
48.5 
60.5 
69.2 
76.5 


2.0 
4 
6.7 
7.6 
10.0 
11.4 
14.1 
18.8 
24.3 
30.0 
33.3 
37.6 
47.6 
60.0 
81.8 
90.0 


1.2 

2.3 

4.2 

4.9 

6.3 

7.1 

6.3 

11.1 

14.3 

17.3 

19.2 

21.7 

^7.1 

36.7 

60.0 

65.6 

62.6 


1.1 

2.1 

8.0 

3.0 

6.3 

6.0 

8.6 

9.6 

12.6 

14.3 

16.2 

18.2 

23.1 

30.8 

40.0 

44 4 


4 




6 

8 

10 

12 






14 














16 
















17 


















19 




















22 






















24 
























26 


























28 




























29 






























31 
































60.0 
•80.0 


33 
























"" 















































44 



CONCENTRATION OF ECONOMIC POWER 



The number of additional years of life to be expected, on an average, 
for independent retail meat stores in Chicago,*® is 5 at the time of 
entry into business. With survival thi'ough 5 years accomplished, an 
average expectancy of 7.4 additional years is indicated by table 57. 

Table 57. — Life expectancy of individually owned Chicago retail meat stores (com- 
puted according to their experience between 1920 and 193S) 



Age attained 



Percentage of total number continu- 


ing for number of years indicated 


Meat mark- 


Combina- 


All meat 


ets 


tion stores 


stores 


100.0 


100.0 


100.0 


75.5 


74.8 


75.1 


65.7 


53.8 


54.6 


40.4 


38.9 


39.6 


31.6 


30.5 


30.9 


25.5 


23.7 


24.5 



Average life 
expectancy 
of stores of 
ages indi- 
cated 
(years) 



Less than 1 year 

1 year 

2 years 

3 years 

4 years 

5 years 



5.0 
5.5 
6.1 
6.9 
7.2 
7.4 



Added to the many differences inherent in the various studies, such 
as sources and nature of the data, calculation of probability follows 
somewhat different methods. 

From the available information covering grocery stores, however, it 
may be estimated that the stores (combination) of Chicago displayed 
the greatest average stamina, followed in order by Pittsburgh, Austin, 
and Buffalo. 

The drug and shoe stores of Buffalo appear to have an advantage ir« 
longevity over those of Pittsburgh, a relation which is reversed in the 
case of hardware outlets. 

Were comprehensive and current information of this type ade- 
quately available for scientific analysis, the foresighted prospective 
proprietor and the cautious creditor would be greatly aided in de- 
termining zones of safety. 

« Howard C. Greer: "Business Mortality Among Retail Meat Stores in Chicago Between 1920 and 1933," 
Journal of Business, University of Chicago, vol. IX, No. 3, July 1930. 



CHAPTER III 
BUSINESS MORTALITY IN MANUFACTURING 

Analysis of the life span of manufacturing concerns is complicated 
by the formal aspects of their organization and the efforts made for 
rehabilitation of insolvent concerns. 

Individual proprietorships and partnerships are typical of the 
retail field, the corporation more especially of manufacture. When a 
proprietor fails, his establishment usually closes; a partnership is 
readily dissolved. But a corporation commonly has diverse and 
scattered ownership; its liabilities affect extensive interests; its place 
in industry, usually related to size, has economic and social implica- 
tions of wide ramification. 

A corporation in financial difficulties passes into receivership which 
is a legal process devised to conserve the interests of owners, creditors, 
and the public, through the appointment of a manager responsible to 
the court. The object is basically to reorganize and to reestablish 
solvency. After months or years the corporation may be dissolved; 
but the problem of determining life span is then complex. Shall the 
date of establishing receivership control be accepted, or the date of 
final liquidation? 

Revision of our bankruptcy laws has placed emphasis upon re- 
habilitation rather than upon liquidation, further enlarging the ad- 
vantage of the corporate form. 

LONGEVITY 

In the experience of more than 70 years, only 53 percent of Pough- 
keepsie ^ manufacturing establishments continued in existence more 
than 3 years. City directory lists were consulted in following the 
longevity of concerns, as described in the discussion of retail mortality. 

Two circumstances are important in considering the special problem 
of the corporate form. In a cortimunity the size of Poughkeepsie, th'e 
proprietorship and partnership forms of organization would be repre- 
sented relatively more frequently than in the larger cities. In addi- 
tion, as a device recent in popularity the corporate form would appear 
infrequently in the early part of the period represented, 1844-1926. 

These facts make the comparisons of table 58 particularly interesting. 
In the second column, the ownership point of view is, stressed, the 
"firm" rather than the establishment, in contradistinction to the third 
column in which the plant or store is the unit. While the longevity 
of 945 establishments was traeed without regard to proprietorship, 
1,194 concerns were involved when proprietorship was considered. 

> R. G. Hutchinson and A. R. and Mabel Newcomer: "Study in Business Mortality." American 
Economic Review. 

45 



262652— 41— No. 17- 



46 



CONCENTRATION OF ECONOMIC POWER 



Table 58. — Length of life of manufacturing enterprises in Poughkeepsie between 

1844 and 1926 





Changes in 
proprie- 
torship 
counted 


Changes in 
proprie- 
torship 

not counted 




Changes in 
proprie- 
torship 
counted 


Changes in 
proprie- 
torship 

not counted 




Percentage distribution 
by years of life 


Numbers of enterprises... 


1,194 


945 


Years of life— Continued. 
5 


5.4 
4.5 
2.7 
.2.9 
2.7 
2.7 
21.4 


5.5 




Percentage distribution 
by years of life 


6 


5.3 




7 


2.3 




8 


2.4 




9 


2.4 


Years of life: 
1 


24.0 
13.1 
12.7 
8.0 


23.1 
11.5 
12.3 
7.8 


10 


2.0 


Over 10.... 


25.3 




Total.... 




3 . - 


100.0 


100.0 


4 . 











The principal difference as the result of the double classification is 
the longevity beyond 10 years, where there is an advantage of the 
establishment over the person. Had the corporate form of organiza- 
tion been important in this picture we should have expected even a 
closer agreement a? to numbers and years of life in the two columns. 

Between the years 1844 and 1916 there were 846 Poughkeepsie 
manufacturing concerns established which subsequent to 1916 were 
liquidated. Of this number, 107, or 12.6 percent, continued m business 
more than 20 years. In table 59 the mortality of manufacturing con- 
cerns is approximated. Two- thirds of the enterprises failed to con- 
tinue beyond their sixth year, and three-fourths did not reach their 
eleventh year. 

TA>fT,E 59. — Length of life of manufacturing enterprises in Poughkeepsie between 

1844 and 1926 



Cumulative 
percent of 

Years of life — Continued. fi^'^^ 

7 or less 68 

8 or less 70 

9 or less --- 73 

10 or less 75 

Over 10 25 



Cumulative 
percent of 

Years of life: ^'■™» 

1 or less 23 

2 or less 35 

3 or less 47 

4 or less 55 

5 or less 60 

6 or less 66 

In a study of mortality in Minneapolis, St. Paul, and Duluth, 
Minn., from 1926 to 1930,^ the avorag-e age of manufacturing firms upon 
discontinuance was 8 years. The average life of printing establish- 
ments was 62.6 years, an imusual record. Woodworking establish- 
ments averaged 15.5 years, and lumber manufacturers 11.4 years. 
The range of other manufacturing groups was from 7.7 years for the 
food industry, and 6.7 years for leather and shoe firms, to 4.9 years 
for clothing and textiles, and 2.6 years for music and radio. 

Id the field of shoe manufacture, a sample area,^ including the States 

f Maine, Pennsylvania, Wisconsin, and Missouri, and the cities of 

yim., Haverhill, Brockton, and Rochester, disclosed an average life 

up to 1935 of 5.2 years for firms starting in business since 1905. This 

» S. A. Heilman: Mortality of Business Firms in Minneapolis, St. Paul and Duluth, 1926-1930. Univer- 
■Ity of Minnesota Press, 1933. , . . „ „ ^ t, . 

•Horace B. Davis: "Business Mortality: The Shoe Manufacturing Industry." Harvard Business 
■•view, spring 1939. 



C50NCENTRATI0N OF ECONOMIC POWER 



47 



analysis counted a concern as discontinuing if succeeded by another 
firm. 

Automobile manufacturers * of the United States had an average 
life span of 8 years from the date of their entry until 1924. For the 
181 automobile manufacturers^ in business in the period, 1903 to 
1926, the average longevity was 9.4 years. 

SHIFTS WITH TIME 

As in the classification of retail estabhshments, the Poughkeepsie ' 
life span of manufacturing enterprises was divided into three 30-year 
periods, as in table 60. It is apparent that survival has increased 
relatively in the most recent period. Only 22 percent of manufactur- 
ing estabhshments discontinued within 1 year during the years 1904 
to 1933, as compared with 24 percent and 25 percent, respectively, 
in the two earher periods. Survival beyond 3 years was greater 
relatively, as well. These rates are based upon the experience of 
new concerns, not of all concerns in business. 

In each year since 1923, the mortality rate of shoe-manufacturing^ 
concerns has exceeded 10 percent, and in the period 1926-34 it was 
above 16 percent of all firms in business. For the period, 1905 
through 1935, the average rate was 12.4 percent; this was a loss each 
year of one firm in eight. In commenting upon this record, Davis 
concludes, "Neither the mortality nor the insolvency of the shoe firms 
seems to be greatly affected by the business cycle." 

In addition, the size of operations of firms, as a whole, showed 
decreases in their period of existence. Of 1,296 firms, 819 failed to 
grow. 

A discussion of general trends and cycles of failures appears in a 
separate section. 

Table 60. — Length of life of business enterprises in Poughkeepsie in 3 periods, 

18U-1933 



Years of life 


Cumulative percentage 
distribution 


t 

Years of life 


Cumulative percentage 
distribution 


1844-73 


1874- 
1903 


1904-33 


1844-73 


1874- 
1903 


1904-33 


lor less 


25 
38 


24 
38 


22 
33 


3 or less 


48 
62 


60 
60 


44 


2 or less . 


Over 3 


66 









SIZE OF COMMUNITY 

As pointed out in the treatment of retail-store mortality, there is a 
dearth of significant information relating life span to the size of com- 
munity, and there should be a corresponding skepticism as to the 
importance of this single factor. 

However, a study of the shoe-manufacturing industry ^ dieveloped 
interesting conclusions which are directly opposed to the usual assump- 

* Ralph C. Epstein: "The Rise and Fall of Firms in the Automobile Industry." Harvard Btisiness 
Review 2, January 1927. 

' Ralph C. Epstein: The Automobile Industry: Its Economicand Commercial Development. MoQriW- 
Hill, Inc.. 1928. 
« R. O. Hutchinson and A. R. and Mabel Newcomer: Op cit. 
' Horace B. Davis: Op. cit. 

• Horace B. Davis: Op. cit. 



48 



CONCENTRATION OF ECONOMIC POWER 



tions regarding the advantages of small towns. Davis is quoted as 
follows: "As between the small towns and the larger, it is significant 
that the mortality is higher in the former. Our study covered com- 
pletely four States which contain a considerable number of shoe firms; 
m different localities, and in each of which one city stands out as 
larger and more important than the others, both in size and in the 
number of shoe plants. The States, with the corresponding shoe 
metropolis in each, were Maine (Auburn-Lewiston), Pennsylvania 
(Philadelphia), Wisconsin (Milwaukee), and Missouri (St. Louis). 
The shoe firms in the smaller towns had a mortality of 90 percent 
from 1885 to 1911 and of 83 percent from 1911 to 1937, while the four 
larger cities showed a mortality of onlj 87 percent and 79 percent 
respectively in the 2 periods. This findmg tends to confirm the view, 
already held by students of the industry, that the better-managed 
firrns prefer the superior faciUties of the medium and larger cities 
while the firms (other than branches of large firms) that gravitate to 
the smaller towns in search of lower costs tend to be less capable; 
they usually go out of business anyway." 

LIFE SPAN AND NET WORTH 

Based upon credit ratings, table 61 classifies Minnesota ' manu- 
facturing enterprises recorded in 1930. Approximately 50 percent 
had an estimated net worth of $2,000 or less or were unclassified. 
This pecuniary weakness indicates the "shoestring" character of 
many enterprises. Moreover, to the extent that these firms are 
pipprietorships or partnerships, there is an upward bias in the esti- 
mates of concerns of less than $5,000, since private assets are included 
in the credit ratings of these firms. 

For the period, 1926-30, 1,225 manufacturing firms closed, as 
classified in table 62. In this period, the number of closing manu- 
facturing firms approximated 62 percent of the total number in business 
in the last year of the period. %^ith the exception of the second net- 
worth group, the lower the capital investment, the greater the mor- 
tahty rate. 

Table 61. — Number of manufacturing firms in S Minnesota cities classified by net 

worth, 1930 

Net worth: Number 

$500,000 and over 97 

$75,000 to $500,000 . 226 

$10,000 to $75,000 425 

$2,000 to $1 0,000 225 

L'ess than $2,000 or unclassified 1, 001 

Total -. 1,974 

Table 62. — Number of manufacturing firms closed in 3 Minnesota cities classified 

by net worth, 1926-30 



Net worth 



Number 
closed in 
period as 
percent of 
1930 total 



$500,000 and over. 

$75,000 to $S00,000 

$10,000 to $75,000 :--. 

$2,000 to $10,000- 

I /<ss than $2,000 or unclassifled 

Total. 

»W. A. Hellman: Op. clt. 




CONCENTRATION OF ECONOMIC POWER 



49 



FORM OF ORGANIZATION 

Aside from a dynamic study of changes in fonn of organization, 
reported in a later comparison, the most significant summary of 
relationships, particularly as regards life span, was reported for 
Poughkeepsie.^" 

The proportionate distribution of the 1,095 manufacturing con- 
cerns opening and closhig in the period 1844-1927 is given in table 
63. With almost 52 percent individual proprietorships and less than 
14 percent corporations, it might be expected that other factors, such 
as size and nature of business, would determine the differences. Or 
it is possible that Poughkeepsie corporations, as elsewhere, are usually 
larger than proprietorships and partnerships. 

Table 64 discloses longevity advantage associated with corporations 
over the total of manufacturing establishments, including corpora- 
tions, for the first 6 years of life. With the seventh year the balance 
shifts. The 6-year advantage is so short that it might even be 
associated with, complex legal procedures, such as receivership, rather 
than with economic merits. 

Table 63. — Form of organization, Poughkeepsie manvfacivring enterprises 

Percent' 
age dis- 
Tvpe; tribution 

Individual enterprise 51. 7 

Partnership . - . 22. 2 

Corporation 13. 7 

All others 12.4 

Total.- . - - -- 100.0 

Table 64. — Length of life of corporations compared with all forms of Poughkeepsie 
manufacturing concerns, 1844~1927 



Years of life 


Cumulative per- 
centage 


Years of life 


Cumulative per- 
centage 


All con- 
cerns 


Corpora- 
tions 


All con- 
C8(ms 


Corpora- 
tions 




23 
35 
47 
55 
60 
66 
68 


10 
26 
40 
48 
55 
63 
69 


8 or less 


70 
73 
75 
25 
945 


73 






75 




10 or less 


76 




Over 10 - 


24 


5 or less 


Number of cases... 


108 




Percent incorporated . . . 


11.4 


7 or less...' 













'« R. Q. Hutchinson and A. R. and Mabel Newcomer; op. cit. 



CHAPTER IV 



COMPARISON OF MORTALITY EXPERIENCE OF VARIOUS 
TYPES OF BUSINESS 

Steps in the production and distribution of goods and services 
differ so widely as to structure and function, that a comparison of 
life spans for manufacturing, wholesaling, and retailing might appear 
anomalous. And yet we have found within both the retail and the 
manufacturing fields great differences in longevity, suggesting that 
even these classifications are not necessarily fundamental lines of 
demarcation in the problem of mortality. 

LONGEVITY 

Little attention of a detailed nature has been given to the wholesale 
field. As a group, wholesale concerns appear to withstand the impact 
of destructive elements better than retailers as a whole; but the 
experience of Poughkeepsie ^ wholesale establishments for the period 
1844-1927 indicates, as in table 65, that only 31 percent continued in 
operation more than 10 years. 

Table 65. — Length of life of wholesale enterprises in Poughkeepsie, 1844-1927 



Cumulative 
Years of life: percent of firms 

7 or less 62 

8 or less . -. 65 

9 or less 68 

10 or less, -, 69 

Over 10 31 



Cumulative 
Years of life : percent of firms 

1 OX less ^ 20 

2 or less 29 

3 or less 38 

4 or less 46 

5 or less 51 

6 or less _ 56 

The maximum average age of Minneapolis and St. Paul ^ whole- 
salers, 30 years, was enjoyed by the printing and paper industry. 
This was less than half that of the leader in the manufacturing field. 
This period was closely approximated by electrical equipment firms 
with an average of 28.4 years. Thp, average for leather and shoe 
establishments was 24.1 years; for agricultural machinery, 19 years; 
for meat wholesalers, 15 years; and for wholesale jewelers, 14.6 years. 
No other group averaged half the life span of the jewelers, food whole- 
salers reaching 7 years, and lumber and woodworking, 6 years. Music 
and radio and clothing and textiles enterprises barely exceeded 5 
years, while cigars and tobacco and oil approximated 4 years, and 
constructicu machinery 3 years, on an average. 

Interesting comparisons of Minnesota records for the cities of 
Minneapolis, St. Paul, and Duluth are contained in tables 66, 67, 
and 68. 



1 R. Q. Hutchinson and A. R. and Mabel Newcomer; op. cit. 
» E, A, Heilman; op. cit. 



61 



52 C50NCBNTRATION OF ECONOMIC POWER 

Reference to table 66 suggests a similarity in the staying qualities 
of manufacturers and wholesalers, with heavy odds against retail con- 
cerns. As the table footnote indicates, the figure, 84.4 percent, for 
retailers means that more than 8 retail firms failed in the period, 
1926-30, for every 10 establishments in business in 1930. 

Longevity, on an average, for retailers was even less than for service 
groups, according to table 67. The average length of life for all enter- 
prises in the three cities was 6.6 years. It will be recalled that the 
rating records of Dun & Bradstreet were the sources of the Minnesota 
data and represent the firm, or ownership unit, rather than the con- 
cern, or establishment, point of view. An establishment might remain 
intact at the same address but under a change of proprietorship, 
whereas a firm would be considered as dissolved with the withdrawal 
of the owners. 

Table 66. — Mortality by type of business, Minneapolis, St. Paul, and Duluth, 

1926-SO 

Percentage offirmt 

Type of business: '^''«'"i' is-year periody 

Manufacturers 62. 

Wholesalers 66. 1 

RetaUers , ---- 84.4 

' The flgizres in the table represent the ratio of the number of concerns closed in the 5-year period to the 
number in the industry in 1930. 



Table 67. — Average life span by type of business, Minneapolis, St. Paul, and 

Duluth, 1926-30 

Average number of 

Type of business: 2'«°''« '" bminess 

Manufacturers 8. 

Wholesalers^ _ .- 7. 5 

Retailers 6. 

Service - 7. 2 

Table 68. — Percentage distribution of closing and of opening enterprises, Minnesota 

cities, 1926-30 





Type of business 


Percentage oi firms 




Closing 


Opening 




9.9 

6.9 

56.4 

26.8 


9.2 




6.2 


RetaU - - 


55.0 


Service - - -- 


29.6 








Total 


100.0 


100.0 







In table 68 the proportions of new and of discontinuing firms are 
given for types of business. Of 12,213 firms closing in the period, 
1926-30, more than 56 percent were retailers; and of the 11,905 new 
enterprises, 55 percent were retailers. For this period, only the 
service group had an excess of new over retiring enterprises, with 
3,268 closing and 3,531 opening. 

Although the numbers of firms decreased in three categories, it does 
not mean that the numbers of establishment declined. The census 
showed an increase. The apparent discrepancy may be accounted for 
in consolidations, disposal of local plants to be used as branches by 
outside companies, and the incorporation of independent outlets into 
chain systems. 



CONCENTRATION OF ECONOMIC POWER 



53 



Turning to the experience of Poughkeepsie, N. Y., a study ^ of the 
survival of business enterprises covering the period, 1844 to 1927, 
indicates that only 47 percent of retail, 45 percent of service, 53 
percent of manufacturing, and 62 percent of wholesale establishments 
continued in existence more than 3 years. 

Of 10,000 enterprises established in business in Poughkeepsie 
between 1844 and 1926, 30 percent remained in business only 1 year, 
14 percent continued only 2 j'^ears, 21 percent survived more 
than 10 years. Since the study covered 82 years tliis category 
includes survivals for a range of 72 years. 

The survival experience of wholesalers was superior to all other 
groups, with manufacturers second. 

In tables 69 and 70 are recorded the Ufe span of Poughkeepsie 
enterprises, in the first instance with changes in proprietorship not 
counted as new businesses, and in the second with changes in pro- 
prietorship included as entries. 

Almost 10 percent of Poughkeepsie enterprises estabhshed between 
1844 and 1916 continued existence more than 20 years. The classified 
record of this group is presented in table 71. 

If changes in proprietorship are frequent, then, when counted as a 
business cessation, as in table 70, they should increase the total 
turn-over. In the first year, the percentages are greater in table 70 
than in table 69, with the exception of service establishments. The 
total number of service organizations classified in table 69 is 2,618, 
as compared with 2,855 in table 70, a difference of 237, or 9 percent of 
the lesser total. Let us compare this with the other proportions: 





Eetail 


Whole- 
sale 


Manu- 
facture 


Craft 


Service 

2,855 
2,618 


Total 


From table 70 - 


5.567 
4,998 


183 

157 


1,194 
945 


1,423 
1,315 


11,222 


From table 69 - - 


10, 033 






Difference 


569 
11 


26 
17 


249 
26 


108 
8 


237 
9 


1,189 


Difference as percent of totals, table 69 


12 


Table 69. — Length of life of business enterprises established in Poughkeepsie between 
ISUJi- and 1926, not counting change in -proprietorship as a new business 




Retail 


Whole- 
sale 


Manu- 
facture 


Craft 


Service 


Total 


Number of enterprises 


4,998 


* * 
157 


945 


1,315 


2,618 


10, 033 








Percentage distribution 


Years of life:" 

1 : 


29.0 
14.2 
9.4 
6.2 
4.9 
4.1 
3.1 
2.6 
2.1 
2.0 
21.8 


19.7 
9.6 
8.3 
8.3 
5.1 
5.1 
5.7 
3.2 
2.5 
1.3 

31.2 


23.1 
11.5 
12.3 
7.8 
5.5 
5.3 
2.3 
2.4 
2.4 
2.0 
25.3 


30.7 
14.7 
9.7 
5.6 
5.3 
3.7 
3.0 
2.6 
1.9 
1.9. 
20.9 


32.7 
13.0 
9.4 
6.7 
5.1 
3.9 
3.5 
2.6 
2.3 
2.0 
18.8 


29.8 


2 


13.6 


y 3:!:.:: 


11 


4 . 


5.., . 


5.0 


6 " - . 


4.1 


7. - 


3.2 


8 .- Jli 

9. 

10 . ... 


2.6 
2.2 
2.0 


Over 10 , 


21.4 






.Total 


100.0 


100.0 


100.0 


100.0 


100.0 


100.0 








1 Those concerns classified as living 1 yea 
that the actual existence of these concerns n 
of nearly 2 years. Likewise, those concern 
tories and may have been in existence for a 


- have been 
aay vary fr 
s classified 
period of a 


found in t 
om a perloc 
as living 2 
little over 


be director 

lofconside 

years hav 

1 year to o 


? for 1 year 
rably less t 
e appeared 
ne of nearl 


only. Iti 
han 1 year 
in 2 succes 
y 3 years. 


s apparent 
to a period 
sive direC' 



» R. C. Hutchinson and A . R. and Mabel Newcomer; op. clt. 



54 ooncentEu4lTion of economic power 

Thus we see that counting proprietorship changes would have its 
greatest significance in the case of manufacturers, and its least effect 
with craft enterprises. Since the number of retailer enterprises is 
almost one-half of the total of all establishments, the percentage 
difference of the latter is affected by the retail figures. The close 
agreement in the two cases, of the first year mortality percentages for 
service establishments has no vital significance. 

On the other hand, including changes in proprietorships does have 
an effect upon the ranking of the types in first year mortality. It 
would be interesting to know the proportion of all such changes 
occurring within the first 12 months of the lives of concerns. The 
service group records the highest relative withdrawals in both in- 
stances; but when these changes are counted, the retail establishments 
displace the crafts in second place. 

In both tables 69 and 70, the survival beyond the tenth je&T is 
highest for wholesalers, second highest for manufacturers, and third for 
retailers. As disclosed by table 71, the wholesale group leads, and the 
manufacturing group is second, in survival beyond 20 years. 

Table 70. — Length of life of business enterprises established in Poughkeepsie between 
1844 O'^d 1926, counting change in proprietorship as a new business 



Retail 



Whole- 
sale 



Manu- 
facture 



Craft 



Service 



Total 



Number of enterprises 

Years of life: 

1 

2 

3 

4....... 

5 

6 

7 

8... 

9 

10 

Over 10 

Total.... 



1,194 



1,423 



2,855 



11,222 



Percentage distribution 



32.5 
13.3 
9.2 
6.1 
5.1 
4.2 
3.1 
2.8 
2.3 
2.2 
19.3 



100.0 



22.4 


24.0 


31.9 


32.9 


9.8 


13.1 


14.8 


14.3 


11.5 


12.7 


9.8 


9.6 


8.2 


8.0 


6.2 


6.9 


6.0 


5.4 


5.4 


5.3 


6.6 


4.5 


3.7 


4.0 


5.5 


2.7 


3.1 


3.3 


1.6 


2.9 


2.5 


3.0 


2.2 


2.7 


2.2 


2.2 


1.1 


2.7 


2.2 


1.9 


25.1 


21.4 


18.1 


16.6 


100.0 


100.0 


100.0 


100.0 



31.6 
13.7 
9.8 
6.6 
6.2 
4.2 
3.2 
2.8 
2.3 
2.1 
18.7 



100.0 



Table 71. — Business enterprises established in Poughkeepsie between 1844 o.nd 1916 
and lasting more than 20 years 





Retail 


Whole- 
sale 


Manu- 
facture 


Ct&ft 


Service 


Total 


Total Tuimhpr 


3,763 
373 
9.9 


108 

18 

16.7 


846 
107 
12.6 


1,062 

98 

9.2 


2,007 
162 
8.1 


7,786 


Number lasting more than 20 years 

Percent lasting more than 20 years 


768 
9.7 



Since bankruptcy is a device for liquidation, by this procedure 
closures are not comparable with other discontinuances. But the 
experience of bankrupt concerns is significant. Of 709 Chicago * en- 
terprises for which life span was calculated, 55 percent had been in 
existence 5 years or less at the tim.e of petition for bankruptcy in 
1930 and 1931. Sixty -nine percent had rem.ained in business less 
than 8, and 65 percent less than 7 years. 

* Johii H. Cover: Business and Personal Falhu« and Keadjustment In Chicago, University of Chicago, 
August 1033. 



OONCENTRATION OF ECONOMIC POWER 



55 



CHANGES "WITH TIME 

It cannot be overemphasized that mortahty of business enterprise 
is not chiefly a. function of business depressions. The growth of busi- 
ness, as with the increase of population, presupposes an increase in 
the number dying. To the extent of a relation between human and 
business population, the former representing the clientele of the latter, 
an overoptimistic increase in the number of establishments would 
naturally result in an increase in the rate of entry and subsequently 
of closure. 

As illustrative of the long-time growth of bankruptcies, the follow- 
ing notes are significant: 

For the period 1916-31 the average annual increase in the number 
of closed cases in- the Chicago ^ area was 68, representing 5 percent of 
the average number for the period. 

The annual average increase in the num.ber of bankruptcies in the 
United States, for the years 1911 through 1931, was 2,428. The 
southern Federal district of New York, including New York City, 
accounted, on an average, for about 38 percent of the number of 
bankruptcies in the United States. 

As an example of fluctuations in the relationship of numbers of 
persons and numbers of business establishments, Poughkeepsie ^ rates 
at 30-year intervals are entered in table 72. The niunber of persons 
per establishment for all concerns, listed in the final column, is of 
little significance due to the preponderance of retail concerns in the 
aggregate and the differences in rates as between business types. 
For the period beginning in 1873, the rates for manufacturers and 
for wholesalers have been moving in opposite directions. Retail 
and service groups show rates alternately high and low. 



Table 72. — Number of people per business establishment i — Poughkeepsie 


Year 


RetaU 


Whole- 
sale 


Manu- 
facture 


Craft 


Service 


Total 


1842 . . 


96 
78 
97 
72 




399 
260 
455 
545 


151 
345 
429 
305 


417 
195 
209 
121 


46 


1873 


3,074 
1,910 
1,063 


40 


1903 - 


60 


1933 . 


36 







1 The population figure used is that for the city and 4 surrounding to^ns. It has been assumed that the 
increase in population between census years is equal in amount each year. 

Table 73. — length of life of business enterprises in Poughkeepsie in S SO-year 

periods, 18U-19SS 



Years of life 


Cumulative percentage 
distribution 


Years of life 


Cumulative percentage 
distribution 




1844-73 


1874-1903 


1904-33 


1844-73 


1874-1903 


1904-33 


RetaU: 

lor less 


34 
50 
60 
40 

43 

57 


27 
40 
49 
51 

19 
27 


30 
44 
53 
47 

18 
27 


Wholesale— Con. 

3 or less ... 

Over 3 . ... 


71 
29 

26 
38 

48 
52 


29 
71 

24 
38 
50 
50 


36 
6ff 


3 0*1,688 

Overs 


Manufacture: 

1 or less -- 

2 or less 

3 or less 

Over 3 


22 


Wholesale: 

lor less 


33 
44 
56 









• John H. Cover; op cit. 

I B. G. Hutchinson and A. R. and Mabel Newcomer; op. cit. 



56 



CONCENTRATION OF ECONOMIC POWEIR 



A comparison of the life span of manufacturing, wholesaling, and 
retailing concerns in three different periods of 30 years each, is pre- 
sented for Poughkeepsie in table 73. Relatively, wholesaling has 
shown a distinct improvement. First-year mortality has been 
reduced, on an average, for this group from 43 percent of the new 
concerns to 18 jjercent, and the proportion continuing in business 
beyond 3 years has increased from 29 to 65 percent. The manufac- 
turing group has not alone outstripped the retailer, but, in addition, 
has increased the proportion continuing beyond 3 years, in the most 
recent period as copipared with the middle period. 

LIFE SPAN AND NET WORTH 

In our examination of the relations of life span to initial capital 
investments in retail and manufacturing firms, the "shoestring" nature 
of the large majority of enterprises was observed. We are now in 
position to compare the types of business enterprise in three Minne- 
sota ^ cities with respect to pecuniary strength. 

Only one- third of all concerns, as indicated in table 74, had initial 
capitfll of $2,000 or more. Of firms rated, just over one-half of the 
number was in the retail, and one-fifth in the service group. 

Length of life, on an average, as related to investment is summarized 
in table 75. The apparent advantage of large capital is readily seen, 
though the conglomerate nature of firms and fields included does not 
contribute much to the picture. 

Table 74. — Number of business firms in 3 Minnesota cities classified by type and 

net worth, 1930 i 



Type 


$500,000 
and over 


$75,000 to 
$500,000 


$10,000 to 
$75,000 


$2,000 to 
$10,000 


Less than 
$2,000 or 
unclassi- 
fied 


Total 


Percent- 
age of all 
firms 


Manufacturing 


97 
94 
42 
23 


226 
210 
177 
86 


425 
345 
872 
453 


225 

112 

1,587 

620 


1,001 

485 

5,497 

3,512 


1,974 
1,246 

8,175 
4,694 


12.3 


Wholesale 


7.7 


Retail 


50.8 


Service. 


20.2 






Total 


256 
1.6 


699 
4.3 


2,095 
13.1 


2,544 
15.8 


10, 495 
65.2 


16, 089 
100.0 


100.0 


Percentage of all firms 









' The classification of the concerns according to credit ratings or "estimated pecuniary strength" gives a 
rough measure of the owner's investment, but contains a bias upward in the case of single proprietorships 
and partnerships, since private properties are usually included in the estimate for these concerns. In the 
firms ■\Yith ratings of over $5,000 an attempt has been made to eliminate these private assets from the estimate 
and these may therefore be accepted as substantially correct. 



Table 75. — Average life of business firms in 3 Minnesota cities classified by net 

worth, 1926-30 



Number 
Net worth: of yean 

$500,000 and over. 3^-2 

$75,000 to $500,000 .-. 30.0 

$10,000 to $75,000 17. 7 

$2,000 to $10,000 9.4 



Net worths-Continued. of yean 
Lees than $2,000 or unclas- 
sified 5.2 



All firms 6.6 



Numbers of new and discontinuing firms, and ratios of these num- 
bers ^o total numbers in business in 1930, both related to investment, 
are given in tables 76 and 77, respectively. The shift in the grain 



' E. A. Heilman; op. cit. 



CONCENTRATION OF ECONOMIC POWER 57 

and milling industries of this area may have affected the sample and 
restricted the application to a wider field. 

In discussing the tabulations, Heilman comments as follows: 

No reasonable interpretation of these changes can be made without taking into 
consideration the numbers of establishments operating in each type of business. 
A ratio has been calculated between the number of closings and openings and the 
total number in the industry. This ratio is expressed as the number of closings 
or openings during the 5-year period 1926-30 per hundred in operation at the 
end of 1930. 

Table 77 is a summary of these ratios for the different types of 
industry grouped according to various investment value classes. 



58 



OONCENTRATION OF ECONOMIC POWER 







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ssgs 


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Pi 





CONCENTRATION OF ECONOMIC POWER 



59 



A comparison of the ratios in table 77 with the absolute numbers in 
table 76 shows clearly that the large number of changes in retailing 
and in service enterprises are due not merely to the large numbers in 
the business but also to heavier mortality rates. 

The death rate for all retail stores is 84.4 per hundred in existence in 1930, for 
service firms 69.6, for wholesale 66.1, and for manufacturing 62.0. There is a 
surprisingly close correspondence between manufacturing, wholesaling, and 
service enterprises in the death rate per hundred. (It should be remenibered 
that the death rate here calculated is not an annual rate but covers a 5-year 
period.) 

Heilman reaches the conclusion from examination of the 5-year 
death rates that — 

investment is the decisive factor in determining the ability of business enterprises 
tp survive. Type of business is of little significance. The firms with substantial 
amounts of capital survive the longest, and those types of business including the 
firms with large investments have the lowest mortality rates. The lowest rate is 
that for manufacturing, 62.0, about 12.4 a year, and the probable life expectancy 
for the average firm is therefore 8 years. 

Table 77. — 5-year turn-over ratios of business firms in 3 Minnesota cities classified 
by type and net worth, 1926-30 ' 













Less than 






$500,000 


$75,000 to 


$10,000 to 


$2,000 to 


$2,000 or 


Total 




and over 


$500,000 


$75,000 


$10,000 


unclassi- 












fied 








t3 




•o 




■o 




"d 




T3 




•o 


























a> 




^ 






a 




n 








a 




a 




o 


£ 


o 


s 


o 


a 


o 


a 


s 


a 


'8 


o. 




O 


o 


U 


o 


U 


o 


U 


O 


u 


O 


u 


O 


Manufacturing 


16.5 


3.1 


15.0 


10.2 


35.8 


29.2 


66.3 


74.8 


87.4 


78.5 


6:i.o 


55.9 


Wholesale 


15.9 

7.1 

21.7 

15.2 


2.1 
2.4 
13.0 
3.5 


19.0 
18.1 
12.8 
16.6 


9.5 
11.3 
17.5 
11.3 


34.0 
25.0 
23.6 
28.3 


28.4 
20.5 
19.8 
23.4 


80.6 
55.0 
38.6 
53.0 


102.0 
49.4 
42.1 
52.2 


113.8 
105.0 
82.7 
96.5 


102.1 
101.1 
90.0 
95.4 


66.1 
84.4 
69.6 
76.0 


58.6 


Retail- 


80.0 


Service. 


75.2 


Investment class as a whole .. 


74.2 







' The figiues in the table represent the ratio of the number of concerns closed or opened in the 5-year period 
to the number in the industry in 1930. For example, the first figures for manufacturing in the $500,000 class 
indicate that for every 100 in the group in 1930, 16.5 closed and 3.1 opened during the 5-year period. 



FORM OF ORGANIZATION 

Chicago ^ establishments which survived 5 years or less before 
entering bankruptcy represented all forms of business organization. 
Of the 1,012 bankrupt enterprises studied, 67 percent of the partner- 
ships, 59 percent of the individual proprietorships, and 55 percent of 
the corporations failed to reach their sixth birthdays. 

The Poughkeepsie study ' of 12,618 busmess units listed 78 percent 
of the enterprises as individual proprietorships. As indicative of the 
size of the establishments represented, only 14 percent of the manu- 
facturing firms were mcorporated. Table 78 offers a percentage 
distribution of Poughkeepsie business according to organization type. 
Perhaps the extent of partnership control of manufacturing and whole- 
saling enterprise is another indication of the small-size local nature 
of the business. 

A comparison of the life span of corporate and of all concerns 
is presented in table 79. Although manufacturing corporations 

'John H. Cover: op. cit. 

' R. G. Hutchinson and A. R. and Mabel Newcomer: op. cit. 



60 



OONCENTRATION OF ECONOMIC PQWER 



appear to be at an advantage in survival during the early years of 
business existence, by the end of the tenth year, the advantage 
appears to have disappeared. 

Table 78. — Form of organization, Poughkeepsie 



Retail 



Whole- 
sale 



Manu- 
facture 



Craft 



Service 



Total 



Number of enterprises 

Individual enterprise. 

Partnership 

Corporation 

Another- 

Total 



6,230 



245 1,095 1,595 3,453 12,618 



Percentage distribution 



77.2 
11.4 
2.8 
8.0 



100.0 



59.6 


51.7 


88.3 


84.9 


22.7 


22 2 


5.8 


9.0 


8.2 


13.7 


.8 


1.6 


9.5 


12.4 


5.1 


4.5 


100.0 


100.0 


100 


100.0 



78.2 
11.2 
3 2 
7.4 



100.0 



Table 79. — Comparison of length of life of corporations and all forms of business 
enterprises, Poughkeepsie, 1844-1927 





Cumulative percentage distribution 


Years of life 


Retail 


Wholesale 


Manufacture 


Craft 


Service 




All 
con- 
cerns 


Cor- 
pora- 
tions 


All 

con- 
cerns 


Cor- 
pora- 
tions 


All 
con- 
cerns 


Cor- 
pora- 
tions 


All 
con- 
cerns 


Cor- 
pora- 
tions 


All 
con- 
cerns 


Cor- 
pora- 
tions 


lor less - 


30 
44 
53 
59 
64 
68 
72 
74 
76 
78 
22 
4,998 
2.9 


20 
32 
44 
52 
68 
63 
65 
66 

31 
117 


, 20 
29 
38 
46 
51 
56 
62 
65 
68 
69 
31 
157 
6.4 


10 
30 
30 
30 
40 
40 
40 
50 
50 
50 
50 
10 


23 
35 
47 
55 
60 
66 
68 
70 
73 
75 
25 
945 
11.4 


10 
26 
40 
48 
55 
63 
69 
73 
75 
76 
24 
108 


31 

45 
55 
61 
66 
70 
73 
75 
77 
79 
21 
1,315 
■ 0.2 










33 
33 
33 
67 
3 


33 
46 
55 
62 
67 
71 
74 
77 
79 
81 
19 
2,618 
1.3 


23 


2 or less 


37 


3 or less . . . 


43 


4 or less 


49 


6 or less ^' 


52 


6 or less 


52 


7 or less 


57 


8 or less 


57 


9 or less 


66 


10 or less . . 


69 


Over 10 . 


31 


Number of cases 


35 


Percent incorporated 









Although treatment of business growth and change is presented in 
another section, realization of the continuous flux in the forms of 
organization is important at this point. Based upon the story of 
industrial evolution, there appears to be a general impression that a 
small business begins as an individyal proprietorship, grows by the 
addition of partners who bring more capital and acumen, and blossoms 
into a corporation with diversified management and ownership. 

Based upon the records of 77,000 cases indicating succession, ^° table 
80 presents a summary of changes in organization in the first 6 months 
of 1986. To assure clarity, the change may be traced as follows: 

Of the total of manufacturing enterprises, 45 percent were individual 
proprietorships before the change. After the change, 17 percent were 
still individual proprietorships. However, in the case of 14 percent, 
the new form of organization was partnership; and the succeeding 
form of another 14 percent was corporate. Thus the 45 percent of 

" William A. Rothmann: Business Births and Deaths, Dun's Review, June 1937, 



OONCENTEATION OF ECONOMIC POWER 



6] 



manufacturing concerns starting as proprietorships have been, ac- 
counted for. 

Table 80. — Percentage distribution of types of organization before and after change 

(first 6 months of 1936) 

MANUFACTURING 



Before 
(percent 
of total) 



After 
(percent 
of total) 



45 

S2 

23 

100 



[Proprietorships 

Proprietorships became< Partnerships... 

[Corporations.., 

[Proprietorships. .. 

Partnerships became-jPartnerships 

I Corporations 

{Proprietorships. . . 
Partnerships 
Corporations.-... 



100 



WHOLESALE 



100 



[Proprietorships 

Proprietorships became-jPartnerships. .. 

(Corporations... 

{Proprietorships... 
Partnerships 
Corporations 

j Proprietorships... 

Corporations became] Partnerships 

[Corporations.. 



IS 
12 
17 
17 

6 
11 

T 



RET.\IL 



70 

23 

7 

100 



{Proprietorships 
Partnerships... 
Corporations... 
[Proprietorships... 

Partnerships became< Partnerships 

(Corporations 

{Proprietorships... 
Partnerships 
Corporations 



52 
14 
4 

17 
4 
2 
4 
1 
2 



100 



In the case of partnerships, representing before the change 32 
percent of all manufacturing enterprises, almost one-half, 15 percent, 
revert to proprietorships. Frequently, this is due to disagreement 
between partners, or the withdrawal or death of a partner. 

The change from the corporate form to proprietorship or partnership- 
would appear a complete reversal of general tendency. However, 
adjustments to tax levies or to other regulations regarded as restrictive 
or discriminatory may account for a large part of this change. 

Examining the right-hand column of table 80, representing succes- 
sions or the ''after" form, we may now summate the percentages. 
First, the proprietorships. Adding 17, 15, and 6 percent, we have a 
total of 38 percent, or 7 percent less "after" than "before." We 
discover, also, a decline in partnerships from 32 to 24 percent. The 
proportion of corporations has risen from 23 to 38 percent. 



262652— 41— No. 17- 



62 



CONCENTRATION OF ECONOMIC POWER 



To discover the net results of these changes, the followmg Summary 
is offered: 





Manufacture 


Wholesale 


Retail 




Before 


After 


Before 


After 


Before 


After 


Proprietorship . . 


Percent 
45 
32 
23 


Percent 
38 
24 
38 


Percent 
44 
34 
22 


Percent 
39 
24 
37 


Percent 
70 
23 

7 


Percent 
73 


Partnership .... ., 


19 


Corpwration - 


8 






Total . 


100 


100 


100 


100 


100 


100 







In general, the corporate form became more important, relatively, 
and the partnerships less popular. But in the retail field, resort to 
proprietorships increased, reversing the trend among the manufac- 
turing and wholesaling groups. 

But the status referred to as "after" will become the "before" in 
the next moment of time. The dynamic changes illustrated here occur 
almost too rapidly to be observed for analysis. And yet the estimate 
of survival, mortality, and life span, and prescriptions for many of the 
ills of business life, are currently dependent upon diagnoses of symp- 
toms so fleeting and so vague. 



CHAPTER V 
CHANGES IN BUSINESS POPULATION 

In seeking information disclosing business life span and factors 
associated with mortality, we were compelled by the lack of informa- 
tion on the total problem to make an arduous study of small fragments 
of the business population in scattered communities. But we have no 
basis for determining to what extent these facts represent the more 
than 2.2 million establishments estimated by the Bureau of the 
Census as currently in business. It is to that problem that attention 
will be drawn in the next two chapters. 

Based upon 680,000 new concerns listed by Dun & Bradstreet ^ 
in the four quarters of 1936 and three quarters of 1937, there are, on 
an average, approximately 390,000 new enterprises per year, or a 
birth rate annually of 191 per 1,000 of firms in business. 

The annual mortality of about 340,000, based upon 595,000 dis- 
appearances in the same 7 quarters, gives a death rate of 167 per 
1,000 listed firms. 

Consequently, the net gain was at the rate of about 50,000 per year, 
or 24 per 1,.006 firms. 

In these analyses both industrial and commercial enterprises were 
included while the following were excluded: Financial institutions, 
railroads, professional enterprises, such as lawyers and doctors, and 
other types not ordinarily concerned with commercial credit. 

Since about 75 percent of all changes relate to retail enterprises, 
table 81 is a significant summary, by quarters, of changes occurring 
within the period. 

But not all discontinuances are failures, and the proportions of dis- 
continuances which are due to failure vary widely by industrial divi- 
sions, as is recorded in table 82. Included among failures in the third 
column are 77B cases, under bankruptcy-law reorganization at that 
time. 

Table 81. — Changes in retail population by quarters, January 19S6-September 1937 

[In thousands of enterprises] 



Year and quarter 


New 


Discontin- 
uing 


Succession, 
no owner- 
ship change 


Net gain 


1936: 

I . 


68.7 
78.2 
72.0 
75.7 

67.2 
73.8 
67.7 


67.3 
63.8 
58.3 
66.4 

66.8 
61.7 
55.2 


8.6 
8.5 
7.8 
7.9 

8.3 

8.4 
7.2 


1.4 


II 


14.4 


Ill _ 


13.6 


IV 


9.3 


1937: 

I 


.4 


II - -- 


12.0 


III 


12.5 







1 WiUiam A. Rothmann:Business Births and Deaths, Dun's Review, March 1938, pp. 12-14. 



63 



64 



CONCENTRATION OF ECONOMIC POWEK 



Table 82. — Business disappearances and business failures, by major divisions of 
industry, January 1936-September 1937 



Total outs 



Failures 

and 77B 

cases 



Number 
outs per 
failure 



Manufacturing 

Wholesaling 

Retailing 

Construction 

Commercial service 



63, 808 
30, 035 
439, 538 
23, 309 
37, 113 



3,235 

1,691 

9,726 

943 



19.7 
17.8 
45.2- 
24. r 
41.4 



From data upon listings of Dim & Bradstreet ^ for the first 6 months 
of 1936, it appears that for every one enterprise discontinuing with 
legal formality, 30 leave business less formally. When successions 
without change of ownership are eliminated, failures represent a ratio- 
of 1 to 18 total discontinuances. 

The authors find that the distribution of total births and deaths by 
industries seems to correspond with general impressions as to their 
relative importance in the total, when measured by number of enter- 
prises. In every group, the new enterprises exceeded the disappear- 
ances, although for commercial service, the margin was slight. Retail 
trade, accounting for nearly three-fourths of the total, obviously domi- 
nates the record. The exact significance of the construction figures is. 
somewhat confused by the character of the industry itself, with its 
many in-and-out operators, now working as independent subcontrac- 
tors and now as skilled laborers in someone else's employ. Commercial 
service also is a less exact area. 



Table 83. — Distribution of business births and deaths by industrial divisions 
[Data for first 6 months of 1936] 




New enter- 
prises 


Disappear- 
ances 




Percent 
10.3 
5.5 
73.9 
4.6 
F,.7 


Percent 
10.2- 




5.0 


Retail 


74.5 


Construction . -- . .- 


4.0 


Commercial Service - - . 


6. a 


Total . . 


f 100. 
\ (199,000) 


100. a 







Table 84.- 


— Relative changes in enterprises by industrial divisions 
[Data for first 6 months of 1936] 








New 

concerns 

(base) 


Proportionate to number of new concerns 




Successions 


Net new 


New out ' 


Gain- 




100 
100 
100 
100 
100 


32 
32 
41 
25 
38 


68 

68 
59 
75 
62 


56 
48 
49 
51 
59 


12- 


Wholesale , ..- 


20 


Retail - -- 


10 




24 


Commercial Service 


3 








Total 


100 


39 


61 


50 


11 











1 The net out figure is obtained by deducting the number of successions from the total outs. This is not 
strictly accurate, since the successions are recorded when the new enterprise is formed. However, if one 
assumes a fairly uniform rate, then the discrepancy between successions on the birth side and on the death 
side'will be not great. 



' Willard L. Thorp and William A. Rothmann: "Business Births and Deaths," Dun's Review, February 
1937, pp. 10-11, 46. 



OONCENTRATION OF ECONOMIC POWER 



65 



BIRTH RATES COMPARED 

An estimate of the rapidity with which new enterprises appeared 
in various industries during the first 6 months of 1936 is summarized ' 
in table 85. The author urges care in interpretation as follows: 

This table is a comparison of birth rates only. Its essential significance there- 
fore is the measures of mobility of life in these contrasting kinds of enterprises, 
the speed with which new concerns made their appearance during the kind of an 
economic period through which we have just passed. 

The third column entitled "Probable Birth Rate Ranking" becomes therefore 
a picture of relative volatility and not of net growth. 

The first column represents merely the relative percentag-e of 
concerns that each industry constitutes of all concerns within its 
census classification, and that the second column indicates merely 
the percentage of new concerns in each classification that each in- 
dustry constitutes. Furthermore, the new concern percentages are 
not to be considered as indicating net increases of the number of 
concerns in each industry as the figures upon which they are based 
will be modified and in some instances completely offset by the 
deaths and disappearances. 



Table 85. — Probable birth rate ranking of divisions of industry 
[Data for first 6 months of 1936] 



Manufacturing: 

Fuels. -_ - - --- ..-- -1- 

Transportation equipment 1- 

All other industries - -i- 

Iron and steel ._ -- \- 

Chemicals and drugs k 

Stone, clay, glass, and products i- 

Forest products --- - ' 

Leather and leather products -- - -^ 

Jextiles.-.- - 

Machinery r - 

Paper, printing, and publishing - 

Foods , -• - 

Total 

Retail trade: 

Automotive products _ -'...- 

Farm supplies, general stores-.-.. 

Furniture, household furniture 

Lumber, building materials, hardware ^--- 

Foods.. 

Apparel 

General merchandise. '. -- 

Restaurants.- 

All other lines 

Drugs 

Total - -- 

Wholesale trade: 

Fuels 

Lumber, buUding materials, hardware .- 

Farm products, foods, groceries - - 

Automotive products 

Clothing and furnishings.'... 

Dry goods and textiles , - 

Chemicals and drugs -- 

Supply houses --- 

All other lines -- 

Total - 



All con- 
cerns 
(1935 

census) 



Percent 

0.6 

1.2 

11.6 

4.4 

4.1 

3.2 

6.7 

2.4 

15.2 

-7.7 

15.2 

27,7 



100.0 



19.3 
4.1 
2.8 
4.5 

33.4 
5.8 
2.7 

15.4 
8.5 
3.5 



100.0 



1.6 
4.4 
23.8 
6.4 
4.5 
4.1 
3.3 
10.1 
41.8 



100.0 



New 
concerns 



Percent 
2.8 
2.0 

18.7 
7.1 
5.7 
4.3 
9.0 
2.6 

12.6 
6.2 

12.0 

17.0 



100.0 



25.7 
5.2 
3.3 
4.3 

31.6 
6.4 
2.4 

12.8 
6.9 
2.4 



100.0 



6.4 
9.1 

40.9 
9.6 
4.4 
3.7 
2.3 
4.9 

18.7 



100.0 



Probable 
birth 
rate 

ranking 



' William A. Rothmann: "Business Births and Deaths," Dun's Review, April 1937, pp. 19-20. 



66 



OONCENTRu\TION OF ECONOMIC POWER 



TENDENCIES IN BUSINESS GROWTH 

While changes are occurring within the year or within short range- 
periods, it is important to view the picture in the perspective of a long 
period. It is possible to accomplish this by reference.^ to table 86. 

Total concerns recorded grew in number steadily from 1900 through 
1917, receded slightly for 2 years, and then climbed again to a maximum 
for the period in 1929 with 2,213,000. The succeeding drop reached a 
low of 1,961,000 in 1933. Subsequent increases brought the 1938 total 
to 2,102,000. 

With the exception of 1917 and from 1930 through 1932, new enter- 
prises outnumbered discontinuances each year. In the 39-year 
period 15,989,000 new concerns were established and 14,013,000 
closed their doors, a startling turn-over. 

The proportions of entries and of departures to the total of con- 
cerns in business are calculated^ in table 87. Contrasts of 1920 and 
of 1933 offer evidence of year-to-year differences. 

Of the discontinuances recorded,^ the proportions closing with losses 
to creditors fluctuated from 2.4 percent in 1936 to 8.3 percent in 1932. 

Table 86. — United States business population 
[In thousands] 



Year 



1900- 
1901_ 
1902. 
1903. 
1904. 
1905. 
1906. 
1907. 
1908. 
1909. 
1910. 
1911. 
1912. 
1913. 
1914. 
1915. 
1916. 
1917. 
1918. 
1919. 



Total 


New 


Total 


listed 


enter- 


discon- 


concerns • 


prises 2 


tinued 3 


1,174 


272 


248 


1,219 


286 


248 


1,253 


304 


265 


1,281 


305 


272 


1,320 


308 


268 


1,357 


329 


287 


1,393 


334 


299 


1,418 


339 


302 


1,448 


361 


325 


1,486 


360 


331 


1.515 


358 


348 


1,525 


365 


326 


1.564 


369 


316 


1,617 


387 


348 


1,655 


388 


369 


1,675 


380 


347 


1,708 


369 


344 


1,733 


361 


385 


1,708 


307 


305 


1.711 


308 


197 



Year 



Total ; New 
listed I enter- 
concerns 1 1 prises 2 



1920 . 


1,821 


1921 


1.927 


1922 


1,983 


1923 .. . 


1,996 


1924... 


2,047 


1925 


2,113 


1926 


2,158 


1927 


2,172 


1928 


2,199 


1929 


2,213 


1930 . 


2,183 


1931 


2,125 


1932 


2,077 


1933 


1,961 


1934 


1,974 


1935.... 


1,983 


1936 


2,010 


1937 


2.057 


1938 .... 


2.102 



459 
483 
491 
469 
477 
496 
484 
483 
476 
453 
423 
355 
338 
345 
379 
392 
408 
400 
388 



Total 

discon- 
tinued 3 



353 
427 
478- 
417 
411 
451 
471 
456 
463 
483 
481 
404 
454 
332 
319 
385 
382 
351 
365 



1 Total listed concerns refers to the total of industrial and commcerial names in the July issue of the Dun 
& Bradstreet Reference Book. In general it excludes financial institutions including banks, railroads, pro- 
fessional enterprises such as lawyers and doctors, farmers and others not ordinarily users of commercial 
credit in the accepted sense. In general, branches are listed, except in the case of chain distributors. 

2 New enterprises refer to names added, but does not include cases arising from change in style or geo- 
graphical location within the community. The figures refer to calendar years. 

3 Discontinued enterprises include those which have discontinued operation as a result of any of the fol- 
lowing types of action: Assignment, attachment, voluntary petition, involuntary petition, receivership, 
absconding, compromise, execution, foreclosure and other voluntary d'scontinued operations in "which., 
there is no oflQcial record of loss to creditors. The figures refer to calendar years. 



Table 87. — Changing percentages of all concerns represented by new and discon- 
tinuing enterprises 





Percent 

entries of 

concerns in 

business 


Percent 
closures of 
concerns in 

business 




Percent 

entries of 

concerns in 

business 


Percent 
clo.sures of 
concerns in 

business 


1920 


25.2 
23.5 
19.4 
16.7 
16.3 
17.6 


19.3 
21.3 
22.6 
19.4 
18.6 
23.5 


1934 


19.2 
19.8 
20.3 


18.5 


1925 


1935... . 


19.1 


1930 _- 


1936 1 


19.0 


1931 I 


Period average 




1932... 


18.5 


20.1 


1933 









♦Dun & Bradstreet, Inc.: Vital Statistics of Industry and Trade. 

• Roy A. Foulke: Behind the Scenes of Business, rev. ed., 1937. Dun & Bradstreet, Inc. 



OONCENTEATION OF ECONOMIC POWER 



67 



FAILURES 

In table 88 estimates ^ of numbers of com.m.ercial failures, with 
aggregate assets and total and average liabilities give an iro.pression 
of the size of the problem.. The niiro.ber of failures reported here for 
1937 is 9,017 as contrasted with 9,490 by Dun & Bradstreet. The 
difference is attributed to the om.ission by the census from, its aggre- 
gates of those figures added by Dun & Bradstreet beginning with 
June, 1934. 

In 1936, of 9,185 failures, 9,007 each recorded Habilities under 
$100,000. The average was $10,280.^ 

Table 89 offers a comparison ^ for the calendar years 1938 and 1937 
of com.m.ercial failures classified by industrial groups, and the cor- 
responding liability values in thousands of dollars. The relation of 
numbers of failures and of liabihties is typical. While retail trade 
accounted for alm.ost 8,000 of the 12,836 failures in 1938, the liabihties 
of the manufacturing group exceeded those of the retail trade, 
$98,251,000 and $76,528,000 respectively. It will be recalled that 
a total of 2,102,000 concerns was listed for 1938, with 388,000 entries 
and 365,000 exits. 



Table 88. — Commercial failures: Number and assets and liabilities 

XoTE.— In January 1936 sratisties were revise! to exclude failuresofinsurance and real-estate agents and 
brokers, holding and finance companies, shipping agents, tourist companies, transportation terminals and 
the like, all of which were formerly included. These revisions bring the failure record more nearly in 
accordance with the type of concerns covered by "Total Number of Concerns in Business," in which no 
changes were made. The following table presents revise! statistics beginning with January 1933. 



Year 


Total num- 
ber of con- 
cerns in 
business 


Number of 
failures 


Assets 


Liabilities 


Average 
liability 


1915 


1, 674, 788 

1, 707, 639 
1,733,225 
1.708,061 
1,710,909 
1,821,409 
1,927,304 
1,983,106 
1,996,004 
2. 047, 302 

2, 113,312 
2, 158, 457 
2,171,688 
2, 199, 049 
2, 212, 779 
2,183,008 
2, 125, 288 
2, 076, 580 
1, 960, 701 
1, 960, 701 
1, 973, 900 
1, 982, 905 
2,009,935, 
2, 056, 598 


22, 156 
16, 933 
13, 855 
9,982 
6,451 
8,881 
19, 652 
23, 676 
18,718 
20, 615 
21,214 
21,773 
23, 146 
23, 842 
23,909 
^6, 355 
28,285 
31,822 
20, 307 
19, 859 
11,724 
11,510 
9,185 
9,017 


$183,4.54,000 
113,599,000 
103, 465, 000 
101 , 638, 000 
67, 038, 000 
195, 504, 000 
409, 038, 000 
413, 358, 000 
388, 382, 000 
337,945,000 
248,067 000 
202, 345, 000 
2,';6, 740, 000 
255, 478, 000 
226, 028, 000 
442, 800, 000 
434, 939, 000 
509, 135, 000 
270,730,000 
251,875,000 
143, 675, 000 
94, 867, 000 
77, 108, 000 
67, 537, 000 


$302, 286, 000 
196, 212, 000 
182,441,000 
163.020,000 
113,291,000 
295, 122, 000 
627, 402, 000 
623, 896, 000 
539,387,000 
543, 225, 000 
443, 744, 000 
409, 232, 000 
520, 104, 000 
489, 460, 000 
483, 2.50, 000 

•668, 284, 000 
736, 309, 000 
928, 313. 000 
502,831,000 
457, 520, 000 
230, 198, 000 
183, 013, 000 
147, 253, 000 
115,594,000 


13,644 


1916 - 


11 547 


1917 


13, I6S 


1918 


16, 331 


1919 


17, 561 


1920 


33, 230 


1921 


31, 926 


1922 


26, 351 


1923 


28, 816 


1924 . 


26, 351 


1925 


20, 918 


1926 .- 


18, 795 


1927 . 


22, 471 


1928 


20, 533 


1929 . 


21, 094 


19.30 


25,357 


1931 


26, 032 


1932 


29, 172 


1933 1 


24,761 


1933i_.._ 


23, 038 


1934 


19, 635 


1935 


15, 900 


1936.. 


16, 032 


1937 


12, 820 











1 See headnote regarding revisions. Figures for 1933 (first row) are on the old basis and are comparable 
with figures for earlier years; other figures for 1933 and those for subsequent years are the revised series. 

Source: Bureau of the Census: Proof sheet of the 1938 edition of the Census Abstract, p. 298. 



« Bureau of the Census: Proof sheet of the 1938 ed., Census Abstract, p. 298. 

1 Roy A. Foulke: Op. cit. 

8 Dun's Review, February 1939: Analyzing the Record of Industrial and Commercial Failures. 



,gg CONCENTRATION OF ECONOMIC POWER 

Table 89. — Failures by divisions of industry — yearly totals 1938 and 1937 





Number of 
failures 


Liabilities 
(thousands 
of dollars) 




1938 


1937 


1938 


1937 


Total United States 


12, 836 


9,490 


246, 505 


183, 253 






Manufacturing (total) . 


2,428 


1,997 


98, 251 


91, 776 






Foods _. 


445 
597 
210 
98 
48 
80 
82 
142 
156 
57 
327 


497 
413 
155 
161 
71 
45 
74 
63 
100 
115 
56 
247 


15,316 
16, 818 
6,417 
6,675 
2,126 
19, 504 
2,016 
3,783 
8,616 
6,084 
3,403 
7,493 


16, 933 


Textiles 


17, 627 


Forest products __ .. 


5,409 


Paper, printing, publishing 


5,381 


Chemicals, drugs 


1,504 


Fuels .. 


13, 666 


Leather and products 


2,179 


Stone, clay, glass 


4,866 


Iron and steel . ... - 


5,333 


Machinery • .. 


7,716 


Transportation equipment .. 


4,124 


All others ., .. 


7,038 








Wholesale trade (total)....... .. 


1, 289 


1,003 


49, 732 


21, 274 






Farm products, food . 


467 

105 

52 

100 

46 

31 

96 

108 

284 


379 
57 
38 
79 
55 
36 
83 
52 

224 


8,420 
1,789 
1, 258 
4,451 
22, 502 
1,654 
1,744 
1,578 
6, 336 


6,652 


Clothing and furnishings 


607 


Dry goods, textiles 1 .. 


779 


Lumber . 


1,954 




1,311 


Fuels 


1,927 


Automotive products.. ... ... ... 


1,630 


Supply houses . .. .. 


916 


Another 


5,498 






Hetail trade (total)... ... .. 


7,925 


5,423 


76, 528 


46, 740 








2,066 
287 
401 

1,807 
610 
406 
659 
699 
460 
530 


1,780 
265 
246 
951 
263 
304 
421 
508 
328 
357 


11, 387 
2,474 
4,333 

16, 866 

10, 043 
4,655 

10,485 
7,693 
3,812 
4,780 


10,444 


Farm supplies 


2,432 


General merchandise.. 


2,055 


Apparel ...,. .. 


7,144 




3.238 


Lumber 


3,020 


Automotive products . ... .. 


5,611 


Restaurants .. .. 


6,565 


Drugs .. 


2,786 


Another . 


3,445 






€olistruction (total) J 


625 


584 


10,081 


11,625 






General contractors 


78 
180 
345 

22 


77 

184 

307 

16 

/ 

483 


1,376 

4,274 

3,518 

913 


1,.531 


Carpenters and builders 


5, 002 


Building subcontractprs 


4,350 


Other contractors 


724 








569 


11,913 


11,838 






Cleaners, dyers .1 


128 
148 
46 
52 
51 
144 


97 
150 
37 
37 
39 
123 


1,309 
3,200 
3,856 
1,622 
473 
1,453 


1,050 


Haulage, busses, taxis , 


5,524 
1,978 


Laundries 


1,138 


Undertakers . 1 


285 


All others 


1,863 







While the aspects of the relation of the numbers of failures to 
assets and liabilities are discussed in other sections of this survey, 
it is im.portant to give here a picture of certain relationships over 
a period of years. In table 90, in addition to the numbers and liabili- 
ties of bankruptcies, the sm.all proportions of realizations are 
recorded.^ 

Analyzing num.bers of bankruptcies and liabilities for the period. 
1916 through 1931, it was found ^° that the increase in num.bers of 

» Louis P. Starkweather and Edward H. Bishara: Reported by U. S. Department of Commerce, Division 
of Business Review, October 1938. 

10 John H. Cover: Business and Personal Failure and Readjustment in Chicago, University of Chicago, 
August 1933. 



CONCENTRATION OP ECONOMIC POWER 



69 



bankruptcies annually approximated Ij percent of the average for the 
period, whereas the increase in liabilities was 8 percent annually. 
However, when the liabilities were adjusted for changes in the value 
of the dollar, the annual average increase was 4.9 percent of the average 
for the period. 

It is estimated that approxim.ately 20 m.anufacturing enterprises 
discontinue for every 1 that passes through bankruptcy, and in 
retailing the ratio is 45 to 1. With this in m.ind, certain discrepancies 
would appear in the differences between tables 82, 88, and 90. For 
instance, in table 88 the total number of failures for 1937 is 9,017, 
whereas in table 90 the number of bankruptcies is 55,115 for the sam.e 
year. The answer is that the data, while com.parable within.tables, are 
not classified in such manner as to be comparable as between tables. 

Table 90. — Bankruptcy liquidations — 1920-37 



Fiscal years 
ended 
June 30 


Total 
liabilities 

(000 
omitted) 


Total 
assets 

realized 
(000 

omitted) 


Total 
paid to 
creditors 

(000 
omitted) 


Expenses 

of 
liquida- 
tion (000 
omitted) 


Cents 
paid per 
dollar of 
liability 
or per- 
cent of 
liability 
paid 


Cents of 
liquida- 
tion per 

dollar 
of total 

asset 
realized 


Total • 
num- 
ber of 
cases 


Num- 
ber of 
no- 
asset 
cases 


Ratio 
of no- 
asset 
eases 

to 
total, 
per- 
cent 


1920_ . 


$201,626 

171,284 

255, 614 

486, 401 

663, 645 

747, 523 

806, 313 

885, 557 

830, 789 

883, 606 

948, 258 

1,008,654 

1, 260, 230 

1, 627, 066 

1, 589, 816 

1, 518, 932 

1, 400, 000 

1, 224, 789 


$29, 599 
27, 278 
37, 900 
61,861 
71, 587 
85, 349 
93, 018 
96, 559 
90, 540 

88, 964 
106, 245 

89, 535 
85, 577 

115,789 
81, 501 
63, 073 
85, 084 
63, 484 


$22, 223 
21,511 
29, 434 
47, 998 
54, 523 
63, 528 
70, 765 
72, 094 
66, 693 

66, 323 
81,827 

67, 620 
63, 028 
87, 282 
61, 580 

47, 352 
66, 692 

48, 593 


$6, 355 
4, 835 
7,357 
12, 041 
15.300 

18, 522 
19,842 
21,342 
21,512 
19, 949 
22, 220 

19, 777 
18, 683 
24, 109 
18, 217 
15, 721 
17, 953 
15, 404 


11.02 
12.56 
11.52 
9.87 
8.22 
8.50 
8.78 
8.14 
8.03 
7.51 
8 63 
6.70 
5.00 
5.36 
3.87 
3.12 
4.76 
3.93 


21.47 
17.72 
19.41 
19.66 
21.38 
21.70 
21.33 
22.10 
23.76 
22.42 
20.91 
22.09 
21.83 
20.82 
22.35 
24.93 
21.10 
24.24 


15, 622 
15, 200 
22, 517 
34, 401 
41, 649 
44, 440 

47, 307 

48, 269 
53, 392 
57. 039 
60, 568 
60, 322 
63, 502 
67, 031 

63. 482 

56. 483 
52, 339 
55, 115 


9,000 
8,480 
10, 082 
17, 758 

22, 316 

23, 694 
26, 913 
28, 062 
30, 405 
35, 572 
38,116 
30, 507 
38, 760 
38, 181 
37, 099 
37,027 

■ 38, 867 
42, 396 


57.6 


1921 


55.8 


1922.. ..-. 

1923 


44.8 
51.6 


1924 

1925 

1926 

1927 


53.6 
53.3 
56.9 

58.1 


1928— 


56.7 


1929 


62.4 


1930 


63.0 


1931 

1932 .. 


63.8 
61.0 


1933 

1934 

1935 

1936 

1937 


57.0 
.58.4 
65.6 
74.3 
76.9 


Total, 1920- 
37, 18 years. 


16, 510, 103 


1, 372, 943 


1, 039, 066 


299, 145 






858, 858 


521, 235 












Average per 
year, 1920-37 


917, 228 


76, 275 


57, 726 


16, 619 


6.29 


■ 21. 79 


47, 714 


28, 957 


60.7 



In addition to exclusions from the? Dun and Bradstreet records 
previously explained, the differences in classification are due in part 
to the use of calendar years for the failure data and fiscal years for 
the bankruptcy figures. 



SHORT-PERIOD MOVEMENT 

In addition to growth over a long historical period, there are m.any 
changes, sm.all or violent, occurring from day to day, seasonably, or 
every few years as econoro.ic and social conditions vary. 

In table 91 are presented the number of failures per 10,000 of listed 
comm.ercial enterprises.^^ Two figures are given for 1933; revision of 
current figures elim.inating real estate and financial com.panies have 
been carried back only to that year. Even with this alteration, the 
rates vary significantly within the recent period. Since the data are 

11 Dun's Review, February 1939; Op. cit. 



70 



CONCENTRATION OF ECONOMIC POWER 



•expressed as rates, and since both the numbers of faihires and of total 
^concerns change, the figures in the table give a moving picture of the 
relative welfare of enterprise. 

Table 91. — Insolvency index 1895-1938 — apparent annual number of failures for 
each 10,000 listed commercial enterprises 



Year 


Index 


Year 


Index 


Year 


Index 


Year 


Index 


Year 


Index 


1895 


111.7 


1904 


92.3 


1913 


98.1 


1922.. 


119.8 


1931 


133.4 


1896 


133. 4 


1905 


84.9 


1914 


117.6 


1923 


93.4 


1932 


154.1 


1897- 


124.7 


1906 


76.8 


1915 


132.7 


1924 


100.0 


1933.. 


102.6 


1898 


110.0 


1907 


82.8 


1916 


99.7 


1925 


100.4 


1933 


100.3 


1899 


82.1 


1908 


108.2 


1917 


80.3 


1926 


101,0 


19341 


61.1 


1900 


91.6 


1909 


87.1 


1918 


58.7 


1927 


106.4 


1935.. 


61.7 


1901 


90.4 


1910 


83.8 


1919 


37.4 


1928 


108.5 


1936 


47.8 


1902 


93.1 


1911 


88.0 


1920 


48.3 


1929 


103.9 


1937 


45.9 


1903 


94.0 


1912 


99.8 


1921 


101.9 


1930- 


121.6 


1938 


61.1 



> New series; real estate and financial companies omitted. 

Both as evidence of continual change and as indicating the problem 
of one im.portant group of creditors, table 92 records the changes 
between October 1, 1938, and May 1, 1939, of rental space in 16 
im.portant cities. Using Buffalo as an exam.ple, it is observed that 
new tenants more than com.pensated for the space surrended by con- 
cerns closing. Moreover, Buffalo gained by the intercity migration. 
Present tenants show a net expansion in space, aJso. On the other 
hand, there was m.ore space lost to other buildings than gained through 
transfer of tenancy from other buildings. 

The final column of table 92 shows a wide difference in the cities 
represented, ranging from a net expansion of almost 172,000 square 
feet in Philadelphia to almost 21,000 contraction in Detroit. While 
not all buildings are represented, it is believed by the reporting groups 
that the data are comparable. The space represents prim.arily office 
accom.m.odations, a variety of financial, service, and light manufactur- 
ing space and retail stores. 

Table 92. — Fluctuations in tenancy {square feet of rental area changes between 
Oct. 1, 1938, and May 1, 1939) 



EXPANSION 










City 


New ten- 
ants 
Gocal) 


New ten- 
ants from 
other 
cities 


Tenants 
from 
other 

buildings 


Expan- 
sion by 
present 
tenants 


Total 
expan- 
sion 




7,879 

13,457 

3,961 

121, 342 


780 

5,964 

1,816 

20, 205 


2,110 

5,300 

6,409 

238, 216 


3,186 

11, 965 

3,163 

177, 868 


13, 955 


Buffalo - 


36, 686 




15,349 




557.631 


Detroit - .. . . 


279, 592 


Duluth 


2,081 
10, 901 
9,138 
9,142 


2,426 

- 806 

646 


1,043 

9,870 

22, 742 

634 

636 

39,297 

9,118 

166, 407 

15,870 

20, 675 

13, 522 


1,649 

25, 765 

9,903 

3,606 

2,042 

36, 256 

9,930 

S9. 769 

32, 669 

43, 050 

7,934 


7.199 


Fort Worth - - 


47, 342 




42, 429 




13,382 




375 

26, 506 

3,740 

30, 436 

6,569 

3,967 


3,035 




32, 744 
6,189 

97, 883 
3,847 

35, 696 
9,261 


134, 803 


Omaha 


28, 977 




384, 495 




58,955 


St. Louis 


103, 388 




30, 717 









CONCENTRATION OP ECONOMIC POWER 



71 



Table 92. 



-Fluctuations in tenancy (square feet of rental area changes between 
Oct. 1, 1938, and May 1, 1939) — Continued 



CONTRACTION 



City 



Akron 

BuSalo 

Cleveland 

Chicago 

Detroit 

Duluth 

Fort Worth_. 
Indianapolis. 

Memphis 

Milwaukee-. 
Minneapolis. 

Omaha 

Philadelphia. 

Portland 

St. Louis 

Spokane 



Out of 
bu.siness 



6,011 

10, 563 

6,771 

176, 855 



892 
5,565 
9,040 
10, 175 



25, 908 
10, 034 
71,270 
11,217 
12, 385 
5,261 



To other 
cities 



724 
566 



5,273 
2,500 
2,460 



1,291 
893 



2,726 
3,911 
1,657 



To other 
buildings 



4,185 

10, 606 

3,022 

182, 018 



1,275 
12, 171 
23, 246 

2,765 

2,320 
41, 690 
14, 470 
89, 940 
25,246 
18, 639 

7,681 



By pres- 
ent ten- 
ants 



2,061 

5, 571 

2,258 

151, 601 



1,06 J 
6,916 
3, 777 
10, 789 



Total 
contrac- 
tion 



22, 358 
4,458 
61, 436 
23, 450 
23, 219 
6,926 



12, 257 

27, 464 

12,617 

510, 474 

300, 360 

8,501 

27, 155 

38, 523 

23,711 

2,320 

91, 247 

29, 855 

212, 646 

62, 639 

58, 152 

21, 525 



Net ex- 
pansion 
or con- 
traction 



I 1, 689 
I 9, 222 

1 2, 732 

1 47, 157 

2 20, 768 

2 1,302 
1 20, 187 

1 3, 906 
1 10, 329 

'715 

< 43, 557 

3 878 

1 171, 849 

2 3, 684 
1 45, 236 
1 18, 903 



1 Expansion. 2 Contraction. 



CYCLES OF FAILURES 



In a study of the duration of the cycle of business failures in the 
United States, Greenstein '^ estimates the typical length as 9.4 years. 
The period of 66 years included annual data from 1867 to 1932. The 
author carefully states that the period is not constant and warns that 
"seven instances of a cycle are hardly sufficient as a basis for fore- 
casting." 

It is apparent also that there are regional differences in failure 
cycles. For instance, the following applies t.o a comparison ^^ of 
Colorado and national series for the period, 1900 through 1926: 
"The effect of the depression of 1907 was far greater upon the national 
series than upon Colorado failures; a comparison of the relative posi- 
tion of the curves in 1907 and 1908 would indicate that the panic's 
effect upon local failures was immediate bjLit not prolonged. It is 
interesting to note that the highest point in Colorado failures about 
the middle of the period was in, 1912 whereas the national series rose 
to a high point in 1915." 

Following the collapse of 1920, numbers of failures increased 
rapidly, but whereas the peak of the national series was reached in 
early 1922, the maximum for Colorado was a year later. The lag of 
liquidation behind business crises is a common observation. In 
Austin," Tex., it was found that proprietors continued depleting 
capital in the hope of survival and because other employment was 
difficult to obtain. 

The relation of the business cycle to the life span of enterprises is 
discussed in another section. 



'2 Benjamin Greenstein: "Periodosrram Analysis with Special Application to Business Failures in the 
United States, 1867-1932." Econometrica, Vol. 3, No. 2, April 1935. 

'3 John H. Cover: "Changes in Economic Welfare," Denver Business Review, vol. Ill, No. 1, January 
1927. 

i« Solon Ayers: A Study of Mortality of Retail Grocery Stores in Austin, Tex,, 1880-1932 (University of 
Texas Master's T' esis). 



CHAPTER VI 
BUSINESS MIGRATION 

Shifts of industrial enterprise are continuous. With the rapid 
growth of a new area rich in natural resources and the influx of people, 
industry develops and branches of distant plants are established. 
This has been a frequent occurrence in our economic history. The 
steel and packing industries have moved westward in pursuit of new 
supplies of raw materials and fuels. The cement industry has 
diffused its manufacture as population has concentrated in widespread 
metropolitan communities. 

With migrations of industry not only are employees of discontinuing 
concerns affected, in addition, the business lives of many kinds of 
suppliers are at stake, the purveyors of necessities to persons and to 
plants. 

Unfortunately, the term, migration, has been employed in describ- 
ing so many different kinds of movement that a false impression 
persists in the minds of many people that some areas of the country 
are being depleted of industries while others are booming with the 
accession. 

At present the expression, industrial migration, is used with the 
following meanings: ^ 

1. Actual movement of an industrial plant from one locality to another. 

2. Movement of productive capacity without the actual movement of the 
original plant, the latter being retained while new plants are established in other 
territories. Branch plants illustrate this type of movement. 

3. Development of new plants of a given industry in regions heretofore without 
such industry. These new plants may be under entirely different ownership from 
those established elsewhere. 

4. One region may be experiencing a more rapid Jate of growth than another. 

Involved in the problem is the indefiniteness of delineation of regions. 
Differences between political and economic boundaries are further 
complicated by differences in the significance of areas to different 
industries. The New York manufacturing region includes territory 
in several States. In Minnesota, regions differ for the milling and 
the logging industries. 

It is suggested by Mitchell that the following different kinds of 
inter-regional industrial displacements be recognized: 

1. Unidirectional displacements are to be explained in terms of shifting regional 
advantage. Examples are, the "migration" of the cotton-text,ile industry from 
New England to the South Atlantic region, and the rising importance of Chicago 
as compared with Pittsburgh in the steel industry. 

2. Dispersional displacements are those changes resulting in less concentration. 
They result in less regional emphasis than the unidirectional type. The uni- 
directional displacements do not tend to dissolve regional concentration; they 
merely give rise to new concentration. The opposite is true of dispersional 
displacements. This is the essence of decentralization. 

1 W. N. Mitchell: Trends in Industrial Location in Chicago Region Since 1920, University of Chicago 
Press, 1933. 

73 



74 CONCENTRATION OF ECONOMIC POWEK 

3. Concentric displacement: This is the tendency for concerns in the same- 
industry to gather in the same locality or region. 

Dispersional movements within the single region might be termed "peripheral." 
Intraregional movements of the concentric type are less frequently observed 
than peripheral movements because centralization is more closely identified with 
early phases of urban government than with conditions characterising metropoli- 
tan areas today. 

An analysis of the discontinuance of 845 business firms in Minneap- 
olis, St. Paul, and Duluth ^ disclosed that some logging and lumber 
companies had transferred operations to the West and the South, but 
that the majority had closed entirely or shifted into other fields, such 
as road contracting. The closing of the important logging industry 
in Duluth was the only clear example of the migration of an entire 
industry. 

In the case of the cottoji-textile industry, movement to the South 
was selective.^ It took from New England coarse- and medium-count 
fabrics but left overwhelming predominance in fine cotton goods and 
rayon mixtures. This resulted in complete specialization within 
these two divisions. 

The increases of plant equipment in the South were due to speciali- 
zation "in cloth and yarn manufacture, a disparity in operating costs 
between the upper tier of Southern States and the deeper South, 
community desire for industries where agriculture was faltering. 

That many closings in the textile industry were actual failures rather 
than migrations is indicated in an excerpt from a report of study in 
1938 and 1939 by a Massachusetts commission: * "In cotton textiles 
19 actual removals were traced, but cases are known in which Massa- 
chusetts concerns first established branch plants in other States, and 
then developed most or all of their operations in those plants. In 
other instances, capital recovered by liquidations was used to organize 
new cotton manufacturing corporations in other States. Losses by 
bankruptcies, liquidations, and curtailment of operations have been 
much heavier than by direct removals * * * 'pj^g survey made 
by the Commission disclosed only three actual removals of woolen 
and worsted mills to other States, so that most of the decrease in num- 
bers of establishments between 1923 and 1935 — 71 altogether — was 
evidently due to bankruptcies, liquidations, and suspensions of 
business." 

Of 79 removals in the boot-and-shoe industry, between January 1, 
1930, and December 31, 1938, 46 establishments were relocated in New 
Hampshire, 25 in Maine, 3 in Rhode Island, 3 in New -York, 1 in 
Pennsylvania, and 1 in Indiana. ''A considerable number of * * * 
factories moved from one Massachusetts community to another." 

In the same period 11 foundries and machine shops moved to other 
States, but 10 of these removals resulted from mergers or consolida- 
tions. In such instances migrations are contractions due to de- 
pression rather than shifts territorially, and are part of the closure 
picture. 

2 E. A. Heilman: Mortality of Business Firms in Minneapolis, St. Paul, and Duluth, 1926-30, Univer- 
sity of Minnesota Press, 1933. 

3 Clauiius Murchison: "Relocation of the Cotton Textile Plant," Proceedings of the Minnesota Con- 
ference on Unemnloyment Relief and Stabilization. University of Minnesota, Employment Stabilization 
Research Institute. 1932, pp. 71-77. 

♦ The Commonwealth of Massachusetts, Final Report of the Commission on Interstate Cooperation^ 
June 1939, pp. 14-19. 



CXDNCENTEATION OF EOONOMIC POWER 75 

FACTORS IN INDUSTRIAL MOVEMENT 

Shifts in industrial plants are made for a large number of reasons. 
The Massachusetts report ^ states that "ultimately, the matter de- 
pends largely upon comparative costs * * *" and suggests the 
following items: out-of-State competition, high wages, restrictive laws, 
labor difficulties, taxation, inefficient management, obsolescence of 
plant and equipment and technological changes. But many other 
factors are significant as well. A listing, with examples, may aid our 
identification: 

1. Raw materials. — Seeking new sources of raw materials or areas 
with new materials accounts, in part, for a shift of paper manufacture 
to the South. 

Within a few years the South has increased from a negligible produc- 
tion to 30 percent of Kraft output due to a new process making it 
possible to produce Kraft and certain types of pulp from slash, a 
fast-growing pine.^ 

An interesting sidelight on the development of southern manu- 
facture is a resolution ^ approved by 80 percent of the "paperboard 
manufacturing industry" and addressed to the Reconstruction 
Finance Corporation. This resolution protests "against further 
public funds being loaned by the Reconstruction Finance Corporation 
or provided by any other public agency to promote the construction 
of any additional mills." Reference is made to the loan of $3,425,000 
for construction of "a mill for the manufacture of newsprint paper 
* * * at Lufkin, Tex., which mill will on completion sufficiently 
demonstrate whether or not newsprint paper can be economically 
manufactured from southern timber * * *." 

Some paint and varnish plants are being established in the South 
near sources of turpentine, resin, and tung oil.* 

Loose- Wiles Biscuit Co. and General Mills, Inc., are decentralizing 
in part to insure processing against drought and crop failures in 
particular grain producing areas.* 

With soil becoming a national concern, Goodrich foresees two 
general trends: Recoil eastward from the wind -devastated plains, and 
a drift northward out of the South. 

2. Markets. — Doubtless with distribution costs looming as a major 
problem in industry many dispersional movements are aimed at 
establishing positions close to the demand for the product. 

Paint manufacturers w^ith national distribution -operate factories 
in several parts of the country and have established a system of ware- 
houses, each serving an area usually within a radius of about 500 
miles. The tendency of retailers to carry small stocks and to aim 
for quick turn-over requires the manufacturer to be ready for prompt 
delivery.^ 

A few decades ago cement manufacture was centered in the Lehigh 
Valley of Pennsylvania. Tod'ay the Lehigh Portland Cernent Co. 
operates in 10 States, the International Cement Corporation in 8, 
and the Alpha Portland Cement Co. in 7 States.^" 

» Commonwealth of Massachusetts, op. cit. 

« Business Week, Reports to Executives, No. 2, Industry on the Move, February 27, 1937. 
' National Paper Board Association; signed by H. S. Adler, secretary, June 8, 1939, file R-3. 
* Business Week, February 27, 1937, op. cit. 

' Metropolitan Life Insurance Co., Policyholders Service Bureau, The Paint Industry: Plant Location 
Factors, 1936. 
10 Business Week, op. cit. 



76, CX)NCENTRATION OF ECONOMIC PpWBR 

3. Power and fuel. — It has been suggested that cheap electric power 
might attract manufacturing to the countryside, but this possibility 
depends upon the extent to which power costs are a determining fac- 
tor. It may become an important consideration when joined to a 
further development of railroad and highway transportation permit- 
ting extension to the periphery. ^^ 

Construction of large dams in the Tennessee Valley and in the 
West have already proved added inducements to establishment of 
new or additional plants. 

Fuel is usually one of the largest expenses to the glass industry 
and, therefore, the manufacturer is very much influenced by the source 
of fuel supply in locating his plant. The glass industry was first 
located along the Atlantic coast, where wood was the chief fuel at 
that time. It followed the change in fuel to the coal fields of Pitts- 
burgh, and later located near the gas and oil regions in western Penn- 
sylvania. Either natural or artificial gas is said to be the ideal fuel 
in the glass industry because of its freedom from dirt and ashes, its 
uniform heat, its almost perfect combustion, and the ease with which 
its flame is applied and controlled. ^^ 

4. Labor costs. — Much has been printed and many statements made 
regarding the responsibility of labor costs in migrations. Usually no 
one factor is entirely responsible. Insofar as the South has an ad- 
vantage to offer industry in low wages, that advantage probably will 
be short-lived. Development of industries in a community is auto- 
matically associated with a rise in prices and, therefore, in wages. 
Moreover, the national minimum wage law will tend to remove the 
South's advantage, by equalizing wage rates. 

5. Transportation. — To save two-way freight charges on heavy steel 
cylinders and the pressure for lower selling costs has forced decen- 
tralization upon companies selling various gases for commercial uses. 
The Union Carbide & Carbon Co. operates 160 plants and the Air 
Reduction Co. 133 plants. ^^ 

The canning industry is another example. The California Pack- 
ing Corporation has 75 plants in California. Similarly the companies 
supplying cans find it easier to ship sheet tin plate than finished cans. 
The American Can Co. operates 50 plants, as does the Continental 
Can Co. 

6. Efficient plant size. — P. W. Litchfield, president of the Goodyear 
Tire & Rubber Co., referring to the company's purchase of a plant 
at Windsor, Vt., said recently: "Experience has taught us that a 
5,000-tire plant running at full capacity with a standardized line can 
be just as efficient as one of 20,000, -30,000, or even 40,000 units with 
a fluctuating volume." T. G. Graham, vice president of the B. F. 
Goodrich Co., which is equipping a tire plant at Oaks, Pa., added: 
"Customers let it be known that we had. better establish additional 
plants outside of Akron if we expect to enjoy our full share of their 
business." " 

7. Climate. — The airplane mdustry is reputed to be moving to the 
Pacific coast in part in search of year-round flying weather. 

S. Negative factors. — As summarized in a previous section of this 
study, some governmental agencies have offered inducements to 

" Daniel B. Creamer: Is Industry Decentralizing? University of Pennsylvania Press, 1935. 
" Metropolitan Life Insurance Co., Policyholders Service Bureau, The Glass Industry: Plant Location 
Factors 1934—35 
13 Business Week, February 27, 1937, op. cit. 



CONCENTRATION OF ECONOMIC POWER 77 

migration in the form of tax exemptions, aid in financing purchase of 
sites and equipment, and assurance of "passive labor conditions." 
These aids were directed at weak points in the armor of other juris- 
dictions. 

For instance, movements of some plants out of Minnesota and 
Wisconsin were heralded as efforts to avoid taxes and regulatory- 
statutes. Labor conditions and activities were widely quoted as 
reasons foi- some departures from New York and Ohio.^* 

In view of this type of competition it is interesting to observe some 
groups studying the probems of their own jurisdictions and establish- 
ing cooperative devices based upon the experience of their own con- 
cerns. It is sound, as a major step, to correct existing conditions. 

As an example, a plan to aid existing industries and develop new 
industries for Danville, 111. has been put into operation by the Dan- 
ville Chamber of Commerce. ^^ This plan provides for- the construc- 
tion of modern, low cost, daylight, efficiency factory buildings of 
standard construction. 

After a study of the success and failure record of manufacturing ^ncerns in 
Danville, certain facts were clearly established. (1) The majority of manu- 
facturers have too much land and building. (2) The majority of manufacturers 
could efficiently occupy a standard building in place of a specially designed 
building. (3) The successful business must have a plant equal to or better than 
his competitors. (4) The cry for additional working capital ivas not the prime 
factor that spelled success or failure. The principal factor appeared to be business 
ability and orders. (5) Operating profit and losses, where they occurred were 
rarely correctly reported by small and medium-sized industries. Immediate 
cost and budget-control figures were absent in most concerns. (6) No special 
efforts were made by small and medium-sized industries to have financial state- 
ments that would be eligible for commercial or capital loans. (7) No sales, 
merchandising, operating, and financial assistance were available except possibly 
at professional rates. (8) No funds were available to buy lands or to bujld eflB- ' 
cient factory buildings. (9) In the majority of cases very little funds were 
available for operations. ' 

The solution proposed was the construction of modern factory build- 
ings by the chamber of commerce. 

These fine factories are acquired through paj^ments like rent. No mortgage is 
assumed. For example, a factory with clear working space 40 by 115 feet on the 
office side, steel uprights, steel trusses, no posts, an adjoining space containing 
814 square feet including boiler room, wash room, machinery room and office, 
all erected on a plot of ground large enough to provide for further expansion, 
which would be an addition to the length of the original unit making it 40 by 200 
feet, doubling the office and running another wing on the opposite side 40 by 230 
feet, can be acquired for approximately $10,000 with no down payment, but 
with rent of about $100 a month, and this will give the manufacturer title to the 
land and building in about 10 years and 7 months * * *_ 

The Danville Plan provides for a personnel made up of successful operating 
manufacturers. A manufacturers' and retailers' school is conducted on budget 
control and arranging financial statements so as to be eligible for commercial 
credit. The problems taken up are actual, and not academic. With a set-up 
of this kind, the civic-minded citizens of Danville developed an organization and 
employed a full-time secretary. They occupy their own building. 

'* Business Week, February 27, 1927, Op. cit. 

" U. S. Department of Commerce, Bureau of Foreign and Domestic Commerce, Domestic Commerce 
Series, March 20, 1939, p. 166. 



262652— 41— No. 17- 



78 



CONCENTRATION 

Some industrial movements are centripetal, an assemblage in con- 
venient centers. 

In view of the abundant evidence of an ever-decreasing share of 
wage jobs located in the principal cities, it is of interest that the 
highest birth rates in both the durable and semidurable goods indus- 
tries have been in the cities. The availability of loft space, work- 
shops, abandoned factories and obsolete machinery, the presence of 
a large reservoir of workers with various skills, the existence of ample 
credit institutions, proximity to large concentrations of population 
and to transportation facilities tend to make the principal and satel- 
lite cities a favorable place for industrial incubation. This may be 
illustrated by the many small plants that started up in the silk and 
rayon business in Paterson, N. J., in 1929-33 at the very time the 
large plants were emigrating from the city. ^® 

Birth and mortality rates calculated from unpublished data of the 
Census of Manufactures for durable and semidurable goods industries 
are presented in table 93. 

Table 93. — Vital statistics for IS durable and 11 semidurable goods industries, 1929 

and 1933 

[Based on unpublished data of the Census of Manufactures! 

DURABLE-OOODS INDUSTRIES 



Year 


A' 


B2 


C3 


D« 


E» 


F9 


O' 


Average 


Total 


Birth rate: 

1929 


3.5 
1.7 

2.5 


5.1 
.4 

.9 


1.6 
.5 

1.1 


3.2 
1.1 

.8 

m 


0.2 
.3 

1.3 


2.6 
1.4 

1.7 


2.1 
1.7 

2.7 


2.7 
1.2 

1.8 


18.3 


1933 


7.1 


Mortality rate: 

1929 


10.6 


1933* 











SEMIDURABLE GOODS INDUSTRY 



Birth rate: 

1929 


6.1 
8.3 

6.1 


4.3 
8.2 

6.8 


2.6 
2.6 

2.8 


3.5 
2.1 

1.9 

(8) 


2.6 
1.3 

1.1 


2.2 
4.4 

1.0 


3.0 
4.3 

1.1 


3.9 
5.1 

2.9 


2i.3 


1933 


31.2 


Mortality rate: 

1929 


20.8 


1933 u 











' Principal cities of industrial areas. 

> Large satellite cities in the industrial area. 

' Remainder of the industrial area._ 

• A city of 100,000 or more inhabitants outside of an industrial area. 

• Remainder of the county in which D is located. 

• Important industrial county without a city as large ds 100,000inhabitants. 
' Remainder of the United States. 

' Not given. 

PROSPECTUS 

Siqce there is little prospect of a wide dispersion of economic activi- 
ties and every likelihood of a continuation of the observed tendency 
toward its diffusion, manufacturing and other activities may be 
expected to develop in areas of moderate concentration and to spread 
out into suburbs and outlying sections of existing urban districts. ^^ 

!• Daniel B. Creamer: "Is Indftstry Decentralizing?" University of Pennsylvania Press, 1935. 
" Carter Goodrich, et al.: Migration and Economic Opportunity, University of Pennsylvania Press, 
1936. 



CONCENTRATION OF ECONOMIC POWEH 79 

There is a tendency for industries to be less concentrated in certain 
favorite spots. ^* In most cases the dominance of the early center has 
disappeared due to its failure to keep pace with the growth of the same 
industry in other parts of the country. As example. Chicago fell 
from 35.6 percent of the national total in meat packing to 18.8 percent 
since 1899, although it has more than doubiod its value of products. 
Also Philadelphia, in making carpets, and rug;:, doubled the number of 
employees, but fell from 45.6 percent of the Nation's total to 27.8 
percent. 

Thus, we have three steps in the gradual evening out of manu- 
facture: 

1. Development of backward areas and decline of highly developed 
areas. 

2. Development of rural sections and decline of urban. 

3. Break-down of local concentration in historical centers of specific 
industries. 

The advantages of these procedures are as follows: 

1. Saving in freight hauling. 

2. Less delay in shipping. 

3. Less dependence of areas upon single types of manufacture or 
activity for livelihood. 

4. Less violent depressions and less excited prosperities due to 
diversification of industry. 

The relation of industrial movements to mortality are threefold. 
First, discontinuances frecjuently are reported as migrations. Second, 
desertion of one area and concentration upon another would directly 
affect the welfare of all concerns serving industries and employees. 
Finallj^, expansive and centrifugal movements must be accepted as 
normal elements of growth tobo included in the planning and among 
the risks of business enterprise. 

'8 Willard L. Thorp: The Changing Structure of Industry, in Recent Economio Changes in the United 
States, vol. h pp. 20&-16, 1929. 



CHAPTER VII 

MANAGERIAL COMPETENCY AS A FACTOR IN BUSINESS 

MORTALITY 

In the preceding chapters attention has been focused almost 
exclusively on the amount and character of business failure. We 
turn now to a discussion of the reasons. These may in general be 
grouped in two general classes; nanaely, failures due to errors in 
management and those due to lack of adequate protection by Gov- 
ernment. 

Management difficulties to which failures are attributed are as 
num.erous as the problem.s of business. In individual proprietorships 
business difficulties are further com.plicated by the incursion of per- 
sonal attributes and domestic and social relations. 

From, an analysis of life experience of retail concerns in sm.all towns 
of Illinois ^, it is estim.ated that a dealer entering business has two 
chances out of three of lasting a year, an even chance of continuing 
through 2 years, and two chances out of five of surviving 3 years. 
Mortality am.ong new establishments is much gi-eater relatively than 
am.ong those establishments that have succeeded in batthng the dis- 
integrating diseases of youth. 

It may be generalized that much m.ore foresiglit is required in the 
planning and conduct of a business than has been evinced in the 
establishznent and guidance of m.ost enterprises. 

Perhaps in the future, with calorim.eters, lie detectors, and m.ental- 
aptitude analyzers, the prospective manager may be cataloged as to 
success probability. Certainly at present predictions are precarious, 
and post mortem.s cursory and elem.entary. 

From long-tini.e studies of m.ortality rates, it would appear that 
there has been little change in the average life span of enterprises, 
and that at present entry into business is as inadequately planned, 
and control as inefficiently applied, as at any tim.e in the last 80 
years. 

TRAINING AND EXPERIENCE 

In instances failing proprietors were found to have the technical 
training required for the particular business, but no business experi- 
ence; in other cases, to have had previous general business ero.ployment 
alone, which required the engagem.ent of technical assistants beyond 
the capacity of the firm to support. This is illustrated in the case 
analysis of liquidating retail druggists in St. Louis ^ Twenty-five of 
the 30 druggists studied probably were qualified technically through 
training and retail drugstore sales experience; 23 lacked previous 

1 Paul D. Converse: Business Mortality of Illinois Retail Stores from 1925 to 1930, University of Illinois' 
Boll. No. 41. 

s U. S. Department of Commerce, Bureau of Foreign and Domestic Commerce, Domestic Commerce 
Series No. 59, Causes of Failure Among Drug Stores, 1932. 

81 



g2 CONCENTRATION OF ECONOMIC POWER 

management experience adequate to the direction of an enterprise. 
Five had neither business nor technical training nor experience. 

Analysis of factors influential in the bankruptcy of 397 Chicago 
retail concerns indicates that about one-half of the individual pro- 
prietors failed because of discernible errors in m,anagem,ent.^ Seven 
percent of this group were so lacking in background experience as to 
leave native aptitude as the only possible elem,ent in management 
success. An additional 6 percent showed general incompetence; 
since this category has an arbitrary standard of judgment, it was 
used only when recurrent m.ism,anagem.ent appeared in various phases 
of business. Moreover, inexperience was a contributory factor in 
more than 6 percent of the cases having other prim.ary causes, while 
general incompetence appeared in a similar proportion of the cases 
with principal factors assigned elsewhere. In fact, inexperience and 
general incompetence affected more than 27 percent of all bankrupts. 

Twenty-six percent of retail failures in the period 1890-1931 were 
due to incom.petence or inexperience, according to the estimate of 
Dun and Bradstreet.'* 

As stated by Thorp, ^ "It is not difficult to enter into retailing. 
The public does not regard it as a type of activity calling for any high 
degree of technical knowledge. We all remem.ber how successfully 
we played with toy cash registers as children and feel that successful 
merchandising needs only an average amount of intelligence and com- 
mon sense. We meet ro.erchants daily, and they do not impress us 
as being superm.ea. 

"The result of this situation is a continual flow of hopeful and 
enthusiastic individuals into retailing, replacing another group of 
sadder and, we hope, wiser m.en." 

In commenting upon results of retail mortality experience in Colo- 
rado,^ Hallas estimates — 

* * * in all likelihood much of the failure rate in the retail trades may be 
attributed to inadequate foreknowledge of what the business entered into really 
requires in the way of capital, markets, and managements. 

And Nystrom concludes — ^ 

No lesson is drawn from the accumulated experience of the vast number of failures 
that have taken place in the past. For the most part the system by which elimina- 
tion takes place is such as to preclude the outside public from gaining from the 
experiences of others. 

In estimating the relative importance of training and experience in 
the drug and grocery trades, Boer ^ points out that the drug trade has 
"educational requirements for dispersing prescriptions," whereas, no 
"special knowledge of merchandise is believed to be required in the 
operation of a grocery store, and it is a trade that attracts the un- 
thinking on the basis that 'everyone must eat' and therefore the 
business is sure to be successful." 

Forty percent of the failing grocery proprietors included in Boei's 
study had no previous experience which might be of an}' possible value 

3 John H. Cover: Business and Personal Failure and Readjustment in Chicago. Dniversity of Chicago ■ 
August 1933. 

< Quoted by Paul H. Nystrom, Opportunities for the Improvement of Retail Management, Journal of 
Marketing, April 1936. 

« In an address "Trend of Failures in the Distribution Field," quoted in a Bureau of Foreign and Domes- 
tic Commerce release, Busines:^ Information Section, October 1938. 

« E. T. Hallas: "Mortality cf Retail Stores in Chicago," University of Denver, 1936. 

' Paul H. Nystrom: "The E conomics of Retailing" 1919, p. 325. 

• A. E. Boer: "Mortality Costs in Retail Trades," Journal of Marketing, Vol. II, No. 1, July 1937, pp. 52- 
60. 



CONCENTRATION OF ECONOMIC POWKR 83 

in the new enterprise. In the shoe trade the proportion of inexperi- 
enced managers was 29 percent, in the hardware field, 22 percent, and 
in the drug; trade, 16 percent. 

Of the Poughkeepsie proprietors,^ more than 50 percent were in- 
experienced in the field of their endeavor, while an additional 12 per- 
cent had had no previous employment whatever. 

It was the observation of Vaile ^° that more than one-half of the 
persons entering the grocery field in 1930 were without employment 
and "had to do something." Fifty percent of the new proprietors 
had no previous grocery experience, either in the retail or wholesale 
field. 

McGarry " selected a group of discontinuing Buffalo retail pro- 
prietors for questioning as to previous occupation and reasons for 
entering the particular trades. Of 45 grocers without previous mer- 
chandising experience, 12 had been laborers; of 61 with some trade 
experience, 26 had been in the confection, 11 in the meat, field. 
Three principal reasons were offered for entry into proprietorships; 
the desire for the independence associated with managing one's own 
enterprise; the hope for a steady, increasing income; the opportunity 
for supplementary, regular income through establishment of a small 
outlet as a side issue with members of the family operating it. 

Of 322 Poughkeepsie retailers whose background was determined, 
almost 38 percent recorded experience which was related to the field of 
their proprietorship : grocery, meat, saloon, confectionery, or tobacco. 
Thirty-nine percent had been laborers, and almost 12 percent had 
had no previous occupation. 

The flux of occupations is vividly illustrated in the following sum- 
mary of Pittsburgh ^^ cases : 

Related experience.— Oi 77 grocers, 48 had been grocery sales clerks; 8 meat 
sales clerks; 6 wholesale salesmen; 5 miscellaneous salesmen; 4 hucksters. Of 49 
hardware proprietors, 37 had been hardware sales clerks; 4 wholesale salesmen; 
4 contractors. Of 62 drug store proprietors, 52 had been drug sales clerks; 5 
miscellaneous salesmen. Of 37 shoe store proprietors, 28 had been shoe store sales 
clerks; 8 wholesale salesmen. 

Unrelated experience. — Of 51 grocery proprietors, 21 had been laborers; 8 
farmers; 6 office clerks; 5 truck drivers. Of 14 hardware proprietors, 2 had been 
laborers; 2 carpenters; 2 engineers. Of 12 drug-store proprietors, 2 had been 
laborers; 2 office clerks. Of 15 shoe-store proprietors, 12 had been laborers. 

The "side-issue," "hole-in-the-wall," enterprise is of major sig- 
nificance in the problem of retail mortality. It may be an increasing 
phenomenon in some fields, including groceries, beverage dispensaries, 
and counter eating places. Frequently, these stores and service 
establishments are seasonal in their operation; in many instances, 
they are used to tide a family over periods of unemployment. A 
contrast of "home" and separate establishments for five fields and 
for two periods is presented in table 94. 

' R. O. Hutchinson and A. R. and Mabel Newcomer; Op. cit. 

If R. S. Vaile: "Grocery Retailing with Special Reference to the Effects of Competition," Studies in 
Economics and Business, No. 1, University of Minnesota Press. 
" Edmond D. McGarry: "Mortality in Retail Trade," University of Buffalo, 1930. 
12 A. E. Boer: Op. cit. 



84 



CX)NCENTKATION OF ECONOMIC POWER 



Table 94. — Comparison of number of Poughkeepsie business concerns in homes and 

in separate buildings 



1873-76 



Kind of business 



Total num- 
ber of 
concerns 


Home 


Percent 
separate 


94 


54.3 


45.7 


35 


17.1 


82.9 


81 


86.4 


13.6 


19 


57.9 


42.1 


43 


41.9 


58.1 



Total 



Grocery store - . 

Meat market 

Saloon 1 

Confectionery store 

Cigar store ._ 

1923-20 

Grocery store 

Meat market :. 

Saloon 

Confectionery store 

Cigar store _ 



100 
lOO 
100 
100 
100 



329 


159.9 


40.1 


82 


18.3 


81.7 


27 


59.3 


40.7 


79 


51.9 


48.1 


38 


18.4 

1 


81.6 



100 
100 
100 
100 
100 



".When chain stores are omitted, 66 percent. 

Since these home stores are so frequently temporary by intent as 
well as in fact, and subject to discontinuance and reestablish'ment,. 
they present problems of competition to other enterprises, and of 
estimating to the student of business population. 

In summary, several points may be made. Wliile factual informa- 
tion refers principally to the retail and service fields, it is believed 
that similar circumstances apply, though perhaps to a lesser extent, 
to other business fields. It is apparent that optimism exceeds under- 
standing in the cases of possibly two-thirds of our new proprietors. 
There exists no adequate device for tempering the desire for inde- 
pendence in business with the knowledge of the attributes necessary 
to assure continued enjoyment of that independence. 



AGE OF MANAGER 

The physical age of a proprietor, particularly at the time of estab- 
lishing an enterprise, may not only be a general index of the energy 
with w^hich he is likely to promote his business, but, m addition, a 
warning of underlying causes leading to his entry into business. 

Recording the ages of failing proprietors in Pittsburgh " for the 
period 1925-34, Boer classified the ages at entry into two periods: 
those entering prior to 1920, and those inaugurating businesses in 
1920 or later. It was found that in the retail grocery, drug, hardware 
and shoe trades the age of entry was relatively greater in the period 
beginning in 1920. 

Wliile a possible element, the early elimination of older proprietors 
in the first period is not sufficient to account for this shift, particularly 
to the extent that the Chicago ^^ bankruptcy experience is applicable. 
The age range of the most frequent failures in Chicago was from 36 to 
40 years, with the 5-year age periods immediately above and below 
heavily represented. Very small proportions of the total occurred at 
ages below 26 and above 55. WhUe individual proprietors and 
managers of Qorporations were recorded principally in the age group 

"A. E. Boer: 0p.<;it. 
i< John H. Cover: Op. cit. 



CONCENTRATION OF ECONOMIC POWER 85 

36 to 40, the concentration of partnership failures was within the range 
of 26 to 35. 

Compared with the range of years available for business activity, 
and the frequency of age groups in the human population, it appears 
that turn-over is highest in the ages centered at about 35 years. 

Neglect of business was the principal factor attributable to 3 percent 
of the Chicago ^^ bankruptcies. The interests diverting attention to 
the proprietor ranged from other business or professional responsi- 
bilities — applying to 9 percent of all cases — to the attractions .of the 
dog races. 

PERSONALITY 

As important as unmeasurable are the personal characteristics of 
the proprietor and his staff. Two percent of the retail bankruptcies 
in Chicago ^^ were attributed primarily to this factor. This group 
included illiterate- persons whose chances of success even in the neigh- 
borhoods of lowest standards of intelligence seemed exceedingly small. 
In other instances repugnant, or offensive, personality seemed to be a 
large factor in failure as gaged by the interviewer's estimate and by 
inquiry among creditors, customers, employees, and neighbors. 

A study of food outlets in Pittsburgh " disclosed that one-fifth of 
the proprietors permitted attendants with soiled and unsightly cloth- 
ing to serve customers, an important neglect in personal appearance 
frequently associated with other forms of carelessness in business 
management. 

From the same source many other attributes are suggested as limi- 
tations upon business success, some within personal control: absence 
of refrigeration, lack of protection of rheat and other merchandise, 
careless and unsanitary handling of commodities, wrapping meat in 
newspapers, unclean store interiors. In 38 percent of the outlets 
observed, no greeting or expression of appreciation for patronage was 
extended to customers. 

ACCOUNTING EECORDS 

It is difficult to conceive of business decisions without accounting 
and statistical records as bases for judgment; even the hole-in-tbe-wall 
store needs information regarding inventory turn-over and expenses. 
The extent to which records are neglected, even recognizing the de- 
mands upon the time of the lone proprietor-clerk, is amazing. A 
Pittsburgh retailer simply counts his cash each night; he explained, 
"If there comes a time when the cash drawer is empty, then I'm put of 
business." 

An appraisal of the adequacy of records of New Jersey ai^d Boston 
bankrupts,^^ based upon estimated needs of the individual concerns, 
disclosed that almost one-third kept no records, and that less than one- 
fourth kept adequate records. 

In table 95 the data are presented in detail. 

15 John H. Cover: Op cit. 

16 John H. Cover: Op. cit. 

17 John H. Cover: Neighborhood Distribution and Consumption of Meat in Pittsburgh, Universityof 
Chicago Press. 1932. 

18 William O. Douglas: "Some Functional Aspects of Bankruptcy," Yale Law Journal, vol. XLI, No. 3, 
January 1932, pp. 329-364. 



86 



CJONeENTEATION OF ECONOMIC POWEH 



Table 95. — Accounting records of New Jersey and Boston bankrupt firms 

NEW JERSEY 



Business 



Number 
of cases 



Adequate 



Inade- 
quate 



None 



Insuffi- 
cient data 



Retailers ._ 

Proprietors (miscellaneous) . 

Realtors. 

W holesalers 

Manufacturers 

Contractors 

Professional people 



231 
33 
29 
12 
26 
99 
16 



Percent 
27.4 
27.2 
17.3 
75.0 
61.5 
19.2 
.0 



Percent 
36.9 
12.6 
27.4 
.0 
26.9 
39.4 
12.5 



Percent 
24.7 
30.1 
38.0 
.0 
.0 
29.4 
87.5 



Percent 
11 

30.1 
17.3 
25.0 
11.6 
12.0 
.0 



Total. 



446 



27.2 



30. 



28.8 



13.1 



BOSTON 



Retailers 


179 
32 
33 
34 
34 

103 
7 


17 
25 
15 
38 
50 
18 
29 


47 
32 

JS 

26 
29 
28 


■33 
34 
51 
19 
21 
48 
43 


3 


Proprietors (miscellaneous) . - - 


» 


Realtors . . .. . - 


19 




3 


Manufacturers .- --- - - 


3 


Contractors ....... 


5 


Professional people , 









Total - 


422 


22 


37 


36 


6 











COMPARATIVE SUMMARY 










Adequate 


Inadequate 


None 


Insufficient data 




Number 
of cases 


Percent 


Number 
of cases 


Percent 


Number 
of cases 


Percent 


Number 
of cases 


Percent 


New Jersey.- -.. 


121 
95 
216 


27.2 
22.0 
24.8 


138 
154 
292 


30.9 
37.0 
33.5 


128 
153 

281 


28.8 
36.0 
32.4 


59 
20 
79 


13.1 


Boston 


5.0 
9.3 







A similar condition existed among Chicago bankrupts. Of 708 
firms studied in detail, one-third kept no books and another third kept 
inadequate systems of receipts and expenditures. Of the 103 manu- 
facturing concerns included, 72 had adequate record systems; 54 of 
these were corporations. Only 27 percent of the 494 retail merchants 
had adequate accounting systems. 

Records of failing drug stores in St. Louis "' would not have revealed 
at any time the status of the business. Only 2 of the 30 enterprises 
studied had ever attempted to prepare statements of profit and loss 
and balance sheets. Most of the proprietors took action. 

Though neglect may account for the absence of records in some 
cases, and the pressure of long hours and of fatigue in others, it is ap- 
parent that the basic difficulty is the complete ignorance of the ele- 
ments of manao-erial control. 



'• See U. S, Dept. of Commerce, Domestic Commerce Series No. 59. 



CHAPTER VIII 
ADEQUACY OF CAPITAL 

Most analyses of business failures record inadequate capital as one 
of the most important causal factors. Again, we are dealing with a 
term defying definition, and with a complex series of interrelated 
elements. If a going concern, successful in its history of earnings, 
suffers from lack of capital, the probable fault lies with a phase of 
management rather than with the investment or credit market. If 
an enterprise is established on a "shoestring," it may logically be 
classified as lacking economic reason for existence. 

Current researches promise to give us bases for the identification of 
optimum firms in certain fields and stages of business. Standards of 
measurement, including proportions of the most economical combina- 
tion of constituent factors would aid materially in determining the 
need, in a particular field, for new enterprises and for expansion of 
existing concerns. But, in addition, there are always fortuitous events 
demanding alert management to take advantage of market conditions 
and to fortify against recessions. 

In any event, capital is a factor of production and a tool of manage- 
ment. And its need varies with the functions the enterprise performs, 
the stage of development of the firm, the crises to be tided over, and 
the opportunities for expansion of service and for acquiring of the 
sinews of operation. 

FRAUD 

Douglas ^ reported 16 cases of fraud in 118 bankruptcies analyzed. 
Of 38 cases with previous failures within the preceding 6 years, 3 were 
fraudulent, and of the 20 cases in which a discharge had been granted 
within the preceding 6 years, there were 3 titiged with fraud. 

A case in point is quoted: 

No. 0311 was the case of a retail shoe dealer tinged with fraud throughout. 
In the same line of business he failed twice before — 1913 and 1917 — each time 
making an assignment for the benefit of creditors. A few months before bank- 
ruptcy he had given a financial statement showing $8,000 in stock and annual 
sales of $31,000. On examination he gave his sales as $18,000. Shortly after 
giving the above statement his stock wap sold at public auction and purchased 
by his son for $1,200. It seemed fairly clear that he sold most of his stock at 
any price and gave the money to his son so as to buy back the business. It 
further appeared that during the past few years he had taken money from the 
business to purchase real estate in his wife's name. His total liabilities were 
$9,800, most of which was owed wholesalers. His assets were the $1,200 of stock. 

Frequently, a review of a business case history suggests irregular 
practices, whereas the proprietor at the time of an emergency probably 
merely acted to stay failure and with honest intentions. In the sur- 
roundings of the bankruptcy procedure in Chicago,^ the "atmosphere 
is surcharged with emotion, and accusations of fraudulent intent are 
made in a majority of cases." Speculation, particularly, borders upon 

' William O. Douglas: Op. cit. 

' John H. Cover: "Business and Personal Failure and Readjustment in Chicago, 1933." 

87 



gg OONCENTRATION OF ECONOMIC POWER 

the fraudulent in the use of funds, which proprietors tend to regard 
as their personal property. 

In general, liquidations induced with the object of fraudulent gain 
are a small proportion of discontinuances. On occasion, a crisis 
brings a desperate effort at adjustment, resulting in an apparent 
misappropriation of property. 

INVESTMENT 

An approach to an estimate of capital investment is the net worth 
of firms based upon credit ratings. As reported in the section of this 
report on business life span, table 38, page 31, more than 65 percent 
of all enterprises in three Minnesota ^ cities had a net worth of $2,000 
or less, or the investment was not ascertainable. Attention is called 
to a bias in individual proprietorships and partnerships with ratings 
luider $5,000 since private properties are usually included in the "esti- 
mated pecuniary strength"; consequently, the recorded figures of at 
least two-thirds of the enterprises are probably in excess t)f actual 
business investment. 

Maiiufacturing firms constituted only 12.3 percent of the total num- 
ber of establishments, but this proportion is greater than for the 
United States * as a whole, in which manufacturing establishments 
account for only 8 percent of all enterprises. In the Minnesota com- 
munities almost 51 percent of the manufacturers had a net worth of 
less than $2,000 or an uncertain amount of investment. Machinery 
and equipment concerns and printing establishments account for 
about one-half of this group. 

A smaller proportion of manufacturing than of wholesaling enter- 
prises are found in the higher investment groups. Of the wholesaling 
firms, 7.5 percent are rated at more than $500, OOQ, 24.3 percent at 
more than $75,000, and 54 percent at more than $10,000. But 
almost 39 percent are found in the group with less than $2,000. 
While wholesaling establishments account for about 9 percent of the 
total of enterprises in the United States, they constitute 7.7 percent 
in the Minnesota cities. 

It is apparent that m.ost business in this area is "sm.all" business, 
and that a standard of judgm.ent as to essential capital investro.ent 
m,ight be quite different in the industrial Northeast. 

Studying the circumstances under which 270 establishments failed 
in the Minnesota com.m.unities, it was estim.ated that lack of capital 
was of prime importance in 116 cases, as com.pared with 133 cases 
charged, in general, to "m.anagement difficulties." 

Throughout most of the period during which Bradstreet assigned 
causes of failure, lack of capital ranked first. In 1931 and 1932 
Bradstreet^ attributed 31.5 and 30.2 percent of the failures to lack 
of capital, and for the period 1890 to 1931 assigned this cause on an 
average to 31 percent of failures.^ Subsequently, these published 
estimates were discontinued. 

In an analysis of the difficulties of Chicago "retail bankrupts, while 
one-half of the liquidations were attributed to managerial limitations, 
including failure to control capital, only 6.5 percent of the bankrupt- 

' E. A. Heilman: Op. cit. 

• U. S. Bureau of the Census. Statistical Abstract of the United States, 1938. 

• Dun & Bradstreet, Bradstreet's Failure Statistics for 1938, Bradstreet Press, N. Y. 

• Quoted by Paul H. Nystrom: "Opportunities for the Improvement of Retail Management," Journal 
of Marketing, April 1936. 

' John H. Cover: Op. cit. 



CK)NCENTEATlON OF ECONOMIC POWEH 



89 



cies were traced primarily to capital problems ; of these, alm.ost one-half 
were assigned to the category of inadequate capital at organization. 
However, it is probable that many discontinuances within the first 
and second year of business life are related, at least in part, to too 
sm.all capital; the bankruptcy process is used as a method of dissolu- 
tion by only about 5 percent of discontinuing m.anufacturing firm.s and 
2 percent of retailing establishm.ents.^ 

It is clear that m.ost of the Chicago ^ firm.s were, in the year preceding- 
bankruptcy, living principally upon short-term, loans or m.ercha.ndise 
credit, or both, and were, therefore, not econom.ic enterprises. Ap- 
proxim.ately one-fourth of the retail drug stores and one -eighth of the 
wom.en's clothing concerns had less tem.porary than perm.anent capital 
invested, 

Alm,ost 85 percent of the failing Chicago ^ concerns had original 
capital not exceeding $10,000, and 67 percent had $5,000 or less. The 
capitalization of two-thirds of the m.anufacturing firm.s did not exceed 
$10,000, and only 14 percent exceeded $50,000. Less than 5 percent 
of the retad enterprises had original capital exceeding $20,000. 

A study of failing retail m.eat stores in Chicago ^^ disclosed for the 
period 1920 through 1930 a m.axim.um. average initial investm.ent of 
$2,386, and a m.inim.um, of $1,543. The form.er was in 1920, and the 
latter in 1927. But the rating service found that in 1930 less than one- 
half of the new stores had an ascertainable capital investm.fint as 
com.pared with three-fourths in 1921. 

The relation of capital* investm.ent to survival is represented in 
table 96. 

Table 96. — Percentage of Chicago meat stores in each capital-rating group and 
percentage continuing in business over 5 years 





Percentage to total number of stores 


Percentage continuing 
more than 5 years 


Average 
life in 


Capital rating 


In business 
in 1920 


Entering 


Stores 


years, 
stores 
in busi- 




1921-26 


1921-30 


In business 
in 1920 


Entering 
1921-26 


ness in 
1920 


Above $10,000. 


3.8 

4.1 

6.7 

6.0 

9.3 

12.7 

35.8 

21.6 


" 1:1 

2.3 

6.1 

9.0 

13.3 

12.9 

19.5 

35.8 


0.9 
1.9 

4.9 
8.0. 
11.6 
11.9 
17.9 
42.9 


43.4 
33.7 
32.3 
28.7 
30.9 
26.6 
17.8 
23.4 


31.8 
31.0 
25.7 
25.9 
24.6 
25.3 
20.2 
22.0 


5 9 


$5,000 to $10,000 


4.8 
4 5 


$3,000 to $5,000 -. 


$2,000 to $3,000 


4 3 


$1,000 to $2,000 


4 2 


$500 to $1,000 


3 7 


under $500 


2 7 


No rating 


3 5 






All stores 


100.0 


100.0 


100.0 


24.6 


23 3 


3 6 











The United States Departm.ent of Commerce has m.ade a num.ber of 
studies of m.ortality in various cities. In each instance it was found 
that an important condition was an insufficiency of capital to meet 
em.ergency conditions, or an inability of the m.anager to operate effec- 
tively with the capital available. 

In an analysis of bankruptcies in Boston and contiguous territory, 
the Departm.ent ^^ reports that approxim.ately 48 percent of the bank- 

8 Dun & Rradstreet; offered in Willard Thorp's testimony, hearings before the Temporary National 
Economic Committee, pt. 1, pp. 129-131. 

» John H. Cover: Op. cit. 

'0 Howard C. Greer: "Business Mortality Among Retail Meat Stores in Chicago between 1920 aBd 1933," 
Journal of Business, University of Chicago, vol. IX, July 1936: 

" U. S. 'Department of Commerce, Bureau of Foreign and Domestic Commerce, Domestic Commerce 
Series No. 69, "Causes of Commercial Bankruptcies, 1932." 



(JO OONCENTRATION OF ECONOMIC POWER 

rupts attributed their failure to insufficient capital, while 33 percent 
of the creditors involved agreed with this conclusion. There was 
closer agreement of debtors and creditors on this point in the manu- 
facturing field than elsewhere. 

A survey of grocery-store failures in Lincoln, Nebr.,^^ disclosed that 
37" of 50 failing concerns had investment in stock and fixtures of less 
than $2,000. Bankruptcy records in Philadelphia ^^ for the period 
1922 to 1936 indicated that 10 percent of all individuals had little or 
no capital upon establishing an enterprise. 

Many Knoxville grocers ^* had entered business with little or no 
capital and were forced to rely upon loans and credit. 

Illinois ^^ experience indicated that trades requiring the greater 
amount of capital for entry had longer life spans, on the average; this 
fact favored survival of drug and hardware establishments, as com- 
pared with other retail groups. It was suggested that the survival 
advantage of the larger Poughkeepsie ^^ concerns m.ight be due in part 
to m,ore careful study of conditions before investing large capital 
amounts. The same conclusion, in part, was reached in the 
Pittsburgh ^^ study. 

In the cities studied by Vaile,*^ from 55 to 70 percent of the inde- 
pendent stores had investm.ents not exceeding $1,000. In 1928, 84 
percent of the liquidating establishments had a rating of $1,000 or less.' 

In the autom.obile industry, it was found ^^ that in alm.ost every 
year the firm with the highest return was near the m.edian size of 
invested capital, that there was no relation between the size of firm,s 
and earning stability, and that high and stable earnings were related. 

Rodkey ^° found a direct relation between survival of Michigan 
banks and the size of capital and surplus, ranging from a failure of 
24.6 percent for the group with $25,000 or less to 16.67 percent for 
those exceeding $500,000. 

Instances of the im.pairm.ent of capital are provided by the Beacon 
Falls Rubber Shoe Co. and the Columbia Gramophone Manufactur- 
ing Co.21 

In the Beacon Falls case, the ratio of current assets to current 
liabilities stood at 289 in 1918; m 1919 it was 259; in 1920, 287; in 
1921, the year a creditor's com.mitt6e took charge, at 120. The ratio 
of quick assets to current liabilities proceeded as follows: 1918, 197; 
1919, 160; 1920, 196; 1921, 71. The net worth to debt ratio declined 
for the given years: 425, 296, 369, 88. The trends of current liabili- 
ties and of net worth indicate the dependence of the com.pany upon 
creditors. CaUing the 1918 value of current liabilities 100 percent, 
the indexes for the following years were 107 percent for 1919, 148 
percent for 1920, and 564 percent for 1921. Concurrently, the net- 

" Harold O. Avery: "Some Aspects of Grocery Store Failures," Nebraska Studies in Business, No. 14, 
Committee on Business Research, University of Nebraska, 1926. 

•3 William Lowry and Christian L. Swartz: "Causes of Philadelphia Commercial Bankruptcies in the 
Last 14 Years," PhUadelphia Chamber of Commerce, 1937. 

1* John N. Rebori: "Business Mortality of Retail Grocery Stores in Knoxville, Tenn., 1924-35," Univer- 
sity of Tennessee Thesis, 1937. 

'5 Paul D. Converse: Business Mortality of Illinois Retail Stores from 1925 to 1930, University of Illinois, 
Bureau of Business Research, Bull. 41. 

" R. G. Hutchinson and A. R. and Mabel Newcomer: Op. cit. 

" A. E. Boer: "Mortality Costs in Retail Trades," Journal of Marketing; vol. II, No. 1, July 1937, pp. 
52-fiO. 

IS Rt S. Vaile: "Grocery Retailing With Special Reference to the Effects of Competition," Studies in 
Economics and Business, No. 1, University of Minnesota Press. 

i» Ralp.h C. Epstein: "Profits and Size of Firms in the Auto Industry," American Economic Review, 
vol. XX, No. 4. December 1931. 

'0 Robert G. Rqdkey. State Bank Failures in Michigan, Michigan Business Studies, vol. VII, No. 2, 
University of Michigan, 1935. 

" Paul J. Fitzpatrick: "Symptoms of Industrial Failures as Revealed by an Analysis of th^ Financial 
statements of the Failed Companies, 1920-29"; Catholic University, Wa.shineton. D. C. 



CONCENTRATION OF ECONOMIC POWEiR 



91 



worth index rose from 100 percent in 1918 to 103 percent in 1919, and 
to 128 percent in 1920, but dropped to 117 percent in 1921. The rise 
of the inventory index from 100 percent in 1918 to 297 percent in 
1921 discloses one use of the capital. 

The Colum.bia Co. had in 1915 a ratio of current assets to current 
liabilities of 333. This proportion fell below the 2 to 1 relationship 
in 1921 to 138, and in the following year to 84. The ratio of quick 
assets to current liabilities stood at 199 in 1915; by 1920 it had fallen 
to 71, by 1P21 to 54, and by 1922 to 41. With large orders on hand 
in 1919, and prospects for increased demand bright, the company 
purchased land and erected plants at Bridgeport, Baltimore, and 
Toronto, at an aggregate cost of $5,000,000. It was soon apparent 
that the dero.and was only tem.porary, probably the result of a forced 
curtailm^ent of production in the war years and the carry-over of 
unfilled consumer purchases into the early post-war years. 

SOURCE OF CAPITAL 

Since mortality experience in the m.anufacturing field stiil awaits 
adequate study, and since the usual m.ethod of liquidation or rehabili- 
tation of the corporation is through receivership, few factual data 
are available relative to source of capital. However, it is the usual 
procedure to finance corporations through stock issues and to rein- 
vest a portion of earnings after the concern becomes a profitable 
enterprise. 

A recent report of the silk industry in Paterson,^^ N. J., gives signi- 
ficant inform.ation regarding the financing of the sm.all units repre- 
sented. The investm,ent of operators of the 100 shops was sm.all. 
Fifty-five concerns opened before 1926, and of the 170 full or part 
proprietorships, inform.ation was obtained from 165 regarding initial 
outlays. The m.edian amount of their investment was $808 per 
individual. The new establishments from 1926 to 1936 represented 
53 full or part proprietorships; 5 received m.achineiy as gifts, so that 
am.ounts of outlay were not obtainable. The median investment for 
the rem.aining 48 was $611. The initial investment record is sum- 
marized in table 97. 



Table 97. 



-Individual investment of operations in year of first entry into business, 
1904-36 1 





1904-36 


1904-25 


1926-30 


Individual investment 


Total 


Sole 
opera- 
tor 


Partner 
or share- 
holder 


Total 
165 


Sole 
opera- 
tor 


Partner 
or share- 
holder 


Total 


Sole 
opera- 
tor 


Partner 
or share- 
holder 


Totals 


213 


51 


162 


16 


149 


48 


35 


13 






$500 or under. 


67 

86 

14 

32 

12 

5 

6 

1 

788 


18 
11 

5 
2 
3 
3 



841 


39 
75 

5 
27 
10 

2 

3 
1 


35 
77 
6 
27 
12 
4 
4 



2 
3 
2 

4 
2 
2 

1 



33 
74 
4 
23 
10 
2 
3 



22 
9 
8' 
5 


r 

2 

I 


16 
8 
7 
1 

1 
2 



6 


VWl to. $1,000. ._. 


1 


*1,001 to$l,500__ _... 


1 


il,501 to?2,000 


4 


$2,001 to $3,000... 





$3,C01 to $4,000 





$4,001 to $5,000 





$5,001 to$r,,000 


1 


Median invest- 
ment 


780 


808 






611 

















' Data obtained in National Research Project Field Survey: Schedule for shops having 20 looms or less. 

' Includes operators interviewed in 1936 and others who were associated with them in business when they 
first became 1. road-silk operators. Excludes 10 operators not reporting initial investments. Represents 
54 shops for 1904-25 and 11 for 1926-36. 



"James E. Wood: "Employment Experience of Paterson Broad-Silk Workers, 1926-30," W. P. 
National Research Project, Rept. No. L-3, 1939. 



A., 



92 CONCENTRATION OF ECONOMIC PQWER 

One of the burdens which enterprises frequently must support as 
the result of inadequate initial capital is the purchase of equipment 
and fixtures on credit. The Paterson experience is m point. 

In 68 of the original 100 entries, machinery was purchased on time. 
The usual down payment was 50 percent of the purchase price. 

Savings from wages was the most common source of funds for mitial 
investments. Other sources included insurance benefits, dowries, 
the soldier's bonus, and loans. 

One-half of the 100 shops experienced dissolution; of the 50 escaping, 
31 had opened within the previous 5 years. The 50 dissolving within 
the period studied accoimted for 76 closmgs, 12 having discontinued 
twice; 5, three times; and 1, five times. 

Failures in this declining industry were not relative to the size of 
plant. Of the 49 shops closing in 1936, 23., or 47 percent, had 20 or 
fewer looms; in the same year, 203 of the total of 390 plants, or 52.2 
percent, had 20 or fewer looms. While approximately 40 percent of 
the plants had from 21 to 60 looms, 37 percent of the failures were in 
this size group. Five percent of existing shops had loomage between 
61 and 100, but the closures in this group reached 10 percent. The 
remaining plants, less than 3 percent, with loomage exceeding 100, 
accounted for 6 percent of the closures. 

Shoe manufacturing ^3 is another industry in which large capital is 
not required to establish an enterprise, due to the small-scale nature 
of production, particularly of women's shoes; and to the practice of 
renting manufacturing machinery. This practice creates other types 
of problems, of course, in operating costs and in excessive competition. 

Through analysis of liabOities of Chicago ^^ bankrupts, a picture 
is available of the inadequacy of proprietor investment and of the 
source of workuig funds and credit. Borrowings safeguarded by 
collateral reach their highest proportion in the manufacturing field, 
almost 64 percent of total indebtedness. Only one-fourth of the loans 
to retailers was secured, and, of this group, drug stores and women's 
clothing establishments protected only 13 percent of indebtedness. 
The extent to which landlords and wholesalers financed unsuccessful 
enterprise is evident in table 98 which summarizes sources by various 
business groups. The small proportion of businessmen resorting to 
loan and finance companies is in contrast to the professional and em- 
ployee groups; in the latter cases 26 percent of liabilities were owed 
to loan compLanies.2^ 

Of capital available upon entering business, failing Philadelphia ^ 
grocers provided 66 percent themselves. Probably the inadequacy of 
this origmal investment is related to- the extent of borrowing at high 
rates subsequently, in instances ranging from 18 to 35 percent. 
Supporting this inference is the high turn-over of enterprises within- 
the first 2 years, 7 percent of the initial capital was obtained from 
relatives and friends, and 5 percent from merchandise creditors, while 
fixtures purchased on installments accounted for almost 19 percent. 

"Horace B. Davis: "Business Mortality: The Shoe Manufacturing Industry," Harvard Business 
Review, Spring, 1939. 

»< John H. Cover: "Business and I'ersonai Failure and Readjustment in Chicago," University 6t Chi- 
cago, August 1933. 

" John H. Cover. "Consumer Credit and Individual Bankruptcy," Annals American Academy Political 
and Social Science, Mar-ch 1938, pp. 86-92. 

2i> U. &. Department of Commerce, Bureau of Foreign and Domestic Commerce Trade Information Bul- 
letin No. 700. "Credit Extension and Causes of Failure Among Philadelphia Grocers." 



OONCENTRATION OF EC<3NOMlC POWER 



93 



Table 98. — Percentage of amounts of total liabilities in particular debt categories — 

individual proprietors 



Business groups 



Percentage of total amounts in respective sources 



Total lia- 
bilities in 
dollars 



Secured 
by col- 
lateral 



Loan and 
finance 
com- 
panies 



Banks 



Install- 
ment 
goods 



Groceries 

Total food 

Restaurants ,.-1 : 

Drugs 

Total men's clothing 

Total women's clothing 

Total clothing..- 

Total retail 

Total wholesale , 

Total manufacturing 

Agriculture ■ 

Miscellaneous tradeand services. 
Real estate 



558, 489 

883, 180 

495, 493 

439, 527 

272, 102 

753, 253 

1,362,814 

5, 749, 919 

378,911 

1, 920, 073 

21, 540 

1, 055, 821 

8, 440, 240 



46.00 
38.40 
21.72 
13. 45 
14.85 
13.42 
20.28 
25.12 
30.41 
63.76 
28.73 
40.48 
76.73 



1.77 

1.56 

.08 

.25 

1.03 

.32 

.49 

.94 

.35 

.82 

3.97 

1.16 

1.03 



1.53 




1.89 




.86 
1.31 
6.95 


0.06 
1.02 


1.68 




2.56 




2.46 
7.62 


11 


.65 




8.96 
2.08 
3.25 


1.09 
.36 
.003 



■Total --. _-..-.. 17,566,504 



55.18 



.97 



2.74 



.06 



Business groups 



Percentage of total Eunounts in respective sources 



Retailers 



Profes- 
sional 
services 



Individ- 
ual 
persons 



Rent 



Whole- 
salers 



Groceries 

Total food ... 

Restaurants 

Drugs. - 

Total men's clothing. .; 

Total women's clothing 

Total clothing 

Total re tail . 

Total wholesale 

Total manufacturing 

Agriculture 

Miscellaneous trade and services. 
Real estate 



0.01 
.22 
.51 
.07 
.12 
.07 
.08 
.40 



.31 
8.44 
1.44 

.22- 



0.44 
.62 
.54 
.15 
.76 
.17 
.29 
.40 
.43 
.23 
.52 
.77 
.28 



3.16 
5.21 
7.14 
4.92 
5.62 
6.32 
6.41 
7.71 
6.69 
2.71 
2.90 
9.02 
4.13 



9.53 

10.53 

29.23 

31.01 

9.88 

3.37 

4.21 

11.21 

1.58 

2.06 



17. ( 



26.46 
30.39 
32.66 
34.66 
60.84 
60.38 
55. 16 
41.53 
51.36 
22.23 
23.14 
12.10 
7.22 



Total. 



.37 



.35 



5.49 



5.13 



21.36 



Twenty-one percent of New Jersey " bankrupt establishments 
borrowed from loan or finance companies. The largest proportion 
was recorded for painting contractors, and the second largest for 
retail jewelers. While only 15 percent of the retail food group bor- 
rowed from this source, one establishment had 12 creditors in this 
group. 

With the capital of Boston bankrupts averaging $4,215 and those of 
New Jersey, $9,030, the Bostonian, on an average, provided 77.5 
percent of the total from his own resources, the New Jersey ^^ pro- 
prietor only 18.4 percent. Comparisons are made in table 99. 

Louisville, 2^ Ky., liquidating grocers had provided, on an average, 
46 percent of their own initial capital, had borrowed from friends and 
relatives, 16.5 percent, from commercial banks, 14.3 percent, and had 
received assistance from wholesalers and jobbers to the extent of 10 
percent. Fixtures acquired on time payments approximated 9.5 
percent of the capital at organization. 

■2' U. S. Department of Commerce, Domestic Commerce Series No. 54, "Causes of Business Failures and 
Bankruptcies of Individuals in New Jersey In 1929-30." 

i' Wm. O. Douglas, "Some Functional Aspects of Bankruptcy," Yale Law Journal, vol. XLI, No. 3, 
January 1932, pp. 329-364. 

29 U. S. Department of Commerce, Trade Information Bulletin No. 627, "Credit Extension and Business 
Failures" 1930. 

262652-^41^No. 17-^ — S 



94 



OOMJENTEATION OF ECONOMIC POWER 



Proprietors of failing drugstores in St. Louis ^° had borrowed, upon 
establishing business, more of the capital from friends and relatives 
than was provided from their own resources, 36 percent and 32 per- 
cent, respectively. From former owners, 13 percent had been 
obtained and from commercial banks, almost 7 percent. Other sources 
aggregated 12 percent. An astonishing fact disclosed is that one- 
third of the proprietors made no personal investment. 

Since funds obtained from personal finance companies are based 
not alone upon the borrower's assets but, in addition, upon character, 
it is difficult to distinguish loans made for business purposes from 
those for household use. 

From State banking reports on purposes of personal loans " the 
following tabulation, table 100, is made of the number of loans 
obtained for stated business needs: 

The average proportion of loans made by the two largest American 
companies for business capital in 1936 was 5.3 percent of the total 
number. The National City Bank proportion was reported as 11 
percent in 1935. 

An occupational classification of borrowers from Wisconsin personal 
loan companies in 1936, records owner-managers with 12.29 percent 
of the number of loans and with 14.82 percent of the amount; the 
number represented exceeded 7,800 loans and the amount, 2}^ million 
dollars. A comparison of this occupational classification with the 
the 8.6 percent recorded above illustrates the difficulty of aUocating 
purposes. A further illustration from the same source is represented 
in the following categories, table 101 adapted from a Pennsylvania 
report covering 1936: 

Table 99. — Sources of original capital, Neio Jersey and Boston bankrupts 



Source of capital 



Boston 

percent of 

total 

capital 



Owner, without borrowing 

Friends and relatives. 

Life Insurance 

■Commercial banks 

Finance companies ». 

Wholesalers, jobbers, and manufacturers 
Fixtures, on installment 

Total 




100.0 



Table 100.- 


—Proportion of personal loans for business purposes 


State 


Percent of 

total 

number 

of personal 

loans 


lowa...^. 


6.9 


Kentucky.. . . . 


5.7 


Pennsylvania 


5.7 


Wisconsin 


8.6 







»" U. 8. Department of Commerce, Domestic Commerce Series No. 59, "Causes of Failure Among Drug 
Stores," 1932. 
" M. R. Neifeld, Personal Finance Comes of Age, 1939 



CONCENTRATION OF ECONOMIC POWER 95 

Table 101. — Business borrowers from Pennsylvania personal finance companies 



Occupation 



Number of 
loans 



Percent of 

total 

number 



Executives 

Commission agents and salesmen- 
Retail merchants. _ 

Professional 



14, 186 
9,645 

18, 296 
6,619 



4.66 
3.10 
5.89 
2.13 



Though obtaining loans upon personal credit, all of the above groups 
are in position to employ these funds for business purposes. 

An index of financial solvency for industrial enterprises has been 
suggested by Fitzpatrick ^^ as follows: When 70 percent of the capital 
funds have been provided by owners, "condition excellent"; when 65 
percent is from owner source, "condition very good"; when 60 percent 
"good"; from that point, decreasing ownership— financing becomes 
fair and problematical. Eor retailers, it is suggested that not less 
than 50 percent of the capital employed in the business should be 
owner-contributed. 

USE OF CAPITAL 

It is apparent that the use of capital investment is a continuing 
process and closely related to costs and operation, debit position, and 
plant capacity. These related categories are treated later in analyses 
of business costs, assets and liabilities, and credit extension. 

But at this stage there are certain illustrative uses of significance in 
studying the solvency of enterprises. 

Among business practices controversial in nature, difficult of ap- 
praisal, and, in instances, subject to fraudulent misrepresentation, is 
the valuation of intangibles, such as goodwill, and of property rights in 
patents and copyrights. 

The process of establishing goodwill assets and some misleading 
results are illustrated in the case of the Young, Smyth, Field Co. 
dissolved in 1923. Fitzpatrick^^ comments as follows: 

The ratio of "other" assets to total assets shows a decided growth from 2 percent 
in 1915 to 30.9 percent in 1916. This is on account of an issue of $1,000,000 in 
common stock and the setting up on the balance sheet of an offsetting item, 
goodwill, for the same amount. Consequently, the net worth item is affected 
favorably. This can be seen by the good showing of the two ratios in 1916; 
net worth to defet, and net worth to fixed assets. 

The ratios to which he refers are 227 and 450, respectively. 
An instance of questionable appraisal off worth is quoted from 
Douglas : ^ 

No. 186 was a "one man" corporation organized with a paid-in capital of $2,000 
engaged in a retail radio business. The sole stockholder had gone through 
bankruptcy in 1911 while engaged in a similar retail business. At the end of teh 
first 6 months he issued a financial statement to R. G. Dun & Co. over his own 
signature, showing a net worth of $4,000; at the end of the year another showing 
a net worth of $5,000 and a few months before bankruptcy another giving assets as 
$16,000, liabilities as $4,500 and the net worth as $11,500. In a year and a half 
after beginning business a petition was filed. The assets then were $13,000 and 
the liabilities $19,000. No possible explanation appears for such radical change in 

" Paul J. Fitzpatrick: The Problem of Business Failures, 1036. 

33 Paul J. Fitzpatrick: "Symptoms of Industrial Failures as Revealed by an Analysis of the Financial 
Statements of the Failed Companies, 1920-29"; Catholic University, Washington, D. 0. 
" William O. Douglas: Op. cit. 



95 OONCENTKATION OF ECONOMIC POWER 

the last few months. It seems that the company was insolvent during the 
greater part of its existence. 

Frequently, an act is designated as speculation only when it does not 
prove to be business .sagacity. Had the estimated market for phono- 
graphs materialized as estimated, the $5,000,000 expansion program of 
the Columbia Gramophone Manufacturing Co., previously mentioned, 
would have been business foresight. At what point does the action of 
the Columbia Co. differ from the Chicago operator "of 62 years, who 
had lost $100,000 in real estate speculation," and who "is convinced 
that he will soon recoup his fortune by the same process"? '^ 

The Chicago study attributes 7 percent of the bankruptcies to 
speculation with almost 5 times as many real estate as stock specula- 
tions. In addition, many individuals contracted interest and amorti- 
zation obligation in the purchase of a residence far beyond the possi- 
bilities of current income, considering other, irreducible commitments, 
as well. Such action is based upon optimism with respect to future 
profits; profits failing to materialize, heavy withdrawals from business 
capital ensue. 

In sunmiary, the need for guiding principles for organizing and 
operating business units is obvious. In establishing a job-printing 
concern or a delicatessen, maximum results depend upon knowledge of 
many elements from location advantages to delivery facilities. What 
is the most efficient relationship of machines and fixtures to personnel? 
What is the minimum investment needed for a safe start? Whafe 
amount should be available for current operations? What is the 
danger point of debt? Answers differ by kinds of business, types of 
operation, and many other factors. And the prospective proprietor is 
anxiously in need of enlightenment. At present he is using the tri^ 
and error process, and the odds are heavily against him. 

85 John H. Cover: "Business and Personal Failure and Readjustment in Chicago," University of Chicago, 
1933. 



CHAPTER IX 
CONTROL OF ASSETS AND LIABILITIES 

In the treatment of capital, two uses of assets and liabilities were 
employed in illustrating insolvency: the excess of assets over lia- 
bihties, or the net Invested capital, and the margin of current assets 
over current liabUities, or the working capital. Invested capital is 
the fund provided by owners plus reinvested earnings; current and 
long-time liabilities are capital loaned by creditors. 

The accountants use and recommend as helpful guideposts for 
managers and creditors a number of ratios indicating the relative 
position of asset and liability items. 

As the result of a detailed analysis of Illinois ^ experience it is 
suggested that balance sheet ratios might provide significant evidence 
for predicting the probable future operation of old companies. Some 
analysts particularly favor such ratios as net worth to debt and net 
profits to net worth. 

As an instance of their use, a comparison ^ of the ratios of solvent 
and failing companies manufacturing pianos is presented in table .102. 



Table 102. — Ratio comparisons of successful and failed concerns- 

facture 



-piano manu- 





Failed concerns 


Successful concerns 


Type of ratios 


Dec. 31, 
1926 


Mar. 31, 
19281 


Mar. 31, 
1929 1 


Dec. 31, 
1926 


Dec. 31, 
1927 


Dec. 31, 
1928 


1. Current a.ssets to current liabilities 

2. Quick assets to current liabilities 

3. Saies to fixed assets 


306.0 

148.0 

301.0 

238.0 

309.0 

82.0 

458.0 

390.0 

130.0 

12.0 

54.8 

21.1 

2.4.0 


203.0 
91.0 
290.0 
287.0 
483.0 
103.0 
296.0 
287.0 
168.0 
3.5 
48.4 
26.0 
25.5 


277.0 

125.0 

243.0 

321.0 

521.0 

88.0 

■)25. 

285. 

162.0 

-1.7 

41.9 

29.4 

28.6 


887.0 

614.0 

842.0 

385. 

174.0 

140.0 

288.0 

603.0 

45.0 

8.0 

87.7 

12.3 

None 


793.0 
544.0 

76.1 
326.0 
153.0 
123.0 
282.0 
621 

46.0 
5.1 

88.1 

11.8 
None 


1,039.0 
725.0 
696.0 


4. Sales to inventories 


311.0 


5. Sales to receivables . 


140.0 


6. Sales to net worth 


108.0 


7. Net worth to debt 


326.0 


8. Net worth to fixed assets. . . . 


642.0 


9. Inventories to receivables.. 


45.0 


10. Net profits to net worth 


3.6 


11. Current assets to total assets . ..- 


88.1 


12. Fixed assets to total assets. . 


11. 9 


13. ther assets to total assets . 


None 







1 No statement published Dec. 31, 1927 and 1928. 

In the last year of the failed firm, the first ratio, wliich theoretically 
should be a minimum of 200, and the second, >vhich should not fall 
below 125, are satisfactory. Fitzpatrick comments: 

The declining tendency of the sales to fixed assets ratio and the ratio of net 
worth to fixed assets indicates overinvestment in fixed assets. The fixed assets 
to total assets ratio confirms this fact. The sales to fixed assets means that the 
failed company is only obtaining $2.43 of sales to each dollar invested in fixed 

1 For an illuminating study of the financial characteristics of large ana small manufacturing corporations 
see T. N. E. C. Monograph No. 15 bv Charles L. Merwin. 

2 University of Illinois, Bureau of Business Research, Bull. No. 40> "A Demonstration of Ratio Analysis," 
1931. 

3 PaulJ. Fitzpatrick: "A Comparison of the Ratios of Successful Industrial Enterprises With Those of 
Jailed Companies," The Certified Public Accountant, October, November, and December, 1932. 

97 



98 



CJONCENTEATION OF ECONOMIC POWE!R 



assets, while the successful concern shows $6.96 of sales to each dollar invested 
in fixed assets. 

The sales to receivables ratio is high and increasing for the failed concern. 
This condition is satisfactory if the company is not hypothecating its receivables 
or maintaining too strict a credit policy. 

Furthermore, there is the important fact that sales have dropped from the 
high mark of $14,300,000 in 1924 to $11,400,000 for the year ending March 31, 
1929, as the financial statements reveal. 

The net worth to debt ratio is very good for both companies, although the 
failed concern's ratio is higher. Incidentally, this is one of the few unsuccessful 
companies, in this investigation, reporting a favorable position. 

FIXED ASSETS 

Investmeiit in plant and equipment is made in anticipation of 
future use. The further the business process in time and space from 
the ultimate market, the greater the need of advance planning. In 
addition, fluctuations in business conditions require estimates, as to 
the changing market. A boom, or fortuitous event may easily be 
mistaken for the beginning of a long period of vigorous growth in 
demand, and an expansion of facilities be predicated upon this judg- 
ment. Investing capital in fixed assets necessarily withdraws it 
from use for operating purposes, and should the expected demand for 
goods not materialize, there is likely to be an excess of plant capacity 
accompanying a shortage of capital for meeting current obligations. 

Expansion of plant of the American Chicle Co.* illustrates the 
unbalancing of financial structure. There was an increase of fixed 
assets of more than 100 percent between 1918 and 1920. This 
change was based upon war impetus to the demand foi- its product. 

The American soldiers took abroad the chewing-gum habit and spread the idea, 
among the soldiers of foreign armies. The company received large orders from 
the American and British Governments for the armies. Besides, the Red Cross, 
Knights of Columbus, Y. M. C. A., and other organizations placed orders. Shops 
in Paris began to sell chewing gum. Furthermore, the high price of candy 
increased the sale of gum. Prohibition was also a factor. 

A com.parison of assets scheduled by 570 bankrupts in Boston,^ 
table 103, indicates accounts receivable as a large proportion of 
claim.ed assets, a high fixture investment foi" the service group, and 
a large m.iscellaneous item, for manufacturers. Since these assets 
are posted by the bankrupts, the proportion that ultimately will be 
realized by liquidation ma,/ be sm.all. From, accounts receivable m.ust 
be deducted bad debts. 



Table 103. — Scheduled assets of 570 bankrupt enterprises, excluding real estate 





Number 
report- 
ing 


Total assets 


Percent of total assets 


Classification 


Accounts n. ^ i 


Fixtures 


Other 
assets 


Manufacturers . - 


54 

52 

218 

66 

180 


$947, 962 
177, 227 
294, 762 
28, 580 

311,659 


14.7 
48.6 
42.3 
42.7 

62.2 


10.6 

30.4 

30.3 

7.2 

1.4 


17.2 
3.4 
7.7 

19.4 

4.1 


57.5 


Wholesalers— total-- 


17.6 


Retailers — total (merchandise) 


19.7 


Retailers — total (service) . 


30.7 


Real-estate agents, or dealers, builders, 
and contractors^total .'. .. 


32.3 






Grand total 


670 


1, 760. 190 31. 6 1 14. 2 


11.9 1 42.3 















* Paul J. Fitzpatrick: "Symptoms of Industrial Failures as Revealed by an Analysis of the Financial 
Statements of the Failed CompanlQS, 1020-29," Catholic University. 

• U. 8. Department of Commerce, Domestic Commerce Series No. 69. 



CX)NCENTEATION OP ECONOMIC POWER QQ 

When failure is inevitable, assets posted as security are claimed, 
fixtures and implenn.ents rented or sold on installment contracts are 
removed, and dissolution is rapid. All other creditors hold claim.s 
against the general assets, with certain types, such as taxes and wages, 
in preferred position. 

The extent of business transacted on lim.ited fixed assets is illustrated 
in the experience of restaurants and worn. en's clothing concerns in 
Chicago. Both these trades normally require large am.ounts of fixed 
assets in their business. Only one-half of the restaurants and one- 
third of the clothing concerns had annual sales five tim.es or m.ore the 
investm.ent in fixed assets. 

RECEIVABLES 

With excessive investm.ent in receivables, a concern is im.paJring its 
own working capi/tal by extending too m.uch credit to customers. In 
the case of firm.s with inadequate capital, the credit extended to it is, 
in effect, being passed on to custom.ers. With liquidation, the firm's 
creditors are faced with the problem of realizing upon this chain of 
financing. 

Credit sales form.ed a sm.all proportion of total business in most of 
the fields represented in the Chicago study. Receivables represented, 
on an average, 17 percent of credit sales of wom.en's clothing; restau- 
rants were next lowest with 25 percent, while men's clothing stood 
highest, at 76 percent. 

In table 103 receivables are averaged for business groups as percent- 
ages of total assets. Am.ong retailers, furniture dealers -averaged 88 
percent, and in the building gi'oup, electrical contractors listed receiv- 
ables as 100 percent of assets. 

CURRENT ASSETS 

Excess of current liabilities over current assets m.eans lack of work- 
ing capital, since funds for operation should necessarily be free from 
obligation and therefore represent the difference between current 
assets and current liabilities. 

When the term, "lack of capital" is used in studies of failures, som.e 
tim.es working capital is m.eant, other tim.es both fixed and working 
capital. Certainly both are significant in gaging the efficiency of an 
enterprise, but the items should be sc|)arated for analysis, particularly 
since their significance varies with business fields. 

Of the Chicago bankrupt firm.s, 11 percent had no assets. Current 
assets, including, cash, 'receivables, and the average inventory for the 
year preceding failure, equaled or exceeded liabilities in 11 percent of 
the cases. But assets as scheduled by bankrupts are usually highly 
inflated values, as reference to realized assets will suggest. More 
than one-fourth of all cases had scheduled assets of less than 10 percent 
of their liabilities, and an additional fourth, from. 10 to 29 percent. 

A frequent occurrence in business, in an eft'ort to expand facilities, 
is the shift of capital from, current to fixed assets. In 1919 the Good- 
year Tire & Rubber Co.^ had §3.7 percent of total assets invested in 
current assets, and 30 percent in fixed assets. In 1920, only 35.2 
percent of total assets were in current assets while 61.5 percent were 
in fixed assets. 

« Paul J. Fltzpatrlck; op. olt. 



IQQ CONCENTRATION OF ECONOMIC POWER 

REALIZED ASSETS 

One-half of the Chicago ^ failures either had no assets or such small 
amounts that none remained for distribution after liquidation for the 
benefit of secured creditors or the granting of exemptions. Except in 
the case of corporations, $400 exemption was granted for the head of 
a family, $100 for an unmarried person, or a person not the head of a 
family, and $1,000 if a home was owned. A period of 2 years within 
which to close bankruptcy cases is permitted bv law; in Chicago 18 
months was about the average time. 

In addition to the no-asset cases, one-half of the remaining indi- 
vidual proprietors had realized assets of less than $1,000, and almost 
55 percent of the corporation and partnership groups and 78 percent 
of the individual proprietors had less than $2,000. 

Analyzing the proportions of realized assets (excludmg secured 
assets and exemptions) which were expended in court administrative 
procedure, it was found that, for the sample available, 29 percent of 
the individual proprietor cases had required 100 percent of the realized 
assets in expenses of administration. In many cases the bankrupt is 
permitted to retain clothing and personal household effects. If 
liquidable assets, not held as specific security against indebtedness, 
remain, the receivers', trustees', attorneys' feesj and referees' expenses 
are next deducted. Wages and taxes are preferred claims. General 
creditor claime share the residue. All realized assets were spent for 
administrative purposes in 5 percent of the corporation and partner- 
ship cases. Accounting for much of this apparently excessive cost of 
administration is the fact that low-asset cases are disposed of more 
easily and, therefore, earlier on the calendar. 

There is dii-ect relationship between the percentage of realized 
assets spent for administrative purposes and the total amount of 
realized assets, the expenditure percentage decreasing as the amount 
increases. This is natural, since there are basic fixed charges for even 
no-asset dissolutions. Forced sales of assets bring small returns. 

To discover the extent to which creditor claims are realized, divi- 
dends were expressed as percentages of filed claims. In the case of 
one proprietor and of one corporation, dividends aggregated 40 percent 
of the claims filed; the corporations and partnerships reoord a higher 
percentage of realized clauns than do individual proprietors. This 
fact is due to the far more complete records of corporations and part- 
nerships, permitting a check upon the liquidity of the concerns by 
creditors prior to credit extensions, and to the nature of the assets of 
corporations and partnerships, frequentlv assuring them of greater 
market value. 

In only one case did the amount of assets realized at forced sale 
equal the amount of assets sclieduled by the debtor. Realization 
through sale in the case of mdividual proprietors is less than 15 per- 
cent of estimated values for almost 47 percent of the bankruptcies, 
and for 34 percent of corporations and partnerships. 

These deflations of value are due largely to the optimism of the 
debtor in evaluating his assets, in instances apparently a studied 
policy to present a favorable case, and to the degree of sacrifice 
represented in forced sales. 

In estimating losses to general creditors; creditors' claims or 
scheduled liabilities — whichever was the larger item — and claims paid 

■ John n. Cover, op. cit. 



OONCENTRATION OF ECONOMIC POWER 



101 



were used. In 8 percent of the corporation and partnership cases no 
claims were paid; this percentage mounted to 29 in individual pro- 
prietorships. Only one case, a corporation, paid claims approximating 
as high as 30 cents on the dollar. 

No correlation is apparent between the percentage of losses of 
liabilities or claims, on ike one hand, and the amount of claim or 
liability, on the other. 

Since busuiess concerns with no assets or with very limited assets 
can be liquidated easily if no other complications are involved, it is 
probable that the cases that have been closed do not fully represent 
the total picture. The extent of bias of this sample is difficult to 
determine, but in consideration of realized assets and losses the sample 
is probably more representative of economic waste than one should 
like to admit. 

In more than 70 percent of the individual proprietor cases and 50 
percent of the coinbined corporations and partnerships, the assets of 
the concern as estimated by the debtor were less than $7,500. 

Table 104 details the disposition of realized assets, and the relation 
of realized to scheduled assets in 1 1 cases of drug-store failure in St. 
Louis.* The average proportion of scheduled assets which were 
realized was 39 percent. The percentage of realized assets paid to 
unsecured creditors, last eolumn, is unusually large, and should not 
be confused with the percentage of unsecured claims that were paid. 

TAiBLE 104. — Scheduled assets of 11 failed^ drug stores compared to realized assets 
and disposition of realized assets, St. Louis, 1925-31 





Assets 


Uiksecured claims 


Cost of ad- 
ministration , 


Miscellaneous 
payments 


Per- 
cent of 
realized 


Store No. 


Sched- 
uled 


Real- 
ized 


Per- 
cent 
realized 


Amount 


Amount 
paid 


Per- 
cent 
realized 


Amount 


Per- 
cent of 
realized 
assets 


Amount 


Per- 
cent 
realized 


assets 
paid 
un- 
secured 
credi- 
tors 


7 

9 


$860 

1,880 

1,267 

720 

2,118 

27, 940 

4,214 

11, 693 

489 

3,696 

15, 739 


$706 

573 

1,218 

720 

514 

9,820 

1,517 

3,402 

240 

1,824 

7,018 


82.1 
30.5 
96.1 
100.0 
24.3 
35.1 
36.0 
29.1 
49.1 
49.4 
44.6 


$3,380 
1,379 
4,623 
1,737 
2,637 

47, 144 
5,649 

13,100 
2,539 

11,992 

15, 871 


$455 
370 
134 
400 
131 

8,486 
328 

2,182 

51 

809 

4,455 


13.5 
26.8 

2.9 
23.0 

6.0 
18.0 

5.8 
16.7 

f? 

28.1 


$122 
203 
853 
320 
82 

l,334r 
488 

1,220 
105 

J, 015 

2,171 


17.3 
35.4 
70.0 
44.4 
16.0 
13.6 
32.2 
35.9 
43.8 
65.6 
30.9 


$129 


18.3 


64.4 
64.6 


10 

15 


231 


19.0 


11.0 

55.6 


16 

17 


301 


58.5 


25.6 
86.4 


20 . 


701 


46.2 


21.6 


21 . 


64.1 


23 


84 


34.9 


21.3 


26 ... 


44.4 


27 


392 


5.6 


63.5 






Total- 


70, 616 


27, 552 


39.0 


110,051 


17, 801 


16.2 


7,913 


28.7 


1,838 


6.7 


64.6 



' 7 of these failures were bankruptcies and 4 assignments. 

An analysis of the distribution of assets in 10 grocery proprietoi 
cases in Philadelphia,^ disclosed that creditors with secured loans 
obtained 2.3 percent of the assets, and general creditors 14.3 percent. 
The bankrupts' exemptions consumed almost 17 percent and costs of 
administration in excess of 66 percent. Attorneys' fees constituted 
almost 44 percent of the administrative expenditures. 

Business liabilities were used to disclose information regarding 
sources of initial business capital, and will be serviceable again in the 

' U. S. Department of Commerce, Domestic Commerce Series No. 59, 1932. 
' U. S. Department of Commerce, Trade Information Bulletin No. 700. 



102 



CONCENTEATION OF ECONOMIC POWER 



consideration of business costs. Just as there is a difference between 
the value of scheduled, or claimed, assets, and the market realization 
upon those assets, so, also, there is frequently a variation between 
liabilities claimed by creditors and admitted by debtors. Entering 
into this problem are the debts claimed by insolvents as due relatives 
or friends and challenged by other creditor^ as evasions. 

The average of assets, excluding real estate, scheduled by 602 bank- 
rupts in New Jersey '° was $5,47&5 and of liabilities scheduled, $29,202. 
In 33 real-estate cases, liabilities exceeded assets by more than 
$4,000,000. 

In the period 1920-31, the percent of bankruptcy liabilities in the 
United States as a whole that was paid ranged from 13.14 percent in 
1921 to 6.70 percent in 1931, an average of 8.43 for the 12 years." 
From the same source is summarized in table 105, the proportions of 
liabilities owed various sources by Boston bankrupts. 

Table 105. — Scheduled liabilities of 570 bankrupt Boston enterprises, excluding 
collateral and real-estate mortgages 





Percent of total liabilities to — 


Classification 


Whole- 
salers 


Finance 
com- 
panies 


Morris 
Plan 
banks 


Other 
banks 


Goods 
on in- 
stall- 
ment 


Judg- 
ments 


Re- 
tailers 


Profes- 
sional 
services 


Per- 
sonal 
services 


All 
others 


Manufacturers 

Wholesalers 

Retailers (m e r - 

chandise) 

Retailers (service)-. 
Real-estate agents 
or dealers, build- 
ers, and contrac- 
tors 


34.4 
47.7 

64.1 
9.0 

35.4 


0.4 
.3 

1.1 
.5 

.7 


4.0 
1.1 

.2 
.1 

2.0 


9.0 

8.9 

10.6 
7.5 

8.4 


0.1 
.3 

.5 
1.5 

.1 


0.1 

2.4 

.4 
22.0 

.6 


0.2 
.5 

1.2 
7.3 

.5 


0.5 
.6 

.9 
1.3 

.8 


12.8 
32.8 

15.6 
19.6 

35.0 


38.5 
6.4 

15.4 
31.2 

16.5 


Grand total.. 


38.5 


.6 


1.7 


8.9 


.2 


2.5 


1.2 


.7 


25.7 


20.0 



Bankrupt New Jersey ^^ manufacturers owed almost 50 percent 
of their indebtedness to wholesalers, jobbers, and other manufacturers, 
19 percent to commercial banks, and almost 17 percent to individuals. 
Wholesalers were indebted for 71 percent of their obligq^^ions to the 
wholesaler-manufacturer-jobber group, and retailers, on an average, 
46 percent to the same group. Wholesalers owed almost 8 percent to 
commercial banks and 14 percent to individuals. The other principal 
liabilities of retailers were 10 percent to commercial banks, 19 percent 
to individuals, and 18 percent to miscellaneous creditors. Preferred 
claims, including taxes and rent, averaged 6.6 percent, while equip- 
ment dealers were due, on an average, only one-tenth of 1 percent. 



SECURED LIABILITIES 

Collateral security safeguarded some portion of the indebtedness 
of only one-half of the Chicago '^ proprietors. Of the proprietors 
with som.e security, m.ore than 18 percent had less than 5 percent of 
total liabilities protected, and 44 percent of the proprietors had col- 
lateral covering less than 15 percent of their indebtedness. 

•"U. S. Department of Commerce, Domestic Commerce Series No. 54. 
" U. 8. Department of Commerce, Domestic Commerce Series No. 69. 
»> U. 8. Department of Ccmmerce, Domestic Commerce Series No. 54. 

n John H. Cover: Business and Personal Failure and Readjustment in Chicago: University of Chicago, 
August 1933. 



OONCENTRATION OF ECONOMIC POWER 103 

INSTALLMENT DFBTS 

The r.mall proportion of liabilities due installment creditors in 
Boston, as indicated in table 105, is duplicated in the Cliicago ex- 
perience, where only 13 proprietors had installment goods debts 
outstanding. In part, this is due to a stringent credit control, and, 
in part, it represents m.erely residue of accounts, most creditors 
reclaiming the chattels upon failure of a debtor to meet installments. 

FINANCE COMPANY OBLIGATIONS 

Obligations to loan and finance companies at the time of liquida- 
tion appear to be negligible in most categories of business. In 1929 
and 1930, however, fading New Jersey ^* retail automobile dealers 
were indebted to finance companies for almost 29 percent of their 
liabilities, and the miscellaneous group of contractors owed alm.ost 8 
percent of total debts to this source. Boston *^ hucksters and ped- 
dlers and radio and musical instrument dealers were obligated in 
excess of 6 percent of total debts. Approxim.ately 14 percent of 
Chicago failing proprietors had obligations in this category. How- 
ever, in 87 percent of the cases, this source represented less than 15 
percent of liabilities, and in 39 percent of the concerns, less than 5 
percent. 

OBLIGATIONS TO WHOLESALERS 

Heavy obligations to wholesalers of Boston bankrupts is illustrated 
in table 105. Jewelry retailers owed in excess of 9^ percent of sched- 
uled indebtedness to wholesalers, while dealers in boots and shoes 
and furniture, and hucksters and peddlers were obligated to whole- 
salers for m.ore than 73 percent of total liabilities. In Chicago, 13 
percent of retail clothiers were exclusively indebted to wholesalers 
and 18 percent of the food dealers owed 90 percent or more of their 
liabilities to wholesalers. 

INDEBTEDNESS FOR RENT 

There appeared, in the Chicago study, ^^ to be som.e relationship 
between the total amount of liabilities and the percentage of such 
indebtedness owed to landlords. The ratio of rental obligations 
tending to be larger with larger liabilities up to $40,000 of total 
liabilities. The extent to which this relationship applies, would offer 
a basis for credit control; however, 52 percent of the individual 
proprietors owed no rent. 

In tables 106 and 107 are summ.arized the Chicago experience by 
percentages of proprietors and amounts of liability, respectively. 
Additional sources of debt obligations are represented also. 

Analysis of records of failed concerns and comparison with solvent 
establishments clearly discloses the problems unsurmounted in one 
case and solved in another. While no set of standards will automati- 
cally assiu-e successful control of an enterprise, the value of various 
comparisons as indexes of welfare is apparent. In most failures, the 
checks were not applied in time, or their availability as storm signals 
not realized. 

'< U. S. Department of Commerce, Domestic Commerce Series No. 54. 
" U. S. Department of Commerce, Domestic Commerce Series No. 69. 
i« John H. Cover: Op. cit. 



104 CONCENTRATION OF ECONOMIC POWER 

Table 106. — Percentage of all proprietors with particular types of indebtedness 





Total 
num- 
ber of 
firms 


Percentage of firms with respective debt types 


Business 


Secured 
by col- 
lateral 


Loan 
and 
finance 
com- 
panies 


Banks 


Install- 
ment 
goods 


Retail- 
ers 


Profes- 
sional 
services 


Indivi- 
dual 
persons 


Rent 


Whole- 
salers 


Groceries , 


42 
91 
32 

28 

35 

72 
134 
498 

22 

46 
4 

53 
38 


66.67 
60.44 
53.12 
57.14 

45.71 

41.67 
41.79 
49.00 
50.00 

45.65 
75.00 

47.17 
65.79 


23.81 
14.28 
6.25 
14.28 

14. 28 ■ 

6.94 
9.70 
13.25 
13.64 

17.39 
50.00 

18.87 
21.05 


11.90 
14.28 
15.62 
28.57 

17.14 

15.28 
14.18 
17.27 
45.45 

19.56 
50.00 

24. 53 
34.21 


"""b.25 
7.14 


2.38 

5.49 

12.50 

10.71 

8.57 

4.17 
5.97 
7.03 


21.43 
21.98 

18.75 
14.28 

22.86 

15.28 
17.91 
18.88 
9.09 

15.22 
50.00 

33.96 
36.84 


38.10 
34.06 
50,00 
39.29 

20.00 

25.00 
28.36 
37.95 
27.27 

26.09 
75.00 

50.94 
44.74 


52.38 
60. 55 
62.50 
64.28 

54.28 

38.89 
41.04 
48.19 
31.82 

58.70 

52. 83 
31.58 


95.24 


Total, food 


93.41 


Restaurants 


90.62 


Drugs . 


89.28 


Total, men's cloth- 
ing 1... 

Total, women's cloth- 
ine ' 


97.14 
97.22 


Total, clothing 

Total, retail 

Total, wholesale 


97.76 
93.57 
95.45 


Total, manufactur- 
ing _. 


"'25."o6" 

9.43 
2.63 


13.04 
50.00 

18.87 
13.16 


95.65 


Agriculture 

Miscellaneous trade 

and service 

Real estate .. 


75.00 

69.81 
78.95 






Total... 


661 


49.77 


14.67 


20.12 


2.12 


8.77 


20.73 


38.43 


47.50 


90.92 







Table 107. — Percentage of amounts of total liabilities in particular debt categories — 

individual proprietors 



Business groups 



Tbtal lia- 
bilities in 
dollars 



Percentage of total amounts in respective sources 



Secured 
by col- 
lateral 



Loan 
and fi- 
nance 

com- 
panies 



Banks 



In- 
stall- 
ment 
goods 



Re- 
tailers 



Pro- 
fes- 
sional 
serv- 
ices 



Indi- 
vid- 
ual 
per- 
sons 



Rent 



Whole- 
salers 



Groceries 

Total food . 

Restaurants 

Drugs . 

Total, men's clothing... 
TotaK women's cloth- 
ing. ..i.. 

Total, clothing 

Total, retail 

Total, wholesale.. 

Total, manufacturing.. 

Agriculture 

Miscellaneous trades and 

services 

Real estate 



658, 489 
883, 180 
495, 493 
439, 527 
272, 102 

753, 253 
1,362,814 
5, 749. 919 

378,911 

1, 920, 073 

21, 540 

1,055,821 
8, 440, 240 



46.00 
38.40 
21.72 
13.45 
14.85 

13,42 
20.28 
25.12 
30.41 
63.76 
28.73 

40.48 
76.73 



L77 
1,36 
.08 
.25 
1.03 

.32 
.49 
.94 
.35 
.82 
3.97 

1.16 
1.03 



1.63 
1.89 
.86 
1.31 
6.95 

1.68 
2.56 
2.46 
7.62 
.65 



0.06 
1.02 



.11 
i."09' 



.36 
.003 



0.01 
.22 
.51 
.07 
.12 

.07 
.08 
.40 



.31 

8.44 



1.44 
.22 



0.44 
.62 
.54 
.15 
.76 

.17 
.29 
.40 
.43 
.23 
.52 

.77 
.28 



3.16 
5.21 
7.14 
4.92 
5.62 

6.32 
6.41 
7.71 
6.69 
2.71 
2.90 

9.02 
4.13 



9.53 
10.53 
29.23 
31.01 



3.37 
4.21 
11.21 
1.58 
2.08 



17. ( 



.31 



Total. 



17, 566, 604 



55.18 



.07 



2.74 



.06 



.35 



6.49 



5.13 



26.49 
30.39 
32.66 
34.66 
60.84 

60.38 
55.16 
41.53 
51.36 
22.23 
23.14 

12.10 
7.22 



21.3ft 



It is apparent from observation of the activities of proprietors upon 
discovery of the insolvency of their concerns, that emphasis is placed 
upon obtaining more credit rather than upon curtailment of opera- 
tions. This is a logical move since returns on the investment already 
made appear just around the corner, and since, as the experience with 
costs to be discussed next, have shown, outstanding and contractual 
obli; ons are difficult to adjust. 

^ bankruptcy liquidations are not necessarily representative 

of oti Uquidation procedures, they are accompUshed under Federal 
court "jurif^ 'ictions and the records are relatively more complete than 
in more casual devices. 



CHAPTER X 
CONTROL OF COSTS OF OPERATION 

With sharp fluctuations in business conditions, expenses of smaller 
firms appear less elastic, and therefore more difficult of adjustment, 
than larger; and expenses in the field of distribution apparently are 
more rigid than in manufacturing, extractive industry, or transporta- 
tion. 

McNair ^ is of the opinion that the costs of marketing have become 
slightly greater than the costs of manuf actm-e for manufacturing firms 
as a group, but that part of the dift'erence is due to a shifting of costs 
from manufacturing operations to marketing. In absolute terms, 
WiUis ^ reports that distribution costs in groceries have decreased at 
least 15 percent in the last 15 years. A general statement of the 
problem has recently been published by the Twentieth Century Fund.^ 

OVERHEAD COSTS 

The largest item of mismanagement apparent in the review of 
Chicago ^ bankrupt enterprises was found to be the failure to control 
overhead expenses; this accounted for the insolvency of 12 percent of 
the dissolved concerns. 

OVERHEAD AND SALES 

The ratio of total overhead to net sales is a good measure of control. 
The Cinchona Club of St. Louis studied this relationship for 40 
solvent retail drug stores, and the results have become useful as a 
standard in analyzing insolvent enterprises. The average ratio was 
29 percent as compared with 38 percent for 29 failed drug stores.* 
The highest ratio for going concerns was 41 percent, appearing in 
2 cases; the highest for failed concerns was 98 percent, with 14 of the 
29 exceeding the maximum ratio of the active group. 

In table 108 are fisted the average ratios for bankrupt business 
firms in Chicago. 



Table 


108. — Percentage total overhead of total net sn 


es 




Type of business 


Number 
of firms 


Median 
percent 


Mean 
percent 


Drugs . ... . . 


35 
34 
38 
63 

130 
90 
17 
21. 

524 

126 
34 
89 

773 


47.0 
48.5 
60.0 
48.5 
53.7 
40.0 
59.0 
61.2 
53.5 
59.2 
47.5 
97.3 
56.3 


79.5 


Restaurants . ... 


65.6 


Men's clothing-. ...^ . L 


70.5 


Women's clothing- , ..... 


62.4 


Total, clothing... ... 


68.6 


Food-. ... . 


57.2 


Hardware. _........ 


77.2 


Furniture - 


87.0 


Totalretail.- . . . .' 


73.5 


Manufacturing.. 


92.0 


Wholesaling... . . . ... 


56.4 


Miscellaneous services ' .. 


117.2 


Total bankrupts . - - ,.. 


81.0 







1 Professional, miscellaneous proprietor, contractor, and realtor. 



1 M. P. McNair; Marketing and Our Economic Future. Address before special session for business 
executives. Department of Economics and Business Administration, Westminster College, 1938. 

2 Louis Boder: Recent Price Legislation and Economic Theory, Journal of- Marketing, volume III, 
No. 2, October 193S. 

3 Twentieth Centuj-y Fund: Does Distribution Cost Too Much?, 1939. 
< See Domestic Commerce Series No. 59. 

105 



106 



CONCENTRATION OF ECONOMIC POWER 



For comparison, the following averages (means) of overhead-to- 
sales ratios are given for groups of Chicago "going concerns": 



Percent 
Drug stores 29 

Men's clothing stores 27 

Women's clothing stores 30 



Percent 

Grocery stores 20 

Hardware 35 

Furniture 32 



From an analysis of expenses of retail meat stores in Chicago, 
Cleveland, and New York,^ it was fomid that the average ratio of 
overhead to sales was 19.5 percent with the most frequent range from 
17.5 to 23.5 percent. The variation by size of store is given as follows: 



The total expense for— 

1-man stores -. 

2-man stjres 

3-man stores 

4-man or larger stores 




Common 
amounts 
(percent) 



21. S-29. 
17. 5-22. 5 
16.5-20.0 
15.4-1?. 5 



RENT 

In attempting to segregate expenditure items for study, it is fre- 
quently found that proprietors fail to allocate expenses for services 
not requiring a cash outlay. For instance, an enterpriser who owns 
the building in which his store is located may not charge off as rental 
an amount approximating the income he would receive from a lease 
to a similar business, or the interest on the value of the property plus 
repairs and taxes. 

Women's clothing stores in Chicago ^ paid the highest median 
rental, $3,000, even exceeding the median of the manufacturing con- 
cerns, $2,470. This is explained by the need of central locations by 
clothiers, where high rentals are charged for small space. Median 
rentals of other groups were as follows: Men's . clothing, $2,170; 
food stores, $1,280; drug stores, $2,300; restaurants, $1,960; whole- 
salers, $1,700. 

RENT AND SALES 

Ratios of rentals to sales for Chicago ^ bankrupts are given in table 
109. The following range of rentals of solvent concerns, operating 
in various Chicago neighborhoods in which bankruptcies occurred, are 
offered for comparison: 

Rent as percentage of sales 
Kind of business: Low and high 

Drug _ _ _.. 4.7-8.8 

Grocery 6.0-10.0 

Men's clothing . 9. 0-14. 

Haberdasheries 10. 0-14. 

Women's clothing : — 6. 0-10. 

Women's specialty 10. 0-15. 

Hardware 10.0-12. 

Confectionery 10. 0-26. 

Shoes 4.0-12.0 

Books 8.0-12.0 

' Horace Secrist, "Expenses, Profits and Losses in Retail Meat Stores," Northwestern Bureau of Business 
Research, Series III, No. 9, 1924. 
'John H. Cover: Op. fit. 
' John H. Cover: Op. cit. 



OONCBNTKATION OF ECONOMIC POWER 
Table 109. — Percentage business rent of total net sales 



107 



Types of business 



Drugs 

Restaurants 

Men's clothine; 

Women's clothing 

Total clothing 

Food 

Hardware __ 

Furniture 

Total retail 

Manufacturing 

Wholesaling 

Miscellaneous services 
All bankrupts 



All known cases — 



Number 
- of firms 



35 

33 

38 

68 

135 

99 

18 

22 

542 

137 

35 

109 

823 



Median 
percent 



16.5 
13.8 
19.4 
13.5 
15.3 
9.5 
15.0 
19.0 
14.3 
5.8 
4.1 
10.0 
11.9 



Mean 
percent 



25.0 
16.0 
25.5 
19.4 
21.8 
13.0 
22.5 
26.7 
22.6 
9.5 
6.5 
23.3 
19.3 



Excluding "no rent" cases- 



Number Median 
of firms percent 



35 
33 
36 
68 

133 
99 
18 
22 

532 

136 
31 
89 

788 



16.5 
13.8 
20.0 
13.5 
15.6 
9.5 
15.0 
19.0 
14.6 
5.9 
4.7 
15.5 
12.6 



Mean 
percent 



25.0 
16.0 
27.0 
19.4 
22.1 
13.0 
22.5 
26.7 
23.0 
9.6 
7.3 
28.7 
20.0 



« Professional, miscellaneous proprietor, contractor, and realtor. 

Rentals of solvent retail drug firms in St. Louis * ranged fpom $540 
to $3,775 annually, while failed outlets ranged from $600 to $6,800. 
The average for successful concerns was $1,629, and for liquidating 
stores, $1,939. 

For going concerns, the average ratios of rentals to net sales was 
4.7 percent, and for failmg enterprises, 10.6 percent. The range of 
the former was from 2.2 to 9.8 percent, and the spread of the latter, 
from 5.1 to 36.4 percent. 

Experiences of retail meat stores in Chicago, Cleveland, and New 
York ® are summarized as follows: 





Percentage of net 
sales- 




Aver- 
age 


Common 
amounts 


Rent for— 

1-man stores 


3.5 
2.6 
1.4 
1.7 


2. 6-4. 


2-man stores. ... . . . ... 


1. 6-3. 3 


3-man stores . .. ■ 


.9-1.7 


4-man or larger stores. 


1. 2-2. 2 







The percentage ranges for the middle 50 percent, by cities, are- 
Chicago . - 1. 47-3. 18 

Cleveland 1. 89-3. 45 

New York 1. 67-3. 68 



PAY ROLL 

Modal, or most frequent, pay rolls of Chicago bankrupts ranged 
from $1,000 for druggists to $3,750 for restaurants, and $7,450 for 
manufacturers. The medians of the salary-w^age item were low for 
retail men's clothing stores, at $2,350 and high for manufacturers, 
at $16,780. Unfortunately, when members of families were employed 
part time, salary entries were frequently not made; in these instances 
payment in kind, as. subsistence, was habitual. 

Approximately two-thirds of total expense of retail meat dealers *° 
is attributable to the wage bill. 

* U. S. Department of Commerce, Domestic Commerce Series, No. 59. 
» Horace Secrist: Op. cit. 



108 



CONCENTRATION OF ECONOMIC PQWER 



PAY ROLL AND SALES 

In the study of retail meat store ^° expenses, the wages of the 
proprietors were included. Since in the Chicago bankruptcy ^* study, 
proprietor withdrawals were treated separately as a combination of 
salary and profit, some differences are to be expected. 

The following is given as the experience of meat retailers in the 
three cities: 



Percentage of net 
sales— 



Aver- 



Common 
amounts 



Wages, for— 

1-man stores 

2-man stores 

3-man stores : . - . 

4-man or larger stores 



16.0 
13.0 
12.0 
10.5 



13. 0-19. 
11.0-15.0 
11.0-14.0 
9.0-12.0 



It was found that stores making a profit showed an average ratio 
of 12.22 percent, and those experiencing a loss recorded 13.96 percent. 
The Chicago pay-roll ratios are presented in table 110. 

Table 110. — Percentage pay roll of total net sales 



Type of business 



Drugs . 

Restaurants 

Men's clothing 

Women's clothing 

Total clothing 

Fooa 

Hardware 

Furnitue 

Total retail 

Manufacturing 

Wholesaling 

Miscellaneous services ' 
Total bankrupts - . 



All known cases 



Num- 
ber of 



35 

29 

32 

63 

123 

94 

17 

19 

492 

125 

33 



Median 



14.0 
32.0 

9.0 
17.2 
12.2 

7.0 



22.5 
11.6 
31.8 
13.3 
15.0 
15.2 



Mean 



29.1 
36.7 
10.8 
21.7 
16.4 
16.8 
9.0 
20.4 
19.4 
64.0 
20. 6 
39.8 
27.3 



Ex3luding "no pay roll" 
cases 



Num- 
ber of 



31 
29 
22 
61 

100 

62 

7 

14 

370 

120 
27 
63 

580 



Median 



10.0 
32.0 
14.0 
17.8 
15.8 
14.0 
16.2 
30.0 
17.2 
32.5 
17.5 
33.5 
20.9 



Mean 



32.9 
36.7 
15.7 
22.4 
20.2 
25.4 
21.8 
28.0 
25.8 
56.1 
25.4 
61.8 
35.3 



I Professional, miscellaneous proprietor, contractor, and realtor. 

Solvent St. Louis druggists ^^ had salary expenditures averaging 
18.5 percent of sales, while liquidating concerns averaged 21.4 percent. 
The respective ranges were from 12.9 to 27.8 percent, and from 8.8 
to 53.8 percent. 

PROPRIETOR WITHDRAWALS AND SALES 

Analysis of failing individual proprietors in Chicago indicated that 
management had some regard for the ability of their enterprises to 
support them. Modal, or most frequent, withdrawals ranged from 
$1,210 annually for restairrants to $2,500 for women's clothing 
establishments f metdans extended from $1,690 for fooc^ stores to 
$5,020 for manufacturing concerns. 

'» Horace Secrist: Op. cit. 

II John H. Cover: Op. cit. 

n U. S. Department of Commerce, Domestic Commerce Series, No. 59, 1932. 



CONCENTRATION OF ECONOMIC POWER 



109 



That the concerns were, indeed, in trouble is indicated by the 
relation of withdrawals to sales in table 111. Normally, with a 
successful enterprise, some portion of proprietor withdrawals should 
be charged against salaries, the remainder declared as dividends from 
profits. In may instances^ the proprietor was a parasite living upon 
a parasitic enterprise. 

Table 111. — Percentage withdrawals of total net sales — individual proprietors 



Type of business 



All known cases 



Num- 
ber of 
firms 



Median 



Mean 



Excluding "no wlth- 
' drawals" cases 



Num- 
ber of 
firms 



Median 



Mean 



Drugs 

Restaurants 

Men's clothing 

Women's clothing 

Total clothing 

Food 

Hardware 

Furniture . - 

Total retail 

Manufacturing- - _ 

Wholesaling 

Miscellaneous services ' 
Total bankrupts 



33 
33 

37 

64 

129 

96 

17 

21 

522 

128 

35 

101 

786 



12.9 
12.1 
27.0 
14.5 
21.2 
13.7 
34.0 
26.0 
19.7 
11.9 
10.0 
22.0 
17.6 



23.7 
16.9 
33.7 
21.3 
29.8 
19.8 
42.0 
32.0 
28.9 
23.7 
17.1 
43.8 
29.4 



. 31 
32 
37 
63 

128 
95 
17 
19 

512 

125 
33 
88 

758 



25.1 
16.4 
33.7 
21.6 
30.0 
20.0 
42.0 
34.0 
29.5 
24.2 
18.1 
50.4 
30.6 



I Professional, miscellaneous proprietor, contractor, and realtor. 



COSTS AND' PRICES— MARGINS 



While price fluctuations are of basic importance to all phases of 
business, here our interest is primarily the relationship of two sets of 
prices — buying price, or cost, and selling price. 

Inferences drawn from the Chicago ^^ failure study are in point: 

It is general practice in this group to charge goods at original cost. This is 
natural, since retail price is regarded as a mark-up, establishing a margin for over- 
head and profit, and a decline in market price is the basis for calculating loss. 
However, this practice aflfects subsequent policy. If stock moves slowly, the 
emphasis is placed, not upon clearing this merchandise, but upon purchasing 
small lots of additional goods — necessarily at relatively greater per unit outlay. 
Moreover, since a stock of merchandise is seldom regarded as capital against 
which interest should be charged, the principal incentive for pushing sales is the 
need of cash. 

This situation leads to the holding over of goods for the next corresponding 
season at a time when manufacturers, wholesalers, and jobbers are introducing 
new styles and new products as devices to increase business. The results include 
both further depreciation of old stock and a certain friction between sellers and 
buyers, the former already creditors for the depreciated stock. When a crisis is 
imminent, special effort is employed to dispose of the stock, but by this time 
only "price" sales are effective, and since other merchants are under economic 
pressure, cutthroat competition frequently occurs. In several instances a direct 
relation can be traced between sacrifice sales of an insolvent dealer under the 
necessity of obtaining cash and the -subsequent insolvency of competitors whose 
customary sales have been depleted by the emergency liquidation. 

As the process indicated above suggests, there are few instances in which a 
price policy exists or receives consideration as an important merchandising ele- 
ment. Although, as mentioned, a general idea of mark-up obtains, this idea 
does not include the concept of the retail price as the base upon which to establish 
costs, earnings, and profits.. Nor is the mark-up even conceived of as a percentage 
of the cost of the commodity. It is an absolute amount added to the approxi- 

13 John H. Cover: Op. cit. 



262652— 41— No. 17- 



■^-j^Q CONCENTRATION OF ECONOMIC PQWER 

mate per-unit cost of merchandise to establish a price which the market should 
conceivably bear; the check of the estimate is the prevailing price in the neighbor- 
hood. 

Consequently, though in some neighborhoods bargammg persists as a national 
habit, a "customary" price tends to become established. This lethargy does 
not yield to the elements commonly conceived to be present in competitive 
demand and supply except in the "bargaining neighborhoods" where the price, 
established by mark-up tends to become a maximum rather than a "normal." 

The established price, then, becomes a stabilizing factor; it yields most readily 
in an advancing market but resists declining tendencies. Without the concept 
of differential cost it is difficult to realize the significance of the new supplies, 
small in quantity, to the problems of profit and minimum .price; and with an 
original cost base resisting price changes there is little warning of impending 
danger. Therefore, prices yield not gradually but suddenly when a substitute com- 
modity (including style change), a new competitive device, creditor pressure, or 
a buying slump, develops. 

A chain store with a different merchandising set-up, including slight price 
undercutting, is a new competitive device. Resentment against the chain is not 
merely the defensive reaction to a powerful competitor with advantages in 
purchasing, capital, and management mechanism; it includes, as well, indignation 
over the "unethical" practice of disregarding the established price. 

With limited experience in estimating dispersion of sizes, qualities, and "lines" 
demanded purchasing'^nd cost problems are further involved, making more 
complicated the determina,tion of profitable and unprofitable " goods. This 
dilemma adds to the difficulty of deciding upon products to be pushed. 

Modifying the report that inventory is not taken, or is taken only at long 
intervals, is the fact that the proprietor's attention is concentrated upon depleted 
stocks. This is an informal and partial inventory device that may prove mod- 
erately adequate in a stable business period, but is likely in an unstable market 
to result in mere duplication of order and the stocking of out-of-date commodities. 
In the absence of knowledge of inventory value and of relative costs of different 
policies, proprietor withdrawals of funds from business income for personal use 
may easily result in an impairment of capital. If, when he calculates at all, he 
thinks of the original cost rather than of the prospective marktet value of his 
inventory and of the established price rather than of potential price, the antici- 
pated income automatically appears to cover his withdrawals. Though at least 
a portion should be regarded as profit and fluctuate with business success, the 
entire withdrawal is considered a fixed item and as rigidly determined by desire 
for a certain standard of living as is rent by a formal contract. 

Analysis of retail meat store operations in Chicago, Cleveland, and 
New York '^ indicates a range of from 73 to 78 percent as the most 
typical ratios of the cost of merchandise sold to the sales value. 
This ratio is greater, on an average, for large volume than for small, 
and is smaller for stores making profits than for those incurring losses. 

The most typical gross margins ranged from 23 to 27 percent of 
sales, the spread of the middle 50 percent of margins was from 19.5 
to 28.5 percent of sales. The gross margin tended to decrease with 
increase of sales volume. Variations by size of staff are given as 
follows : 



Percent of sales 



"^^^S^es - 24.5 19.5-30.0 

2-maii stores 

3-maii stores - - _, „ ia k oq k 

4-iiian or larger stores - 21.0 18. b-a. 5 




20. 0-28. 5 
17. 0-26. 



The average rate for profit stores was 23.85 percent of sales and for 
stores with losses, 18.89 percent. 



M Horace Secrlst; Op. clt. 



CONCENTRATION OF ECONOMIC POWER m 

The average rate of profit for the siores making a profit was 5 
percent of sales, and of loss for those incurring a loss, 3.56 percent of 
sales. 

The following summaries offer comparisons of profit and loss stores: 

Net trading profit 
Size of stores : (percent of sales) 

1-man stores 0. 1 

2-man stores 2. 8 

3-man stores 4. 

4-man or larger stores 5. 

The average result of operation of stores with varying gross margins 
is as follows: 

Net trad- 
ing profit 
(percent 
Gross margin (percent of sales) : oj sales) 

Below 16 15-8 

16 to 20 1 1-2 

20 to 24 1-2 

24 to 28 . 3-5 

28 to 32 -■ 8-9 

32 and over 10-11 

1 Loss. 

The average result of operation for stores of different size is a net 
trading loss when margins are as follows: 

Margins 

(percent 

Size of stores : "/ »o^) 

1-man stores, below :. 24 

2-man stores, below 20 

3-man stores, below ^ 20 

4-man or larger stores, below . 16 

The average result of operation of stores with varying total expenses 
is as follows: 

Net trad- 
ing profit 
(percent 
Total expense (percent of sales) : <" *"'«*) 

Below 16 5. 0-7. 

16 to 20 5. 0-6.0 

20 to 24 , : 2. 5-3. 5 

24 to 28 0. 0-1. 

28 to 32 . - 15. 0-6. 

32 and over • 9. 0-11. 

' Loss. 

The margins and expenses as percents of sales most conducive to 
earning a net trading profit are as follows: 

For one-man stores: Margins, 26 to 36; expenses, 20 to 26. 

For two-man stores: Margins 22 to 30; expenses, 16 to 22. 

For three-man stores: Margins 20 to 28; expenses, 14 to 20. 

For four-man or larger stores: Margins, 18 to 24; expenses, 12 to 18. 

The margins and expenses as percents of sales most likely to produce 
a net trading loss are as follows: 

For one-man stores: Margins, 18 to 26: expenses, 26 to 32. 

For two-man stores: Margins, 16 to 22: expenses,, 22 to 28. 

The following are important conclusions from this study ^^ of meat 
store operations: For three-man or larger stores, losses are rarely 
incurred. Losses are more common in small than in large stores. 

«» Horace Secrlst: Op. cit. 



]^]^2 CONCENTRATION OF ECONOMIC POWER 

Inadequate margins seem to be more responsible for losses than high 
operating expenses. Profits are most likely to be made when both 
margins and expenses are moderate in amount. The single most 
important explanation of the failure of merchants to make a reasonable 
profit was found to be cutthroat competition, resulting from poor 
location, price cutting, lack of records showing true costs, and easy 
entrance into the trade. 

For limited-price variety chains, the net cost of merchandise sold 
in 1938 was, in the aggregate, 65.44 percent of sales, and the gross 
margin, 34.56 percent. The net profit was 2.38 percent, and the 
average sales volmne per store, $182,000. The net profit rate in 
1937 was 4.11 percent of sales, and in 1936, 5.05 percent. The 1938 
decrease is attributed to a contraction of the gross margin rate and 
and increase in the expense rate. 

Some observations of margins and profits in the Pittsburgh ^^ meat 
market are indicative of the management problem merchants face: 

Analyzing gross margins-^the -difference between retail and whole- 
sale prices expressed as a percentage of the former — it was found that 
the highest priced cuts consistently showed the greatest margins, 
although the range of margins for lower-priced cuts was larger. 
The widest fluctuations occurred in beef and lamb prices, due in part 
to kosher influence, and, in addition, to the preference for pork and 
veal in the lower-income neighborhoods. 

To the degree' that margins indicate demand, that is, the wider the 
margin between retail and wholesale prices, the greater the consump- 
tion, the higher priced cuts were less expensive in the smaller-income 
areas than in the larger. 

Almost one-half of the retailers had gross profits ranging between 
20 and 29 percent of the sales price. A lai^e proportion of independent 
meat markets was in the upper fringe of this range, while chain outlets 
were in the lower fringe. 

Use of average and marginal cost technique, of practical considera- 
tion in large-unit enterprise, is a rapidly developing field. ^^ The 
former is principaUy of value in the determination of flexible standards 
for cost control, the latter in arriving at the most profitable price 
and output policies. 

Net profits as percentages of net sales for 35 manufacturmg lines ^^ 
show a range from a loss of 0.23 for the leather garments field to a 
profit of 6.15 for industrial machinery. None of the wholesaler groups 
reached 2 percent; the range was from a loss of 0.58 to a profit of 1.94 
percent. The largest profit ratio for retailers was for the installment 
furniture dealers, 4.52 percent of net sales. The smallest was 1.21 
percent for shoe retailers. No retail groups suffered a loss as a whole. 

INVENTORY 

The problem of the stock of goods on hand is fundamental to all 
commodity producing and distributing agencies. It is a management 
concern related to the use of capital, the market price structure, the 
solvency of an enterprise. ^^ 

•« John H. Cover: "Neighborhood Distribution and" Consumption of Meat in Pittsburgh," University 

1' Joel Dean: "Statistical Determination of Costs, with Special Reference to Marginal Costs," University 
of Chicago Journal of Business, vol. IX, No. 4, pt. 2, October 1936. _ 

■' Roy A. Foulko: "Financial Ratios as Guides to Operating Policies", Dun's Review, December 1938. 



CONCENTRATION OF ECONOMIC POWER 113 

Overhead expeiises are increased by the cari-ying costs of inventory. 
Capital is tied up in the investment and is therefore not available for 
operating purposes. Frequently, credit facilities are used involving 
interest and the instability of tlie financial structure. Surplus of 
stock is a particularly difficult problem with a decline of selling prices, 
a change of style, or with a new invention. 

The rate of stock turn for 15 identical variety chains ^^ ranged from 
5.24 in 1929 to 4.86 in 1933; the 1938 ratio was 4.90. 

Rising sales normally are accompanied by declining stock-sales 
ratios. The ratios of inventory to sales for variety chains in 1936 
were below those of con'esponding months in previous year^; and 
were high again until late 1938. 

Among Chicago bankrupts, the average ratio of inventory as a per- 
centage of total net sales was 10 in the retail food field, 43 for men's 
clothing, 25 for women's clothing, 42 for dmgs, 44 for furniture, and 
57 for hardware. The averages for insolvent wholesalers and manu- 
facturers were, respectively, 23 and 27 percent. 

In retail meat markets in New York, Cleveland, and Chicago,^" 
merchants turn their stock of goods, on the average, every 3.4 to 4.8 
days. The larger the store, the more frequently is the stock turned. 

Neglect of recording inventory is apparent in all analyses of failure. 
In New Jersey,^^ 39 percent of the enterprises studied had never taken 
inventory. 

Foulke ^^ found that the ratio of net sales to inventory in the retail 
field varied from 2.3 (times, or 320 percent) for men's and women's 
shoe stores, to 9.8 for women's specialty shops. Men's and boys' 
clothing ratio stood at 3.5, installment clothing at 7.8. In the whole- 
sale field, men's and women's shoes averaged 5,6, women's and chil- 
dren's shoes, 7.7. Other wholesale ratios included groceries, at 7.5, 
hardware, 3.9, hosiery, 7.1, women's wear, 19.2, and drugs, 5.3. 
Among manufacturing groups, diversified ratios ranged from 3.4 for 
fruit and vegetable canners, to 20.5 for dresses. 

Another ratio found of value is inventories to receivables, used in 
conjunction with sales to inventories. Both are important asset 
items, but while inventories is a. cost item, receivables is a selling 
value series. With inventory value in the numerator of a fraction 
^nd receivables in the denominator, a check as to whether inventories 
are being accumulated too rapidly is available. 

As an example, the American Pii^iio Co., which went into receiver- 
ship in 1929, had the following ratios of inventories to receivables for 
the 6 years beginning with 1923: 85, 107, 118, 130, 168, 162. The 
inventory position then became unfavorable in 1924 and remained so. 
The index of inventories rose to a peak in 1926, then declined, as 
follows, beginnmg with 1923: 100, 105, 114, 146. 128, 94. Thus, 
although the 1929 inventories had been reduced to 94 percent of the 
1923 figure, the relation of inventories to receivables was still un- 
balanced in 1929. 

In reviewing the evidence brought to bear upon this problem, the 
extent of failure to control overhead costs is impressive. The ma- 
chinery is complex and each cog must fit and function, or friction will 

i» Stanley F. Teele: "Expenses, Profits, and Losses in Retail Meat Stores," Northwestern Bureau of ■ 
Business Research, series III, No. 9, 1924. 
'» Horace Secrist; Op. cit. 
" Domestic Commerce Series No, 64. 
" Roy A. Foulke: Op. cit. 



214 CONCENTRATION OF ECONOMIC POWER 

stop operation completely. The following quotation ^^ presents the 
composite expenditure of retailers: 

Out of every $100 which customers paid to retailers in 1929, about $73, on the 
average, was paid by the retailer for the goods sold, and $25 or more went for 
his operating expenses. Of the latter sum, more than $14 was paid out for wages, 
including as estimated remuneration for proprietors. Of the remaining $11, rent 
accounted for more than $4 and the remainder of $7 went for light, fuel, supplies, 
interest, etc. 

This composite estimates operating costs at about one-fourth of 
retailer expenditures. . This proportion necessarily varies by retail 
fields which in some aspects are as different as is a manufacturing 
concern from a hot-dog stand. This complexity is obscured by com- 
posite estimates. The proprietor is in need of very specific guides, 
and such landmarks can be made available only by careful research 
and analysis. Dissemination of the results is a problem in adult 
trade education. 



"Twentieth Century Fund: "Does Distrib-itioft Cost Too Much?" 1939.- 



CHAPTER XI 

CONTROL OF SALES, OF MARKETS, AND OF PRODUCTS 

In the analysis of the relation of life-span to sales, we have noted the 
survival advantage of the larger volume outlets. Also significant, is 
the overoptimism of new proprietors in estimating business income, 
resulting in assumption of unwarranted obligations and the excessive 
withdrawals for personal use. 

SALES VOLUME 

In the country as a whole, approximately 64 percent of all retail 
stores had sales in 1933 of less than $10,000 annually,^ and these 
stores accounted for less than 14 percent of the total volume of retail 
sales. The average sales per small store (those with a volume of less 
than $10,000) was $3,530, and per large store, $39,656. In the food 
group, 62 percent had sales of less than $10,000, representing 15 
percent of food sales volume. Among druggists, small stores repre- 
sented 43 percent of the total number and 6 percent of sales. 

In 1933, the average sales volume of 2,188 stores of 15 identical 
variety chains ^ was $154,000. The number of outlets had increased in 
1938 to 2,374, and the average sales to $182,000. 

In the Chicago study of bankruptcy, it was found that the average 
(arithmetic mean) sales of failed concerns were in all groups less than 
the average for the city of Chicago. 

Since income of business is primarily from sales of commodities and 
services, and since each enterprise and its competitors are seeking 
large volume, there is little to be said regarding the total amount of 
sales except in post mortem. The potential total demand may be 
obviously too small to support the number of enterprises desiring to 
share it. 

SALES EFFORT 

Misdirected selling effort is basically the result .of disregard for 
market potentials, or a tactical device for retaining the goodwill of 
customers. 

An analysis of sales management problems records many interesting 
pitfalls to which unsuccessful firms have succumbed. 

Cowan ^ illustrates experiences, particularly in the field of meat 
distribution. Although one concern found that sales volume to 
country retailers was 128 percent greater per interview than to city 
stores, the expense attached was 78 percent greater for country stores; 
in 14 marketing areas, the per capita sales in rural sections were only 
25 percent of those in neighboring cities, 

■' Solon Ayers: A Study of Mortality of Retail Grocery Stores in Austin, Texas; from 1880 to 1932 (Uni- 
versity of Texas Master's Thesis) . 
■ » Stanley T. Teele: Op. eit. , „ -rr \ ,. . /^u, 

'Donald R. O. Cowan: "Sales Analysis from the Management Standpoint," University of Chicago 
Journal of Business, vol. IX, Nos. 1, 2, 3, and 4, 1936, and vol. X, No. 1, 1937. 

115 



116 



CONCENTRATION OF ECONOMIC POWER 



In table 112'is summarized the sales experience of alarge city meat 
wholesaler, indicating variations in patronage; in subsequent pages 
the cost and profit results of similar analyses will be discussed. 



Table 112. 



■Variations in weekly amour ts sold to different tijpes of retailers; the 
experience of a meat wholesaler in a large city 





Types of retailers 


Weekly amounts sold 


Meat 


Grocery 


Combination 


Delicatessen 




Num- 
ber 


Vol- 
ume 


Num- 
ber 


Vol- 
ume 


Num- 
ber 


Vol- 
.ume 


Num- 
ber 


Vol- 
ume 


Unsuccessfully solicited. 


Percent 
34.3 
15.0 
9.0 
20.8 
9.0 
11.9 


Percent 

"'i'.8 

2.6 
15.9 
17.6 
62.1 


Percent 
46.3 
15.4 
12.8 
17.5 
6.4 
1.6 


Percent 

"3.4 
11.1 
31.5 
25.4 
28.6 


Percent 
3.'). 4 
17.1 
14.7 
20.0 
8.8 
4.0 


Percent 

"3.7' 
9.7 
27.1 
25.3 
34.2 


Percent 
28.5 
33.3 
14.3 

9.6 
14.3 




Percent 


Up to $10 


9 


$10 to $20 . . 


13 8 


$20 to $50 ^ 


17.5 


$50 to $100 - 


59 7 


$100 and up 









Total , 


100.0 


100. 


100.0 


100.0 


100.0 


100.0 


100.0 


100.0 







In the same field, a Pittsburgh * study indicated that no retailers 
purchased meat exclusively from salesmen and that most proprietors 
preferred to inspect meat at the packers' branch establishment. 
Kosher and chain outlets purchased most of their volume from packers' 
headquarters, while the combination grocery and meat outlets pre- 
ferred purchase by telephone or through salesmen. Almost one-third 
of the retailers made no purchases on Monday or Saturday. Only 
14 percent patronized one packer exclusively, while 64 percent dealt 
with three or more packers. With small volume in most instances, 
the cost of merchandising was high. 

Three packers' branch houses ^ found their average order ap- 
proximately $26 for the period 1926-30, as elaborated in table 113. 
But the tremendous turn-over of customers served, table 114, is 
another side of the customer problem. 



Table 113.- 



-Number of customers, number of orders, and total dollar sales of 3 
branch houses for 5-year period, 1926-30 





Total 
number of 
customers 

served 


Total 

number of 

orders 

sold 


Total dollar 
sales 


Number 
of orders 

per 
month 


Dollar sales 
per month 


Dollar 

sales per 

order 


Branch house A . 


925 

510 

1,007 


171,463 

104, 289 

2 300, 493 


$5, 921, 423 
3, 090. 085 
6, 072, 753 


2,857 
' 1, 931 
2 5,008 


$98, 690 
■ 57, 223 
101, 212 


$34. 53 


Branch house B 


' 29. 63 


Branch house C .- . 


2 20.21 






Combined 


2.442 


576, 245 


15.084,261 


9,604 


251,404 1 26,17 



' Calculated on basis of 54 sales months, data for first half of 1926 being incomplete. 

2 The number of orders and related figures as stated for this branch house are not comparable with those of 
the other 2 branches, as this branch used separate sales tickets for beef orders and for provisions. The 
"per order" figures therefore cannot properly be compared as between branch houses, but probably are 
comparable as between classes of customers for all 3 branch houses taken together and are used accordingly. 



* Joiin H. Cover: "Neighborhood Distribution and Consumption of Meat in Pittsburgh," University of 
Chicago Press, 1932. , 

* Howard C. Greer: "Customer Turn-over Experience of Meat Packing Companies," Journal of Business, 
Yol. Ill, No. 3, pt. 2, April 1933. 



CONCENTRATION OF ECONOMIC POWER 117 

Table 114. — Customer mortctflilty— percentage lost and rate of customer turn-over 





Total 
number of 
customers 

served 


Number 
of cus- 
tomers 
lost in 
period 


Average 
number 
active at 
one time 


Number of cus- 
tomei^ lost in 
percentage of— 


Averagetateof 




■T«tal 
number 
served 


Average 
number 
active 


custom turn-over 


Branch house A- 


925 

510 

1.007 


660 
354 
671 


294 
182 
328 


71.3 
69.4 
67.1 


224 
194 
205 


Once in 19 months. 


Branch house B .. _ 


Do. 




Do. 






Combined 


2,442 


1,685 


804 


69.0 


210 


Do. 



COST OF SELLING 

Cost of making a sale is represented for a wholesaler of packing- 
house products in a southern city ^ in table 115. 

Table 115. — Functional distribution of expenses: A typical wholesale unit, 1929 

Percentage of 

total wholesale 

expense 

Order-taking 23. 6 

Packing and loading. .. 3. 8 

Handling 2. 9 

Delivery 1 2. 1 

Sales bookkeeping ■ 1.9 

Credits and collections . 6 

Total variable expense 44. 9 

Fixed expense ^ 55. 1 

Total expense 100. 

In illustrating ascertained costs, Cowan cites the case of a wholesale 
meat distributor who obtained from a retailer — 

one order for three product items and incurred expenses for two interviews, two 
telephone calls, one delivery, bookkeeping, and incidental services, the total 
amounting to $0.95. Now, the sales value of the order was $24.37, the goods 
cost $23.40, and the difference, $0.97, was the gross profit on the transaction. 
Dealer Smith was a profitable customer,' because, after paying the direct cost of 
serving him during the week, the distributor had $0.02 left for defraying fixed 
expenses. 

A study of two wholesale branch houses of different companies ^ 
disclosed that orders of one-half of the retail customers were so small 
as to produce in the aggregate only 4 percent of the total volume, and 
to create a handling cost ranging from $10 to $35 per $100 of sales. 
In contrast, 5 percent of the accounts produced one-third of the total 
volume, and 20 percent produced two-thirds; only for these accounts 
were handling costs lower than gross profits. 

Table 116 suggests that, in the experience of six wholesale meat 
houses, only sales of $20 or more per week offer opportunity for a net 
profit.* Though only one-third of the customers buy $25 or more 
weekly, these purchases represent 9:1 percent of sales volume and only 
37 .percent of total expenses. 

* Donald R. Q. Cowan: Op. cit. 

' Howard C. Greer: "The Cost of Handling Small Orders and Accounts," Institute of American Meat 
Packers, 1928. 
8 Donald R. O. Cowan: Op. cit. 



U8 



CONCENTRATION OF ECONOMIC POWER 



Table 116. — Profitableness of different customers,' classified by Mmount purchased 

weekly 



[6 wholesale meat distributors, a typical week, 


930] 






Amount purchased during 
week 


Percent- 
age of 
total 
customers 


Percent- 
age of 
total 
sales 


Percent- 
age of 
total 

expenses 


Percent- 
age of 
average 
sales per 
customer 


Gross 
earnings 
per sales 

unit 


Direct 

expense 

per sales 

unit 


Net profit 

per sales 

unit ' 


Dealers unsuccessfully solicited . 


27.0 
12.0 
10.1 
7.3 
5.8 
4.9 
32.9 




3.9 
2.1 
2.8 
2.5 
2.3 
2.2 
37.1 










Less than $5 


0.8 
1.6 
2.0 
2.1 
2.4 
91.1 


6.5 
15.5 
27.4 
36.7 
49.0 
276.6 


$1,50 
1.38 
1.33 
1.16 
. 1.09 
.76 


$2.95 
1.92 
1.33 
1.16 
.97 
.44 


— $1. 45 


$5 to $10- - 


-.54 


$10 to $15 




$15 to $20 




$20 to $25. 


. 12 


More ban $25 


.32 






Average . . .. 


100.0 


100.0 


52.9 


100.0 


.80 


.57 


.2S 







1 Gross earnings minus direct expenses only. 

LOCATION 

In our earlier industrial history, and too frequently in current 
experience, business locations were chosen in the area in which the new 
proprietors, or promoters, lived, without consideration of the "many 
important elements necessary to success. With a concentrated 
population and small-scale industry, this neglect was of minor im- 
portance, since factors of production and distribution were readUy 
available. But with population migration and exhaustion of resources, 
location has become an increasingly important consideration. 

Prime factors in the past have been raw materials, power, labor, 
capital, markets, transportation, and military defense.^ Negative 
elements in management's consideration were labor organizations and 
taxation. 

In recent years certain artificial factors have developed, such as 
special inducements offered by political jurisdictions^ncluding tax- 
free status, land, plant, and other capital contributions — and special 
obstacles m the nature of barrier regulations — prohibitions to manu- 
facture, or the flow of trade, or movement of persons. 

In the process of spreading manufacture geographically. Thorp '"^ 
lists three steps: 

1. Development of backward areas and decline of highly developed areas. 

2. Development of rural sections and decline of urban. 

3. Break-down of local concentration in historical centers of specific industries. 
Advantages of this procedure are suggested as follows: 

.1. Saving in freight hauling. 

2. Reducing delay in shipping. 

3. Relieving the dependence of areas upon single types of manufacture or 
activity for livelihood. 

4. Lessening of violent depressions and of excited prosperities due to diversifi- 
cation of industry. 

An example of problems faced by a new manufacturer and limiting 
his chance of survival is found in the glass industry." The two most 
important factors are availability of fuel and raw materials; skilled 
labor is of next importance. Fuel is usually one of the largest expense 
items. Although any sand may be used, the purer quality produces 

' EliotB. Mears: "Strategy in Industrial Location," Harvard Business Review, autumn. 1937, vol. XVII. 
No. 1. 

10 Willard L. Thorp: "The Changing Structure of Industry"; in Recent Economic Changes in the United 
States, vol. I. pp. 206-216, 1929. 

1' Metropolitan Life Insurance Co., Policyholders Service Bureau; "The Glass Industry: Plant Location 
Factors." • 



CONCENTRATION OF EtHJNOMIC POWER IJQ 

the clearer glass; this limits location to nine States. Limestone is a 
secondary raw material. Alethods of production range from auto- 
matic machinery to primitive hand methods. At present there is a 
considerable overcapacity in the industry. 

Changes in the welfare of an industry are illustrated by the decline 
of flour milling in Minnesota. ^'^ The Northwest was surpassed in 
output by the Southwest in 1921 and Minneapolis yielded first place as 
a milling city to Buffalo in 1930. The important causes may be out- 
lined as follows: 

1. Superiority in quality of spring wheat was lessened by — 

(a) Decline in average quality of northwestern wheat. 

(b) Substitution of choice hard wheat for soft winter wheat in the South- 
west. 

2. Reduced production of spring wheat in the Northwest due to substitution; 
to territorial limits of mountains on west, Canadian border on north, and lati- 
tudinal boundary in south; invasion of weeds and disease. 

3. Changes in distribution. The shift from carload to less-than-carload distri- 
bution of flour interposed jobbers between millers and retailers and small bakers; 
this removed direct touch of millers with retailers, increased importance of cost 
and price. Large milling companies obtained volume at expense of small enter- 
prises. Chain-store buyers shopped around, purchaving for their use under pri- 
vate brand. 

4. Consumption per capita of wheat flour declined. Bakeries were substituted 
for home production. 

5. Transportation: Change in freight rates to the advantage of Buffalo, which 
also is closer to the market. Milling-in-bond privilege in export gave advantage 
to Buffalo in manufacturing from Canadian wheat. 

Measures of the location of manufacture have been suggested ^^ in 
the form of indexes, as follows: 

1. Density of employment; wage earners pel 1,000 population. 

2. Geographical density: wage earners per square mile of land area. 

3. Percentage of wage earners of urban population. 

4. Employees per establishment. 

5. Value added by manufacture per employee. 

6. Percentage ratio of wages and salaries to value added by manufacture. 

7. Index of concentration: a composite index of wage earners and population. 

The importance to meat wholesalers of the location' of their head- 
quarters ^* is illustrated in table 117. The advantage in total volume 
to wholesalers in large cities 'is apparent. It was found that each 
wholesaler's volume does not vary in proportion to the population 
served. Competition in large cities tends to be more severe; in addi- 
tion, the per capita sales in smaller cities are greater due to local domi- 
nance and to the proportion of the population served in neighboring 
areas. Despite smaller and scattered population, expense per 
hundredweight is not much greater in the smallest communities than 
in the largest, while gross earnings per hundredweight are considerably 
higher in the towns. And, finally, net earnings tend to be less in large 
cities. 

i« Victor Q. Pickett and Roland S. Vaile; "The Decline oi Norihwestern Flour Milling," University of 

13 F. B. Garver, F. M. Boddy, and A. J. Xixon: "The Locaticii of IMaJoufactures in the United States, 
1899-1929," 1933. 
" Donald R. G. Cowan: Op. eit. 



120 CONCENTRATION OF ECONOMIC POWER 

Table 117.: — The size of the headquarters city and its relationship to sales volume, 

expenses, and earnings 

[78 meat wholesalers — a typical year] 



Population of headquarters city 



Less than 
100,000 



100,000 to 
500,000 



500,000 and 
over 



Number of wholesalers 

Average population: 

Headquarters city _ 

Selling area 

Percentage of population outside of headquarters city 

Index ratios: 

Volume per wholesaler 

Sales per capita 

Gross earnings per hundredweight 

Expense per hundredweight 

Net earings per hundredweight 



47, 000 
112,000 

58 

46 

414 

$1.11 

$1.10 

$0.01 



26 

219,000 

281, 000 

22 

108 

385 

$0.95 

$1.05 

-$.10 



1,821,000 

2, 124, 000 

12 

788 

371 

$0.92 

$1.01 

-$.09 



References to the cases of failed concerns indicate the importance 
of the site factor. Again, information is available principally for 
retailers, where pedestrian traffic and transportation play such large 
factors for most types of outlets. 

Almost 6 percent of the Chicago bankrupts '^ had such inauspicious- 
locations as to make success highly improbable. In few instances 
had any effort been made in. advance to evaluate the location. Some 
proprietors had been influenced by an offer of space for a period free 
of rent. One independent grocer in order to enlarge his space changed 
location to a site between two chain grocers. He recognized the 
competition involved but hoped for patronage with the development 
of an.tichain propaganda. 

Twenty-eight of the 487 New Jersey ^^ cases studied failed due to 
location. A bankrupt who had been successful in another location is 
quoted, "People forgot me, although I moved only around the corner." 

The extent of congestion of stores in certain neighborhoods is illus- 
trated by a Jewish area in Pittsburgh,^^ where 26 food outlets within 
4 blocks sought the kosher trade and 5 others served from, tributary 
streets. Chain stores have not penetrated the area, and the oldest 
meat market is proud of its life span of 5 years. 

In addition to congestion, pedestrian traffic, and transportation 
facilities, there are other problems of location that failed retailers have 
overlooked. 

In one section of Chicago 23 percent of retail store sites were vacant 
over a period of approximately 18 months. All of these locations had 
previously been occupied and landlord competition was so severe 
that retail proprietors were offered liberal inducements to establish 
business enterprises. In continuous flux were luggage, radio, sporting 
goods, cigar, painting and decorating, and lingerie and hosiery stores. 

The opening of supermarkets in. otitlying areas tended to draw, at 
least temporarily, patrons who shopped by automobile. The exten- 
sive advertising of "downtown" stores left some neighborhood pro- 
prietors servicing convenience goods purchasers. 

Closing of industrial plants, or partial reduction of employment, 
removed much of the advantage of stores dependent upon industrial 

'5 John"H. Cover: Business and Personal Failure and Readjustment in Chicago, University of Chicago, 
August 1933. 

'» U. S. Department of Commerce, Domestic Commerce Series No. 54. 

"John H. Cover: "Neighborhood Distribution and Consumption of Meat in Pittsburgh," University 
of Chicago Press, 1932. 



CONCENTRATION OF ECONOMIC POWER 121 

workers who were accustomed to shop and carry purchases to theu* 
homes. 

There are many mstances of parlor stores, the use of front rooms of a 
home for business purposes; frequently, the wife adds the clerking 
involved to her regular responsibilities. The turnover is high, since 
such outlets frequently are established to tide over periods of unem- 
ployment or of reduced income. The extent of this type of establish- 
ment in Poughkeepsie ^® is shown in table 94. 

An item of importance in some neighborhoods is the race or nation- 
ality of the proprietor. Closely knit nationality groups prefer a 
dealer of their origin, and another would have little success in these 
preferential areas. 

CHANNELS OF DISTRIBUTION 

A dynamic statement of the "battle of the channels" of distribution 
is adapted from Thorp :^^ 

* * * for any particular raw-material-to-product sequence, there is nothing 
inevitable with regard to the location of the various functions within any existing 
pattern of economic enterprises. The entire process may be under a single con- 
trol, as in the case of the farmer who optimistically sends eggs direct to cus- 
tomers by parcel post. It may be roundabout and subdivided among at. least a 
dozen intermediaries, as in the case of transforming raw cotton into a house dress. 
Often there are many channels all in simultaneous operation — a single manufac- 
turer of rubber tires may sell to wholesalers, to mail-order houses, to a filling 
station chain, to large fleet buyers, to independent retailers through his own 
wholesale branches, to his own retail stores, and direct to his own employees. 

A consideration of changing distribution channels must record not only the 
continued contest among the various routes to the consumer but also the shifting 
location of functions along the different channels. Advertising, for example, 
may be undertaken by the manufacturer, by a cooperative arrangement between 
him and the retailer, or by the retailer himself. Inventory may be carried at 
any of several points. The function of determining the retail price may, through 
the operation of resale price maintenance contracts, be shifted from the retailer 
to the manufacturer. In the case of State laws establishing minimum prices or 
mandatory mark-ups, even State legislatures have taken a hand in what has 
historically been a function of the retailer. 

The complicated character of present-day distribution is the result of the many 
interrelated forces which make our economic system dynamic. Since the operat- 
ing unit of retail trade can be no larger than its trading area, the growth of cities 
and the development of automobiles and roads have been fundamental to the 
rise of large store units. Mass production has created national markets while the 
development of large-unit products, particularly the so-called consumers' durable 
goods, has encouraged many specialized types of selling. 

Merchandising has appeared as an art and competitive pressure resulting from 
excess productive capacity has made "seUing" the concern of every busir^ssman. 
Not only have soonomic forces been exceedingly active but the -various interested 
parties engaaed in the gtruggle for survival have turned to the authority of govern- 
ment for ala, and mort and more the problems of distribution are becoming the 
concern of our le^'lslators. During the last decade, it is probable that more legis- 
lation relatlv© ^t tht processes of distribution than of manufacturing has been 
added to ths St&tuts books and survived court scrutiny. The battle of the 
channels la a national issue. 

A condensed summary ^ of current movements is recorded as follows : 

The struggle for power, or for existence, in distributive enterprise parallels 
the contests of a few generations ago in manufacturing. In order that the signifi- 
cance of this struggle may not be underestimated, it is important to list some of the 

•8 R. G. Hutdiinson and A. R: and Mabel Newcomer; "Study in Business Mortality," American Econ- 
omic Review, vol. XXVIII, No. 3, September 1938, pp. 497-514. 

i» Willard L. Thorp: "Changing Distribution Channels," American Economic Review, vol. XXIX, No, 
1, Supplement, March 1939. 

20 John H. Cover: "Changing Distribution Channels: The Initiati- e Taken by Distributors Themselves," 
American Economic Review, vol. XXIX, No. 1, Supplement, March 1939. 



222 CONCENTRATION OF ECONOMIC POWER 

related factors and occurrences: Rapid changes in channels of distribution, business 
organization, and business practices; high costs of merchandising; alinement of 
forces upon a national basis for obtaining special advantages and protection; use 
of legislation as a competitive or security device; expansion of monopoly devices 
(laws, patents and trade-marks, and trade association activities) in fields regarded 
as desirably competitive (these devices tend to control price, quality, and conditions 
of sale); potential restricting effect upon consumer purchasing power; prospective 
increase in unemployment; competition of State and Federal governments over 
trade and commerce jurisdiction. 

An enterpriser should consider the importance of estabhshed 
distribution channels, the possibility of their change, and the absorp- 
tion of functions in the process. It is part of his competitive problem. 
Some cooperative purchasing retailer groups,^^ for instance, combining 
to gain the economies of mass purchasing, have been unable, as a 
group, to meet the price competition of chains and some other retailers 
due to the inclusion in membership of weak independent proprietors 
who proved a burden to the organization. 

The significance of credit financing in many distributive fields, 
makes it difficult for an enterpriser to break away from a -channel, 
though a shift might strengthen his competitive position. Similarly, 
the agency- relation frequently used ties the representative to an 
established procedure, 

COMPETITION 

A complex factor frequently credited as the principal deterrent to 
the successful operation of an enterprise is competition. In some 
instances, it is apparent that an excess of firms in a particular field 
or area is meant. In others, recurrent or continued price wars are 
involved. Again, branded products, or patented procedures, or 
special services or terms, are the instruments. 

The chain store is under attack by the independent merchant 
organizations in some fields, as the mail order business and department 
store were previously on the figuring line. Each new channel of 
distribution becomes a competitive device resented by the existing 
trade outlets. 

Emphasis is placed upon a distinction between fair and unfair 
competition, ranging from monopolistic concentration of control to 
specific trade practices. A counterdevelopment by organized groups 
has resulted in a series of enabling statutes permitting resale price 
control, regulation of sales below cost, prevention of price discrimina- 
tion, discriminatoiy taxation, and a series of special protective devices 
referred to as trade barriers. 

In estimating the place of competition in the bankruptcy of Chicago 
concerns, the general conclusion is as follows: 

Among the environmental factors, chain-store competition, involving 9 percent 
of the failures, was dominant. The chain store in most instances has been charac- 
terized by lower costs (including rentals), reduced consumer prices of many 
commodities, and more modern business facilities. However, it is hot apparent 
that the chain, store as an institution is eliminating the best of the individual 
proprietors. It would appear that most of the failures occurred to marginal 
firms, parasitic in nature, which could remain in business only so long as not 
challenged by pressure of economic forces or of modern business methods. 

In the price-competition category are principally those affected by the liquidat- 
ing sales of competitors failing in business or attempting to raise qash to stave off 
failure.^ 

« John H. Cover: Retail Price Behavior, University of Chicago Press, 1935. 



CONCENTRATION OF ECONOMIC POWER 123 

From a study of New Jersey " bankruptcies, it was concluded that 
■''in very few cases could it be said that compebition was the cause of 
failure." 

Again in the case of the St. Louis ^^ drug stores, competition played a 
general, but not a primary role: 

Twelve of the thirty druggists stated that competition was a cause of failure. 
In only one case did this seem to be an apparent cause. The principal creditors 
seemed to have had utmost confidence in the owner who failed and were in com- 
plete accord as to the cause of failure in this particular case, stating that chain- 
«tore competition was the only reason. A large chain-store organization had a 
very attractive store directly across the street from the druggist who failed and 
there did not seem to be sufficient business in the immediate neighborhood to 
support two stores. 

A summary background applying to Boston '* is of more general 
implication: 

Competition determines the fate 'ef industries and the firms that survive within 
an industry. The most efficient and well-operated concerns generally survive. 
During the last decade, a multitude of firms have been eliminated during the 
process of the revolutionary changes that have taken place in practically every 
industry. 

Many concerns have broadened the sphere of their activities, numerous manu- 
facturing firms now own retail outlets, and a great number of wholesale establish- 
ments are at present engaged in manufacturing and retailing. Examples of 
retailers who have extended their activities to include the functions of manufactur- 
ing and wholesaling are becoming numerous. The growth of cooperative organiza- 
tions in practically all lines of trade has been rapid. New products have been 
created, new. methods devised, and new types of businesses established to meet the 
changing conditions. Many concerns are now manufacturing and selling merchan- 
dise which even a few years ago would have appeared to be an unprofitable and 
unwise procedure. 

In practically every phase of commercial activity-, expansion has extended 
beyond present needs, and the problem of securing sufficient business to provide 
A profitable existence is difficult. The entrance of many unqualified and ineffi- 
cient business venturers into commercial activities has accentuated the condition. 

Competition serves to eliminate the inefficient and unqualified from business, 
but unfortunately their places are filled by others equally inefficient and un- 
qualified. No effective method of selecting business enterprisers -has yet been 
created, although there is sufficient evidence to prove the need. Thousands of 
business ventures are launched by optimistic individuals without a proper valua- 
tion of the existing competition or their own abilities. The unnecessary duplica- 
tion of retail stores — which fail in larger numbers, comparatively, than any other 
type of enterprise — is widespread and prevents many efficiently managed concerns 
from making a legitimate and just profit. 

There are many examples of several stores striving to secure a share of business 
in a trading area whose total available business is insufficient to warrant the 
existence of more than one store. If four drug stores are within one blocji of each 
other, each endeavoring to obtain all of the available volume of business, which is 
inadequate to support any two of them (a not uncommon occurrence), the advent 
of another is fraught with danger to all, and to succeed, the newcomer must be 
well fortified with resources and endowed with unusual abilities. Generally, it is 
the newcomer who fails to survive, but frequently the old, established firms, strug- 
gling with antiquated methods and relying on past achievements, fail to meet the 
pace set by a new and aggressive competitor utilizing modern methods in the 
operation of his business. 

Lack of sufficient ability, resources, and opportunity to overcome existing com- 
petition is a frequent cause of failure, but in many other cases the inability of 
certain established concerns to match the progressive activities of new and better 
qualified competition is a cause of failure. 

" U. S. Department ot Commerce, Domestic Commerce Series No. .54. 
23 U. S Department of Commerce, Domestic Commerce Series No. 59. 
^* U. S.. Department of Commerce, Domestic Commerce Series No. 09. 



124 



CONCENTRATION OF. ECONOMIC PQWER 



PRODUCTS 

In a previous discussion of merchandising cost problems, the sig- 
nificance of quantity purchases by retailers was emphasized. 

The problem of lines to be handled faces the merchant, and is 
related to his market location, credit, costs, and other factors. In 
the development of N. R. A. retail codes, a controversy arose between 
representatives oi the retail drug and grocery trades over assignment 
of soap. Both claimed proprietary interest in this product. Cur- 
rently, many grocers sell cosmetics and toiletries while some druggists 
stock packaged foods and beverages and even fresh fruits. 

As illustrative of the problems of selling families of products, 
table 118 gives the experience of four meat wholesalers^^ in 1932. 
Selection of customers is involved. It was estimated that the elimina- 
tion of 51 percent of their customers would reduce the sales of product 
A by only 4 percent, but of product I by 25 percent. Concentration 
upon large dealers might recoup the loss upon the first six products, 
and might even increase the wholesalers' total volume, but the sales 
of products G, H, and I might thereby be reduced considerably. 

The production of joint products in the meat industry is inescap- 
able. The beef carcass yields four quarters, and the quarters provide 
smaller specific cuts commonly demanded by the consumer. The 
wholesaler must dispose of the whole carcass; the consumer has 
definite preferences. 



Table 118. 



-Proportions of different products sold to small and large buyers — 4 
wholesalers, 1932 



Products 


Small (per- 
centage) 


Large (per- 
centage) 


A -. - --- - - 


4 
6 
7 
8 
9 
9 
14 
20 
25 


96 


B . - 


94 


C --- 


93 


D ... . 


92 


E . -. 


91 


F - - 


91 


Q .. . . 


86 


H - : ---- 


80 


I ... _ 


75 








All products . . 


9 
51 


91 


Customers .. . 


49 









Consumer preference is illustrated by the tenets of religious creed. 
In addition to pork, kosher markets in Pittsburgh ^^ do not handle 
calves' liver and dried beef. This selectivity tends to add to the price 
which the consumer must pay for desired cuts. Therefore, kosher 
shops charged the highest city prices on round steak, vfeal loin chops, 
lamb shoulder chops, beef rib roast, beef chuck roast, jumbo bologna, 
beef liver, and beef brisket boil. On the one hand, the retailer in a 
Jewish area is aware of the field of customer demand, on the other he 
is faced with high product costs; if his market is a neighborhood of low 
income, his problem of existence is further aggravated. 

Failure of an effort to sell one product in combination with others is 
discussed by Cowan: ^'^ 

2^ Donald K. Q Cowan: "Sales Analysis from the Management Standpoint," University of Chicago 
Journal of Business vol. IX, Nos. 1, 2, 3, and 4, 1936, and vol. X, No. 1, 1937. 

w John H. Cover: "Neighborhood Distribution and Consumption of Meat in Pittsburgh," University of 
Chicago Press, 1932. 

» Donald R. Q. Cowan: Op. cit. 



OONCENTRATION OF ECONOMIC POWER 



125 



Market preferences are as important as consumer preferences in choosing 
products to be sold in combination with others. An interesting example is pro- 
vided by the experience of a manufacturer who produced a fine quality of cream 
cheese and branded it "Excel." Although sold along with other perishable 
and semiperishable foods, this product was a failure for the following reasons: 
(1) The brand name "Philadelphia" is so well established that consumers regard 
it as a special type of cheese. Retailers might be willing to handle Excel Phila- 
delphia Cream Cheese, but not Excel Cream Cheese. (2) Although the price 
of the Philadelphia brand is higher, its producer gives excellent service, taking 
back all of this perishable cheese not sold promptly during warm weather. (3) 
Because the total consumption of cream cheese is small, the retailing of a second 
brand is uneconomical. This experience illustrates the danger of reasoning, 
without investigation, that an almost clear profit may be gained by requiring 
the present sales force and facilities to sell and deliver an additional product. 

In table 119, Cowan summarizes the results of a product-sales study 
of 15 wholesalers. He comments as follows: 

In this same study expenses at 15 wholesale establishments were allocated to 
9 product groups, and the unit exposes of the highest-cost group were found to 
be 3 times those of the lowest-cost group. 

There are several reasons for believing that, in this study, the careful applica- 
tion of these methods gave dependable results. By regrouping of tlie product 
expenses according to the triple classification used in the correlation study, some- 
what similar unit expenses were obtained. Second, gross earnings, which are 
established competitively on each of the nine products, varied above or below 
average earnings in approximately the same manner as the corresponding selling 
costs varied around average selling costs. Third, the method took into consider- 
ation ail the known elements in wholesaling each product, and the resulting 
differences in expenses were not due to arbitrary manipulation. Many expenses be- 
longed entirely to each product while others were divided on such bases as space, 
time, volume, and value. The division of salesmen's time was the most compli- 
cated and, at the same time, the most important allocation because it gave effect 
to the quantities and combinations of different products sold to different classes 
of retailers. Although nearly the same time and expense were required in selling 
an item of each product, there were extreme variations in volume per itepi and 
per interview which * * * were clearly related to expenses as finally allo- 
cated. 

Intricacies of the market, of the product, and of the sales problems 
facing the business proprietor are contained in the references just pre- 
sented. It is so frequently the experience of the manager that his 
errors are apparent only after he has reaped their harvest, that his 
records, bitter reminders of these miscalculations, are destroyed. 
But only through accumulation, coordination, and comparison of 
such records can our successors have the advantage of past experience. 

Table 119. — Relationship of product expense to volume per item and per interview 

[In percentages of average] 



Ranked product-groups 


Volume per 
item 


Volume per 
interview 


Product 
expense 


C 


186 
178 
158 
119 
77 
63 
52 
52 
15 


150 
219 
151 
109 
82 
56 
56 
56 
21 


65 


A 


79 


F.-.. 


64 


B _ 


81 


E :... 


89 


G 


121 


D......:.: 


98 


H-.... 


110 


I 


193 







26265>2 — 11— No. 17- 



-10 



CHAPTER XII 
CREDIT AS A FACTOR IN BUSINESS MORTALITY ^ 

Though credit is a function of sales and of business cost, it is of 
sufficient importance in the experience of failed enterprises to war- 
rant separate treatment. 

In considering capital problems earlier in this section, the sources 
of funds of bankrupts and the types of credit were examined. In 
examining assets and liabilities of failed concerns, reference was made 
to receivables, as well as to credit sources. 

CREDIT RISKS 

Important quaUfications for a credit risk are suggested from the 
study of insolvent drug stores of St. Louis. ^ 

1. Adequate accounting records, as bases for a knowledge of the cost of 
doing business and of the financial status of the enterprise. — It is sug- 
gested that Httle credence should be given to financial statements sub- 
mitted to creditors by debtors unless supported by an adequ'ate set of 
books. 

2. Sound financial structure. — Lack of capital in the conduct of 
business was discussed previously. In one drug store failure in St. 
Louis, the proprietor started business without any capital of his own, 
and with an indebtedness of $6,000. 

Financing of a business at exorbitant interest rates is a certain pre- 
lude to insolvency. In one instance, the proprietor paid 36 percent 
interest on $7,250 borrowed to start in business. The total capital 
was $8,000, and in the year prior to failure, sales aggregated $14,000. 
Interest alone exceeded profits. 

Three St. Louis druggists endorsed notes for each other at a time 
when all were actually insolvent. 

Insufficient working capital results in inability to take advantage 
of trade discounts and adds to the cost of doing business. 

3. Progressive and experienced management, based upon training, 
experience, and personal aptitude and appearance, is a factor elabo- 
rated previously. 

4. Efficient and honest store personnel. — Dishonest or careless and 
ineffective employees are serious detriments to success and the basis 
of a number of failures. 

5. Operating costs. — Excessive costs are illustrated by St. Louis 
drug experience. The average rent paid by the insolvent firms was 
10.6 percent of net sales, and by successful firms, 4.7 percent. 

6. Store location. ^Failed enterpris-es had not considered, in choosing 
their store sites, the potential number of customers (500 families is 
suggested as the minimum patronage), the amount or stability of 

' For a discussion of the capital and credit problems of small business in general, not only of those that 
fail, see pt. Ill below. 
• U. 8. Department of Commerce, Domestic Commerce Series No. 59. 

127 



128 



CXDNCENTRATION OF ECONOMIC POWER 



c'ustomer income, the employment experience of the neighborhood,, 
the number and strength of competitors, or the history of predecessors 
in that location. 

7. Antecedent information. — The history of a firm and of its pro- 
prietor are important in gaging the present crediX risk. Particularly 
■should investigation be made of previous failures, fraud, fire losses, 
cancelation of contracts, heavy personal withdrawals from business, 
inaccurate financial statements, and gambling proclivities. 

Comparison of two similar firms manufacturing cotton textiles,^ 
one insolvent and the other successfully operating, illustrate vital 
differences in strength. The failing concern had $27,500,000 of 
assets, the going concern, $23,500,000. They were competitors 
located in New England, and at one time, had about the same volume 
of sales. 

Table 120. — Comparison of insolvent and successful firms — cotton textile industry 



Dec. 31 


. failed concern 


Type of ratios 


Oct. 


31, successful 
concern 


1922 


1923 


1924 


1922 


1923 


1924 


105 


99 

71 

55 
378 
157 

73 

90 

75 

41 
-5.7 

32.7 

63.1 
4.1 


39 

20 

17 

360 

5;< 

3l 
103 
58 
147 

-18.2 

8.8 

86.1 

5.1 


1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 
10. 
11, 
12. 
13. 


Current assets to current liabilities... 


170 

72 

68 
179 
340 

53 
334 
130 
190 
-6.5 

39.1 

69.4 
1.5 


160 
65 

147 

232 

400 

103 

216 

142 

172 

+ 10.8 

50.7 

48.2 

1.0 


160 


74 


Quick assets to current liabilities 


58 


33 


Sales to fixed assets _ 


126 


178 


Sales to inventories . ... 


238 


82 


Sales to receivables , 


567 


42 


Sales to net worth 


95 


38 




257 


go 


Net worth to fixed assets - 


133 


46 
— 13.0 


Inventories to receivables 

Net profits to net worth. 


238 
-4.3 


36.4 
59.4 


Current assets to total assets _. 

Fixed assets to total assets . . . ... 


44 8 
54. 1 


4.1 


Other assets to total assets 


1.0 









Reference to the current and quick ratios, table 120, suggests that 
neither company was a favorable risk, since the ratios are below the 
200 and 100 percent 'standards, respectively, each year. The sales 
ratios of the failing concern are particularly interesting, Nos. 3 and 6 
showing poor condition, but Nos. 4 and 5 indicating strenuous mana- 
gerial efforts at improvement. The sales to receivables ratio, No. 5, 
suggests success in reducing the proportions of their own credit 
business. 

In 1928, almost 79 percent of the 1,371 Philadelphia* independent 
retail grocers extended credit to customers. The s.trictly cash stores 
accounted for only 15 percent of the total dollar volume of sales. 
Credit stores handled 47.1 percent of their total volume on credit; 
the highest proportion of credit sales was recorded for stores with an 
annual volume of $250,000, or more each. 



CREDIT LOSSES 

Credit losses averaged 1.5 percent of credit sales, or 0.7 percent of 
total sales for the credit stores as a whole. Losses varied inversely 
v^th the size of stores; the range was from 8.3 percent of credit sales 

s Ralph C. Epstein: "The Rise and Fall of Firms in the Automobile Industry," Harvard Business 
Review 2, January 1927. 

* Ralph C. Epstein: The Automobile Industry: Its Economic and Commercial Development, McOraw- 
Hill, Inc., 1928. 



CK)NCENTRATION OF ECONOMIC POWER 



129 



for stores with annual sales of less than $5,000 to 0.2 percent for those 
with $250,000 or more. The loss dropped below 1 percent of credit 
sales for the stores with volumes exceeding $50,000, but with less 
than $100,000. 

In contrasting bankrupt stores wdth going concerns, it was found 
that the failing group extended proportionately twice as much credit 
as solvent enterprises of the same size. 

Failing business concerns in New Jersey ^ in 1929 and 1930, suffered 
credit losses averaging 7.2 percent of credit sales, or 5.3 percent of 
total sales. Installment credit losses averaged 17.1 percent of install- 
ment sales. 

Twenty-six contractors has made 36.9 percent of their total sales 
on open credit and 56.6 percent in the form of installment credit. 
Credit losses were reported for 18, losses on open credit averaging 
16.5 percent of total open credit extended, and instalment losses, 
28.8 percent of that category. Plumbing and heating contractors 
were particularly heavy losers. 

Retail radio stores lost 16.6 percent of their open credit, and 3.6 
percent of their installment credit advances. Almost 4 percent of 
the radio business was done on credit. Automobile dealers suffered 
a loss of 11.7 percent of their open-book credit, and 9.5 percent of 
their installment credit. Eighty-four percent of their business had 
been transacted on credit. 

It is surprising that the furniture stores with 98.9 percent of their 
business on credit lost only 3.6 percent of the open credit sales, and 
^.6 percent of installment sales. However, since repossession of goods 
from deUnquent customers frequently jrielded saleable values, the loss 
was modified. 

The retail average percentage loss on open credit was 4.8 percent 
and on installment credit, 6.5 percent. 

The average for wholesaler bankrupts were as foUows: on open 
credit, 10.8 percent; on instaUment credit, 5.6 percent._ 

A comparison of average bad-debt losses of 1,077 Philadelphia* and 
416 Louisville ^ independent retail grocery stores is given in table 121. 

Table 121. — Average credit losses of ■ Philadelphia and Louisville grocers, 1928 — 
credit losses as percentage of credit sales classified hy amount total sales 





Number of stores 


Percentage loss of credit 
sales 


Total annual sales 


Phila- 
delphia 


Louisville 


Phila 
delphia 


Louisville 


Less than $5,000 . . 


150 
201 
497 
153 
52 
24 


42 

51 
165 
111 
36 
11 


8.3 
6.0 
3.0 
1.6 
.9 
.2 


5.6 


$5,000 to $9,999 - 


2.9 


$10,000 to $24,999 - - 


2.0 


$25 000 to $49 999 - 


1.0 


$50,000 to $99,999 


.6 


$100 000 and over - 


.3 






The extent of the divergence of e> 
the general experience is emphasizf 


cperience 
3d in ta 


of ban! 
ble 122, 


Lrupt fin 
compai 


US from 
'ing the 



5 William A. Rothmann: "Business Births and Deaths," Dun's Review. June 1937. 

6 Robert G. Rodkey : State Bank Failures in Michigan, Michigan Busmess Studies, vol. VII, No. 2, Van . 
of Mich. 1935. ^„ „„„ 

' Twentieth Century Fund: Does Distribution Cost Too Much? 1939. 



130 



CONCENTRATION OF ECONOMIC POWER 



credit losses of Boston ^ bankrupts with those ascertained through 
the Department of Commerce national credit survey. 

TvBLE 122. — Bad-debt losses as percent of total credit sales 



Business 


Bankrupt 
firms 


All firms 


Manufacturers >... . 


3.3 
3.8 
6.4 
14.5 
6.7 


1 n ; 


Wholesalers 


1 ( 


Retailers (merchandise) 


) 

(2) 


Retailers (service) . 


Real estate agents or dealers, builders, and contractors 






All groups 


5.6 


m 





1 Computed on total net sales. 
' No comparable figure available. 

Among Chicago retail bankrupts,^ credit extension was a minor 
problem, except in the furniture business, but even there the per- 
centage of credit sales averaged 38 percent as compared with 69 per- 
cent for solvent concerns. Cash sales approximated the following 
percentages of total in various fields: Wholesale, 55; manufacturing, 
66 ; food retail, 80 ; women's clothing, 89. Other retail groups recorded 
92 percent or more. 

Credit losses ranged as percentages of credit sales from 19 for man- 
ufacturers to 56 for restaurants, but as percentages of total sales, 
from 4 for restaurants to 12 for wholesalers. 

A study of the experience of three packing houses branch offices in 
th« Chicago ^° area disclosed that about 6 percent oi the customers, 
for the period 1926-30, were responsible for losses on uncollectible 
debts, and that the average loss was $1.30 per $1,000 of sales, or 1.3 
percent. 

Table 123. — Number and amount of had debt losses 

[3 branch houses— 5-year period] 





Total 
number 
of cus- 
tomers 


Total dollar 
sales 


Number 
of bad 
debt 
losses 


Bad debt 
losses 

in 
dollars 


Percent 
of cus- 
tomers 
producing 
bad debt 
losses 


Bad debt 

losses per 

$1,000 of 

sales 


Branch house A. 


925 

510 

1,007 


$5,921,423 
3, 090, 085 
6, 072, 753 


55 
17 
74 


$6, 696 
4,520 
8,469 


5.9 
3.3 
7.3 


$1.13 


Branch house B 


1.46 


Branch house C 


1.39 






Combined-.... 


2,442 


15, 084, 261 


146 


19,685 


6.9 


1.30 







As disclosed in table 123, a large proportion, both of number arid of 
amount of loss, occurred among new customers. Almost 60 percent 
of the losses and 25 percent of the amount occurred within the first 
6 months of patronage. The corresponding proportions for the first 
year were 71.2 and 65.7 percent. This experience talHes with the high 
infant mortality rate of retailers. 

* Industry, January 1939. 

• John H. Cover: Business aad Personal Failure and Readjustment in Chicago, University of Chicago, 
August 1933. 

"> Franklin W. Ryan: "Municipal Control of Retail Trade in the United States," Supplement to Na- 
tional Municipal Review, December 1935, vol, XXIV, No. 12. 



CONCENTRATION OF ECONOMIC POWER I3I 

Table 124. — Number and amount of had debt losses according to length of service life 



Length of service life ' 


Number 
of bad 
debt 
losses 


Percent- 
age of 
total 
number 
of losses 
(cumula- 
tive) 


Bad debt 

losses in 
dollars 


Bad debt 

losses per 

$1,000 of 

sales 


Percent- 
age of 
total 

losses in 
dollars . 

(cumula- 
tive) 


1 to 6 months 


87 
17 
13 
9 
3 
3 
7 
2 
2 
3 


59.5 
71.2 
80.1 
86.3 
88.3 
90.4 
95.2 
96.6 
97.9 
100.0 


$4,911 

8,023 

1,153 

1,172 

758 

1,023 

?,062 

150 

364 

69 


$18. 50 

17.60 

2.80 

1.60 

1.10 

1.70 

2.60 

.10 

.10 


24.9 


7 to 12 months. ._ 


65.7 


13tol8months . . 


71.6 


]9to 24 months 1 


77.5 


25 to 30 months . . 


81.3 


31 to 36 months ' 


86.5 


37 to 42 months 


97.0 


43 to 48 months 


97.8 


49 to 54 months 


99.6 


55 to 60 months 


100. 0' 








Combined 


146 




19, 685 


1.30 











1 That is, within the 5-year period covered by this study. 

Though the aggregate losses are greater among purchasers of large 
quantities, the number of losses and the loss per $1,000 of sales are 
larger among customers with small patronage. Relevant to the 
summary in table 124 are the comments upon specific experiences: 

In spite of the fact that one large customer alone was res,ponsible for almost 
20 percent of all the bad debt losses sustained by the three branch houses in the 
3-yeaf period, and that five others produced another 20 percen;t of the losses, 
there was no group of customers buying over $200 per month which had bad' 
debt losses of over $2 per $1,000 of sales. No packer wants to lose $3,750 on a 
single account, but it is probably no worse to take a loss of that amount on the 
business of a group of customers whose total purchases aggregate over $3,000,000 
than to take losses totaling $800 on the business of a group of customers whose 
aggregate purchases amount to less than $150,000. 

The influence of the type oLbusiness is apparent in table 125. 
Table 125. — Customer characteristics according to type of business 



Type of business 


Number 
of cus- 
tomers 


Average 
pur- 
chases 

per cus- 
tomer 


Size of 

average 

order 


Average 
rate of 
turn- 
over 

(months) 


Bad 
debt 
losses 
per 
$1,000 
Of sales 


Percent- 
age of 
. cus- 
tomers 
satis- 
factory 


Meat markets 


514 
489 

479 

222 
48 

182 
45 
91 
10 

362 


$»3^ 369 
11, 150 

661 
1,746 
8,651 
2,952 
. 496 
10, 158 
2, 753 

353 


$27. 08 
24.46 

11.80 
21.82 
34.97 
27.27 
49.35 
54.15 
14.73 
18.78 


?4.3 
28.2 

11.8 
16.4 
31.1 
23.7 
20.1 
22.3 
23.5 


$1.30 
.30 

5.50 
10.27 

.40 
1..70 

.20 
1.00 


6T 


Combination meat and grocery stores ..L. 
Delicatessens, groceries, and other food 

shops 

Restaurants, etc 

Schools, hospitals, institutions 1 

Bakeries _ 

Laundries and cleaners 


66 

27 
26 
53 
58 
18 


Jobbers : ".. 


54 
70 




4.10 


16 








All combined 1 . 


2,442 


6,177 


26.17 


19.1 


1.30 


45 







The first two groups of customers, meat markets and combination 
meat and grocery stores, make purchases averaging twice the per- 
customer patronage of all customers, and, in addition, their service- 
life is about one-third longer than the average of all stores. Deemed 
unsatisfactory, and excluded from the last column, were custorQer& 
who bought no more than $150 of merchandise in any 6-month period^ 



132 



CONCENTRATION OF ECONOMIC POWER 



or who failed to buy for more than two consecutive 6-month 
periods. The bad-debt losses of the restaurant group were par- 
ticularly high. 

For a comparison of customers by size, the number of full-time 
employees has been used as criteria: Small, less than two employees; 
medium, two or three; large, more than three, ^he custoiher ex- 
perience is summarized in table 126. 

Table 126. — Customer characteristics- according to size of store 



Size of store 


Number 
of cus- 
tomers 


Average 
pur- 
chase 

per cus- 
tomer 


Size of 

average 

order 


Rate of 
cus- 
tomeV 
turn- 
over, 
once in— 


Bad 
debt 
losses 
per 
$1,000 
of sales 


Percent- 
age of 

cus- 
tomers 

satis- 
factory 


Meat markets: 

Large , 


130 
211 
173 

90 
161 
238 


$30, 241 
10. 157 
4,608 

28,890 
11, 528 
4,186 


$35. 64 
22.60 
16.73 

33. 48 
22.01 
17.06 


Morttha 
31.8 
24.6 

18.7 

38.5 
30.4 
22.7 


$1. 28 
1.18 
1.96 

11 
.74 
1.50 


75 




■71 


Small - ;.. 

Combination meat and grocery stores: 
Large . - 


43 
83 


Medium 

Small - -- -- 


71 
56 







It is thought that the superior showing of combination stores as to 
life span and bad-debt losses may be due to size, since they have both 
grocery and meat departments. 

"Few customers whose first-month purchases are less than $50 ever 
amount to anything" is a summary related to table 127. 



Table 127. — Gustomer characteristics a 


ccording to size o 


f first-month purchases 


Size of first-month purchases 


Number 
of cus- 
tomers 


Average 
purchases 
per cus- 
tomer 


Size of 

average 

order 


Rate of 
customer 
turn-over; 
once in— 


Bad debt 

losses per 

$1,000 of 

sales 


Percent- 
age of cus- 
tomers 
satisfac- 
tory 


Less than $25 


821 
338 
317 
307 
164 
168 
210 
95 
22 


$491 

962 

2,227 

4,252 

8,322 

9,653 

17, 401 

41, 848 

87,002 


$13.34 
16.19 
18.04 
20.99 
22.28 
23.89 
25.68 
31.48 
54.95 


Movths 
12.4 
16.6 
19.7 
22.5 
25.0,. 
26. € 
29.6 
37.6 
39.2 


$2.25 
2.13 
1.39 

.89 
1.55 
1.46 

.82 
2.07 

.09 


,14 


$25 to .$50 . ._ 


31 


$50 to $100 ... 


48 


$100 to $200 


65 


$200 to $300 - - 


73 


$300 to $500 . 


81 


$500 to $600 ...... 


82 


$1,000 to $2,000 ... 


84 


Over $2,000 . . 


82 







Of the 821 customers purchasing less than $25 the first month, only 
111 bought enough during the 5-year period to justify the term satis- 
factory. The aggregate purchases of this group averaged less than 
$500, with an average order of $13.34. Both the customer turn-over 
and losses are high. 

A chain-independent store comparison appears in table 128. The 
large debt loss ratio of chains is attributed to the failure of one chain 
system, causing a substantial loss to one branch house. 



CONCENTRATION OF ECONOMIC POWER J3^ 

Table 128. — Chain stores and independent markets compared 





- Number 
of cus- 
tomers 


Average 
purchases 
per cus- 
tomer 


Size of 

average 

order 


Rate of 
customer 
turn-over; 
once in— 


Bad debt 

losses per 

$1,000 of 

sales 


Percent- 
age of cus- 
tomers 
satisfac- 
tory 


MEAT MARKETS 

Chain stores: 

Individual accounts - - 


111 
14 


$14, 016 
35,407 


$28. 93 
30.78 


Month i 
22.1 
32.6 


$3.40 
10 


6» 

71 


Central buying .. 




Combined -.-._- . ..- 


125 
389 




29.36 
26.62 


24."6' 


2.63 
.70 


69' 
67- 


Indeoendents 1 .. 


12, 392 




All markets ..- - 


514 


13, 369 


27. 38 


24.3- 


1.30 


67 




COMBINATION MEAT AND GROCERY STORES 

Chain Stores: 

Individual accounts --. 


25 

8 


26, 917 
16, 228 


59.94 
5.75 


29.5 
32.2 


(■) 


72 


Central buying 


75 






Combined 


33 
456 




23.76 
24.58 




0) 
.50 


73 


Independents 


10, 196 


28.1 


66. 


All markets 


489 


11,150 


24.46 


28.2 


.30 


66' 







' None. 

Records inadequate for control of credit extension were common to 
many failing enterprises. Perhaps the extreme of laxness is repre- 
sented in a Pittsburgh neighborhood, as indicated in the following 
quotation: '' 

Typically, records are of the "single pass book" variety, the purchase being 
recorded by the sales person in a small book which is then given the customer for 
safekeeping. One of the retailers uses a modern calculating machine for adding 
up the sales in the "single pass book." Should the customer mislay the book,, 
there would be no duplicate record of purchase, 

THE CREDITOR AND INSOLVENCY 

Though credit is an important instrument of successful business, it is; 
also a factor in insolvency. There is competition in granting as well as 
in seeking it. It may prove the goodwill emissary winning the 
loyalty of a harassed client, and there is a speculative element to risk- 
ing the investment that is not without its thrill. 

But how will the creditor know at what point to withdraw ^rom the 
market in order to conserve his intelrest or minimize his loss? An 
indication is available in the case histories of Chicago bankrupts. 

Where commercial ratings ai^e available the problem is less intricate; 
but we have noted instances in which plausible but misleading state- 
ments from debtors have been made to credit agencies. 

Including all types of business and all forms of organization, 79 
percent of Chicago bankrupts had critical periods prior to application 
for bankruptcy of at least 6 months. About 59 percent were in obvious 
difficulty at least 12 months before action toward dissolution. Only a 
little more than 13 percent had been insolvent 3 months or less. 

It would appear that in most cases sufficient time was available for 
adequate checking as to the credit risk involved. But this very fact is 
a commentary not alone upon credit negligence, but perhaps even 

11 John H. Covqt; "Neighborhood Distribution and Consumption of Meat in Pittsburgh," University 
of Chicago, 1932. 



234 CONCENTRATION OF ECONOMIC POWER 

more significant upon creditor leniency. The individual creditor is 
eager, of course, to retrieve as much as possible of his investment, and 
is keenly aware of the necessity of representing his interests in competi- 
tion with other creditors. But he is also hopeful that his client may 
be experiencing only a temporary embarrassment, and that by with- 
holding pressure the emergency may be successfully weathered. 

There was no evidence of a relationship between the crucial period 
and the amount of assets remaining at the time of petitioning for 
bankruptcy. Assets were depleted either through liquidation in 
an effort to obtain liquid capital for continuing operation, or in 
the satisfaction of the pressed claims of creditors. Similarly, no 
relation was apparent between life span and the critical period. 



CHAPTER XIII 



PERSONAL AFFAIRS COMPLICATING MANAGEMENT 
DIFFICULTIES 

The business machine frequently yields to human frailties. This is 
particularly true of small enterprises. 

In the corporation, the struggle for power, ranging from a battle for 
proxies to despotic control within the management, frequently dis- 
rupts the economic development. In partnerships, friction may lead 
to collapse of the business with loss to the participating individuals. 
In the individual proprietorships, illness with attendant expenses, 
large numbers of dependents, extravagance, indolence, speculation, 
and similar problems have been important factors in failure. 

INCIDENCE OF PERSONAL FACTORS 

Estimates of the importance of domestic and personal factors in 
Boston ' failures are recorded in table 129. 

Table 129. — Percentage of bankrupt concerns affected by adverse domestic and 

personal factors 



Business field 



Manufacturers 

Wholesalers .■... : 

Retailers (merchandise) 

Retailers (service) 

Real-estate agents or dealers, builders, and contractors 

Average . 




ILLNESS AND ITS COSTS 

St. Louis ^ drug store failures were attributed 



Three of the 30 ..„. „« 

directly to illness, while in the cases of 41 of 487 New Jersey ^ bank- 
ruptcies, illness was a major element. Table 130 analyzes the cost of 
illness in 34 New Jersey cases. 

Table 130. — Cost of illness in S4 New Jersey cases 



Classification 


Num- 
ber 


Total cost 

of medical 

care 


Average 

per 
family 


Range 


High 


Low 


Contractors 


3 
2 

I 

19 

8 

1 


$1, 576 

1,790 

700 

21,518 

4,717 

850 


$525 
895 
700 
1,133 
590 
850 


$906 
1,650 

700 
3,500 
1,400 

850 


$275 


Manufacturers. 


140 


Real-estate dealers :. 


700 


Retailers . 


10 


Wage earners and professional persons... . . . 


50 


Wholesalers 


850 






Total 


34 


31,151 


916 


3,500 


10 







' U. S. Department of Commerce, Domestic Commerce Series No. 69. 
' U. S. Department of Commerce, Domestic Commerce Series, No. 59. 
'.U. S. Department of Commerce, Domestic Commerce Series, No. 54. 



135 



136 OONCENTEATION OF ECONOMIC POWER 

Almost 10 percent of the bankruptcies of individual proprietors in 
Chicago were attributable to personal and family affairs, with the 
burden of medical expenses accounting for 3.28 percent, and illness 
of bankrupt, 2.27 percent of all cases. In addition, medical costs 
were contributory factors in almost 4 percent of the cases in which 
other causes were considered paramount, with illness of the bankrupt 
a secondary factor in another 2 percent of the cases. 

Something of the significance of medical costs in the experience of 
proprietors is observed in the following quotation: 

Ratios of medical and dental expenses to total income were computed for 326 
families of individual proprietors. Seventy-three percent of the families spent 
less than one-fifth of their total income for medical and dental expenses. About 
10 percent spent 50 percent or more of their income for medical purposes and 3 
percent spent more than 90 percent of their income for this purpose. The average 
(mean) ratio of expenditures i§ 19.5 percent. The median ratio is 10.4 percent 
and the modal ratio 2.5 percent. The first quartile value is 4.5 percent and the 
third, 21.6 percent. 

These ratios become even more startling when the small incomes of 
the 632 proprietors' families, for whom the information was obtainable, 
is recognized. Incomes as recorded are totals for the family, in- 
cluding the proprietor's withdrawals from business and the earnings 
of other members. One-fourth of the families had incomes between- 
$1,000 and $1,599. Dividing the number of families into fourths, the 
lowest, or first quartile value, is $1,284, the second, or median, $2,004, 
and the third, $2,763. Almost one-half of the families had incomes 
less than $2,000, and 93 percent, less than $5,000. The average 
(mean) medical expense per family was about $438. One-half of all 
cases had expenditures of $200 or more in the year preceding bank- 
ruptcy, and 10 percent from $500 to $550. 

In earlier considerations, reference was made to negligence and 
speculation as personal items affecting the enterprise. 

It is important to recall that the incidence of these costs falls not 
alone upon the proprietor but upon the creditor as well. 

Granting the im.portance of the vagaries of econom.ic life and of 
environm.ental conditions in which the businessm.an is a pawn, it still 
appears probable that not less than one-half of business failures is 
directly chargeable to inadequate m.anagem.ent. And m.ost of the 
dissolutions resulting from, this major factor are the inevitable result 
of the incom.petence and inexperience of proprietors, discernible at 
the time of their assum.ing m.anagerial responsibilities. 

Motives activating their launching of new enterprises are in m.ost 
instances com.m.endable — the desire for independence and for an im.- 
proved standard of living. Nor should subsequent efforts, after fail- 
ure, be condem.ned. But such com.plete ignorance of the requirem.ents 
and problem.s involved is dem.onstrated, that there is desperate need 
of a preconditioning through instruction and apprenticeship. 

Control of capital, usually not the personal property of the m.an- 
ager, is a grave responsibility not to be entrusted to am.ateurs. Too 
frequently, a key to the door and a bland optim.ism. are the chief assets 
of a new proprietor. 

An experienced pilot is essential to guide an enterprise past the 
m.any shoals and through the recurrent storro.s of business life. He 
will make certain, first, that his boat is seaworthy, and then that he 
has adequate m.achines, fuel, crew, and ballast. Only then will he 
feel ready to enter competition for trade. The evidence of this sec- 



CONCENTRATION OP ECONOMIC POWER J 37 

tion of the report is almost incredible in its account of the many land- 
lubbers who attem.pt to operate a m.erchant ship with rowboat oars. 

If establishm.ents com.m.only existed for the lifetim.e of the proprie- 
tor, their life span could be accepted as related to the active period 
of a generation. But this is untenable. In som.e fields 3 of each 10 
newly organized business concerns fail to survive through the first 
12 m.onths, and 1 or 2 m.ore of the 10 dissolve within 24 months. 

The corporate form, of organization, while setting up a legal person 
to outlive the hum.an, fails to elim.inate the personal factor. Fre- 
quently, its longevity advantage over the individual proprietorships 
or partnership appears to be largely in the intricacy of the corpora- 
tion's ownership-m.anagem.ent pattern. The corporation is so involved 
in its share-property rights that adhesions deter the effort toward dis- 
section; and the fcim.e consum.ed by lawyers and the court is credited 
to longevity. 

When a concern successfully weathers the early years, its chances 
of continuance in business are greatly enhanced. A partial im.ro. unity 
appears to be established. 

Consequently, it is iro.portant to distinguish between mortality rates 
relating to new enterprises and those applied to aU concerns in busi- 
ness. In instances, the forro.er, "infant" mortality, accounts for one- 
half of the total turn-over. 

The concerns well-nourished with capital investment appear, in 
general, to have a distinct advantage over the sm.aller enterprises. 
And small establishm.ents* do not tend to grow into larger ones; the 
weaker are elim.inated. 

While depressions and seasonal pressures affect m.ortality, m.ore 
emphasis should be placed upon the long-tim.e tendencies of turn-over. 
The m.ortality problem, is always with us, whether we are of the horse- 
and-buggy, the stream.lined-automobile, or the airplane age. 

There appears to be no conclusive evidence that the sm.all com.- 
munity is m.ore favorable than the city to business survival. Evi- 
dence varies, in some instances supporting the advantage of the 
m.etropolis. 

Human population changes m.ay be a dir'ect factor in determ.ining 
the rate of mortality. This is particularly im.portant as a basic con- 
sideration M^hen proprietors gage their prospects in term.s of business 
prosperity. 

Business experiences are so dynam.ic and their relationships so di- 
verse as to require com.prehensive study of environm..ents and ante- 
cedents as well as of current operations. Conditions vary by area, 
trade, and organization, in tim.e and m^ethods, and with technical 
requirem.ents and consum.er preferences. No local analysis can be 
considered a safe representation of the country as a whole. No 
com.posite picture discloses the individual features. 

The whole of Am.erican life is involved, and the question before us 
is whether the m.aterial waste and the hum.an displacement are 
necessary concom.itants of free enterprise. 



CHAPTER XIV 

GOVERNMENT REGULATION AS A FACTOR IN BUSINESS 

MORTALITY ' 

It is a generally accepted premise that our social relations lag behind 
developments in our economic life. Currently we are conscious of the 
effort of our legislators to catch up with industrial developments. 
In fact, some commentators suggest that we have now entered the era 
of the quantity production of statutes. 

It is not difficult to list important factors which form the basis of 
much of the current business legislation. We are experiencing rapid 
changes in channels of distribution, in business organization, and in 
business practices. We are finding the cost of marketing of products 
excessive. We are experiencing an alinement of business forces upon a 
national basis. We are aware of an expansion of monopoly devices. 
We are cognizant of the restrictions upon consumer purchasing power. 
We have observed increases in unemployment. We are aware of the 
use of legislation as a competitive or security power, and we have even 
come to realize that there is competition between State and Federal 
Governments for jurisdiction over trade and commerce. 

Consequently, it is not surprising to observe opposing pressure 
groups struggling to enact legislation that will promote or restrict 
competition; that will alter or make rigid the existing channels of 
distribution ; that will make price a barometer of the market, or that 
will stabilize it in the hope of assuring profits; that will permit certain 
trade practices as competitive advantages, or prohibit them as monop- 
oly devices; that will use the taxing power for local trade advantages," 
or restrict assessments to the protection of the consumer and sound 
business, or exclusively for the raising of revenue. 

Legislation for the advantage of pressure groups must necessarily 
prove discriminatory and lead to retaliation on behalf of other groups. 
We have reached the time for recognition of the need of careful analysis 
of these problems -and of the effects of regulation. Our new legislation 
should be unified and coordinated, so that its application may be 
similar under all circumstances and the incidence of its effect may be 
foreseen wherever possible. 

As laws require enforcement, their increase in number and applica- 
tion require additions to administrative agencies. When these laws 
are general in character, administrative procedures and interpretations 
frequently have the effect of statutory enactments. On the one hand 
this device provides latitude for the exigencies of each case; on the 
other, it frequently creates misunderstanding and opposition on the 
part of the unsuccessful appellant. Growth of administrative func- 
tions and of personnel is further promoted by the expansion of re- 

1 This chapter was written by Dr. John H. Cover. The survey in this chapter is strictly limited to that 
portion of governmental regulation directly affecting business mortality. It obviously makes no pretense 
of any kind at being a survey of all governmental regulation affecting small business. See in particular the 
bibliographical references in recent publications of the Marketing Laws Survey (in the Federal Work 
Projects Administration). 

139 



140 OONCENTBATION OF ECONOMIC PQWER 

sponsibilities of a business nature undertaken by Government. Ex- 
tension of control is frequently regarded by tbose affected as usurpa- 
tion, particularly in a period of rapid economic and social change. 
Regulations, such as the tariff, are often beneficial to some industries 
or kinds of business and prejudicial to others. In such instances they 
may act as insurance for one group and as an agent of liquidation for 
another. The history of our liquor-prohibition legislation is an 
example of industry's dependence upon social whims. 

PURPOSES OF GOVERNMENT REGULATION 

Some of our business laws were enacted to insure fulfillment of 
contracts between persons, or to prevent enforcement of agreements 
between unequal parties. Many are bas.ed upon the desire of our 
citizens to promote equal opportunity, to protect private and public 
welfare, and to provide the peaceful pursuit of our economic life. 

The*extent to which we tend to regulate our course and to restrict 
our individual initiative is illustrated in the following police order 
in a small town:^ 

Special Notice Regarding Working on Memorial Day, Tuesday, May 30, 

1939 

This is a reminder of the fact that May 30, Memorial Day, is subject to Sabbath 
Day laws. This makes it necessary to secure a permit from local police in order 
to operate before 1 p. m. — and permits will be issued upon such terms and con- 
ditions as he deems reasonable, for such necessary work or labor which in his 
judgment could not be performed on any other day without serious suffering, 
loss, damage, or public inconvenience, if it can be proved that there is an emer- 
gency. 

Statutes covering such restrictions are frequently enacted to con- 
form to the religious tenets of the majority of the townspeople. But, 
in addition,, they are supported by proprietors who wish to prevent 
competitors, otherwise not conformists, from taking advantage of an 
open store on holidays. In opposition, the proprietor denied the 
privilege may regard the regulation, as prejudicial to his business 
interests and a "confiscation of property." 

It is estimated ^ that only 25 of 120 basic activities of retail trade 
can be controlled by municipalities. For instance, the power to fix 
standards of weights and measures was granted Congress by article 
1, section 8, of the Federal Constitution. 

The original divisions of responsibility between the Federal and 
State Governments was largely in terms of foreign commerce and 
interstate commerce on the one hand, and intrastate trade on the 
other. But this cleavage is not clear-cut, as evidence will indicate.* 
In addition, our most recent attempt to solve the liquor problem has 
resulted in the allocation to the States, by constitutional amendment, 
of control which logically should remain within Federal jurisdiction. 

TYPES OF REGULATION 

It has been pointed out that while the theoretical purpose of 
regulation is thfe safeguarding of individual rights and of pubhc wel- 
fare, there is frequently a discriminatory effect upon those to whom a 

* Industry, January 1939. , ^ ^ 

' Franklin W. Ryan: "Municipal Control of Retail Trade in the United States." Supplement to 
National Municipal Review, December 1935. Vol. XXIV, No. 12. 
« T. N. E. C. Hearings, Part 29. 



CONCENTRATION OF ECXJNOMIC POWER 14^ 

prohibition applies. When laws of this kind are passed they impose 
a burden upon concerns that have operated to advantage under 
previous conditions, and may result in failure. This is true regardless 
of the social desirabihty of such statutes. 

Control of entry into or expansion of business. 

In addition to the requirements for corporate charters which differ 
widely as between States, most communities have Ucense and franchise 
requirements' for entry into certain fields of business, ar dealing in 
particular commodities, or services. 

The Ucense requirements may stipulate the minimum capital 
necessary, the qualifications or number of persons employed, the 
location approved, or may include posting of bonds, or payment of 
special fees. 

Franchises, granting certificates of convenience and necessity, 
originally appUed to pubhc utilities, more recently have been extended 
to businesses affected with public interest — milk, ice, goal, and 
trucking. 

Zoning restrictions limit the location of business areas and the sites 
of particular industries. Most cities specify areas for manufacturing, 
wholesale and retail activities. In addition, many prohibit certam 
types, such as liquor stores, from using sites in the environs of schools, 
churches, or residential sections. 

A common form of regulation is applied to commodities and services 
for which certain standards are required. We are acquainted with 
milk, meat, building material, and barber-shop inspection, with the 
registration of securities, and the censorship of theaters. 

In instances, there is complete prohibition, such as the exclusion of 
narcotics, and of the use of white phosphorus in matches. 

A recent new type of prohibition is illustrated in the following 
transient vendor ordinance, No. 175, of Green River, Wyo.: 

Section 1. The practice of going in and upon private residences in the town of 
Green River, Wyo., by solicitors, peddlers, hawkers, itinerant merchants, and 
transient vendors of merchandise, not having been requested or invited so to do 
by the owner or owners, occupant or occupants of said private residences, for the 
purpose of soliciting orders for the sale of goods, wares, and merchandise, and/or 
for the purpose of disposing of and/or peddling or hawking the same, is hereby 
declared to be a nuisance, punishable as such nuisance as a misdemeanor. 

Monopoly and Practices in Restraint of Trade. 

The proprietors of small business, if their various associations and 
trade journals represent their beliefs, have been convinced for the 
past three-quarters of a century that monopolistic practices are an 
important source of their competitive difficulties. 

A summary of complaints made to the Federal Trade Commission 
and the Department of Justice with respect to the Sherman Act 
emphasizes: (1) Price controls, (2) control of distribution channels, 
(3) labor coercion in the nature of racketeering, and (4) miscellaneous 
practices, including control of location, development pi special brands, 
and similar devices.^ These practices, it is claimed, operate unfairly 
against the small, independent producer and merchant, making it 
difficult for him to survive. 

In the experience of the National Recovery Administration,® the 
differences which most frequently gave use to conflict among business* 

' Willard L. Thorp: Testimonir before the Temporary National Economic Committse. ! 

» N. R. A.: Report of the President's Committee of Indiistrial Analysis, February 17, 1037, pp. 204-205. 

262652— 41— No. 17 -11 



142 OONCENTKATION OF EM^'ONOMIC POWER 

men and groups may be summarized as follows: Size, concentriation 
upon market, costs, methods of operation, nature of the demand for 
products or services, service offered, development of prestige. 

In the judgment of Prof. Frank A. Fetter,^ important hindrances to 
the development of individual and independent enterprise are: (1) 
Political measures, such as tariffs and State licenses, (2) technical 
conditions requiring large and exclusive operations, and (3) changes 
in the law of industrial corporations, resulting in mergers, agreements^ 
and new business practices. 

Berle and Means * examined the largest corporations with respect to 
(1) gross assets and found that of 573 independent American corpora- 
tions, 130 reported assets of over $100,000,000 and controlled more 
than 80 percent of the assets of all companies represented, (2) net 
income, and estimated that the largest 200 nonbanking corporations 
received considerably in excess of 45 percent of the net income of all 
corporations, (3) corporate wealth, and estimated that at least 78 
percent of American business wealth is corporate wealth, (4) national 
wealth, and calculated the proportion controlled by the 200 largest 
corporations at a minimum of 22 percent in 1930. In all these cate- 
gories the proportions appear to be increasing. 

The foregoing analyses have been summarized to emphasize the 
imputed relationship between the large corporate organization and 
the special opportunity for business success. The small competitor 
claims that the advantage lies with size in almost every phase of busi- 
ness, quantity purchases, unit costs, integration, extension of market, 
expansion of products, extension of service, facility in financing^ 
development of consumer goodwill, and establishing of prestige through 
advertising and special brands. 

This attitude on the part of the small enterpriser and the general 
public has resulted in two types of legislation: (1) the penalizing 
statute, designed to prevent further combination, and (2) the enabling 
statute, to permit association of enterprises for promotion of common 
interests. 

At first, both types of legislation were sponsored largely by the 
individual State. Antitrust laws had been passed in at least 13 States 
before 1890, but the Federal Government had to accept increased 
responsibility thereafter.® More recently, the second type of Govern- 
ment control has operated by fostering and stimulating the smaller 
business unit. The devices employed are examined in later sections 
dp this report, where it will be interesting to note that the "small"^ 
businessman has set out to "combine." 

Based upon the experience of the local businessm.an and the local 
consumer. States have frequently provided the laboratory for legisla- 
tion subsequently adapted to Federal needs. The struggle of the local 
concern with the national corporation has in the past disclosed many 
practices which have been claimed as prejudicial to competition and 
to the local enterpriser. In order that we may be cognizant of the 
diverse nature of this problem and of its possible relation to mortality, 
it will be well to identify some of the restrictive provisions of many 
State constitutions and of the body of their laws. The general pur- 

' Frank A. Fetter: "Competition or Monopoly," Proceedings of the Academy of Political Science, vol* 
XVIII, No. 1, May 1938, pp. 10O-107. 

8 A. A. Berle, Jr., and Gardiner C. Means: The Modern Corporation and Private Property, 1934. 

' Leverett S. Lyon, Myron W. Watkins. and Victor Abramson: "Government and Economic Life," 
vol. I, ch. X, The Brookings Institution, 1939. 



CXDNCENTRATION OF ECX)NOMIC POWER 143 '. 

poses usually are ft) prevent mon6polistic practices and practices 
detrimental to the status of competitors ; they regulate — 

1 . Capital combinations by consolidation, merger, trust agreement, 
interlocking directorate, intercorporate stockholding, contract, or other 
formal device; 

2. Voluntary associations including pools, trade associations, tr^de 
agreements, codes, and gentlemen's agreements; 

3. Concerted action leading to price fixing, price information, and 
agreement upon terms; 

4. Agreements regarding production quotas, sales, and market 
allocations ; 

5. Paten t'pools, and cross-licensing for the sharing of patent rights; «= 

6. "Blacklisting" practices in exchange of credit information; 

7. Interference with a competitor's access to the market, by 
obstructing channels of distribution, or interfering with materials, 
equipment, or credit; 

8. Agreemjgnts between seller and distributor to exclude another's 
products from their transactions ; 

9. Exclusive dealing, in which distributor agrees not to handle 
goods of a manufacturer's competitor; 

10. Exclusive representation, an arrangement the reverse of item 
above; 

11. Tying contracts compelling a purchaser of one item to purchase 
other goods as well ; 

12. Market boycotts in which there is concerted action to refrain 
from buying or selling; 

13. Contracts not to compete, usually upon disposiD.g of a business; 

14. Predatory practices calculated to injure competitors; 

15. Obstruction, intimidation, and molestation, mcluding sabotage, 
espionage, blocking of credit or supplies, suits in bad faith; 

16. "Bogus" competition, operations through concealed subsidiaries; 

17. Brands and sales forces used for deceptive competition, usually 
called "fightin.g brands" and "flying squadrons"; 

18. Predatory price cutting to injure particular competitors; 

19. Imitative goods, inferior in quality but resembling a competi- 
tor's products; 

20. Disparagement of competitor's character, products, and business 
methods; 

21. The misappropriation of a competitor's formulas, designs, trade 
secrets, and other intangible property ; 

22. Bribery of employees or customers of competitors; 

23. Interference by a third party with a transaction between others. 
Each of these practices has been effective in eliminating enterprises 

from business. The small proprietor is alertly p.ware of their dis- 
criminating nature. He associates them with "big business," with 
"corporations," and with the "interstate dealer." The inter vs. 
intrastate struggle is currently presenting one of our greatest national 
problems, for the local merchant has been seekin.g the aid of his com- 
niunity and State governments against the competition of the "for- 
eign" competitor from the neighboring State. The movement toward 
local isolation can result only in the stagnation of exchange and the 
failure of many enterprises. 



144 CONCENTRATION OF E€ONOMIC POWER 

Interstate and Intrastate Commerce. 

Under article 1, section 8, clause 3 of the Federal Constitution, 
"The Congress shall have power * * * to regulate commerce 
with foreign nations, and among the several States, and with the 
Indian tribes." In an early interpretation of the Supreme Court 
(Gibbons v. Ogden (9 Wheat. 1)), Chief Justice Marshall declared that 
the word "among" means "interm.ingled with" and was restricted to 
that commerce which concerned more States than one. 

Therefore, it would appear clearly established that Federal juris- 
diction covers interstate commerce, and State responsibility, intra- 
state. But unfortunately for o\n- economic welfare and the solvency 
of business enterprise, the case is not so simple. 

As an example of the complexity of the problem, the State of 
Cahfornia applied a "use" tax, levied on storage and use of property, 
to property brought into the State by the Southern Pacific Co. as 
part of its transportation facilities. The railroad was refused an 
injunction and appealed to the "Supreme Court. In a decision of 
January 30, 1939 (Southern Pacific Co. v. Gallagher), the Court con- 
cluded that there was a taxable moment when those articles had 
reached the end of their interstate transportation and had not begun 
to be consumed in interstate operation. At that moment, the tax on 
storage and use — retention and exercise of a right of ownership, 
respectively — was effective.^" 

The use tax is illustrative not alone of the difficulties involved in 
determining lines of demarcation between mterstate and intrastate 
commerce, but, in addition, of recent State activities in support of 
resident business enterprisers. 

Faced with the necessity of raising additional revenue, most States 
have enacted retail sales taxes. These taxes are levied at the time 
of the sale against goods purchased by the consumer. Depending upon 
a number of factors, they are paid by the consumer or by the mer- 
chant or producer. But it proved difficult to collect sales taxes upon 
products shipped to consumers across State lines; moreover, the 
question of jurisdiction over interstate trade was involved. The local 
merchant and producer felt that a discrimination against intrastate 
enterprises existed in the amount of the tax. They were at a dis- 
advantage in competing upon a price basis. Consequently, many 
States enacted use tax laws which applied to the storage or use of 
products within the State. 

So many of the regulations referred to as trade barriers have as an 
original purpose the increase in revenue or the protection of the 
citizens of the State or municipality, that it is difficult to estimate the 
extent of discrimination against nonresidents, the degree of local pro- 
tective-tariff intent, or the restriction upon trade both interstate and 
intrastate. It seems probable that many of these regulations give 
temporary advantages to local business enterprises to the detriment 
of interstate competitors, and that the ultimate effect wiU ^be to 
decrease exchange and to curb business as a whole. The transitional 
step to failure of many enterprises is readily recognized. 

To indicate the relationships involved, a few illustrations should 

suffice: 

Protection of a State's domestic, manufacturers and wholesalers of alcoholic 
beverages takes at least five forms: (1) Lower excise taxes on alcoholic beverages, 

••National Tax Association Bulletin, vol. XXIV, No. 7, April 1939. pp. 218-2^9. 



CX)MCENTRATION OF ECONOMIC POWER 145 

especially wines, which are manufactured from domestic rather than from out-of- 
State or partly out-of-State alcoholic beverages; (2) higher license fees on whole- 
salers who handle imported alcoholic beverages than on those who handle domestic 
products only; (3) special license fees or "certificates of approval;" for nonresident 
manufacturers who wish to ship into States; (4) requirements that a manufacturer 
qualify to do business in the State as a foreign corporation before he can secure a 
license; and (5) explicit or implicit advantages to domestic products given by the 
liquor stores in those States which themselves monopolize the retailing of liquor. 
"Preference to farmer producers of raw materials usable in liquor manufacture 
may take several forms likewise: (1) Lower taxes on wines made from local raw 
materials than on those made from 'foreign' grapes; (2) sale by domestic pro- 
ducers directlj^ to retailers rather than through wholesalers; and (3) requirements 
that a certain percentage of the alcoholic beverage be made from specified products 
grown in the State."" 

Apparently as a means of financing the construction and repair of 
roads and in the interest of highway safety States have estabhshed 
registration requirements, levied taxes upon motor fuel, mileage, and 
gross receipts, and regulated truck dimensions and weight. Only 
9 States grant complete reciprocity to commercial vehicles from other 
States. ^^ To bear the accmnulation of taxes imposed both by the 
home State and States of transit may be such a heavy burden upon 
any one vehicle as to exclude the enterpriser from interstate trade. 
In Ohio, caravaning vehicles are required to obtain "in transit" cer- 
tificates of registration and two plates for each vehicle; $50 is charged 
for the original and $3 for duplicates. Arizona requires a wholesale 
peddler's license. For purposes of resale in counties of more than 
100,000 population, the fee is $500; in other counties, $300; also a 
bond of $5,000 from surety licensed in the State. These regulations 
are not applicable to products grown by the vehicle owner. A mer- 
chant peddler using an automobile is assessed $200 per annum in every 
county and $25 for each assistant.^' 

Laws giving preference to their own products, contractors, laborers, 
or printing for institutions and Government agencies have been 
enacted by almost all States. Indiana requires limestone; Maryland, 
green marble; Missouri, products of her quarries; Oklahoma, local 
mineral and forest products. 

Georgia designates as ** fresh" those eggs produced in Georgia which 
are not decomposed, cold storaged, or processed; each egg brought 
into the State must bear the inscription "shipped". New Jersey 
eggs "contain more vitamins." In 1938-39 10 States spent $2,579,000 
advertising one or more of the following "home" products to "foreign" 
State markets: citrus fruit, dairy products, apples, prunes, potatoes, 
onions, canned sweet corn, blueberries, lobsters, scallops, poultry, 
peaches, pears, wine, olives, and eggs.^* 

The tendency of these regulations is toward isolation. Progress in 
the United States has been aided by free trade among its people and 
specialization in production. A program of self-sufficiency in each 
State would be harmful to all. Michigan wishes to sell its automobiles 
to California and in exchange to purchase California citrus fruit and 
wine. Ohio has mining machinery for the coal mines of West Vir- 
ginia and in return can use West Virginia coal. But in each of these 
instances regulations brought threats of reprisals which, if adopted, 
would have resulted in economic warfare. 

" Eugene F. Melder, "State Trade Walls," Public Affairs Committee, Inc., 1939, pp. 19-20, 
'» W. P. A. Marketing Laws Survey, 1939. 
'« Ibid. 

'< George R. Taylor, Edgar L. and Frederick V. Waugh, Barriers to Internal Trade in Farm Product?, 
n. S. Department Agrioultare, 1930. 



146 CONCENTRATION OF ECONOMIC POWER 

Business enterprisers are aided by an increase in national income 
and in the standard of living of our people. Isolationist and protec- 
tive tariff policies are agencies of business mortality. 

Regulation of Marketing Devices and Practices. 

Kegulation of business practices has increased in importance as 
business organization and procedure have become more complex. We 
frequently think of competition in its price aspects and overlook the 
large number of nonprice elements involved. 

Most Government jurisdictions have enacted statutes referring to 
a large diversity of items ranging from the identification, standardiza- 
tion, selling, transportation, storage, and warehousing of products, 
through financing and security, to marketiilg organization and ex- 
changes. Considerable attention has been focused recently upon 
trade-marks and trade and brand names as identification devices; 
in the same category is deceptive and misleading advertising. Public 
interest has been directed to regulation of installment selling and to 
prevention of coercion in the selection of finance companies. 

With a presentiment that business changes in process might result 
in a heavy toll for small, independent retailers and wholesalers, coop- 
erative efforts have been directed, in the last 8 years, toward enactment 
of statutes with the following ostensible purposes: 

1. Preservation of fair competition. 

2. Preservation of existing channels of distribution, and of their agents; 
manufacturer, wholesaler, independent retailer. 

3. Protection of the consumer and the general public. 

These regulations have both price and nonprice aspects; the price 
restrictions will be discussed in the next session. 

1. There is no agreement as to criteria to determine lines dividing 
"fair" frorii "unfair" competition, and the courts follow the procedure 
of deciding upon the circumstances of each case, considering "reason- 
ableness" in restraint, "intent," and "incidental" discrimination. 

A discrimination working hardship upon the small enterprise is 
charged in the ability of large distributors to purchase commodities 
at reduced prices. This opportunity is available because of the 
advantage to manufacturers of large orders. These orders may 
eliminate or at least reduce some of the selling expense of manu- 
facturers, and brokerage fees are usually dispensed with through 
direct negotiations. Moreover, large distributors may aid in the 
financing of production. The large buyer certainly has bargaining 
advantages in comparison with the small distributor. 

Indirect price reductions have been accomplished in the following 
manners: Advertising and other allowances; service, such as demon- 
strators, rendered by the seller to the buyer; special discount and 
credit policies; large trade-in allowances; allowances of brokerage to 
the buyer; secret rebates; special selling policy, such as cost-plus 
contracts. Some of these special terms are made illegal by the 
Robinson-Patman Act. As an instance, the following quotation refers 
tx) a court decision regarding the acceptance of allowances and dis- 
counts in lieu of brokerage: ^^ 

The United States Supreme Court on January 2, 1940, denied The Great 
Atlantic & Pacific Tea Co.'s petition for a writ of certiorari to review the judgment 
of the United States Circuit Court of Appeals for the Third Circuit affirming the 
Federal Trade Commission's order against The areat Atlantic & Pacific Tea Co. 

w U. 8. Department of Commerce, Domestic Commerce vol. 26, No. 1, January 1940, p. 4. 



OONOENTKATION OF ECONOMIC POWER I47 

directing it to cease and' desist from accepting allowances and discounts in lieu 
of brokerage in violation of section 2 (c) of the Robinson-Patman Act. The 
Commission's order prohibited The Great Atlantic & Pacific Tea Co. from pur- 
chasing commodities at so-called net prices which involved a price concession in 
lieu of brokerage, from accepting so-called quantity discounts, and other types of 
discounts granted in lieu of brokerage, and from accepting discounts and pay- 
ments of aU kinds representing, in whole or in part, brokerage on its own pur- 
chases. 

In affirming the Commission's interpretation of the law, the lower court held 
that the services-rendered clause of section 2 (c) of the act, the brokerage para- 
graph, did not set u,p a condition upon which brokerage could be paid or allowed 
to a buyer on his own purchases, but that the paragraph absolutely prohibited 
the payment of such brokerage. The circuit court also held that paragraph (c) 
was entirely independent of paragraph (a), the general price discrimination para- 
graph of the act, and the provisions of the latter could not be read into the former. 
The court said that paragraph (c) as construed and applied by the Commission 
was not violative of the Constitution. 

This is the second case in which the Supreme Court has refused to review a 
Circuit Court of Appeals decision affirming a Commission order entered under 
section 2 (c) of the Robinson-Patman Act, the other having been in the Biddle 
Purchasing Co. case in which certiorari to the Second Circuit was denied on Octo- 
ber 17, 1938. 

Group-buying organizations, largely through controlled central 
offices, enjoy privileges similar to the large distributor. 

In addition, special merchandise, such as private brands, or special 
grades, qualities and sizes, is available to the large-order buyer. 

2. The traditional channel of distribution connects the manufac- 
turer with the independent wholesaler, occasionally with a broker 
intervening, and the wholesaler with the independent retailer. It 
is natural, therefore, that the independent wholesaler and retailer 
regard integrated business as an agent of destruction. 

Legislative aid is sought against the chain store, mail-order house, 
department store, price-cutting independent retailers, supermarkets, 
vertically integrated distributors and group-buying organizations. 
Perhaps in the future we shall find this antagonism extending to con- 
sumers' cooperatives, farmers' cooperatives, retailer cooperatives, and 
voluntary wholesaler-retailer groups. 

The manufacturer frequently is caught between the desire to assure 
large-scale production through the stable orders of the large dis- 
tributor and the eagerness to continue wide-spread distribution to all 
classes of consumers through the independent -merchant. 

3. The independent claims that policies followed by his large com- 
petitor are likely to result in the elimjnation of the small enterpriser 
and monopolistic domination by the national concern to the detriment 
of the consumer. 

Certain essential types of services and qualities of goods may oe 
dispensed with, it is argued, in the process of price competition. 

Laws are urged to protect the general public against certain dangers 
inherent in mass distribution, particularly in chain-store operation. 
It is contended that, except in metropolitan centers, absentee manage- 
ment has resulted in the underpaying of employees, the concentration 
of economic power, the draining of funds from the community, and an 
indifference toward local problems, charities, and community activi- 
ties. 

The national distributor has denied the charges. Chain enterprises 
particularly have offered evidence in contradiction. 



148 CONCENTRATION OF ECONOMIC POWER 

Regulation oj Price Policies artd Practices. 

Of piime importance in the activities of independent enterprises, 
particularly of retailers and wholesalers, in bringing governmental 
services to their aid, are the resale price maintenance laws, so-called 
"fair trade" regulations; the regulations concerning sales below cost, 
the "unfair practices" acts; statutes controlling price discrimination 
between localities and between buyers; and indirect devices, chain- 
store taxes and special licensing laws. 

In terms of the three contentions used in the immediately preced- 
ing section, "Regulation of marketing devices and practices," the 
problems as they may affect mortality are outlined as follows : 

1. Preservation oj fair competition. — Elimination of price cutting 
and discrimination between buyers are the two leading objectives of 
price regulation. 

A general low price policy is made possible, the antichain group 
contends, by special buying techniques, limited service, cheap fixtures, 
low rentals, and limited lines of merchandise. 

An aggressive price cutting on selected items, called "leaders," 
is aided by choosing certain nationally advertised products, or stand- 
ard products, such as sugar or salt, or products upon which, price 
comparisons are difficult. The amomit of mark-up is important, also, 
since sales on a limited number of articles have been made below m- 
voice cost ; or the mark-ups have been so moderate as to fail on a basis 
of cost allocation to cover selling expense. Claims through advertis- 
ing of a general underselling policy have been patently unfair in many 
instances, or, if true, have earned the hostility of competitors. 

Locality price discrimination has resulted from two general factors. 
In one instance, certain outlets of the supermarket, or limited service, 
type have been low-operating cost units and have been able to aft'ord 
low prices. In contrast, some units have charged low prices as a 
means of developing a competitive advantage, the other units in the 
system carrying the burden. 

.Discrimination between buyers, as recorded in the previous section, 
may result from the economy of dealing with large enterprise, or from 
the bargaining power of large buyers. It is difficult to establish the 
point at which concessions are unwarranted or excessive. The devices 
used are special prices, quantity discount, or volmne discount; in 
addition special selling policies have been employed, such as cost-plus 
contracts. The elimination or diversion of brokerage is essentially 
an indirect price -reduction. 

. 2. Preservation of existing channels. — The relation to price of short- 
cut channels is largely in terms of the elimination of separate steps 
and the saving of costs. There are theoretically fewer mark-ups and 
a conservation of sales and buying effort. 

The chain store, mail-order house, department store, and similarly 
integrated organizations are viewed by the independent wholesaler, 
retailer, and broker and commission merchant as marketing develop- 
ments potentially detrimental to their existence. Aid of Government 
is sought in an effort to equalize competitive opportunity, or, as 
charged by critics, to eliminate competition. 

The manufacturer is concerned in this struggle because he is the 
source of supply on the one hand, or the displaced producer on the 
other. To refuse supplies to large purchasers might lose to the manu- 
facturer not alone a large volume of sales, but, in addition, a basis 



CJONCENTRATION OP ECONOMIC POWER ^49 

for stabilized production. Moreover, the large enterprise might de- 
cide to manufacture a competitive product. Sales to the many small 
concerns are expensive. 

The large distributor is in position to insist upon special terms in- 
cluding drastically cut prices. 

Of concern, also, is the effect of "leader" sales. If the manufac- 
turer's product is used as a special inducement to customers by some 
merchants, others may be reluctant to carry this item. Continued sale 
of a brand at low prices may cheapen it in the consumer's mind and 
lower its prestige. A habit may be established with resultant resist- 
ance when the price is reestablished. 

3. Protection of the consumer and the general public. — The proponents 
of price regulation contend that the consumer and public are misled 
by the tactics described. 

Leader, or **bait" advertising, it is held, induces the customer to 
enter the store where an effort is made to sell other or substitute items 
at inordinately high prices. 

The low prices on some items, in the opinion of opponents of the 
practice, require high charges in general to compensate ; or an inferior 
quality or service is made necessary. 

Ultimate elimination of the small enterpriser would result, his rep- 
resentatives insist, upon a considerably, higher level of prices to the 
consumer, and a lowering of living standard for the general pubUc. 

Most of the States have enacted "fair trade laws" enabhng the 
manufacturer to establish the price of resale in a contract with one or 
more retailers ; when the contract is in effect it is equally binding upon 
all other merchants. A Federal statute, the Miller-Ty dings rider to 
a District of Columbia appropriation biU, is an enabling act faciUtating 
administration of these laws. Retail drug organizations have been 
particularly active in supporting these measures. ^^ 

Many States have passed "unfair trade practices laws" regulating 
sales below cost. The difficulty of defining "cost" has made these 
statutes less enforcible than the resale-price acts. The grocery field 
has been much interested in this type of legislation. 

Price discrimination has received the attention of most States and 
of the Federal Government. The Robinson-Pa tman amendment to 
the Clo 3n Act has been upheld in the courts. 

Chain-store taxes and special licensing laws have been yariously 
enacted. The most frequent tax levyas upon the store itself, in sorne 
jurisdictions, such as Louisiana, applying to the number of outlets in 
the entire country. Tennessee has enacted a levy upon floor area. 
In certain current bills it is openly proposed to forbid the operation of 
the chain-store system. 

Unfortunately, there exist no factual data adequate to a determina- 
tion of a sound poHcy and legislative program. 

The problem is complex, and although there is general agreement 
that discriminating practices should be outlawed, there is available 
currently no basis upon which to determine the line of demarcation 
between efficient, large-scale operation and unfair competition. 

The smaU, independent merchant has observed the tactics of large 
enterprise and of other groups in pressing their special ipiterests and 
desires up)on State and national legislatures. In the last decade the 
growth of pressure organization among some retail trade groups has 

" E. T. Grether: Price Control Under Fair Trade Legislation, Oxford Press, 1939. 



150 CX)NCENTRATION OF ECONOMIC POWER 

resulted in a stampede of legislatures. Since 1931 most of the States 
have enacted resale-price-maintenance laws, passing bills so rapidly 
as to adopt statutes from other States including even typographical 
errors. 

This wave of protective legislation leaves no opportimity for study 
of merits. 

Sine? no adequate, objective study has been made of these problems, 
no conclusion can be reached as to the effect upon public welfare or 
upon the business enterprises of these many laws. Only cautionary 
observations can be made. It is difficult to see how maintained and 
cost-fixed price, if widely applied, can avoid a higher prj^e level and 
a reduction of demand ; these are the elements of reduced patronage 
and insolvency. It is difficult to see an advantage to the pubhc m 
trade restraint by one group as against another. 

StUl more reprehensible is the use of government for private 
advantage. 

GOVERNMENT AID TO BUSINESS 

WhUe there is general familiarity with the extent of Government 
activity in the regulation of business, less recognition is given the wide 
range of benefits derived from other functions. Daily research ^^ 
covers fields as widely divergent as the development of sturdy grain 
and the stabilization of trade. Information flowing from Government 
sources gives the American businessman an advantage in the conduct 
and planning of his enterprise unequaled elsewhere in the world. 

But among the problems barely touched by Government or private 
analysis is the relation of Government aid to business success. 

Gilt-edge invitations. 

It would be enlightening to list the direct forms of assistance spon- 
sored by Government — soU and water conservation, public highways, 
health and police protection; these types are of general benefit to the 
business community. Others would appear, on the surface, to ad- 
vance the interests of limited groups. In this category are tariffs, 
subventions, and bounties. To determine the special as against the 
general welfare involved requires much more information than is cur- 
rently available. 

For immediate purposes, certain special aids and inducements should 
be mentioned as bearing upon the problem of mortality. 

In turning the phrase that the South is the country's economic 
problem No. 1, the following advertisement appeared in many period- 
icals over the names of the Governors of North Carolina, Louisiana, 
Georgia, Mississippi, Florida, Tennessee, Arkansas, South CarolLua, 
and Alabama: 

Economic Opporttinity No. 1 

We, the Governors — invite industry to the Southeastern States. 

Industry seeking lower production costs and better profit possibilities will find 
the Southeast economic opportunity No. 1. A moderate year 'round climate 
makes possible lower living costs for better standards of living, ideal working 
conditions, lower capital investment, and lower production costs. Add to these 
powerful attractions: Unlimited supply of raw materials, ample powers, excellent 
transportation facilities to rich and growing markets, and you will understand 
why industry in ever-increasing volume is moving into the Southeastern States — 
why the Southeast today is economic opportunity No. 1. 

Southeastern Governors' Conference. 



" National Resources Committee, Research— a National Resource. 1. Relation of the Federal Govern- 
ment to Beseu'ch, Washington, December 1938. 



OONCENTRATION OF EOONOMIC POWER I5I 

In addition to advertising, the States have made direct bids to lure 
industry. Chief inducements are tax exemptions for periods of from 
5 to 15 years, and the provision of land, plants, and equipment for 
new industrial firms. 

Property tax exemption on all industrial construction for a period 
of 10 years was approved by Louisiana voters in adopting two arnend- 
ments to the State constitution in 1936. One authorizes municipali- 
ties and parishes to exempt new industries or additions to established 
plants ; the other empowers the Governor to contract with new or de- 
veloping industries for exemptions. ^^ In the period to February 1938, 
53 exemptions had been granted, including oil, kraft pulp and paper, 
public utility, lumber, food manufacturing, chemical and cotton indus- 
tries. It was claimed that 86 new plants had been established.'® 

That there are many liability as well as asset items to be considered 
by industry in studying inducements to migrate is illustrated by the 
situation reported for the State of New Jersey as of late winter, 1938.^° 

New Jersey has in the past 2 years attracted 3,440 new plants, em- 
ploying 52,000 wage earners, according to the State Department of 
Labor. Low corporation taxes have been a factor in the migration of 
industry to the State. The State does not levy a franchise tax on 
industry 50 percent of the rssets of which are inv^es ed in manufac- 
turing, farming, horticulture, or minmg. The corporf.tion tax rate is 
low enough to attract some industries from across the river where the 
franchise tax is considerab,1y higher. New Jersey has no income tax. 
There is no sales tax. 

The State has an intargible property tax. There is also a tax on 
tangible personal property, the statute requiring assessment of true 
value. 

New Jersey ranks among the first 10 States in population although 
it is among the 5 smallest in area. The western section is within the 
radius of such important industrial centers as New York and Phila- 
delphia. In comparison with other States, New Jersey has a rela- 
tively high per capita debt both for the State and its localities. 

Local property taxes are levied at a higher rate than in many of its 
neighboring States. High real-estate taxes aire attributed by observers 
mostly to the inefficient collection laws, and partly to the fact that 
real estate provided most of the tax moneys. 

State debt amounts to about $172,000,000 as against a sinking fund 
of $88,000,000. Because of the high debt in many of the cities, there 
is a relatively high tax rate in those cities as compared with other 
cities of the same population. 

Industry moving to New Jersey would probably weigh as advan- 
tageous the relatively low rate of levy on corporations, the distribution 
advantages of manufacture, and the labor situation which has been 
relatively free from discord. On the other hand a/ sharp eye would 
have to be kept open for real-estate tax rates. 

An interesting commentary on competition through exemption 
which took the form in Pennsylvania of a survey sponsored by the 
State Chamber of Commerce, and which cohdenmed tax increases, 
is quoted from the report.^' 

That industries are leaving Pennsylvania is indisputable. To what extent such 
migrations are due to regional shifts or to natural spreading put of industry, and 

" Business Week: "Vie in Tax Exemption," Mar. 27, 1937. 

'• Business Week: "Diversification Goes South," Feb. 12, 

» Barron's: "New Jersey Bids for Industry," Mar. 14. 1938. 

" Leonard P. Fox: State Taxes and Industrial Growth, Pennsylvania State Chamber of Commerce. 



152 OO^XENTRATION OF ECONOMIC POWER 

would occur regardless of our State tax situation, is a controversial question which 
we shall not attempt to discuss here. 

Early in May of this year we learned that a State chamber of commerce in a 
border State had received 113 requests from industries that desired to move there 
from other States. Of these requests, fully one-half came fom Pennsylvania. 
This is a serious state of affairs, even if some of the industries were undesirable in 
character and their migration would be a good riddance to Pennsylvania. 

Many communities have rued invitations to citizenship after the 
industrial guests have arrived. 

Although it is not the purpose at this point to discuss migration, it 
is important to report conclusions of some investigations. One 
statistical study ^^ concludes that the geographical shift of industry 
between 1899 and 1933 was of less importance than the migration from 
large to small communities. 

The question of the relation of 'taxation to migration has been 
considered statistically in a study "^ of the relative tax burdens, geo- 
graphical contiguity and industrialization of various States. It was 
concluded that "heavy taxation has apparently placed little inhibition 
upon rapid industrial development in prosperous years. Relatively 
light tax burdens * * * have not proved a stimulus to the 
development of industry in years of prosperity." 

Most States have tax exemptions,. though not usually for the entice- 
ment of new industry, but rather to avoid double taxation. States 
seek to avoid both a property tax on land and upon the crop from the 
land; and they try not to jeopardize subsistence needs of the means to 
obtain it.^* 

An example of direct physical assistance is illustrated in the activity 
of Mississippi.-^ 

Tax exemption on property to lure business was authorized in the 
Mississippi State Constitution in 189Q. But the granting of tax 
exemptions was considered inadequate for a satisfactory industrial 
development of the State, and municipalities sought to offer more 
attractive inducements to industries. The town of Booneville was 
the first to offer industry substantial aid by voting a bond issue 
to build a factory to be leased to private enterprise. The State 
supreme court ruled that the act violated the State Constitution 
in that it provided funds in aid of a private corporation (Carothers v. 
Tovm of Booneville, 169 Miss. 511). 

In 1936 the legislature authorized municipalities to own and operate 
manufacturing plants or to sell or lease them for operation by private 
concerns. This legislation followed a report which claimed that "an 
acute economic emergency" existed in the State of Mississippi, and 
that "present public policy demands a program to encourage and pro- 
mote agriculture and industry with industrial expansion for the pro- 
motion of the general public welfare." A test case was ruled upon 
favorably by the State supreme court when it upheld the bond issue 
of the city of Winona for the construction of a mimicipal factory 
building to be leased to a private concern (Albritton v. City of Winona, 
178 So. Miss. 799). The court held that municipal ownership of pri- 

2' Daniel B. Creamer: "Is Industry Decentralizing?" Univ-ersity of Pennsylvania Press, 1935. 

2' George A. Steiner: The Tax System and Industrial Development, Business Research Bulletin No, 
57, University of Illinois, 1938. 

i* Jens P. Jensen: Tax Exemption as a Means of Encouragement to Industry; University of Kansas, 
Kansas Studies in Business. No. 10, May 1929. 

25 M. H. Satterfield: Mississippi Municipalities and Industrial Promotion, Bulletin of the National 
Tax Association, December 1938. 



CONCENTRATION OF ECONOMIC POWER I53 

vate enterprises was a reasonable method to accomplish governmental 
fmictions — care of the poor, relief of unemployed, and the promotion of 
agriculture and industry. 

The procedure in inaugurating industrial prom.otion is as follows: 

1. A municipality, upon petition of 20 percent or more of the 
qualified electors, m.ay m.ake application to the industrial commission 
for a certificate of convenience and necessity to engage in industrial 
enterprise. 

2. The commission determines whether the applicant has sufficient 
means to conduct such an enterpnse without undue burden upon the 
conununity. 

3. Should the application be approved, the comm.ission determines 
the type of enterprise, the am.ount of land acquired and the am.ount of 
land that m.ay be expended; the num.ber of bonds issued, their m.aturity 
dates and the amount of taxes that m.ust be levied to retire the bonds. 

4. Before an industrial plan approved by the comm.ission can be 
put into effect, it must be approved by the qualified electors of the 
municipality. 

In efforts to solve problem.s of unem.ployment distress and business 
depression, m,any governm.ental jurisdictions have enacted legislation 
to stimulate local industrial development. In m.ost instances measures 
used have been com.petitive with other jurisdictions, the effort to gain 
by another's loss. This procedure is inimical to the economic and 
social unity of the United States. 

There is a natural ecOnom.ic progression with population flux, 
business expansion, industrial displacem.ent and teclmical change. 
When new industries appear and older plants expand or migrate 
under these circum.stances the public is benefitted. But when 
artificial, com.petitive stim.ulus is given to m.ovemtent or expansion 
there is grave danger of ultim.ate disorganization, dissolution, and waste. 

SUMMARY 

Rapid changes in our economic and social life have influenced gov- 
emm.ents to attempt by legislation and adm.inistrative action solution 
of problems which are regarded as factors in our inslabilit3^ At the 
sam.e tim.e, business interests haye sought the aid of governm.ent in an 
effort to protect them from, certain practices of competitors, or to 
support them, in com.peting with others. 

As a result there has developed a conglom.erate of statutory pro- 
visions enacted by Federal, State, and local governm.ental agencies, 
supported by pressure groups. There is no objective attem.pt at 
coordination. There have been no adequate analyses of the im.pacts 
of regulations, or of their effects upon the business community or the 
pubHc. 

In m.any instances the com.petition has spread to antagonism 
between and retaliation upon governmental jurisdictions. In the 
milieu are the seeds of economic chaos and of business mortality. 



PART II 

MARKET SECURITY AND PRICE STABILITY 
(SOME PHASES OF COMPETITION IN DISTRIBUTION) 



155 



FOREWORD TO PART H 

Fifty years ago, when a national antitrust policy was enunciated 
in the Sherman Act, the problems of size and monopoly, then as now 
often incorrectly identified, were found chiefly in mining, manufactur- 
ing, and transportation. Activities "in restraint of trade" usually 
took the form of selling practices. of manufacturers, or of methods 
designed to keep competitors out of a field by such means as patents, 
exclusive dealing contracts, boycotts, and other restrictive controls. 
No attention was paid to the fact that the most effective monopoly 
of the time was the small retailor — the general store at the crossroads — 
whose customers were as dependent on this single source of supply as 
the desert inhabitant on his oasis. Even the small town provided 
similar local monopolies in many of the specialized fields >\ftiere the 
market could support only a single store. 

The weakening of these local monopolies, thanks to the railroad, the 
mail-order house, and the automobile, paradoxically brought retail 
distribution within the scope of the student of concentration and 
competitive practices. The same forces which extended trading areas 
created mass distributors, with buying power sufficient to make their 
market position subject to critical scrutiny. And with the growth of 
chain stores and supermarkets", the problem of large versus small 
is nowhere as burning as in retail trade. 

The current report presents data concerning recent trends in the field 
of distribution. It is clear that major changes have been and are 
taking place. While costs of manufacture have been declining, costs 
of distribution have been increasing. We have changed from an 
economy unable to produce all the goods demanded by consumers, 
to one where the vital problem of the businessman is to market the 
goods which he is able to produce. 

This report is limited chiefly to those trends for which statistical 
evidence is available. Part of the conclusion must be that at many 
points, the statistical data are inconclusive. And back of these 
objective measures lie the human struggle for existence, the search for 
effective methods of competition, the cry for legislative aid, and the 
impact of changing techniques arid products on the problem of iselling. 
If they show nothing else, the statistics show that distribution today 
is a complicated process, with no simple standardized pattern, but 
with many methods and processes side by side, fighting for their 
existence. Part of the determination of survival will depend upon the 
concepts of "unfair competition" current in business practice and 
defined in the law. Here ecoiaomic, social, and political values all 
converge, and the future is stillto be determined. 

WiLLAED L. Thorp, 
157 



262652 — 41— No. 17 — —12 



CHAPTER XV 
THE STRUGGLE FOR MARKETING CONTROL ^ 

CHANGING CHANNELS 

Traditional Methods. 

Marketing channels are the methods /used in moving merchandise 
from producers to consumers. There is historical evidence that these 
channels were at one time quite simple. Indeed during the handi- 
craft stage of production, direct sale from producer to consumer 
dominated the marketing of manufactures, many, if not most articles 
being made to order. The formal distribution system of those earlier 
times was limited very largeh'" to market days, to periodical fairs, 
to which producers and consumers alike flocked, and to itinerant 
merchants. There was in addition some international trade, largely 
confined to luxury goods and to essential materials such as salt, iron, 
and spices. 

In the United States, the traditional channels of distribution for 
manufactured goods, with which this study is chiefly concerned, have 
been manufacturer to wholesaler to yetailer, with some use of agents, 
brokers, and factors of various types evident from the first. Indeed 
this traditional system of distribution was characteristic of American 
marketmg until well into the present century. 

The New Era. 

A change in distribution techniques became inevitable with the 
maturing industrial era. Efficiencies of mass production are condi- 
tioned upon volume output, which in its turn must have volume con- 
sumption. A prime essential, the absence of which was a limiting 
factor upon the full flowering of the industrial revolution, was there- 
fore a marketing system which could absorb tlie accelerated distribu- 
tion functions essential to large-scale output. The profit pos- 
sibilities of mass manufacture insured that a way would be 
found to dispose of the output. Pressure was thus automatically 
generated for modernization of marketing channels. It is perhaps 
no great exaggeration to say that the struggle for economic power 
picked out the wholesale marketing system for a battlefield, and 
there the war still rages. 

Marketing Functions.. 

Essentially the struggle is for control over the marketing machin- 
ery — over who shall perform the marketing functions. It should not 
be overlooked, in evaluating this problem, that there are a large 
variety of inescapable marketing functions which must be performed 
by someone. These functions of marketing include assembling, 
buying, or purchasing; advertising and selling; grading, sorting, and 
standardization; transportation and delivery, storage, and warehous- 
ing; financing sales; keeping records, extending credit, and, above all, 
assuming the risks of marketing. There are many other functions 

I Written by Dr. Nathanael H. Engle, Assistant Director, Bureau of Foreign and Domestic Oommerce. 

159 



IQQ CONCENTRATION OP ECONOMIC POWER 

or tasks which the marketing of goods entails and which consumers 
demand. Some marketing agency or person must assume the re- 
sponsibility for seeing that these marketing jobs are done promptly 
and efficiently. Channels of distribution are but agencies or institu- 
tions which perform the functions of marketing in varying degrees, 
some more, some less. The shifting of these functions underlies the 
changing pattern of marketing channels. 

Present Pattern of Marketing. 

The extent of the losses or victopes of competing channels are dif- 
ficult to evaluate precisely smce comprehensive statistical data were 
not available until the 1929 Census of Distribution was taken. Since 
then additional facts have been assembled which permit a closer quan- 
titative scrutiny of the magnitude of the struggle in this field. The 
Census Bureau reports seven different types of distribution channels 
utilized by manufacturers to sell their goods. In 1929, reporting 
manufacturers indicated that 7.4 percent of their sales were negoti- 
ated by agents or brokers of various sorts. By 1935 the ratio had 
increased, to 8.3 percent. Sales to wholesalers dropped from 31.8 
percent of the total to 27.3 percent between 1929 and 1935. Simi- 
larly direct sales to industrial consumers fell from 26 to 24.6 percent 
durmg the same period. Manufacturers reported larger sales through 
wholesale branches which they themselves owned and operated, the 
ratios rising from 18 percent in 1929 to 20.6 percent in 1935. Direct 
sales to retailers also expanded from 20 to 22.9 percent between the 
two dates. Some manufacturers operated their own retail stores but 
the total was small, comprising but 2.4 percent of sales reported by 
manufacturers in 1929 and 2.2 percent in 1935. Despite our con- 
sciousness of house-to-house salemen of brushes, silk hosiery, and 
vacuum sweepers, only 1.8 percent of manufacturers sales were re- 
ported as direct to household consumers in 1929. While there was a 
relatively large increase by 1935, the total was only 2.4 percent in 
that year. 

These general summary data from the census require some modifi- 
cation for the purpose of this discussion. As has been pointed out by 
students of the subject certain limitations inhere in the crude census 
statistics. A refinement of the figures reveals that wholesalers lost 
ground in the percentage of business which they enjoyed from 90 
comparable industries between 1929 and 1935 to the extent of from 
3.1 to 4.1 points depending upon whether a weighted or unweighted 
average is used. The crude census figure shows a loss of 4.5 points.* 

There were, however, variations from one industry to another, and 
in 21 of the 90 industries surveyed by Dr. Thorp, wholesalers actu- 
ally gained some ground. A careful examination of each industry 
would bring out the exact areas within the marketiaig arena wherein 
wholesalers have gained ground and those in which direct selling is 
advancing. There seems to be no clearly defined pattern. 

The significance of these data perhaps lies more in comparison with 
prestatistical days than in the relatively small changes revealed for 
the two recent bench-mark years, that were indeed characterized by 
depression conditions which make conclusions as to trends uncertain 
at best. If it be assumed, as seems reasonable in the light of historical 
evidence, that there was a time 30, 40, or 50 yeacs ago, when the 

« See WiUard L. Thorp: Changing Distribution Channels, the A.merican Economic Review Sup* 
pleinent, vol. XXIX, No. 1. pt. 2, March 1939, pp.. 75-84. 



CONCKNinjATiON OF ECONOMIC POWER 261 

braditioiiai channels of distribution prevailed, wholesalers must have 
handled a much larger share of the total business than they do today. 
In fact there is little doubt that they handled nearly all of the business 
in early days. If this be a reasonable assumption, the decline of 3 
or 4 points in the share of the total business which wholesalers lost 
between 1929 and 1935 may be interpreted as a continuation of a long- 
range downward trend and the importance of the statistics lies in the 
fact that they show wholesalers having but 30 or 40 percent of the 
current volume of trade. Similarly the increasing proportion of 
direct selling both to retailers and through manufacturer-owned 
wholesale branches must be looked upon as the prolongation of trends 
which had their roots in the titanic struggle for control of the marketing 
mechanism. 

Contestants in the Struggle jor Control. 

"Wliolesalers, manufacturers, and retailers are the major groups of 
contestants for control of the marketing mechanism. 

Wholesalers. 

Wholesalers are much misunderstood middlemen. The N. R. A. 
experienca brought out the fact that there was a wide difference of 
opinion even within the trades about what constituted a wholesaler. 
The confusion arises from the fact that the field of wholesaling, as 
covered by the census, includes all agencies which operate in the 
wholesale field, which perform wholesale marketing functions. These 
agencies include agents, brokers, manufacturers who operate their own 
wholesale branches, chain-store systems which maintain their own 
wholesale warehouses, and independent wholesalers. The word 
wholesaler should properly be limited to the independent merchant 
who owns and operates a warehouse, buys most of his stock of mer- 
chandise outright and performs the important storage function, main- 
tains a- staff of salesmen, and sells largely to the retail trade or to 
industrial or institutional buyers. In general the wholesaler performs 
all of the marketing functions, whereas other types of middlemen 
operating in the wholesale market perform only a part of the functions 
or limit their operations to the goods of a particular producer.^ 

Wholesalers had enjoyed a rather large measure of control over 
marketing in the United States from the earliest times. Direct 
descendant of colonial importers, they grew up with the country and 
waxed wealthy and powerful in their growth. It was the wholesalers 
who were the big businessmen of the early nineteenth century. John 
Jacob Astor, for example, a leading wholesaler of his day, is said to 
have been the only millionaire in the United States durmg the first 
decade of the last century. These wholesalers were able to dominate 
the puny manufacturing industries of the early industrial revolution. 
They provided about the only means of disposing of the manufactur- 
ers' output. They had access to greater stores of capital and often 
were able to finance nascent manufacturers. Retailers were largely ofc 
the general store type and had to depend on wholesalers for such 
manufactured goods as they handled. Wholesalers kept pace with the 
changing patterns of trade from rural to urban markets, and from gen- 
eral line to specialty merchandising as long as such changes were slow. 
Thus, with the growth of cities, retail shops developed which were able 

' See nefkman and Engle: "Wholesaling, Principles --nd Practice." ch. 2, The Nature of Wholesaling, 
Ronald Press, 1937. 



IQ2 CONCENTRATION OF ECONOMIC POWER 

to specialize in groceries, in drugs, in dry goods, in hardware, in 
shoes, and in clothing. Wholesalers followed or, perhaps more ac- 
curately, kept pace with these changes, and retained their dominant 
role in the marketing structure until well into the twentieth century. 
Throughout this period the secular trend of consumer demand was up- 
ward. True there were cycles of depression and wars, which had their 
serious reaction upon business, but the rapid growth of population 
and the conquest of a rich continent maintained a pressure of demand 
that justifies the characterization of the era as a sellers' market. 
By this is meant that more and more goods of an ever-widening variety 
were absorbed about as fast as they could be produced. Manufactur- 
ers found little trouble in disposing of their capacity output. Whole- 
salers were eager for more goods to meet the growing demands of re- 
tailers, and retailers found profitable employment in supplying the 
expanding demands of a population which was making rapid strides in 
raising its standard of living. 

Manufacturers . 

The ripening of the industrial revolution to a stage where mass pro- 
duction with its potentially great economies became widespread 
precipitated a change in the dominant status of the wholesaler. The 
manufacturer became more important with his increase in size. He 
gained access to larger volumes of capital through the development 
of corporate financing. He was rapidly assuming proportions which 
freed him from dependence upon the wholesaler. The latter, moreover 
found difficulties in adjusting his operations rapidly enough to the 
vastly accelerated tempo of the new order. Where he had once eagerly 
sought out new products to handle, he was now faced with an amaz- 
ing array of products many of which were essentially identical in their 
use but which manufacturers attempted to differentiate in order to 
secure competitive advantages. Thus friction developed between 
manufacturer and wholesaler, as the latter resisted the pressure to add 
new items when he was stocked adequately with the same goods un(^er 
other names or in other packing. Constantly goaded by the hope of 
increased gain through larger volume with its concomitant lower 
costs, the manufacturer turned from the wholesaler to other channels 
or sought means of compelling cooperation from wholesalers. 

Retailers. 

Retailers, not the old-fashioned country general store type of re- 
tailer, but newer types which were developing as a response to the 
needs of the times, offered one alternative to the manufacturers in 
this crisis. Dissatisfied with the wholesale price structure, or feeling 
that lower prices to consumers would bring increased volume and 
profits, and failing to secure what they considered adequate conces- 
sions from the wholesalers, a new crop of retailers appeared on the 
scene. Direct buying and low prices to consumers with reduced 
services characterized these new retailing types. First came the de- 
partment store", followed quickly by the mail-order houses and the 
chains. More recently supermarkets have made their appearance. - 

These newer types of retailing provided the answer to the prayers 
of mass producers for a system of mass distribution. But they did 
not stop there. Their rapid rise soon placed them in a position to 
compete powerfully for control of the market, not only with whole- 
salers which they displaced, but also with manufacturers. They were 



CONCENTRATION OF ECONOMIC POWER IQ^ 

soon bringing pressure to bear on the mass producers to split their 
profits with th'em. They argued that low costs were possible only by 
volume production and volume production was made possible by their 
large-scale orders. 

NATURE OF THE STRUGGLE 

Competitive Devices. 

Manufacturers had not been idle meanwhile but had sought out 
other methods of competition. They did not relish tod great control 
of their markets either by wholesalers or by the newer types of retailers. 
They found convenient offensive weapons in product differentiation, 
packaging, labeling, branding, and in advertising. National adver- 
tising in particular became a powerful tool in the hands of manufac- 
turers for exercising control over the distribution of products. By 
the widespread and continuous use of advertising, manufacturers were 
able to build up in the consumer's mind recognition, acceptance, and 
even insistence upon his particular product. Retailers, large-scale 
and small, integrated and independent, were then placed under pres- 
sure to stock the nationally advertised items. Wholesalers also felt 
the same pressure as the demand was transmitted to them from the 
retailers. Thus the manufacturer was placed in an advantageous 
position to control his market. Some manufacturers pushed this ad- 
vantage too far by attempting to compel acceptance of an entire line 
in order to secure certain advertised items for which consumer insist- 
ence had been developed. Manufacturers also attempted to reduce 
margins on the grounds that advertised goods require less selling effort 
by wholesalers and retailers. 

Counter-offensives were initiated by both wholesalers and large-scale 
retailers. Both adopted private brands and found manufacturers who 
were willing to make them. Indeed some of the products so supplied 
were manufactured by the national advertisers themselves, glad to 
secure increased volume by this method. The product supplied 
under private brands has frequently been identical in quality with 
that put out by the manufacturer under his nationally known brand. 
To complicate the problem still further some of the private brands 
have also been advertised nationally by the chains, mail-order houses, 
and department stores which have developed them. 

Wholesalers have brought still another weapon into the struggle for 
control of the channels of distributiqn. Raked by the cross-fires of 
direct-selling manufacturers on one flank, and direct-buying retailers 
on the other, wholesalers, in the grocery field particularly, but also in 
several other lines, have turned to closer cooperation with their inde- 
pendent retail customers. So-called voluntary chains have been 
established which have strengthened the competitive position of the 
independent retailers and indirectly bolstered up the wholesalers. 

Legislative Action. 

Despite these efforts the depression of the 1930's caught the inde- 
pendent wholesalers and retailers in a weak position. Feeling that 
the struggle was too great for them, they shifted their ground from 
the economic to the political field and started a legislative offensive 
against their competitors. The chain stores were attacked first by 
the method of taxation. A number of States passed chain-store tax 
laws designed to reduce somewhat the competitive advantage of the 
chains. Such legislatiok had made Uttle headway by the time of the 



164 COiNCKNTKATION OF KOONOMIC POWER 

great depression. The change in the national administration in 1933 
opened the door for more aggressive utilization of legislation. The 
N. R. A. with its codes of fair competition was seized upon as a mech- 
anism for strengthening the position of the wholesaler. The vistas 
thus opened sharpened the appetites of the hungry independent whole- 
saler and retailer for more legislative protection, when the N. R. A. 
was eliminated by the Supreme Court decision in 1935. Both national 
and State legislation followed. The Robinson-Patman Act, the 
Miller-Tydings Act, and the multitude of State fair-trade and unfair- 
practice laws were passed. Chain-store tax legislation also enjoyed 
a recrudescence. 

The struggle on the legislative front followed three difi"crent pat- 
terns. First the legislation was leveled directly at the competing 
institution through tax laws so designed as to reduce profits in the 
hope that the competitor would either have to increase prices or go 
out of business. The two other types of legislation were aimed at 
eliminating alleged unfair advantages or abuses said to be practiced 
by the mass distributors. The attempt to eliminate the alleged buy- 
ing advantages of the large-scale retail organizations was embodied in 
the Robinson-Patman Act. So-called unfair-practice acts atten^ipted 
to freeze the distributive margins of all types of distributors in order 
to protect the margins of the independents, an objective which was 
paralleled by resale price-maintenance legislation passed under the 
guise of fair-trade laws. 

None of these laws appears to have been as effective in achieving the 
objectives of their sponsors as was originally anticipated. They have, 
of course, had varying reactions throughout the country and have un- 
doubtedly aroused greater caution on the part of mass distributors and 
indirectly, if not directly, influenced policy. Some of the laws have 
offered potential danger of backfire, as, for example, the Colorado 
chain-store tax law which was held to apply to a voluntary chain 
group. The loss of brokerage fees and discounts, a chief source of 
income for some of the voluntary groups, has not been in line with 
the expectation of sponsors of these laws. Then, too, the laws have 
contained loopholes, such as that in the Robinson-Patman Act, which 
permits sale to exclusive buyers at savings provided by the law. The 
growth of supermarkets may also be traced in part to ^ax laws on 
the number of stores in a chain which have indirectly encouraged 
fewer and larger stores. 

Apparently the wave of legislation, which was generated in large 
part by depression psychology, has begun to subside somewhat, pos- 
sibly because of reviving business, partly because of its failure to 
accomplish the desired results. A recent study in Michigan revealed 
the fact that large numbers of retailers were not even aware of the 
existence of fair-trade laws in their State. 

Trade Association Activity. 

Much, if not all , of the legislative drive of the post N. R. A. era owed 
its impetus tora new organization consciousness which the N. R. A. 
had generated among independent wholesalers and retailers, as well 
as among business and labor groups generally. Old trade associations 
were rejuvenated, new ones formed, and new members recruited on 
a greatly enlarged scale. Particularly strong national associations 
were forged in the drug and food lines. Many State and regional 
associations also took on new potency during this era. The average 



CONCENTRATION OF ECONOMIC POWER 165 

wholesaler and retailer in the United States now holds membership 
in one or several trade associations. The very large distributor may 
belong to the local association in his field, to the State, and to the 
national organizations. In addition he may hold direct and indirect 
membership in such special-purpose organizations as the National 
Retail Credit Association, National Association of Credit Men, 
Chamber of Commerce of the United States, American Retail Federa- 
tion, and American Management Association. 

Local associations look to the average comer grocer or other small 
retailer or to the local wholesaler for the bulk of their membership. 
Local associations may have as few as 25 or less members although 
some have up to several hundred. State associations in the marketing 
field are frequently federations of local groups. 

The largest national trade association as to membership is the 
National Association of Retail Grocers, which claims well over 40,000 
food merchants ; these are direct members in the State and local asso- 
ciations which comprise this federated organization. In size of staff 
and in scope of activities the National Retail Dry Goods Association 
probably holds first rank; approximately 50 persons serve the needs of 
the some 6,000 department and dry-goods stores which are members. 

On tlie other hand, the largest distributors' association from the 
standpoint of number of affiliated State and local groups is probably 
the National Automobile Dealers Association, to which most of the 
more than 400 State and local associations of automobile retailers 
belong. The National Association of Retail Meat Dealers, formed in 
1885, appears to be the oldest national trade association of retailers, 
while the pioneer wholesale group is the National Wholesale Druggist 
Association, formed in 1882. 

The N. R. A. program encouraged the organization of hundreds of 
new local associations in the field of marketing and a small number 
of national groups, although a considerable proportion are not now 
as active as during the "industrial self-government" days of 1933-35. 
There are today about 3,500 associations of wholesalers and of 
retailers in the United States. In round numbers, 300 of these arc 
interstate and 3,200 intrastate. 

Of the 600 wholesale marketing associations, 200 are national and 
interstate, while 400 are State and local in scope. Only 100 of the 
2,900 retail middlemen's trade associations are national and interstate. 

In the absence of official statistics petimates must be relied upon to 
determine the growth in membership of these marketing associations. 
Between 1929 and 1939 the National Association of Retail Druggists 
expanded from approximately 22,000 to 28,000 members; the National 
Association of Retail Grocers from about 23,000 to over 40,000; the 
National Retail Dry Goods Association from 4,000 to 6,000 members, 
all in round numbers. In the wholesale field the Wholesale Dry 
Goods Institute has from 150 ^to 200 members with no change re- 
ported between 1929 and 1939; the National Electrical Wholesalers 
Association increased from 350 to 500 members between the above 
two dates; the National Food Brokers Association expanded from 850 
to 1,000; and the National American Wholesale Grocers Association 
grew from 1,200 to 1,500 over the same period.* 

While the motivation of this new urge fcr organization was deeply 
tinged by .hopes of legislative action, the functions of these trade 

* Data on trade associations supplied by C. J. Judkins, chief of the Trade Association Section, Bureau 
of Foreign and Domestic Commerce. 



IQQ CX)NCENTRATION OF ECONOMIC POWER 

associations in the marketing field have been much broader. They 
have generally set themselves the goal of service to their trades. Some 
of them have engaged in the study of the internal management prob- 
lems of their members with an eye to increased efficiency. Some have 
encouraged vertical cooperation among wholesalers, retailers, and 
manufacturers, or various combinations of these groups. Most of 
them have struck at imfair trade practices and attempted varying 
degrees of policing their industries. All of them hold frequent con- 
ventions for the purpose of enlightening their members on new de- 
velopments in their trade, and promoting goodwill and greater homo- 
geneity among their groups. Most issue bulletins, while some publish 
periodical journals. All of them engage, to a greater or lesser degree, 
in education and public-relations programs. 

A most important phase of trade association work has been the 
interassociation activities of such groups as the American Trade 
Association Executives and the Council of National Wholesalers' 
Associations. 

Of particular interest is the recently launched National Grocers 
Institute sponsored by the National Association of Retail Grocers. 
This institute, patterned in part after the British Institute of Qertif- 
icated Grocers, seeks to serve the retail grocer through education on 
the job. The ideal is to make the grocer more efiicient, better in- 
formed, and better able to cope with competition. 

There is a very real field for constructive pi emotion of efficient 
marketing by these trade associations. Through the encouragement 
of research and constant, emphasis on the utilization of improved 
methods uncovered by research, trade associations can do a great 
deal to raise the level of marketing efficiency and improve the com- 
petitive position of their members. 

EFFECT OF THE STRUGGLE ON SIZE 

Size of Manufacturing Establishments. 

There is little or no direct statistical evidence which conclusively 
links the changes in distribution channels with changes in the size- 
and economic strength of the dominant competing groups. Indeed 
there may be no such connection. It is nevertheless iriteresting to 
note what has happened to the three groups in the way of changes 
in size and strength. During the last half of the nineteenth century, 
manufacturing increased substantially in the volume of output from 
something over a billion dollars m 1849 to $13,000,000,000 in 1899. 
This achievement was accomplished by somewhat more than a four-. 
fold increase in the number of factories and hand and neighborhood 
industries and by a substantial increase in horsepower consumption. 
Measured in terms of average wage earners employed, however, there 
was little evidence of change, the average number of wage earners per 
year in a single plant varying only from a minimum of 8 to a maximum 
of 12 with 1899 showing 10.3 as the average. 

After the census of 1899, the enumeration of hand and neighbor- 
hood industries was discontinued. Approximately 305,000 establish- 
ments were included in the 19 industries which were classed as hand 
trades in that year and these establishments averaged two wage earners 
each. Excluding this group of establishments, the average number of 
wage earners m factories in 1899 was 22. By 1914 this average had 



CONCENTRATION OF ECONOMIC POWEH IQ'J 

increased to 26 or to 39 if the 96,000 factories with products valued at 
less than $5,000 be excluded. On the latter basis the number of 
factory wage earners in 1929 averaged 42. In that same year, 11.5 
percent of the wage earners were employed in factories with more than 
2,500 workers each, 26.3 percent in factories with 501 to 2,500 employ- 
ees, and 33.0 percent in factories with 101 to 500 workers. In other 
words, over 70 percent of all factory wage earners in 1929 were 
employed by plants which had an average of 101 or more employees 
each. At the other extreme, 45.4 percent of all manufacturing estab- 
lishments employed between 1 and 5 wage earners and together 
accounted for but 3.2 percent of all workers. Much the same dis- 
tribution prevailed in 1935. 

In 1914, factories with products valued between $5,000 and $20,000 
employed but 6 percent of all wage earners, while factories in the 
$100,000 to $1,000,000 class had nearly 43 percent of the wage earners, 
and those with over a million doiL'jra employed 35.3 percent of the 
workers. This latter group had expanded by 1929 to a point where 
it employed 58.3 percent of all miinufacturing wage earners, and 
accounted for 69.2 percent of the total value of all manufactured 
products, although but 5.6 percent of the manufacturing establish- 
ments fell in this class. 

The evidence is clear that manufacturing establishments generally 
have been increasing in size and strength, at least up to 1929. It 
appears certain also that this growth lias been paralleled by the exer- 
tion of more and more control over the channels of distribution by 
manufacturers as a whole. There has been variation between indus- 
tries, and there are, as noted previously, instances in which whole- 
salers have been advancing in strength. On the other hand, there 
have been mergers in the food-manufacturing field, for example, which 
appear to have been prompted largely by hopes of increased efficiency 
from control over the marketing of the products. There are serious 
limitations on the possibilities of gain from this course both in theory 
and in practice,^ but the tendency represents one clear example of a 
larger scale of manufacturing enterprise resulting from the desire for 
more direct control over marketing. 

Wholesalers generally have lost ground and appear to be stUl losing 
business to direct distribution in most trades. On the other hand, 
large-scale retailing has become a more powerful factor in the distri- 
bution picture, the ultimate effect of which upon the manufacturers' 
position is as yet indeterminate. There is evidence in the statistics 
that chain stores have passed their zenith. Their rate of growth 
appears to have slowed down very markedly, whereas the rate of 
growth of independent retailers is decidedly on the mend, both in 
number of stores and in sales volume, if currently available series can 
be relied upon.^ 

Size of Wholesalers' Establishments. 

As noted above it is necessary to look at the wholesaling picture in 
terms of what has happened since 1929 if a quantitative approach is 
desired. This is especially true of data on the size of the wholesaler's 
establishment and trends within the field of wholesaling. Whole- 

« See N. H. Engle: Competitive Forces in the Wholesale Marketing of Prepared Food Products, 
Ph. T>. thesis, University of Michigan, 1929, published by the National Wholesale Grocers' Association— 
The Bulletin, December 1929. 

« Based on estimates of retail-chain and independent-store sales derived from projection of current series 
compiled by the Marketing Research Division of the U. S. Bureau of Foreign and Domestic Commerce. 



168 CONCENTRATION OF ECONOMIC POWER 

salers, as distinguished from the many types of business which operate 
in the wholesale field, including the integrated wholesale departments 
of chains and other large-scale retailing business and the integrated 
wholesale branches of manufacturers and refineries, are of particular 
interest here since they have borne the brunt of the competitive strug- 
gle for control of marketing. There were in 1929 a total of 79,840 
establishments classified as wholesalers with total sales of over 
29K billion dollars. Average sales were $370,000 while the average 
number of employees was about 11 K per establishment. In 1935, the 
nearest compar«,ble classification of wholesalers revealed an increase 
to nearly 90,000 but with greatly reduced total sales of but $17,662,- 
000,000. Average sales were below $200,000 per establishment and the 
average number of employees was about 8K workers per establish- 
ment. Whether due to the influence of the depression, or to com- 
petition, or some other cause, wholesalers were on the average smaller- 
scale operators in 1935 than in 1929, although there was a substantial 
increase in their numbers. 

More specific data on size for general or fuI14ine wholesale mer- 
chants, the so-called typical wholesaler, in the leading wholesale trades 
of groceries, drugs, dry goods, electrical goods, and hardware reveal 
the pattern of distribution as well a§ changes between 1929 and 1935. 

Grocery Trade. 

Wholesale grocers selling a general line of commodities were found in 
both 1929 and 1935 with average sales ranging from $50,000 or less 
to $2,000,000 or more. (See table 1.) In 1929, 12 percent of the 
grocery wholesalers did less than $100,000 each annually, but together 
accounted for only 1 .3 percent of total sales. Seventeen percent of the 
wholesalers had an annual volume of sales between $100,000 and $200,- 
000 and did 4.6 percent of the business. At the highest sales level, 
nearly 4 percent of the establishments had sales of $2,000,000 or more 
each and did 28.6 percent of the total while 7.6 percent of all grocery 
wholesalers sold between $1,000,000 and $2,000,000 each and had 
17.3 percent of the business. 

The pattern for 1935 showed relatively little change. The total 
number of grocery wholesalers, contrary to the general trend for all 
wholesalers, had dropped from 4,776 to 3,210 and sales volume had 
fallen from $2,660,000,000 to $1,707,000,000, but only minor changes 
took place in the size distribution. The very large wholesalers with 
average sales in excess of $2,000,000 had fallen from 188 to 98 or from 
3.9 to 3.1 percent of the total. From 28.6 percent of the total dollar 
sales these largest wholesalers dropped to 24.3 percent in 1935. 
There were no changes in the relative positions of the wholesalers doing 
less than $100,000 annually, while the other groups between these 
extremes, with one exception, registered slight gains. The $500,000 
to $1,000,000 group dropped slightly from its 1929 position. 



OONCENTItATION OF EOONOMIO POWER Igg 

Table 1. — Grocery wholesalers — general line — by size 0/ business, 1929-35 





1929 


1935 


Size group (not sales) 


Establishments 


Net sales 


Establishments 


Net sales 




Num- 
ber 


Percent 


Amount ' 


Percent 


Num- 
ber 


Percent 


Amount ' 


Perceat 


Total 


4,776 


100.0 


$2, 660, 450 


100.0 


3,210 


100.0 


$1, 707. 024 


100.0 






Under $50,000 


215 
356 
815 
794 
1,052 
991 
365 
188 


4.5 
7.5 
17.1 
16.6 
22.0 
20.8 
7.6 
3.9 


5,321 
29, 265 
122, 381 
194, 213 
404, 388 
683, 736 
460, 258 
760,888 


0.2 
1.1 
4.6 
7.3 
15.2 
25.7 
17.3 
28.6 


85 
240 
591 
594 
741 
627 
234 

98 


2.6 
7.5 
18.4 
18.5 
2.3.1 
19.5 
7.3 
3.1 


2,934 
18, 283 
86, 737 
147, 249 
287, 663 
429, 407 
320,062 
414, 689 


0.2 


$50,000 to .l;99,999 


1.1 


$100,000 to $199,999. 


5.1 


$200,000 to $299,999.... 


8.6 


$:500,COO to $499.999 


16.0 


$500,000 to $999,999 


25.1 


$1,000,000 to $1,999,999 

$2,000,000 and over 


18.7 
24 3 







1 Figures in thousands. 

Source: U. S. Bureau of the Census. 

It is noteworthy that size appears to influence distribution costs in 
the grocery trade. The small volume dealers had relatively high 
costs in both 1929 and 1935. The group with sales between $200,000 
and $300,000 hi-d lowest operating costs relative to sales in both 
years. The larger houses showed increasing costs with the very large 
wholesalers having nearly as high costs as the very small. 

Drug Wholesalers. 

In the drug trade there was, in 1929, a total of 488 general-line 
wholesalers doing a combined business of $405,000,000. (See table 2.) 
Nearly 35 percent of these distributors sold less than $200,000 each 
that year, or com.bined sales of but 3K percent of the total for all drug 
wholesalers. Large-scale druggists selling $1,000,000 or more each 
made up 28.1 percent of aU units. The heavy concentration of 
business in the larger houses is revealed in the fact that they held 73.5 
percent of the total volume. The changes registered between 1929 
and 1935 reveal evidence of a trend toward larger size establishments. 
The total number of drug wholesalers had dropped from 488 to 274 
and total sales were down to $298,000,000. The heaviest casualties 
appear in the ranks of those wholesalers with less than $200,000 sales 
volum.e. The total num.ber here had been reduced from 169 to 36 or 
13.1 percent of the total and these 36 did but 1.3 percent of the 1935 
volume of business. Those drug wholesalers selling from. $200,000 to 
$500,000 had dropped from 96 to 61 but the 61 m.ade up a slightly 
larger percentage of the 1935 total. They dropped shghtly in relative 
sales position, however, from 8.0 percent of the total in 1929 to 7.1 
percent in 1935. The next larger group, those with volume between 
$500,000 and a ro.iUion dollars increased in relative importance despite 
the loss of 16 firm.s. They m,ade up 25.6 of all drug distributors and 
accounted for 17.2 percent of the sales. A loss of 30 establishm.ents in 
the $1,000,000 and better, the very largest group, nevertheless, left the 
titans better off relatively than in 1929, with 39 percent of the firms 
and 74,4 percent of the business. 



170 CONCENTRATION OF ECONOMIC POWER 

Table 2. — Drug wholesalers — General line — by size of business, 1929-35 



Size group (net sales) 



1929 



Establishments 



Num- 
ber 



Percent 



Sales 



Amount' Percent 



1935 



Establishments 



Num- 
ber 



Percent 



Sales 



Amount' Percent 



Total 

Under $200,000 

$200,0(10 to $499,999. 
$500,000 to $999,999 
$1,000,000 and over 



488 



100.0 



$405, 358 



100.0 



274 



100.0 



$297, 784 



100.0 



34.6 
19.7 
17.6 
28.1 



12, 354 
32, 396 
62, 806 
297, 802 



3.0 
8.0 
15.5 
73.5 



36 
61 
70 
107 



13.1 
22.3 
25.6 
39.0 



3,809 
21, 308 
51, 237 
221, 430 



1.3 
7.1 
17.2 
74.4 



' Figures in thousands. 

Source: U. S. Bureau of Census. 

Dry Goods Wholesalers. 

The picture in dry goods was somewhat similar to that in drugs 
although dry goods wholesalers suffered more serioiis losses as a group 
dropping from 848 houses with $566,000,000 sales in 1929 to 303 houses 
with $263,000,000 sales in 1935. (See table 3.) There were heavy 
losses in every size group with the Very small houses losing relatively - 
more ground. The large-scale operators with volume of $1,000,000 
and over dropped from 104 in 1929 to 50 in 1935. Relatively they 
improved their position from 12.3 to 16.5 percent of the total houses 
and 69.5 to 74.3 percent of the total business. The total volume done 
by these large-scale houses, however, had fallen from $394,000,000 in 
1929 to $195,000,000 in 1935. 

General-line dry goods wholesalers have faced very heavy competi- 
tion from direct seUing manufacturers on the one hand, and from the 
direct buying chain, mail-order houses, and department stores, on the 
other. With few outstanding exceptions, they have been slow to 
evolve effective techniques for stemming the tide which has been 
flowing against all wholesalers. It has been more difficult to strengthen 
the position of the independent dry goods retailer in the face of the 
newer competition, and without retail outlets, even the stronger 
wholesalers have little hope. 

Hardware Wholesalers. 

Turning to one of the heavier industries, the hardware trade, the 
bulk of the wholesale business, is handled by the larger firm.s although 
the very largest appear to be losing ground relatively. Out of 936 
general-line hardware wholesalers in 1929 with combined volume of 
$664,000,000, 320 or over a third accounted for 83.1 percent of the 
total volume. Of these, 159 firms with sales of one million or more each, 
had nearly two-thirds of the total volume of business. (See table 4.) 
At the lower scale of operation, 376 wholesalers shared but 5 percent 
of the total volume between them. By 1935, there were 599 hardware 
wholesalers v/ith $378,000,000 in sales, a substantial reduction from 
1929. The largest group, those with $1,000,000 sales and over, had 
dropped from 159 houses with 66 percent of the sales to 84 with 57 
percent of the sales. The $500,000 to $1,000,000 group increased 
their relative position from 16.9 to 19.2 percent of sales. The largest 
percentage of gain in sales position was found in the $200,000 to 
$300,000 group which rose from 4 to 7.3 percent of sales, although the 



CONCENTRATION OF ECONOMIC POWER 



171 



$300,000 to $500,000 houses also gained three points from 7.8 to 10.8 
percent of all sales. The smaller of these two groups registered the 
only absolute gain over 1929 in both number of houses and dollar sales 
volume. Apparently the medium-size hardware wholesalers are 
meeting competition in this field somewhat better than are the very- 
large housres. 

Table 3. — Dry goods wholesalers — General line — By size of business, 1929-S6 



Size group (net sales) 



1929 



Establishments 



Num- 
ber 



Percent 



Net sales 



Amount' Percent 



1935 



Establishments 



Num- 
ber 



Percent 



Net sales 



Amount' Percent 



Total - 

Under $50,000- 

$50,000 to $99,999--. 
$100,000 to $199,999. 
$200,000 to $299,999 
$300,000 to $499,999. 
$500,000 to $999,999 
$1,000,000 and over 



848 



100.0 



$566, 374 



100.0 



303 



100.0 



$262, 615 



100.0 



161 
154 
143 
83 
88 
115 
104 



19.0 
18.1 
16.8 
9.8 
10.4 
13.6 
12.3 



4,057 
11, 242 
20, 527 
20, 501 
34, 902 
81, 358 
393. 787 



.7 
2.0 
3.6 
3.6 
6.2 
14.4 
69.5 



10.9 
17.5 
18.8 
10.2 
12.2 
13.9 
16.5 



1,095 
."<, 822 
8,156 
7,569 
14, 615 
32, 310 
195, 048 



.4 
1.4 
3.1 
2.9 
5.6 
12.3 
74.3 



> Figures in thousands. 

Source: U. S. Bureau of the Census. 



Table 4. — Hardware wholesalers — General line — By size of business, 1929-35 



Size group (net sales) 



1929 



Establishments 



Num- 
ber 



Percent 



Net sales 



Amount' Percent 



1935 



Establishments 



Num- 
ber 



Percent 



Net sales 



Amount ' 



Percent 



Total 

Under $50,000 

$50,000 to $99,999... 
$100,000 to $199,999. 
$200,000 to $299,999 
$300,000 to $499,999. 
$500,000 to $999,999. 
$1,000,000 and over 



936 



100.0 



$663, 593 



100.0 



599 



100.0 



$377, 568 



100.0 



105 
115 
156 
108 
132 
161 
159 



11.2 
12.3 
16.7 
11.5 
14.1 
17.2 
17.0 



2,520 
8,619 
22, 704 
26, 664 
52, 048 
112,017 
439, 021 



.4 
1.3 
3.4 
4.0 
7.8 
16.9 
66.2 



24 
63 
109 
113 
104 
102 
84 



4.0 
10.5 
18.2 
18.9 
17.4 
17.0 
14.0 



3 665 
4,483 
15,831 
27, 452 
40.888 
72,418 
8 215, 831 



.2 

1.2 

4.2 

7.3 

10.8 

19.2 

57.1 



1 Thousands of dollars. 

» Sales estimated for 2 establishments. 

' Sales estimated for 49 establishments. 

Source: U. S. Bureau of the Census. 



Electrical Goods Wholesalers. 

General line electrical goods wholesalers suffered drastic reductions 
both in numbers and in sales between 1929 and 1935, falling from 911 
establishments with $414,000,000 sales to 386 with. $184,000,000 sales. 
(See table 5.) In 1929 nearly 47 percent of the establishments had 
less than $200,000 each in sales, and they did but 9.8 percent of the 
total business. While 3.6 percent of the electrical wholesalers did 
$2,000,000 or more and accounted for 25.5 percent of total sales, those 
with sales in excess of $1,000,000 made up 11.4 percent of the whole- 
salers and handled 48.9 percent of the total business. The remaining 



172 



CONCENTRATION OF ECONOMIC POyWER 



41.3 percent of sales was handled by 41.3 percent of the houses with 
average sales falling between $200,000 and $1,000,000. 

By 1935 the pattern revealed substantial changes. The very small 
houses made up about 30 percent of the total and had 9.6 percent of 
the business, slightly less than in 1929. The $2,000,000 and over group 
lost the most ground, declining to 2.1 percent of the houses and to 11.8 
percent of sales. Houses with sales between $1 ,000,000 and $2,000,000 
improved their relative position shghtly. The greatest gain was 
made by the establishments with average sales between $200,000 and 
$1,000,000 which by 1935 had increased to 59.6 percent of all estab- 
lishments and to 53.7 percent of all sales. Electrical goods whole- 
salers have shared with dry goods distributors excessive competition 
from rival channels of distribution. Not only have the larger manu- 
facturers established their own wholesale branches, but wholesalers 
in other lines such as hardware, furniture, and even dry goods and 
drug houses, have stocked electrical goods. In the retail field there 
has been the direct buying, not only of chains, mail-order houses, and 
department stores, but also the invasion of the utilities which' have 
established retail appliance sales outlets in their various offices. All 
of this competition has tended to reduce the market for the services 
of independent general-line wholesalers of electrical goods. 

In concluding this section on the effect of competition upon the size 
of wholesaling establishments there is no clear-cut trend indicated. 
In groceries, hardware, and electrical goods, the largest wholesalers 
have lost ground. In drugs and dry goods the large-scale houses 
have made slight relative gains, due possibly to their greater powers of 
resistance derived from 4heir laige volume and stronger capital posi- 
tion. It is perhaps more significant that all wholesalers have been 
losing ground in each of the leading trades than that certain shifts 
within the size pattern were noticed between 1929 and 1935. There 
is scarcely an adequate basis in the statistics for evaluating significant 
trends since cyclical factors have been in the ascendancy ever since 
1929, and earlier data of a comprehensive character are lacking. The 
same limitation applies to the retailing analysis which follows. 

Table 5. — Electrical goods wholesalers — general line — by size of business, 1929-35 





1929 


1935 


Size group (net sales) 


Establishments 


Net sales 


Establishments 


Net sales 




Number 


Percent 


Amount' 


Percent 


Number 


Percent 


Amount ' 


Percent 


Total 


911 


100.0 


$413, 936 


100.0 


386 


100.0 


$183, 660 


100.0 






Under $200,000 


427 

253 

127 

71 

33 


46.9 

27.8 

13.9 

7.8 

3.6 


40,566 
82, 373 
88,582 
96, 861 
105, 554 


9.8 
19.9 
21.4 
23.4 
25.5 


116 
167 
63 
33 
8 


29.8 
43.3 
16.3 
8.5 
2.1 


17, 594 
65, 346 
43,406 
46,651 
21,663 


9.6 


$200,000 to $499,999 _. 

4500,000 to $999,999- 

11,000,006 to $1,999,999... 
$2,O0G,OO() and over 


30.1 
23.6 
24.9 
11.8 



' Figures in thousands. 

Source: U. S. Bureau of the Census. 



TRENDS IN SIZE OF RETAILING ESTABLISHMENTS 

In discussing trends in size and type of retail outlets, reliance must 
be placed largely on data collected during the past 10 years. (See 
chart 1.) In 1929 there were a million and a half stores in the United 



CONCENTRATION OP ECONOMIC POWER 



173 



States doing some $49,000,000,000 worth of business with a million 
and a half proprietors and s6me four and a half million employees. 
(See table 6.) In its struggle with the great depression, this retail 
army suffered heavy casualties. Business dropped off in dollar volume 
by nearly 50 percent and a. million employees lost their jobs by 1933. 
Two years later retailing had rriade rapid progress toward recovery 
with over 100,000 more stores than in 1929, with sales in excess of 
$33,000,000,000 and with some 500,000 replacements in the army of 
employees, bringing the total well up to the 4,000,000 mark. 

Retailing service is widespread and closely correlated to the needs 
of the people. In 1929 there was on an average 1 store for every 79 
persons, or about 1 store for every 20 families. A slight drop in the 
total number of stores coupled with a continued increase in population 

Chabt I 

TREND OF RETAIL SALES 

1929-1939 (Inclusive) 

® ACTUAL (CENSUS OF BUSINESS) 
• ESTIMATES OF BUREAU OF FOREIGN AND DOMESTIC COMMERCE 



PERCENT OF 1929 VOLUME 



PERCENT OF 1929 VOLUME 



120 
























I20 


100 
80 

eo 


























100 

80 

60 


\ 


\ 


























\ 






^ 


y 








'^ 










V. 


-^ 


^ 














40 


























^t/i 




























?o 


























?0 




1929 


1930 


1931 


1932 


1933 


1934 


1935 


1936 


1937 


1938 


1939 


1940 





• RETAIL SALES FOR THE FIRST 3 MONTHS OF 1940 WERE ABOUT D.D40-3AI 

7 PERCENT ABOVE THE CORRESPONDING PERIOD OF 1939 

brought the average for 1933 to 1 store for every ,82 persons- The 
number of stores rose more rapidly than the population in the 2 
following years, bringing the average up to 1 store for every 77 persons, 
the equivalent of about 19 families. 

Changes in Average Size of Store. 

Returning to the more comprehensive data dealing with size, the 
average retail store sold $31,827 worth of goods m 1929. (See table 
7.) Depression sales averaged $16,406 per store, while the 1935 
recovery carried the figure up to better than $20,000. These are 
over-all figures which need modification at a number of points in 
interest of clarity. 

First of all these changes in dollar sales do not represent a corre- 
sponding change in the actual physical volume of goods handled 
because part of the differer>c6 was due to price changes. Existing 
retail price indexes cannot be used to determine the exapt aijaount^ pf i 

262652— 41— No. 17— — 13 



174 



CONCENTRATION OF ECONOMIC PQWER 



change due to that factor with any degree of accuracy but it is known 
that it was significant. For example, the decHne in retail personnel 
was much less than in sales, which fact in itself is some evidence that 
the physical job of retailing remained larger than the sales drop 
indicated. Then, too, wholesale prices declined and retail prices 
usually follow sooner or later. To illustrate, wholesale grocery dollar 
sales fell off by 44 percent between 1929 and 1933. Price declines 
were responsible for three-quarters of the loss, as physical volume 
fell off by only 11 percent. 

Table 6. — General summary of retail trade, 1929, 1933, and 1936 



Item 



1929 


1933 


1,543 


1,526 


49, 115 


25, 037 


$31, 827 


$16, 406 


78.8 


82.4 


$400 


$204 


21.1 


26.0 


1, 510, 607 


1, 574, 341 


4, 402, 940 


3, 433, 652 


2.9 


2.2 


$11, 155 


$7, 292 



1935 



Number of Stores (thousands) 

Sales (millions of dollars).. 

Average sales volume per store 

Population ner store ' 

Sales per capita 

Expenseaspercent of sales 

Proprietors 

Employees (full- and part-time) 

Average number per store 

Sales per employee 

' Population based on midyear estimates of Bureau of Census 
Source: Bureau of tbe Census; Census. 



1,654 

33,161 

$20, 050 

77.1 

$270 

22.9 

1,511,734 

3, 961, 478 

2.4 

$8,371 



Table 7. — Percentage distribution of retail stores and sales, by size of store, 

1929, 1933, 1936 



Size of store 



Total.. 

$300,000 or more... 

$100,000 to $299,999 

$50,000 to $99,999 

$30,000 to $49,999 

$20,000 to. $29,999....: 

$10,000 to $19,999 

$5,000 to $9,999 

Less than $5,000 

Source: Bureau of the Census 



1929 



Percent 
distribution 



stores Sales 



100.00 



4.05 
8.35 
11.45 
11.24 
20.27 
16.48 
27.18 



100.00 



25.11 
20.06 
17.81 
13. 74 
8.55 
9.04 
3.69 
2.00 



Average 
sales 
per 
store 



$31,827 



815,492 
157, 643 
67, 886 

38. 193 
24, 210 

14. 194 
7,126 
2,342 



1933 



Percent 
distribution 



Stores Sales 



100.00 



.34 
1.62 
3.65 
5.84 
7.12 
17.07 
18.76 
45.60 



Average 
sales 
per 
store 



100.00 



17.88 
15.03 
14.96 
13.35 
10.41 
14.52 
8.15 
5.70 



$16, 406 



862. 720 

152. 210 

67, 242 

37,503 

23, 987 

13, 955 

7,127 

2,051 



1935 



Percent 
distribution 



Stores Sales 



100.00 



.51 
2.25 
4.40 
7.31 
7.90 
17.69 
18.47 
41.47 



Averaee 
sales 
per 
store 



100.00 .$20,050 



813, 405 

156, 477 

68, 670 

38, 152 

24,060 

13, 952 

7,088 

2,151 



In the second place, average sales conceal the variation within the 
different size groups. (See chart II.) In 1929 nearly 1 percent 
of the retail stores accounted for 25 percent of the total sales, with 
average sales per store of $815,492. This group included only those 
stores with sales of $300,000 or more each. At the other extreme, 
stores with sales of less than $5,000 each per year made up 27 percent 
of all stores but accounted for only 2 percent of the total volume of 
business. The average sales of these little fellows — the really small 
businessmen of the country — was but $2,342 per year. 

Trends in Size Since 1929. 

By 1933 the very large stores, those with sales of $300,000 or more, 
made up but one-third of 1 percent of the total number of stores 
and accounted for less than 18 percent of all sales, a drop of more 



CONCENTRATION OF ECONOMIC POWER 



175 



than seven points from 1929. Average sales, however, had increased 
to $862,720. Thus there were fewer, but on the average iai^er, 
stores in this group in 1933 than in 1929. The very small stores on 
the other hand had increased from 27 to over 45 percent of the totals 
with sales volume rising frorn 2 to nearly 6 percent of all retail sal^. 
In general, the incidence of the depression appears to have been to 
increase both percentage of stores and percentage of business done }yy 
small-scale retailers and to reduce the percentage of stores and per^ 
centage of business for larger-scale stores. With the exception of 
the very large stores above noted, the average sales per store remained 
fairly constant for each size group. 

The very large stores recovered slightly by 1935; from one-third to 
one-half of 1 percent of all stores falling in the group with sales of 

Chaet II 

STORES 5 SALES BY SIZE QF BUSINESS GROUPS 
1929-1933-1935 

(2>>f 73f /MW CfNSUS£S <^ Bi/SW£SS) 
P£/fC£MT OF ror/ll P£RC£MT OF TOTAL 

^^\ \9Z9 I I 1933 I r TeSS" 

^0 




1933 




S70^£S 




/ \^^S/IL£S 





f « 5 Si' ? Sf 5' I 

I ' ' . ' ' ? M 

!|ss|||| 

I '^ 5 S Sf 5{- I i 




$300,000 or more. Average sales for this group, however, had dropped 
to sliglitly below the 1929 level. The very small stores lost some 
groun_d but still comprised nearly 42 percent of all stores with nearly 
4K percent of all sales. Retail stores with sales of $10,000 annually 
or less still accounted for 1 1 percent of all retail sales, while 60 percent 
of all stores fell in this group in 1935. While this was a reduction 
from the corresponding figures of nearly 14 percent of sales and over 
64 percent of stores in 1933, these small stores remained substantially 
more important than in 1929 when they did less than 6 percent of 
the business with less than 44 percent of all stores. These figures- 
tell a story of the changing pattern of retailing. 

They represent the readjustments of a dynamic society to the- 
changing tides of the business cycle. They indicate the virility of 
our people when faced with adversity. The general picture, to be sure^ 
tells only a part of the story. A break-down of the facts as between 



176 CONCENTRATION OF ECONOMIC POWER 

different lines of retail trade, and, more important, between different 
and competitive types of retailing is necessary to a full understanding 
of what is taking place in retailing. (See table 8 and chart III.) The 
different reactions of grocery stores, drug stores, automobile agencies, 
general stores, variety stores, and many others inject interesting varia- 
tions into the theme. 

NEW DEVELOPMENTS IN TYPES OF RETAILING 

Chain Stores. 

More important are the changes which are taking place in the types 
t>f retailing outlets. The struggle between chain stores and indepen- 
dents continues to play a dominant role. It is believed by some 
authorities that chain stores of the so-called regular or corporate type 
had reached or were rapidly approaching their zenith by the late 
1920's. Prof. Paul H. Nystrom, of Columbia University, who is also 
president of the Limited Price •Variety Chain Association, and an 
eminent authority on retailing, stated at the Seventh International 
Management Congress held in Washington that in his opinion the 
chains were rapidly approaching a limit or saturation point by the 
close of the last decade. This may have been true of the long-range 
trend of chain-store sales which had a very rapid and spectacular rise 
during the post-war era. Statistics are lacking to verify or disprove 
this contention as to the long-range trend. Cyclical factors have been' 
dominant ever since adequate statistics have been available. They 
ihdicate that the chains maintained their relative strength until well 
into the present decade. In 1929 chains had 9.6 percent of all retail 
stores and did 20 percent of the business of the Nation. By 1933 
they had relatively fewer stores, but accounted for 25.4 percent of 
the business. The 1935 Census revealed a decline to 7.7 percent of 
the stores and 22.8 percent of sales. In the drug trade the chains 
accounted for 18.5 percent of the businefes in 1929 and 25.7 percent in 
1935. Since 1935 they have shown successive declines to 23.4 percent 
thus far in 1938, according to estimates by the Marketing Research 
Division of the Bureau of Foreign and Domestic Commerce. Esti- 
mates for grocery and combination stores indicate that the chains 
had arrived at a turning point in 1932-33 with 36.4 percent of sales. 
Since that time the relative proportion of grocery chain sales to total 
grocery sales has fallen to 33.1 percent, the estimate of the Bureau of 
Foreign and Domestic Commerce, (See chart IV.) 



OONCENTRATION OF ECONOMIC POWER 



177 



Chart III 

TRENDS IN RETAILING 
^929-1938 




INDEX NUAfB£/?S 
ISO 

MO 
I30 
120 
110 
lOO 

SO 

SO 

70 

60 

SO 

40 
30 

1929 1930 



/ft^yf/fZ J:41£S OF G£NL. MEf!CMMD/S£ 
PAS5£/^G£I? AUTOMOB/LE SALES 
LUMBER, BU/LD//^6. e HA/tPtVARE 
VAR/ETY STORE SALES 
DEP'T. STORE SALES 
■JEWELRY STORE SALES 




INDE X /¥UMB ERS 
ISO 

140 
I30 
I20 
110 

too 

90 
60 
70 
60 
SO 

40 

}30 



*F/Ol/fiES EOe 6 MO/^THS 



Chart IV 

CHAIN STORE SALES PROPORTIONS 
1929^1937 



PERCE/VT OF TOTAL 
40 



35 




SO 



1929 



1930 1931 



GROC£/?Y e: COAfB/A//ir/0/V 
STO^£S (f/iog. GRoc£/i) 



PERCENT OF TOTAL 
40 



35 



Cm/N DR(/6 STORES (Eg Lit) 




ALL K//VOS OF 
dl/S/NESS (cEAfSUS) 



1932 



1933 



1934 



1935 



1936 



1937 



30 



25 



20 



^ 



1938 



OD 9S09 



178 



CONCENTRATION OF ECONOMIC POWER 



Table 8. — Trends in retailing as shown by department-store sales, stocks, and col- 
lections; mail order, variety store, rural store and automobile sales, 1929-37 



Department stores: 

Sales, total United States, unadjusted, 

1923-25=100 1 

Stocks, total United States, end of month, 

unadjusted, 1923-25=100 ' 

Collections: 

Installment accounts, percent of ac- 
counts receivable ^ 

Open accounts, percent of accounts 

receivable 2 

Installment sales, New England depart- 
ment stores, percent of total sales ^ 

Mail order and store sales: Total sales, 2 
companies (Montgomery Ward & Co., and 
Sears Roebuck & Co.) (thousands of dol- 
lars) < , 

Variety store sales: Combined sales of 7 chains, 

unadjusted, 1929-31 = 100 2 

Rural sales of general merchandise: Total 

United States, unadjusted, 1929-31 = 100 2.... 

Automobiles: New passenger automobile 

sales, unadjusted, 1929-31 = 100 2 .. 



61, 249 
107.1 
124.9 
144.1 



55. 225 
99.0 
97.8 
93.0 



47, 214 
93.8 
77.4 
62.9 



67 
6! 

14.9 

37.0 

7.4 



38,344 39,775 



1935 1936 



16. 6i 16.7; 

I I 

42. Oi 43.8; 

I I 

7.71 9.01 



88 
67 

17.1 
45.6 



I 49, 639 59, 8781 

80.8 82. 5j 90. sj 91. 5j 

63.1 69. 2I 83. 7} 99.4' 

III 

35.5 43.31 57.6! 83.8, 



■4, 520 
99.5 
114.8 
105.1 



1937 



92 
76 

16.6 
45.6 
9.6 

83. 924 
102.0 
121.7 
108.3 



Sources: ' Board of Governors of the Federal Reserve System; ' Bureau of Foreign and Domestic Com- 
merce; 3 Federal Reserve Bank, Boston; * Reported to Bureau of Foreign and Domestic Commerce. 
Data taken from: Supplement to Survey of Current Business, 1938. 

Table 9. — Number oj chain stores and full-year sales, 1922, 1926, 1928 



Size of store 


1922 


1926 


1928 


Stores 


Sales 


Stores 


Sales 


Stores 


Sales 


Total 


Percent 
100.0 


Percent 
100.0 


Percent 
100.0 


Percent 
100.0 


Percent 
100.0 


Percent 
100.0 






Less than $25,000 . 


14.9 
76.3 
8.8 


1.9 
43.1 
55.0 


13.3 

77.3 
9.4 


1.6 
41.1 
57.3 


13.3 

79.7 

7.0 


2.0 


$25,000 to $249,999 . . . . - 


47.7 


$260,000 and over 


50.3 









Source: Federal Trade Commission, Chain Stores; Size of Stores of Retail Chains, Washington, 1933, 
pp. 25 and 25. 

With the trend toward saturation for chain stores has come a 
tendency toward larger stores. The Federal Trade Commission's 
Chain Store Investigation affords some evidence that the average chain 
store has been increasing in size since 1922. (See table 9.) More 
recently there is reason to believe that this trend has been accentuated 
by two sets of developments, one political and the other economic. 
The taxation of chain stores in many States has led to the reducticai in 
the number of stores .and the concentration of sales efforts in thQ re- 
maining stores, emphasis well designed to increase the average size 
of stores. The economic development has been the appearance and 
rapid growth of super markets. While confined to the food trades, 
this new competition has caused many grocery chains to follow suit 
with giant food markets, another force in the direction of larger aver- 
age sales per store. Statistics on these more recent shifts must wait 
another census or further sample studies, but there is some evidence 
that this movement has been of substantial proportions.^ 

The chain systems have had to contend with more than economic 
adversities since 1929. In addition to the special taxes levied against 

.' See W. L. Thorp: Changing Distribution ChannRls, op. cit., pp. 79-84, 



COXCENTRATION OF ECONOMIC POWER 279 

them in several States, legislation, designed to cripple if not eliminate 
them, has appeared on the statute books of many States, and national 
legislation similarly aimed has been passed, with even more drastic 
laws in contemplation. It is argued by supporters of this type of 
legislation that chains are monopolistic in tendency and destructive 
of competition. Is this true? There is good evidence that chains 
had reached a saturation point several years ago. They also offer 
vigorous competition to each other. There has, moreover, been a 
continuous expansion in the number of independent stores in recent 
years, both in number and in volume. It is argued that this has been 
due to a large number of new stores replacing those which chains have 
driven out of business. There is now and probably always has been 
a very high degree of mortality among independent retailers. There is 
little evidence that it has been speeded up as a result of the chain 
competition. While these facts do not exclude the possibility of local 
monopoly situations, neither do they point to a general monopolistic 
tendency. The important questions from the standpoint of this 
analysis- of trends in type of retail outlets is what is to become of the 
chains, and furthermore if chains are eliminated what types of retail 
outlet may be expected to replace tljem? 

The answers to these questions are not clear but there is abundant 
evidence that chain-store competition has contributed to a more 
efficient retailing system. It has achieved this result directly by 
setting up standards of -economy which have compelled competing 
stores to fall in line, to modernize, to reduce costs, and to lower, prices 
to consumers. Indirectly the chains have contributed to a more 
efficient type of retail outlet by providing a training ground for 
independent merchants. Many efficient and successful independent 
retailers of today served their apprenticeships in chain stores. 

Looking at these facts objectively, the student of m.arketing can 
only question seriously the wisdom, of proposals to eliminate the 
chains on cconom.ic grounds. There m.ay be social or other non- 
econom.ic reasons for the anti-chain movem.ent. To be sure, it is 
often pointed out that there are m,any abuses and unfair practices 
for which the chains are blam.ed. These accusations m.ay have foun- 
dation, but before being accepted at face value they should be care- 
fully scrutinized and weighed against such advantages as just pointed 
out. Legislation, if necessary, m.ight then be directed onlj against 
m.anifestly unsound and unfair practices, anxong chains and inde- 
pendents alike. Should the chains be legislated out of business, how- 
ever, they m.ust inevitably be followed by some other modern system 
of retailing — perhaps super m,arkets, an expansion of cooperative 
groups of retailers and wholesalers, or a greatly enlarged consmners' 
cooperative m.ovem.ent. In any event it seems clear that any wide- 
spread departure from m.ass m,erchandising would be im.possible with- 
out accepting retreat to an outmoded economic system with neither 
large-scale production nor ro.ass distribution. 

Super Markets. 

In the food field there has appeared a new competitor for market- 
ing honors in the form of gigantic food markets. Quickly recognized 
as "an im.portant corltender for a place in the sun, these super markets 
have made rapid progress during the depression. Characterized by 
large buildings, with mam,moth stocks of merejaandise displayed 
prominently and marked with what appear to be low prices, heavily 



180 CONCENTRATION OF ECONOMIC POWER 

advertised, with parking facilities but no other service, these new- 
food outlets have given the chains in particular very sharp competi- 
tion. 

Apart from the breathtaking size of these undertakings there is 
little to distinguish them from the self-service, cash-and-carry chain 
store. They have merely out-chained the chains by their adoption 
of mass-merchandising technique. Indeed, as has been noted earlier, 
many of the chains have gone in for super markets themselves, a 
transition which requires very little change in traditional chain-store 
policy. No official statistics are available on the exact extent of the 
super markets. 

Department Stores. 

One of the earliest types of retail outlet to attempt large-scale dis- 
tribution, the department stores in this country continue to provide 
a significant channel for the m.ass movem.ent of commodities. They 
are essentially large-scale units, relatively few in number. 

There were som.e 4,200 departm.ent stores reported by the census 
in 1935 with sales of nearly three and one-third billion dollars. While 
there is census data for only 3 years, 1929, 1933, and 1935, the Fed- 
eral Reserve Board has provided an index of departm.ent-store^ sales 
for many years. A comparison of estimated total sales of depart- 
ment stores with estimated total retail sales since 1929 indicates some 
measure of stability for that type of retailing. (See table 10 and 
chart V.) Department stores accounted for 8.9 percent of the total 
retail volume of. the country in 1929. Like the chains, departm.ent 
stores showed a rem.arkable ability to adjust them.selves to depression 
conditions. They unproved their relative position in the retail 
structure to 10.6 percent of total sales in 1932. Since then the rela- 
tive strength of departm.ent stores as reflected in. percentage of sales 
diminished until a low point of 9.7 percent was' reached in 1936. A 
slight recovery in relative strength is indicated for more recent years. 
There is some shght evidence in these com.parisons of an inverse cor- 
relation between department store sales and changing business con- 
ditions. The data indicate a tenacity in the face of adversity which 
should exert a significant stabilizing influence on retail trade. 

These sales data do not reveal the whole truth, however as a glance 
at net operating results quickly reveals. (See table 11.) Net oper- 
ating losses rather than gains were characteristic of the depression 
years, with 1932 representing the nadir. Recovery of net earnings 
was not perceptible until 1934, after which there were increases 
through 1936. Results for 1937 reflected the depressing experience 
of the recession of the last half of that year in reduced net earnings. 

No discussion of department stores would be complete which failed 
to comro.ent on the rising level of department-store costs. Studies by 
the Harvard Bureau of Business Research provide well-known evi- 
dence of this trend. There appeal's to be a tendency for costs to 
increase as sales volume increases after the volume has reached sub- 
stantial proportions. (See chart VI.) Other closely related reasons 
are the expansion in expensive services and the addition of new 
departments. 



CONCENTRATION OF ECONOMIC POWER 



181 



Chart V 



DEPARTMENT STORE SALES 
1929-1940 (Una</jusied) 



tNDEX^NUMBERS 
HO 



too 



1923-25 = 100 



INDEX NUMBERS 

no 



100 




1929 1 1930 1 1931 I 1932 i 1933 1 1934 f 1935 I 1936 1 1937 1938 T|939 1 1940 

* r/OUfl£S rOR JANUARY TO APRIL INCLUSIVE 0.0.4C-340 



Chart VI 

RELATION OF OPERATING EXPENSE AND 
SALES VOLUME, DATA FOR 1933 

OPE MT/AfG EWfMSfS fP^JfCEJifrJ QPERAmo EXPENSES (pERC ENt) 



SO 
46 

46 

44 

42 

40 

38 

36 

34 

32 

30 

26 

26 

24 

22 
20 



\-DATA F/!OM "SM/IU SC4L£ 
RETA/UNG AND COV£/!/NC 



4l,000 



$10,000 



® DATA FROM HARVARD BUSINESS 
SCHOOL REPORT AND COi/ER/NG 
D£PARTM£A/T STORES, t 



4100,000 

SALES 



01,000,000 
VOLUME 




^10,000,000 



SO 
46 

46 



182 



CONCBNTKATION OF ECONOMIC POWER 

Table 10. — Department store sales, 1929-39 





Total 

retail sales, 

millions 


Department-store sales 


Year 


Estimated by Bureau 
of Foreign and Do- 
mestic Commerce 


Bureau of the Census 




Millions 


Percent 


Millions 


Percent 


1929 


$49, 115 
42, 849 
35, 414 
25, 597 
25,037 
29, 188 
33, 161 
37, 940 
39, 930 
35,425 
37, 950 


$4, 350 
3,997 
3,606 
2,704 
2,538 
2,841 
3,311 
3,688 
3,856 
3,562 
3,772 


8.9 
9.3 
10.2 
10.6 
10.1 
9.7 
10.0 
9.7 
9.7 
10.1 
9.9 


$4, 361 


8 90 


1930 




1931 _ 






1932 






1933 

1934 


2,538 


10.10 


1935 


3,311 


98 


1936 




1937 






1938 






1939 













Table 11. — Net operating results, percentage of sales, in department stores, 1930-37 



Size of business groups 



193a 


1931 


1932 


1933 


1934 


1935 


1936 


-1.9 


-3.3 


-7.9 


-0.7 


1.3 


L7 


2.2 


-1.7 


-2.8 


-6.6 


.4 


.8 


1.9 


2.2 


.0 


-1.8 


-5.3 


-.8 


.1 


1.9 


2.8 


.7 


-1.2 


-5.5 


-1.5 


.4 


1.1 


2.1 


.5 


-2.2 


-6.1 


-1.1 


-.6 


1.3 


2.2 



W37 



.$500,000 to $1,000,000... 
$1,000,000 to $2,000,000. 
$2,000,000 to $5,000,000. 
$5,000,000 to $10,000,000 
Over $10,000,000 



2.0 
1.4 
1.9 
1.4 
1.0 



Source: Controllers' Congress of the National Retail Dry Goods Association. 

Mail-Order Houses. 

Department stores and chains do not exhaust, by any means, the 
types of retail outlets in which changes are occurring. (See chart 
VII.) Mail-order houses afford one of the most intriguing phases of 
retail distribution since they combine in their current organization 
mq,ny of the characteristics of chains and department stores. The 
leading companies in this field have achieved no little success from 
their venture into the department-store field. Thc\^ have also 
established tire and automobile accessory stores operated on the 
chain-store pattern. At the same time the mail-order business has 
been continued, but efforts have been made to limit it to territories 
not served by branch stores. 

Consumer Cooperatives. 

The upsurge of interest in consumer problems necessitates brief 
mention of consumer cooperatives in this discussion of retailing. 
The movement has had widespread success in England, in Sweden, 
and in other European lands. In the United States its history dates 
back over a century. Its progress has been very limited in this 
country. With all the interest expressed in consumer cooperation in 
recent years the total volume of business done by consumer coopera- 
tives is less than 2 percent of total retail sales. The reasons for the 
small scale of this movement are not far to seek. Retailing in the 
United States has been highly competitive and on the whole quite 
efficient. The competitive thrust of mass distribution has kept 
prices down to such a level that the cooperatives have found little 
opportunity to do a better job. In a few communities, usually where 



CX)NCENTRATION OF ECONOMIC POWER 



183 



racial or religious homogeneity prevails, the movement has been 
successful. In a few lines of merchandise such as gasoline, farm 
supplies, and college textbooks, the consumer cooperatives have made 
some headway. But in the main they remain an insignificant factor 
in the struggle for control of American marketing machinery. 

The Independent Retailer. 

There are two significant trends in retailing that are designed to 
strengthen the position of the independent merchant. The first of 
these is the cooperative chain movement, which may more accurately 
be called distributive cooperation. This movement has spread 
widely in the grocery trade, sometimes sponsored by wholesalers and 
sometimes strictly a retailer's cooperative effort. The very growth 



Chart VII 



MAIL ORDER AND STORE 
1929 - 1940 



SALES 



MILLIONS OF DOLLARS 
100 

90 



80 
70 
60 
50 
40 
SO 



MONTHLY AVERAGE 























/^ 


V. 


















/^ 


J 


^ 


• 
















/ 








■ 


^^^ 












/ 


r 










^ 


N 


< 






/ 


/ 
















\ 


\_ 


^ 


/ 














SOORCE: 


Su/vfy 
Stars n 


s;' Curren 
otbuck « 


t Buiine 
Co.. vrxf /« 


ss- Comtt 
lattyomfr, 


ffiKf 3a/t 
Y wani ( 


I or 

~0. 












1929 


mo 


1931 


1932 


1933 


1934 


1935 


1936 


1937 


1938 


1939 


1940 



MILLIONS OF DOLLARS 
100 

90 



60 
70 
60 
SO 
40 
30 



of the system is some evidence of its utility to intependent retailers to 
whom it offers some of the advantages of the corporate chains while 
permitting the retention of a substantial measure of independent 
autonomy. The second trend is the rapid appearance of neighbor- 
hood shopping centers with adequate parking space for automobiles. 
These centers are springing up in many cities and apparently attract- 
ing a large volume of patronage. While chain stores are not excluded 
from the center, it is common to find independent drug stores, bakeries, 
delicatessens, hardware stores, and many others. 

In conclusion of this section, it appears that one of the most sig- 
nificant changes in retailing is the tendency away from specialization. 
With this is coupled a trend toward larger-scale operations on the 
part of mass distributors, and some expansion of small-scale inde- 
pendents. There appears to be a recrudescence of the old general- 
store concept in retailing. To illustrate, department stores experi- 
mented with grocery departments a number of years ago. The 



Jg4 CONCENTRATION OF ECONOMIC POWER 

experiments proved unprofitable and the idea was abandoned and for 
a number of years grocery and food departments were rarely, if ever, 
found in department stores. More recently new ideas — possibly the 
result of competition — have led to the reestablishment of grocery 
and food departments in department stores throughout the country 
on a much wider spread basis than was ever true in the past. Another 
example is the growth of men's clothing departments in the depart- 
ment-store field. Time was, not so many years ago, when the average 
man would no more think of going into a department store to buy a 
suit of clothes than he would think of flying to Europe. Now both 
concepts are accepted. There is no factual data on this trend for 
earlier years, but a study has been made of the sales of men's clothing 
by department stores which is very illuminating for recent years. 
In 1929, out of total saleg of men's clothing of 767 million dollars, 
82.5 percent was sold through men's clothing and furnishing stores 
and 17.5 percent thi'ough department stores. By 1933, these per- 
centages had changed to 77.7 for men's clothing stores and 22.3 
for department stores. Four years later department stol-es were 
accounting for 23.5 percent of the total. These figures give clear 
indication of a significant competitive change in men's buying habits. 

The foregoing cases are typical of. what has taken place on a wider 
scale throughout the entire field of retailing. In grocery distribution 
there has been a marked tendency away from the old specialized 
grocery store to combination stores which handle groceries, meats, and 
produce. The development of super markets is only the latest stage 
in this trend toward complete food stores under one roof where Mrs. 
Consumer can get all her staple groceries, her meats, her bakery goods, 
her dairy products, and her fresh fruits and vegetables at the same 
time. The widespread use of the automobile for shopping is a 
contributing factor here since parking difficulties make one-stop 
shopping centers with adequate automobile space very attractive to 
the buyer. In the drug field, the common jokes about the odd items 
one can get at the corner drug store are founded on the fact that 
drug stores are rapidly becoming general stores, with their fountains 
and food departments, cigarette and tobacco departments, camera and 
photographic supplies, their books, periodicals and newspapers, as 
well as a host of other commodities unrelated to the original business 
of dispensing drugs. 

This general and widespread recrudescence of the old general-store 
concept appears to be the result of competitive forces at work in the 
field of retailing. How far this move will continue and whether it will 
ultimately be replaced on the return swing of the pendulum by more 
specialization, no one can say at this time. It should be pointed out, 
however, that specialization in merchandising as well as in production 
tends for more efficient methods and for lower costs of operation. 
Unless the more generalized operations can bring about new types of 
economies in distribution which will cut costs and enable the consumer 
to supply his wants at lower prices, they cannot be easily justified nor 
can they be expected to prevail in the long run. 

PKOFITS IN MANUFACTURING, WHOLESALING, AND RETAILING 

What effect, if any, has the struggle far control of marketing chan- 
nels had on the profits earned by the competing groups? Evidence is 
not available to answer this question conclusively. A few studies 



(X)N€ENTRATION OF ECONOMIC POWER 



185 



of profits have been made, chiefly of incorporated companies. Ralph 
C. Epstein's study of "Industrial Profits in the United States" based 
•upon analysis of special tabulations of Federal income-tax returns, 
presents profit data for selected large and small corporations in the 
fields of manufacturing, wholesaling, and retailing for the years 
1924-28. While not perfectly satisfactory these data are offered as 
being on the whole the best available break-down for this analysis. 
For large-scale corporations in each group, his sample contains 
identical corporations while for the small corporations the number 
varied from year to year. 

The data indicate that small manufacturing corporations, defined as 
those with average capital of $171,000 earned slightly higher profits 
on total capital than did large corporations (with average capital 
of $13,500,000). (See table 12.) The 5-year average was 11.2 
percent for small corporations and 10.4 for the large ones. Large 
wholesaling corporations with average capital of nearly $2,000,000 
averaged profits of slightly over 9.1 percent of total capital in the 
years 1924-28. In 1924 the 397 small wholesale corporations with 
average capital of $138,000 earned 12.4 percent on their capital, while 
in 1928 there were 308 small wholesale corporations with the same 
average capital earning 10.9 percent. Data for intermediate years 
are not available but for the 2 years 1924 and 1928 the smaller corpora- 
tions had definitely higher earnings than the larger ones. The 
contrary was true of retail trading corporations of which there were 
283 large-scale identical companies with average capital of $6,800,000 
earning an average of 14.3 percent profits. The small-scale retail 
corporations (average capital $89,000), numbering 742 in 1924 and 
858 in 1928, averaged 12.1 percent profits of their total capital or over 
2 points below the larger operators. 

Table 12. — Profit as percentage of total capital wholesale, retail, and manufacturing 

corporations, 192^-28 



Year 


Wholesale trade 


Retail trade 


Manufacturing 


Large 


SmaU 


Large 


Small 


Large 


Small 


1924 


9.g 
9.5 
9.4 
8.5 
8.5 


12.4 


14.4 
15.2 
14.6 
14.3 
12.9 


12.3 


9.5 
11.4 
11.7 

9.0 
10.4 


10 8 


1925 


11 1 


1926 -.. 






11 4 


1927 - 


10.9" 




11 3 


1928 


12.0 


11 3 







Source: Epstein, R. C: "Industrial Profits in the United States." National Bureau of Economic 
Research, 1934. 

In selected manufacturing lines the small-scale corporations appear 
to have had slightly higher earnings in foods, chemicals, textiles, 
metals, and rubber over the 4-year average (see table 1'3). Earnings,, 
moreover, fluctuated somewhat less from year to year among the 
smaller companies. 

In the wholesale grocery trade small-scale corporations had higher 
profit ratios than the large-scale units in each but one of the 5 years^ 
under consideration. (See table 14.) Large-scale drug wholesalers 
showed the reverse with higher returns on capital in each year but one 
than were reported by the small-scale corporations. Small-scale 
dry-goods corporations showed higher returns in 3 out of 5 years and 



186 



CONCENTRATION OF ECONOMIC POWER 



averaged higher profits over the entire period. In the hardware 
trades, small-scale corporations were in the profit lead each year but 
one. 

In the retail grocery trade profits of large-scale corporations, which 
no doubt included the larger chains, showed much higher ratios than 
those of the smaller retailers, the 5-year averages being 21.9 and 12 
percent, respectively. (See table 15.) 

Small-scale dry-goods retailers, however, reported higher profit 
ratios in each year than did the large-scale firms with a range from 13.3 
percent in 1928 to 15.5 percent in 1925, as compared with a low of 
9.8 percent for large-scale corporations in 1924 and a high of 11.2 per- 
cent in 1925. Large-scale department stores showed consistently 
better profit ratios than did tlie small corporation, but at the same time 
revealed a persistent downward drift from 11.9 percent in 1924 to 8.8 
percent in 1928. The smaller department st^^res averaged about 
8.4 percent and showed no indication of a trend. In the furniture 
trade small-scale corporations had higher profit ratios in 3 out of the 5 
years and averaged slightly higher for the entire- period. The same 
was true of small-scale corporations operating in the retail building 
materials and hardware trade. 

Table 13. — Manufacturing corporations — profit as percentage of total capital, 

selected industries, 192^-28 





Foods 


Chemicals 


Textiles 


Metals 


Rubber 




Large 


Small 


Large 


Small 


Large 


Small 


Large 


Small 


Large 


Small 


Number of corp- 
porations - .. 


215 

10.1 
9.3 

10.9 
9.7 

10.3 


0) 

12.1 
13.9 
12.0 
10.1 
10.5 


210 

8.9 
11.8 
11.6 

7.3 
11.1 


15.3 
13.2 
13.8 
12.0 
9.7 


28,9 

6.6 
9.1 
7.0 
8.9 
6.6 


(') - 

10.7 
11.3 

9.6 
11.6 

9.8 


648 

9.2 
11.3 
12.2 

9.3 
10.4 


0) 

10.6 
10.6 
11.2 
11.1 
13.1 


26 

6.8 
15.7 
7.6 
6.4 
2.3 


(») 


Year: 

1924 


9.7 


1925 


14.7 


1926 


16.2 


1927 -- 


12.0 


1928 - 


12.4 







1 Number varied from 220 to 203. 

2 Number varied from 84 to 110. 

3 Number varied from 191 to 247. 
« Number varied from 336 to 373. 
' Number varied from 11 to 15. 

Source: Epstein.R. C: "Industrial Profits in the United States." National Btircau Economic Research, 
1934. 



Table 14. — Wholesaling corporations — profit as percentage of total capital ' — selected 

trades, 1924-28 





Grocery 


Drug 


Dry goods 


Hardware 


Year 


Large' 


Small 3 


Large* 


Small s 


Large 2 


Small 3 


Large* 


Small 3 


1924 


10.8 
9.3 
7.7 
7.8 
7.3 


9.9 
10.3 
9.0 

8.7 
10.9 


11.7 
11.4. 
10.9 
9.8 
10.3 


7.7 
10.4 
10.5 
12.4 

8.8 


7.4 
9,1 
7.0 
9.1 
8.4 


10.1 
11.4 
7.6 
8.6 
6.8 


6.7 
8.6 
7.6 
7.6 

8.5 


8.9 


1925 


8.2 


1926 - 


7.7 


1927 . ...... - 


8.0 


1928... _...- 


9.4 







I Source: Epstein, R. Q.: "Industrial Profits in the United States." National- Bureau Economic 
Research 1934 

* Based on data for large identical wholesale trading corporations, 59 grocery, 25 drug, 29 dry goods, and 
43 hardware. 

3 Nonidentical small wholesale trading corporations, ranging from 78 to 97 grocery, 29 to 49 drug, 39 to 49 
dry goods, and 48 to 49 hardware corporations. 



CONCENTRATION OF ECONOMIC POWER 



187 



Table 15. — Retailing corporation — profit as percentage of total capital — selected 

trades, 1924-28 





Grocery 


Dry goods 


Department 
stores 


Furniture 


Building mate- 
rials and hard- 
ware 




Large 


Small 


Large 


Small 


Large 


Small 


Large 


Small 


Large 


SmaU 


Number of corpora- 
tions.. 


14 


(') 


27 


(2) 


93 


(3) 


12 


{*) 


27 


(') 


Year: 

1924 ... 


23.5 
21.0 
21.7 
21.8 
21.3 


16.0 
8.9 

13.0 
9.1 

13.1 


9.8 
11.2 
11.1 
11.0 
10.6 


14.7 
15.5 
14.4 
14.1 
13.3 


11.9 
11.7 
11.4 
10.7 
8.8 


8.4 
9.1 
8.8 
7.8 
8.4 


14.3 
7.9 
7.4 
8.9 
9.6 


10.7 
10.2 
11.2 
10.4 
7.2 


10.7 
11.6 
10.0 
8.2 
8.4 


8 7 


1925.... 

1926... _... 

1927.. 


11.3 
11.1 
9 5 


1928 


10.6 



' Number varied from 81 to 92. 
2 Number varied from 81 to 96. 
5 Number varied from 87 to 93. 
* Number varied from 41 to 48. 
' Hardware only. Number varied from 41 to 48. 

The foregoing data on profits are inconclusive and have only indirect 
bearing on the problem of the influence of changing channels of dis- 
tribution on size. They may be the more significant because of the 
absence of definite trends. Plowever, they need to be supplemented by 
additional studies, over a longer range of time and with samples 
selected specifically for the purpose. Until such time as more and 
better data are available, the case must rest on existing evidence. 
This evidence does indicate that large-scale retailing has been able 
to earn a higher leturn on capital than either large- or small-scale 
manufacturing or wholesahng. (See table 12.) It also appears that 
Fm all-scale wholesaling and small-scale retailing corporations earned 
higher profits on capital than did large-scale wholesaling or large- 
and small-scale manufacturing corporations. Manufacturing corpo- 
rations large and small had higher profit ratios than large-scale whole- 
salers. Finally there is some indication of a downward trend in 
earning I'atios of both large-scale wholesalers and large-scale retailers 
between the years 1924 and 1928 which may be significant because of 
the fact that those years were generally characterized by increasing 
business activity, the so-called expansion stage of the business cycle. 



SUMMARY AND CONCLUSION 

The foregoing examination of what is taking place in the channels of 
distribution reveals, if anything, the fact of a keenly competitive 
struggle. From this struggle, manufacturers appear to be increasing 
in size and strength with a growing resort to more direct channels of 
marketing. Retailing appears to be thriving with a growing tendency 
toward larger scale units harulling a wider variety of merchand se. 
The large-scale retailing outlets appear to have expanded about as 
far as present demand for their type of services justify. Chains 
appear to have reached their height and to be consolidating their 
positions, subject of course to freedom from further political aggres- 
sion. Department stores have run into rising costs which may well 
hold them in check, unless they can revise their techniques and avoid 
the race for expensive service to customers. Mail-order houses have 
shifted their base and are rapidly entering the field of department- 



188 CONCENTRATION OF ECONOMIC POWER 

and chain-store operation. Here they find the same limiting factors 
which chains and department stores have encountered. Super mar- 
kets have had a lush growth but would appear to differ but little 
fundamentally from self-service cash-and-carry chain grocery stores. 
They are much larger, carry a wider range of merchandise, but they 
cater to the same market, the -customer with cash who is willing to 
provide his own service in selecting his goods and in getting them home. 
The same forces which circumscribe the chains would appear to limit 
the expansion of super markets. They are essentially a competitive 
factor which limits the chains and in turn may be limited by the 
chains. 

The independent merchant is showing his ability to survive and even 
to increase in numbers and in relative sales volume. There are some 
trades which have suffered losses but there are others which have made 
distinct headway in the face of competition. The cooperative move- 
ment among distributors is a bulwark to their survival in certain lines, 
notably foods. Consumers' cooperatives have made practically no im- 
pression on the retailing structure of this Nation as a whole. In a 
few lines, notably gasoline, and farm supplies, and in a few limited 
areas of the country there is a successful movement. It is not a 
serious competitive contender for the responsibility of doing the 
Nation's marketing as yet, nor is the outlook encouraging to consumer 
coop^ators. 

The wholesalers alone of the three major competitive groups have 
lost ground. Their future is closely identified with that of their 
customers, the independent retailers, and the smaller industrial and 
institutional buyers. There is a very large volume of business and a 
substantital measure of employment now existing in the wholesale 
field. Wholesalers have well-organized trade associations which are 
striving to provide leadership out of the difficulties of recent years. 
There will probably remain a comparatively large area in which 
wholesalers will continue to function as the most efficient type of 
marketing channel. By so doing they will contribute to a balance of 
power between manufacturers and retailers in the struggle for control 
of marketing channels and functions. 



CHAPTER XVI 
RESALE PRICE MAINTENANCE— AN ECONOMIC SUMMARY^ 

DEFINITION AND CLASSIFICATION 

Resale price maintenance may be defined as that system of distri- 
bution under which the manufacturer of trademarked or otherwise 
identified goods names the prices at which its products shall be sold 
and distributed by wholesalers and retailers, thus controlling the 
margins realized by distributors and the prices paid by consumers.^ 

Among the methods of resale price maintenance that have been 
employed are the following : ^ 

(la) The manufacturer furnishes to the distributor^-a list of 
prices regarded as desirable, wdth the suggestion that such prices 
be maintained. Only persuasion is employed to secure the 
observance of the suggestions. 

(lb) The same price suggestions are made, but, in addition, 
the manufacturer refuses to sell to distributors who cut below 
these prices. 

(Ic) Refusal to sell is supplemented and implemented by active 
policing, with or without Cooperation of complying distributors.* 

(2) Maintenance by the manufacturer of agencies or pseudo 
agencies whereby ownersliip of the goods does not pass from him 
until final sale to the consumer. This method is lawful where 
actual agency exists,^ but unlawful where the agency method is 
but a subterfuge.^ 

(3) Retail outlets that are owned and operated as manufac- 
turers' branches. Under this method no intermediaries exist, 
hence no resales take place. There is no question as to lawful- 
ness of this method. 

(4) Contracts between the manufacturer and his distributors 
in which the actual or the minimum resale price is stipulated. It 
is around this method that controversy has raged, and toward the 
legalization of which much legislation has been enacted. 

WHY PROPONENTS WANT LEGALIZATION OF RESALE PRICE MAINTENANCE 

Retailers. 

It is generally believed that" the strongest pressure for resale price 
maintenance is exerted bv the manufacturers of nationally advertised 
goods. There have been examples of such origins, but they have been 

' This chapter was written by Dr. Earl D. Strong, who was requested by the economic coordinator of the 
T. N. E. C. to summarize the fragments of available evidence on perhaps the most notable governmental 
activity made on behalf of small business in recent years; i. e., price-control legislation. 

2 U. S. Federal Trade Commission. Report on Resale Price Maintenance, pt. 1, p. 2 (1929). 

3 Methods (la) and (lb) have always been regarded as legal, but (Ic) was adjudged unlawful in the Beech- 
Nut. case, where elaborate methods for detecting and reporting violations were involved. 

* F. T. C. V. Beech-Nut Packing Co. (257 U. S. 441 (1922)). 

5 U. S. V. General Electric Co. (272 U. S. 476 (1926)). 

« Dr. Miles Medical Co. v. Park & Sons Co. (220 U. S. 373 (1911)). 

189 

262652— 41— No. 17 14 



190 CONCENTRATION OP ECONOMIC PO>VER 

exceptions to the general situation. The real source of nearly all 
recent propaganda and pressure is to be found among retailers and 
their associations, especially in the drug trade. The wants of these 
groups will, therefore, be considered first. 

In the current anemic spirit of industry and trade, the traditional 
drive for profits, with their accompaniment of hazards, seems to have 
given way, in large measure, to a search for security. Retailers dis- 
play this new emphasis in their fear of price competition. They wish 
to be assured of adequate margins between their buying and selling 
prices regardless of efficiency or of services rendered. Resale price 
maintenance is publicly advocated as a "fair trade" methodology; in 
reality it is a margin-maintaining measure.^ Its retailer friends do 
not want to compete with each other in the matter of price. 

It is usually claimed, however, that resale price maintenance is 
needed in order to prevent "loss leader" selling. This merchandising 
device offers or purports to offer a selected list of well-known and 
commonly used items at much less than customary prices and, it is 
often claimed, at less than cost, in order to attract to the store cus- 
tomers who may be induced to buy other articles that give a profit to 
the seller. This type of sales building is frequently employed by 
chains, department stores, and cut-rate independents, and is stren- 
uously opposed by most of the smaller dealers. 

In addition to the general dislike of price competition, there are 
specific reasons for the opposition to loss-leader selling. Because it 
is used as "bait" to attract customers it deprives the price-maintain- 
ing competitors of the sale of other goods as well as of the leaders, 
unless they meet the competition. They claim that purchasers, fre- 
quently ignorant of quality, are led to believe that all prices of the 
loss-leader store are low prices. They see less opportunity for them- 
selves in offering more service and better quality of goods. They 
think that loss-leader selling has a "snowball" effect and that prices 
will have to, be cut on more and more goods to meet customers' ideas 
as to proper price levels in the trade. If they do not meet the low 
prices they are deprived of the sale of the most attractive items of 
trade — nationally advertised goods — which require less selling effort 
and have a more rapid turn-over. It should be said, however, that 
there is not much agreement as to what actually constitutes loss- 
leader selling, and that little convincing evidence has ever been 
assembled to show that it is significant in amount or essentially detri- 
mental to consumers. 

But the reasons why resale price maintenance is wanted go beyond 
opposition to loss leaders. Many independents fear that monopo- 
listic power possessed by mass distributors will, in spite of the Robin- 
son-Patman Act and the various State unfair practices acts, react to 
the detriment of small retailers. Anything, such as resale price con- 
trol, that will weaken the ability of chain stores and other large price 
cutters to attract patronage will, conversely, aid the independents in 
theix -Struggle. The zeal for price control is, in part, one manifestation 
of the intense hostility to the newer forces of distribution. (But it is 
significant that chain stores are now supporting resale price mainte- 
nance in the drug field.) 

One reason seldom advanced in trade-association publicity, but 
readily found in the arguments to the trade itself, is the necessity 

' Testimony of Representative Emanuel Celler of New York before a subcommittee of the Committee on 
the Judiciary of the Unitr d States Senate, 75th Cong., 1st sess., on S. 100. Resale Price Maintenance. 



OOXCENTRATION OF ECONOMIC POWER JQl 

of securing and maintaining generous profit margins on as mujch 
business as possible. The drug trade has suggested a 33}^ percent 
margin on the retail price as fair; of course this means a 50-percent 
margin on the invoice price. Nationally advertised goods of general 
demand afford the best possibilities of such margins if the proper 
controls are established. 

Wholesalers. 

Wholesalers want resale price maintenance for much the same 
reasons that retailers do. They don't like competitive price-cutting 
and they do like to be assured of adequate profit margins. They share 
the retailers' fear of chains and great department stores, for such 
institutions tend to eliminate wholesalers. They are disturbed about 
the dangers that may arise from low prices given by manufacturers 
to mass distributors which may not be available on a competitive 
basis to wholesalers, and hence favor methods that will prevent these 
mass distributors from cutting prices to consumers and that will thus 
diminish the pressure by small retailers for low prices from whole- 
salers. They fear that direct selling by manufacturers to large outlets 
may lead to a practice of direct selling to the smaller stores and thus 
bring about a further reduction in the business of wholesalers. 

The main reason, however, for wholesalers' concern with resale price 
maintenance is that their whole fortune is bound up with the retailers. 
They must keep the goodwill of retailers, so whatever the retailers 
favor the wholesalers will favor. And if independent retailers are 
prosperous, their prosperity will tend to spread to the wholesalers. 

Manujadurers of branded goods. 

It should not be assumed that manufacturers, even of nationally 
advertised and trade-marked goods, are unanimously and whole- 
heartedly in favor of resale price maintenance. Some support it 
merely to keep the goodwill of distributors by helping them to get 
what they want; others believe that enough direct advantages exist 
to justify support; many are totally indifferent or in active opposition. 
In the main, manufacturers of trade-marked goods are on the affirma- 
tive side. 

Specific reasons held by manufacturers who favor price control may 
be enumerated briefly: 

(a) Price-cutting breaks down to some degree the product dif- 
ferentiation that has been expensively created, reduces consiuners' 
faith in the quality of the product, and substitutes the pull of low 
prices for the push generated by advertising. Accepted qualities 
of alleged uniqueness tend to break down in the struggle of hetero- 
geneous price competition. 

(6) The goodwill of the retailer is important even to manufac- 
turers of advertised products. He will push those goods that 
give him good margins and ignore or disparage those that provide 
only small ones. The assurance of adequate margins is, then, 
the strongest inducement that the manufacturer can off er to secure 
the cooperation of the retailer. 

(c) Manufacturers, like others, have no great love for low prices 
as such. Prices once cut are hard to raise again. If price-cutting 
begins, it may lead to destructive competition, both from com- 



192 CONCENTRATION OF ECONOMIC POWER 

peting manufacturers and among distributors, who then press for 
higher margins and lower prices from thfe manufacturers. 

It is not too difficult to persuade manufacturers to participate in 
resale price-maintenance procedure. 

ECONOMIC AND SOCIAL REASONS FOR RESALE PRICE MAINTENANCE 

In suggesting valid arguments for price control there is intended 
no attempt to justify the forms that have been legalized, nor any par- 
ticular form. Further, there is no intention to imply that the argu- 
ments are powerful and convincing, or the reverse. It is believed, 
however, that there exist certain bad situations which demand a 
remedy, although not necessarily by Government intervention. 

Numerous studies have shown that many retailing trades suffer from 
high mortality, especially among the smaller units. Iliiere are many 
causes, among which is to be found the inability to get adequate mar- 
gins on sales. Whether this be due to inefficiency of the dealers, too 
many competitors, or the very effective competition of the newer and 
larger types of competitors is not clear. It is clear, however, that 
numerous and scattered small retailers offer definite conveniences to 
the consuming public. It is equally clear that a large casualty list in 
business involves heavy economic waste. And finally, there is ample 
evidence to sustain the charge that many examples of imfair com- 
petition have existed and continue to exist. 

It seems obvious that resale price maintenance will tend to elimin- 
ate one of the factors of ruinous competition, through its restrictions 
on price cutting. If, by this means, it reduces business mortality, it 
accomplishes something of economic benefit. If, on the other hand, it 
retains in trade inefficient and high-cost distributors, or attracts addi- 
tional ukits of the same character, it is merely providing a subsidy for 
uneconomic concerns. By ameliorating, however; one of the severest 
aspects of the competitive struggle, resale price maintenance lays a 
foundation for the continued functioning of many desired retail units 
and reduces the death rate in the retail fields to which it is applicable. 
Where strenuous competition is forcing a wide area of profit margins 
to subnormal levels, it is to the interest of the general economy that 
•organized effort be taken to remove the destructive features. 

"Loss leader" selling is neither as innocuous as its practitioners 
testify nor as dangerous as its enemies charge. To discuss it ade- 
quately would involve one in a maze of accountancy and merchandis- 
ing policies.. If by "loss" is meant selling below invoice cost, it is- 
obvious that it -has no economic justification other than advertising. 
If the article is sold at a price that does not carry a full share of operat- 
ing expenses, its increased sales may warrant the practice. If the 
price of the article sold does not include a proportion of those various 
factors called "overhead," the confusion as to the economic or business 
propriety of the practice becomes almost unsolvable. 

It seems undeniable, however, that positive evils may be found in 
connection witli the worst features of this method of selling. "Loss 
leader" prices do not change with supply and demand, but are an- 
nounced or withdrawn according to the whim or business judgment of 
the seller. They are as definitely "a,dtoinistered" prices as are the 
prices whose maintenance is often attempted^ Because of frequept 
changes in the selection of leaders, and of the prices that will be asked, 
"loss leader" tactics remove any possibility of stable marketing of the 



CONCENTRATION OF BOONOMIC POWER J93 

leaders actually utilized at any given time and also of all other articles 
that have potentialities as leaders. 

Some merit, moreover, is to be found in the contention that oscillat- 
ing and subnormal prices for trade-marked goods affect unfavorably 
the goodwill that has been created by manufacturers' advertising. 
Goodwill is an evanescent asset that may be quickly blown away. 
The destruction of established prices may readily demolish faith in 
quality. 

Probably the strongest attacks against ''loss-leader" selling have 
utilized the argument that it deceives consumers. Unquestionably 
this contention has been exaggerated, but average consumers are a 
credulous lot, and a false impression that a few outstanding low prices 
are reflected m the whole price policy of the store is easy of acceptance. 

Since the only function of "loss-leader" selling is to act as "bait" 
for the sale of other articles, the gullibility of consumers perhaps 
creates the need for some outside protection. The "loss leader," as 
a device to attract customers, is not in quite the same category as 
advertising. 

This list of reasonable arguments for resale-price maintenance is 
neither long nor formidable. It does not in the least prove a justifica- 
tion for such legislative devices as have been adopted, but it does 
show a need for the creation of some methodology for curing a few 
weaknesses of marketing that are beyond the control of individual 
concerns. A search should be made for substitutes for the defective 
methods that now exist. 

ARGUMENTS AGAINST RESALE-PRICE MAINTENANCE 

It would be desirable to classify the opposition arguments in such a 
way as to show the adverse effects of price control upon the various 
groups concerned. Such a procedure is impracticable, however, 
because the effects are so generalized and so interrelated that their 
incidence on any particular segment of the industrial structure cannot 
be isolated. An attempt will be made to put into juxtaposition those 
arguments that are most closely related to each other, but no clear-cut 
separation by definite boundaries can be achieved. 

The effects of resale-price maintenance on consumers can be most 
successfully segregated. Here theory is supported by facts. It is 
argued that price control would have no reason for existence if it did 
not result in higher prices, and the facts bear out the argument. Con- 
vincing figures are, however, entirely inadequate, and we must await 
broader studies than have yet been made for confirmation of the early 
reports. A few of these figures may be cited. 

(1) In California cut-rate and chain-store institutions, in 
metropolitan centers, prices of maintained items were raised,, on 
the average, one-third above the prices for the same articles 
before the law was made effective. 

"There can be no doubt that resale-price maintenance * * * 
has made for higher prices on advertised products * * * '' » 
In small outlying districts there was no increase (in some places 
there was a slight decrease) because prices had not been cut 
previously. 

E. T. Grether: "Experience in California With Fair Trade Legislation Restricting Price Cutting," 
California Law Review, vol. 24, p. 676. September 1936. This article of 60 pages is one of the best availalbe 
on actual experience with the law. 



194 CONCENTRATION OF ECONOMIC POWER 

(2) In a Los Angeles cut-rate store, in October 1938, prices of 
five very popular nationally advertised drug items were 135 
percent higher than prices of their identical substitutes. In- 
creases after the passage of the California act ranged up to 29 
percent and decreases to 7 percent, according to type of store and 
size of city.^ 

(3) In comparing Washington, where there is no price-main- 
tenance law, with Baltimore, where such a law exists, it was 
found that for 55 identical items, under contractual prices in 
Maryland, prices were the same for about one-half of the items. 
More than one-third of the Washington prices were lower and 
only one-tenth were higher than in Baltimore.^" 

Such figures as are • available show almost universally that price- 
maintained items sell for higher prices than nonmaintained goods; 
that prices of contractual articles rose after the law was passed ; that 
prices average higher in cities where maintenance is legal than in 
comparable cities where it is not legal. The National Association of 
Retail Druggists has made much of the fact that prices in some out- 
lying stores and in some small towns showed a slight decline after the 
passage of the law. The agreement is not convincing, however, 
because of — 

(a) The meagerness of the decreases where they have been 
found. 

(b) The fact that these prices were always high prices. 

(c) The much more than offsetting increases in the large stores 
and cities. 

(d) The fact that most of the figures have been compiled by 
the drug association itself. 

There is ample justification for the- broad conclusion of Grether, the 
best authority, that resale-price maintenance means high prices and 
increased prices. 

By indirect means also there is a tendency to mulct consumers. 
Prices cannot be set and maintained unless the articles are readily 
identifiable and the demand for them is continuously nursed and kept 
alive. This m^ans that manufacturers must make a great outlay for 
advertising and, of course, the only source of these funds is the con- 
sumer. Advertising, then, that is wasteful'' in that it only persuades 
people to buy one brand instead of another, and that is expensive on 
any account, builds up a quasi-monopolistic position for producers 
and makes consumers pay for it. It is encouraged and aided by resale- 
price-maintenance practices. 

Advertising, moreover, may be wasteful in another sense — that it 
tends to persuade people that branded, advertised, and high-priced 
goods are the best. This may, at times, be true, but consumers' 
organizations have accumulated enough evidence to suggest that it 
is far from universal. Since the control of resale prices is stimulative 
of additional advertising, it is, therefore, of assistance in the deception 
of consumers, as well as in the enhancement of the imperfections of 
competition. 

« Ralph Cassady, Jr.: "Maintenance of Resale Prices by Manufacturers," Quarterly Journal of Eco- 
nomics, vol. 53, No. 3, p. 456-7. (May 1939.) 

'• Mrs. Eugene Callaghan: Hearing before a subcommittee of the Committee on the District of Columbia, 
U.S. Senate, 76th Cong., 1st sess., on H. R. 3838, Fair Trade Act. (This testimony contains much original 
factual material.) 



CONCENTRATION OF ECONOMIC POWER 195 

Under the contemporary system of one-price merchandising the 
consumer has \itt\t chance to do any bargaming and higgling; he 
expects the retail merchants to do this for him and to secure the best 
prices obtainable. Under resale-price maintenance the retailers 
abandon this function for a considerable number of articles, and the 
consumer is left completely at the mercy of administered prices or a 
choice of substitutes. 

It is reasonable that other adverse effects will appear, especially as 
they relate to consumers with most limited purchasing power. Under 
resale-price-maintenance contracts, prices of contractual goods can 
vary little or not at all from store to store, regardless of location or 
of services rendered. A cash-and-carry store in a poor neighborhood 
must ask as much for the article as the Park Avenue shop with attrac- 
tive and expensive furnishings, numerous and courteous clerks, charge- 
account privileges, and delivery service. The poor who cannot or do 
not want to pay for expensive services must do so whether they get 
them or not. 

Still more remote from consumers, but yet affecting them, is the 
tendency of resale-price control to develop a stand-still condition in 
the marketing structure. The search for profits has created, within 
a relatively few years, a host of new selling types, such as chain-stores, 
mail-order houses, low-price department stores, cut-rate mdepend- 
ents, supermarkets, and others. Theii* principal appeal to customers 
has been low prices. But under price-maintenance laws they haVe 
met restrictions that destroy the low-price appeal as applied to an 
ever-growing number of items, and discourage the entire low-price 
policy. This tends to freeze distribution in statu quo. It protects 
the inefficient, the unprogressive, and those who have abandoned the 
hazardous struggle for profits in a preference for security, while it 
penalizes the ambitious and resourceful merchants. It thus safe- 
guards the living of one group, but reduces the opportunities for the 
more progressive, and at the same time takes away from consumers 
the advantages of low prices. 

Closely related to the above tendency is the encouragement of 
uneconom.ic new com.petition. At present this would apply n^.ainly to 
the drug trade, but enthusiasts for price m.aintenancc in m.any lines 
are trying to extend its application. If dealers are to be guaranteed 
generous m.argins on a considerable part of the goods they ^cll, their 
position is going to look exceptionally atiiractive to a large nianber of 
potential com.petitors, m.ost of whom, would be of the type who do not 
succeed where profits are to be obtained only by efficiency and hard 
work. Such a process would add to the number of sellers without 
increasing the num.ber of buyers and would, of course, eventually 
increase the num.ber of bankruptcies. Unit m.argins m.jxy be assured 
by law, but there is as yet no guaranty as to the num.ber of units that 
will be sold per store. 

Most of the foregoing argum.ents against resale price m.aintenance 
are m.erely different aspects of the broader consideration that such a 
policy reduces or abolishes price com.petition am.ong distributors. 
Events have proved that sales can be m.ade with little or no price 
competition, but events have also proved that high prices reduce 
sales and output. Maintained prices are usually high prices. While 
the laws ar^ not at present applicable to a sufficiently wide range of 
commodities as to affect the general econom.y appreciably, the process 



196 CONCENTRATION OP JECONOMIC POWER 

is nevertheless in operation. If consunaers buy as many articles at 
liigh prices as they did at lower prices the output of these goods is not 
uiTected, but the production of other goods will be reduced because 
consumers will have less m.oney to spend for them.. 

Moreover, if price com.petition does not exist, or prices -are estab- 
lished by contract, there can be no flexibility of prices. Supply is 
determ.ined by an artificially determ.ined demand which itself is, in 
fact, a function of an adm.inistered price. There is created a rigid 
structure of prices that does not yield either to general or specific 
changes in econom.ic conditions. Thus is removed one of the factors 
m.ost essential to adjustments to econom.ic change. Production and 
ero.ploym.ent are bound to suffer from, this defect during declines in 
price levels or in periods of economic stagnation. 

Since all of the fair trade laws legalize price maintenance con- 
tracts only for goods which are "in fair and open com.petition with 
comm.odities of the same general class produced by others," the 
friends of the policy argue that it is only a vertical arrangem.ent for 
the disposal of goods and carries no iro.plication of horizontal price 
fixing or absence of competition. The argument seems to be weak, 
and on two accounts. First, in the industries that utilize the price- 
fixing privilege, m.anufacturers will tend to regard the established 
price as perro.anent and will expect their rivals so to regard it. Any 
downward digression from the fixed price would be opposed by 
retailers and would be likely to be met by similar action on the part of 
com.petitors. Therefore no price cut will be made. Such a situation 
m.ay arise without any price-maintenance laws, or without collusion 
am.ong the manufacturers, but it is aided and supported by such laws. 

In the second place, pressure from distributors creates a strong 
resemblance to horizontal price fixing. The druggists, through their 
State and National associations, decided that they needed a 50 percent 
mark-up on invoice prices. This com.es close to horizontal action, 
although it is taken through the m.edium. of an association. Moreover, 
such pressure exerted sim.ultaneously on- oom.peting m.anufacturers 
reinforces the tendency toward identical prices at the production level. 
Horizontal price fixing m.ay not exist in nam.e, but it is closely ap- 
proached in fact. 

And finally, no adequate definition for "free and open com.petition" 
exists. No trade-m.arked and advertised article can be in corrspletely 
free competition with any other article, yet this is the only type of 
goods to which resale price maintenance is applicable. The courts 
will ultimately have to decide som.e fine-spun questions of econom.ic 
theory. 

In sum.mary, it is sufficient to point out that resale price m.ainten- 
ance is not a fair-trade ro.easure but a price-fixing, margin-setting 
measure that injures consum.ers, reduces flexibility of output, restricts 
progi'ess in m.arketing, and contributes to monopolistic prices and 
monopolistic action. 

RESALE PRICE MAINTENANCE LAWS IN THE UNITED STATES 

It is impossible to discuss in detail the various State laws, but 
«ince they all closely resemble the California law (first passed in 1931 
and amended in 1933), and in. many cases are identical with it, a 
brief examination of that act will be sufficient. 



CXDNCENTRATION OF ECONOMIC POWER 197 

California Fair Trade Law 

An act to protect trade-mark owners, distributors, and the public against injurious 
and uneconomic practices in the distribution of articles of standard quality 
under a distinguished trade-mark, brand, or name 

The people of the State of California do enact as follows: 

Section I. (a) No contract relating to the sale or resale of a commoditj' which 
bears, or the label or content of which bears, the trade-mark, brand, or name of 
the producer or owner of such commodity and which is in fair and open compe- 
tition with commodities of the same general class produced by others shall be 
deemed in violation of any law of the State of California by reason of any of the 
following provisions which may be contained in such contract: 

1. That the buyer will not resell such commodity except at the price stipulated 
by the vendor. 

2. That the vendee or producer require in delivery to whom he may resell such 
commodity to agree that he will not, in turn, resell except at the price stipulated 
by such vendor or by such vendee. 

(b) Such provisions in any contract shall be deemed to contain or imply 
conditions that such' commodity may be resold without reference to such agree- 
ment in the following cases: 

1. In closing out the owners' stock for the purposes of discontinuing delivering 
any such commodity. 

2. When the goods are damaged or deteriorated in quality, and notice is given 
to the public thereof. 

3. Bv any officer acting under the orders of any court. 

Sec."^1>^. Willfully and knowingly advertising, offering for sale, or selling any 
commodity at less than the price stipulated in any contract entered into pursuant 
to the provision of section 1 of this act, whether the person so advertising, offering 
for sale, or selling is or is not a party to such contract, is unfair competition and 
is actionable at the suit of any person damaged thereby. (This section added 
by amendment in 1933.) 

Sec. 2. This act shall not apply to any contract or agreement between producers 
or between wholesalers or between retailers as to sale or resale prices. 

Sec. 3. The following terms, as used in this act, are hereby defined as follows: 
"Producer" means grower, baker, maker, manufacturer, or publisher. "Com- 
modity" means any subject of commerce. 

Sec. 4. If any provision of this act is declared unconstitutional it is the intent 
of the Legislature that the remaining portions thereof shall not be affected but 
that such remaining portions remain in full force and effect. 

Sec. 5. Thi^ act may be known and cited as the Fair Trade Act. (Approved 
1931.) 

Section 1 (a) legalizes the making of a contract relating to the sale 
or resale of a branded or named commodity that is in free and open 
competition with commodities of the same general class made by 
others. Then follows a stipulation of the provisions that ^e made 
legal. (1) That the buyer will not resell except at the price stipulated 
by the seller. (2) That the buyer require of anyone to whom he 
sells that he will not, in turn, sell except at such stipulated price. 

Section 1 (b) exempts from these price stipulations goods whose sale 
is being discontinued by the dealer; damaged or deteriorated goods, 
when public notice is given ; goods being sold by a court order. 

Section 1}^ (added by amendment in 1933), denominates as unfair 
competition and makes actionable by any person damaged thereby, 
knowingly selling or offering for sale of any contractual article at less 
than the stipulated price, whether the seller is or is not a party to 
such contract. 

Section 2 makes it clear that "horizontal" price contracts are not 
legalized by the act;, the remaining sections need no comment. 

The Federal act, popularly known as the Miller-Tydings Act (Pub- 
lic, No. 31.4, ch. 690, 75th Cong., 1st sess. (H. R. 7472)), is an 
amendment of the Sherman Antitrust Act, but, t)ebause of expected 



198 CONCENTRATION OF ECONOMIC POWER 

'residential disapproval, was passed as a part of the appropriations 
vcl for the District of Columbia, and approved on August 17, 1937. 
It may be regarded as an enabling act, to make effective the State 
laws that had been handicapped by their powerlessness to restrict 
interstate commerce. Employing, whenever practicable, the phrase- 
ology^ of the California act, it legalizes resale-price contracts in inter- 
state commerce where such contracts are lawful in intrastate trans- 
actions in any State where the commodity is to be sold or shipped. 
It further provides that such contracts shall not be deemed unfair 
competition under the Federal Trade Commission Act, and then makes 
the exception of "horizontal" resale-price agreements. 

At the present time 44 States have resale-price-maintenance laws, 
the remaining "free" States being Delaware, Missouri, Texas, and 
Vermont. In 1939 the Vermont Senate refused to enact such a 
statute. California, as has been mentioned, started the movement in 
1931. After its amendment in 1933 that put teeth into the law, 
making it apply even to those who had not entered upon contracts; 
the other States rapidly fell into line. Nine acts were passed in 1935, 
five in 1936, and all but two of the remainder in 1937. Alabama and 
Mississippi were the latest to come in. The District of Columbia has 
held out up to now, but a bill has been introduced and hearings have 
been held in both Houses. It is still active, and will be pushed at the 
next session of Congress. 

Slightly more than half of these laws closely follow the wording of 
the California act, while most of the remainder are based on the 
"model" N. A. R. D. draft. Only Wisconsin, among the early States, 
departs materially from the California type, and then only in that it 
adds a provision empowering " the State department of agriculture 
and markets to declare a resale-price-maintenance contract unlawful if 
the minimum resale price is found to be "unfair and unreasonable," 
after a complaint and hearing. 

The newer laws, following the N. A. R. D. model, besides adding 
much precision to the wording throughout, have introduced several 
provisions to assure greater effectiveness.^^ These laws — 

1. Give recognition to the right of the seller to refuse to sell 
not only to price cutters but also to those who deal with price 
cutters. 

2. Permit contracts specifically binding the seller to exercise 
his right to refuse to sell. 

3. Prohibit any but the owner of a trade-mark or his agents 
from initiating resale price contracts. (Based on Supreme 
Court decision protecting goodwill of owner of trade-mark.)'^ 

4. Permit price cutting if identifying marks are removed. 
(Same court opinion.) 

In 1936 the Supreme Court of the United States ruled the Illinois 
fair trade act constitutional '* but there has been no final ruling on the 
provision of the newer laws that impose the contract price upon non- 
contractors. There remains, of course, much litigation before all of 
the details of the acts are finally interpreted. In this memorandum 
there is no intention to go into the legal intricacies. 

" Zorn and Feldman: "Business Under the New Price Laws" (New York, 1937), p. 290. 
'2 Merrell and Kittelle: "Analysis of the State Fair Trade Laws," Dun's Review, October 1937; Zorn 
and Feldman, op. cit., pp. 297-3U. 
'3 Old Dearborn Distributing Co. v. Seagram Distillers, op. cit. 
•< Tbid. 



CONCENTRATION OF ECONOMIC POWER JQQ 

These laws are not criminal laws and provide for no enforcement by 
public authorities. They merely remove resale price contracts from 
the categories of unfair competition and restraints of trade. Enforce- 
ment must lie in suits for damages by parties who believe themselves 
injured, and actual damages will often be difficult to prove. ^^ 

The proponents of price-control laws have not been aggressive in 
bringing suits. They have, in the main, preferred to conduct "edu- 
cational" campaigns directed primarily toward manufacturers and 
the general public, and to persuade uninterested retailers toward 
greater participation in the movement. This education has centered 
in the trade associations, who supplement it with strong pressure 
brought to bear on nonassenting manufacturers. Since individual 
dealers and manufacturers have been slow to resort to the courts, 
inconspicuous violators of the law often enjoy a considerable degree 
of immunity. 

Some of the State "mifair practices" acts (e. g., California) provide 
that any trade association may maintain an action to enjoin acts of 
violators or to recover damages if injured by the violations. If such 
a provision should be applied to the "fair trade" acts, violations 
would unquestionably be more dangerous and prosecution more 
effective. 

DirnCULTIES AND LIMITATIONS ENCOUNTERED IN THE PRACTICE OF 

PRICE MAINTENANCE 

If the dangers of price cutting have often been exaggerated the 
dangers to the economy of price maintenance have been likewise 
overemphasized. So many weaknesses and limitations exist that no 
profoimd social evil can be envisioned. 

1 . Price control is applicable to only a limited number of commodi- 
ties.^^ 

They must be marked, standardized, and easily identifiable; 
otherwise there is no basis for customer choice. 

They must have a general appeal. Other goods would not 
justify price control. 

They must be neither expensive nor inexpensive. Customers 
of ordinary means seeking expensive goods will be inclined to 
much shopping and bargaining; well-to-do customers will pay 
high prices without maintenance laws. Price control is not 
necessary for inexpensive goods, for they are unlikely to be cut in 
price under any circumstances. 

Perhaps 50 percent of all goods sold at retail are identifiable, but 
many of these do not carry the other qualifications. Moreover, manj'' 
brands are not aggressively promoted, manj^ manufacturers are not 
interested in price maintenance, and trade associations cannot ade- 
quately police the field. It is probable that not over 15 percent of 
retail sales come within the scope of the act.^^ And finally, many of 
the maintained prices are little or no higher than they would be with- 
out maintenance. It is impossible to estimate how much price-control 
practices have substracted from the purchasing power of consumers, 

" Giuralain, Inc., v. F. W. Woolwprth Co., New York Supreme Court. New York Times, Aug. 8, 1939. 
'« Seligman and Love: Price Cutting and Price Maintenance, (New York, 1932) is. 154. 
" Cassady; op. cit., p. 455. Professor McLaughlin of the Marketing Laws Survey suggests 10 percent as 
a probable figure. 



200 CONCENTRATION OF ECONOMIC POWER 

but a small percentage of 15 percent of sales is not especially alarming. 
The acts have been applied with real effectiveness only to liquors, 
books, drugs, and cosmetics, although examples can be found in a 
great many other lines. 

2. The laws themselves are weak in that they are permissive rather 
than mandatory, are in about half of the cases poorly and loosely 
worded and rely for their enforcement upon the voluntary actions of 
usually hesitant individuals. Neither public prosecution nor enforce- 
ment agencies or commissions are provided. And further, they will 
probably meet with strict interpretation by the courts. 

3. The attitude of consumers is still largely a matter of guesswork. 
We know that most consumers are price-conscious, but to what extent 
this factor will overcome convenience, custom, and the pressure of 
advertisers cannot be estimated. 

Organizations of consumers and many individuals are carrying on 
an effective campaign to educate consumers in greater buying knowl- 
edge and skill. It may be possible that greater resistance to the blan- 
dishments of advertisers will result. 

The publicity undertaken in connection with price-maintenance 
laws and anti-chain-store laws may have effects the opposite of those 
intended. If consumers once become conscious that prices of certain 
articles are artificially held up by various laws they may decide to' 
choose other articles and other sellers, or even overturn the laws. The 
relative small proportion of purchases that come under these laws may, 
however, nullify the possibilities just suggested. 

4. The situations in the distributing trades are not conducive of 
too much optimism among price maintainers. Wholesalers are for 
the laws, but their influence and numbers are not great. Many 
retailers are either ignorant or apathetic or both.^^ Cut-rate stores 
and the large low-price department stores are in opposition. There 
are no legalized means of forcing contracts upon unwilling manufac- 
turers. All price-maintaining distributors must compete with all the 
methods of avoidance, or even of evasion, devised by resourceful 
price cutters. That the lot of distributors is not, in this connection, 
a too happy one is suggested by the continued campaigns of the trade 
associations and their journals. 

5. The manufacturers are in an anomalous position. They are 
subjected to the terrific pressure, sometimes amounting to coercion '* 
that is exerted by distributors, and also subscribe, in general, to the 
product-differentiation argument, yet they can feel no assurance that 
the policy is correct. 

In many cases they can have no doubt that higher prices to con- 
sumers reduce sales. This means a lower rate of output and increased 
unit costs. Price cutters have little interest in controlled items, will 
not push them and hence will buy less of them. Price cutters will 
also attract to their stores customers who will purchase substitutes for 
the price-maintained goods, which might otherwise have been bought 
in other stores. 

Price-maintaining manufacturers must always fear price cuttmg bj'^ 
their competitors. This may not often bccur in drugs and related 
lines, but it is not an impossibility anywhere. If they sell directly to 
mass retail distributors they must cope with requirements of whole- 
salers, "Who demand lower prices than those given to the large retail 



>« Orether; op. cit., p. 653. 
:» Cassady: op. cit., p. 461. 



OONOENTRATION OF ECONOMIC POWER 201 

outlets. The problems of manufacturers are numerous and Jarge, 
and they cannot be relied upon to give enthusiastic support to price- 
maintenance laws. 

6. Price-cutting retailers have so many effective devices for carry- 
ing on their particular methods of merchandising that they can often 
successfully avoid the control laws. They must maintain the mini- 
mum price for contractual goods, but they are not compelled to give 
emphasis to those goods. 

Private brands are growing in popularit}^ as alternatives to main- 
tained goods. Large distributors can feature their own brands with 
much success, maintain their low-price policy and yet secure their 
normal profit margins. A comparison with price-maintained articles 
can be made so effective that price-conscious consumers will abandon 
their preferences for certain brands without too much difficulty. 

One of the typical tools of price-cutting institutions is the loss- 
leader. It is not essential, however, that these leaders be price- 
maintained articles. Special drives, displays, salesmanship may be 
utilized to attract customers, and the result be a deemphasis of goods 
with controlled prices. 

The same principles may be employed without resort to loss-leader 
selling. Noncontract items and lines are pushed ; contract articles 
are kept in the background; comparisons unfavorable to the contrac- 
tual goods are made. 

Discounts, special deals, gifts, bonuses, premiums, coupons, bargain 
combinations — a bewildering group of offerings — are all available to 
the low-price opponents of resale price maintenance. That they 
weaken the sales of maintained goods is evident. 

In a more general sense resale price maintenance is weak in its abil- 
ity to contribute to the permanent prosperity of distributors. And 
perhaps its broader defects will, in the long run, be of greater 
significance than its deficiencies of detail. 

Potential new competition has been previously mentioned, but 
deserves reemphasis. The farther price maintenance spreads over the 
field of distribution, the more complete its guaranty of resale margins, 
the greater will be the inducement to increasing the number of outlets. 
Many individuals will see a chance, free from the dangers of price com- 
petition, to seize a share of a relatively stable market, and mil estab- 
lish additional units. Resale margins will remain high, but unit sales 
per outlet will decline and profits per store will go down with them. 
The excessive multiplicity of gasoline filling stations furnishes a good 
example. Stability of prices and margins is no guaranty of adequacy 
or stability of incomes in distributive lines where entrance of new- 
comers is easy. 

Fixed prices may be delightful for producers and dealers when the 
general price level is steady, but in a period of a rising. price level the 
situation is not such a happy one. Purchasers who have been edu- 
cated by all the devices of merchandising to expect a certain price for 
their favorite articles will regard higher prices. with considerable irri- 
tation and may turn to goods to which no customary price has been 
attached. These latter articles may move upward with no questions 
asked and their vendors may readily adapt prices to changing situa- 
tions. It is not so with the fixed-price sellers. _-Ag^in it may be re- 
marked that a guaranty of margins is not a guaranty of sales. 



202 CONCENTRATION OF ECONOMIC POWER. 

Most important of all are the adverse effects of a rigid price struc- 
ture upon the whole economy. Prices that cannot adjust themselves 
to changing economic conditions are prices that result in decline of 
sales, underproduction, higher costs, unemployment, cumulative loss 
of purchasing power, progressive stagnation. Resale price mainte- 
nance may be no great menace when all other economic conditions are 
favorable, but it may be an exceedingly disruptive element during 
economic disorder and prove to be a boomerang for its sponsors as 
well as a danger to society. 

INTERRELATIONSHIP WITH OTHER FACTORS 

To discuss resale price maintenance in isolation from other factors 
of economic and social life is superficial. Interrelationships are 
numerous and significant. Certain factors reinforce price control^ 
while others weaken it. 

1. Relationship with other factors that reduce price competitioi^. 

(a) " Unfair practices" laws. — These are otherwise variously de- 
nominated as loss-leader laws, no-sale-below-cost laws, minimum 
mark-up laws. The general intent is to apply to all commodities 
restrictions similar to those applied to identifiable goods by the 
price-maintenance laws. Such laws now exist in 16 States, but 
what particular type will finally receive the general support of price- 
controlling interests is not yet clear. Four types of limitations on 
selling price have been suggested: The invoice cost of the goods, 
a specified 6 to 10 percent above invoice cost, invoice cost plus a 
proper share of operating expenses, and invoice cost plus a proper 
share; all costs, including "overhead," are enumerated. 

(6) Laws such as the Robinson-Patman Act that prohibit a seller from 
discriminating as to price among his various customers who buy for 
resale.- — This Federal law meets its State counterpart in a section of 
the California "unfair practices" act. 

(c) Chain-store tax discrimination laws. — As yet these laws are 
confined to the States and carry various degrees of injurious possi- 
bilities. Efforts to enact similar Federal legislation have not, how- 
ever, been abandoned. 

It is clear that with all these varieties of laws in existence distrib- 
utors who prefer to make their profits by means of a low price are 
meeting with tremendous difficulties. And the combination of 
restrictions that is likely to create a rigid structure of high prices, 
is offering a real menace to the economy. Resale price-maintenance 
laws are not understandable without reference to these other limi- 
tations. 

2. Relationship with outside fields. 

Although the relationships are less distinct, the effectiveness of 
resale price-maintenance laws will depend much upon various other 
developments. 

{a) Such laws may stimulate the growth of consumers' coopera- 
tives which, in turn, would reduce the strength of the price-mainte- 
nance laws. 

(6) The spirit of the antitrust laws is violated by price-control 
laws. A clearer solution of the conflict is imperative. 



OONOENTRATION OF ECONOMIC POWER 203 

(c) Growth of consumer education and protection may diminish 
greatly the effectiveness of advertising and the potency of brands. 
The demand for high quahty and low price will flourish. 

(d) If concentration of production continues to grow the problem 
of price maintenance will diminish. The producers will take care 
of that. 

CONCLUSIONS 

1 . Resale price maintenance is bad in principle and practice. It sets 
a bad precedent and has possibilities for extrusion. It injm-es con- 
sumers, penalizes progress, and introduces an unhealthy element of 
rigidity into the price structure. 

2. Resale price maintenance is not, at present and in itself, a major 
economic evil. Despite its potentialities for evil the actualities are 
minor. It is applicable to only a small segment of trade, is surrounded 
by indifference and opposition, and is shot through with possibilities 
of evasion and avoidance. 

3. The extension of resale price maintenance should, therefore, be 
opposed. Where possible, it should be repealed or allowed to become 
a dead letter. 



PART III 

ADEQUATE LONG-TERM AND SHORT-TERM 
FINANCING 



205 



262652 — 41 — No. 17 15 



CHAPTER XVII 
CAPITAL AND CREDIT PROBLEMS OF SMALL BUSINESS ^ 

THE FINANCIAL POSITION OF SMALL BUSINESS 

Available evidence indicates that the financial position of small 
business has been weakened since 1929. Most of the data used in the 
following section refer to corporations submitting balance sheets to the 
Bureau of Internal Revenue. They cover the 6-year period 1931-36. 
This is the only evidence which permits of comparison by size of busi- 
ness enterprise. There is some question as to whether generalizations 
from a sample consisting only of corporate enterprise can be applied to 
noncorporate enterprise. Large business enterprise, however, is prac- 
tically all in corporate form. Hence, the sample for large business 
enterprises may be taken to be identical with the universe of large 
business enterprises. This is not the case with the small-business 
universe. Most small businesses are individually owned, or are 
partnerships. Since the corporate segment of small-business enter- 
prise is larger and stronger, on the whole, than noncorporate small 
business, it is reasonable to infer that the severe effect of the depression 
on corporate small business fell at least equally as severely upon 
noncorporate small businesses. Our comparison of the relative 
financial and commercial position of large and small businesses in 
terms of the corporate segments of each is therefore valid also for 
large and small business as a whole. If anything, we may infer that 
small unincorporated businesses were relatively worse off than the 
data based on corporate business indicate. 

Prior to 1934, the data were based on consolidated returns, where 
there were interrelated groups of corporations. For the period 
1934-36, the analysis pertains only to the individual members of such 
corporate systems as existed. From the point of view of the cor- 
porations, the advantage of the coiisolidated return lay in the fact that 
losses of one subsidiary could be offset against profits of another; in 
this way, the taxable income of the whole group was reduced. This 
difficulty is of some significance in dealing with profits rates by years, 
since comparability is affected, however, average rates for the 
period 1931-36 as a whole remain valid for analysis by size 
groups. Another question raised by the elimination of consolidated 
returns has to do with the homogeneity of industrial classifications; 
since most of the data presented deal with broad groupings, this 
difficulty is likewise largely eliminated. 

There remains one problem of indeterminate significance arising 
from the change in the law. Aggregate figures for pairs of i ems such 
as receivables and payables, surplus and deficit, gross sales and cost of 
goods sold, were changed in magnitude to a varying degree, as off- 

' Prepared by William B. Saunders, Harold Vatter, and Harold H. Wein, Industrial Economics Qivision, 
Department of Commerce. 

207 



208 



OONOENTRATION OF ECONOMIC POWER 



setting factors between affiliated corporations of a consolidated system 
were removed. The probability that percentage changes in the vari- 
ous items were equal is relatively small; this will have some effect on 
the comparability of the ratios used in this study. Thus, equity 
fig-ures in a consolidated return may be relatively small compared to 
what they would be if regarded separately, whereas assets may be 
relatively unchanged in the two forms; consequently, the ratios of 
equity to assets in 2 years may not be strictly comparable. 

One of the key factors in carrying on business is adequate working 
capital — that is, availability of assets of the type that enter into the 
day-to-day transactions and maintain the continuity of operations. 
The following table, compiled by Donald Woodward of Moody's 
Investors Service, presents data for manufacturing industries, based 
on reports to the Bureau of Internal Revenue. The "large corpora- 
tions" are 316 in number, specially tabulated by Moody's with 
assets ranging upward from $3,000,000. The working capital for the 
smaller corporations is the difference between the total working capital 
of all manufacturing corporations submitting balance sheets (which 
include the 316 large companies) andihe 316 large corporations. 



Table 1. — Aggre 


ga{e volume of working capital in manvfacturing industries 




Manufacturing 
corporations 

submitting bal- 
ance sheets 


Large cor- 
porations 


Small cor- 
porations 


Proportion 
of large 

companies' 

share to 

total 


Index: 1929=100 


Year 


Large cor- 
porations 


Small cor- 
porations 


1926 

1927 


$18, 985, 000, 000 
19, 042, 000, 000 
20, 142, 000, 000 
20, 588, 000, 000 
18, 794, 000, 000 
16, 010, 000, 000 
13, 562, 000, 000 
14,192,000,000 
13, 641, 000, 000 
14, 086, 000, 000 
15, 138, 000, 000 


6,696 
6,859 
7,450 
8,037 
7,618 
6,916 
6,021 
6,132 
6,187 
6,502 
6,793 
7,002 
7,356 


12,289 
12, 183 
12, 692 
12,551 
11,176 
9,094 
7,541 
8,060 
7,454 
7,584 
8,345 


35.3 

36.0 

37.0 

39.0 

40.5 

43.2 

44.4 

43.2 

45.4- 

46.2 

44.9 


83.3 
85.3 
92.7 
100.0 
94.8 
86.1 
74.9 
76.3 
77.0 
80.9 
84.5 
87.1 
91.5 


97.9 
97.1 


1928 :. - 


101.1 


1929 : 


100.0 


1930 . . 


89.0 


1931. - - 


72.5 


1932 


60.1 


1933 


64.2 


1934 


59.4 


1935 . ... 


60.4 


1936 . 


66.5 


1937 




1938 





















Source: Hearings on Mead bill (S. 1482 and S. 2343), 76th Cong., 1st Sess. 

The table shows a sighificant trend toward concentration of work- 
ing capital in the 316 large corporations. Their proportion of the 
total rose almost without interruption from 1926 to 1936, increasing 
from 35 to 45 percent of the total volume of working capital 
owned by manufacturing corporations. This trend may best be inter- 
preted as showing one aspect of the increasing financial strength of 
the large corporations relative to the smaller businesses. 

The effect of the depression was particularly severe on the smaller 
companies. Their volume- of working capital declined more sharply 
during the depression years and recovered only slightly. The smaller 
corporations had lost 40 percent of their working capital by 1932 and 
by 1936 had regained- only 7 percent; in the same period the large 
corporations lost. 25 percent afid regained 10 percent. 

Inadequate working capital is often defined in terms of a low ratio 
of current assets to current liabilities. The current ratio shows how 
much can be currently realized from the sale of merchandise and the 
collection of receivables for every dollar that' must be paid out cur- 



OONCENTRATION OF EOONOMIC POWER 



209 



rently in meeting short-term obligations. A ratio of 2.0 is a rule-of- 
thumb measure of soundness, since there would be sufficient funds 
available to meet current obligations even if the current assets should 
shrink to one-half their stated value or be converted into cash half as 
rapidly as was anticipated. 

If we examine the working-capital ratios of corporations submitting 
balance sheets to the Bureau of Internal Revenue and classify them 
according to size of assets, we find the working-capital ratios increasing 
with the size of the corporations as shown in the following table: 

Table 2. — Current ratios for corporations in all manufacturing combined, in 
manufacturing textiles and their products, and in trade, 1932 and 19S6 



Asset class 



All manufacturing 



1936 



Textiles and 
products 



1932 



1936 



Trade 



1932 



1936 



Oto $50,000 

$50,000 to $100,000 

$100,000 to $250,000 

$250,000 to $500,000 

$500,000 to $1,000,000 

$1,000,000 to $5,000,000... 
$5,000,000 to $10,000,000.. 
$10,000,000 to $50,000,000 
$50,000,000 and over 



1.36 
1.73 
1.95 
2.36 
2.68 
3.11 
3.94 
3.83 
3.54 



1.43 
1.82 
2.08 
2.40 
2.. 54 
3.16 
3.68 
3.65 
3.12 



1.71 
2.14 
1.96 
2.30 
2.76 
3.26 
4.56 

5.84 



1.74 
1.93 
2.04 
2.28 
2.79 
3.32 
3.12 
4.60 
4.82 



1.81 
2.34 
2.44- 
2.70 
2.80 
3.03 
2.87 
2.42 
2.13 



1.78 
2.14 
2.17 
2.41 
2.35 
2.28 
2.07 
2.02 
2.10 



Source: Statistics of Income. 



Short- and Long-term Debt. 

Another indication of the greater financial strength of large busi- 
nesses is seen in the structure of their financing. On the whole, the 
larger corporations get a larger proportion of their capital from stock- 
holders and a smaller proportion from, lenders than do the smaller 
corporations. Borrowed capital must eventually be repaid; it carries 
interest charges which must be met as a cost of doing business. 
Stockholders' (equity) capital is a permanent investment, and divi- 
dends are contingent upon earnings. The larger corporations that 
borrow money have, as a rule, fixed maturity dates, with a smaller 
proportion of their borrowed money at the call of creditors. 

The following table shows the ratio of current liabilities to total 
borrowed capital, by size of corporation. 

Table 3. — Ratio of current liabilities to total borrowed capital for corporations in 
all manufacturing, in manufacturing textiles and their products, and in trade, 1982 

and 1936 

[A\\ ratios in percent] 



Asset class 



A 11 manufacturing 



1932 



1936 



Textiles and 
products 



1932 



Trade 



1936 



Oto $50,000-.-.. 

$50,000 to $100.000 

$100,000 to $250,000 

$250,000 to $500,000. 

$500,000 to $1,000,000 

$1,000,000 to $5,000,000... 
$5,000,000 to $10,000,000. 
$10,000,000 to $50,000,000 
$50,000,000 and over 



Source: Statistics of Income. 



210 



CJONCENTRATION OF ECONOMIC POWER 



The table shows that the smaller companies finance themselves 
largely on a short-term basis, wkareas the larger corporations rely 
on long-term funds. Thus, in manufacturing as a whole, about 
80 percent of the borrowed capital of the smallest corporations is 
subject to the call of creditors. This percentage declines with each 
larger class until, in the largest class (with assets of $50,000,000 or 
more), only about 50 percent of the borrowed capital is callable. 
The vulnerability of the small corporations, especially in the down- 
swing of the cycle when credit is becoming tight, is readily apparent. 
The creditor can call the debt when his own position requires it. 
Thus, the small businessman is weakest in a cyclical decline, not only 
because his own market is shrinking, but because his creditors' posi- 
tion is likely to be weak. The large firm with a preponderance of 
long-term debt must meet only the interest burden, whereas the 
small firm has both interest and principal to pay off. 

The high proportion of current liabilities is a partial explanation of 
the low current ratios characteristic of small business. If the debt 
structure of all corporations were uniform, the current ratios would 
not show such great variation. 

Present Equity. 

The value of the owners' share in the business is an important 
measure of financial strength. This "equity" in the case of cor- 
porations, is the value of preferred and common stock, plus surplus 
and undivided profits, minus the deficit. There is a considerable 
possibility of error in the data arising from the "book value" of stocks, 
which may be altered without affecting assets directly. With this 
potential defect in mind, we may examine the following table. 



Table 4. 



-Ratio of equity to total assets for all manufacturing corporations, 1932 
and 1986 



[All ratios in percent] 










Assets 


Returns with net 
income 


Returns with no net 
income 




1932 


1936 


1932 


1936 


to $50,000.... 


67.5 
72.4 
77.1 
80.0 
82.4 
83.5 
84.6 
81.5 
79.4 


58.1 
64.0 
67.4 
71.0 
73.2 
75.6 
74.0 
75.6 
77.0 


49.2 
60.2 
65.3 
70.3 
73.6 
75.9 
73.6 
75.0 
71.4 


33.8 


$50,000 to $100,000 


45.8 


$100,000 to $250,000 


61.4 


$250,000 to $500,000 


54.2 


$500,000 to $1,000,000.-.. 


63.6 


$1,000,000 to $5,000,000-- ... -. . 


67.3 


$5,000,000 to $10,000,000 


58.2 


$10,000,000 to $50,000,000 


53.1 


$50,000,000 and over 


42.0 







Source: Statistics of Income. 

It is evident that the ratio of equity to total assets, in general, 
varies directly with the size of the corporation. This relationship 
applies to individual industries as well as to the group for which data 
are presented. For every dollar of assets, the small firm has a smaller 
proportion of invested capital than the large firm. This suggests 
either that the large company has been more profitable and has 
thereby increased its equity or that it has freer access to the capital 
market than does the small company. In either case, it is clear that 
the small firm is relatively vulnerable because of the higher propor- 
tion of borrowed funds in its financial struct ure. 



CONCENTRATION OF ECONOMIC POWER 



211 



By 1936, the equity status of all groups had been weakened. More- 
over, the decline in the ratios is somewhat greater for the smaller 
corporations, especially those showing no net income. This is indi- 
cated in the following table. 

Table 5. — Percentage changes in equity ratios for manufacturing corporations 



Asset class 



Percentage decrease in 
equity ratios, 1932-1936 



Income 
corporation 



Deficit 
corporation 



Percentage by which 
ratio for income 
corporations exceeds 
ratio for deficit 
corporations 



1932 



1936 



to $50,000 — 

$50,000 to $100,000 ■. 

$100,000 to $250,000 

$250,000 to $500,000 

$500,000 to $1,000,000 

$1,00Q,000 to $5,000,000... 
$5,000,000 to $10,000,000- 
$10,000,000 to $50,000,000 
$50,000,000 and over 



13.9 
11.6 
12.6 
11.2 
11.2 
9.5 
12.5 
7.2 
3.0 



31.3 
23.9 
21.3 
22.9 
27.2 
24.5 
20.9 
29.2 
41.2 



27.1 
16.9 
15.3 
12.1 
10.7 

9.1 
13.0 

8.0 
10.1 



45.6 
39.7 
31.1 
31.0 
36.6 
31.9 
27.1 
42.4 
83.3 



Source: Statistics of Income. 

Thus, for returns with net income, the ratio for the group with 
assets under $50,000 declined 14 percent between 1932 and 1936, while 
the largest class had a decrease of only 3 percent. For returns with no 
net income, the relationship is not as clear, especially because the 
largest group decreased so sharply. This difficulty arises frequently 
because of the relatively small number of firms in the class, causing 
undue weight to be attached to a few returns. It is clear, however, 
that the smallest corporations were in a relatively weaker position in- 
1936 than in 1932. 

The table also indicates considerable weakening in the position of 
deficit corporations. In 1932, the ratio for the smallest net-income 
group was 27 percent above that for the deficit corporations in the 
same class; however, by 1936, those with net income had a ratio 46 
percent higher than those which had no earnings. This relationship 
applies to corporations in aU size groups. It is evident that the 
equity position of deficit corporations was much worse in 1936 than 
in 1932. 



THE ECONOMIC POSITION OF SMALL BUSINESS 

In 1935 there were, according to Dun & Bradstreet, ^,244,175 
active firms in the United States. Arthur Whiteside, president of 
Dun & Bradstreet, estimates that 1,680,000 concerns have net worth 
under $120,000.^ Excluding banks, insurance companies, and service 
concerns not seeking credit, 30 percent of all commercial units have 
an investment of $500 or less; 48 percent have between $500 and 
$10,000; 21 percent have more than $10,000. Although it is difficult 
to obtain adequate data as to the long-run trend in the number and 
size of firms, there is some evidence with respect to the short-run 
stability of enterprise. 

' Temporary Islational Economic Committee Hearings, Part 9, "Savings and Ipvestment," p. 3873 
<76th Cong.). 



212 



CONCENTRATION OP ECONOMIC POWER 



In the field of retail trade, fbxir?. are comparable data over a period 
of several years. According to the Census of Business, the number 
of retail stores was 1,543,158 in 1929 and 1,653,961, in 1935. Although 
this indicates relative stability of numbers, there is a large amount 
of turn-over in ownership. 

In a study of Births and Deaths of Retail Stores in Indiana, 
1929-37, 2 it" was found that "out of a total of 10,430 stores in 
business at the end of 1929 and 13,585 starting during the next 8 
years, disappearances aggregated 14,509 or 139 percent of the number 
of stores operating at the end of 1929. Since the actual number of 
closings exceeded openings by 924, there were 9 percent fewer retail 
outlets m 1937 than in 1929. * * * 

"In general the lines with the smallest capital investment might 
be expected to have the highest turn-over, since the ease with which 
a person may enter an unregulated business is determined in large 
part by the capital necessary to start the business." About 54 per- 
cent of the disappearances were registered in the class with less than 
$2,000 in net worth; another 24 percent were in the $2,000 to $20,000 
grou ping. 

These data refer to changes in ownership and management of retail 
outlets much more than with failures. In recent years, the number 
of failures has averaged between 10,000 and 12,000 per year.* Dun's 
Statistical Review classifies failures by volume of liabilities. In the 
accompanying table, it is evident that over 90 percent of the manu- 
facturing concerns failing in the period 1935-39 had liabilities under 
$100,000. In wholesale trade, this proportion was about 97 percent 
and in retail trade about 99 percent. Moreover, in each group, at 
least three-fourths had liabilities under $25,000. 



Table 6. — Failures by industrial groups and size of liabilities 



Liabilities 


Number of failures as percent of total in each group 


1935 


1936 


1937 


1938 


1939 


MANUFACTURING 

UnderSS.OOO 


25.0 
53.2 
16.3 
94.7 
5.3 


28.0 
51.5 
16.3 
95.8 
4.2 


21.4 
51.6 
17.5 
90.5 
9.5 


22.0 
50.9 
20.1 
93.0 
7.0 


22.8 


$5,000 to $25,000 


52.3 


$25,000 to $100,000 


18.2 


Under $100,000 


93.3 


$100,000 and over 


6.7 






Total 


100.0 

26,4 
53.3 
16.8 
96.5 
3.5 


100.0 

24.7 
54.5 
17.5 
96.7 
3.3 


100.0 

23.2 
56.0 
19.4 
97.6 
2.4 


100.0 

23.4 
55.0 
18.4 
96.8 
3.2 


100.0 


WHOLESALE TRADE 

Under $5,000 


26.1 


$5,000 to $25,000 


55.9 


$25,000 to $100,000 


15.6 


Under $100,000 


97.6 


$100,000 and over. 


2.4 






Total 


100.0 

51.8 

41.4 

5.9 

99.1 

.9 


100.0 

51.1 

42.0 

6.2 

99.3 

.7 


100.0 

52.0 

42.3 

5.2 

99.5 

.5 


100.0 

48.7 

44.2 

6.5 

99.4 

.6 


100.0 


RETAIL TRADE 

Under $5,000 


49.8 


$5,000 to $25,000 - -- 


44.2 


$25,000 to $100,000 . .. 


5.6 


Under $100,000 


99.6 


$100,000 and over 


.4 






Total ^ 


100.0 


100.0 


100.0 


100.0 


100.0 







Source: Dun's Statistical Review, February 1937, 1939, 1940. 



» Dun's Review, January 1940. 

* See, for example, Dun's Statistical Review, February 1939. 



CONCENTRATION OF ECONOMIC POWER 



213 



Closer examination of the data ^ reveals that, for firms with liabilities 
under $100,000, the volume of current liabilities was identical with 
total liabilities. Apparently, the smaller firms had no long-term 
debt, as was the case with the larger companies. We have already 
seen that, for all corporations, current liabilities represent about 80 
percent of total borrowed capital in the smallest asset class. Claims 
on the assets of small firms are thus composed almost entirely of 
current liabilities and the owners' investment. Inasmuch as the 
smaller corporation has a smaller proportion of equity to assets, the 
weakness of small business in economic fluctuations is apparent. 

Net Income. 

One of the most significant measures of the economic status of 
small business is relative profitability. The following table shows the 
relationship of the smallest corporations (assets of less than $50,000) 
to the total num,ber of corporations filing balance sheets with the 
Bureau of Internal Revenue, 

Table 7. — Proportion of smallest corporations to total corporations, 1931-36 



Year 


Proportion of 

income 
corporations 
with less than 
$50,000 assets 

to total 
income corpo- 
rations 


Proportion of 
deficit corpo- 
rations with 

less than 
$50,000 assets 
to total deficit 
corporations 


Proportion of 
corporations 
with less than 
$50,000 assets 
to total num- 
ber of corpo- 
rations 


1931 


45.79 
45.73 
46.95 
. 46.95 
45.54 
43.34 


49.13 
64.27 
57.09 
57.93 
60.21 
64.12 


47 88 


1932 


52.67 


1933.. 


54.45 


1934 


54.33 


1935 


54 80 


1936 


54.70 







Source: Statistics of Income. 

Although the relative number of corporations in the class with 
assets under $50,000 had increased 7 percent between 1931 and 1936, 
they formed a decreasing percentage of the profitable firms and a 
sharply increased proportion of the unprofitable companies. In 1931, 
these small concerns were 46 percent of the net-income corporations, 
but by 1936 they declined to 43 percent of the total, a drop of 3 per- 
cent. On the other hand, they represented 64 percent of the no-net- 
income corporations in 1936, an, increase of 15 percent. In part, the 
shift may be attributed to changes ,in classification rules, by the 
Treasury in 1936; nevertheless the general trend shown is probably 
valid. 

The following table shows clearly the variation in the proportion of 
large and small firms showing no net iiicome. 

Table 8. — Proportion of smallest and largest deficit corporations to total corporations 

in eflch group 





Percent of 


Percent of 




Percent of 


Percent of 




deficit cor- 


deficit cor- 




deficit cor- 


deficit cor- 




porations to 


porations to 




porations to 


porations to 


Year 


total corpo- 


total corpo- 


Year 


total corpo- 


total corpo- 




rations (less 


rations (over 




rations (less 


rations (over 




than $50,000 


$1,000,000 as- 




than $50,000 


$1,000,000 as- 




asset class) 


set class) 




asset class) 


set class) 


1931... 


64.06 
83.77 
77.60 


64.38 
76.35 
69.65 


1934 


71.60 
69.36 
64.06 


62.14 


1932 


1935 .. . 


54.93 


1933 


1936 


34 13 









Source: Statistics of Income. 



« Dun's Statistical Review, Febraary 1939. 



214 



CONCENTRATION OF ECONOMIC POWER 



In 1931, 64 percent of the firms in both groups had no net income; 
in 1936, there were still 64 percent of the small firms in that category, 
as compared with only 34 percent of the large enterprises. Thus, 
from the point of view of numbers, the smallest group had failed to 
improve its relative position between 1931 and 1936 — since onlyi 36 
percent had any net income; on the other hand, the group with assets 
over $1,000,000 had a large increase in the proportion of firms with 
net income. 

Thus far we have been considering the net-income position of small 
firms in all types of business. That the relative position of small 
manufacturing concerns has suffered since 1932 is clear from the 
data iu table 9. 

Column (1) shows that the smallest manufacturing corporations 
with deficits have constituted an increasing proportion of total deficit 
corporations, although the total of corporations in this class (assets 
under $50,000) has remained about one-half of all corporations filing 
balance sheets. As business improved, the relative number of small 
corporations showing no net income decreased from 86.8 to 64.3 
percent of the total in the group (column 3). However, this decrease 
was much less rapid than the decrease in the number of large businesses 
^\'ith no net income. As shown in column (4), only 61 percent of 
those in the large group ($50,000,000 or more) had no net income 
in 1932; by 1936, this percentage had declined to 11.2 percent. 

Table 9. — Relationship of smallest deficit corporation to total corporations with and 

without net income 



Year 


Proportion 
of deficit 
corporations 
with assets 
under $50,000 
to total defi- 
cit corpora- 
tions 

(1) 


Proportion 
of all corpo- 
rations with 
assets under 
$50,000 to 
total corpo- 
rations 

(2) 


Proportion 
of deficit 
corporations 
to total cor- 
porations in 
class with 
Assets under 
$50,000 

(3) 


Proportion 
of deficit 
corporations 
to total cor- 
porations in 
class with 
assets of 
$50,000,000 
or more 

(4) 


1932 


52.4 
58.6 
60.0 
62.6 
67.4 


49.8 
51.2 
50.9 
51.0 
50.4 


86.8 
79.1 
72.2 

6«r:8 

64.3 


60.7 


1933 


48.7 


1934 


43.0 


1935 


33 3 


1936 


11 2 







Source: Statistics of Income. 

Examination of the profit record of manufacturing concerns reveals 
a direct relationship between size and profits. 

Table 10. — Ratio of compiled net profit (after tax) to net worth (average equity), 

manufacturing' industries 

[Average 1931-36] 

Ratio 
Size of asset class: (percent.) 

Oto $50,000 -17. 2 

$50,000 to $100,000 -5. 2 

$100,000 to $250,000 -2. 4 

$250,000 to $500,000 -. 3 

$500,000 to $1,000,000 : . 8 

$1,000,000 to $5,000,000 1. 6 

$5,000,000 to $10,000,000 2. 4 

$10,000,000 to $50,000,000 .- _._. 2. 5 

$50,000,000 and over ..^^ 3. 6 

Source: Statistics of Income. 



CONCENTRATION OF ECONOMIC POWER 



215 



Profitability varies with the size of business. The smallest size 
class shows the greatest loss, the largest size class shows the greatest 
profit. It is well to note that these ratios are based on combined 
returns. A more detailed break-down reveals that small manufac- 
turing corporations showing net income tend to have higher ratios 
than the larger ones; at the same time, small no-net-income corpora- 
tions have higher losses. In general, large corporations that make 
profits make them at lower rates than small ones, while large corpora- 
tions that lose money, lose at lower rates than small ones. But, 
since so few small corporations show any earnings, the group average 
in the smaller classes will be dominated by the no-net-income cor- 
porations. Another fact of striking significance is that corporations 
with assets under $500,000 averaged deficits during the period 1931-36. 

The observed correlation between size (as measured by assets) and 
profit rates in all manufacturing corporations is significant and not 
due to differences among the various branches of manufacturing 
industries. This is shown by the following table. 

Table 11. — Ratio of compiled net profit {after tax) to net worth {average equity) in 
three manufacturing industries 

[Average 1931-36] 



Size of asset class 



Food ratio' 


Metals 
ratio 


Percent 


Percent 


-11.1 


-19.2 


-2.7 


-5.9 


—.8 


-3.2 


2.1 


-1.6 


3.2 


-.4 


3.3 


.3 


4.0 


.9 


} 16.2 


.6 
3.2 



Textiles 
ratio 



Oto $50,000... 

$50,000 to $100,000 

$100,000 to $250,000 

$250,000 to $500,000- 

$500,000 to $1,000,000 

$1,000,000 to $5,000,000... 
$6,000,000 to $10,000,000-. 
$10,000,000 to $50,000,000 
$50,000,000 and over 



Percent 
-23.9 
-7.6 
-3.7 

-.7 
.0 



2.7 



« Classes grouped $10,000,000 and over. 
» Classes grouped $5,000,000 and over. 

Source: Statistics of Income. 



It can be seen that differences do exist between groups of manu- 
facturing industries. The range of variation in the food group is 
much less than in metals or textiles. The yearly record shows that 
the food groups respond less sharply to cyclical influences than either 
metals or textiles and that the profit disparitv between the lowest size 
group and the highest is much less in this branch of inanufacturing 
than in any other. 

Notwithstanding the differences in detail between these branches of 
manufacturing industry the basic correlation of profit rate and size 
is apparent in each branch. W. L. Crum, who has studied this ques- 
tion in great detail, concludes— 

The almost universal prevalence among the groups of a positive correlation 
between rate and size — a tendency for rate to increase as size increases — strength- 
ens the conclusion that in manufacturing in general, this correlation is charac- 
teristic and fundamental. Whatever be the causes of the increase of rate with 
size, they are not to be found in the accidental mingling of \\idely different tyj)e8 
of industry in the manufacturing division.* 

The same correlation between size and profit rate has been shown 
to exist in aU the branches of corporate industry.^ It is not so defi- 

« W. L. Crum, Corporate Size and Earning Power, Harvard University Press, 1939, p. 158. 
' W. L. Crum: Ibid. 



216 OONCENTRATION OF ECONOMIC POWER 

nitely established that differences in size are a significant factor in the 
explanation of differences in profit rate for these other segments of 
corporate industry as in the manufacturing segment.* Break-downs 
comparable to those which exist for manufacturing industry are not 
given, and so the possibility that the differences in profit rate are 
simply the result of the mingling of widely different branches with 
different typical profit rates is not conclusively eliminated. It is, 
however, extremely improbable that, in all the segments of corporate 
enterprise classified by the Bureau of Internal Revenue, the basic 
positive relationship of size and profit rate should appear were size 
not a significant factor. 

The following table, which shows the profit rate and asset size of 
all corporations, may then be taken as the average pattern. 

Table 12. — Ratio of compiled net profit {after tax) to net worth (average equity), all 

corporations 

[Average, 1931-36] 

Ratio 

Size of asset class: (percent) 

Oto $50,000 -16.3 

$50,000 to $100,000 -4. 7 

$100,000 to $250,000 -2. 7 

$250,000 to $500,000 1 -1. 4 

$500,000 to $1,000,000-.- -. 8 

$1,000,000 to $5,000,000 -. 1 

$5,000,000 to $10,000,000 . 4 

$10,000,000 to $50,000,000 1. 4 

$50,000,000 and over 2.6 

Source: Statistics of Income. 

We may conclude that in branches of industry snfiiciently large to 
show wide size distributions, it is highly probable: * 

(a) There will be a significant positive variation of profit rate with 
size of firm. 

(6) The profit rates for the largest firms will be significantly above 
the rates for the smallest firms. 

Share of the Market. 

The best available market data is to be found in the field of retail 
trade, which is overwhelmingly a "small business" industry. Accord- 
ing to the Census of Business in 1935, the chains are the "big busi- 
nesses" in retail trade though some independent local branch systems 
are also "big businesses." In 1935 there were 6,079 chains in retail 
trade operating 127,482 stores, while there were approximately 1,450,- 
000 independents operating al30ut 1,480,000 stores. The gross sales 
per chain in 1935 were $1,242,000. The gross sales per independent 
were a,ppfoximately $16,750. However, the "smallness" of the great 
-mass of retail storekeepers is not really shown by this latter figure, 
small though it is. Almost one-half of all independent retailers have 
gross sales of less than $5,000 per year. The independents have since 
1929 lost part of the market to chains and other types of retail units. 
The independents' share of gross sales decreased by 4.4 percent, while 
the number of stores which they operated remained constant. The 
chains, on the other hand, increased their sales by 2.8 percent, while the 
number of stores operated by them decreased by 1.9 percent. 

* The Bureau of Internal Revenue classifications are Manufacturing, Mining, Agriculture, Construction, 
Trade, Service, Public Utilities, Finance. 



CONCENTRATION OF ECONOMIC POWER 



217 



Table 13. — Stores and sales by size of stores, 19S6, independents , chains, aUd 

mail order 



Oross sales 



Number of stores 



Independ- Chain and 
ent mail order 



Percent of total stores 



Independ- 
ent 



Chain 



Percent of total sales 



Independ- 
ent 



Chain 



Less than $1,000.... 

$1,000 to $1,999 

$2,000 to $2,999 

$3,000 to $4,999 

Less than $5,000.. .. 

$5,000 to $9,999 

$10,000 to $19,999... 
$20,000 to $29,999... 
$30,000 to $49,999... 
$50,000 to $99,999... 
$100,000 to $299,999. 
$300,000 and over.. 



177,151 

173, 720 

127, 293 

201, 835 

679, 999 

297, 617 

271, 059 

109, 523 

90,888 

47,582 

24,622 

5,798 



926 

1,254 

1,381 

2,824 

6,385 

8,094 

21, 654 

21, 193 

29,994 

25,286 

12, 645 

2,646 



11.6 
11.4 

8.3 

13,2 

44.5 

19.5 

17.7 

7.2 

6.0 

3.1 

1.6 

.4 



5.0 
6.3 
16.9 
16.6 
23.4 
19.8 
9.9 
2.1 



0.4 
1.0 
1.2 
3.2 
5.8 
8.3 
14.8 
10.4 
13.7 
12.9 
15.5 
18.5 



.2 

.8 
4.2 
6.6 
14.6 
21.8 
24.2 
27.6 



Total. 



1, 527, ( 



134, 282 



100.0 



100.0 



100 « 



100.0 



Source: Census of Business, 1935. 

The position of small business in the service trades is analogous to 
that of small business in retailing. Service establishments are, 
for the most part, small businesses more than half of which are operated 
solely by proprietors and members of their families, since the volume 
of their receipts does not justify the employment of paid personnel. 
Of the total number of establishments covered by the census, 203,078, 
or 35.3 percent, reported receipts per establishment for 1935 of less 
than $1,000, An additional 226,834 establishments, or 39.5 percent 
of the total, reported receipts amounting to more than $1,000 but less 
than $3,000. These two groups represent 75 percent of the total 
service establishments, but they account for only $494,935,000, or 24 
percent, of the total receipts. Establishments in these two size groups 
are operated by 442,002 active proprietors and firm members, or 76 
percent of the total number of active proprietors and firm members of 
all service establishments. 

The large businesses in service industries — those which reported 
receipts in excess of $50,000 for 1935 — account for $464,877,000, or 
23 percent, of total receipts, and represent 996, or 0.2 percent, of the 
total number of proprietors of all service establishments. It is im- 
portant to note that a large majority of the establishments in this 
group are business-service establishments. 

In the field of manufacturing we are restricted to corporate data. 
The following table illustrates the changes in sales relationships be- 
tween 1932 and 1935. 

Table 14. — Gross sales {or gross receipts from operations) in all manufacturing 
corporations submitting balance sheets, 1932 and 1935 



Asset size 


Percent 

increase 

in average 

sales 


Total sales in each 
group as percent- 
age of all sales 


Number of returns 
in each group as 
percentage of total 




1932 


1935 


1932 


1935 


$0 to $50,000 


35.4 
48.5 
55.9 
60.9 
71.2 
70.1 
71.9 
26.7 


4.3 
3.-5 
6.5 
6.0 
6.3 

15.0 
6.4 

52.0 


4.2 
3.4 
6.8 
6.7 
7.7 

18.5 
7.5 

45. 2 


49.8 
15.3 
15.9 
7.9 
4.9 
4.7 
.7 
.8 


51.0 
14.4 
15.3 
7.8 
5.1 
4.9 
.7 
.8 


$50,000 to $100,000 


$100,000 to $250,000- 


$250,000 to $500,000 


$500,000 to $1,000,000 


$1,000,000 to $5,000,000 


$5,000,000 to $10,000,000. 


$10,000,000 and over 




Total 




100.0 


100.0 


100.0 


100.0 






Source: Statistics of Income. 













218 



OONCENTRATION OF EOONOMIC POWER 



Average sales increased for all groups, with a definite tendency for 
the larger firms to increase more than the smaller ones, (except for 
the class with assets of $10,000,000 or more). With the improvement 
of business conditions, the individual small concern handled rela- 
tively less of the increased sales, as the percentage increases indicate. 
On the other hand, examination of the proportion of total sales reveals 
that a relatively constant share of the market was retained by firms 
with assets under $250,000; this may be explained by the changing 
relationship between the proportion of firms and the proportion of 
sales in each group. The significant shift occurred among the larger 
corporations. Thus, sales of firms with assets between $250,000 and 
$10,000,000 rose from 33.7 to 40.4 percent of the total, whereas the 
share of the largest group decreased from 52.0 to 45.2 percent. Since 
the increase in average sales for all corporations was 43.8 percent, it 
seems clear that the relative loss was confined to the smallest and the 
largest group. 

In the light of the concentration already noted in trade, it is well 
to observe that, at one extreme, 51 percent of the firms made 4 
percent of the sales, and, at the other extreme, 0.8 percent made 
45 percent of the sales. 

Turn-over. 

The rate of turn-over is a measure of the relationship between sales 
and working capital. In the following table, the rate of turn-over is 
the ratit) of sales to current assets. 



Table 15. — Turn-over ratio in manufacturing corporations submitting balance 

sheets, 1932 and 1935 



Asset size 



Returns showing 
net income 



1932 1935 



Returns showing 
no net income 



1932 1935 



$0 to $50,000 

$50,000 to $100,000 

$100,000 to $250,000 

$250,000 to $500,000 

$500,000 to $1,000,000-... 
$1,000,000 to $5.000,000.. 
$5,000,000 to $10,000,000. 
$10,000,000 and over. ... 



4.47 
3.72 
3.28 
3.06 
2.59 
2.29 
2.20 
2.16 



4.81 
3.98 
3.48 
3.15 
2.91 
2.52 
2.31 
2.18 



3.48 
2.55 
2.10 
1.83 
1.65 
1.52 
1.35 
1.34 



4.35 
3.22 
2.76 
2.44 
2.22 
2.11 
2.00 
1.71 



Source: Statistics of Income. 

The rate of turn-over varies inversely with the size of firms; thus, 
the smallest firms with net income had sales of $4.5 for every dollar 
of current assets, while the largest had sales of only $2.2. This 
indicates a relatively high degree of liquidity in the operation of the 
small concern. This may be an indication of an improved position 
in the market or of a weaker position because of inadequate working 
capital. Ordinarily, a high turn-over is associated with high 
profitability; however, as has been shown, the evidence does not 
support this view. In our analysis of working capital, we have seen 
that the current position of small business is relatively weak; the 
volume of working capital in small firms declined sharply in the 
depression years and recovered only moderately. Accordingly, the 
high turn-over ratio may reflect merely an unsound "hand-to-mouth" 
form of operation. 



CONCENTRATION OF ECONOMIC POWER 



219 



Another aspect of the turn-over data is the relationship between 
net-income and no-net-income corporations. In each year and in 
each size group, firms with no net income had lower turn-over ratios. 
This indicates the potential importance of sales, since it is likely that 
an increased volume of business would have taken some concerns out 
of the deficit category. 

Cost oj Capital and Credit. 

The economic and financial position of the small businessman is 
further weakened by the costs involved in obtaining capital. The 
inequalities in costs as between large and small firms are brought out 
in the S. E. C. record of 217 issues registered during 1937, as shown in 
the accompanying table. The expense of a common stock issue of 
less than $250,000 is 22 percent, whereas only 16 percent represents 
expense in issues of more than $1,000,000. For preferred stock and 
bonds, the discrepancy is even more marked. The result has been 
that only a small part of the need has been met in this way. 



Table 16. — Expense of security flotation, by size of issue, first 6 months of 1937 



Type and size of issue 



Common stock: 

Under $250,000 _._ 

$250,000 to $499,000—. 
$500,000 to $749,000-— 
$750,000 to $999,000.. -- 
$1,000,000 to $4, 999,000 

Preferred stock: 

Under $250,000 

$250,000 to $499,000.... 
$500,000 to $749,000.... 
$750,000 to $999,000-... 
$1,000,000 to $4, 999,000 
$5,000,000 to $9,999,000 



Num- 


Expense 


ber of 


of issue 


cases 


(percent) 


33 


22.4 


19 


19.9 


21 


19.1 


10 


18.2 


22 


15.7 


9 


17.3 


11 


19.5 


8 


U.8 


3 


15.7 


17 


9.3 


2 


3.7 



Type and size of issue 



Prefered stock— continued. 
$10,000,000 to $24,999,000- . 
$25,000,000 or more 

Bonds, notes, and debentures 

Under $250,000 

$250,000 to $499,000 

$500,000 to $749,000 

$750,000 to $999,000 

$1,000,000 to $4,999,000 

$5,000,000 to $9,999,O0O 

$10,000,000 to $24,999,000.- 
$25,000,000 or more 



Num- 
ber of 
cases 



Expense 
of issue 
(percent) 



3.3 
3.0 

9.2 
9.3 
9.8 
4.2 
4.8 
4.8 
3.1 
2.3 



Source: Taken from J. L. Nicholson, "The Fallacy of Easy Money for the Small Business," Harvard 
Business Review, autumn, 1938, p. 33. 

Even in cases where small enterprises have completed the registra- 
tion process, there is evidence that in many cases the entire issue is 
never sold. Most large issues sell 100 percent of the registered 
amounts offered. However, in a S. E. C. survey of sales by small 
and unseasoned companies, a quite different picture is given. 

Of the $321,000,000 of securities registered by the 584 registrants, only 
$74,000,000, or 23 percent, was sold within a period of about 1 j^ear following 
the effective date of registration. Reports from 191 registrants show that none 
of the $105,000,000 of securities registered by them — about one-third of the total 
registration covered by this study — was sold. For the remaining 393 regis- 
trants reporting some sales, total sales of $74,000,000 were equivalent to 34 per- 
cent of the $216,000,000 of securities registered by them.^ 

» "Selected Statistics on Securities and on Exchange Markets," S. E. C, August 1939, p. 35. 



220 



CONCENTRATION OF ECONOMIC P9WER. 



The situation is similar with respect to the cost of credit. The 
following table indicates that interest rates vary inversely with the 
size of loan: 



Table 17. 



-Average size of commercial loans made at different rates, by groups of 
banks, Sept. 1-15, 1938 





Average size of loan 


Interest rate 
charged 


Average size of loan 


Interest rate 
charged 


New 
York 
City 


7 north- 
ern and 
eastern 
cities 


11 south- 
ern and 
western 
cities 


New 
York 
City 


7 north- 
ern and 
eastern 
cities 


11 south- 
ern and 
western 
cities 


1 to 2 percent 

2 to 3 percent 

3 to 4 percent 


$88,000 
54.000 
21,000 


$180,000 
26,000 
22, 000 


$65,000 
24,000 
19,000 


4 to 5 percent 

5 to 6 percent 

6 to 7 percent- 


$18,000 
5,000 
3,000 


$13,000 
6,000 
2,000 


$10,000 
6,000 
3,000 



Source: Federal Reserve Bulletin, January 1939, p. 18. 



The importance of the marked tendency for rates to vary with the 
size of the loan is shown by the following table, which gives the per- 
centage distribution of the number of borrowers according to the 
interest rate charged: 



Table 18.- 



-Distribution of commercial loans, by interest rate charged, Sept. 1-15, 
1938 





Percent of borrowers 


Interest rate 


Percent of borrowers 


Interest rate 


New 
York 
City 


7 north- 
ern and 
eastern 
cities 


11 south- 
ern and 
western 
cities 


New 
York 
City 


7 north- 
ern and 
eastern 
cities 


11 south- 
ern and 
western 
cities 


1 to 2 percent 

2 to 3 percent 

3 to'4 percent 


35 

14 

12 

' 12 


4 
6 
9 
18 


3 

5 
8 
12 


5 to 6 percent 

6 to 7 percent 

7 percent and over.. 


11 
16 


21 

41 

1 


24 
38 
12 


■4 to 5 percent 









Source: Federal Reserve Bulletin, January 1939, p. 17. 

It is clear that a large proportion of borrowers are in the high- 
interest range; 16 percent of those borrowing in New York City paid 
interest at 6 percent or more, while 42 percent in the North and East, 
and 50 percent in the South and West, were in the same category. 

Further evidence in support of this view is to be found in the 
changing rates of interest income from loans. 

Table 19.- — Interest income from loans of national banks {as percentages of total loans) 





Fiscal year 




1929 


1934 


1938 


.Central Reserve city banks.. . 


5.1 


3.5 


2.7 






Reserve city banks, total - -- 


5.8 


4.7 


4.2 






New England, eastern, and midwestem .. .. .. -- .. 


5.6 
6.0 


4.1 
5.3 


3.3 


Southern, western, and Pacific. •. 


4.9 






Country banks, total 


6.5 


5.9 


5.6 






New England, eastern, and midwestem.. 


6.1 
7.1 


5.6 
6.5 


5.2 


Southern, western, and Pacific . .. 


6.2 







Source: "Current Comments," Federal Reserve Board, Apr. 23, 1940. 



CONCENTRATION OF ECONOMIC POWER 



221 



Interest rates received on loans by banks have shown much smaller 
declines among country banks than city banks. In spite of ample 
funds, some areas continue to receive very high rates, A partial 
explanation is that country banks make smaller loans, on the average, 
than do the city banks; since sniall loans bear higher interest rates, 
the interest income of country banks remains relatively high. In 
general, most of the decline in rates occurred in the first 5 years of the 
decade, partly because, in more recent years, banks have increased' 
their personal loans, which bear higher rates of interest than business 
loans. The fact that the differential between the rates of Reserve city 
banks and country banks has increased suggests that there is con- 
siderably less competition in small towns than in large cities. This is 
an extremely important imperfection in the market structure from the 
point of view of the farmer and small businessman, since the local 
bank is often the only source of funds. 

If the small businessman cannot obtain credit at his bank, his 
alternatives are limited to a few types of consumer credit agencies 
and business finance companies. Rolf Nugent, of Ruseell Sage 
Foundation, estimates that in 1938 consumer credit agencies had out- 
standing at least $75,000,000 in loans made for business purposes. 
The following table shows the estimated amounts outstanding for each 
type of agency and the range of interest rates: 

Table 20. — Business loans of agencies whose charges exceed normal banking rates 



Type of agency 



Amount out- 
standing 



Interest rates 
charged (per- 
cent) 



Industrial banking companies 

Regulated small-loan companies. -. 
Personal loan department of banks 

Credit unions 

Axias 

Pawnbrokers 

Total-.-. 



$20, 000, 000 
15, 000, 000 
20, 000, 000 
6, 000, 000 
9, 000, 000 
5,000,000 



75,000,000 



12-30 
24-12 

7-20 
10-18 
12-20 

&-60 



While these agencies do not exhaust the sources to which businessmen 
apply for credit, they are representative because of their high charges. 
Probably a much greater volume of credit is extended by installment 
finance companies, factors, and miscellaneous business financiag 
agencies. 

Trade Credit. 

Probably the most important type of nonbank credit to small firms 
is trade credit. Trade credit comprises credit stemming from goods 
bought for resale and inventory, and from the purchase of equipment. 
It is thus both short and long term. The dominant form is the short- 
term trade credit which provides working capital, though there seems 
to be a trend toward financing investment goods such as store fiuxtures, 
soda-fountain equipment, and refrigerating units through long-term 
trade credit. 

The reliance by small businesses on trade credit is a mixed blessing. 
There are several important disadvantages in using trade credit, all 
of which add to the cost of doing business. 

The weaker the financial position of a firm, the greater is its de- 
pendence on trade credit. Firms which can pay cash are in a positioir 

262652 — il^No. 17 -16 



222 CONCENTRATION OF ECONOMIC POWER 

to bargain for price and quality concessions. Those businesses which 
must depend on trade credit must buy only where they can obtain 
credit. These firms are thus buying both goods and credit and will 
not be able to obtain either on terms as favorable as the firm which 
buys only goods and obtains its credit requirements from a bank. The 
ability to buy from different suppliers is important in the competitive 
struggle, and those firms which are tied to a small number of suppliers 
are in the position of having to buy from what is, in effect, a group of 
monopolists, while their competitors can buy on the competitive 
market: Firms which must depend largely on trade credit exist as 
mere outlets or satellites of the large suppliers. 

During cyclical fluctuations, firms dependent upon trade credit are 
in a particularly bad position. At a time when they need credit 
most, they cannot obtain it. They are, moreover, always faced with 
the possibility that their suppliers may lose "confidence" and press for 
immediate payment both of mterest and principal. Their position 
at these times is especially precarious. Firms with long-term debt, on 
the other hand, have merely to meet interest payments and hence are 
shielded from the devastating effects of changes in "business confi- 
dence." 

BANKING POLICY AND THE NEEDS OF SMALL BUSINESS 

The banks' decision to lend will be determined primarily by two 
factors — the risk of the loan arid the profitability of the loan. The 
risk involved in making a loan depends upon the nature of the assets 
securing the loan. If the assets are highly liquid, the risk is small. 
On the other hand, if the assets which are used as collateral are fixed, 
or subject to rapid depreciation, the risk involved is considerable. A 
bank making a loan secured by collateral of the latter sort, will demand 
collateral with a value more than the face of the loan, depending upon 
the bank's estimate of the depreciation of the assets and what it would 
probably bring in cash if it had to be liquidated. Hence the use of a 
current ratio as a criterion of soundness. 

The profitability of a loan depends upon the cost of making the loan 
(clerical, legal, administrative) and the rate charged. The cost of 
small loans per dollar, loaned will in most cases be higher than large 
loans, since the administrative expenses are fixed. For these two 
reasons banks find it less desirable to loan to small businesses. 

In general, small businessmen require funds in order to improve or 
maintain their position in the market. In the short run, this may 
mean repair of plant and equipment, payment of taxes, expansion of 
inventory, or repayment of short-term loans and trade credits; in the 
long run, this may involve replacement of existing plant and equip- 
ment, refunding of debts on easier terms, or retirement of existing 
debts. In either case, they need funds for periods much longer than 
the usual 1- to 3-month commercial loan. 

The Hardy-Viner report ^° indicates that almost 60 percent of appli- 
cations rejected by banks were for working capital. The following 
table shows this: 

10 Availability of Bank Credit in the Seventh Federal Reserve Pistrict, 1935, p. 9. 



CONCENTRATIOX OF ECONOMIC POWER 223 

Table 21 .—Distribution of rejected loan applications, by purpose of loan 



Type 



Working capital 

Fixed capital 

Both, or undesignated - 

Commercial 

Refinancing : 



Number 
rejected 



1,071 

94 

87 

420 

64 



Percent- 
age of 

total re- 
jected 



59.9 
5.3 
4.9 

23.5 
3.6 



Type 



Financial institutions. 
M iscellaneous 



Total. 



Number 
rejected 



1,788 



Percent- 
age of 

total re- 
jected 



1.6 
1.3 



100.0 



Source: Hardy & Viner, Availability of Bank Credit in the Seventh Federal Reserve District, 1935. 

A working-capital loan is defined as one which finances a conti;;iuing 
series of transactions, while a commercial loan is made to finance a 
single self-liquidating transaction or a group of such transactions to 
be completed within a relatively short period. Thus, it seems that 
the bulk of applications was for credit to finance the continuing oper- 
ations of the business. This is substantiated by an unpublished study 
of the Reconstruction Finance Corporation on the duration of loans 
desired by 1,000 rejected applicants. Of 827 cases where the length 
of loan was specified, only 6 wanted funds for less than a year and 
only 161 for less than 5 years. On the other hand, 242 requested 5-year 
loans, 159 fell between 5 years 1 month and less than 10 years, and 
182 asked fpr 10-year loans. The assets of small businesses consist of 
plant and machinery on the one hand and inventories and receivables 
on the other. During the depression, banks especially have laid great 
emphasis on liquidity; thus security in the form of fixed assets has 
been viewed with disfavor. Receivables are generally unsatisfactory 
to banks unless they are composed of a few good accounts. 

There are a number of legal and practical considerations which limit 
the acceptability of both inventories and receivables. In a review of 
rejected R. F. C. applications conducted by the Department of Com- 
merce," it was pointed out that: 

In order that chattel mortgages on inventories may provide a practicable secu- 
rity, they should (1) permit the sale of goods in the usual course of trade and 
(2) cover goods acquired to replenish stock that is sold. According to a survey 
made by the Legal Division of the R. F. C, however, there are only eight States 
where such security is acceptable from a practicable point of view. In nine States, 
a chattel mortgage covering a fluctuating stock of goods exposed for sale is abso- 
lutely invalid, and in all the others, including the District of Columbia, the steps 
necessary in order to maintain a valid and effective lien are too complicated (or 
too unqertain) to be practicable. In all States except the eight first referred to, 
a chattel mortgage on inventories does not constitute satisfactory collateral unless 
the goods are warehoused. The latter requirement would probably make it 
irnpossible for retail businesses to continue operations in the majority of cases. 

As aheady indicated, accounts receivable ais, in general, acceptable as security 
by the R. F. C. except where they are composed of so many small or delinquent 
items that administrative costs would be prohibitive or recoveries doubtful. 
Unfortunately, the latter conditions obtain with respect to many small retail 
businesses desiring credit. 

In this connection, it should be observed that, if the collateral posi- 
tion of the small manufacturing concern is bad, then the position of the 
small wholesaler or retailer is much worse. The latter have most of 
their assets in the form of inventories and receivables and only a small 
portion in mortgagable plant or equipment. The emphasis on liquidity 

" Cited in hearings on S. 1482 (Mead bill), 76th Cong., 1st Sess. 



224 CONCENTRATION OF ECONOMIC POWER 

and negotiability of collateral thus restricts the potential volume 
of credit, since few small businessmen will be able to meet banking- 
requirements. 

Table 22 indicates the reasons given by banks for refusal of loans. 
One of the main reasons is "inadequate working capital," generally 
defined as too low a ratio of current assets to current liabilities. This 
current ratio shows how much can be currently realized from the sale 
of merchandise and the collection of receivables for every dollar that 
must be paid out currently in meeting short-term obligations. A cur- 
rent ratio of 2.0 is ordinarily considered adequate by bankers, since 
there would be sufficient funds available to meet cm-rent obligations 
even if the current assets should shrink to one-half their stated value 
or be converted into cash half as rapidly as was anticipated. 

Table 22. — Reasons given by banks for refusal of loans * 

Percentage 

Reason: of all cases 

Loan policy of bank 4. 9 

Earnings 19. 2 

Inadequate workirfg capital -^ .._ 36. 8 

. Unsatisfactory customer relationship 12. 5 

Inadequate net worth ' 40. 3 

Speculative or promotional . 9. 6 

Character of business . . 2. 5 

Indebtedness to closed banks 2. 5 

Past insolvency . 5. 7 

Character of management ^ ,. 14. S 

Loan too slow ^ 19. 5 

Real estate. - ^ 1. 8 

Not customer of bank ., 6. 1 

Cause unknown . . — ^ 2. 2 

Examiner criticism ^ 8. 1 

Collateral unsatisfactory 16. 1 

Loan to transfer indebtedness. 1. 1 

Other reasons 3. 6 

' The percentages given in the tables are the ratios of number of times the particular reason was given to 
the total number of eases in the group. As the average number of reasons per case is more than 1, the per- 
centages in each case add up to more than 100. 

Source: "Report on the Availability of Bank Credit in the Seventh Federal Reserve District," 1935 
(Hardy-Viner Report), p. 10. 

A Department of Commerce study, *^ based on reports from firms 
employing no more than 250 workers, shows that credit difficulties 
Were experienced even by firms with high current ratios. In 1929, 
58.3 percent of these establishments had ratios of 2.0 or higher, while 
in 1933, 43.3 percent fell in the same category, with 23.4 percent 
showing ratios of 3.0 and over. It must be remembered that some 
in'dustries are more liquid than others; those having a number of 
"turn-overs" annually may be expected to show greater liquidity 
than those having only a seasonal or annual "turn-over." Moreover, 
some industries suffer more severely than others from the effects of 
depression. 

Inadequate net worth — "too much debt"— accounts for 40 percent 
of the refusals shown in table 22. The usual measure of inadequacy 
is the "net worth-to-debt ratio." The difference between total assets 
and total obligations, representing net worth, is expressed as ratio to 
total obligations. This indicates how much the owners have invested 
for every dollar obtained from creditors; it measures, than, the rela- 

1*^ "Survey of Reports of Cxjedit and Capital DlfElcalties Subscribed b^ Small Manufacturers," 1935, p. 57. 



CONCENTRATION OF ECONOMIC POWER 



225 



tionship between owners' equities and creditors' claims and is of par- 
ticular interest from the long-run view of ability to pay. In this area 
of "opinion" or "policy" we find a large proportion of loan refusals. 
(See table 22.) Such reasons as "Earnings," "Character of Manage- 
ment," "Loan too Slow," "Loan Policy of Bank," or combinations of 
these and other reasons probably account for at least one-third of the 
rejections. Unfortunately, there are no specific criteria which can be 
applied generally to determine willingness and ability to pay, apart 
from past experience. One of the decisive factors here is the bankers' 
attitude toward the future, since this colors their approach to the 
problem of each applicant. 

Again turning to the Department of Commerce study, we find that 
in 1929, 57.2 percent of the firms had net worth-to-debt ratios of 2.0 
and over, while in 1933 51.3 percent were in the same class. There 
appears to have been a considerable stability in these small firms dur- 
ing the depression. It must be remembered that the net worth-to-debt 
ratio includes the more permanent factors in each case, while the cur- 
rent ratio reflects the immediate situation; hence, it is significant of 
stability that the decline in the number of firms with sound net worth- 
to-debt ratios was less than in the case of current ratios. Neverthe- 
less, these firms had difficulty in obtaining credit. 

Correlating the ratios, we find that 18 percent of firms reporting 
credit difficulty had both current and net worth-to-debt ratios of 3.0 
or over, while 33 percent had both ratios at 2.0 or over. 

Table 23 shows borrowing establishments classified by size and credit 
ratios. In the smallest group, 51 percent reported credit difficulty, 
as compared with 40 percent in the largest group. Again, in the 
smallest group, 30 percent of those firms with current ratios of 3.0 
and over had difficulty, as compared with only 18 percent in the 
largest, group. These relationships hold for the net worth-to-debt 
ratios as well. Thus, size of firms is closely related to credit difficulties. 

Table 23. ■ — Borrowing establishments classified by size, and credit ratios, showing 
the percentages that reported credit difficulty in each size and ratio group, 1933 





Percentjeporting difficulty— current ratio 


Number of employees 


Total 


Under 
1.0 


1.0 to 
1.4 


1.5 to 
1.9 


2.0 to 
2.4 


2.5 to 
2.9 


3.0 and 
over 


21 to 50 •. 


50.9 
43.7 
39.8 


76.7 
76.6 
79.9 


67.2 
68.3 
62.0 


66.0 
56.9 
56.3 


52.0 
51.8 
45.6 


49.0 
47.0 
35.1 


29.8 


51 tolOO 


22.6 


101 to 250 


18.4 






Total . .. 


44.8 


77.5 


66.1 


60.0 


49.9 


44.0 


23.3 








Net worth-to-debt ratio 


21 to 50.— , 


50.9 
43.7 
39.8 


68.3 
69.0 
61.1 


68.0 
67.9 
63.1 


63.5 

57.4 
59.4 


56.6 
55.3 
64.6 


52.3 
62.4 
34.8 


35.8 


51 to 100 


26.1 


101 to 250 


25.0 











Source: "Survey of Reports of Credit and Capital Difficulties Submitted by Small Manufacturers," 
Department of Commerce, 1935, p. 52. 

This conclusion is further substantiated by a study on the "Avail- 
ability of Bank Credit" by the National Industrial Conference Board. 
Their conclusion is that a very high proportion of the large concerns 
having capital over $1,000,000 reported either no experience ov no 



226 OONCENTRATION OF ECONOMIC POWER 

difficulty in obtaining bank credit. On the other hand "credit refusals 
and restrictions reported were largely confined to the groups classed 
as small and very small, that is to concerns with capital of $500,000 or 
less." The small and very small concerns, as this is defined, accounted 
for only 51.9 percent of the total number of concerns reported. But 
they accounted for 81.2 percent of all credit refusals or restrictions. 
If size is measured by number of employees per firm, the report 
showed the following: 

Number of employees per firm and percent of credit refusals or restrictions in each 

group 

20 and under 19. 5 

50 to 100- 14. 3 

101 to 250 - 13. 5 

501 to 1,000 2. 6 

1,000 and over . 6 

The study of the Department of Commerce previously referred to 
examined the Dun and Bradstreet ratings of 620 firms which reported 
difficulties in securing credit and whose net-worth-to-debt ratios were 
2 or more. It was found that 38 percent of these firms were rated 
"high" and that 26 percent were rated "good." "In other words, 
almost two-thirds of these firms might be considered acceptable credit 
risks on the basis not only of their reported financial condition, but 
also of their credit worthiness as judged by the efficiency of manage- 
ment and by willingness to pay obligations at maturity."- 

It cannot, therefore, be doubted that credit difficulty is inversely 
correlated with size of firm. Moreover, it has been shown that there 
are many small firms which are sound even by orthodox banking 
standards, yet cannot obtain sufficient credit. 

In the past, banks have financed the purchase of fixed assets 
knowing that the money could be repaid only very slowly out of 
profit. A similar policy was pursued with respect to working capital, 
with full realization that inventories, receivables, and supplies will 
never be liquidated so long as the business remains a "going concern." 
In the normal course of events, inventories are sold and accounts are 
collected frequently, so that money comes in just as in the case of a 
true commercial loan ("one turn-over"). However, the money can- 
not be used to repay a working-capital loan without restricting busi- 
ness operations. Inventory is usually replaced as it is sold, while 
one set of receivables is replaced by another. It was common prac- 
tice to allow such loans to run on for several years, so long as interest 
was paid and the principal gradually reduced. The present difficulty 
arises out of the nature of these working capital loans, which, whUe 
ostensibly short-time, are in reality long-run advances by the banks. 

At the same time, pressure for liquidation of old debts by the 
banks aggravates the situation. Many borrowers who, during the 
depression, kept up payments of interest on their debts and made 
small payments on the principal, are faced now by a steady sapping 
of their working capital in order to repay their old debts. 

The sharp decline in business activity from 1929 to 1933 and the 
slow recovery since then has had the effect of diminishing the demand 
for credit and making the banks more cautious in their general lend- 
ing policies. The relationship between business and the ban]vs 
changed from a debtor to creditor status. Long-term loans fell off 
sharply, as well as short-term advances to small business firms. 



COXCENTRATION OF ECONOMIC POWER 227 

Evidence for these statements is found in the Twentieth Century- 
Fund Study — "Debts and Recovery." In 1930, the peak year as 
regards total corporate debt, the amount owed by corporations was 
estimated at $75,000,000,000. Of this amount, $48,000,000,000 rep- 
resented long-term loans and $27,000,000,000 short term. By 1934, 
the long-term loans in the industrial group had declined to $21,300,- 
000,000, or 44.4 percent of the 1930 level. The short-term loans 
declined to $22,500,000,000 or 83.3 percent of the 1930 level. In 
1929 business debts in commercial banks comprised 60 percent of ail 
debts owed to banks including both short- and long-term debts. 
By 1936, however, business debts had declined to 33 percent of all 
debts. 

Even short-term business borrowing declined drasticall3^ Loans 
of commercial banks "representing chiefly short-term borrowings of 
small business houses" are placed in June 1929 at $16,200,000,000. 
By June 1934 these loans had dechned to $6,200,000,000. It is esti- 
mated that these short-term loans had risen b}^ late 1937 to about 
$8,400,000,000, not quite half of their 1929 volume. 

In 1929 business apparently owed the banks some $12,500,000,000 
more than it had on deposit, and in 1933, $4,400,000,000; but in 
1936, business had $2,300,000,000 more on deposit than it owed the 
banks; and even with the loan expansion of 1936-37, business still had 
a slight creditor balance in 1937. 

Equity Capital. 

A business enterprise can obtain additional funds in several ways. 
It can plow profits back into the business, it can obtain credit from 
the banks or by selling debentures, or it can try to obtain funds from 
investors by selling stock. If most small businesses made a profit, 
there would probably be no credit problem for them. Since com- 
mercial banks take the view that they can grant funds only to 
"sound" business and since most small businesses are not "sound," 
this source is largely closed to them. The last private source is the 
capital markets. But this of all sources has been perhaps the least 
important to small business. It certainly is so to today. The opinion 
of both private and Government authorities agree on this point. 
Thus, Mr. Edward E. Brown, president of the First National Bank 
of Chicago, before the Senate Banking and Currency Committee, 
declared: "In my opinion, it 'has always been difficult f^^ small 
business to get risk capital. I thirtk the difficulties today, for a 
variety of causes, are greater in getting proprietary risk capital for 
small- and medium-sized businesses whose capital needs are not 
large enough to warrant the expense of a public issue." The evi- 
dence from S. E. C. registrations already mentioned is concrete 
illustration of the fact that the capital markets are simply not 
organized for small issues, and consequently closed to small businesses. 

PRESENT GOVERNMENTAL AIDS 

The present system of Government aid to small business is vested 
in two agencies: The Reconstruction Finance Corporation and the 
Federal Reserve System. They are dealt with in their stated order. 

In June 1934 Congress passed an act liberalizing the loan policy of 
the Reconstruction Finance Corporation and the Federal Reserve 
Board (Pubhc, No. 417, 73d Cong.), addng section 5d to the R. F. C. 
Act and sectir- 13b to the Federal Reserve Act. 



228 OONCENTRATIOJ^ OF EOONOMIC POWER 

Reconstruction Finance Corporation. 

The act authorized the R. F. C. to make loans to any solvent in- 
dustrial or commercial business established prior to January 1, 1934. 
The maximum amount to any one borrower was set at $500,000; as 
for security, the law provided merely that it be "adequate." Loans 
were limited to 5-year terms and could be made only when credit at 
prevailing rates was not available "at banks." The R. F. C was 
authorized to make these loans directly, in cooperation with banks, 
or by the purchase of participations from banks. 

Some of the more significant administrative regulations set up to 
clarify the act provided that loans were to be made "primarily to 
supply needed working capital * * * as contrasted with fixed 
capital," ^^ and that loans could not be made if the proceeds were to 
be for repayment of existing debt, for construction or repairs, or for 
payment of taxes. "Adequate security" was to consist of either a 
first mortgage on real estate, plant and equipment, chattels, or 
"assignment of current accounts or notes receivable, trade accept- 
ances, warehouse receipts on merchandise stored in bonded ware- 
houses, or a first lien on other assets of sound value acceptable to the 
Corporation." 

In April 1938, an act was passed permitting the R. F. C. to pur- 
chase securities from businesses. Security for loans does not seem 
to be specifically required, the law stating merely that loans must 
be of "sound value" or secured. Chairman Jones insisted that this 
did not mean that R. F. C. would make character loans and inter- 
preted the law as prohibiting unsecured loans. ^^^ Limits on the ma- 
turity of loans were removed, as well as limits on the amount out- 
standing at any one time. As to eligibility, wording of the section 
was changed to allow loans to any "business enterprise," rather than 
merely to any "industrial or commercial business." The clause limit- 
ing loans to cases "deemed to offer reasonable assurance of continued 
or increased employment of labor" was omitted, but the loans were 
to have as an added purpose "promoting economic stability of the 
country." Borrowers were eligible when credit was "not otherwise 
available," the words "at banks" having been struck out. 

In the revised circulars which the R. F. C. issued '* to explain the 
changes in the law, it was stated that loans were to be made for a term 
not longer "than is justified by the facts of the particular case," but 
long enough to enable the borrower to plan for the development of 
his future business without impairing his working capital. ^^ More 
important, the loans could be made not solely for working capital, as 
before, but also for replacement of equipment or purchase of new 
machinery, "when it is shown that such capital expenditures are 
necessary for efficient operation and are economically sound." Even 
loans for new business enterprises and for expansion were to be given 
consideration by the R. F. C, if they likewise could be shown to be 
economically sound. The only remaining restrictions were that the 
R. F. C. would not make loans to business enterprises in receivership 
"unless it were to ,end the receivership and restore the business to a 
solvent condition," or to finance the development of new inventions. 

" R. F. C. Circular No. 13: Information Regarding Loans to Industry, June 1934. 

»« Hearings on H. R. 4012 (H. R. 3383), Feb. 7, 8, 9, 1939, to extend functions of R. F. C, p. 9. 

« Circular No. 13 and Circular No. 15, revised April 1938. 

'• The regulations stated that for shorter term credit, loans "usually shoi^ld be repaid within 5 years or 
less. When loans are primarily to finance capital expenditures, a longer repayment program may be con- 
sidered." Circular No. 13, revised, p. 1. ~ ' 



CONCENTRATION OF ECONOMIC POWER 229 

"Acceptable" security for loans, as set forth in the regulations, 
included only first mortgages on real estate, plant, or equipment, 
chattels, assignment of warehouse receipts, or accounts receivable. 
As additional collateral, "any other assets of sound value" were 
acceptable. The regulations also stated that the tangible net worth 
of the business enterprise "should be in an amount proportionate to 
the loan requested." The circular defined "securities" that could be 
purchased by R. F. C. as referring only to bonds with definite promises 
to pay and definite maturity dates, and with the same restrictions 
applying as to loans. 

R. F. C. 'procedure. — The prospective borrower makes an application 
at one of the 32 field agencies of the Corporation. A preliminary ap- 
plication may be filed with the following information: purpose of loan, 
bank connections and bank indebtedness, recent efforts to obtain bank 
credit, description of collateral, income and balance-sheet accounts, 
officers of the company (their net worth, insurance carried by them for 
benefit of the applicant). Usually this form is sufficient, although in 
the case- of larger companies a formal application with much more 
detailed description is necessary. 

The application is referred to an examiner; if the nature of the col- 
lateral requires, an appraiser may be called in. The examiner writes 
a report and makes recommendations which are submitted to the 
agency manager and a group of local businessmen, comprising the 
directors of the agency. The application and report of the examiner 
are reviewed and further recommendations made. 

The papers are then sent to the Washington office, where ajiother 
examiner goes over them and submits his report to a review committee. 
This group makes its recommendations to the R. F. C. Board, which 
passes final judgment. If the application is rejected, the reasons are 
submitted at once to the local agency and thence to the applicant. 
If approved, the papers and a resolution adopted by the Board are 
sent to the agency. The applicant discusses the terms and if eYOTj- 
thing is satisfactory to him, he furnishes the necessary papers (notes, 
titles, mortgages, etc.). The case is then transferred to the "custodian 
bank" — the Federal Reserve bank of the district — which can then 
disburse the funds. 

Results. — No information has been published by the R. F. C. as to 
size of the borrowing firms, but the size of the loans authofized has 
been cited as proof that the small busipessman has been given a great 
deal of consideration. The following table ^^ shows loans authorized 
(and commitments outstanding as of June 30, 1939) from February 2, 
li932, to June 30, 1939, inclusive, by size of loans to business enterprises 
(excluding banks, utilities, and railtoads). 

The table shows that 57.8 percent of the dollar volume of loans au- 
thorized was for loans of more than $200,000, although this group con- 
stituted only 4.3 percent of the total number of loans. Loans of 
$100,000 or less were 30 percent of dollar volume of loans and 91.2 
percent of total number of loans authorized. Loans in the category 
$5,000 or less comprised 36.9 percent of the number of loans and only 
1.5 piercent of the dollar volume. 

'* "Quarterly Report of R. P. C," June 30, 1939, p. 50. The amounts shown include loans to fishing 
industry and loans to business through mortgage-loan companies and banks, under sec. 5. 



230 



OONCENTRATION OF ECONOMIC POWER 



Table 24. — Total loans and authorizations of the R. F. C. to business enterprises, 
Feb. 2, 1932, to June 30, 1939 



Size of loans 



Number of 
loans 



Percent of 
total 



Amount au- 
thorized 



Percent of 
total 



$5,00nand under 

$5,001 to $10,000 

$10,001 to $25,000 

$25,001 to $50,000.... 
$50,001 to $100,000.-. 
$100,001 to $200,000.. 
$200,001 to $500,000-. 
$500,001 to $1,000,000 
Over $1,000,000 

Total. --. 



3,023 

1,277 

1,542 

928 

694 

366 

257 

39 

61 



36.9 
15.6 
18.8 
11.4 
8.5 
4.5 
3.1 
.4 



{Millions 

of dollars) 

6.8 

10.3 

28.1 

36.6 

64.0 

65.3 

83.0 

130.7 

47.5 



8,187 



100.0 



452.2 



1.5 
2.3 
6.2 
8.1 
11.9 
12.2 
18.4 
28.9 
10.5 



100.0 



While the total amount authorized by R. F. C. since February 2, 
1932, totaled $452,000,000, actual disbursements were only $180,- 
242,000. Assuming that the distribution of disbursements is the same 
as that of authorizations, the total disbursed in loans of $50,000 or less 
would be about 32.6 million dollars. Since this figure refers to a period 
of more than 7 years, it can be seen that small business has received 
little aid from the R. F. C. 

The greater amount of money disbursed moreover, has been dis- 
bursed since June 1934 under section 5d. The amount authorized 
under this section (up to June 30, 1939) was $351,000,000. Of this 
amount about one-half — $174,000,000 — was disbursed. Thus, prior 
to June 1934, only $6,000,000 had been disbursed to business enter- 
prises by the R. F. C. Of the total authorizations, $267,000,000 were 
in the form of direct loans and $85,000,000 represented purchases of 
participations in bank loans to business enterprises (since June 1934). 
The banks' share in these participations aggregated $40,000,000, so 
that total loans to business with the aid of banks was $125,000,000, or 
roughly one-third of the total authorized aid. While bank participa- 
tions have been higher in 1938 and 1939 than in previous years, they are 
still of minor importance in comparison with the total credit extended 
by the banking system. 

The bulk of the discrepancy between authorizations ^d disburse- 
ments is accounted for by withdrawals and cancelations. R. F. C. 
reports indicate that, in all industries, the proportion of total authori- 
zations withdrawn amounts to 2 1 .4 percent. Marked variations occur 
among industries, from a low of 8 percent in paper and allied products 
to a high of 64 percent in cotton warehousing. 

Many reasons have been offered to explain this discrepancy. Ac- 
cording to R. F. C. officials, an important factor is the ability to get 
credit elsewhere; the borrower may use the R. F. C. authorization as 
a means of convincing his bank that he is a good risk. This suggests 
that R. F. C. policy is considered "sound" by bankers, since they will 
accept R. F. C. recommendations in making loans. Another possible 
explanation is that businessmen prefer to deal with banks in the com- 
munity because of their constant banking needs ; if there is only a small 
spread between R. F. C. rates and bank rates, the businessman may 
prefer to build up his local standing by borrowing from the bank. 

Again it has been suggested that the borrower may be interested 
merely in getting the best offer of R. F. C. and then withdraw because 



CONCENTRATION OF ECONOMIC POWER 231 

he can get more favorable terms elsewhere. Still another factor is 
that the final terms offered by R. F. C. may be different from those 
originally proposed by the applicant. In view of the complicated na- 
ture of administrative procedure this might well be an important 
factor. 
Federal reserve loans to industry. 

Provisions oj section 13b. — The section as passed provides that, "in 
exceptional circumstances," when a Federal Reserve bank is satisfied 
that an "established industrial or commercial business" in its district 
cannot secure loans "on a reasonable basis from the usual sources," 
the bank may "make loans to or purchase obligations of such business," 
or make commitments to do so. Such loans or obligations may be 
for the purpose of providing the business with working capital only, 
and are not to have maturities in excess of 5 years. 

In addition, the section empowers each Federal Reserve bank to 
discount for, or purchase such obligations from, any financial institu- 
tion in its district, or to make loans to the financing institution on the 
security of such obligations, or to make commitments either to so 
discount, purchase, or make loans. This action is conditional upon 
the financing institution's obligating itself (to the satisfaction of the 
Federal Reserve bank) to pay 20 percent of any loss sustained hj the 
Federal Reserve bank on the obligation. The existence of loss is to 
be determined by Federal Reserve Board regulations. If the financ- 
ing institution prefers, it may, instead of obligating itself for 20 percent 
of the possible loss, advance 20 percent or more of the working capital, 
i. e., participate in the loan to that extent, without obligating itself 
to the Federal Reserve bank for loss on the Reserve bank's part of the 
loan. 

The act provides for the appointment in each district of an indus- 
trial advisory committee to wMch all applications for loans, advances, 
and purchases must be submitted, such committee to be appointed by 
each Federal Reserve banlc, subject to the approval of the Federal 
Reserve Board. The committees consist of from three to five mem- 
bers, each "actively engaged in some industrial pursuit" in the dis- 
trict. This advisory committee is authorized to examine the would-be 
borrower's business, pass on the applications, and transmit them with 
its recommendations to the Federal Reserve bank for final approval. 

Regulation "S". — After conferences called by the Federal Reserve 
Board with the chairmen and governors of the 12 Reserve banks, 
regulation "S" was issued covering the "direct loans to industry" sec- 
tion, with the statement that Congress had recognized "the need for 
many small and medium-sized industrial and commercial businesses for 
additional working capital to enable them * * * to maintain 
employment or provide additional employment." The Board left 
entirely to the Federal Reserve banks what constitutes an "established 
commercial or industrial" business, and the defining of the term "work- 
ing capital." In addition, the Board, to eliminate the necessity for 
having loans approved in Washington, allowed the Federal Reserve 
banks to grant loans and make commitments directly without referring 
them to Wd,shington. Each Federal Reserve bank was left to make 
up its own apphcation forms and its own requirements as to informa- 
tion and documents to be furnished by the apphcant." 

" Discounts, Purchases, Loans and Commitments by Federal Reserve Banks to Provide Working Capital 
for Established Industrial or Commercial Businesses (Regulation "8") June 26, 1934. 



232 



OONCENTRATION OF EOONOMIC POWER; 



The regulations stressed that the Federal Keserve banks must 
ascertain to their satisfaction that the borrowers' financial needs 
were for working capital, that the borrowers' financial condition and 
credit standing, and the value of the security offered, if any, justified 
the loan. Security was not necessarily required, the law having 
stated merely that the loans be "on reasonable and sound basis," 
and each Federal Reserve bank was to set up its own standards in this 
respect. The regulations specifically say that the Federal Reserve 
bank must ascertain, before making direct loans or commitments to 
make loans or -to participate in bank loans, that the "circumstances 
are exceptional," and, as in the case of section 5 (d) of the Recon- 
struction Finance Act, that the obUgor cannot obtain the assistance 
"on a reasonable basis from the usual sources." 

On issuing regulation "S," the Board stated that "it is expected 
* * * that the Federal Reserve banks will not compete with 
local banks, but will rather assist them in meeting local requirements 
for working capital," and that "it was agreed that these loans would 
be chiefly to small and medium-sized enterprises, which Tiave the 
greatest need for such assistance * * *." ^^^ 

Loans and commitments made. — The following figures show total 
applications for loans and participations received and the total 
approved, by years from 1934. 

Table 25. — Applications received and approved by Federal Reserve System, 1934-39 





Number of applications 


Percent of 
applica- 




Received 


Approved 


tions 
approved 


1934 . -.. 


5,053 
2,662 
764 
298 
659 
96 


984 
1,009 
287 
126 
247 
60 


20 


1935 .. . . 


40 


1936 -.. - 


38 


1937 


42 


1938 . . -. 


37 


1939 (May 31) 


62 






Total 


9,432 


2,713 


29 







Approved applications for the entire period therefore constituted 
29 percent of the total applications received. These figures show 
that, after the first 6 m.onths of operation, about 40 percent of all 
applications were approved, and suggest that the decline in loans 
approved resulted from the decline in applications and not from, any 
change in policy by the Federal Reserve banks. No inform.ation had 
been published by the Federal Reserve Board as to the num.ber of 
informal inquiries m.ade which were discouraged before they reached 
the stage of form.al application. 

The Philadelphia Reserve Bank, for exam.ple, has reported that of 
2,497 inquiries received by the end of 1938, only 652 form.al applica- 
tions, or 26 percent, were actually filed. . Of these only 191 were 
approved, and because of cancelations, only 127 were ever disbursed. ^^ 

As of January 17, 1940, $405.8 million had been applied for, and 
$188.8 m.illion had been approved. Of this, only $21.7 m.illion of 
Federal Reserve bank advances and com.m.itm.ents were still outstand- 

>8 Press release. Federal Reserve Board, June 28, 1934. 

" Survey of Credit and Capital Requirements Among Small and Medium-sized Business Establish- 
ments, Third Federal Reserve District, Department of Research and Statistics, Federal Reserve Bank of 
Philadelphia, November-December 1938, p. 2, p. 47. 



CONCENTRATION OF ECONOMIC POWER 233 

ing. The largest amount of advances and commitments outstanding 
at any one time was 60 million, at the end of 1935. The emphasis 
in the act is on enabling banks to increase their loans to industry/and 
the direct Federal Reserve loans were to be m.ade only *'in exceptional 
circumstances." In most cases of applications for direct loans the 
Federal Reserve banks usually have attempted to interest a local 
bank either in m.aking the loan and then securing Federal Reserve 
participation, or in participating in the Federal Reserve loan. How- 
ever, during the first year most of the advances were direct loans.^° 
Although figures published by the Federal Reserve Board do not 
separate purchases of or participation in bank loans from direct loans, 
there were at no time more than $12.8 million of the financial institu- 
tions' share of these participations outstanding, plus about $1.7 
ro.illion of guaranties by financial institutions of Federal Reserve 
bank loans purchased from them. 

Although the Federal Reserve Board had stated, in issuing regula- 
tion "S" at the beginning of the program, that loans would be made 
chiefly to sm.all and m.edium-sized enterprises "which have the greatest 
need for such assistance" ^^ the Reserve banks appear to have rejected 
a larger proportion of applications from small borrowers for small 
loans than of applications from medium-sized and larger borrowers. 
The Philadelphia Reserve Bank reported that concerns of medium 
and large size have predominated in obtaining these loans ''principally 
because they were able to demonstrate a reasonably sound basis for 
obtaining this credit in spite of weakened financial positions." Fifty- 
one percent of the loans made by the Philadelphia bank- were for less 
than $25,000, 81 percent were for less than $100,000, and 45 of the 
borrowers, or 35 percent, had a net worth of less than $100,000. 
However, concerns with net worth of less than $50,000 totaled 58 
percent of the rejected applications, and those with net worth of less 
than $100,000 accounted for 72 percent of all rejected applications.^^ 

The fact that, for all Reserve banks, up to January 17, 1940, only 
30 percent of the applications received had been approved, whereas 
47 percent of the amount applied for had been approved, indicates 
that a great m.any of the sm^aUer loans were rejected. Of the loans 
and com.m.itm.ents that were approved, according to figures published 
at the end of 1937, 23 percent were for $5,000 or less, 36 percent were 
between $5,000 and $25,000, 29 percent were between $25,000 and 
$100,000, and 12 percent for over $100,000.^3 A rem,arkable feature 
of the loan history of 13b is found in the increasing size of the loans 
extended. The following figures give the average size of the loan 
applications approved by all Federal Reserve banks (industrial 
advances and commitments): 

[000 omitted] 



1934 $50.4 

1935 74.2 

1936 53.4 



1937 $88. 6 

1938 97.3 

1939 103. 2 



If the average is representative of the size trend of individual loans, 
it suggests a reorientation away from small business as the program 
developed. 

2« Federal Reserve Bulletin, June 1935, p. 339. 
21 Press release. Federal Reserve Board, June 28, 1934. 
" Third Federal Reserve District Survey, op. rit., pp. 51, 56, 64. 

23 Twenty-fourth Annual Report of the Board of Governors of the Federal Reserve System, 1937. table 
14, p. 61. 



234 OONCENTRATION OF ECONOMIC POWER 

Results claimed for the Federal Reserve ind/iistrial loan program. — 
No estimates have been made as to the probable amount of employ- 
ment created by the Federal Reserve industrial loans, although the 
Philadelphia bank reported that 35 of the 60 borrowers who had repaid 
their loans in full by the end of 1938, had been able to maintain em- 
ployment in their plants as a result of the loans, and 30 had been able 
to restore their credit with trade and the local banks. The Phila- 
delphia bank reported also that only 7 of their 127 borrowers had been 
placed on the "trouble" list, and that 5 had petitioned for bank- 
ruptcy.^* The-New York bank reported, also at the end of 1938, that 
nearly two-thirds of their borrowers showed definite improvement of 
their position after receiving the loan, but that one-fifth showed con- 
tinued deterioration.^^ 

From time to time Reserve ban^ officials have claimed that the 
program stimulated banks to make loans independently that they 
otherwise would have refused. Many Reserve bank officials feel 
that the downward trend in applications indicates that credit require- 
ments are being satisfied and that so\ihd potential- borrowers Avho can- 
not get loans for working capital do not exist. ^^ 

At ho time have there been more than 32 million of Federal Re- 
serve bank advances outstanding; hence, if there did exist over the 
period 1934-39 any substantial unsatisfied demand for credit, the 
Federal Reserve program has certainly been of httle significance in 
meeting it. The reason most usually cited for the small volume of 
loans and of applications for loans has been the limitation of the law 
restricting advances to those for working capital purposes. Sugges- 
tions were made from time to time by interested observers that the 
law be amended to allow loans for permanent capital purposes. 
Although Federal Reserve banks were allowed «ome leeway in defining 
working capital, for the most part they seem to have defined the term 
rather strictly." The restriction of the loans to 5-year terms and to 
businesses already established has also been held to have hindered 
approvals of loans otherwise eligible. 

Comparison of R. F. C. and Federal Reserve loans to industry. — At the 
end of June 1939 the Federal Reserve banks had authorized a total 
of only $179,800,000 in loans and commitments, compared with 
$351,100,000 in loans and participations authorized by the R. F. C. 

The great increase of R. F. C. loans over Federal Reserve loans to 
industry came after April 1938. This can be explained by the liberal- 
ization of the R. F. C. law, particularly the clause allowing loans for 
permanent capital purposes. The difi'erence between the approvals 
made by the two agencies prior to that time can be explained in part 
by differences in policies of the two organizations. Even before 1938, 
"incidental" portions of the R. F. C. loans could, according to R. F. C. 
regulations, be made for permanent capital purposes or repayment of 
existing debt, since the law specified that the loans were not limited 
in the law to "working capital." On the other hand, the R. F. C. Act 

'< Survey of Credit and Capital Requirements Among Small ana Medium-Sized Business Establishments, 
Third Federal Reserve District, Department of Research and Statistics, Federal Reserve Bank of Phila- 
delphia, November-December 1938, pp. 59-61. 

2' Twenty-fourth Annual Report, Federal Reserve Bank of New York, for the year ended December 31, 
1938, pp. 23-24. 

M Journal of Commerce, June 8, 1939. 

" The New York Federal Reserve Bank, for example, frequently approved applications calling for the 
use of as much as 10 percent to 25 percent of a loan for machinery and repairs, but not as much as 50 percent 
to be so used. New York Times, Mar. 6, 1938. 



CONCENTRATION OF ECONOMIC POWER 



235 



specifically requires "adequate security" whereas section 13-b of the 
Federal Reserve Act does not, although security was generally required 
as a matter of policy. It may be that the change in the R. F. C. law 
in January 1935, enabling R. F. C. to lend to newly established enter- 
prises increased the number of loans made, and that extension of the 
maturity period from 5 to 10 years may have contributed also to this 
increase. As early as 1935, there were cases where borrowers who 
had been turned down by the Federal Reserve bank were able to get 
a loan from the R. F. C. There is some evidence that the Federal 
Reserve banks have not been willing to make loans to businesses which 
have been in poor condition for the past few years, while the R. F. C, 
according to its chairman, has been somewhat more optimistic about 
the future of such businesses. ^^ 

The following tabulation shows the differences between the pro- 
visions of law under which the two agencies at present make loans to 
business enterprises: 





Federal Reserve banks i 


Reconstruction Finanap Corporation 




An industrial or commercial business 
An established business 


Any business enterprise. 




New and established businesses. 


Financial status 


No provision 1 


Solvent, in the opinion of the Board 




Unable to obtain requisite financial 
assistance on a reasonable basis 
from the usual sources. 

For working capital 


of Directors of the Corporation. 
When credit At prevailing rates for 


Purpose of loan 


the character of loans applied for is 
not otherwise available. 
For "maintaining and promoting the 




Not over 5 years 


economic stability of the country or 
encouraging the emplojTnent of 
labor." 
No limit. 


Security required 


"On reasonable and sound basis"... 
$280,000,000 


In the opinion of the Board of Di- 


Amount of funds available 


rectors of the Corporation, of sound 
value or so secured as reasonably to 
assure tepayment or retirement. 
None specified. 


Amount of any 1 loan .. . 


No limit-.. 


No limit. 




(a) Direct loan; 

■(b)' Discount for or purchase. from 
financial institutions; 

(c)' Advance to financial institution 
on the security of such obli- 
gations; 

(d)' Commitments with regard to 
such loan or advance to finan- 
cial institution. 


(a) Direct loan. 




(b) Loan in cooperation with bank. 

(c) Purchase or agreement to pur- 

chase participation. 

(d) Purchase of securities from busi- 

nesses. 



1 Revision of tablcappearing in Availability of Bank Credit in the Seventh Federal .eserve District 
op. cit. p. 30. ' . ' 

» (b), (c), and (d) require 20 percent participation of financial institution in the risk. 

It is clear that both R. F. C: and the Federal Reserve batiks are 
operating in the same area and with essentially the same powers, 
although R. F. C is less restricted by statute than the Reserve banks. 
The Hardy-Viner report ^^ declares "that the making of direct loans 
to industry is a responsibility which ought never to have been put 
on the Reserve banks * * *, because the extension of this type of 
credit is fundamentally inconsistent with the more important func- 
tions and responsibilities of the Reserve banks * * * (they) are 
obviously put in an embarassing position when they are required to 
make loans which, because of length of term, would be deemed 
doubtful or inappropriate for the member banks." 

" Testimony of R. F. C. Chairman Jesse Jones at hearings on S. 2343, before the Senate Banking and Cur- 
rency Subcommittee on R. F. C. Affairs, June 29, 1939, and at hearings on H. R. 4240, to extend the functions 
of R. F. C, January 21, 1935, p. 5. 

M "Availability of Bank Credit", op. cit., p. 38. 



230 CONCENTRATION OF ECONOMIC PQWEB 

At the same time, the report recommends specific changes in pro- 
cedure and policy if the Federal Reserve banks are to continue mak- 
ing industrial advances. The purpose of law would be better served, 
says the report, if lending officials adopted a broad view in the case 
of loans to clear up existing debt, where forced liquidation of existing 
loans can be prevented or where procurement of needed capital wUl 
be facilitated. 

The work of the industrial advisory committees, made up of busi- 
nessmen from the Reserve district, is essentially a duplication of the 
work of the lending officers and results in divided responsibility, as 
well as in compelling the applicant to be judged by two tribunals. 
There is, moreover, a tendency for the committee to place initial 
responsibility upon that member who comes from the general area in 
which the applicant's business is located. • This is extremely undesir- 
able, especially since the members are likely to be "soimd" business- 
men who may not be very sympathetic to the needs of their smaller 
or less "sound" associates. This criticism applies with equal force 
to the composition of R. F. C. local agencies. 

R. F. C. policy also leaves much to be desired. Audits and ap- 
praisals should be limited to applications for fairly large loana, since 
this activity increases already high costs for technical assistance aris- 
ing from legal work on titles to property and preparation of mort- 
gages. The present R. F. C. policy of requiring "subordination" is a 
serious hurdle from the view of both time and expense. Mortgage 
holders must be induced to waive priority and agree to create a first 
lien in favor of R. F. C. This is a very difificult. obstacle, since mort- 
gage holders may not feel that their own position will be improved 
as a result of an R. F. C. loan. It would be preferable, if indeed 
this type of protection is needed, that R. F. C. accept an agreement 
to share collateral. This would simplify considerably the problem of 
"obtaining waivers. 

The present centralization of R. F. C. activity in Washington is 
extremely unsatisfactory from the borrower's point of view. Much 
waste of time and effort results from this practice. Moreover, the 
proportion of rejections in Washington may result in a conservative 
attitude on the part of local examiners. The Hardy-Viner report 
has already recommended that the Washington oflfice of R. F. G. be 
limited to (1) consideration of policy, (2) hearing appeals, (3) unusu- 
ally large loans, and (4) cases of disagreement among the members 
of the local agencies. Such a change would leave considerable dis- 
cretion to the agencies. This would not be dangerous since the 
central office would still exercise general supervision of local activity. 

SUGGESTED AIDS 

In European countries the special credit and capital requirements 
of the small firm have been recognized and steps have been taken to 
aid small business for many years. In this country, however, it was 
not until 1934 that any attempt to meet the problem was made. As 
already indicated. Government aid to small business has been thus 
far unsuccessful. In the past few years, a number of bills which 



CONCENTRATION OF ECONOMIC POWER 237 

would provide additional aid to small business have been introduced 
in Congress.^° 

The proposals take tliree main forms: (1) The supplying of equity 
capital through Government purchase of the stock of small businesses; 
(2) the extension of long-term credit to small businesses by an agency 
of the Government; and (3) insurance by the Government of private 
loans. 

Equity Capital Proposals. 

Equity capital can be provided through Government or private 
agencies purchasing preferred stock of small businesses. The argu- 
ment for this proposal is that small businesses are already loaded 
with debt, and an extension of credit would simply add to their burden. 
Moreover, credit would involve a rigid system of interest and amor- 
tization payments, independent of the varying business fortunes of 
the small concern. Preferred^ tock, on the other hand, wo«ld be 
cheaper and more flexible, insofar as it would involve no fixed pay- 
ments of any kind. 

Private sources must be ruled out as a practical method of providing 
equity capital at the present time. Objection is raised to the Govern- 
ment's undertaking this task, on the grounds that it would be entering 
business as a part owner of the concern. However, the Government 
could receive nonvoting preferred stock so that it would not have to 
set up an administrative mechanism for participation in the direct 
control of the business. 

The short duration of business life of many small concerns and the 
fact that the Government would have no claim on any specific assets 
but only on the unimpaired assets of the business raises the question of 
the possible losses that might be incurred. Preference as to assets 
would in part eliminate this difficulty, but the rate of return on stock 
of this kind should in theory be sufficiently higher than the interest 
rate on loans so that any additional losses would be covered by the 
additional profit from the successful firms. 

Direct Loan Proposals. 

The idea behind these proposals is that it would be easier for the 
Government than for private sources to extend credit to small business. 
The Government would not necessarily be seeking a profit from the 
loan and could more easily carry the risk burden which is involved in 
loans to small business. Moreover, the Government can lend in 
greater volume than any single private source arid thus minimize 
the possibility of loss through a better distribution of risks. These 
proposals recognize that private sources cannot or perhaps will not 
grant sufficient credit to small concerns at the present time. 

30 H. R. 9291— Creation of an intermediate credit corporation (Kuppleman, February 1, 1938). 

H. R. 9?25— To establish a U. S. Industrial Loan Insurance' Corporation (Reed, February 1938). 

S. 3430— To provide insurance by R. F. C. of loans by banks to business enterprise (Pepper, February 
9, 1938). .^ , 

H. R. 9441— To authorize national banks to underwrite or participate in investment of new issues (Barry, 
February 10, 1938). 

S. 3630— To establish a system of regional industrial banks (Pepper, March 8, 1938). 

H. R. 3520— To enable banks to make capital loans to small business (Brown, January 31, 1939). 

S. 1482— To provide for R. F. C. insurance of loans by banks to business (Mead, February 17, 1939). 

S. 1743 — To provide for a Federal investment bank and local association to extend credit to business (Logan, 
March 8, 1939). 

H. R. 5429— To empower R. F. C. to guarantee character loams made to merchants by local bahks and 
by Federal Reserve Banks (Jeffries, March 28, 1939). 

H. R. 5910— To set up industrial finance banks (Voorhis, April 20, 1939). 

S. 2998 — To establish a permanent industrial loan corporation to assist borrowing institutions in making 
credit available to commercial and industrial enterprises (Mead, October 31, 1939) . 

262652 — 41— No. 17 17 



238 OONCENTRATION OF EOONOMIC PQWER 

The direct loan schemes differ from each other on the issue of using 
existing agencies or creating new ones to administer the program. 
The plans which favor existing agencies provide that the R. F. C. or 
the F. R. B. lend to small firms on more liberal terms. The advantage 
of such plans is that the organizations are already set up and would 
therefore involve less delay and expense in getting the program going. 
On the other hand, the utilization of existing facilities and personnel 
would tend to bring to bear in the operation of the plan, the full weight 
of orthodox banking practice. The efi^ectiveness of any plan depends 
in part upon the people and facilities who put the plan into practice. 
It IS argued by those advocating the creation of new agencies that this 
factor would restrict the volume of loans to small business regardless 
of .any new powers that might be authorized. Even a new agency 
would be free of this objection, however, only if the personnel and high 
administrators were indeed free of the orthodox banking bias. On the 
other hand, it would suffer from the organization difficulties of all new 
agencies and would be open to the charge of unnecessary duplication 
of facilities. 

Insurance Proposals. 

The central feature of all the insurance plans lies iii the attempt 
to obtain the requisite funds from private banking sources. This 
would make the fullest use of existing facilities and would eliminate 
the necessity of setting up extensive administrative machinery for 
field investigation. These proposals differ in two ways: (1) The type 
of agency; and (2) the type of insurance. The type-of-agency differ- 
ences in this case also revolve around the issue of creating a new agency 
or using present facilities. The need for administrative decisions 
would not be entirely eliminated under this arrangement and the 
effectiveness of the plan would be limited by the restrictions on the 
types of loans insured. Thus the argument for new as against exist- 
ing agencies are much the same as those already mentioned under 
direct loans. 

The type-of-insurance differences hinges on the issue of guaranteeing 
a specified portion of every loan or insuring each loan completely but 
limiting total payments to a specified proportion of the total loans 
insured. 

The first plan would insure every loan a bank made to the extent 
of a specified proportion, say 90 percent; then the maximum insurance 
would be 90 percent and banks would in every case of failure bear 
10 percent of the loss. The second plan would guarantee each loan 
100 percent but the maximum Government insurance would apply 
to only a part of the total volume of loans. The maximum percentage 
which the Government should insure under this plan could best be 
worked out in practice. In the housing field, the experience of F. H. A. 
indicates that 10 percent is sufficient insurance; in the small business 
field a somewhat higher percentage might be necessary. Thismethod 
would probably produce a greater volume of loans than the other 
method of insurance. It would also be more costly, unless the per- 
centage of failures exceeded the proportion of loans insured by a per- 
centage greater than the ratio of the uncovered to the covered pro- 
portion of each loan insrired under the first plan. 

It is not within the province of this report to ciiOQse between alter- 
native plans to help small business. But it should be emphasized 
that any credit or capital program to help small business must be 



CONCENTRATION OF ECONOMIC POWER 239 

part of a wider program to stimulate business activity and employ- 
ment. Small business needs a wider market as well as limds to enable 
them to compete for and hold a larger portion of the present market. 
If the economy as a whole does not rise to higher levels of employment 
and business activity, the effectiveness of any capital or credit program 
will be greatly reduced. 

SUMMARY AND CONCLUSIONS 

A high proportion of enterprises in this country fall in the category 
of "small business." The problems of this group are in part those of 
all business and center on the need for a^arger market. There is one 
field, however, in which it is alleged that small business has special 
problems — the field of capital and credit. Many smaU businessmen 
feel that their needs for equity capital and long-term credit are not 
being adequately met at the present time. The holders of disposable 
funds, on the other hand, feel that prospective losses make investment 
in these small enterprises too risky. From the social point of view, 
the issue is one of far-reaching importance. This report will attempt 
to bring together all available information that bears upon this con- 
troversy and in the light of this knowledge to analyze the questions 
of public interest that are mvolved. 

In general, business concerns can obtain additional capital in several 
ways — by reinvesting earnings, by turning to the capital markets for 
sale of securities, or by borrowing from banks. The efforts of small 
business firms to tap these sources, however, have been comparatively 
unsuccessful. The depression greatly reduced the possibility of 
obtaining capital from earnings; many small firnas have had to take 
losses in recent years. The organization of the capital markets gives 
little or no access to this source of funds, as the cost of floating securi- 
ties is prohibitive when the amount of the issue is small. Borrowing 
from banks has also become a less satisfactory source. Small bank 
loans carry higher rates than large loans. With the advent of the 
depression in 1929, moreover, banks have placed more emphasis on 
liquidity as a basis for extending credit. Receivables and inventories, 
which usually are the most liquid' assets of small businessmen were 
unsatisfactory collateral to the banks in many cases. The general 
emphasis on liquidity has increased the difficulty of small firms in 
obtaining credit both for short- and long-term uses. 

The banks, however, take the view that "virtually no small business 
or medium-sized business which is entitled to credit — either for a 
short or a long time, and which can give reasonable assurances of 
repayment — fails to get it."^' 

It is clear that the truth of this statement will be determined by the 
meaning of the phrase "entitled to credit." Those who reason from 
the private, profit-motive standpoint define "entitled to credit"- in 
terms of "soundness" or risk. "Sound" small businesses are those 
which satisfy the criteria that have been established by bankers 
through long experience with the risk and profitability of various types 
of loans and investments. Thus, the needs of "sound" small busi- 
nesses are met. 

On the other hand, from the viewpoint of small busmessmen them- 
selves, or an organization not primarily interested in making a profit 

31 Statement of Mr. E. E. Brown, president First National Bank of Chicago. Hearings on S. 1482 (Mead 
Bill) 76 th Cong., 1 St. Sess. 



240 CONCENTRATION OP ECONOMIC POWER 

from loans or investments, these criteria of somidness are not neces- 
sarily determinate. This report has shown that there are small 
businesses "whose credit standing at the present level of business 
activity does not make them acceptable risks for banks. These are 
not misconceived, or mismanaged, or insolvent businesses, but 
businesses whose prospects of success are dimmed by the current 
economic situation." ^^ Moreover, there is a minor proportion of 
small businesses which, even though "sound" on banking standards, 
yet cannot obtain credit. A Department of Commerce study of small 
firms reporting credit difficulties found that 620 had net-worth-to-debt 
ratios of 2 or more; the Dun & Bradstreet ratings of approximately 
40 percent of these firms were "high," and another 25 percent of them 
were "good." 

From a direct and immediate standpoint, what is needed to resolve 
this conflict is a demonstration of the relative economic efficiencies 
of small businesses and large businesses. It goes almost without 
saying that such a demonstration, covering all lines of business, under 
all possible general conditions that may ensue, cannot bte made at the 
present time. All that can be shown. is that a certain degree of validity 
inheres in each of the interacting causes which contribute to the 
relative deterioration of the small-business position. 

Small firms generally have been hard hit since the beginning of the 
depression. Their working capital is inadequate and has been a 
decreasing proportion of the total for more than a decade. This is 
shown by an increase in the proportion of working capital held by 316 
manufacturing firms with assets over $3,000,000. In the decade 
1926-35 their share increased from 35 to 46 percent of the total work- 
ing capital held by all manufacturing corporations submitting bal- 
ance sheets to the Bureau of Internal Revenue. There is a definite 
decrease in liquidity with decreasing size. The current assets-current 
liabilities ratio brings this out quite clearly. In 1936, for example, 
this ratio was 1.33 for corporations with assets of less than $50,000 
and 7.26 for corporations with assets of over $50 million. Small 
concerns can best finance themselves* only on a short-term basis, 
whereas the larger corporations can obtain long-term funds at favor- 
able terms. In 1936 current liabilities were 77.7 percent of all bor- 
rowed capital for corporations with assets under $50,000 and only 21 
percent for corporations with assets of $50 million and over. Analysis 
of net worth reveals that, for every dollar of assets, the small concern 
bas a smaller proportion of invested capital than the large firm. Thus, 
in 1936 the proportion of equity to total assets (for the above classes) 
was 43.6 percent for the smaller class and 76.3 percent for the larger 
class. In other words, small firms obtain a relatively larger share of 
their capital by borrowing, as opposed to the more permanent invest- 
ment represented by equity capital. As a result, the small firm is 
more vulnerable to cyclical fluctuations, which have increased greatly 
in amplitude in recent years. 

It is, therefore, reasonable to suppose that a substantial part of their 
'difficulty is due, not to secular factors which would be difficult to 
'Control, but to the severity and duration of the depression of 1929-33 
and the laggard Recovery of the later years. Their weakened 
position becomes all the more serious because of Iheir inability to 
obtain funds with which to take advantage of the recovery when it 

•• £. E. Draper, Board of Oovernors, Federal Reserve System, AVashington Post, October 1, 1939. 



CONCENTRATION OF ECONOMIC POWER 241 

comes. The process becomes cumulative. The impact of the 
depression becomes multiplied because of restricted credit and capital 
facilities. Reserves are depleted and they are unable to wait out the 
lean years. The recovery, did not enable small business completely 
to regain their former position. Rather, it strengthened the position 
of large businesses relative to small firms. Thus, small firms were hit 
harder and recovered more slowly, with the result that their com- 
petitive position deteriorated. Their poor economic and financial 
position is in part a reflection of this depression-recovery experience. 

There can be no denying the fact that the long-run trend of the 
competitive battle in most lines has been against small business. The 
small businessman has been displaced from entire industries. Today,, 
small business is concentrated in retail and wholesale trade, service^ 
and some branches of manufacturing industry. 

It is clear, of course, that in industries in which mass production 
dominates for technological reasons, the small business cannot hope 
to compete unless it becomes a large business. On the other hand, 
there are no a priori valid reasons to suppose that in all industries 
the large unit is the more efficient from an operating viewpoint. 
Retail trade, for example, is still predominantly conducted through 
small units and to a large extent will continue as a small-business, 
industry. Although the chains and larger firms have been making 
headway, relatively to the small businesses, their progress has been 
such that it does not seem likely that they will obtain the major 
portion of the market for many years. In 1935 the sales of inde- 
pendents in retail trade were approximately $24,300,000,000. Sales 
of chains were $7,600,000,000. The increase in the proportion of 
chain sales from 1929 was only 2.8 percent. Other examples may be 
pointed to in branches of manufacturing industry which still have a 
great many small firms. Among them are food products, women's 
apparel, knit goods, auto accessories, and paints. 

Thus, although some small businesses are in a poor financial con- 
dition because of relative long-term economic inefficiency, there cer- 
tainly is no evidence to warrant the conclusion that all those who 
are in a poor condition are so because of their economic inefficiency. 
The battle does not always go to the concern with the greater operat- 
ing efficiency. A common example of this is cutthroat competition.^ 
Prices of finished goods may be cut to uneconomic levels, or prices of 
materials bid up to uneconomic levels. The concern with the greater 
financial reserves wins this struggle. This concern is not necessarily 
the one that can produce more cheaply in the long run. 

It must be recognized that by and large, efficiency of operation is 
only one factor in the problem of small business, and a factor moreover 
not independent of the ability to obtain funds when most needed. 
Financial strength itself is an important factor in business success,^ 
especially during an era of severe business contractions and slow- 
recovery. The firm that cannot tap the community's supply of 
long-term capital except at high cost, and that cannot rely upon an 
immediate short-term credit when opportunity knocks, is evidently 
at a disadvantage for that reason alone. The role of capital and 
credit in business expansion and success should not be underestimated^ 
Whatever other causes may have contributed to the weakness of small 
business, this may be recognized as an essential factor. 



242 CONCENTRATION OF ECONOMIC POWER 

Thus, both the contradictory positions on this problem are reason- 
able when considered from their particular viewpoints. The logic 
of those who take the small business view is that insufficient capital 
creates unsoundness and contributes to the inferiority of their com- 
petitive position. The logic of those who take the orthodox invesment 
view is that small businesses cannot obtain term credit or equity 
capital precisely because they are economically and financially 
unsound. Thus, the one view is that a cause of the poor condition of 
small businesses is tlieir credit and capital difficulties; the other view 
is that their credit and capital difficulties are a result of their poor 
condition. But the central economic issiie of the relative operating 
efficiencies of small and large units cannot be demonstrated in favor 
of either side, so that the problem cannot be resolved at this level. 

What is necessary is a consideration of all the elements from a social 
point of view. From this viewpoint, it is clear that one of the really 
important difiiculties making small business "unsound" can be allevi- 
ated. To hold that the "unsoundness" or the poor condition of small 
businesses is due to their economic inefficiency, and that all "sound" 
small businesses obtain adequate credit and capital is very similar to 
asserting that all workers who are unemployed are submarginal and 
that any efficient worker willing to work can find a job. In either 
case, one factor is magnified to explain the entire problem. Making 
available to the small-business man more capital based on cheaper 
credit provides a means by which the community can continue to 
move forward. Denial that ultimately sound expansion can be 
achieved in this way implies that opportunity for growth in America 
is closed to small business or open only to big business. 

It is believed, therefore, that since small business cannot obtain 
needed capital through existing facilities, the dUemma can best be 
solved by the Government. This is made advisable by the impor- 
tance of the small-business sector of the economy, and by the urgency 
of their needs. It is made possible by the unimpeachable credit of 
the Government and the huge lending power of the banking system. 
It is made workable by the fact that there are many small businesses 
that are sound now and want long-term funds or will be sound if the 
national income increases and the needed funds are made available. 
Thus, a Government program designed to stimulate the activity of 
the entire- economy should include and will be made easier by any 
measures that assist small business to obtain additional investment 
fu»ds. 

It was in recognition of the serious difficulties faced by small busi- 
ness that Congress authorized the Reconstruction Finance Corpora- 
tion and the Federal Reserve banks to make loans to business directly 
or in cooperation with banks. However, these agencies have contrib- 
uted only slightly to the alleviation of \he difficulty. Of $450,000,000 
in loans authorized by R> F. C. between 1932 and 1939, less than 
4 percent were for Joans under $10,000 and on'y about 30 percent 
were for loans under $100,000; at the other extreme, loans -for $1,000,- 
000 or more represented almost 30 percent of the total amount author- 
ized. Actual disbursements in the 7-year period totaled only $180,- 
0d0,000; if the distribution of disbursements assumed to be identical 
with that of authorizations, the total credit extended in loans of 
$50,000 or less was about $32,600,000 during the period. Obviously, 
the R. F. C. has done little to meet the nfeeds of small business. 



CONCENTRATION OF ECONOMIC POWER, 243 

Similarly, the Federal Reserve banks, with $180,000,000 as the total 
authorizations and $32,000,000 as largest amount of advances outr 
standing, during this period cannot be considered important factors 
in this area. 

A more effective program may involve direct Government loans, a 
system of loan insurance by the Government to encourage banks to 
expand their lending operations, or perhaps Government investment 
in small businesses through purchase of stock, preferably nonvoting 
preferred stock. Direct loans could be made on more liberal terms 
by existing Government agencies or by new agencies established for 
that purpose. Purchase of stock would eliminate fixed payments by 
the small business and would exact payment for the entire program 
from the successful firm but might be less advantageous to the Govern- 
ment. Insurance of private loans would make greatest use of existing 
facilities, but might fail to increase the volume of loans significantly 
jf the insurance coverage were not, high. The type of insurance that 
would produce the most loans appears to be that which guarantees 
each individual loan completely, but is restricted to some portion of 
the banks' total obligations. The experience of F. H. A. suggests 
that such insurance of a fraction of the loans, guaranteeing each com- 
pletely, might be sufficient inducement for the banks to make the 
large volume of reasonably sound loans which they now hesitate to 
risk. 

The success of any poUcy designed to aid small business depends 
in part upon the trend of general business activity. Small business 
cannot hope to be prosperous unless the whole Nation is prosperous. 
Consequently, a broad recoveiy program aimed at achieving full 
utilization of both idle labor and idle capital would greatly lift the 
level of sales and ensure that' the assistance to small business would 
be a profitable rather than an unprofitable venture. The importance 
of greater sales volume is brought out by the facts uncovered in the 
study. The small manufacturing corporation which showed net in- 
come during the period 1931-36 had uniformly higher turn-over 
ratios than the concerns which shewed no net income. The inference 
that many more would show net income if sales increased is therefore 
not unreasonable. This is likely to be true in retail trade also where 
44.5 percent of the units had gross sales of less than $5,000 per year. 
A greater sales volume would in fact do much to solve the problem, 
provided small businesses can obtaiijithe working capital necessary 
to maintain the increased volume of business before the expanded 
market i& absorbed by their larger competitors. 



CHAPTER XVIII 
THE FINANCIAL PROBLEM OF SMALL BUSINESS ^ 

INTRODUCTION 

This report is an exploratory study of certain aspects of small 
business and its financial problems. While the problems of small 
business have long been familiar, little in the way of systematic study 
has been made of those problems. The difficulties of small enterprise 
in the modern economy of large-scale operation have given rise to 
much loose thinking, unproved assertion, and contradictory opinion. 

What is small business? Is a small business one with assets of 
$5,000,000 or one with assets of $250,000 or is it a business with 
assets of less than $25,000? In what areas does small business pre- 
dominate? Has it a special place in our economy? What kind of 
financial aid, does small business require? Is it working capital or 
equity capital, or both? Are the commercial banks extending ade- 
quate short and long term credit? Is it a function of the com- 
mercial bank to make "capital loans"? Can the investment banking 
machinery as presently constituted be expected to distribute the 
securities of local small businesses? Does the investment trust offer 
possibilities for supplying equity capital to small business? Has it 
been used for that purpose? 

If small business does not obtain capital and credit through these 
institutional channels, from what sources does it obtain its financing? 
Have the factor, the trade creditor, the accounts finance company 
and the personal loan company become the bankers for small business? 
Are their charges too high in relation to the services rendered? Has 
small business been placed at a disadvantage in relation to big business 
in its access to capital and credit as a result of the inadequacies of. 
the existing financial machinery? Or are its disadvantages inherent 
in our economic and financial structure? 

And not least in importance, what is the actual demand for financing 
on the part of small business? 

Since the trend of American economic life appears to be in the 
direction of mass production, chain stores and the corporate form of 
business organization, why should we be concerned with p^-eserving 
small independent businesses? Are they not doomed to extinction? 
x4.re not those who lament the passing of the corner grocer seeking to 
turn back the clock of progress? 

It was to seek answers to these and similar questions that the 
present study was undertaken. As part of its agenda, theTemporary 
National Economic Committee directed the Securities and Exchange 
Commission to examine the capital and credit needs of small business. 

Accordingly, in the Spring of 1939, the Commission's Investment 
Banking Section undertook this inquiry. Numerous methods of 

1 Prepared by Peter R. Nehemkis, Jr., special counsel, and members of The Investment Banking 
Section, Securities' and Exchange Commission. ' 

245 



246 CONCENTRATION OF ECONOMIC POWER. 

approaching the problem were considered. Should an intensive 
survey be made of one community? If so, what community? Or 
should the problem be attacked on a regional basis? The one-city 
survey was discarded since the conditions in any one city might, not 
be representative of other parts of the country and the results would, 
therefore, be inconclusive. After weighing the various possible 
methods of inquiry, it was decided that the most satisfactory approach 
would be to "spot check" several regions of the country. It was 
believed that, by setting the concrete facts developed from such field 
studies against the facts developed from a statistical analysis of the 
existing data, a reasonably accurate general picture of the position of 
small business could be presented to the Committee. ■ The following 
areas representing a wide variety of economic conditions were, there- 
fore, selected: Fall River, Mass.; Scranton-Wilkes-Barre, Pa.; De- 
troit, Mich.; Omaha, Nebr. ; Birmingham, Ala.; Dallas-Houston^ 
Tex.; Denver, Colo.; Seattle, Wash.; and Portland, Oreg. 

Ir the conduct of the field survey, the questionnaire as a method 
of inquiry was rejected in favor of the "case method." The latter, it 
was thought, would lend itself more effectively to concrete situations 
and would permit direct and personal contact with businessmer^ and 
bankers. 

The study posed three questions: (1) What are the needs of small 
business? (2) Are these needs now being adequately met? (3) if 
not, how can they be met? 

This study was carried out under the direction of Peter R. Nehemkis, 
Jr., special comisel to the Commission's Investment Banking Section. 

Appreciation for suggestions and criticism is due to the following — 
to none of whom, however, is there to be attached any responsibility 
for the conclusions or opinions expressed: Dr. Winfield W. Riefler, 
Institute for Advanced Study; Roy A. Foulke and Edwin B. George, 
Dun and Bradstreet, Inc.; Thomas C. Blaisdell, Jr., director of 
research, National Resources Planning Board ; Rolf Nugent, director, 
and John Hamm. assistant director, department of consumer 
credit studies, Russell Sage Foundation; Stuart Chase; J. Frederic 
Dewhurst, The Twentieth Century Fund; Charles O. Hardy, The 
Brookings Institute; Milo Perkins, president. Federal Surplus Com- 
modities Corporation; Prof. William L. Nuim. Urfivcrsity of 
Newark; Oscar Lasdon, associate editor. Bankers Magazine; Ralph 
W. Manuel, president, Marquette National Bank, Minneapohs, Minn.; 
Prof. William H. Steiner, Brooklyn College; Henry J. Eckstein, 
president, Foresta Factors, Inc., New York; Dr. Raymond W. 
Goldsmith, assistant director, Research and Statistics Section,' 
Trading and Exchange Division, Dr. Morris J. Fields, senior financial 
economist, and David Ryshpan, financial analyst, Investment 
Banking Section, Securities and Exchange Commission. 

The organization of the field studies, and the preparation of the 
statistical data was the work of Ernest Jerome Hopkins who also 
assisted in the writing of the report. 

Other members of the staff of the Investment Banking Section 
likewise assisted in various capacities both in the work of the field 
studies and in the preparation of the report. 

DEFINITION or TERMS 

This report is primarily concerned with the relationship between 
small business and the institutions of finance. Accordingly, the term 



CONCENTRATION OF ECONOMIC POWER 247 

**biismess," as employed in this report, excludes the category of 
"finance." ^ Farms and homes are also excluded, as are government, 
social and professional enterprises and agencies. The railroads, power 
companies, and other regulated utilities are in a special category of 
biisbiess and, where mcluded, are specifically treated as such. 

The term "business", as used in this report, accordingly, refers to 
trade, manufacturing, service (except professional and governmental), 
construction (other than governmental), minhig and quarr^dng. 

In consirlermg the term "small business," it shoiild be borne in 
mind that it conveys not only a quantitative but also a qualitative 
meaning. SmaU business and big business are in many respects 
fundamentally difterent, and between the two there lies an inter- 
mediate zone. Precise boundaries with respect to size are difficult 
to determine; therefore, both the adoption of any single measure of 
busuiess size, and the fixing of any dividmg lines for major size groups, 
must needs be somewhat arbitrary.* However, as a matter of con-, 
venience, and also because significant statistical changes occur at 
about that general size-level, the "smaU" business unit, for purposes 
of tliis study, is defined as having less than $250,000 in assets. (Other 
measures of size, by number of employees, and by value of product 
in manufacturing, are also used in this report.) 

"Intermediate" business consists of enterprises having from $250,000 
up to $5,000,000 in total assets; and small and intermediate enterprises 
together are sometimes referred to as "the smaller units." 

"Large" busmess embraces those units having $5,000,000 or more in 
total assets. 

This classification of business into small, intermediate and large 
units is, of course, a quantitative one. Qualitative differences are- 
equally important for purposes of definition; and these arise largely 
from differences in size. The qualities implicit in sniall business are 
those of the self-determined or independent owner-management. The 
typical small business unit is both owned and directly operated by its 
active proprietor or proprietors, with no overhead affiliations or con- 
trol. Growth in size involves successive stages of hired management 
and submanagement, increasing remoteness of ownership from man- 
agement, division of ownership among many persons, absentee owner- 
ship, and the impersonal quality, commonly &,ssociated with very large 
enterprise. The qualities of small business are seen most clearly in 
the simple one-man proprietorships, but they characterize the small- 
and medium-sized business partnerships and the smaller "closely 
held" business corporations as well. 

The spread in operative size among business concerns is almost 
astronomical. To ihustrate: In 1933, there were 982,184 small stores 
in retail trade, each with annual gross sales of $10,000 or less.* This 
may be compared to 14 large trade corporations which had, in that 
year, average gross sales of $168,738,714.^ In 1936, the latest year 
for which the Bureau of Internal Revenue Statistics of Income were 
available at the time of preparation of this report, 173,674 of the 
smallest corporations in the business groups (those having less than 
$50,000 in total assets) averaged $50,420 in gross sales; the 88 largest 

' This category Includes banking, insurance, real estate, and all other forms of organized investment 
and brokerage. 

^See Appendix 1, sec. II. 

< See W. H. Meserole, Small Scale Retailing, Bulletin No. 100, Domestic Commerce Series, U. S. Depart- 
ment of Commerce; p. 1. 

» See Statistics of Income for 1933, Bureau of Internal Revenue; p. 186. 



248 OONCENTRATION OF ECONOMIC POWER 

corporations in the same groups averaged $178,094,380 in gross 
sales.^ The total assets of the above 173,674 smallest business cor- 
porations averaged $17,950; those of the 88 largest averaged $230,- 
960,3907 Fundamental differences in economic character and status 
are implied by such huge contrasts in operative size. 

THE NUMBER OF SMALL ENTERPRISES. 

Total Number qf Business Units. 

Satisfactory .figures on the total number of business establishments 
in the United States are not at present available. Pending the results 
of the 1940 Census of Business, an estimate of the number must be 
assembled from various sources. On this basis, according to the latest 
figures available, there were roughly 2,400,000 separate business units 
in the United States,* including approximately 300,000 corporations,® 
about 240,000 partnerships '" and approximately 1,860,000 individual 
proprietorships. 

In relation to the national population, the number of business units 
increased steadily from 1901, when there were 15.7 units per 1,000 
persons in the United States, to 1926, when a peak was reached of 
18.5 concerns for each 1,000 persons. ^^ In 1927, this ratio began an 
uninterrupted decline, which continued until 1935, when there were 
but 15.6 business units per 1,000 of population. This was a thinner 
''business population" than at any prior time in this century. The 
heaviest mortality of businesses unquestionably occurred among the 
smaller units and especially among the individually owned concerns, 
which are by far the most numerous. Beginning in 1936, the busi- 
ness population again began to thicken, and by the middle of 1938 
the ratio had climbed to 16.1 business units ior each 1,000 persons. 
This was about where it had been in 1906. Inasmuch as the magni- 
tude and variety of the nation's business activity had greatly ex- 
panded in the period under review, the failure of the business popula- 
tion to thicken commensurately is one indication of the established 
fact that heavy concentrations and integrations of business had 
characterized the entire period. At present the recovery in the 
number of business units relative to the population continues at a 
rate which, even if protracted, would not restore the highest ratio 
<1926) until approximately 1947. 

Numerical Distribution oj Business Units According to Size. 

The smaller units of business enterprise are, numerically, over- 
whelmingly preponderant. Of the 2,400,000 business units in the 
nation, more than 92.5 percent are small (with less than $250,000 
in total assets) and about 6.5 percent are intermediate (with $250,000 
to $5,000,000 in total assets). Only about 1 percent of the business 
population, by almost any system of measure, is large business.*^ 
The distribution of the units of business according to size will be 
described in the following sections. 

« See Statistics of Income for 1936, Bureau of Internal Revenue; pp. 100-117. 
' See Appendix 1, table 2. 

8 See Appendix 1, tables 1-A, 1-B, 1-C. and discussion. 

« There were 290,118 corporations in 1936, in trade, service, manufacturing, construction, and mining and 
•quarrying. Appendix 1, table 5. 

10 There were 237,367 partnerships filing income tax returns in 1936. Statistics of Income, 1936. 
" See Appendix 1, table 11. 
" See Appendix 1, sec. II. 



CONCENTRATION OF ECONOMIC POWER 249 

Marginal and part-time enterprises. — In this area there is an un- 
known number of very small home enterprises, part-time and side- 
line activities of the business type carried on by individuals who are 
not clearly recognized as being "in business" at all. Here may be 
included such activities as: The many homes in which a room or so 
is rented; the small lumbering, gravel-mining, inn-keeping, produce- 
vending, and other business side-lines of faims; the work of the occa- 
sional or semi-occasional dressmaker, carpenter, painter, or writer; 
peddling by children; the breeding and sale of pets by individual 
owners, which largely supplies the pet industry ; the individual talent, 
skill, or "hobby" of an otherwise employed person which results in 
some degree of commercial production, trade, service or invention. 

This marginal area of business life bulks larger, and is more im- 
portant to the dynamics of the national economy, than is generally 
recognized. A considerable amount of work is performed by these 
unrecognized units, and they offer substantial competition to the more ' 
readily recognizable businesses; but of much greater significance is 
the function of this area as an economic seedbed. The small personal 
operation may be, and often is, embryonic of a larger business growth.. 
Some of our largest business enterprises have emerged out of "base- 
ment" or "backyard" origins." 

The number of these part-time and marginal enterprises is unknown. 
Nor can the bulk of their activity be estimated on the basis of presently 
available data. 

The non-employing enterprises. — This little-recorded penumbra of 
economic life which has been described grades over imperceptibly 
into an area of very small but clearly established business units which 
are operated entirely by their proprietors and their families. There 
are between 800,000 and 900,000 business units of this kind recognized 
as such by the Census of Business that are so small as to hire no 
employees. ^^ 

The employing enterprises.— According to the records of the Social 
Security Board, there were, in the first quarter of 1938, 1,516,009 
employing units engaged in business as delimited by this study. 
These units each hired from one emploj^ee to 10,000 employees or 
more. 

There were also 293,810 financial, professional and other "non- 
business" units, ^^ making a total of 1,809,819 employing organizations, 
filing returns for old-age and survivors' insurance. Of this grand 
total of 1,809,819 enrolled employing concerns, 122,890, or 6.8 percent, 
were only occasional employers, having reported some wages paid 
during the first quarter of 1938^ but employing no workers at the 
conclusion of the quarter. 

The enterprises having 9 employees or less at the end of the quarter, 
plus the occasional employers, numbered 1,546,094, or 85.4 percent 
of all the employing enterprises registered with the Social Security 
Board. An additional 128,143 employing enterprises had 10 to 19 
employees. If we assume that small business by this system of 
measure consists of all concerns with less than 20 workers (no statis- 
tical coincidence with the $250,000 total assets measure being asserted), 
the total number of small employmg units was 1,674,237, or 92.5 

" Familiar, notable instances are the Ford Motor Co. and the Procter & Gamble Co, 
'* See Appendix 1, section I. 

i» These "non-business" establishments, while their number is of record, cannot be segregated from tbe 
size-group tabulations of the Social Security Board. 



250 CONCENTRATION OF ECONOMIC POWER 

percent of the number of all employing concerns under the jurisdiction 
of the Social Security Board. ^^ 

In the mtermediate-size group, it may be assumed that there are 
no emoloying concerns with less than 20 employees. The upper limit 
of this intermediate zone, by this measure, may be placed at the 799- 
worker establishment (again no statistical coincidence with the total- 
assets measure being claimed). This intermediate zone included, in 
the first quarter of 1938, 133,137 employing establislm;ients of all 
types (including finance, professional, etc.). This is 7.4 percent of 
all employing concerns. An estimate of the number of business units 
in this zone is 85,000. 

The remainder is large business. Allotted to it are the 2,445 
largest employing establishments covered in the Swial Security figures. 
These were less than 0.14. percent of the total number of employing 
establishments. 

Distribution in manufad wring. — In the field of manufacturing the 
•great multiplicity of small business units is confirmed by an additional, 
statistically unrelated, measure of size. This measure is the value of 
the ai?.nuai product. In 1937, of a total of 166,794 establislmients 
enumerated by the Census of Manufactures,^^ there were 1,653 
concerns, or 1 percent of the total, each of which produced $5,000,000 
or more in value of product for that year, and hence, by this measure, 
may be placed in the category of large business. There were 29,899 
concerns, with annual product between $250,000 and $5,000,000 in 
value, which may be rated as intermediate. Small manufacturing 
concerns, with less than $250,000 product value per unit aimually, 
numbered 135,242. The small business group in manufacturing, 
accordingly, comprised 81.1 percent of all establishments enum.erated, 
and the percentage of intermediate-size manufacturing establishments 
was 17.9. These figures do not include an unknown number of yet 
smaller manufacturing concerns, producing less than $5,000 amiually. 

Distribution of corporations. — A like preponderance of small luiits 
is shown by the measure of total assets used in our definition, as 
applied only to those business units which are incorporated.** In 
1936, there were 290,118 incorporated enterprises in the fields of 
trade, manufacturing, service, construction and mining and quarrying. 

Of these corporations, 252,688, or 87.2 percent, possessed less than 
$250,000 of total assets and, accordingly, fall into the small-business 
classification. The intermediate sector, with assets running from 
$250,000 to $5,000,000, mcluded 35,263 corporations, or 12.2 percent. 
Business corporations with $5,000,000 or more of total assets — the 
large ones — numbered 2,167 or less than 1 percent of all business 
corporations. 

In this connection, it is exceedingly important to note that the 
incorporated establishments are but an approximate one-eighth of all 
business units in the Nation, and they are less than one-fifth of the 
number of all employing business units. The distribution of cor- 
porations by size, moreover, does not truly reflect the distribution 
■of business as a whole, since virtually 100 percent of the large busi- 
nesses, 40 percent of the intermediate businesses, and only 10 percent 
•of the recognizable small businesses, are incorporated. In other words, 

•• See Appendix 1, table 3. As previously noted, this figure includes some portion of the 293,810 non-business 
(units, so it is to that extent an excessive figure for the business establishments above, as here defined. 
'' See Appendix 1, table 4. 
•• See Appendix 1, table 2. 



CONCENTRATION OF ECONOMIC POWER 251 

corporations include the entire peak of the business pyramid, 'only- 
part of its sides, and very Httle of its base. Hence, resort to cor- 
poration figures exclusively as a basis for stating the relative import- 
ance of small, intermediate and large business in respect to sales, 
assets, etc., would be misleading. The use of corporate data alone, 
in size-distributions, considerably exaggerates the importance of 
the big business sector, which consists almost whoUy of incorporated 
units, and understates the economic significance of the overwhelm- 
ingly more numerous smaller units, which are, for the most part, 
individual proprietorships or partnerships. 

PREVALENCE AND CHARACTlERISTICS OF SMALL BUSINESS 

Small business enterprises, then, constitute the vast majority of 
all business units. They do not, however, appear in equal numerical 
preponderance in all groups '-or subgroups of industry alike; small 
business has distinct preferences as to habitat. 

Small business, is, in general, to be found wherever the capital 
requirement for adequate operation is small. It will 'he found 
wherever small-unit machinery or other equipment may be as efficient 
for the given purpose as the large and costly plant. Also, the 
personally operated type of enterprise is prevailingly to be found 
wherever the preference of consumers favors a product marked by 
some distinct individuality, a service involving personal contact, or 
an especially intimate response in other respects to the varieties of 
consumer demands. It is further found where the administrative 
advantages of largeness are not conclusive in determining survival. 

These characteristics of the small business units may be seen more 
clearly by considering their relative position in the major divisions of 
business: 

Trade. 

Of the total of 2,400,000 business estabfishments in this country, 
considerably more than half are engaged in trade, retail or wholesale, 
or both. Trade, in spite of the severity of large-unit (chain-store, 
mail-order house, and department-store) competition, is still numeri- 
caUy the foremost stronghold of smaU business. 

Iri 1936, «,mong the 130,073 incorporated trade estabfishments 
alone, the larger ones having total assets of $5,000,000 or more, 
numbered only 337, or 0.3 percent. ^^ The gross sales of these large 
units, however, comprised 25.1 percent of the gross sales of all trade 
corporations. There were 9,106 intermediate-sized trade concerns, 
or 7 percent of the total, with 36.2 percent of the gross sales. The 
remaining trade corporations — more than 92 percent of the total 
number — were small, with less than $250,000 in total assets; and 
these enjoyed 38.7 percent of the gross sales. (In considering these 
percentages for corporations only, the statistical bias in favor of the 
large units, previously mentioned, should be borne in mind.) 

There are, in addition, many unincorporated trade units, mainly 
small and in many cases very small. While data precisely comparable 
are lacking, the Census of Business for 1935 states that there were 
1,653,961 retail and 176,756 wholesale trade units (each unit within a 
multiunit establishment being individuaUy counted)^" whereas the 
total number of trade corporations (1936), as we have seen, was but 

•» See Appendix 1, table 5. 
'» See Appendix 1, table 1-A. 



252 CONCENTRATION OF ECONOMIC P9WER 

130,073.^^ Since the Social Security Board reports that in 1938 there 
were only 397,841 retail establishments in all in the employing trade 
group, there is obviously a very large number of trade establishments 
so small as to hire no workers. In this connection, it may be repeated 
that in 1933 there were 982,184 retail trade units, none of which 
exceeded $10,000 in gross volume of sales for that year. 

This huge numerical prevalence of small and very small concerns in 
trade results primarily from economic adaptation. The requirements 
previously outlined are peculiarly favorable to small enterprise in this 
field. The requisite capital investment for trade is relatively small. 
Efficient equipmicnt is on a small-unit basis, and mechanization is at a 
minimum. The convenience of location and service, direct contact 
with the consumer, and a close responsiveness to his needs, is also an 
important factor in the success of the small enterprise. Nevertheless, 
large administrative combinations and concentrations in the field of 
trade are offering increasing competition to the small, independent 
trade concerns. These concentrations rely heavily upon the adminis- 
trative and financial advantages of largeness : bulk buying, bargaining 
power, reduction of overhead per unit of output, and superior access to 
capital and credit. The independent and small trade units never- 
theless remain preponderant, and, moreover, in various localities are 
organizing so as to maintain their original advantage in this field, 
while also preserving their independent status. 

Service. 

This is the second largest stronghold of small business though small 
units are not present in all of its various branches alike. The service 
field is broad, including amusements, hotels and restaurants, clean- 
ing establishments, the personal services, and various other non-com- 
modity enterprises. Some of these fields embody areas of business 
concentration while others do not. 

The Statistics of Income of the Treasury Department for 1936 show 
that in the service group there were 48,590 corporations of which only 
246 could be classified in the large-business category — using total 
assets as a measure of size. These represented only 0.5 percent of the 
total number of incorporated service units, with 16.1 percent of the 
corporate receipts derived from operations. The intermediate size 
group of service corporations numbered 7,121, or 14.7 percent of the 
total, with 39.4 percent of the receipts. Small service corporations 
numbered 41,223, or 84.8 percent of the total, and accounted for 44.5 
percent of the receipts. ^^ 

In this field, again, most of the establishments are unincorporated. 
The number of unincorporated units may be inferred from the con- 
trast between the above total of 48,590 corporations m the service 
industries, and the Census of Business figures for 1935, which showed 
that all service units (not subtracting multiunit establishments) 
numbered 615, 862.^^ In service, the number of nonemploying units is 
considerably less than in trade, the Social Security Board reporting 
the existence of 418,187 service establishments with employees in 1938. 
However, a considerable number of the remaining were evidently 
proprietor-manned. 

" Actually, there were roughly 145,000 trade 3 orporations, the difference arising from the fact that all of 
them did not submit balance sheets. 
" See Appendix 1, table 5. 
" See Appendix 1, table 1-A. 



CONCENTRATION OF ECONOMIC POWER 253 

The service field in certain of its branches also offers a favorable 
environment for small business. While a high degree of mechaniza- 
tion exists in some lines, by and large this sector relies upon individual 
skill and personality for its success in the competitive struggle. The 
tastes and wants of the individual consumer and the skill of the indi- 
vidual proprietor and employee are altogether controlling in certain 
service fields. Technological factors, however, play a more im- 
portant part in some divisions of this field than in trade; small busi- 
ness, therefore, finds survival increasingly difficidt where, as in the 
case of the central laundry, for example, large-unit investment and 
technology afford a competitive advantage. 

Construction. 

While the building supply industries, classed as manufacturing, 
include certain heavy concentrations, the construction industry itself 
is the least concentrated of -business categories. Even among the 
14,574 incorporated units, there were in 1936 but 31 construction cor- 
porations in the large business group (using total assets as a measure 
of size). These were 0.2 percent of all the corporations in this field, 
but they accounted for 10.5 percent of the gross receipts. The inter- 
mediate size group, with 1,066, or 7.3 percent of the 14,574 construc- 
tion corporations in this field, accounted for 25.4 percent of the gross 
business.^* 

Of the 14,574 construction corporations, 13,477, or 92.5 percent, 
wei e small units, each having less than $250,000 in total assets. These 
reported 64.1 percent of the total sales in this field. In 1938 the Social 
Security Board found that there were 98,831 employing units in this 
industry, which, when compared with the 14,574 corporations, in- 
dicates an overwhelming preponderance of unincorporated units in 
construction. 

Three factors explain the preponderance of the small unit in this 
major industry. First, mass-production methods have not yet been 
found especially applicable, partly because construction calls for an 
almost endless variety of performance. This in turn is partly ac- 
counted for by the variety of the technical problems encountered, 
which may resist standardization of method, and partly by the 
peculiar variety which characterizes the consumer demand for housing. 
In addition, construction equipment, although mechanized, is efficient 
in small units. It is largely of a portable nature, and in the main 
represents the non-fixed plant; the small assemblage of construction 
machinery is adequate and efficient for the particular tasks which it is 
called upon to perform. Finally, construction equipment adequate 
for many purposes may be acquired with a relatively small outlay of 
capital, and involves no very heavy fixed charges when not in use. 
Accordingly, the small units prevail in this industry, both numerically 
and in the total bulk of the nation's construction work performed. 
Manufacturing. 

This industrial division is obviously the focal point for many of 
the greatest business concentrations. Yet small manufacturing units 
are numerous and important. For manufacturing establishments, 
complete data for units with $5,000 or more in annual value of product 
are available from the Census of Manufactures. Using the value of 

2* See appendix 1, table 5. 

262652 — 41 — No. 17 18 



254 OONCENTRATION OF EOONOMIC "PQWER 

the annual product as the measure of size, and assuming $250,000, and 
$5,000,000 in product value to be the dividing lines of our size groups, 
it is found that, of the total of 166,794 manufacturing establishments, 
both incorporated and unincorporated, in 1937, with a minimum prod-, 
uct value of $5,000, only 1,653, or 1 percent, were large, in that the 
product of each was valued at $5,000,000 or more for the year. These 
few large establishments, however, accounted for 42.8 percent of the 
total product value of all manufacturing included in the Census of 
Manufactures. The intermediate size group comprised 29,899 estab- 
lishments, or 17.9 percent, and turned out 45.3 percent of the total 
value of product. Small manufacturing, with 135,242 establishments, 
or 81.1 percent of the total, each producing less than $250,000 in 
product valuCj accounted for 11.9 percent of the total product value of 
manufacturing tabulated.^* How much the inclusion of the smallest 
manufacturing concerns (with less than $5,000 annual production) 
would affect these percentages, is unknown. 

Included in the foregoing figures are the 85,350 incorporated manu- 
facturing establishments for which additional data are available from 
the Statistics of Income. In 1936, there were 1,278 large manufac- 
turing corporations with total assets of $5,000,000 or more, or 1.5 
percent of the total number; these accounted for 53.9 percent of the 
gross sales of manufacturing corporations. The intermediate size- 
group, again measured in terms of total assets, contained 15,269 
manufacturing corporations, or 17.9 percent of the total, and accounted 
for 32.5 percent of the gross sales. The number of small corporations 
in this field was 68,803, or 80.6 percent of the total, and they ac- 
counted for 13.6 percent of the gross sales. ^ 

The foregoing embodies data for all types of manufacturing. If 
manufacturing is broken down into its component sub-divisions, the 
percentages of small-unit participation are found to vary considerably, 
and the requirements of the small-business milieu are further illus- 
trated. Again having in mind the caution previously expressed to 
the effect that the size-group figures for corporations alone do not 
adequately portray the part played by the smaller enterprises, tlie 
preferred habitat of small business in the various subdivisions of 
manufacturing may be indicated for the corporations." 

Small business in manuf picturing in 1936 ranged from 92.0 percent 
of the total number of corporations in the clothing and apparel indus- 
try, and 89.4 percent in the printing and publishing industry, to 66.3 
percent of the corporations in paper and pulp production, and 63.2 
percent in petroleum and oil production. 

The percentages of gross sales varied widely in relation to the 
numbers of units distributed by size. In the petroleum and oil prod- 
ucts, tobacco products, and the motor vehicle industries, the small 
corporations, though constituting from 63.2 percent to 74.2 percent of 
the total numerically, made only from 1.2 percent to 4.6 percent of the 

fross sales. In chemical products; motal and its products; food and 
indred products; stone, clay and glass; paper and pulp; textile mill 
products; and liquors and beverages, the small corporations (between 
66.3 percent and 82.1 percent of the total numerically) accounted for 
10.5 percent to 16.1 percent of the gross sales. The intermediate 
corporations emerged with 30.6 percent to 53.5 percent ofgross sales. 

«• See Appendix 1, table 4. 
» See Appendix 1, table 5. 
"f^ See Appendix 1, table 6. 



CONCENTRATION OF ECONOMIC POWER 255 

In leather products; printing arid publishing; forest products; clothing 
and apparel manufacture; and the unclassified or assorted manufac- 
turing group, the small units were ffom 77.5 percent to 92.0 percent 
numerically, and their gross sales were from 22.5 percent to 52.7 per- 
cent of all the corporation gross sales in those branches of manufac- 
turing. Since the intermediate units in the last named groups further 
accounted for 40.8 percent to 52.9 percent of all gross sales, the minor 
position of the large corporations is emphasized, and the ability of the 
smaller units to adapt themselves to these forms of manufrxturing 
becomes startlingly clear. 

The underlying reason for this is, again, that the environmental 
factors in the manufacturing fields last mentioned are peculiarly favor- 
able to small enterprise. The machinery used in garment-making, 
printing, planing, leather-working and the other groups in which the 
smaller units are strongest, is of the type which is virtually as efficient 
in small or medium-sized shops as in the large factories. The huge 
printing plant, for instance, merely has more linotypes, not larger or 
more efficient linotypes, than has the small plant. Indeed, in such 
industries not only may the investment necessary for efficiency of 
plant be relatively small, but the small units may have an efficient 
technologiciil base. Again, small plants of these types may and do 
alter their output and their operations w^ith comparative ease, in order 
to produce specialties in conformity w^ith changes in consumer demand. 
In this connection, the huge expenditure for the wholesale overhauling 
of plant and equipment required by the Ford plant in order to turn 
out the first model A car comes readily to mind. Contrast this with the 
little cooperage concern encountered during the course of the field 
study, which when the barrel-making business ceased to pay, used a 
part of its existing equipment for cleaning and renovating old barrels, 
and soon found itself in the "black" again. '^ Similar is the case of the 
small feather concern which, crowded by competitors in that industry, 
turned to the manufacture of shuttlecocks used in the game of bad- 
minton, and is now one of a scant few concerns successfully engaged in 
this business.^® Small enterprise may have less hull than the full 
rigged corporation, but, like the racing yacht, it carries greater spread 
of saU, has lighter draft, and can change its course more swiftly. Such 
factors contribute to the variety of product which enables smaU 
concerns to serve a shifting market and profit by changes in style, 
varieties of demand and even individual orders. This ability to change 
without undue disruption of operations helps to explain the amazing 
vitality which frequently characterizes the small enterprise. 

Mining and Quxirrying. 

A general inquiry into this industry made in the course of the field 
study,^° resulted in the conclusion that an environment favorable to 
the small enterprise is not found under present conditions in mining, 
although it does exist in quarrying. Mining has largelv become a 
deeprock operation requiring large capital and costly smelting equip- 
ment. Quarrying, however, being a surface operation, the smaller 
units find it possible to compete successfully. Figures from the 1936 
Statistics of Income covering this field as a whole show that 8,555 
mining and quarrymg corporations, out of a total of 11,531, fell into 

•• See Appendix 2, III, p. — . 
»• See Appendix 2, VI, p. — . 
w In thiB Rocky Mountain and Pacific Coast States. 



256 oom:)entration of economic power 

the small business category. However, 275 large corporations ac- 
counted for 57.3 percent of the gross sales of the industry, as compared 
with only 8 percent for the small establishments.^^ 

Transportation and Public Utilities. 

In transportation, a striking illustration is afforded by the char- 
acteristic ability of small enterprise to seize upon a new small-unit 
invention, susceptible to operating integration, flexible in its response 
to demand, and with drastic competitive consequences to established 
large enterprise. The invention of the automobile and the truck 
presented small enterprise with a technological weapon which it has 
used effectively to make tremendous inroads into the railroad and 
traction field, which formerly was notably the abode of big business. 
The ability of the motor vehicle to respond more intimately to the 
needs of the public, and at small capital outlay, were vital factors in 
the success of small business in this area. 

A somewhat similar development has now begun to take place in 
the electric utility field. Its technological basis is the small-unit 
generator, which is being utilized by many small municipalities, co- 
operatives and individual factories and apartment houses to make 
important inroads into the regional monopolies of the power com- 
panies. 

ECONOMIC CONTRIBUTIONS OF SMALL BUSINESS 

From the foregoing discussion it is apparent that small business not 
only constitutes a very large segment of the entire business field, but 
m^kes special contributions of its own to the national economy. The 
tendency has been to consider the small business unit only in terms of 
the large, as in the case of the banker who said: ''We must select the 
acorns that will grow into oaks." Small-unit enterprise, however, 
exists in its own right; it performs certain functions and services 
which are not duplicated by mass-production or standardized meth- 
ods, are in some respects the reverse or complement of the latter, and 
are of distinct value in our national life. 

Service to the Consumer. 

The first of these contributions made by small business has already 
been suggested. It is the special service performed for the consumer. 
Thus, to a considerable extent, small business complements and 
rounds out the standardized production characteristics of the large 
mechanized establishments, and adds variety to the uniformity of 
service typical of large organizations. Small business is also respon- 
sible for much of the versatility of product and of service which, 
despite standardizing trends, is still deeply desired by the American 
consumer. 

Contributions to Big Business. 

There are also the contributions made by small business to big 
business itselL Within given industries, small units and large 
generally perform different productive functions or parts of functions. 
Accordingly, there exists between them an interdependence akin to a 
division of labor. It is frequently stated that the development of a 
new large industry brings many small business units into existence; 
it is less commonly recognized that the sm^U ones perform functions 

>i See Appendix 1, table 6. 



CONCENTRATION OF ECONOMIC POWER 257 

without which the large ones would find it difficult to exist. In man- 
ufacturing for example, the large central enterprises rely heavily 
upon the smaller independent unita for secondary and tertiary proc- 
essings, which translate bulk or semi-finished production into a wide 
variety of consumer goods. Much or most of the producing industry 
is dependent, in turn, for its contact with the consumer, upon the 
trade outlets and at times upon the repairing services, which, as far 
as numbers go, are prevailingly in small business hands. 

A second type of inter-relationship between small business and 
large is presented by those instances in which the large, central in- 
dustrial units receive the output of smaller ones, the latter having 
figured in preliminary stages of the productive process. This is most 
clearly illustrated by the pattern and parts concerns in the auto- 
motive industry, without which the assembly lines of the larger plants 
would not move. A variation of this interrelationship is presented 
by the small cannery or garment factory, the entire output of which 
is contracted for by the large mail-order house or chain-store. 

Moreover, small business is an important customer of large business. 
This applies not only to the purchase of commodities for reprocessing 
or for inventory purposes, but also to the purchases of machinery, 
fixtures, vehicles, and the congeries of items which make up the capital 
equipment of the smaller units. 

Competition vjith Big Business. 

But there is still another aspect to the relationship. Although the 
existence of small business is necessary for the operation and the 
welfare of large, small business in many industries also competes with 
large. The course of invention (as in transportation) has provided 
small business with new and efficient small equipment which enables 
it to compete effectively with large business. The small independent 
enterpriser, furthermore is continually seeking oprportunities to break 
into the business of large enterprise where the latter attempts to main- 
tain high prices, or fails to perform some needed service.^^ Moreover, 
as has been frequently observed, the individual and small type oif 
enterprise is regarded as the living expression of the open competitive 
economic system, traditional for this nation and embedded in our laws 
and customs. 

An important corollary of the foregoing is the general effect of small 
business in maintaining the processes of individualism. The inde- 
pendent enterpriser has always been and continues to be of immense 
importance in the national psychology. The small businessman, 
together with the independent farmer and professional practitioner, 
has played an important role in fixing those standards of personal 
initiative, independent economic venturing, self-responsibility and 
self-determination in business, which are basic to the American way 
of fife. 

» But cf. the following: "Thore is a tendency to idealize the early nineteenth century and to assume that 
small business and the prices it charged were the result of competition. As far as I am able to see, there is 
little, if any, foundation for this. The village grocery store, the village blacksmith, the village grist mill, 
were all monopolies. Until the advent of the automobile, they charged conventional prices or administered 
prices which were not elastic. The people of the village could not go many miles to the next town. In a 
large measure this is still true In small towns. Such competition as there has been, curiously enough, came 
from large-scale enterprise; mail-order houses, and later the chain stores. The theory that prices were ad- 
justed by competition under the old small-scale production in small towns, as far as I can see, simply never 
was generally true, despite some nostalgic reminiscences which are indulged in today." A. A. Berle, Jr., 
Memorandum of Suggestions: Investigation of Business Organization and Practices (July 12, 1938) (origin- 
ally prepared for confidential circulation for members of the Temporary National Economic Committee), 
p. 2. 



258 CONCENTRATION OF ECONOMIC POWER 

Contribution to Oainful Employment. 

The final contribution of small business to our economy is by no 
means the least. It consists in the support of a considerable part of the 
population, as small-business proprietors and workers in small- 
business establishments. The smaller units of enterprise provide the 
livelihoods of a large share of the nation's gainfully employed popula- 
tion, principally because small enterprise is prevalent in fields where the 
ratio of machine production to the employment of manpower is 
relatively low. 

In 1935, there were 2,292,184 active proprietors and firm members 
enumerated by the Census of Business, in trade, service, and the con- 
struction industry alone.^^ An additional number, not tabulated, 
included the active proprietors of small manufacturing, quarrying, 
and other business concerns. In view of these omissions and an 
apparent increase in the number of business units since 1935, the figure 
given above is probably an understatement of the number of pro- 
prietors and partners engaged in small business today. The great 
majority of these proprietors derived their livelihoods from the small 
business sector, though some were the owners of intermediate-sized 
establishments arid a few, possibly, of large business concerns. 

The total number of employing concerns, by size-groups based 
upon employment, has previously been stated (pp. — ). The number 
of their employees may now be added. In March 1938 according to 
the Social Security Board, 3,916,574 workers were employed in estab- 
lishments which had less than 10 employees, and 1,730,099 additional 
inj establishments having from 10 to 19 employees.^^ These 5,646,673 
workers constituted 25.2 percent of all the 22,373,417 employees in- 
cluded in the Social Security size-group tabulation.^^ 

Adding these to the proprietors, an approximate minimum number 
of 7,938,857 persons supported by small business is obtained. This 
number represents 18.9 percent of the nation's estimated total of 
42,019,000 persons gainfully employed in March 1938.^^ 

Intermediate business begins at approximately the 20-employee 
level. The employees in all establishments having from 20 to 799 
workers (roughly constituting the limits of intermediate business) 
added to the foregoing employees in the less-than-20-worker estab- 
lishments, numbered 15,493,318, or 69.3 percent of all workers in- 
cluded in the Social Security tabulation. This number, including the 
proprietors, amounts to 40.8 percent of the nation's total of gainfully 
employed, supported by the small and intermediate business units. 

The total number of employees in the large business establishments, 
understood as employing 800 workers or more, was but 6,880,099. 
This included executive staff members whose functions, in small 
business, would be larsrely performed by the active proprietors. 

The number of livelihoods derived from active, direct participation 
in small business is greater than the number of livelihoods derived 
from direct employment in large business, if the active small-business 
proprietor be included in the contribution of small business to gainful 

" Retail trade. 1.511.734; wholesale tra^e, 97,225; service, 61S,032; construction, 69,193. 

** See, Appendix 1, table 3. An additional 2,119,683 employees were not tabulated by size of employing 
establishment. 

" If the 20-29 worker establishments be included fis "small", then the total number of small-business 
employees rises to 6,723,314, or 30 percent of the workers under Social Security; again Including these with 
the proprietors, the percentage of the Nation's gainfully employed persons deriving their living from estab- 
lishments of less than 30 workers rises to 20.7 percent. 

w Total of estimate of non-agricultural employment of Burrauof LaoAp Statistics, plus estimate of agricul- 
tural employment of the Committee of Economic Secodty (R. R. Katban) both for March 1938. 



CONCENTRATION OF ECONOMIC POWER 



259 



employment. Excluding the proprietors, but including all employees 
enrolled under Social Security, the three main size-groups of employing 
concerns contributed to wage employment in 1938, respectively, as 
follows : 





Number of 
■ employing 
organiza- 
tions 


Percent 


Number of 
employees 


Percent 


Payrolls 


Percent 


Small -- -- 


1 1, 674, 237 

133, 137 

2,445 


92.5 
7.4 
0.1 


5, 648, 673 
9, 846, 645 
6,880,099 


25.2 
44.1 
30.7 


$1,415,459,569 
2, 765, 604, 541 
2, 194, 868, 301 


22.2 


Intermediate.--- - 


43.4 


Large. . 


34.4 






Total-- 


1, 809, 819 


100.0 


22, 373, 417 


100.0 


G, 375, 932, 411 


100.0 







I Includes 122,890 establishments, with $59,276,132 taxable wages reported for the period January-March, 
1938, which had no employees at the end of that period. Hence, the worlcers in these establishments do 
not appear in the column headed "Number of Employees." 

In addition to the foregoing data, the figures from the Census of 
Manufacturers for 1937 show that small business employs a larger 
number of workers for each $100,000 of value added by manufacture 
than does large business. 

The following table, which includes data for 166,794 manufacturing 
concerns, shows that the smallest units (those having from $5,000 up 
to $20,000 in value of product), employed almost twice as many 
workers per $100,000 of value added as did the largest. 



_. , , , , Number workers 

Size by value of product: per $100.000 of 

Small : value added 

$5,000 to $19,999 49. 5 

$20,000 to $49,999 46.3 

$50,000 to $99,999 43. 8 

$100,000 to $249,999 42. 4 

Combined small 44. 1 

Intermediate: 

$250,000 to $499,999 41. 3 

$500,000 to $999,999 39.8 



Number workers 

per $100,000 of 

value added 

Size by value of product — Contd. 
Intermediate— Continued. 

$1,000,000 to $2,499,999- 36.5 
$2,500,000 to $4,999,999. 31.4 



Combined 
ate 



intermedi- 



36.7 



Large : 

$5,000,000 to $24,999,999- 26.7 

$25,000,000 and over-.. 26.0 

Combined large 26. 4 



Moreover, the ratio of man-power etnployed to the value added de- 
clined steadily with each increase in the given size classifications of 
manufacturing establishihents. The small business group as a whole, 
according to these figures, employed 44.1 workers for each $100,000 of 
value added as compared with 26.4 workers for the large group as a 
whole. 

It is to be noted that important economic areas exist in which tech- 
nology caDs for a relatively high ratio of man-power to output and 
where the investment of capital per employee is small. The available 
data show that the average fixed investment in plant (capital assets) 
for each worker employed in the large type of factoiy is approximately 
$7,500; in the factory of intermediate size, approximately $2,300; and 
in the small factory, approximately $1,600.^^ 

" See Appendix 1, tid>le9 7 and 8. 



260 OONCENTRATION OF ECONOMIC POWER 

THE FINANCIAL POSITION OF SMALL BUSINESS 

The classic story of the small-business unit is that it was started 
"on a shoestring," grew from its own earnings, and has striven to ac- 
cumulate sufficient capital to tide its operations over the production 
cycle and the collection-lag. 

While most small concerns may have accumulated sufl&cient capital 
for their operating requirements, recent events have operated to 
frustrate the accumulation of sufficient capital to cover the collection- 
lag for a large number of small businesses. The most important of 
these events was the depression. A second development was a gen- 
eral rise in extensions of credit to customers. This latter development 
placed the small units in the position of cither increasing the credit 
lines of its customers or forfeiting business to those of its competitors 
who could make such extensions. 

Small business seldom has had sufficient financial resources with 
which to "bank" its customers. An indication of this lack may be 
seen in the income tax returns of the small business corporations which 
are probably better capitalized than the unincorporated units, for 
which comparable data are not available. For 1936, the 173,674 
smallest business corporations — those with less than $50,000 in' total 
assets — reported an average net deficit in the capital account of $4,322. 
For the entire group of 252,688 small business corporations with less 
than $250,000 in assets, the average net deficit in the capital account 
reported was $1,812. By comparison, the 35,263 intermediate 
corporations showed an average surplus and undivided profits, less 
deficit of $135,590, while the corresponding average figure for the 
2,167 corporations in the large business category was $6,200,510.^^ 

The compulsion to extend additional credit to customers, as well 
as other business exigencies, results in an increased debt burden. The 
1936 Statistics of Income showed the average debt of the smallest 
business corporations to be $8,400, or 47 percent of their average total 
assets; and of all small business corporations to be $19,050, or 40 
percent of their average total assets. The debt of the intermediate 
business corporations averaged $280,030, or 33 percent of their average 
total assets; while that of the large business units averaged $5,589,020, 
or only 23 percent of their average total assets.^^ 

Further differences in debt structure between small and large busi- 
ness may be seen from an analysis of the data in the Statistics of 
Income for 1936. Debt is there subdivided into (1) "Notes and 
Accounts Payable," which in general represents short-term bank debt, 
trade debt, etc., and (2) "Bonded debt and mortgages," which rep- 
resents long-term debt. These data show that 85 percent of the total 
reported indebtedness of the smallest business corporations was short- 
term while 15 percent was long-term. For all small business corpora- 
tions, the respective percentages were 74 and 26 percent. By con- 
trast, the figures for the intermediate and large business group Was 
54 percent for short-term debt and 46 percent for long-term debt.^° 

The heavy ratio of debt and the high cost of credit would appear to 
account, in part, for the smaller profit ratio of small business. Thus, 
in 1936 small business corporations showed a combined profit of 1.6 

" Appendix 1, table 10. 
" Appendix 1, table 9. 
" Appendix 1, table 9. 



CONCENTRATION OF ECONOMIC POWER 261 

percent on total assets, intermediate business corporations, 4.7 percent, 
and large business corporations, 6.0 percent. ^^ 

But despite this smaller profit ratio, the number of small business 
enterprises increased. In 1937, there was an increase of 46,663 small 
business enterprises over the preceding year, or, from 2,009,935 in 
1936 to 2,056,598 in 1937. In 1939, the number increased by 45,402, 
or to 2, 102,000. « 

The resiliency of small business is further indicated by the fact that 
the number and percentage of small business corporations reporting 
net taxable income increased from 15.8 percent in 1932 to 44.3 percent 
in 1936.^^ This increase parallels that of intermediate and large 
business. 

CAPITAL, CREDIT, AND SMALL BUSINESS 

Summary of the Findings. 

With respect to equity capital. — Small business by and large lacks 
adequate equity capital with which to finance its operations. In 
default of adequate equity capital, small business is compelled to rely 
largely upon mortgage and short-term credit. One reason for the 
inability of small business to obtain equity capital lies in the fact that 
it does not have the same access to the capital markets as does large 
business, since that machinery is adapted largely to the needs of big 
business. 

One difficulty which must be taken into consideration in suppljdng 
equity capital to small business is its resistance to impairing its control 
or sharing its equity. 

With respect to credit. — (a) Ijong term: Small business faces the 
same difficulties in obtaining long-term credit as it does in obtaining 
equity capital, since the existing credit facilities are not geared to 
deal with the special and peculiar needs of the smaller enterprise. 

(6) Short term: Although short-term credit appears to be more 
available than either equity capital or .long-term credit, nevertheless, 
small business experiences difficulties in obtaining short-term credit 
from the regular commercial banking sources. Short-term credit is, 
however, obtained through intermediary credit agencies, and from 
trade creditors, at charges which are frequently high and upon terms 
which tend to be onerous. 

The difficulties experienced by small business in obtaining adequate 
financing result from two sets of cJECumstances: (1) the intrinsic 
operative characteristics of small business which have been previously 
noted; (2) the risk involved in individual transactions. 

But the mere provision of adequate capital and credit will not lq 
itself solve the small businessman's problems. He also reqoiires the 
benefits which large business enjoys through its research and analyti- 
cal services. Small business would profit immeasirrably if it had the 
advantages of a systematic infornaational and research service expressly 
designed for its peculiar and distinctive needs and comparable to that 
furnished to the farmer by the Department of Agriculture, and to big 
business . through its own laboratories and the Department of Com- 
merce. Such an informational service could go far in introducing 
modern accounting methods and the wider application of business 

" Appendix 1, table 10, but cf. Crum, Corporate Size and Earning Power (1939), ch. 23. 
" Appendix 1, tfible 11. The number of establishments in 1939 was about 2,116,000. 
" Appendix 1, table 14. 



262 CONCENTRATION OF ECONOMIC POWER 

practices which have been commonly associated with the larger miits 
of enterprise. Moreover, such an informational service might 
experiment with the development of new seciu-ity techniques. In 
this connection, the experience of the agencies of the Farm Credit 
Administration in the organization of farm groups for the establish- 
ment of credit facilities should be looked into to determine whether 
these principles and methods are applicable to the financing of small 
business. 

Sources of Equity Capital. 

Individuals, — The major source of equity investments in small 
enterprise has always been (and still is) the moneyed individual 
who was familiar with the business, its management, and the locality 
in which it operated. 

The financing of small enterprises has always presented difficulties 
since owners often have been more eager to expand than their resources 
would permit. Where their enternrises were successful, additional 
funds were provided from profits. The difficulties in financing usually 
arose when the business was only partially successful so that sufficient 
funds from profits were not available for expansion purposes. In 
such circumstances, the raising of local capital was not always possible, 
due to the uncertainties of the future of the enterprise. 

The growing practice by individuals of placing their savings with 
savings banks, life insurance companies, building and loan associations, 
or the purchase of stock in the great corporations, has tended to 
siphon off into these institutions money which would otherwise have 
been used for investment in local enterprise. The growth of the 
chain store, the branch factory, and the centralization of business 
activity, has reduced a considerable part of local enterprise to the 
position of being a mere appendage of large business. The automo- 
bile dealer, the filling station operator, the dealer in electrical appli- 
ances, have become adjuncts to larcje scale manufacturing and 
distributing operations. The financing of these operations is 
provided by automobile finance companies, oil companies, building 
supply companies. The institutionalization of savings and the 
integration of a considerable part of local business into national organi- 
zations has created a void with respect to the financing of tfhe remaining 
independent local enterprises. Moreover, a comment frequently 
made to the staff representatives during the course of the field study 
was that wealthy individuals were deterred from investing in local 
enterprises because of the tax situation and the desirability of tax 
exempt government bonds.** 

The earlier activities of local wealthy individuals in supplying 
capital to local enterprise have continued but at a greatly diminished 
rate. In one city embraced by the field study a former banker main- 
tained investments in numerous small enterprises.*" To some extent 
group efforts appear to be replacing individual efforts in the supply of 
venture money. In some cities, commuiiity leaders have established 
community funds for the purpose of providing equity capital and 

« See, for example, Hearings before Temporary National Economic Committee, Part IX, p. 3907: testimony 
of S. V. P. Quaclcenbush. For proposals with respect to "incentive taxation" which might remedy this 
situation, see Reoort of the Subcommittee of the Committee on Finance, U. S. Senate, 76th Cong., 1st sess. 
pursuant to S. Res. 2i5. 
' " See Appendix 2, p. — . 



CONCENTRATION OF ECONOMIC POWER 263 

extending credit to local business.*^ In one city, a group of men, 
familiar with small enterprises through their own business and pro- 
fessional relations, organized a corporation for the express purpose of 
finding and selecting ventures in which the individual members of the 
group might make investments.*^ The experience of this group in 
supplying venture capital to small business has been unique in the 
contemporary financing of small business enterprises. The profit 
experience of the group, although not phenomenal, has, nevertheless, 
been such as to persuade the individual members of the possibilities 
of gain from organized and well directed activities in the financing of 
small business ventures. 

Investment hanking. — Investment banking has played virtually no 
part in the financing of small business. This is not surprising, since 
the underwriting and marketing of securities — the traditional business 
of investment banking — is geared almost exclusively to the require- 
ments of large enterprise. 

Even where efforts are made to specialize in the issues of small 
corporations, the experience of one investment banking firm shows that 
it did not underwrite the issue of any corporation having assets of less 
than $1,600,000.*^ Such concerns are not of course "small." That 
the small concern does not to any considerable extent employ the 
machinery of investment banking may be seen from the fact that 
during the period from September 1, 1934, to June 30, 1938, inclusive, 
only 353 issues of less than $100,000 (none, however, being less than 
$30,000) were registered with the Securities and Exchange Commission. 

Since the overwhelming preponderance of small business is unincor- 
porated, only a small sector at best can avail itself of the investment 
banking machinery. And even in this restricted area, there are limi- 
tations upon the effective utilization of investment banking facilities. 
One such limitation is the high cost of flotation. 

The statistics of the Securities and Exchange Commission show that 
among registered issues with expected proceeds of less than $1,000,000, 
the cost of flotation amounts to around 20 percent of proceeds for 
common stocks, about 16 percent for preferred stocks, and about 7 
percent for bonds. "^^ Among the total costs of flotation, the compensa- 
tion paid to underwriters and other distributors of securities looms 
large. For stock issues of less than $1,000,000 between 80 and 90 
percent of the total flotation costs, and for bond issues of similar size, 
70 percent of the flotation cost, have consisted of compensation paid 
for underwriting and distribution. Other expenses, which are not 
attributable to registration costs under the Securities Act of 1933, 
absorb a considerable portion of the remaining costs, as for example, 
listing fees, revenue stamps, State qualification fees, transfer agent and 
trustee fees. These fees must be paid irrespective of whether an issue 
is registered. Other expenses, such as legal and accounting fees and 
the expense of printing, are attributable only in part to registration. 

« The Chnmber of Commerce of the United States, in a study entitled "Community Industrial Financing 
Plans," published in 1936 and reporting information received up to 1932, has described in some detail finan- 
ciUR plans set up in various communities as a means of supplying capitalto local industries. It lists plans In 
such cities as AKron, Ohio; Baltimore, Md.; Danville, 111.; Fort Wayne, Ind.; Johnstown, Pa.; Louisville, 
Ky.; Lowell, Mass.; Omaha, Nebr.; Portland, Greg.; Rochester, N. Y.; and Tulsa, Okla. 

In the course of the field studies, a detailed inquiry was made of three community industrial funds — one 
at Scranton-Wilkes-Barre, Pa.; Omaha, Nebr.; and Portland, Oreg. They are discussed in the respective 
field studies dealing with these regions. See appendix 2, pp. 115-118; 136-137; and 161-162. 

" See Appendix 3. sec. IV, p. 

" See, Article. Ferdinand Eberstadt, Fortune Magazine (April 1939) p. 72. 

<» See Appendix 1, tables 15, 16, and 17. 



264 CONCENTRATION OF ECONOMIC POWER 

While it is difficult to estimate precisely the additional cost of selling 
small issues which may be due to registration under the Securities Act, 
it is apparent that the extra cost is not in excess of about 1 percent of 
gross proceeds, and there is reason to believe that the extra cost is 
nearer one-half of 1 percent.^" 

The relatively small volume of unseasoned equity issues is due to the 
inability of such issues to find purchasers. An analysis of 700 small 
security registrations shows that 1 year after the effective date of the 
registration, over one-third had not sold any of the securities regis- 
tered. In other words, over 200 such issues — fully registered and 
ready for market — could not find a single purchaser in the year follow- 
ing effective registration. This would appear to indicate that the 
"obstacles standing in the way of the successful flotation of issues of 
small and particularly of .unseasoned enterprises are to be found in 
places other than the requirements of the Securities Act."^^ 

As has been pointed out by Chairman Frank: ^^ 

In reviewing the statistical and factual material which comes before it, the 
Com.mission has been particularly impressed by the fact that the flotation of 
small issues appears to have been a costly procedure at all times, and that the 
very grieat majority of those costs consists of the commissions and fees paid to 
underwriters and agents distributing these issues. The origin of the high cost of 
flotation of sm.all issues thus obviously lies in the investm.ent banking machinery^ 
itself. That machinery is geared m.ainly to the handling of larger issues. The" 
minimum of expenses, be it ever so small, involved in the investigation and prep- 
aration of every individual issue and the difficulty of acquainting prospective 
purchasers with the security offering of a company which may not be known to 
the investing public, combined, force the security distributor to charge a com- 
mission on sm.all issues which is very high in proportion to the proceeds. This 
emphasis on the high cost of investm.ent bankers' services in distributing small 
issues should not be taken as a criticism of the investment bankers, but merely as 
a statement of conditions which have prevailed for a great many years, and which, 
unfortunately, are often lost sight of, when the obstacles of the flotation of small 
issues are discussed. 

Investment trusts. — The investment trust or company with its semi- 
mobile source of capital presents important possibilities as one solution 
to the problem of providing equity capital to intermediate-size busi- 
ness;** however, it has seldom been used for that purpose.** The pre- 
vailing practice of diversification has been for a trust to take small 
parts of the capital of many large enterprises, rather than large parts 
of the capital of many small Enterprises. As presently constituted, 

'" Sep, for example, 86 Cong. Rec. p. 7093 (Apr. 17, 1940) communication from Chairman Jerome N. Frank 
to Congressman John W. McCormack : "In our desire to determine as closely as possible the reasons for high 
cost of flotation of small issues, we have recently had our Research and Statistics Section make a comparison 
between the costs of flotation of small issues in the years 1935-38, when the Securities Act was in effect, and 
in the years 1925-29 * * *. Our statisticians have found tbat the total cost of flotation of bond issues of 
less than $1,000,000 averaged about 7 percent of gross proceeds for both periods, but that it rose for preferred, 
stock issues from about 8 percent to nearly 15,percent. It is, however, mainly the expenses other than com- 
pensation to underwriters and distributors which interest us here. These other expenses rose only from I 
to 2 percent for bonds and from 0.8 to 1 .8 percent for preferred stocks. Thus the average increase is less than 
1 percent of total proceeds, and only part of that increase is attributable to registration under the Securities 
Act. We were unable to collect sufficient material on small issues of common stock to form precise estimates, 
but there is no reason to assume that the increase in expenses which may be caused by registration under the 
Securities Act is larger than in the case of small issues of preferred stocks and bonds." See also, Cost of 
Flotation for Small Issues, Report by Research and Statistics Section of the Trading and Exchange Division 
to the Securities and Exchange Commission, 1940. 

" Id. , p. 7094. See also, Selected Statistics on Securities and on Exchange Markets, report to the Securlties- 
and Exchange Commission by the Research and Statistics Section of the Trading and Exchange Division, 
1939, pp. 34-37. 

"Ibid., p. 7094. 

" See Investment Trusts and Investment Companies, reports of the Securities and Exchange Commis • 
sion. See also, Securities and Exchange Commission Release No. 244') (March 18, 1940) relative to the 
Regulation of "Pegging, Fixing and Stabilizing" of Security Prices. 

'* The English experience in financing small business enterprises has not been dissimilar to our own. 
See report, Committee on Finance and Industry (1931) pp. 173-174. But Cf. Grant, A Study of the Capital 
Market in Post War Britain (1937), for attempts to meet the deficiencies described by Lord McMillan's 
Committee. 



CONCENTRATION OF ECONOMIC POWER 265 

the investment trust offers little promise as a financing medium to 
the small enterprise. 

A few investment trusts have been organized with the express 
purpose of purchasing the equities of intermediate size enterprises. 
One such investment trust, which has devoted a portion of its fund 
to a varied list of "special situations," considered 345 prospects during 
a 2-year period, and made investments in 13, the investments ranging 
from $19,900 to $2,500,000, the average investment being approxi- 
mately $755,000.^^ At the end of 1939, this company had invested 
in 20 situations in intermediate size enterprises, having considered 206 
additional applications during this year. Since the smallest invest- 
ment made by this trust during the period 1936-39 was $100,000, it 
is readily apparent that small enterprises were outside the scope of 
its activity .^^ 

Whether some form of investment trust will be able to serve as an 
effective pipeline to connect idle funds with the small business sector 
depends in no small measure upon the adoption of those specialized 
techniques of small business financing which have been successfully 
developed by the intermediate credit agencies." 

Sources of Credit. 

The commercial banks. — Traditionallj', the commercial bank has 
been a major source of credit for local enterprise. The local bank was 
completely integrated into the life of its community; its management 
and ownership were in local hands; the business potentialities of its 
borrowers were known intimately. Frequently, the directors and 
principal stockholders were also themselves financially interested in 
local ventures. ^^ 

The type of credit which the local bank extended was customarily 
based on two kinds of collateral security: (1) short-term promissory 
notes; (2) short-term mortgages on real property. But occasionally 
the small corporation also borrowed on the strength of its own securi- 
ties. In many cases, it was the custom for the local moneyed citizens, 
who themselves were interested in an enterprise, to endorse the paper 
of the borrowers. Over periods of relative economic stability this 
method of credit extension was, on the whole, adequate in supplying 
the needs of that sector of small business which enjoyed normal bank- 
ing relations. 

With the advent of the depression of the 30's and the resulting 
credit strain upon the local banking system, this procedure broke 
down.^' Many local banks were seriously weakened. They found 

" See, Appendix 3, III, p. — for a more detailed discussion of the activities of this trust. 

w Loans to small business enterprises by insurance companies do not appear to offer great promise as an 
effective medium of financial aid to such enterprises. At a hearing before the Temporary National Eco- 
nomic Committee, Mr. John Stedman, vice president of the Prudential Insurance Co., testified that, with 
regard to industrial loans, "we didn't want to go much below one hundred thousand, possibly fifty, and 
considered small industrial loans to be limited by the figure of a million dollars," and that the company 
had made only 2 loans out (if 120 applications. Most of the applicants, he stated, Uere in need of "venture 
capital," a type of loan in which the company as trustee for its policy holders did not believe itself justified 
in engaging. Verbatim record of the proceedings of the Temporary National Economic Committee, Feb- 
ruary 27, 1940. pp. 126-127. Mr. F. W. Ecker, vice president of the Metropolitan Life Insurance Co., 
testified that his company had made onlv 6 loans under .$1,000,000 to "small" business enterprises— 2 being 
below $,'500,000 and 4 being between $900,000 and $1,000,000. There were 8 loans between $1,000,000 and 
$1,500,000. (Id. pp. 144-145.) 

Both witnesses testified that their companies have not as yet developed any systematic machinery for 
servicing loans to small business in order to minimize the otherwise large expense factor. 

" Cf. discussion with respect to finance companies, factors and accounts financing companies, pp. — 
infra. 

" For much of the analysis in this section we are indebted to an unpublished report on "Medium Term 
credit in the United States," prepared for the League of Nations in 1936 by Prof. "Winfield W. Riefler of the 
Institute for Advanced Study. 

»' See, however, Appendix 2, VI, p. — for the effect of branch banking upon local credit relationships. 



266 OONCENTRATION OF EOONOMIC POWER, 

that their local loans were unsuited either for hypothecation or reali- 
zation. Potential outside lenders, being unfamiliar with local condi- 
tions, were generally unable to evaluate the worth of local loans. 
Moreover, realization on such loans became diflBcult, if not impossible, 
since their value was dependent primarily upon the continuance of 
the borrowers as going concerns. In the case of mortgages on small 
industrial enterprises, the special purpose value of the underlying- 
physical assets created difficulties ; and in the case of pledged securities 
of local concerns, there was no marketability. 

The post-depression situation with respect to short-term loans con- 
tinued to present grave problems to the local bank and the small busi- 
nessman. Banks which were in straitened circumstances were 
either unwilling to make such loans or reluctant to renew them as 
formerly. Closed banks could of course do nothing but call for the 
prompt repayment of loans outstanding. In general, the pressure 
which was exerted for prompt repayment resulted in hardships to the 
borrower. 

During recent years, an additional factor has been present which 
has had a serious effect upon small business: the breakdown in the 
nexus of local financing relationships upon which the successful ex- 
tension of bank credit to local borrowers frequently rested. 

By and large, the small business enterprise is not in a position to 
meet the existing lending standards of commercial banks. Asa good 
risk, it would seem preferable that the enterprise should be expanding. 
But if the enterprise is expanding, the likelihood is great that it will be 
short of capital and the equity in the enterprise will be thin. In all 
probability, tangible assets are likely to be special purpose plant and 
equipment of negligible value on an auction basis. 

In reality, the basis of the credit in such instances is determined by 
the personal standing of the owner or owners of the business and the 
lender's judgment of its future prospects as well as of the quality of 
its management. ^° The growth in the average size of the commercial 
bank, the spread of branch banking, and the closing of the doors of 
thousands of small unit banks, has resulted in a situation where bank 
officials no longer have the same intimate knowledge of local manage- 
ment and enterprise as formerly. The local businessmen, who for- 
merly either owned or managed the local banks, have been to an in- 
creasing extent supplanted by a banking personnel which has risen 
from the ranks. This newer type of manager is disposed to pay greater 
attention to the static elements of assets and liquidity than to the 
dynamics of growth and expansion. 

Prior to the depression, when the local banks were generally owned 
and managed by the substantial citizens of the community, it was not 
unusual for the bank to have among its own stockholders the responsi- 
ble backers of those local enterprises which enjoyed bank credit. The 
ultimate cushion of risk for the bank as well as for the enterprise to a 
considerable extent, therefore, rested upon the same individuals. 
During the crisis, this cushion of risk became seriously impaired, since 

•" For a list of 18 reasons given by banks for refusal of loans, see Report on the Availability of Bank Credit 
in the Seventh Federal Reserve District, submitted to the Secretary of the Treasury by Charles O. Hardy 
and Jacob Viner. The list, with the numbers of rejections for each cause, follows (p. 10 of Report): I. Loan 
policy of bank (87). 2. Earnings (344). 3. Inadequate working capital (658). 4, Inadequate net worth 
(720). 5. Unsatisfactory customer relationship (224). 6. Speculative or promotional (172). 7. Character 
of businesfi (45) . 8. Indebtedness to closed hanks (44). 9. Past insolvency (102). 10. Character of manage- 
ment (259). 11. Loan too slow (349). 12. Real estate (33). 13. Not customer of bank (109). 14. Cause 
unknown (39). 15. Examiner criticism (145). 16. Collateral unsatisfactory (288). 17. Loan to transfer 
indebtedness (20) . 18. Other reasons (65). 



CONCENTRATION OF ECONOMIC POWER 267 

many local bank stockholders and directors were compelled to draw 
heavily on their own resources to make good assessments on their bank 
stock in the effort to maintain the solvency of then banks and to make 
good on the double liability which may been attached to their stock. 
The losses sustained by these individuals were frequently of such 
magnitude as to impan their endorsement on the paper of those local 
enterprises in which they had previously been associated. To no 
small extent, the banking crisis served to undermine the financial 
standing of those groups upon whose credit loans had formerly been 
made. Thus, local enterprises which formerly had constituted good 
risks were seriously afTected. And those enterprises which had never 
enjoyed satisfactory banking relations found it even more difficult to 
establish them. 

While many local banks have returned to their traditional lending 
practices, or have endeavored to meet the problem through the estab- 
lishment of personal loan departments, and the Government through 
the Reconstruction Finance Corporation and the Federal Reserve 
Banks ,^^ has also attempted to alleviate the situation, the void has not 
been filled completely either for those who formerly had established 
banking relations or for those who have been unable to establish such 
relations. 

Today, as in the past, the difficulty of obtaining medium term loans, 
i. e., those running from 1 to 5 years, remains a pressing problem. In 
the past, this type of credit was obtained by mortgaging the business 
and the home, or through the transformation of essentially short term 
loans into long term credit by- automatic renewals. The depression 
experience of the banks which formerly engaged m such transactions 
has been so unfortunate as to confine renewals to periods of 1 year or 
less. 

This concatenation of events has made for credit stringency of such 
a kind that small businessmen encountered in the field studies quite 
commonly epitomized their situation by saying: "If your business is in 
shape to get a bank loan, it doesn't need one." On the other hand, 
banl?;ers almost universally challenged this sentiment by observing 
that: "No creditworthy business is ever refused credit." . Both views 
contain a modicum of truth, since the question is, essentially, one of 
definition: "What is a creditworthy business?" 

It must be recognized that corhmercial banks do not act wholly 
without justification in restricting credit to small business. The posi- 
tion adopted by the banker that the funds at his disposal belong not to 
him but to his depositors, and therefore can be loaned only to individuals 
and enterprises whose assets and future prospects make repayment 
certain, is fundamental to sound banking practice. Under this re- 
sponsibility, the business prospects of a considerable proportion of the 
smaller enterprises at any given time is not such as to warrant bank 
credit. One may perhaps criticize the lending policy of the commercial 
banker in not giving sufficient consideration to the individual business 
cycle of his borrowers,^^ but one cannot require the commercial banker 
to lend his resources indiscriminately and irrespective of the financial 
position and future prospects of loan applicants. While a consider- 
able number of loan applicants may not be able to satisfy the existing 

•1 The activity of these agencies is discussed infra, pp. — . 

»» See, in this connection, Hearings before the Temporary National Economic Committee, Part IX. 
p. 3896: testimony of Ernest Jerome Hopkins. 



258 CONCENTRATION OF ECONOMIC) POWER 

standards of commercial banking, it does not follow that such applicants 
and their enterprises are not creditworthy. For such enterprises 
frequently do obtain credit from extra banking sources and are able 
successfully to retire their obligations. 

The available statistics on commercial loans do not clearly reflect 
the inability of small enterprise • to obtain commercial bank credit. 
In the communities studied, the commercial loans and discounts of 
small enterprises ranged between 25 and 40 percent of deposits. How- 
ever, a considerable (and apparently increasing) portion of such loans 
were not credits extended to business directly, but were credits ex- 
tended to finance companies and commercial factors. Commercial 
banking thus appears to have abdicated a part of it& function to the 
latter. Moreover, the commercial banks appear to be increasingly 
satisfied with the "wholesaling" of credit, leaving the extension of 
direct credit to the "retailing" finance companies and factors. 

Those enterprises which now have adequate banking relations are 
the successful ones which have always experienced satisfactory bank- 
ing relations. It is to this group of small business enterprises to which 
the banker usually refers when he observes that no creditworthy 
applicant is being refused. But the heart of the problem has been and 
continues to be that large group of small businessmen whose enterprises 
are not so firmly established and whose personal resources are not so 
great as to be able to satisfy the existing standards of commercial banking. 
While this group does not and cannot obtain bank credit under 
existing banking practices, it does obtain credit from the intermediate 
financing agencies as well as from private lenders and "loan sharks." 
The success of the lending activities of the intermediate agencies and 
the flourishing business enjoyed by "loan sharks" suggests that credit 
can be successfully extended to this group if an appropriate credit 
machinery is utilized. 

Some of the major reasons for the inability of commercial banks 
to extend credit to small business are: 

1. High cost of making small loans.— The costs of investigating and 
"servicing" small loans is not directly proportionate to the size of the 
loan. Therefore, interest rates which may be adequate for larger loans 
are not necessarily adequate for smaUer loans. In this connection, 
consideration might well be given to the establishment of zones of risk 
for commercial credit, with different rates applicable to each zone. 
In practice, this would entail a separation of interest charges from 
cost and loss charges, the latter being treated as a separate cost. 

2. Lack of a systematized procedure for handling small-business 
credits. — The making of small business loans requires special skill and 
facilities. Since the success of the small enterprise is so closely asso- 
ciated with the management qualities of its owner, the extension of 
small business credits lies in a zone between the banking standards 
applicable to business enterprise generally and the personal loan. 
While the small business credit does not fall precisely within the 
standards used in either of these fields, it requires a technique which 
combines elements of both. Furthermore, the successful financing of 
small business by commercial banks necessitates loans to a large 
variety of unrelated enterprises and many different loans in each 
classification. In the absence of such diversification of risk, the bank's 
solvency becomes too- .exclusively dependent upon the vagaries of 
business activity in a restricted field. As presently operated, most 



CONCENTRATION OF ECONOMIC POWER 269 

commercial banks lack the special skill and the facilities for supervision 
necessary in handling small business credits. 

3 . The growth oj intermediary financial institutions financed largely 
by the commercial banks. — The commercial banks, on the whole, do 
not appear to be concerned seriously with the competition offered by 
the personal loan company, the accounts finance company, the factor 
and other intermediary financial institutions in preempting the 
financing of small business. The phenomenal growth of these institu- 
tions has been due largely to their ability to specialize in certain types 
of risk and to obtain the supervision over a large area of small loans 
which is essential to successful lending in this field. In fact, by financ- 
ing the intermediary institutions, the commercial bank is able in- 
directly to engage in profitable operations without directly assuming 
the risk, expense and responsibility incident to handling an enormous 
number of imrelated and widely scattered transactions. Accordingly, 
the banks through this indirect financing have been able to obtain 
the diversification of risk which they have been unable to obtain 
directly. 

4. The need for liquidity operates against medium and long-term 
commitments. — During the course of the field study, numerous in- 
stances were observed of loans rejected not from any lack of credit- 
worthiness, but rather because of the credit period involved. That 
banks should have rejected such loans at a time when excess reserves 
were at or r sar an all time peak and commercial loans were relatively 
more scarce than at any time in recent banking history, suggests that 
the commercial banks have not yet recovered from their bitter expe- 
rience with the crisis. It must also be recognized that under our 
system of banking, the commercial bank should not be expected to 
supply the need for equity capital. In making long or intermediate 
term loans, a bank must consider not only the non-liquid and unmar- 
ketable character of the assets which it will have to hold, but also 
the additional element of risk which is involved as, for example, an 
adverse turn in the business cycle, or changes in the management or a 
new development in technology which may wipe out the borrower's 
enterprise.**^ 

Federal credit agencies. — Since 1932 the Federal Government has 
created a series of credit agencies designed to narrow the gap in credit 
facilities. Among such agencies may be mentioned the Federal 
Housing Administration, which insures bank loans for the repair and 
renovation of residential dwellings; the Federal Reserve banks, which 
make industrial loans for periods up to 5 years in cooperation with 
banks and directly; the Reconstruction Finance Corporation, which 
also makes industrial loans either directly or in participation with 
banks. 

1. Federal Housing Administration. — By the end of December 1938, 
the F. H. A. had insured a total of 1,833,185 loans for repair and 
renovation purposes under title Lof its act, amounting to $733,350,548. 
Claims paid on loans in default total $19,239,537; but recoveries under 
such loans amounted to $6,232,843. It should be noted, however, 
that all the assets acquired in connection with defaulted loans have 
not been realized.®* 

6' See, in this connection, W. Thomas, The Banks and Idle Money. Federal Reserve Bulletin (March 
1940), p. 199. 
«< See report of the Federal Housing Administration for the year ending December 31, 1938, p. 148. 

2626&2— 41— No. 17 19 



270 CONCENTRATION OF ECONOMIC PQWER 

2. Federal Reserve banks. — The Federal Reserve banks up to 
February 21, 1940, have received 9,452 applications for loans aggre- 
gating $406,845,000. The loan appUcations granted were 2,802, 
aggregating $189,472,000. 

A classification of the loans made by size between June 14, 1934, 
and December 29, 1937, shows that 221 of the loans were for less than 
$2,500 each; 343 were for loans from $2,501 to $5,000; 335 were for 
loans from $5,001 to $10,000; 1,289 were for loans from $10,001 to 
$100,000; 243 were for loans from $100,001 to $400,000; and 40 were 
over $400,000. 

The foregoing data shows that 899 out of 2,406 loans made were for 
less than $10,000 — the category which would more nearly embrace the 
small enterprise. Classification of these same loans by amount shows 
that the 221 borrowers taking $2,500 or less received a total of $354,- 
000; the 343 borrowers taking between $2,501 and $5,000 received 
$1,449,000; the 335 borrowers receiving between $5,001 and $10,000 
received $2,900,000. These three groups totalling 899 borrowers, 
which would more nearly embody small business, received a total of 
$4,703,000. 

The gross earnings on the $67,120,320 of industrial advances (no 
break-down by size of loan is available) made by the Federal Reserve 
banks under section 13b of the Federal Reserve Act to December 
31, 1939, were $6,821,395. Expenses, exclusive of losses and reserves, 
for these loans amounted to $3,671,988. Losses charged off amounted 
to $560,780 and reserves set up to cover anticipated losses total 
$2,041,529.*^ 

3. Reconstruction Finance Corporation.— The R. F. C. up to Feb- 
ruary 29, 1940, had received 15,501 applications for loans aggregating 
$1,285,846,000 under section 5 (d) of the Reconstruction Finance 
Corporation Act. The loans granted and commitments outstanding 
as of February 29, 1940, were 9,164 aggregating $575,559,000. 

A classification of the loans disbursed by size as of February 29, 1940, 
shows that 2,462 of the loans were for less than $5,000; 874 were loans 
from $5,001 to $10,000; 1,095 were loans from $10,001 to $25,000; 
605 were loans from $25,001 to $50,000; 502 were loans from $50,001 
to $100,000; 282 were loans from $100,001 to $200,000; 193 were loans 
from $200,001 to $500,000; 44 were loans from $500,001 to $1,000,000; 
and there were 26 loans for over $1,000,000. 

The foregoing data show that there were 3,336 loans disbursed out 
of a total of 6,083 under $10,000 — the category which would more 
nearly embrace the small enterprise. This group of borrowers 
received a total of $12,027,428 or 4-.1 percent of the total loans dis- 
bursed. Data on the loss experience of the R. F. C. comparable to 
that of the Federal Reserve banks are not available.*® 

The accounts financing companies. — It has been stated that accounts- 
receivable finance companies began to purchase retail receivables as 
early as 1904.*^ By 1909, the Commercial Investment Trust Corpora- 
tion had begun to finance piano dealers' receivables. By 1916, at 
least a dozen companies were engaged in purchasing installment 
contracts arising from the retail sale of pianos and automobiles.®* 
Later, manufacturers of carriages, stoves, furnaces, plumbing equip- 

»» Tables 18, 19, and 20, appendix 1, pp. 86-88. 

•* For a more detailed analysis, see appendix 1, pp. 89 et seq. 

•' E. R. A. Seligman: I. The Economies of Installment Selling (1927), pp. 35-58. 

M R. Nugent: Consumer Credit and Economic Stability (1939), p. 80. 



CONCENTRATION OF ECONOMIC POWER 271 

ment and washing machines also entered the field of financing receiv- 
ables. But it remained for the growth and development of the 
automobile industry to give intermediary financing a significant 
position in consumer credit. "Automobile dealers, recruited from the 
ranks of bicycle and carriage dealers, mechanics, and blacksmiths had 
little capital to meet the requirements of increasing credit sales, anjii 
manufacturers, using their funds for plant expansion, required ca^h 
paym.ent for deliveries to dealers. Banks were extremely wary of 
loans secured by a com.m.odity whose location could be shifted so 
readily and they looked askance at long-term, credits for the purchase 
of such luxuries." *^ 

During the 1920's with the developm.ent of the electric refrigerator, 
new heating apparatus, the radio and sim.ilar appliances, the accounts- 
receivable finance com.panies greatly extended their area of operations. 
Today, such com,panies finance the purchase of virtually every type of 
consum.er durable goods, and are now entering the field of nondurable 
goods. There still remains, however, a considerable area of customer 
accounts which they do not finance. 

The growth of the accounts finance companies is a phenomenon of 
our times. At the close of 1923, intermediary financing agencies held 
receivables of $356,000,000, largely automobile paper; at the end of 
1929, the amount held had increased to $1,373,000,000. Ther« was 
a decline to $548,000,000 by the end of 1932, but by 1937 the amount 
of receivables had swelled to $2,173,000,000.^'^ 

The finance companies raise their capital in part through the sale 
of their own securities — common stocks, bonds, and debentures— and 
through bank loans secured by investment paper. For example, one 
medium-sized finance company with an authorized capitalization of 
$1,000,000, had receivables on hand of $1,637,624, and had issued 6 
months' notes, largely taken by banks, secured by receivables, in the 
amount of $1,105,000. The notes outstanding amounted to approxi- 
mately 67.5 percent of the receivables held.'' A large finance com- 
pany with $290,000,000 of receivables at the end of 1938 had short- 
term notes outstanding in the'amount of $105,970,000, or 36.4 per- 
cent of receivables on hand. Th,is company has had as much as 
$300,000,000 of notes outstanding with 300 banks.^^ 

The financing of receivables by special companies established for 
that purpose has become a significant factor in the financing of small 
business. These companies purchase certain customer accounts of 
their clients. Unlike installment credit, the customer is generally 
unaware of the fact that his account has been acquired by a finance 
company and that in reality his debt has been transferred. Repay- 
ments by the customer are forwarded to the finance company. The 
terms incident to the transaction both with respect to interest charged 
and the percentage advanced on receivables vary widely. The suc- 
cess of the finance companies in dealing with their customers has been 
due largely to their ability to assess accurately the peculiar financial 

" Ibid, at 80. 

'« See Appendix 1, table 12, p. — . For additional studies of consumer financing, see[the reports of The 
National Bureau of Economic Research, viz: R. A. Young, Personal Finance Companies and Their Credit 
Practices; W. C. Plummer and R. A. Young, Sales Finance Companies and Their Credit Practices; R. J.. 
Saulnier, Industrial Banking Companies as Agencies of Consumer Installment Credit; J. M. Chapman 
Commercial Banks as Agencies of Consumer Installment Credit; J. D. Coppock, Government AgenciestoT 
Consumer Installment Credit. 

" See Appendix 3, I. p. — for a more complete discussion. 

" See Appendix 3, II, p. — for a more compl^te discussion. 



272 CONCENTRATION OF ECONOMIC POWER 

risk of each particular type of receivable and to adjust charges to the 
conditions of each particular business. 

While discount rates arid attendant terms vary, most transactions 
follow an accepted pattern. The amounts paid in cash by the finance 
company range from 60 to 80 percent of the face value of the accounts 
assigned. Amounts paid by the customers on the receivables in ex- 
cess of the amounts advanced by the finance company are retained 
by the latter. From this excess, deductions are made for losses on 
the uncollectible accounts, interest, service charges, additional in- 
terest on unpaid accounts, bonding fees, flat annual charges, fees for 
"business advice," et cetera. Any sum remaining after the foregoing 
deductions have been made is retained by the finance company for 
the account of the client. 

It is difficult to ascertain what the total accommodation will cost 
the client. Businessmen interviewed in the course of the field study 
stated that their over-all costs for the money obtained ran as low as 
10.5 percent, more commonly from 14 to 22 percent, and as high as 
35 to 40 percent of the face value of the assigned accounts. 

While the costs, expenses, and charges of the finance companies are 
a reduction in the potential profits of the client, the cash provided by 
the finance company, nevertheless, permits the client to obtain trade 
discounts in his business, to make special purchases, and to carry on 
business activities on a scale which might not otherwise be possible. 

The technique of financing small business, as developed by the finance^ 
company, demonstrates the feasibility of successfully providing credit 
to businesses whose creditworthiness is not up to the standards and 
practices of commercial banking. The process of aggregating many 
risks and of fixing interest rates and service charges in accordance with 
the peculiar needs and circumstances of special types of business and 
particular clients, makes it possible to carry on successful operations 
in an area largely abandQncd by the orthodox commercial banker. 

The factor. — Factoring is carried on, in its traditional form, by some 
25 firms located primarily in New York City and a few other financial 
centers." Most of these firms have been long established. The 
history of factoring goes back to the English woolen-cloth industry. 
It was at Blackwell Hall — for centuries the center of the English 
woolen trade— that factoring had its origin. The Blackwell Hall 
factor performed largely the same function which the nineteenth 
century, dry-goods commission merchant did in the United States. 
Each received, stored and sold the merchandise which was consigned 
to them by the mOls. Each made advances on the security of such 
merchandise. When the merchandise was sold on terms of from 1 to 
6 months, or longer, each made cash advances against the obligation 
of the buyer. Each advised the mill of the buyer's financial responsi- 
bility and each warranted such responsibility for a cash consideration. 

The commercial factor was primarily a merchant; he performed cer- 
tain recognized functions for manufacturers and other merchants. 
Today, the merchandising function of the factor is virtually non-exist- 
ent; his financial function is now primary. His principal business 
now is the purchasing of open accounts, usually without recourse. 
That is to say, the traditional factor assumes the full credit risk of the 
accounts which he accepts. He provides each of his clients "with a 
revolving fund, which becomes a permanent part of their liquid 

''See hearings before the Temporary Natlocal Economic Committee, pt. IX, pp. 3993-4005; testimony 
of William Hurd HUlyer. 



CONCENTRATION OF ECONOMIC POWER 273 

capital. He does this by purchasing their selected open accounts as 
rapidly as they are created. In some cases, he makes advances upon 
merchandise, although this practice is falling into disuse. Within 
recent years, factoring has extended to such diverse fields as fuels, 
furs, shoes, paper, rubber goods, glassware, metal products, lumber, 
furniture.^* The annual business of the principal factors increased 
during the period 1928 to 1933 from $340,000,000 to $542,000,000 
and now exceeds $700,000,000. 

Factoring, as a form of accounts financing, is distinguished from the 
finance-company operation by the positive control exercised by the 
factor over the credit sales of his client. Under this arrangement, the 
factor, in advance Of a proposed sale on credit by the client to his 
customer, authorizes or declines to authorize the proposed extension 
of credit. 

In traditional factoring, the receivables which are accepted by the 
factor are purchased without recourse. That is to say, the factor may 
look only to the customer for repayment. The client assumes no 
responsibility in the event of the customer's nonpayment. The factor, 
therefore, must be intimately aware of the creditworth of those cus- 
tomers whose paper he purchases. The largest factors have, therefore, 
instituted elaborate systems for rating the credit of their clients' 
prospective customers. 

All factoring, however, is not done in this fashion. Many concerns 
which describe their business as "factoring" are, in reality, carrying on 
their business in the manner of the installment finance companies. 
There is a large marginal area in factoring, in which both guarantees 
and "recourse" still prevail. The practice of the "double guaranty" 
is apparently increasing as factoring is extended into new fields. 

The factor, like the finance company, is essentially an intermediary 
banker. Factoring concerns are large users of commercial bank 
credit. Recently, a few factors have had indirect recourse to the 
capital markets through their affiliation with the larger finance com- 
panies. The credit rating of the factor is predicated upon: (a) his 
reputation and financial resources ; (6) the resources and reputation of 
his clients where paper is sold with recourse; and (c) the element of 
safety resulting from the aggregation of the paper of many different 
risks. 

One general effect of factoring is to shorten the periods during 
which credit is outstanding. This results largely from the practice of 
the factor in charging a flat fee for the factoring service. This fee 
usually ranges from 1 to 2 percent on the receivables purchased by the 
factor. A 1-percent fee with a turn-over of 30 days will net the factor 
12 percent annually on the average turn-over. But a 1-percen! fee 
with a 15-day turnover will net the factor 24 percent. Therefore, it 
is to the advantage of the factor to reduce the credit period. While 
this shortening of the credit period may be of ultimate benefit to the 
client, a too-abrupt shortening of the credit period may drive cus- 
tomers away. In the course of the field studies, a case was observed 
where the sales volume had shrunk from $1,000,000 to $300,000 as a 

• '< Although the finance company has been of more recent origin than the factor, it is not without interest 
that two of the large st American finance companies have recently entered the factoring field. The Commer- 
cial Credit Corporation now owns two factoring concerns— Textile Banl<ing Co and Edmund Wright Gins- 
berg Corporation. Commercial Investmeni, Trust, through its factoring subsidiary, Commercial Factors, 
owns the old established houses of Frederick Victor & Achelis, Peierls Buhler & Co., and Schefer, Schramm 
& yogel, together with L. Ernstein & Bro., Inc. It also owns Meinhard, QreefT & Co. and William Iselin & 
Co., Inc., the last being one of the oldest and largest firms in the business. Hearin*s before the Temporary 
National Economic Committee, Part IX, p. 3996; testimony of William Hurd HlHyer. 



274 OONOENTRATION OF EOONOMIC POWER 

result of the imposition of a 30-day collection period on a business 
accustomed to a longer period. 

Since the factor functions as the credit department, so to speak, for 
his client's business, he exercises a much more intimate control over 
the business than does the finance company. In the language of the 
trade, a client is referred to as being "in the hands of" its factor. 
This condition is the result of the factor having become an integral 
part of the client's business. Thus factoring has come to be regarded 
by some as "an unmitigated evil," and by others as an important 
influence for stability and prosperity. 

Since the factor determines whether or not he will accept the credit 
extended by the client in any particular case, he will authorize credit 
only to the cream of the accounts; the client must decide whether to 
finance the more marginal accounts himself and assume the resultant 
risks. The client is, therefore, placed in the dilemma of rejecting the 
orders of unauthorized accounts and suffering losses in business volume, 
or filling such orders and assuming the full risk himself. Factors 
naturally discourage the latter practice and their contracts often limit 
the proportion of credit sales which ihe client may make at his own 
risk. 

The factor charges, by standard practice, 6 percent interest on the 
initial cash advances paid to the client on assigned receivables, and 
pays 6 percent interest on client's surplus collections held on deposit. 

An evil present in both factoring and finance-company practice is- 
the secret assignment of accounts receivable. In such cases the cus- 
tomer continues to remit to the business from which the goods were 
ordered, and does not know that the recipient merely countersigns the 
checks and turns them over to the accounts-financing agency. Other 
creditors of the business are unprotected. Wliile the secret assign- 
ment of accounts is not everywhere legal, it is a frequent practice 
where state laws do not expressly prohibit it. 

To summarize the situation wdth respect to finance companies, 
factors, and accounts financing companies : 

1. These "retailers" of credit attract equity capital and are able to 
tap the credit of banks and the capital market because of their ability 
to organize the multiplicity of small transactions into aggregates, and 
to graduate financing charges and terms to the specific requirements of 
each individual industry and client. 

2. These "retailers" of credit are special-purpose concerns, equipped 
to appraise particular types of risk and to apply the most advanced 
techniques of risk-appraisal and accounting. 

3. To an increasing extent, small business is obtaining its credit 
from these "retailers'.' of credit. The cost of such credit is con- 
siderably in excess of the cost of bank credit. The small business con- 
cern which must utilize this medium of credit is placed at a disad- 
vantage in relation to those of its competitors who are able to tap 
bank credit and the capital markets. The latter are commonly the 
intermediate size and large concerns. 

4. Since this field of credit extension is largely unregulated, except 
insofar as competition is a regulating-influence, practices vary widely 
and many types of abuses exist. 

The trade credit. — The trade credit is the oldest form of credit avail- 
able to business. ^^ It has continued to be the mainstay for the smaller 

" See Nugent, op. cit. supra, ch. 11. 



CONCENTRATION OF ECONOMIC POWER 275 

business enterprises. A sample analysis of the ci'edit of 40 small 
businesses of various sizes and types showed that trade credits consti- 
tuted 65 percent of the total payables; other nonbank credit, 24 
percent; and bank credit, 11 percent.''® An indication of the magni- 
tude of trade credit may be seen from the Statistics of Income. ^^ 
Although the data refer only to incorporated enterprises, the aggre- 
gate amount of notes and accounts receivable for all nonfinancial 
corporations at the close of 1937 was $15,700,000,000. It may be 
interesting to compare this figure with the volume of outstanding 
commercial loans as of the same date, which was $7,400,000,000. 

Trade credits include not only credits arising from commodities 
purchased for resale, but also credits arising from the purchase of 
machinery, equipment, fixtures, et cetera, purchased on long term. 
While the credits arising from commodities purchased for resale are 
the preponderant type of trade credit, the long-term type of credit is 
assuming a considerable proportion of all trade credit. The short- 
term variety of trade credit, in reality, provides current operating 
requirements. The long-term variety of trade credit is a form of 
capital extension. 

The use of the trade credit as a method of financmg business enter- 
prise presents three basic problems: (a) the adequacy of the credit 
(6) the control over the customer which the extension of such credit 
makes possible; and (c) the influence of the business cycle on both 
the expansion and contraction of the volume of credit made available 
by the creditor. 

The weaker the capital position of the enterprise, the greater is 
the reliance upon the trade credit. The stronger enterprises having 
access to bank credit can achieve a relative independence from their 
trade suppliers through their ability to pay cash, and are, therefore, 
in a position to bargain for price and terms other than credit extension. 
The weaker enterprises, barred from access to bank credit, are forced 
to use their purchasing power to bargain for credit. These enterprises 
are, therefore, unable to "shop around" for price advantages, but must 
purchase where credit is made available. Thus not only is this type 
of enterprise forced to pay higher rates for its borrowings, but it must 
also sacrifice its freedom of action in order to obtain needed funds. 
Since even under the most favorable circumstances no single trade 
creditor or group of creditors is willing to extend credit tq the full 
amount of the capital requirements , of an enterprise — and this is 
particularly true of the weaker units — the trade credit is inadequate 
to cover all requirements. Therefore, recourse must be had by the 
weaker units to other credit sources, or else forfeit their independence. 

During the course of the field study it was noted that small business 
enterprises, which were dependent heavily upon trade credit and were 
unable to avail themselves of opportunities to canvass competitive 
establishments, were at a sign aPdi sad vantage with 'those of their com- 
petitors whose financial resources did not bind them to any single 
trade supplier or group of suppliers. The business enterprises which 
are largely dependent upon trade credit were found to exist virtually 
on the sufferance of their creditors. Heavily indebted to their sup- 
pliers, such enterprises have become to all intents and purposes mere 

" See AppenoMx 2, 1, p. — ; see also Hearings Before the Temporary National Economic Committee, pt. 
IX, pp. 3894-3895. and exhibit No. fi29, testimony of E. J. Hopltins. 
" V. S. Treasi^y Statistics of Income for- 1937, Part 2, as published in press release of October 25. 1939. 



276 CONCENTRATION OF ECONOMIC POWER 

appendages of the larger organizations and cease to be free and inde- 
pendent entrepreneurs.''^ 

Dependence upon trade credit places the individual enterprise at 
the mercy of those fluctuations in business "confidence" which period- 
ically sweep over the economic scene. The dependent enterprise is 
faced with demands by its suppliers for immediate repayment of 
outstanding accounts and simultaneously finds its supply of credit 
cut off. This compels the weaker enterprises to throw their stocks 
upon the markets at sacrifice prices in order to satisfy the demands 
of the trade creditors. On the upswing of the business cycle, the weaker 
enterprises are apt to be tempted by the abundance of trade credit to 
expand excessively and to accumulate considerable quantities of 
merchandise subject to payment on demand. These expansions and 
contractions of inventory are often without regard to the actual needs 
or financial position of the smaller enterprise and all too frequently 
have led the smaller units to the graveyards of bankruptcy. 

Other sources oj business credit. — In addition to the sources of credit 
previously discussed, small business has resorted to the personal-loan 
company, the personal-loan departments of banks, and to private 
lenders. Numerous examples of this type of borrowing were encoun- 
tered in the course of the field study. While these lenders are osten- 
sibly in the business of extending credit for household and personal 
needs, their facilities are being used increasingly to provide small 
amounts of credit to those enterprises which are forced to utilize these 
agencies as a last resort. 

CONCLUSION 

The small business enterprises which experience difficulty in obtain- 
ing capital and credit are concentrated largely in two sectors of the 
small business area: (1) That older group of en-terprises whose liquid 
and capital assets have been dissipated in the course of recurring 
depressions and whose credit facilities have been cut off through the 
shut-down of more than 15,000 local banks; and (2) that younger 
group of enterprises, still in the early stages of their development, 
which have not yet either acumulated sufficient liquid and fixed 
capital or have been unable to establish permanent-credit relations. 

These two groups are unable to obtain bank credit on' the basis of 
the established credit standards and lending techniques of the com- 
mercial banks. While these two groups of borrowers may not be 
regarded as credit-worthy by the commercial banks, they are by no 
means considered uncredit-worthy by all lenders. For these groups 
of small business do obtain considerable credit from trade creditors, 
factors, finance companies, personal-loan companies, and private 
lenders. Although the smaller enterprises obtain credit from 
such extra-banking sources, they are forced to pay a high price for the 
accommodation and are placed at a disadvantage in relation to those 
of their competitors who possess adequate capital resources or have 
access to the regular banking channels. 

A remedial program for the supply of capital and credit to small 
business should have as its major objective the creation of mech- 
anisms and techniques (1) for the provision of equity capital; (2) for 
the supply of credit at costs sharply below present levels; and (3) 
to provide small business with informational service on accounting, 

" See, (or example, appendix 2; I, p. — . 



CONCENTRATION OF ECONOMIC POWER 277 

managerial, technical, and capital problems comparable to that enjoyed 
by the larger business concerns. 

1. With respect to the provision of equity capital. — 0£ the existing 
financial institutions, the investment trust or company appears to be 
the instrumentality whose form is most suitable for providing equity 
capital to the incorporated sector of small business. The past 
activities of investment trusts have not, however, followed this path. 
Whether or not the investment trust will in the future participate 
actively in the provision of equity capital remains to be sieen. 

2. With respect to the provision of long and short-term credit. — That 
credit can be extended successfully to small business is shown by the 
phenomenal and profitable growth of the "retailers" of credit — the 
accounts finance companies, the factors, the personal loan companies, 
etc. The successful experience of these lenders is due largely to 
their having developed such techniques and methods as (a) pooling 
of risks; (6) routine procedures for appraisal, accounting, and servic- 
ing; and (c) establishment of schedules of charges appropriate to each 
class of risk as well as to individual risks. In other words, these 
"retailers" of credit have been successful in financing small business 
because they have devised "mortality tables" expressly designed for 
the financing of small business. 

By encouraging the organization of additional finance and factoring 
companies of moderate size and a wider extension of the field of 
activity of the existing companies, coupled with some machinery for 
the coordination of their functions and activities in such a way as to 
reduce costs and to improve terms, the deficiency in credit facilities 
for small business might in part be remedied. Consideration should 
also be given to the desirability of providing insurance against losses 
sustained by such intermediary institutions either by an agency of 
Government or by a corporation privately financed and expressly 
organized for that purpose. 

While recognizing that the making of "capital" loans by commercial 
banks is open to serious question, the practice, nevertheless, merits 
further thought in considering the entire problem of financing small 
business. If it is deemed advisable for the commercial bank to further 
extend its aid to small business in this direction, it must be recognized 
that facilities will have to be provided to protect the banks against 
the nonliquid and nonmarketable character of the assets which they 
will be required to hold, as well as against the added risks involved. 
Consideration should be given to tne advisability" under suitable 
safeguards for the Federal Reserve Banks or the Reconstruction 
Finance Corporation assuming the role of guarantor on such loans. 
The basic principle for such an "insurance" arrangement has already 
been embodied in a legislative proposal.^* 

Certain of the measures which have been proposed to Congress ^^ 
for the provision of more adequate long-term and intermediate credits 
for small business recognize that the commercial banks cannot under- 
take this type of financing' without additional mechanisms for the 
distribution of risk, for guidance to banks unfamiliar with the handling 
of small business credits, and for extensions of credits which local 
banks are unable to provide. 

" See Senate Bill 1482, 76th Cong., 1st Sess. 

80 For a summary of legislative proposals, see Appendix 3, p. . 



278 OONCENTRATION OF KOONOMIC POWER 

One such proposal ^' provides for the creation of an industrial loan 
corporation which would utilize the existing machinery of the Federal 
Reserve System. This corporation would utilize the 12 Federal 
Reserve banks and their 24 branches distributed throughout the 
country. In its operations, such a corporation would finance small 
and intermediate businesses through the acquisition of the obligations 
of such enterprises, or by the purchase of preferred stock or by making 
commitments to do so. The corporation could also make advances 
directly or in cooperation with local banks or guaranty loans made 
by the banks directly. Losses would be prorated between the lending 
bank and the corporation. The basic principle underlying this pro- 
posal is the same as that in Title I of the Federal Housing Act, which 
covers loans made by banks for modernization of residential dwellings. 
This proposal utilizes the existing banking system but endeavors to 
overcome some of its deficiencies in the handling of small business 
credits. 

Among other proposals to overcome the deficiencies of the existing 
commercial banking system in supplying credits to small business 
have been those for the creation of a capital-credit banking system 
as a supplement to the existing banking structure. ^^ Those who have 
urged such proposals believe that such a banking system is required 
not only for small and intermediate-size businesses but for business as 
a whole, since only through such banks can equity financing be 
provided. 

Chairman Frank has proposed that there be established a system 
of regional finance companies. In each of the Federal Reserve dis- 
tricts there would be set up a financial institution, the common stock 
of which would be owned by private persons in the district. The 
Government would invest in their preferred stocks, but such preferred 
stock would have little, if any, voting power. These institutions 
would purchase the common stocks of local enterprise. The institu- 
tions would not make loans — they would supply equity capital. In 
short, the institution proposed by Chairman Frank "would be a sort 
of speculative finance company or investment trust. "^^ Such pro- 
posals contemplate that Government would give some aid in financing 
the regional banks. So that Government might not own the voting 
stock of, or otherwise control, such corporations or the -businesses in 
which investments are made, it has been suggested that the Govern- 
ment should purchase only the nonvoting preferred stocks of the pro- 
posed banks, the common stock to be held by private individuals. 
The latter would thus own, control, and operate the banks. 

It cannot, however, be emphasized too strongly that merely to 
reduce the cost of credit or to make its supply more abundant will 
not solve all of the smaU businessman's problems. Nor can it be 
overlooked that, in addition to adequate capital and credit facilities, 
small business also requires that its operathig efficiency and technical 
equipment be improved. Small business must, in order to survive^ 

81 See Senate Bill 2998, 76th Cong., 2d Ses3., p. . 

»' See hearings before the Temporary National Economic Committee, Part IX, pp. 3809-3835: Testimony 
of A. A. Berle, Jr. Mr. Berle's proposal would not only supply capital and credit to all business enter- 
prises, but to governmental agencies and public authorities as well. A substantially similar proposal (but 
one especially designed for the needs of small and intermediate-size business) has been urged by former 
Chairman (now Mr. Justice) Douglas and Chairman Frank. See Hearings before a subcommittee of the 
Committee on Banking and Currency of the U. S. Senate, 76th Cong., 1st Sess.. on S. 1482 and S. 2343; 
Testimony of Jerome N. Frank. 

83 Address, "Regional Financing," before the Klwanis Club of Cleveland, April 25, 1940. 



CONCENTRATION OF ECONOMIC POWER 279 

match the operating and developmental efficiencies which large busi- 
ness enjoys through its expert accounting, managerial, and operating 
techniques.^* 

Just as the credit and marketing problems of the farmer have been 
dealt with successfully because they have been delimited and special 
solutions developed for particular needs, so, too, the capital and credit 
problem of small business requires to be broken down into its com- 
ponent parts and special solutions found for its peculiar requirements. 

The foregoing remedial suggestions by no means exhaust all of the 
possibilities; nor is it to be assumed that their presentation constitutes 
a recommendation for the adoption of any one. Ours is but the task 
of presenting the factual data upon which a solution to the problem 
may be predicated and of blocking out the broad lines by which the 
financing of the small-business sector as a whole might be undertaken. 

M In this connection, see Senate Bill 2584, 76th Cong., 1st Sess. The impact of the war and the need for 
familiarity by commercial banks with technical information affecting the business and production condi- 
tions of prospective borrowers has served to bring about central advisory "clearing" facilities among a con- 
siderable number of banks. See New York Times, June 15, 1940, p. 23. 



CHAPTER XVIII— APPENDIX 1 
STATISTICS AND DISCUSSION 

preface: sources of information 

The statistical materisJ used in this report was obtained chiefly 
from five principal sources and certain additional subsidiary sources.* 
The five major sources are: 

I. The Census of Business for 1935. — Bureau of the Census, United 
States Department of Commerce: Tabulated material from this census 
is reprinted in the Statistical Abstract of the United States, which is 
the source cited here. The Census of Business enumerates each 
physical business establishment as one, without consideration of 
possible ownership by a multiestablishment organization. 

II. Statistics of Income. — Bureau of Internal Revenue, United States 
Treasury Department: The corporation returns contained in these 
publications were analyzed for the years 1931-36, inclusive, the 1936 
figures being the latest available at the time of writing. Manufac- 
turing, trade, service, construction, and mining and quarrying corpo- 
rations were segregated from financial and other corporations, which 
were defined as nonbusiness for purposes of this study. Wherever the 
Statistics of Income consolidate returns, as is occasionally done in the 
upper brackets to protect privacy, such consolidated data were added 
to the lowest appropriate bracket. There is no means of knowing to 
what extent the multiestablishment corporations have rendered com- 
bined or separate tax returns. 

III. The Census of Manufactures for 1937. — Bureau of the Census, 
United States Department of Commerce: This census, complete for 
all manufacturing industries, also enumerates each physical manu- 
facturing establishment as one, irrespective of possible ownership by 
multiestablishment organizations. 

IV. Old-age and survivors insurance. — Statistical Section, United 
States Social Security Board: 6 tables, compiled in 1939, covering all 
employers' returns for the period January-March 1938, and especially 
the last day or last pay roll of March 1938, were provided for this 
study. These tabulations, unpublished at the time of this writing, 
are the second to be made by the Social Security statisticians and 
represent an improved methodology over the first, previously pub- 
lished, study. Single-establishment and multiestablishment em- 
ploying organizations are segregated by industries, .though not by 
size groups. Unlike the practice employed in the Census of Business 
for 1935, and the Census of Manufactures for 1937, the Social Security 
Board tabulations enumerate the multiestablishment organizations as 
one unit, regardless of the number of its component establishments. 
Necessarily, the multi-establishment organizations, and their number 
of component concerns, are based on employers' reports, and the 

' Appendices 2 and 3 constitute the nonstatistical sources upon which the general report is largely based. 

281 



282 



OONOENTRATION OF BOONOMIC POWER 



346,617 component units in the multiestablishment organizations 
reported to the Social Security Board are to be regarded as a minimum. 

V. Statistics compUed by Dun & Brads treet, Inc., under the direc- 
tion of Roy A. Foulke: Data are cited from various publications of 
Dun & Bradstreet, Inc., from the testimony of certain witnesses 
before the Temporary National Economic Committee and from 
material supplied directly by Dun & Bradstreet, Inc., to the Invest- 
ment Banking Section of the Securities and Exchange Commission. 

Additional statistical material has been obtained from the verbatim 
record of proceedings of the Temporary National Economic Com- 
mittee; from the Department of Consumer Credit Studies of the 
Russell Sage Foundation, Rolf Nugent, director; and from other 
sources specifically indicated in the footnotes. 

ESTIMATED TOTAL NUMBER OF BUSINESS ESTABLISHMENTS 

Owing to the lack of satisfactory data, only a rough estimate of the 
total number of business establishments in the United States is now 
possible, and that must necessarily be derived from several sources. 

From the Census of Business for 1935, which enumerates each 
business unit as one, irrespective of whether or not it is part of a 
multiestablishment organization, the following number of establish- 
ments in the given industrial divisions is obtained: 

Table 1-A 



Business category 


Number of es- 
tablishments 


Trade: 

Retail' . --- 


1, 653, 961 


Wholesale ' -. 


176, 756 


Service, nonprofessional '. . - - 


615, 862 




169, 111 


Construction ' 


75,047 








Total 


2,690.737 







I statistical Abstract of the United States, 1938, table 833. 

» Ibid., table 829. 

» Ibid., tables 84.^, 845, and 847. 

* Ibid., tables 791 and 793. (The Census of Manufactures for 1937 reports 166,794 manufacturing establish- 
ments, a decrease of 2,417.) 
■ » Ibid., table 859. 

Supplementary data, though for different years, can be had from 
two other sources. The first consists of the figures from the Social 
Security Board tabulations. They include employing organizations 
only, for 1938. 

Table 1-B 



Business category 



Number of 
establish- 
ments 



Additional construction enterprises 
Transportation, unregulated: ' 

Trucking and warehousing 

Water transportation 

other transportation. 

Allied services 

Mining and quarrjing '. 

Not elsewhere classified ' 

Total 



23,784 

28,202 

882 

5,466 

3,209 

19,032 
7,849 



88,424 



I Derived from table 6-A, Old-Age and Survivors Insurance; Social Security Board. 



CONCENTRATION OF ECONOMIC POWER 283 

The second supplementary source is the Statistics of Income. The 
information from this source, which enables us to piece out the picture 
still further, is for 1936. 

Table 1-C 



Business category 



Agriculture and, related industries: 

Incorporated i... 

Unincorporated ' 

Total 



Number of 
establish- 
ments 



7,126 
20,866 



27, 992 



• Includes an unknown number of incorporated farms, which, by definition, are excluded Ironi this sluay. 
2 Statistics of Income, 1936, Part 1, p. 20. No farms are included. 

While the graiid total of the>«i)Ove is 2,807,153, the three subtotals 
are not comparable, the first being physical units or establishments in 
1935, the second employing organizations in 1938, and the third tax- 
reporting concerns in 1936. From this total, however, rough as it is, 
must be subtracted the number of employing establishments belonging 
to multiunit organizations, which, for every type of enterprise in 1938, 
was 346,617. This adjustment brings the total number of business 
establishments down to 2,460,536, which in the text, is stated in 
round numbers as 2,400,000.^ 

In the January-March 1938 period, 1,809,819 employing estab- 
lishments of all types making returns for old-age and survivors' 
insurance reported to the Social Security Board. Of these, 293,810 
were street-railway, public-utility, financial, insurance, real estate, 
and professional-service establishments, etc., excluded in this report, 
leaving 1,516,009 employing business establishments as delimited by 
this study. If the total number of business units is 2,400,000, since 
the corresponding number of employing establishments is 1,516,009, 
the nonemploying business units must number between 800,000 and 
900,000. 

BUSINESS UNITS DISTRIBUTED BY SIZE 

There is no entirely satisfactory single measure of business size, and 
no existing siae-group data cover more than a portion of the entire 
business field. Accordingly, the following tables present size-group 
distributions using various measures of size and utilizing different 
types of data. The outstanding feature of all of them is the over- 
whelming numerical preponderance of small enterprise. 

Size Measured by Total Assets. 

The data which make possible the utilization of this measure of size 
are available in sufficient detail for corporations only. The figures are 
given in the Statistics of Income, which, in 1936, reported data for 
290,118 corporations in the business field as delimited by this study. 
Thus, the sector of industry covered in the following table includes 
practically all big business, but omits roughly 90 percent of the small 
business establishments and approximately 60 percent of the inter- 
mediate. 

Using tliis measure of size, all corporations with less than $250,000 
of total assets are considered small; those with total assets of $250,000 

' Dun & Bradstreet, Inc., reports the total number of active commercial and industrial business enter- 
prises and construction concerns in 1939 as 2,116,000. This agency disregards all business units which do 
not require mercantile credit. 



284 



CONCENTRATION OF ECONOMIC PQWER 



and less than $5,000,000 are termed intermediate; and those with total 
assets of $5,000,000 and over are called large. 

Table 2. — Size-group distribution of corporations in manufacturing, trade, service, 
construction, and mining and quarrying, by total assets, 1936 i 



Size classes by total assets 



Number 

of cor- 
porations 
in each 
class 



Per- 
cent of 
grand 
total of 
cor- 
pora- 
tions 



Total 
assets in 
each class 

(000 
omitted) 



Per- 
cent of 
grand 
total of 

total 
assets 



Average 

total assets 

in each 

class 



Xrnder $50,000 

$50,000 to $100,000.. 

$100,000 to $250,000 

Total, small 

$250,000 to $500,000 

$500,000 to $1,000,000 

$1,000,000 to $5,000,000.... 

Total, intermediate 

$5,000,000 to $10,000,000. . . 
$10,000,000 to $50,000,000. . 
$5O,00O,BO0 to $100,000,000. 
$100,000,000 and over 

Total, large 

Qiand total 



173,674 
41, 425 
37,589 



59.9 
14.3 
13.0 



$3, 117, 065 
2, 938, 299 
5, 887, 689 



3.3 
3.1 
6.3 



$17, 950 
70, 930 
156,630 



252,688 



87.2 



11,943.053 



47,260 



16, 789 
9,773 
8,701 



5.8 
3.4 
3.0 



5, 885, 674 
6, 808, 822 
17,677,184 



6.2 

7.2 
18.8 



350. 570 

696,700 

2, 031, 630 



35,263 



30, 371, 680 



32.2 



861,290 



1,122 
859 



7, 782, 347 
16, 964, 827 

6,841,115 
20, 324, 514 



8.3 
18.0 

7.3 
21.6 



6, 936, 140 

19,749,510. 

69, 807, 300 

230, 960, 390 



2,167 



51,912,803 



55.2 



23, 956, 070 



290,118 



3 100.0 



94, 227, 536 



3 100.0 



324,790 



1 Derived from Statistics of Income, 1936. 

' Less than 0.1 pertient. 

» Discrepancy in grand total due to "rounding off." 

Size Measured by Number of Employees. 

These data from the Social Security Board represent the most nearly- 
complete and recent of all size-group distributions, covering 1,809,819 
employing organizations, single and multiple, with 22,373,417 employ- 
ees enrolled for old-age and survivors' insurance at the end of March 
1938. Omitted are an estimated 800,000 recognizable business units 
having no employees. Included are 122,890 concerns which had one 
or more hired workers during the 3 months preceding the study date, 
but none on that date. Included, also, are 293,810 employing organi- 
zations not engaged in business as delimited by this study. These 
units were 16.2 percent of the total number of establishments, and 
employed 2,461,100 persons, or 11.0 of the total number of workers 
tabulated by the Social Security Board. It was not practicable to 
take these nonbusiness enterprises and employees out of the following 
table; but inasmuch as small, medium, and large employing organiza- 
tions are all represented in the group that should have been excluded, 
the percentages are probably not greatly in error. 

As a measure of business size, the number of workers employed has 
important qualifications. Rated solely by its number of employees, a 
"hand" or tool operation would loom disproportionately large, a highly 
mechanized operation disproportionately small. The ratio of human 
work to the size of operation is higher in small business than in inter- 
mediate, and higher in intermediate than in large. This measure, 
accordingly, not only does not truly reflect the magnitude of an opera- 
tion, but also tends to overstate the size of enterprise progressively as 
size decreases. 

Using this measure of size, all enterprises employing less than 20 
worker^ are considered small; those employing 20 but less than 800 



CONCENTRATION OF ECONOMIC POWER 



285 



workers are termed intermediate ; and those with 800 or more workers 
are called large. 

Table 3. — Size-group distribution of 1,809,819 employing organizations, by number 
of employees on last day or last payroll of March 1938 ' 



81m classes by number of workers employed 


Number of 
organizations 
in each class 


Percent of 
grand total 
of organ- 
izations 


Number of 

employees in 

each class 


Percent of 
grand total 
of em- 
ployees 


Occasional 


122, 890 
541, 744 
703, 990 
177, 470 
128, 143 


6.8 
29.9 
38.9 

9.8 

7.1 






1 


. 541,744 
2,115,846 
1, 258. 984 
1,730,099 


2.4 


2to6 - - - 


9.5 


6 to 9 


6.6 


10 to 19 - 


7.7 






Total, small 


1. 674, 237 


92.5 


5, 646. 673 


.25.2 






20 to 29 


45.224 
36.850 
27,418 
13,797 
7,982 
1.866 


2.4 
2.0 
1.5 
.8 
.6 
.1 


1, 076, 641 
1,391,610 
1, 886, 483 
1.905,644 
2, 419, 095 
1, 167, 172 


4.8 


30 to 49 ; 


6.2 


60 to 99 .- 


8.5 


100 to 199 


8.5 


200to499 - 


10.8 


500 to 799 


5.3 






Total, intermediate.. 


133. 137 


7.4 


9,846,645 


44.1 






800 to 999 


582 

1,622 

142 

99 


(') 
(') 


519.412 
3, 082, 630 

977, 054 
2.301,003 


2.3 


1,000 to 4,999..: .„. 


13.8 


5,000 to 9.999 


4.3 


10,000 and over 


10. a 








2,445 


1 


6,880,099 


30.7 






Grand total 


1, 809, 819 


100.0 


22, 373, 417 


100. 







■ Derived from table 1, Old-Age and Survivors Insurance. Social Security Board! 
' Less than O.J percent. 

Size Measured by Value of Product. 

Using this measure of size, establishments producing less, than 
$250,000 in value of product annually are considered small; those with 
$250,000 but less than $5,000,000 in^ value of product are termed inter- 
mediate; and those with $5,000,000 or more of annual product value 
are called large. These data apply to manufacturing enterprises only. 

Table 4. — Size distribution of 166,794 manufacturing establishments, by value of 

product in 1937 ' 



Size classes by value of product 


Number 
of estab- 
lishments 
in each 
class 


Percent 
of grand 
total of 
establish- 
ments 


Value of 

product in 

each class 

(000) 


Pement 
of grand 
total of 
value of 
product 


Average 

value of 

product in 

each class 


$5,000 to $19.999-.... _ 


50. 548 
37,611 
23, 661 
23, 422 


30.3 
22.6 
14.2 
14.0 


$576. 966 
1,214,034 
1,683.661 
3, 729. 973 


1.0 
2.0 
2.8 
6.1 


$11,414 


$20,000 to $49,999 


32.279 


$50,000 to $99,999 


71, 158 


$100,000 to .$249,999 


159, 251 






Total, small 


nh, 242 


81.1 


7, 204, 634 


11.9 


53,272 






$250,000 to .$499.999 


• 12,763 
8,908 
6.098 
2,130 


7.6 
5.3 
3.7 
3.3 


4,511,524 
6, 279, 012 
9, 396, 818 
7, 337, 152 


7.4 
10.3 
15.5 
12.1 


353, 485 


$500,000 to $999,999... _ 


704. 873 


$1,000,000 to $2,499,999 


1, 540, 967 


$2,500,000 to $4,999,999 ; 


3, 444, 672 






Total, intermediate 


29,899 


17.9 


27, 524, 506 


45.3 


920, 583 






$5,000,000.to $24,999,999 


1,425 
228 


.9 
.1 


14, 303, 848 
11,679,884 


23.6 
19.2 


10, 037, 788 


$25,000,000 and over... 


51, 227, 561 






Total, large 


1,653 


1.0 


25,983,732 


42.8 


15.719.136 






Grand total ,■„ 


166, 794 


100.0 


60, 712, 872 


100.0 


363. 999 







I Derived from the Summary for Establishments Classified According to Value of Products, Census of 
Manufactiu'es. 1937. 



262652— 41^No. 17- 



-20 



286 



CONCENTRATION OF ECONOMIC POWER 



THE HABITAT OF SMALL BUSINESS 

Small enterprise is, of course, not evenly distributed throughout the 
major divisions and subdivisions of industry. It is most prevalent 
in retail trade, service and in the construction industry. Within the 
manufacturing field, small business is most largely represented in 
garment-making, printing, wood and leather working, and the mis- 
cellaneous group of manufactures. This may be seen in the two fol- 
lowing tables. These tables, being limited to corporate data, omit 
the part played in the respective industrial divisions by the unin- 
corporated (generally small) units. This omission is least serious in 
manufacturing, which is the most generally incorporated division of 
business, 92 percent of all manufacturing being stated as performed 
by incorporated concerns.^ 

In these two tables, which again utilize the previously noted total 
assets size classifications, capital assets (land, buildings and equip- 
ment) are shown, as indicating operative capacity; and gross sales 
are given, as indicating the actual degree of activity. The contrast 
between the two is significant, emphasizing the ability of small busi- 
ness to attain a relatively high level of activity in relation to fixed 
investment in plant. 

Table 5. — Number of units, capital assets, and gross sales of small, intermediate, 
and large business corporations in major divisions of industry, 19S6 * 

[Dollar figures in thousands] 





Number 

of 

units 


Percent 

of 

units 


Capital 
assets 


Percent 

of 
capital 

assets 


Gross 
sales > 


Percent 
of gross 
sales ' 


Trade: 
Smftll 


120, o30 

9,106 

337 


92.7 
7.0 
.3 


$1, 036, 454 
1,301,646 
1, 276, 844 


28.7 
36.0 
35.3 


$15, 084, 054 
14, 073, 831 
9, 786, 333 


38.7 


Intermediate 


36.2 


Large . 


25.1 






Total 


130,073 


100.0 


3, 614, 944 


100.0 


38, 944, 218 


100.0 






Service: 

RmaU 


41,223 

7,121 

246 


84.8 

14.7 

.5 


1, 354, 892 
4, 762, 204 
1, 967, 973 


16.8 
58.9 
24.3 


1, 804, 933 

1, 597, 550 

651,212 


44.5 


Intermediate 


39.4 


Large 


16.1 






Total 


48,590 


100.0 


8,085,069 


100.0 


4, 053, 695 


100.0 






Manufacturing: 

Small 


68,803 
15,269 
1,278 


80.6 

17.9 

1.6 


1, 337, 936 
5, 373, 695 
13, 978, 687 


6.4 
26.0 
67.6 


7, 240, 212 
17, 398, 148 
28, 831, 148 


13.6 


Intermediate , 


32.5 


Large 


53.9 


Total 


85,350 


100.0 


20, 690, 218 


100.0 


53, 469, 508 


100.0 






Construction: 

Small 


13, 477 

1,066 

31 


92.5 

7.3 

.2 


156, 615 
192, 550 
144,238 


31.8 
39.0 
29.2 


508,907 

201, 934 

83, 147 


64.1 


Intermediate 


25.4 


Large 


10.6 


Total 


14, 574 


100.0 


493, 403 


100.0 


793, 988 


100.0. 






Mining and quarrying: 

SmaH-- - 


8,555 

2,701 

275 


74.2 

23.4 

2.4 


343, 164 
1, 873, 602 
3, 633, 521 


6.9 
32.0 
62a 


189,786 

817,804 

1, 350, 665 


8.0 


Intermediate 


34.7 


Large 


57.3 


Total 


11,531 


100.0 


5, 850, 287 


100.0 


2. 358, 255 


100.0 






Combined: 

Small 


252, 688 

35,263 

2,167 


87.1 

12.2 

.7 


4,229,061 
13, 503, 697 
21,001,163 


10.9 


24. 827. 892 


24.9 


Intermediate 


34. 9 34, 089, 267 
54. 2 40, 702, 605 


34.2 


Large 


40.9 


Total 


290,118 


100.0 


38,733,921 


100.0 99.619.664 


100.0 






1 





' Derived from Statistics of Income, 1936. 

' Ezo^t for "Service," for which gross receipts from operations are given. 



* Hearings before the Temporary National Economic Committee, Part 1, p. 96. 



CONCENTRATION OF ECONOMIC POWER 



287 



'Table 6. — Number of units, capital assets, and gross sales of small, intermediate, 
and large business corporations in subdivisions of manufacturing, 1936 i 

[Dollar figures in thousands] 



Subdivision of manufacturing 


Number 
of units 


Percent 
ofbnits 


Capital 
assets 


Percent 

of capital 

assets 


Gross 
sales 


Percent 

of gross 

sales 


■Clothing, apparel... 


7,636 


100.0 


$128, 641 


100.0 


$2,176,958 


100.0 






Small 


6,931 

591 

14 


92.0 

7.8 

.2 


37,241 
66,465 
24, 935 


28.9 
51.7 
19.4 


1, 146, 858 
887, 769 
142, 331 


62.7 


Intermediate 


40.8 


Large 


6.6 






Forest products 


6,067 


100.0 


1,090,964 


100.0 


1, 663, 099 


100.0 






Small _ 


4,700 

1,300 

67 


77.5 

21.4 

1.1 


115,840 
453, 510 
521, 614 


10.6 
41.6 
47.8 


464,311 
873, 890 
314,898 


28.1 


Intermediate.. 


62.3 


Large 


19.0 


Printing and publishing 


11, 156 


100.0 


677,906 


100.0 


1,976,241 


100.0 






Small.. 


9,972 
1,109 

75 


89.4 
9.9 

.7 


151, 416 
273, 561 
252, 929 


22.3 
40.4 
37.3 


530,026 
882, 386 
663,830 


26.8 


Intermediate 


44.6 


Large. 


28.6 






Leather products . . 


2,245 


100.0 


166, 841 


100.0 


1,260,883 


100.0 






Small 


1,782 
438 
25 


79.4 

19.5 

1.1 


22,326 
70, 022 
64, 493 


14.3 
44.6 
41.1 


306,124 
603, 375 
341, 384 


24.6 


Intermediate 


48.2 


Large 


27.3 


Not elsewhere classified 


4,997 


100.0 


438,896 


100.0 


1, 494, 699 


100.0 






Small. 


4,276 
678 
43 


86.6 

13.6 

.8 


63,948 
171, 611 
213, 337 


12.3 
39.1 
48.6 


336, 746 
691, 069 
467,885 


22.5 


Intermediate. 


46.2 


Large 


31.3 






Textile mill products.. 


7,3f4 


100.0 


1, 653, 125 


100.0 


4,290,760 


100.0 






Small 


5,387 

1,799 

128 


73.7 

24.6 

1-7 


111,599 
787, 115 
654, 411 


7.2 
50.7 
42.1 


689,886 
2,265,958 
1, 344, 906 


16.1 


Intermediate 


52.6 


Large.-, 


31.3 






Liquors, beverages 


2,826 


100.0 


626, 285 


100.0 


1, 577, 232 


100.0 






Small 


2,091 
698 
37 


74.0 

24.7 

1.3 


60,597 
330,066 
134, 623 


- 11.6 
62.8 
25.6 


242, 400 
843,951 
490,881 


16.4 


Intermediate 


53.6 


Large 


31.1 


Stone, clay, and glass products 


3,527 


100.0 


974, 786 


100.0 


1, 260, 700 


100.0 


Small :. . 


2,768 

693 

66 


78.5 
19.6 
1.9 


SO, 514 
326, 460 
567, 812 


8.3 
33.5 
68.2 


180, 685 
461, 347 
628, 668 


14.3 


Inten'lediate.. . 


36.8 


Large 


49.9 






Pood and kindred products 


11, 102 


100.0 


2, 163, 048 


100.0 


9, 946, 169 


100.0 






Small 


9,110 

1,866 

136 


82. 1 

16.7 

1.2 


264,633 

675,842 

1, 222, 573 


12.2 
31.3 

66.5 


1, 339, 233 
3,116,420 
5, 489, 516 


13.6 


Intermediate 


31.3 


Large 


55.2 






Paper and pulp products.: 


2,186 


100.0 


989, 876 


100.0 


1, 593, 489 


100.0 






Small 


1,449 

664 

73 


66.3 

30.4 

3.3 


39, 682 
349,832 
600, 362 


4.0 
35.3 
60.7 


199, 478 
769, 087 
624,924 


12.6 


Intermediate 


48.3 


Large 


39.2 






Chemicals and allied products 


6,212 


100.0 


1, 369, 971 


100.0 


3, 614, 105 


100.0 


Small 


5,028 

1,062 

122 


80.9 
17.1 
2.0 


74,316 
313,904 
981, 761 


5.4 
22.9 
71.7 


390, 167 
1, 105, 040 
2,118,898 


10.8 


Intermediate 


30.6 


Large 


68.6 






Metal andpts products 


17, 912 


100.0 


6, 970, 961 


100.0 


11,824,407 


100.0 






Small 


13, 768 

3,792 

352 


76.9 

21.2 

1.9 


292,900 
1, 299, 347 
4, 378, 704 


4.9 
21.8 
73.3 


1, 230, 887 
3, 970, 582 
6, 616, 938 


10.6 


Intermediate 1 


33.6 


Large 


55.9 






Eubber products 


562 


.100.0 


233,944 


100.0 


937,800 


100.0 






Small 


372 
165 
26 


66.2 
29.4 
4.4 


8,786 
87,622 
137, 636 


3.8 
37.6 
68.7 


43,422 
224,518 
669,860 


4.6 


Intermediate 


23.9 


Large 


71.6 



> Derived from StatlsUps of Isooxne, 1036. 



288 



OONOENTRATION OF EOONOMIC POWER 



Table 6. — Number of units, capital assets, and gross sales of small, intermediate,, 
and large business corporations in subdivisions of manufacturing, 19S6-^Con. 



Subdivision of manufacturing 


Number 
of units 


Percent 
of units 


Capital 
assets 


Percent 

of capital 

assets ' 


Gross 
sales 


Percent 
of gross 
sales 


Tobacco products . - - 


334 


100.0 


$82, 265 


100.0 


$1,188,953 


100.0 






Small - - 


248 
66 
20 


74.2 
19.8 
6.0 


2,738 
11,317 
68, 210 


3.3 
13.8 
82.9 


22,971 

89,352 

1^76, fiSO 


1.9 


Intermediate - 


7.6 


Largd - - - - 


00.6 






Petroleum and oil products .... 


671 


100.0 


3, 404, 328 


100.0 


4,044,089 


100. Oi 






Small 


424 
185 
62 


63.2 
27.6 
9.2 


11,356 

104.544 

3,288,428 


.3 

3.1 

96.6 


67,240 

332, 533 

3, 664, 316 


1.4 




8.2 




90.4 






Motor vehicles and parts 


703 


100.0 


929, 391 


100.0 


4,640,930 


100.0 






Small 


497 
173 
33 


70.7 

24.6 

4.7 


10,045 

76, 987 

842,359 


1.1 

8.3 

90.6 


54,776 

326, 717 

4, 259, 437 


1.2 


Intermediate 


7.0 


Large 


01.8. 






Total manufswturing ^ 


85,360 


100.0 


20, 690, 218 


100.0 


63,469,508 


100.0 






Small 


68,803 

16, 269 

1,278 


80.6 

17; 9 

1.5 


1,337,936 
6, 373, 69i 
13, 978, 687 


6.4 
26.0 
67.6 


7, 240, 212 
17,398,148 
28,831,148 


13.6 




32.5 


Large I.. 


53. 9< 







ECONOMIC CONTRIBUTIONS OF SMALL BUSINESS 

That small business employs a disproportionately large number of 
workers and does so with relatively little capital outlay, is demon- 
strated in the following two tables. The first table shows that more 
workers are employed per $100,000 of value added by manufacture 
in small manufacturing' establishments than in intermediate, and 
more in intermediate than in large. 

Table 7. — Number of workers employed per $100,000 of value added by manufacture 
in small, intermediate, and large manufacturing establishments classified according 
to size of annual value of product, 1937 ' 



Size classes by value of product 


Number 
of estab- 
lish- 
ments 
in each 
class 


Numb rof 

worke s in 

each .lass 

(a^ rage 

for year) 


Average 
number 
of work- 
ers per es- 
tablish- 
ment 


Value added 
by manufac- 
ture in each 
class 


Number 
of work- 
ers per 
$100,000 
Of value 
added 


$5,000 to $19,999—. 


50, 548 
36,711 
23,661 
23, 422 


161, 896 
305, 036 
385, 439 
763, 574 


3.2 

8.1 

16.3 

32.6 


$327, 064, 652 

659, 543, 513 

879, 269, 714 

1, 799, 923, 615 


49.5 


$20,000 to $49.999 


46.3 


$50,000 to $99,999 


43.8 


$100,000 to $249, 999. 


42.4 






Total, small 


135, 242 


1, 615, 945 


11.9 


3, 665, 801, 494 


44.1 






$250,000 to $499,999..... . ^ 


12,763 
8,908 
6,098 
2,130 


857, 354 
1, 128, 224 
1,517,198 
1,021,809 


67.2 
126.7 
248.8 
479.7 


2, 076, 254, 427 
2, 834, 842, 924 
4, 157, 830, 600 
3,251,714,648- 


41.3 


$500,000 to $999,999.. 


39.8 


$1,000,000 to $2,499,999 .... 


36.5 


$2,500,000 to $4,999,999 ...'. 


31.4 






Total, intermediate 


29,899 


4, 524, 585 


151.3 


12, 320, 742, 599 


36.7 






$5,000,000 to $24,999,999 


1,425 
228 


1,527,333 
• 901,368 


1,071.8' 
3, 953. 4 


5, 723, 913, 776 
3, 463, 081, 044 


26.7 


$25,000,000 and over 


26.0 






Total, large . 


1,653 


2, 428, 701 


1, 469. 3 


9, 186, 994, 820 


26.4 






Grand total 


166, 794 


8,669,231 


51.4 


26,1:3,538,913 


34.0 







« Derived from the Summary for Establishments Classiflod According to Value of Products, Census of 
Manufactures, 1937. 



CONCENTRATION OF ECONOMIC POWER 



289 



The second table shows that the average investment in capital assets 
(land, buildings, and machinery), that is to say, in "plant," rises 
progressively as size increases. While nearly twice as many workers 
are employed in producing a given amount of value in the smallest 
manufacturing concerns as against. the largest, the fixed investment 
in the smallest type of manufacturing concern is only a very small 
fraction of the fixed investment of the largest manufacturing concerns. 
The following table relates solely to incorporated manufacturing cor- 
porations, capital assets data by size of enterprise being available 
only in the Statistics of Income. 

Table 8. — Investment in capital assets by small, intermediate, and large manu.- 
facturing corporations, classified according to size of total assets, 1936 ^ 



Size classes by total assets 



Number of 
corpora- 
tions in 

each class 



Capital assets 
in each class 
(000 omitted) 



Average 
capital as- 
sets in each 
class 



Under $50,000 

$50,000 to $100,000. 

$100,000 to $250,000 

Total, small -. 

$250,000 to $500,000 

$500,000 to $1 ,000,000 

$1,000,000 to $5,000,000.... 

Total, intermediate 

$5,000,000 to $10,000,000... 
$10,000,000 to $50,000,000.. 
$60,000,000 to $100,000,000. 
$100,000,000 and over 

Total, large -. 

Grand total 



43, 123 
12, 466 
13,214 



$274, 976 
310, 742 
752, 218 



$6,377 
24,927 
56, 926 



68, 803 



1, 337, 936 



19, 446 



6,740 
4,314 
4,215 



889, 483 
1,165,096 
3, 319. 116 



131, 971 
270, 073 
787, 453 



15, 269 



5. 373, 695 



351.935 



625 

519 

62 

72 



1. 687, 384 
4, 022, 666 
1, 492, 753 
6, 775, 784 



2, 699, 814 

7, 750, 802 

24,076,661 

94, 108, lU 



1,278 



13, 978, 587 



10, 937. 862 



85, 350 



20, 690, 218 



242,416 



' Derived fronj Statistics of Income, 1936 
Table 9 



Deht and types of debt, for 290,118 business corporations, by total-assets 
size-groups, 1936 i 



Size classes by total assets 



Total reported debt in each size class 



Number of 
corpora- 
tions in 

each group 



Notes and 
accounts 
payable 

(000 omit- 
ted) 



Bonded 
debt and 
mortgage 
(000 omit- 
ted) 



Average re 
ported debt 

in each 

class » 



Percent 
of long- 
term to 

total 
debt in 

each 
class' 



Percent 
of long- 
debt to 
total 
assets in 
each 
class 



Under $60,000... 

$50,000 to $100,000... 

$100,000 to $260.000. 

Total, small 

$250,000 to $500.000 

$600,000 to $1,000,000 

$i;ooo,ooo to $5.000,000.... 

Total, intermediate 

$5,000,000 to $10,000,000... 
$10,000,000 to $50,000,000.. 
$50,000,000 to $100,000,000. 
$100,000,000 and over 

Total, large 

Grand total. 



173, 674 
41. 426 
37. 589 



$1. 237. 364 

873. 639 

1.472.156 



$220, 729 
287, 719 
722, 379 



$8,400 
28,040 
58,380 



15.1 
24.8 
32.9 



46.8 
30.6 
37.3 



252,688 



3, 683, 149 



1, 230, 827 



19,050 



25.6 



40.3 



16, 789 
9,773 
8,701 



1,246,903 
1,300,119 
2, 740, 371 



916, 836 
1, 072, 710 
2, 599, 833 



128.760 
242.790 
613, 750 



42.4 
46.2 
48.7 



36.7 
34.8 
30.2 



35, 263 



6, 286, 393 



4, 588, 378 



280,030 



46.6 



32.6 



1,122 
859 



1,062,620 

2, 140, 781 

916,731 

2, 382, 919 



1, 219, 536 

2,024,812 

841, 674 

1,532,433 



2, 025. 000 
4, 849, 350 
17, 942, 910 
44, 492, 640 



53.7 
48.6 
47.9 
39.1 



29.2 
24.6 
25.7 
19.3 



2,167 



6, 492, 951 



5, 618, 454 5, .589, 020 



46.4 



290,118 



15. 362. 493 



11. 437, 659 



92, 380 



42.7 



23.3 
28.4 



> Derived from Statistics of Income, 1936. 

• "Notes and Accounts Payable" plus "Bonded Debt and Mortgage." 

• "Bonded Debt and Mortgages, ''^ as percentage of "Notes and Accounts Payable" plus "Bonded Debt 
aad Mortgage." 



290 



OONOENTRATION OF EOONQMIC POWER 



Table 10. — Surplus and undivided profits, less deficits, and combined net profit or 
loss, for 290,118 business corporations, classified by size of total assets, 1986^ 



Size classes by total assets 



Under $50,000 

$50,000 to $100,000. 

$100,000 to $250,000 

Total, small 

$250,000 to $500,000........ 

$500,000 to $1,000,000 

$1,000,000 to $5,000,000- . . . 

Total, Intermediate 

$6,000,000 to $10,000,000... 
$10,000,000 to $50,000,000- . 
$50,000,000 to $100,000,000- 
$100,000,000 and over 

Total, large 

Grand total. 



Number 
of corpo- 
rations in 
each class 



173, 674 
41,425 
37, 589 



252, 688 



16, 789 
9,773 
8,701 



35, 263 



1,122 



2,167 



290,118 



Surplus and 
undivided 
profits, less 
deficits in 
each class 

(000 
omitted) 



-$750, 629 
-41, 140 
333, 774 



-457, 995 



626, 261 

941, 084 

3, 303, 935 



4, 871, 280 



1, 737, 679 
4, 275, 693 
1, 732, 900 
6, 690, 232 



13, 436, 604 



17, 849, 789 



Percent of 

surplus, 

etc., to 

total 

assets in 

each class 



10.6 
13.8 
18.7 



16.0 



22.3 
26.2 
25.3 
28.0 



26.9 



18.9 



Combined 
net profit 
or loss in 
each class ' 
(000 
omitted) 



-$61, 194 
60,011 
194,211 



193, 028 



242, 037 
300, 139 
899,480 



1,441,666 



433, 784 
1, 007, 056 

402, 730 
1, 291, 696 



3, 135, 266 



4, 769, 950 



Percent 
of com- 
bined net 
profit or 
loss to 
total 
assets 



2.0 
3.3 



1.6 



4.1 
4.4 
6.1 



4.7 



6.6 
6.9 
5.9 
6.4 



6.0' 



5.1 



I Derived from Statistics of Income, 1936. 

' The "net" and "no net" corporations are, of course, combined. 

Note.— Minus sign denotes deficit or loss. 



Table 11. — Total number of business establishments in relation to total population 
of the United States, 1901-38 



Year 


National 
population ' 


Total num- 
ber of busi- 
ness estab- 
lishments ' 


Business 
establish- 
ments per 

1,000 
population 


Index of business estab- 
lishments per 1,000 
population 




(1901 = 100) 


(1926= 100> 


1901 


77, 747, 402 
82, 601, 384 
85, 837, 372 
89, 073, 360 
93, 682, 189 
96, 612, 407 
100, 767, 735 
103, 687, 955 
108, 207, 853 
111,637,497 
116,531,963 
119,861,607 
124,113,000 

126, 770, 000 

127, 521, 000 
128, 429, 000 
129, 257, 000 
130, 216, 000 


1, 219, 242 
1, 320, 172 
1, 392, 949 
1, 447, 564 
1, 525, 024 
1,616,517 
1, 707, 639 
1,708,061 
1, 927, 304 
1, 996, 004 
2, 158, 457 
2, 199, 049 
2, 125, 288 
1, 960, 701 
1, 982, 905 
2, 009, 935 
2.056,598 
2,102,000 


15.68 
16.98 
16.23 
16.25 
16.28 
16.75 
16.95 
16.49 
17.81 
17.90 
18.52 
18.35 
17.12 
15.59 
15.66 
16.66 
16.91 
16.14 


100.00 

101. 91 
103. 51 
103.64 
103.83 
106. 82 
108. 10 
105. 17 
113.58 
114.16 
118.11 
117.03 
109.18 

99.43 
99.17 
99.81 
101. 47 

102. 93 


84.67 


1904 


86.29- 


1906 


87.63 


1908 


87.74 


1911 


87.90 


1913 


90.44 


1916 


91.62 


1918 


89.04 


1921 


96.17 


1923 


96.66 


1926 


100.00 


1928.. 


99.08 


1931 


92.44 


1933 


84.18 


1936.- 


83. 9« 


1936. 


84.5© 


1937 •. 


85.91 


1938 


37. 16. 







1 Statistical Abstract of the United States, 1938, table 12. 

» As reported by Dun & Bradstreet, Inc. Enterprises which do not use commercial credit a.'e not in 
eluded in the Dun & Bradstreet compilations. 



CONCENTRATION OF ECONOMIC POWER 



291 



Table 12. — Estimated receivables of all consumer credit agencies in the United StateSf 
at the close of each year, 1923-37, by major classes of creditors ^ 

[Millions of dollars] 



Year 


Retail 
mer- 
chants 


Service 
creditors 


Inter- 
mediary 

financ- 
ing 
agencies 


Cash 
lending 
agencies 


All cred- 
itors 


Incre- 
ment or 
decre- 
ment 


Index of 
consumer 

credit 

(average 

1923 to 

1937=100) 


1923 


2,991 
3,095 
3,444 
3,745 
3,841 
4,177 
4,564 
4,261 
3,734 
2,925 
2,878 
3,010 
3,221 
3,566 
3,818 


337 
361 
409 
450 
481 
530 
596 
573 
531 
491 
467 
451 
472 
620 
557 


356 

453 

737 

910 

862 

1,080 

1,373 

1,138 

878 

548 

614 

831 

1,262 

1,927 

2,173 


373 

759 

920 

1,053 

1,191 

1,409 

1,650 

1,598 

1,299 

993 

848 

930 

1,125 

1,422 

1,778 


4,357 
4,668 
5,510 
6,168 
6,376 
7,196 
8,183 
7,570 
6,442 
4,957 
4,807 
5,222 
6,080 
7,435 
8,326 




70.1 


1924 


+311 

+842 

+648 

+217 

+821 

+987 

-613 

-1,128 

-1,486 

-150 

+415 

+858 

+1, 355 

+891 


76.1 


1925 - 


88.6 


1926 


99.0 


1927 


102.5 


1928 


115.7 


1929 


131.6 


1930 


121.7 
103.6- 


1931 


1932 


79.7 


1933 ^.... 


77.3 


1934 


84.0 


1935 


97.8 


1936 ... 


119.6 


1937 


133.9 







1 From R. Nugent, Consumer Credit and Economic Stability (1939), p. 116. 

Table 13. — Thim-over in the number of active busine'Bs establishments, and business 
discontinuances involving losses, 1930-36 ^ 



Year 


Total 
number 
of enter- 
prises 


New 
enter- 
prises ' 


Per- 
cent ' 


Discon- 
tinued 
jenter- 
prises ' 


Per- 
cent' 


Difi- 
con- 
tinu- 
ances 
with 
losses 


Per- 
cent of 
dis- 
con- 
tinu- 
ances 


Percent 
of dis- 
contin- 
uances 
with 

losses to 
total 

number 

of enter- 
prises 


1930 


2,183,000 
2,125,000 
2, 077, 000 
1,961,000 
1,974,000 
1,983,000 
2,000,000 


423,000 
355,000 
338,000 
345,000 
379,000 
387,000 
408,000 


19.4 
16.7 
16.3 
17.6 
19.2 
19.8 
20.3 


493,000 
413,000 
386,000 
461,000 
366,000 
378,000 
382,000 


22.6 
19.4 
18.6 
23.6 
18.5 
19.1 
19.0 


26,000 
28,000 
32,000 
20,000 
12,000 
12,000 
9.000 


6.3 
6.8 
8.3 
4.3 
3.3 
3.2 
2.4 


1.2 


1931 


1.3 


1932 - 


1.5 


1933 


1.0 


1934 


.6 


1935 


.6 


1936 


.4 






Total 


2,635,000 


""is." 6' 


2,879,000 


'"'26."i' 


139,000 






Average 




4.8 


1.0 













> Dun & Bradstreet, Inc., Behind the Scenes of Business, revised edition, 1937; pp. 146, 149. 
' Including all proprietary changes, reorganizations, incorporations, etc., as well as actual births and deaths 
of enterprises. 

Table 14. — Number and percentage of small, intermediate, and large business cor- 
porations earning net income classified by size of total assets, 1932-36 ' 





Small 


Intermediate 


Large 


Total 


Year 


Number 
of cor- 
pora- 
tions 


Percent 
with 
net 

income 


Number 
of cor- 
pora- 
tions 


Percent 
with 
net 

income 


Number 
of cor- 
pora- 
tions 


Percent 
with 
net 

income 


Number 
of cor- 
pora- 
tions 


Percent 

with 

net 

income 


1932 


228,890 
230,543 
241,801 
247,311 
262,688 


15.8 
26.5 
34.4 
37.4 
44.3 


30, 560 
29,303 
31, 593 
32,380 
35,263 


23.3 
41.2 
60.4 
66.1 
64.7 


1,973 
1,948 
2,176 
2,144 
2,167 


27.4 
43.8 
63.0 
60.4 
76.0 


261, 413 
261, 794 
275, 570 
281,836 
290,118 


16.8 


1933 


28.2 


1934.-. 


36.4 


1935 


39. r 


1936 


47. a 







> Derived from fetatietics of Income, 1932-36. 



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298 



OONOENTRATION OF EOQNOMIC POWER, 



Tabli: 20. -^Applications for industrial advances (including commitmentsj under 
sec. ISh, classified according to business and industries, June 19, 1934, to Dec. 
29, 1937 

[Amounts in thousands of dollars] 



Net applications 
received by in- 
dustrial advisory 
committees 



Number 



Amount 



Applications approved by Federal Re- 
serve banks (with and without con- 
ditions) 



Commitments 



Number Amount 



Advances 



Number Amount 



MANUFACTUEER 

Aircraft 

Autos, trucks, and accessories --,. 

Chemicals and allied products 

Electrical goods 

Food products 

Furniture, office and household equip' 

ment.- 

Hides and leather _ 

Jewelry and silverware 

Liquors, wines, and beer .- 

Lumber apd btlilders' supplies 

Machinery and machine tools 

Metals 

Paper products 

Railway equipments 

Rubber goods - 

Btone, clay, and glass products 

Textiles 

Wearing apparel, shoes, etc 

Wood products. 

Other. 

Total 

WHOLESALE AND RETAIL TRADE 

Autos and accessories 

Chain and department stores 

Clothing, dry goods, jewelry 

Drugs, tobacco, and liquor 

Florists, nurseries, etc 

Food products 

Furniture 

Grain, feed, seeds, etc 

Hardware and machinery 

Lumber and builders' supplies 

Oil 

Electrical goods 

Other 

Total 

MISCELLANEOUS 

Contractors and construction 

Hotels, apartments, restaurants, etc 

Laundries, cleaners, and dyers 

Mines and quarries 

Oil and gas production 

Printing, publishing, and allied trades 

Shipbuilding and repairing 

Transportation 

Other 

Total 

Grand total 



21 


1,995 


117 


26,115 


139 


3,503 


80 


6,170 


489 


14, 325 


296 


14,083 


69 


2,325 


44 


1,865 


222 


21, 482 


378 


19, 161 


326 


19,296 


317 


25, 589 


115 


8,972 


13 


6,887 


22 


1,891 


152 


6,876 


248 


21,994 


414 


10, 715 


140 


4,420 


379 


21,245 



3,981 



3,149 



1,547 



237,909 



335 


3,851 


249 


8,113 


370 


4,021 


210 


2,301 


66 


1,394 


624 


12, 816 


182 


3,745 


159 


7,286 


168 


3,085 


372 


9,220 


135 


4,305 


34 


585 


245 


5,383 



66,105 



227 


9,692 


130 


3,935 


158 


3,272 


173 


11, 897 


41 


8,-589 


360 


6,242 


20 


2,674 


114 


4,907 


324 


8,070 



69, 278 



2 


60 


4 


28 


10,689 


23 


13 


264 


22 


16 


1,151 


16 


44 


1,909 


108 


47 


2,959 


59 


4 


206 


• 7 


3 


177 


9 


28 


3,743 


24 


71 


5,910 


72 


40 


3,111 


82 


42 


3,785 


73 


19 


1,789 


27 


1 


20 


6 


4 


685 


5 


19 


2,020 


34 


35 


3,756 


61 


56 


2,164 


77 


19 


840 


29 


66 


4,748 


78 



557 



49,886 



19 


246 


19 


1,433 


26 


470 


13 


286 


12 


290 


57 


3,318 


16 


611 


19 


2,668 


13 


280 


39 


1,464 


11 


1,610 


5 


132 


21 


427 



13,015 



30 


2,864 


7 


171 


4 


456 


14 


1,785 


6 


2,800 


25 


645 


4 


604 


11 


600 


15 


1,029 



116 



10,954 



805 



233 



8,677 



363, 292 



1943 



73, 855 



11,484 



» Includes 21 appUcations each of which covered an advance and a commitment. 

Source: Table No. 15, Twenty-fourth Annual Report of the Board of Governors of the Federal Reserve 
System for the year 1937. 



CONCENTRATION OF ECONOMIC POWER 



299 



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300 CONCENTRATION OF ECONOMIC POWER 

Table 22. — Number and amount of business loans authorized, by size of loans, as 

of Feb. 29, 1940 



Size groups 


I 


Loans (and participations) ' 


II. Conditional agree- 
ments outstanding as 
of Feb. 29, 1940 ' 


Number 
loans au- 
thorized 


Percent 
of total 


Amount 
authorized 


Percent 
of total 


Number 


Amount 




3,332 

1,412 

1,739 

1,032 

786 

421 

278 

63 

40 


36.6 
15.5 
19.1 
11.4 
8.6 
4.6 
3.1 
.7 
.4 


$7,513 072.64 
11,556,985.31 
32,181,764.67 
41, 106, 882. 00 
61, 706, 912. 27 
64, 480, 693. 86 
90, 740, 275. 20 
47, 318, 87.9. 57 
109, 938, 498. 45 


1.6 
2.5 
6.9 
8.8 
13.2 
13.8 
19.5- 
10.1 
23.6 


1 
1 
3 
5 
6 
10 
16 
6 
13 


$5,000 

10.000 

54,500 

202,000 

560, 000 

1,578,000 

5, 946, 000 

5, 503, 000 

93, 161, 025 


$5,001 to $10,000, inclusive 

$10,001 to $25,000, inclusive 

$25,001 to $50,000, inclusive 

$50,001 to $100,000, inclusive 

$100,001 to $200,000, inclusive.--. 

$200,001 to $500,000, inclusive 

$500,001 to $1,000,000, inclusive. - 
Over $1,000,000 . 






Total 


9,103 


100.0 


466, 539, 463. 97 


100.0 


61 


107, 019, 525 







I Includes amounts authorized to be taken by participating banks, etc. 

Table 23. — Number and amount of business loans disbursed, by size of loans, as 

of Feb. 29, 1940 



Size groups 



Number 
loans dis- 
bursed ' 



Percent 
of total 



.\ mount 
disbursed ^ 



Percent 
of total 



$5,000 and under 

$5,001 to $10,000, inclusive 

$10,001 to .$25,000, inclusive 

$25,001 to $50,000, inclusive 

$50,001 to $100,000, inclusive... 
$100,001 to $200,000, inclusive.. 
$200,001 to $500,000, inclusive . . 
$500,001 to $1,000,000, inclusive 
Over $1,000,000. 

Total 



2,462 

874 

1,095 

605 

502 

282 

193 

44 

26 



40.5 
14.4 
18.0 
9.9 
8.3 
4.6 
3.2 
.7 
.4 



998, 402. 88 
029, 025. 16 
987, 069. 56 
811,690.85 
349, 166. 38 
523, 590. 15 
118, 723. 72 
984,660.11 
400, 030. 54 



3 6,083 



100.0 



3 294, 202, 359. 35 



100.0 



1 Includes number of loans disbursed by banks, etc., in which the Reconstruction Finance Corporation 
took deferred participations. 

' Includes amounts disbursed by participating banks, etc., on immediate and deferred participations. 

' Includes 960 loans disbursed in the amount of $991,505.89 to fruit growers in certain areas in Washington. 
Of these 960 loans, 941 totaling $833,815.89 are in the "$5,000 and under" group; 16 totaling $111,350 are in the 
"$6,001 to $10,000" group; and 3 totaling $46,340 are in the "$10,001 to $25,000" group. 



CONCENTRATION OF ECONOMIC POWER 



301 



Table 24. — Number of business enterprises to which loans were authorized, and 
amounts authorized and disbursed,^ as of Feb. 29, 1940, by indxistries 



MANUFACTURING 

Food and kindred products: 

Dairy products 

Meat and poultry packing 

Canning (fish, fruit, vegetables)... 

."'Averages - 

tread, bakeries, flour milling 

Confectionery 

Another 



Total food products. 



Textiles and their products: 

Cotton goods and small wares. 

Woolen goods 

Silk and rayon goods 

Knit goods, hosiery 

Dyeing and finishing 

Apparel 

Another 



Total textile products- 



Lumber and timber products: 

Lumber. 

Furniture 

Wooden containers 

Millwork, sash, doors, etc.. 
Wooden turned products.. 
All other 



Total luniber products 

Paper and allied products, total. 

Printing and allied products: 

Book and job printing 

Another 



Total printing and allied products. 

Chemical and allied products, total 

Rubber products, total. 

Leather and shoes, total 



Stone, clay, and glass products: 

Stone, granite, slate, etc 

Clay products 

All other. 



Total stone, clay, and glass products. 



Iron and steel products (including machinery) : 
Foundry products (castings, forgings, etc.)-- 

Structural and ornamental steel 

Hardware, plumbing, and supplies 

Stoves, ranges, furnaces 

All other . 



Total iron and steel products. 



Nonferrous metals and their products: 

Alloys, stampings, etc 

All other 



Total nonferrous metals. 



Machinery: 

Electrical machinery, apparatus, supplies. 

General machinery and equipment 

All other. •. 



Total machinery 

Transportation equipment, total... 

See footnotes at end of table. 



Number 
business 
enter- 
prises 



137 
113 
189 

67 
166 

47 
272 



991 



Amount author- 
ized by R. F. C. 



92 
51 
43 
123 
33 
150 
115 



201 
158 
50 
184 
30 
59 



682 
113 



171 
101 



272 
172 
26 
86 



112 
141 



294 



107 
71 



178 



76 
95 
197 



368 
113 



$4, 145, 210. 00 
5, 468, 587. 90 
17,113,446.76 

2, 049, 756. 03 

3, 702, 393. 25 
2, 444, 200. 00 
7, 185, 658. 95 



42, 109, 252. 89 



15, 603, 754. 86 
12, 326, 798. 21 
8, 944, 750. 00 

7, 473, 038. 53 

8, 494, 350. 00 
4, 475, 520. 00 
7, 881, 975. 00 



65, 200, 186. 60 



22, 047, 003. 63 
8, 162, 952. 75 
2, 810, 029. 47 

10,083,887.14 
1, 256, 496. 67 
1, 839, 150. 00 



46, 199, 519. 66 
30, 909, 194. 98 



3, 314, 443. 29 
2, 373, 975. 00 



5, 688, 418. 29 
7, 557, 946. 61 
2, 068, 950. 00 
6, 079, 478. 71 



2, 848, 425. 00 

8, 479, 018. 51 

9, 788, 907. 71 



21, 116, 351. 22 



9, 498, 600. 00 
4, 370, 618. 24 
3, 078, 215. 00 
5, 238, 816. 40 
6, 845, 033. 34 



29, 031, 282. 98 



6,112,654.49 
3, 201, 475. 00 



9, 314, 129. 49 



3, 275, 330. 00 
3, 746, 078. 58 
15, 098, 106. 76 



22, 119, 515. 34 
31, 760, 126. 45 



Amount dis- 
bursed by 
R. F. C. 



$1, 938, 366. 84 
2, 226, 833. 66 
6, 931, 945. 33 
926, 240. 27 
1, 598, 487. 77 
1, 297, 550. 00 
3, 316, 127. 58 



18, 235, 551. 44 



9, 453, 183. 18 
8, 374, 662. 50 
6, 474, 279. 75 
4, 337, 885. 97 
5, 488, 053. 99 
1, 959, 488. 43 
5, 205, 433. 94 



41, 292, 987. 76 



12, 831, 999. 50 

4, 749, 452. 40 

1, 686, 129. 47 

5, 295, 289. 41 

639, 613. 94 

662,967.27 



25, 865, 451. 99 
14, 186, 032. 19 



2, 025, 447. 07 
783, 599. 66 



2, 809, 046. 73 
5, 055, 270. 32 
1, 044, 412. 50 
2, 443, 992. 26 



1, 872, 007. 17 
6, 090, 464. 31 
6, 044, 395. 31 



12,006,866.79 



4, 664, 746. 04 
1, 659, 436. 87 
1,906,331.71 
2, 186, 222. 53 
4, 481, 297. 34 



14, 898, 034. 49 



3, 313, 324. 20 
1, 542, 000. 00 



4, 855, 324. 20 



1, 534, 830. 00 
1, 709, 201. 72 
7, 701, 408. 66 



10, 945, 440. 28 
20, 126, 779. 33 



262652 — 41— No. 17- 



-21 



302 



CONCENTRATION OF ECONOMIC POWER 



Table 24. — Number of business enterprises to which loans were authorized, and 
amounts authorized and disbursed, as of Feb. 29, 1940, by industries — Continued 



Goal.. 
Other. 



MINING ' 



Total mining » 

WHOLESALE TRADE 

Orooeries-- 

Lumber atid building supplies 

All other 



Total wholesale trade 

KETAIL TBADE 



Apparel... 
Groceries. 
Drugs - 



Hardware, etc 

Grain, feed, fuel, ice, etc. 
All other. 



Total retail trade. 



MISCELLANEOUS 

Contracting, etc 

Laundries, dry cleaning 

All other ^ 



Total miscellaneous. 



Add- 



Total all industry groups •. 



Loans to business enterprises to repair damage by 
flood, etc. (under act of Apr. 13, 1934, as amended).. 

Amount authorized to be taken by banks, etc., in 
immediate and deferred participations (under sec. 
5d) 

Vmount disbursed by banks, etc., on immediate and 

iWerred participations (under sec. 5d) 



»3rand total 

Add conditional agreements outstanding as of Feb. 29, 
1940 (under sec. 5d; includes banks' share) 



Grand total, including conditional agreements out- 
standing 



Number 
business 
enter- 
prises 



132 
90 
203 



80 
125 
64 
74 
113 
694 



1,150 



108 

168 

3 1,304 



1,580 



7,503 
213 



7,71J 
28 



7,744 



Amount author- 
ized by R. F. C. 



$14, 051, 686. 12 
3, 466, 860. 00 



17, 518, 536. 12 



8, 640, 805. 00 
2, 618, 851. 00 
4, 318, 715. 92 



15, 578, 371. 92 



783, 147. 86 
445, 843. 33 
195, 932. 04 
516, 300. 20 
1, 630, 629. 67 
10, 145, 886. 40 



13, 717, 739. 50 



3, 231, 500. 00 

2, 337, 750. 24 

46, 698, 814. 06 



52, 268, 064. 30 



418, 237, 065. 06 

1,711,962.75 

46, 690, 436. 16 



466, 539, 463. 97 
107, 019, 525. 00 



573, 558, 988. 97 



Amount dis- 
bursed by 
R. F. C. 



S6, 641, 952. 81 
1, 915, 982. 08 



8, 557, 934. 89 



2, 064, 806. 49 

1, 324, 667. 00 

2, 306, 434. 42 



5, 695, 907. 91 



277, 852. 86 
217, 350. 15 
96, 126. 36 
228, 299. 34 
1,026,141.25 
6, 366, 355. 47 



8, 212, 125. 43 



1, 804, 628. 78 
1, 469, 999. 43 
18, 631, 877. 41 



21, 906, 405. 62 



218, 137, 564. 13 



891,372.75 



♦ 75, 173, 422. 47 



294, 202, 359. 35 



294, 202, 359. 35 



« Figures b\, industries represent authorizations and disbursements by the Reconstruction Finance 
Corporation tt. business enterprises under sec. 5d of the Reconstruction Finance Corporation Act, as 
amended; and i .- the fishing industry, and to business enterprises through mortgage-loan companies and 
banks, uilder sec. 5 of the Reconstruction Finance Corporation Act, as amended. 

' Excludes mining loans authorized under see. 14 of the act approved June 19, 1934, as amended, 

' Includes 716 fruit growers located in certain areas in Washington. 

* Includes amounts disbursed by participating banks, etc., on R. F. C.'s share of deferred participations. 



CHAPTER XIX— APPENDIX 2 
FIELD STUDIES 

EXPLANATORY NOTE 

Field sm'\'eys were made in the following areas representing a wide- 
variety of business conditions: Fall River, Mass. ; Scranton and Wilkes- 
Barre, Pa.; Detroit, Mich.; Birmingham, Ala.; Dallas and Houston, 
Tex. ; Omaha, Nebr.; Denver, Colo.; Seattle, Wash.; and Portland, 
Oreg. The Birmingham report has not been included in this appendix 
2 since it served merely to corroborate the findings of the President's 
Committee on Economic Conditions of the South (Report on Economic 
Conditions of the South, prepared by the National Emergency Council^ 
1938). In connection with the hearings on the capital and credit, 
needs of small business, before the Temporary National Economic. 
Committee in May 1939, testimony was offered on the activity of the 
Tennessee Valley Authority in encouraging the development of «mall 
business enterprise in the Southeast. See the testimony of Mr. 
John Ferris of the Tennessee Valley Authority, Hearings before the 
Temporary National Economic Committee, Part IX, pages 3923-3943. 

NEW ENGLAND AREA: FALL RIVER, MASS. 

The following is quoted from the weekly bulletin of the Fall River 
Cotton Manufacturers Association, dated April 1, 1939: 

A few days ago a local laundryman made mention of the condition of materials 
running through his laundry. He said that he couldn't recollect when items like 
sheets, pillowcases, towels, etc., were in such poor condition. He has warned his 
help to be particularly careful in running these through the wringers and manglers 
to see that same are not torn, thereby causing damage claims. He has even 
noted patches on towels which he calls. very unusual. He mentioned this at a 
laundry convention recently and was surprised by the response of a large per- 
centage of those present who had noted the same conditions. 

This quotation expresses the main problem of small business in 
Fall River, which is peculiarly that of a low; level of consumer income,, 
and a payroll income which comes irregularly. The state of con- 
sumer income everywhere limits local business and conditions its 
capital and credit requirements. 

Consumer Income. 

Fall River, for more than a century an important textile producing 
center, has a population of about 115,000, overwhelmingly factory 
workers and their families. The resident labor supply is thrifty and 
industrious. In 1937, with the community's gross wage-income 
higher than in a decade, 23,584 factory workers earned $18,950,567, 
or an average of $803.43, according to the Massachusetts Department 
of Labor and Industries (press release of January 14, 1939). The 
workers' families (largely French-Canadian and Portuguese) being 
above the average ill size, that average income probably reflects the 

303 



304 CONCENTRATION OF ECONOMIC POWER 

income status of at least 100,000 of the population. Besides factory 
workers, the 1935 Census of Business of the Department of Commerce 
reports 4,182 employees of local retail business as receiving $3,686,000 
in wages, or an average of $881.38. Combining mill payroll, 
"other" industrial payroll, Federal outlay and city payroll, the 
chamber of commerce reported that this city of 115,000 population 
has received outside money as follows: 



1930 $28,441,381 

1931 29,769,870 

1932 22,751,224 

1933 26,333,928 

1934 29,649,252 



1935 $26,191,460 

1936 27,664,526 

1937 31,152,244 

1938 27,657,460 

1939 1 ... 7,317,163 



* First quarter. 

This figures at about $240 a year per person, or less than $1,000 for 
■a family of four. Community income other than that from payrolls 
and relief is negligible. These conditions date from far back in Fall 
River's past, as a one-industry, ootton-mill town. 

Standard of living comparisons with certain cities of approximately 
equal size follow. In Fall River meat, including sea foods, was pur- 
chased in 1935 to the amount of $138,000 against $389,000 for Wichita, 
Kans.; $562,000 for Fort Wayne, Ind.; and $781,000 for Reading, Pa. 
In purchases of shoes. Fall River was far at the bottom of the list of 
seven communities of equal size. 

New automobile sales were $1,969,000 for Fall River, against 
Elizabeth $3,454,000, Erie $3,975,000, Reading $4,498,000, Fort 
Wayne $5,160,000, Spokane $7,748,000, Wichita $8,164,000, Miami 
$8,951,000. But in household furnishings and appliances, Fall 
River's population bought more heavily than the people of Erie, Pa. ; 
Fort Wayne; Reading; Spokane, Wash.; or Wichita; and were out- 
ranked only by Elizabeth, N. J., and Miami, Fla. In consumption 
of dairy products Fall River was outranked only by Reading and 
EUzabeth.^ 

Employment in Fall River is irregular and unemployment is pre- 
ponderantly male; daughter quite commonly supporting the family. 
In the last quarter of 1938 the Catholic Charities provided 27,000 
food and clothing cards worth $10 apiece. During the pit of unem- 
ployment the workers and their families were fed by a town committee 
at a cost per person of 65 to 71 cents a week. 

In FaU River the condition of low wages accounts for the survival 
of the textile mills. It also accounts for the rapid rise, expansion, 
and individual prosperity of the expatriate New York sweatshops 
that have come to the town of late years, as well as, in fact, the 
absence for them of a serious credit or capital problem. Fundamen- 
tally, it accounts also for the conservative credit policies of the com- 
mercial banks. Similarly, it accounts for the rise of the high interest 
commercial and personal lending that has fastened itself upon the 
town. 

The Textile Industry. 

Fall River's economic basis from 1811 to 1932 was exclusively 
textile manufacturing. Its decline from its original prosperous 
position as this country's largest "spindle city" was as gradual as it 
was painful. At the peak, about 1905-10, the city had 110 textile 
mills valued at approximately $100,600,000. Today's valuation is 

I Oensas of Bu?iness, Department of Commeroe. 1935. 



CONCENTRATION OF ECONOMIC POWER 305 

given as $12,000,000. The closing of mills, due to southern competi- 
tion, post-war export shrinkage, the rise of rayon, and the changes in 
women's styles, by 1927 had reduced the number of mills to 86. 
These had, according to State figures, $81,500,000 of invested capital. 
Mill employees in 1926 were, 25,552. Mill payrolls in 1927 were 
around $425,000 a week. 

In 1928 the Pocasset mill burned and set fire to the central part of 
town, causing $6,000,000 in property damage. Times were particu- 
larly hard from then on, weekly payrolls reaching such low levels as 
$129,017, $99,351, $118,147, $121,730, $131,649, $89,247 in June and 
July of 1932, and employment was correspondingly low. 

There has, however, been a substantial recovery. In the pit of the 
depression the weaker and more obsolete mills were abandoned; the 
survivors changed hands, were reequipped, and went mainly off 
"grieg goods" basis. Today 22 mills, owned by 14 concerns, are in 
operation and these are not suffering from obsolescence. Payrolls 
now (1939) run around $325,000 a week and mill employees number 
about 12,900. 

The irregularity of textile-mill employment and wage income influ- 
ences profoundly local small-business credit conditions. Early in 
1939, for example, the mills, on the basis of orders in sight, stepped 
up pay rolls from $288,172 to $336,710 in 2 weeks' time; held produc- 
tion at near 100 percent of normal capacity until orders were filled; 
kept on at peak for the sake of operating economy, ran into speculative 
inventory, and by mid-April were swiftly reducing pay rolls again. 
Although peak pay rolls continued for several weeks in March and 
April 1939, and were the largest since 1930 except for a short time in 
1934, up to mid-April the flow of money had not reached Fall River's 
"Main Street." Apparently the landlord, the power company, the 
corner grocer, and the savings bank got first call. Since some three- 
fifths of the city's workers were millhands, and ^nce no merchant or 
other creditor could see ahead, accounts receivable held by the stores 
accordingly became a gamble, and the position of every commodity 
distributor in the city was affected by this unpredictable variation in 
mill employment and wage income.. 

Even with this irregularity, and in its reduced state, textile manu- 
facturing remained the most stable distributor of consumer income in 
Fall River, though no longer capable of supporting the entire com- 
munity. No new vitality was apparently to be anticipated, nor was 
it likely that easement of capital or credit conditions would greatly 
affect the situation. 

The textile mills of Fall River at the time ot the study apparently 
were not in need of invess^tment capital. While the mill situation had 
apparently hit bottom and was in process of recovery, expansion of 
capacity was not contemplated, nor was there need of capital outlays 
for modernization. For working capital, these absentee-owned 
concerns utilized outside credit sources and did very little banking 
in Fall River. 

The New Industries Drive. 

Aside from the textile mills. Fall River at the time of the study had 
230 manufacturing establishments ranging in size from a few employees 
to 2,000. About half were of local origin, but the other half repre- 
sented enterprises which were attracted to Fall River by its recent "new 
industries" drive. This was a deliberate campaign, common to all 



306 CONCENTRATION OF ECONOMIC POWER 

New England, to replace the declining textile industry with divereificd 
manufacturing plants. The Governor of Massachusetts named Fall 
River as the city that had made the greatest progress in 1938 in the 
State's new industries drive. 

The basis of this drive lay in the suggestion that the huge buildings 
of the abandoned mill plants might again become an asset to Fall 
River. By 1935 vandals had looted most of these idle plants, and the 
mere policing of the structures had proved too great a problem for the 
impoverished city. A few of the empty buildings were still in private 
hands, but the majority had reverted to the town for unpaid taxes 
and so were municipally owned. There was an estimated 9,000,000 
square feet of floor space in these abandoned mills. 

The businessmen and bank officials of the community, with, the 
cooperation of the town council, organized to get tenants into these 
structures and so create payroll. Among the city's "assets" were an 
abundant municipally owned water supply, a now-idle deep-water 
harbor, an "open shop" labor sitiiation, and local job hunger, promis- 
ing low wage scales. The "liabilities" were the bad state of the build- 
ings, the cost of their repair, and tlie expense of moving. While the 
"drive" experienced many set-backs, it, nevertheless, gained results. 

The majority of the imported plants were New York sweatshops 
from the garment trades. Men's and women's clothing, work gar- 
ments, cotton small goods, underwear, shirts, curtains, silk and rayon 
apparel, and felt hats are manufactured by this group, known locally 
as the "needles." About 3,000,000 square feet of the abandoned 
mill space had been leased to these tenants by 1939. The "needles" 
ahd other imported industries had markedly reduced the relief rolls. 
Some of them, moreover, had grown with great rapidity. One gar- 
ment concern, having only about 200 employees to begin with, at the 
time of the study had 2,000. Another that was small upon arrival 
had 1,200 employees. There were several other instances of expan- 
sion, and none had departed or failed. 

Direct subsidy to induce concerns to leave other communities and 
come to Fall River was not the practice in this "drive." Neverthe- 
less, the immigrant concerns were, in effect, subsidized. In the city- 
owned structures rents were at times incredibly low. Space in 
privately owned empty mill structures was renting for 2 to 4 cents a 
square foot, as compared to a 25-cent standard in New York. One 
concern, when in New York, had occupied 20,000 square feet on two 
separate floors, for which it paid $10,000 annual rent. In Fall River 
it now was occupying 30,000 square feet on one floor and pacing 
$2,400 annual rent. At the time of the study, there was being 
discussed the offer of an enterprise to employ at least 100 local workers 
for 5 years, if it could move into a city-owned mill rent free, and then 
buy its mill space — 160,000 square feet — outright for $1. 

The Fall River banks generally accorded the newcomers favorable 
treatment. Although earnings were large and were plowed back into 
plant, working capital was being supplied locally. Certain enter- 
prisers of local origin engaged in similar lines; in fact, complained of 
favoritism. For example, one local "needle" operator declared he 
was unable to obtain working capital, although his "ratio" was fav- 
orable and he carried an average of $8,000 on deposit at a Fall River 
bank. 

Low rents and favorable credit relations w€(re but two of the differ- 
entials which constituted virtual subsidies. Free water and exemp- 



CONCENTRATION OF ECONOMIC POWER 



307 



tion from local taxation were in some cases also granted. A resident 
labor supply of ample proportions, industrious by long habit and ac- 
customed to machine tending, and eager for work at any price, was an 
additional factor of great importance in enabling the imported in- 
dustries to undersell competitors in the national market and to expand 
their own earnings. 

The new industries drive had put but little idle capital to work. 
But it did utilize some idle capital and, on the whole, profitably. The 
outstanding gain was that the Fall River garment concerns were better 
than their New York originals in space, light, sanitation, and general 
physical conditions. Most of them, in this respect, no longer deserved 
to be called sweatshops. It was obvious, however, that the existence 
of a low-cost competitive group within an industry composed mainly 
of small or medium-small concerns, would damage the credit rating of 
home-staying garment enterprises wherever they existed. 

In Fall River itself, while the new industries drive had reduced the 
relief rolls, the enforced contribution of resident labor to the new 
industry subsidy in the form of low wages was proving a major factor 
in depressing local small business. The employment of approxi- 
mately 9,000 workers in industries other than textile manufacturing 
had not helped the merchants of the city commensurately. The 
"needle" employees were very largely girls and women, hired as ap- 
prentices, kept at the $8 or $10 weekly apprentice wage for a period 
of legal apprenticeship, then discharged to make room for new ap- 
prentices. In the case of a potentially large rubber-processing plant 
lately brought to Fall River, and employing males, businessmen who 
had helped underwrite the moving expenses of the plant complained 
that the low wages paid were defeating the purpose of their contri- 
bution, which was "to bring payroll into town." A few merchants 
spoke hopefully of incipient imion attempts to elevate wage scales, 
and several suggested amendment of the Federal Wages and Hours 
Act to control the apprentice loophole. The prevailing hope, however, 
was that once the new industries became fully established, their wage 
scales, and hence the local consumer income, would rise and business 
then would benefit. 

That the low wage levels so far had largely frustrated the "drive" 
was shown by pay-roll statistics of the local chamber of commerce. 
In 1930 textile-mill pay rolls had been $14,831,953; "other" industrial 
pav rolls, $8,768,560. In 1938, aftef, 5 years of the drive, textile- 
mill pay rolls were $13,317,539 and other pay rolls, $9,892,303, a de- 
cline of $400,000 in total pay roll and a shift of only 3 percent toward 
the "other" group. Certain well-paid mechanical and water-front 
trades had gone out, and the "needles," with their much more num- 
erous employment but lower wage scales, had come in. 

Retail Business. 

In 1935 the Census of Business found that Fall River's 1,750 retail 
establishments took in $31,271,000, which compares with other Amer- 
ican cities of approximately equal population as follows: 



City 


Total retail 
snles, 1935 


Per- 
centage 


City 


Total retail 
sales, 193S 


Per- 
centage 


Fall River, Mas?, 


$31,271,000 
38,051,000 
42,668,000 
43,911,000 


100 
122 
136 
137 


Reading, Pa - 


$48,843,000 
49,464,000 
58. 403, 000 
75,326,000 


156 


Erie, Pa »._ 

Fort Wayne, Ind . 


Wichita, Kans.... -. 

Spoltane, Wash. » 


158 
187 


Eliiabeth.N J 


iJ;iAm\, Fill 


240 











308 CONCENTRATION OF ECONOMIC POWEH 

In the number of retail employees, Fall River's stores hired 4,182, 
against 4,639 for Elizabeth, 5,290 for Erie, 6,021 for Fort Wayne, 
6,353 for Reading, 6,644 for Wichita, 6,683 for Spokane, and 10,113 
for Miami. 

Fall River's central business district is disproportionately small for 
a community of this size. Except for one department store of local 
ownership and one branch of a Providence department store, the 
largest units are those of four national chains. , The bulk of the outlets 
are scattered through the neighborhood districts, and here, too, there 
are chain stores. The edge is somewhat taken off chain-store compe- 
tition by the Massachusetts law requiring a minimum 6-percent 
mark-up. 

In the food group, wholesale establishments were generally carrying 
the smaller "independent" outlets. Figures of the Fall River Grocers 
Association, covering 170 retail stores, showed an average business of 
$800 a week; inventory of $2,000; bills receivable from customers, 
$2,300; and indebtedness to supply house, $900. One wholesaler de- 
clared he could close up virtually any of his outlets at any time. 
Another was in process of bringing about a merger of outlets. Some 
chain-store managers, in order to deliver their quota of volume, 
were extending credit to customers at their own risk. This tended 
to remove the last competitive advantage of the independent grocery. 
The supermarket movement was growing. No opening for investment 
money appeared. Credit to the small grocers would be unsafe, due 
to the collection situation. 

In retail men's clothing five autlets disclosed $8,000 cash on hand; 
inventories of $150,000; receivables of $81,000; and payables of $190,- 
000. Included in the payables were various loans: $3,700 identified 
as bank loans, and $102,356 representing either loans from proprietors 
or loans from private and finance company sources. 

Women's apparel business was quite generally merged into the de- 
partment stores, and figures could not be segregated. 

In the sale of household supplies, including furniture, radios, etc., 
Fall River outranked most other towns of equal population. Here, 
because of the repossessable nature of the goods sold, and also because 
the credit buyer had created a legal form of lease, the discounting of 
receivables for cash to some extent entered the picture. Concerns 
doing an installment-credit business enjoyed relatively little aid from 
the banks and were considerably extended. Six concerns had total 
inventories of $114,000, receivables of $340,000, payables of $130,000. 
Of the payables, less than $10,000 was payable to banking concerns. 
The rest was owed mainly to the supply houses, which quite generally 
demanded cash far m advance of customer installment payments — one 
important national refrigerator concern through its finance company 
was reported as keeping watch on merchants' warehouses and demand- 
ing full cash as soon as an item was gone. A local finance company 
accepted installment receivables, but its resources for this purpose 
were limited. One retailer, with $35,000 receivables currently being 
discounted, considered this limited capacity of the financing company 
a limit upon his own business. Another had investigated and found 
that finance company discount rates would swallow up his profit 
margin, hence he did his best to finance himself and was perpetually 
pressed for cash. 

The lumber and building supply industry was small, and there was 
virtually no new building activity. A limited amount oi inoderniza- 



CONCENTRATION OF EOONOMIC POWER 



309 



tion work, requiring lumber, was federally Jfinanced. There was price 
competition between dealers, and a concern that had had more than 
one informal settlement with trade creditors was accused of price- 
slashing practices. 

A summary of 40 balance sheets, taken as a cross section of the 
various business groups, indicated the general position as fellows: 



Cash 



Inven- 
tory 



Receiv- 
ables 



Payables 



Bank 
loans' 



other 
loans 1 



Miscellaneous small manufacturing 

Food products.- 

Builders supply 

Household supply .- 

Retail clothing and shoes 

Services . 



$56, 263 
12, 968 
5,979 
25, 127 
8,125 
1,760 



$480, 000 
140, 000 
94, 000 
114,000 
150, 000 
1,020 



$300, 000 
150, 000 
106, 000 
340. 000 
81, 000 
26, 700 



$580, 000 
308, 000 
126, 000 
131,000 
190, 000 
47, 000 



$108, C^O 
1^.000 
2,200 
12, <,00 
3, 700 
4,400 



$60,299 
101, 882 

19, 375 

6,160 

102, 356 

32,875 



110, 222 



979, 020 



1, 003, 700 



1, 382, 000 



149, 200 



322, 937 



' Included in payables. 



The receivables of these 40 establishments were greater than their 
existing inventories, but their payables were more than their receiva- 
bles and cash together. The enterprises were in debt 42 percent more 
than the value of their inventories. These figures were typical of 
the general "frozen" condition, ai"ising from the practice of extending 
credit as a means of getting business, the low level of consumer 
ability to pay, and the tightness of bank credit. 

Banks and Bank Credits. 

In the above table, bank loans were less than 11 percent of the 
total payables of the 40 enterprises. The percentage probably is a 
fair indication of the extent to which the credit needs of the business 
community were not being fulfilled. 

The three commercial banks were found to maintain an extremely 
liquid position. Their combined reports showed total assets of about 
$20,000,000; cash, $4,750,000; United States Government bonds, 
$4,000,000; State and municipal bonds, $2,350,000; and other liquid 
securities, $1,750,000. Of this total of $12,800,000 in "liquids" 
there was $6,000,000 outstanding in total loans. Deposits were 
$18,000,000. The indicated unused credit capacity was ample to 
finance the town's business, ha(i the security been acceptable to the 
banks. 

In the fire of 1928, two banks were burned and their assets were 
merged into a third. This bank then had loans outstanding of 
$11,800,000. Conferences were called with the two other surviving 
banks, at which duplicate debtors were identified and th;eir debts 
consolidated and allocated to individual banks. Also, worthless 
security was written off. The latter bank reduced its loans from 
$11,800,000 to $1,500,000 in the years that followed. Some debtors 
of the period preceding the debt consolidation are still paying as little 
as 25 cents a week. Foreclosures have been avoided. But the 
policy of reducing the indebtedness of Fall River bank borrowers has 
prevailed over the policy of granting new loans. 

The attitude of two of the three local banks, as expressed to the 
staff representatives, was that the small businessman individually, 
rather than any underlying community conditions or compulsions, was 
to blame for restrictions upon credit. It was reiterated, both in 



310 CONCENTRATION OF ECONOMIC POWER 

general and as to concrete cases, that the local small businessmen 
were prevailingly incompetent in two major respects — in their over- 
eagerness to incur debt and in their propensity to expand whenever 
financial restrictions were relaxed. Credit applications were, there- 
fore, subjected to intense scrutiny, features of which were, at various 
times: Special audits at the applicant's expense by auditors desig- 
nated by the bank; contacting and at times direct interviewing of 
trade and other creditors; inquiry into the applicant's personal life, 
expenditures, and interests outside his business, as indicative of his 
character, personal debt position, and withdrawal policy; knowledge 
of family connections; historical record in abundant detail. Thus, a 
bank was about to extend credit to a man and his wife associated in 
business, when it came to light that a divorce complaint had been 
filed by one of them against the other in the past, and withdrawn. 
In spite of the evident reconciliation, the credit was denied. In 
another case, credit was granted to an enterprise which the bank 
regarded as somewhat precarious, but whose proprietor had a family 
connection which the bank regarded as protective. In a community 
of this size, such personal considerations were known and played an 
important part in the extension of credit. 

Rigid programs of managerial reform were at times set up as a 
condition precedent to credit extension. Small businessmen had been 
required to cut down space and display, reduce advertising, eliminate 
employees, restrict their living standards. Sales aggressiveness, 
expansion, and other risk taking were discouraged under this lending 
policy. One result of this policy was that losses on bank loans were 
practically negligible, but few loans were applied for and fewer made. 
On loans that were made, the terms were short, but renewals were 
not infrequently allowed, the prevailing total time allowance rarely 
exceeding 9 months. 

These banks did not appear to object to small businesses finding 
credit elsewhere. For example, they regarded it as normal that 
supply houses should be the main source of credit for small business, 
pointing out that central supply houses could go to centrally located 
banks and borrow against their receivables. By lending to the trade 
creditors the banks believed that they were properly carrying on the 
functions of commercial banking. Similarly, these bankers did not 
especially deprecate the growth of the loan-shark evil in Fall River, 
pointing out that individuals who loaned money to business at high 
rates were taking a commensurate risk. 

One bank had a more liberal policy. It was developing the personal 
loan business. It was also fostering F. H. A. loans through an adver- 
tising campaign. Some rival bankers criticized this campaign, as 
tending to make people incur debt and put money into homes instead 
of keeping themselves liquid. This bank had a larger proportion of 
loans and discounts outstanding than its more conservative com- 
petitors. In connection with its personal loans, it was giving some 
business aid of a retail character. Merchants were bringing to this 
bank individual indebted customers and signing their notes as 
comakers. By this means the merchant received his money, and the 
customer paid it in installments to the bank. Technically, the 
merchant as comaker was under obligation for the customer's full 
indebtedness in case of default, and the transaction, accordingly, 
should have been entered as a contingent liability on the merchant's 



CONCENTRATION OF ECONOMIC POWER 311 

books. However, this was not the usual accounting practice, these 
receivables being ordinarily accounted for as paid. That this type of 
relief was being utilized even by the larger stores was ample evidence 
of the straits to which small business was put to turn its customer 
receivables into cash. But the total of relief by this means was small. 
Although this bank went considerably further than its competitors in 
"trusting" the business community and the individual borrower, it 
reported that failures to repay were negligible. 

Nonbank Money Lending. 

In the $1,300,000 total of payables of the 40 concerns previously 
mentioned, 24 percent was listed as money loans from sources other 
than the banks. This indicates the result of the limited availabiUty 
of bank credit. Fall River had developed a private "loan-shark" 
activity of exceptional vigor. It had also seen the growth of a strong 
local finance company, with banking connections outside the town. 

This local finance company was one of a group of business corpora- 
tions maintaining separate legal entities, but under conmion owner- 
ship and control. These corporations were active in real estate, 
machine junking, and marine wrecking, ownership of factories, and the 
financing of machinery repairs, receivables, etc. They also included a 
"personal holding company." Thus one general financing contact 
with a business might have various ramifications, each a separate deal 
with a different corporation. As far as local business was concerned, 
this group of enterprises was reputed to be the outstanding source of 
equity capital and credit in the community. Its active head summar- 
ized the local situation to the staff representative by stating: "The 
banks are my best friends. They don't want to furnish money 
to small business; I do." 

It was well known in the business community that money was to be 
had from extra-bank sources if one would pay enough for it. The 
costs for [this type of loan, including holdbacks, interest, service 
charges, and fees exacted under color of payments for "business 
advice," were widely reported as being 35 percent on the money 
received. On the balance sheets of business concerns, nonbank 
payables were at times hsted as loans from "officials", or from 
"partners." In some cases these were genuine reinvestments by the 
original owners, but in others they referred to the acquisition of 
business equities by "loan sharks" as an alternative to foreclosure. 
Cases were reported from that of the businessman who said he had 
been told he could have $75,000 but it would cost him $100,000 plus 
interest to pay it back, to that of the man who said he had borrowed 
$30,000 by mortgaging his home, his business equipment and stock, 
some property owned privately, and assigning his own bank account 
and that of his child, and upon repayment had been met with a 
demand for an additional $3,000 as a "service charge." 

In a deal of a somewhat different type, a private party had bought 
a business equity under terms that stipulated the payment of regular 
interest on the investment, plus a fixed weekly withdrawal of $100 in 
summer and $75 in winter as a preferred payable of the enterprise. 
It was figured that this equity sale cost 22 percent annually on the 
amount of capital received, as a perpetual burden on the business. 



312 CONCENTRATION OF ECONOMIC POWER 

MIDDLE EASTERN AREA: SCRANTON AND WILKES-BARRE, PA. 

The Wyoming Valley of Pennsylvania, with a population of 652,512, 
includes the cities of Scranton, with a population of 143,433 "Wilkes- 
Barre, 86,626; Nanticoke, 26,043; Kingston, 21,600; Carbondale,. 
20,061; Pittston, 18,246; and more than 40 other incorporated 
boroughs. 

Anthracite coal has been and still is the major industrial product, 
the Wyoming Valley being one of the two principal anthracite areas 
in the United States. This industry, which includes 5 large and some 
140 small operators, employs approximately 60,000 persons locally. 
The serious decline in Pennsylvania anthracite production from 
92,653,641 tons in 1923 to 45,054 tons in 1938 was shared by this 
area with a drop of 44 .percent. Serious unemployment ensued, 
there being at the time of the study about 30,000 local unemployed 
in the Wilkes-Barre area alone. 

But the locality is not entirely dependent on antliracite; the 
largesTlace mills in the United States are located there, "and it is 
second only to Paterson, N. J., in silk manufacturing. There are 
also numerous plants devoted to food processing, and other small 
manuiacturing establishments of nearly every description. The 
■number of persons employed, outside of anthracite, was about 45,000" 
including 21,000 women. 

Regional efforts, vigorous and organized, were concentrated upon 
the development of diversified small manufacturing, it being recog- 
nized that the decline in anthracite was due to conditions beyond 
local control. But a dearth of local capital for investment and a 
shortage of bank credit had not only largely frustrated progress in 
this direction, but constituted the gravest problem for the existing 
small industries. The difficulty hinged upon the inherent limitations 
of the institutional sources of capital and credit. 

Under sucii conditions, the numerous small manufacturing enter- 
prises of the Wyoming Valley had developed an unusual variety of 
substitute forms of financing. But these did little more than permit 
enterprise to survive, constituting a problem in themselves. 

Some oj the Financing Devices Employed in the Community. 

Anthracite coal. — In general, the small anthracite concerns were 
found to lease their mining properties from one or another of the 
old-line companies, which own among themselves about 90 percent 
of the coal deposits. The lessees paid royalties, and were usually 
obligated to pay all taxes, as well as to maintain the properties. 

Some of the small anthracite concerns turned over all coal they 
mined to a large company, of which they were virtually the sub- 
sidiaries. Others had their own sales facilities or outlet contacts, of 
which there were 31 locally handling anthracite. Some had grown 
from small investments to sizable scope, others had remained small; 
some were marginal. There appeared to be no risk capital in sight 
anywhere for these independent operators. This had hampered their 
technological development. Similarly, the need of capital on the 
part of a local manufacturer of small mining machinery under a 
German patent, adapted to the independent operation, had been 
openly advertised but had gone unfilled, with the result that its term 
sales of such machinery were handicapped. 



OONCENTRATION OF EOONOMIO POWER 3 13 

The silk industry. — There were approximately 150 silk manufactur- 
ing concerns, in the region. The majority were small "throwsters," 
spinning or "throwing" the raw silk into yarn; the remainder were 
engaged in spinning silk and in weaving either the unfinished "greige" 
or "gray" goods or the finished product. The latter were largely 
connected with interests located at Paterson, N. J., and New York 

The throwsters, with certain exceptions, worked on a commission 
basis, to obviate the need of working capital for purchasing raw silk. 
That is, the manufacturers of hosiery and other knit silk goods, 
largely in other centers, purchased and continued to own the raw silk 
which the throwsters made into yarn. Other cash requirements of 
the throwsters were being covered, with considerable difficulty, 
through small bank loans secured by mortgage of buildings and 
machinery, and in some cases through cash advances from the con- 
cerns commissioning the work. As a result of this long-standing 
situation many throwsters had lacked sufficient capital to modernize, 
and were at a serious competitive disadvantage with silk throwsters 
located elsewhere. 

, Other throwsters, however, had obtained modern equipment 
through conditional sales agreements at comparatively high rates of 
interest, but the cost of machine purchases on time was serious in so 
competitive a business, where the difference of a small percentage in 
financing costs often meant the difference between profit and loss. 

Silk weaving had been* hard hit, both by the depression and by 
southern competition. Many mills in this region had closed, gone 
into bankruptcy, or moved to the South. Employment had been 
reduced from a former peak of 3,500 weavers to less than 2,000 at 
the time of the study. Wage differentials apparently accounted for 
less of this decline than the fact that the southern mills were equipped 
with automatic machinery enabling one man to tend 40 looms, whereas 
locally, by union agreement, one worker had tended 18 looms; although 
shortly before the study, in view of the competitive situation, the 
agreement had been relaxed to allow one worker to tend as many as 
24 looms. This incurred a certain danger of machinery breakdown 
and yardage loss, and it was apparent that this industry faces the 
necessity of either obtaining the new type of loom, or of further 
liquidations. The surviving companies, with a few possible excep- 
tions, lacked capital and credit for modernization. Such financial 
aid would, in the opinion of local leaders, readily en;able this long- 
established industry to meet competitive conditions more effectively. 

Sorne silk mills, like the throwsters, were doing their weaving on 
commission in order to eliminate the need of purchasing raw materials. 
Others obtained their raw silk from central New York dealers on trust 
certificates, by which aU title to the material, and to the goods in any 
stage of manufacture, remained vested in these central concerns. 
Under this plan, the weaver paid interest, insured the property ade- 
quately, and paid for the services of a custodian. The weaver made 
the sales, striving to reimburse himself for the interest, insurance, and 
custodian costs, as well as operating costs, from the proceeds of the 
sa^ee. 



314 CONCENTRATION OF ECONOMIC POWER 

Factoring in the ISilk Industry. 

In this industry, where factoring has long been entrenched, the 
accessibility to markets is largely in factoring hands and almost all 
weaving compfnies must sell through them. The factor guarantees 
the credit of the customer and assumes the full risk for those receiv- 
ables which he finds acceptable; he also replaces the accounting and 
collection system which the weaving concern otherwise must have. 
For performing these services the factor's commission is usually 2 
percent on sales, plus interest on moneys advanced to the business, 
less interest on' clients' surpluses. 

These charges, and the control of credit sales exercised by the factor, 
were described by some as "an unmitigated evil." The complaints 
were directed less against the factoring charges proper, than against 
the limitation of markets, -arbitrary selection of some credit risks and 
rejection of others, and control of credit terms, with consequent 
restriction of seles volume. Factoring was held responsible for the 
inability of some concerns to boost their sales above the byeak-even 
point. Also complained against were the auditing fees, accounting 
costs, and legal fees often paid by the manufacturers at the factors* 
behest, for supervision of the business. Undoubtedly, factoring had 
reduced credit risks and losses, but to the businessmen interviewed 
the fact that their business operations were restricted by being "in 
the hands" of the factors was a source of grievance. 

General manujaciuring: Field warehousing. — A credit device em- 
ployed by the small manufacturers was that of obtaining bank credit 
on security of warehouse receipts. The field warehousing plan 
amounts to the hypothecation of salable inventory. It seems to 
have originated to aid canners and others with highly seasonal opera- 
tions, and to have spread to other manufacturers under pressure of 
credit stringency. 

The actual cost of money raised by pledging warehouse receipis was 
found, in the case of the average small manufacturers, to be around 
12 to 14 percent. This included bank interest, at 6 to 8 percent, plus 
fixed charges; the latter including the cost of storage in a warehouse 
of the bank's selection, a fee for a designated custodian of the inven- 
tory with the duty of keeping account of all sales, insurance on the 
inventory, and premium on the bond which the bank ordinarily re- 
quired. While the interest charge was naturally reduced in pro- 
portion to the amount of the credit, the fixed charges were not, with 
the result that for the smallest loans the cost became excessive. 

An additional point of strain occurred when some portion of the 
hypothecated inventory was sold by the manufacturer on credit. 
This involved the question of whether the bank would accept the 
substitution of the purchaser's credit for that of the manufacturer, or 
whether the appropriate portion of the bank credit must be retired. 
Usually, the substitution was accepted with the added endorsement 
of the manufacturer on the equivalent of the "recourse" arrangement; 
but there were instances where this had not occurred and the manu- 
facturer found his inventory to that extent "frozen." 

As a typical instance of this method of financing, there may be 
cited the case of company X. This manufacturer and wholesaler of 
folding boxes and display cartons, with a history of flood losses and 
compromise with trade creditors, had at the time of the study $10,000 
in inventory, receivables of $5,600, trade acceptances of $1,800 and a 



CONCENTRATION OF EOONOMIO POWER 315 

small amount of cash. Against its inventory was a bank loan of 
$4,850 at 6 percent, and it had other payables of $5,650. The ware- 
housing costs were at the rate of $300 annually, or more than the 
amount of the interest. The total loan cost of more than 12 percent 
was an important item to a concern with $100,000 annual volume of 
sales. 

A somewhat different case is that of the L Furniture Co. This 
company manufactures and sells mattresses and upholstered furniture 
to department stores and other retaUers. Its total assets were 
$95,000, of which $60,000 represented real estate and plant. Its 
accounts receivable amounted to only $2,500 and its inventory was 
carried at $10,000. Of the company's liabilities, $23,000 were in 
bank loans, which were secured by a mortgage on real estate and the 
pledge of life insurance policies. Sales and collections were good and 
the company's paper found a ready market with finance companies. 
However, the concern could have added 50 percent to its volume of 
business and, since overhead would have remained relatively sta- 
tionary, increased profits more than proportionately, of adequate 
capital could have been obtained. The company tried various ways 
to raise money. It found that it could not borrow from the banks 
without additional collateral, and that it could only resort to borrow- 
ing on inventory through the medium of warehouse receipts. Since 
this would mean paying between 12 and 14 percent for its money, the 
company declined to obtain funds in this way. 

The banks. — The volume of commercial loans at the local banks 
was comparatively large although the average individual line of 
credit was not great. ^ AH of these loans were secured either by pledge 
of collateral or by endorsement. In one bank there were approxi- 
mately $400,000 in commercial loans outstanding. Of these, a little 
less than half were secured by endorsement and for the remainder the 
collateral was life-insurance policies. The "going" rate of interest 
was 6 percent. But in the majority of cases the interest rate was 
reduced for large borrowers because they were able to go to New 
York, if necessary, to obtain a lower rate. In only one instance 
was the lower rate extended to a small borrower by the banks charging 
6 percent. One bank in Scranton, however, worked on a straight 5- 
percent basis,, extending this rate to all borrowers, and making no 
reductions even in the case of large loans. An official of this bank 
stated that since the lower rate was put into effect the bank's com- 
mercial loans increased considerably. Outside of the bank, on the 
other hand, the opinion was that the advantage of the lower interest 
rate was offset by the fact that the bank took only the "cream of the 
business." All bank loans, excepting mortgages on real estate, were 
for short periods. Only two instances were found where, with the 
permission of the F. D. I. C, loans other than on real estate were made 
for a term of 3 years or more. Both these loans were made by a bank 
in Wilkes-Barre, one of them being extended to a new hosiery 
company, which was induced to come to Wilkes-Barre by the chamber 
of commerce. The bank loaned this company $40,000 to be paid 
off over a period of 3 years, the loan being secured by a pledge of the 
company's machinery. In this case, however, the risk element was 
practically negligible, because the local hosiery company sold its 

' Cf. the Survey of Credit and Capital Requirements Among Small and Medium-Sized Business Estab- 
lishments, p. 35, issued by the Department of Research and Statistics of the Federal Reserve Bank of 
Philadelphia. 



31g CONCENTRATION OF ECONOMIC P(J)WE>R 

entire output to a large Philadelphia company which fully guaranteed 
the loan. 

Except in, rare cases the banks did not discount accounts receivable, 
and they did not encourage the discounting of trade acceptances. 
Exceptions were made in the case of old accounts or when enterprises 
were already heavily indebted to the bank, in which instances the 
banks appeared to discount not only acceptances but also ©rdinary 
receivables. 

A case in point is that of the M Company. This concern is located 
in Scranton and is engaged in the manufacture and sale of wooden 
caskets, store fixtures, and church furniture, among other things. 
The enterprise has been operating at a loss for some time and its 
stock was deposited under a voting trust agreement. Recently the 
trustees effected a change in management. The company had quick 
assets of $244,000, of which $117,000 represented merchandise, $89,000 
accounts receivable and $36,000 notes receivable. Against its fixed 
assets of $301,000 there was outstanding a real-estate mortgage 
amounting to $138,000, of which $120,000 represented the share of 
the bank in question. Additional security for this loan in the form 
of hfe-insurance policies having a cash surrender value of $30,000 and 
a face value of $100,000 was pledged. The receivables of this com- 
pany were not of the best kind, but the bank nevertheless discounted 
approximately $50,000 of the concern's accounts and notes receivable 
for the sole purpose of keeping it in operation. 

Community Attempts at Capital Relief. 

Two community endeavors to relieve the capital and credit strin- 
gency had been made by the Scranton Investment Development 
Co. and the Wyoming Valley Development Fund. 

The former was originally set up by the Chamber of Commerce for 
the purpose of establishing new industries in Scranton. Losses had 
been sustained, and at the time of the study the fund, reduced in size, 
was utilized only for the making of small loans without formal security 
to business operators well known to the Chamber of Commerce. Loans 
as high as $5,000 had been made and in a number of instances such 
loans had tided the concerns over difficult periods. While this fund 
turned over steadily and was a local convenience, its operations were 
not sufficiently widespread to be of general assistance to small business 
enterprises throughout the community. 

The Wyoming Valley Development Fund, with resoiu"ces of $80,000, 
was raised from local businessmen for the purpose of reducing un- 
employment. Eight new establishments, some imported and some 
of local origin; the reopening of three enterprises that had been closed; 
and current negotiations with approximately 35 possible "immigrant" 
concerns from other sections, summed up its achievement at the time 
of the field study. 

The experience of the managers of this fund showed that there was 
a pressing need on the part of the small enterprises for working capital. 
The constant problem faced was that of the development or redevel- 
opment of business for new employment purposes; and the constant 
obstacle encountered was the limitation on the supply of short-term 
credit. There was also present an even greater need for medium-term 
credits. 

A specific instance in which the Chamber of Commerce became inter- 
ested, and in which the Wyoming Development Co. participated 



CONCENTRATION OF ECONOMIC POWER 317 

was that of Mr. R. This man operates a small garage and motor 
parts business. He carries a small supply of fixtures and his receiva- 
bles are small. Purchases are made for cash and his liabilities are not 
heavy. Within the past 4 years, Mr. R. has invented and patented 
a device for reshaping worn pistons. By his process, worn pistons 
are expanded by the application of heat and then reground to form 
a perfect fit. It is claimed that his process does not alter the com- 
position of the metal. A small bank loan enabled Mr. R. to obtain 
his patent and to build a couple of machines. He has been able to 
operate in Scranton with considerable success and does approximately 
80 percent of all the piston work in the city. A loan of $1,500 from 
the Wyoming Development Co. enabled him to retire his bank 
loan and to. build several additional machines. Despite this a.id, 
however, his resources were wholly inadequate for his purposes, and 
there appeared to be no other agency from which he could obtain the 
capital which he needed to expand his business in accordance with 
current requirements. 

Testifying before the Temporary National Economic Committee, 
Mr. T. N. B. Hicks, Jr., manager of the Wyoming Development Fund, 
stated : ^ 

I don't know where you can get a mortgage on an industrial building today 
* * * if it is a case of a new building for a new industry or an addition to a 
building for an expanding industry, or an industrial project * * * that needs 
to purchase or remodel * * *, a mortgage is practically out of the question. 
I don't know where to go for one and I've made repeated efforts * * *. 

The second major difficulty * * * involvts the financing of machinery and 
equipment in cases of plants which' wish to expand * * * and in cases of 
new industrial enterprises. The only method whereby a small business house 
today can finance new machinery or equipment is on a lease purchase plan for 
the manufacturer of equipment. That involves an added cost of machinery 
which ranges in some cases to only 10 percent, in other cases 25 to 30 percent. 
It seems the small industry * * * jg simply saddling itself witn a fixed 
charge * * * which tends to throw it out of competition. 

Mr. Nehemkis. "What is the third major problem?" 

That is the problem of getting needed working capital, particularly in a business 
that is growing and expanding. A small business, one that has started small 
and has grown right along, has in practically every case found it necessary to 
piit all its available funds into the type of assets that are commonly termed slow 
or frozen assets. They go into real estate and they go into machinery'; they go 
into supplies and certain types of inventorv which are difficult to develop for 
collateral purposes. 

When they reach the stage that they need more working capital for current 
operations, they either are unable to get it at all or they must get it by various 
methods which represent an excessive cost * * *_ 

Capital jor New Enterprise. 

In his narration of cases where the fund had assisted in making 
needed adjustments, Mr. Hicks referred to the importance of capital 
for new ventures : * 

I won't say it is not obtainable, because there have been some cases where we 
have been able to work it out, but t^ere have been so manj' cases where we have 
not been able to work it out that I think the answer is that it is difficult to obtain 
in all cases, and impossible in a great many of them. 

Referring to the need of working capital for expansion, he com- 
mented: 

It is simply the type of loan for which there is now no existing machinery. It 
falls into the territory which lies between that of the commercial banks and that 

3 Hearings Before the Temporary National Economic Coir.mittee. Fart IX, pp. 3948-3949. 593-6CO. 
< Idem, p. 3949. 

262652 — il — No. 17 -22 



318 CONCENTRATION OF ECONOMIC POWER 

of the investment banker, either as to the nature of it or as to the size of the 
loan. I am not now speaking of the highly speculative ventures, but those that 
are sound. 

GREAT LAKES AREA: DETROIT, MICH. 

Detroit, of all the regions included in the field study, was the area of 
greatest industrial magnitude. According to the Census of Manu- 
factures for 1937, the motor-vehicle industry alone, consisting of 13 
corporations of major size, accounted for an output valued at $747,- 
000,000 and for an average employment of 63,000. In addition, motor- 
vehicle bodies and parts concerns, consisting of 63 companies with 
58,000 employees, turned out a product valued at $446,000,000. Even 
without the automotive industry, however, Detroit would be industri- 
ally important as a center for the manufacture of machine tools; 
stamped and pressed metal products; non-ferrous-metal alloys and 
their products; paints, pigments, and varnishes; wire working; many 
other types of products. In 1937, there were more than 2,000 
manufacturing establishments in Detroit with an annual output valued 
at $5,000 or more. These enterprises employed more than 235,000 
wage earners throughout the year and produced goods valued in 
excess of $2,000,000,000. 

Detroit is preponderantly a big-business community. But Detroit 
also has a great many small-business enterprises in manufacturing, to 
say nothing of the small local trade concerns. While these tend 
inevitably to be subordinated in the general picture of bigness, they 
are of considerable importance numerically and because small busi- 
ness in Detroit^ in recent years, has encountered extraordinary 
financial difficulties. 

Study of the Detroit area, it was believed, would throw light on the 
general question of how the small enterprise, especially the inde- 
pendent, personal types of business, fares in the shadow of some of 
the greatest industrial corporations in the Nation. Large pools of 
capital and credit obviously being present, the availability of capital 
and credit to small business under these environmental conditions 
emerged as a central question. 

Equity and Venture Cajyital. 

Equity capital for individual small enterprise was, so far as could be 
determined, not available. In respect to venture capital for new 
enterprises, the situation was acute, due to peculiar local conditions. 
Of all American cities, Detroit has probably the greatest number of 
inventors, with patents on file and blueprints ready for development, 
These inventors appear to have beeti attracted to Detroit by its fame 
as a mechanical center. Many of them have worked in automobile, 
chemical or other plants and having perceived the need of some 
particular device, they have proceeded to develop it indepejidently. 
Others have come here to market inventions made elsewhere. 

Yet it would be hard to find an area where venture capital to back 
such inventions is more scarce. Two typical cases may be mentioned. 
In one, the invention was a superior lining for stoves. The inventor 
of this product wanted to retain His proprietorship; but unable to find 
capital, he had, finally and reluctantly, sold out on a royalty basis to a 
large stove concern. The other case was that of an invention for 
applying electricity to the drying of concrete, thus controlling the 
process. In this case, $200 was raised from individuals for a demon- 
stration, and when it was shown that concrete bricks dried by this 



CONCENTRATION OF ECONOMIC POWER 3 19 

process had superior tensile strength, a small compaiiy was organized 
The company, however, was unable to raise the needed capital in 
Detroit. It finally interested a Canadian concern, and a contract was 
worked out which gave the company the benefit of any improvements 
the Canadian company might make, plus a royalty on all sales made 
in Canada, 

Inventors of automotive devices either have to sell out to existing 
automobile companies, which many hesitate to do, or see their inven- 
tions remain undeveloped. This situation has been regarded so 
seriously bj'^ the Detroit Board of Commerce that a committee was 
formed to consider the possibility of leasing a vacant plant, installing 
a hundred inventors, raising a fund to finance them through the 
initial developmental stages and, in the meantime, training them in 
somid accounting and managerial methods. It was argued in behalf 
of this proposal that if only a small minority of the inventions so 
financed proved successful, the capital would be profitably invested, at 
the same time that local employment would be aided and national 
progress fostered. At the time of the field study, this plan had not 
yet been translated into practice. 

The availability of equity capital for the expansion of established 
small industries appeared to be equally lacking in Detroit. Local 
sources had been repeatedly canvassed by small businessmen in need 
of such capital but without success. In one case, a radio-control 
device for opening garage doors and turning on lights from a car's 
dashboard had become fairly well established locally, and mfiny of 
the wealtliier citizens had installed it, but equity capital could not be 
obtained for its extension into other markets. In other instances, 
small enterprises had attempted! local security flotation, but without 
success. 

The Credit Situation. 

Detroit has six principal banks. The combined resources of these 
banks alone, it was generally believed, could finance the entire business 
needs of Detroit. These banks, at the end of 1938, had combined 
deposits of $745,489,000. Total cash was $242,052,000; Government 
securities, $342,862,000; and commercial loans and discounts were 
$134,398,000. The latter figure included an unknown amount of 
credits to intermediary financing concerns. Certain of these banks 
are commonly regarded as having close relations with specific auto- 
mobile interests. 

Despite the large resources of the Detroit banks, small businessmen 
find credit accommodations very difficult to obtain. Specific expla- 
nations for this credit stringency were advanced by individual bank- 
ers. Among the explanations advanced were the severity of Federal 
bank inspections; the uncertainty of the operation and standards of 
Federal agencies; the imcreditworthiness of the majority of small 
business applicants; the absence of sound management qualities of a 
preponderance of the small business group; and a general "lack of 
confidence" in business conditions. Among small businessmen, two 
other explanations prevailed. One was that the troubles of the 
Detroit banks in the depression had led to an almost psychopathic 
avoidance of even normal risk, the leading personnel of most banks 
having changed but little since that grim experience. But more 
often expressed was the opinion that these were "big business banks" 



320 CONCENTRATION OF ECONOMIC POWEE. 

and could not be expected to show much sympathy with or under- 
standing of small enterprise. 

In Detroit it would appear that the banks had largely abandoned 
to the accounts finance companies the financing of antomobile and 
other customer paper and were in some cases recommending to small 
business applicants that they seek credit from the finance companies 
rather than from the banks themselves. This limited bank credit 
almost exclusively to the seasoned business concerns of intermediate 
and large size. At the same time, bankers complained that they were 
not making enough money, and banks were imposing service charges 
in order to increase their income. 

Automotive parts, pattern, and specialty concerns occupy an im- 
portant place in the Detroit manufacturing scene. These smaller 
concerns either sell their products to the larger ones or not at all. 
The independence of the small-parts concerns virtually exists in 
name only; in economic reality they are but contributing adjuncts 
to the great assembly plants, so- much so as to raise the question as 
to why they have not been actually integrated. It appears that 
their "independence" has been preserved, because it has been more 
economical for the large automobile companies not to integrate them. 
The parts industry is one of seasonal operations and annual altera- 
tions. If integrated, the parts units accordingly would present an 
administrative problem to the assembling organizations. Further, 
by keeping alive a considerable fringe of "independent" parts makers 
in competition against each other, the central plants obtain their 
output quite as cheaply as though they owned them. 

Some of these "independents," upon- receiving orders for parts 
from the big automobile companies, were able, it was found, to dis- 
count their orders for cash with which to manufacture their product. 
In some cases, such cash was obtainable from a local bank; but a 
more frequent arrangement was for commercial finance companies 
to "buy" this paper, the financing charges largely eating up the 
profits of each order in advance. The following is a more or less 
typical case: A small concern making a patent brake had received a 
mu3h-needed order for brakes from a truck-assembling company, 
which, in turn, had received a Government order for trucks. The 
brake manufacturer lacked cash to produce the brakes. Its attempts 
to raise money on the $7,000 order it had received were rejected by 
all Detroit banks on the ground that the Federal order to the original 
concern had the usual "escape clause," and because the small brake 
concern's financial position was weak. The manufacturer finally 
paid a finance company an initial fee of $125, received $5,250 in 
cash, paid 2 percent monthly interest on the $7,000, agreed to endorse 
and turn over to the finance company all checks received during the 
period of the transaction, and further agreed to assign all other out- 
standing accounts as security, with recourse in cash or in equivalent 
accounts if not paid up within 30 days. The concern was enabled 
to make the brakes, but what had seemed a profitable order became 
unprofitable because of the high costs of the finance company ad- 
vance. ^ 

A concern making dies for body manufacturers was in the fortunate 
position of not being affected by the cychcal fluctuations in automo- 

» Under Michigan iisury laws, the charges of finance companies may nm as high as 30 percent in interest, 
service charges, and bonding fees. Chicago and Cleveland finance conipanles have their agents in Detroit, 
getting business on commission. These companies enjoy heavy profits from the local parts concerns. 



CONCENTRATION OF ECONOMIC POWER 32I 

bile production, as are most of the parts concerns, since the number 
of dies required is about the same whether the production is small or 
large. Its business, however, was seasonal, and its problem was to 
maintain plant from February to October and to finance peak pro- 
duction thereafter. Its manageriaLpolicy was to distribute its reserve 
in order to avoid taxation; then to finance the peak by borrowing. 
In so doing, it had found that no Detroit bank would advance money 
on its accounts receivable from either the Fisher, Nash, Hudson, or 
the General Motors units. One leading bank, according to the man- 
ager of this concern, had required that he show a 4-to-l ratio in order 
to obtain a loan; but this was denied by the credit manager of the 
bank. 

At the time of the study, this concern's receivables were being dis- 
counted or "purchased" by a finance company, which held a 20-per- 
cent reserve against " uncollectibles" despite the well-known names 
of the automobile companies involved. The assignment of accounts 
was confidential, but all checks had to be endorsed and turned over 
to the finance company. The interest rate, charged against the fuU 
amount, was 6 percent, computed iftonthly. In discussing the situa- 
tion ,„ the manager of this concern evidenced no complaint at these 
terms; in fact, he considered them favorable as things went in Detroit. 
He expressed the view, however, that signed orders, from concerns 
obviously sound and with national reputations, should be accepted 
for discounting as readily as actual receivables for orders filled. Re- 
quiring capital for plant modernization, he had considered applying 
to a large body concern for the investment, but had refrained in order 
to avoid the risk of becoming a virtual subsidiary of the latter. 

Summary of 67 Case Studies. 

Included in the Detroit study was a group of 67 business concerns. 
These included enterprises ranging from $9,000 to $1,000,000 in total 
assets, and averaging $46,000 in total assets. They had been in ex- 
istence from 1 to 30 years. Two proprietors reported that they had 
recently filed bankruptcy proceedings. Of these 67 concerns, the pro- 
prietors or other officials of 55 stated that their business operations 
would be facilitated if a Federal Credit institution were established 
and that they would utilize such an institution. 

In 48 cases the need of additional equity capital, working capital, 
or credit was reported as being urgent. The amount of equity capital 
required was stated to be $775,200. The combined credit need of the 
48 companies was $586,000, for periods ranging from 3 to 9 months, 
according to the cycles of their respective operations. The average 
equity capital required was $16,100, and the average credit need was 
$12,200. Operating ecoriomies of 2 to 5 percent on present operating 
costs were estimated if the equity capital could be obtained. Savings 
in interest costs of 4 to 15 percent were estimated if the credit need 
could be fulfilled and existing debts refinanced at maximum bank 
rates. Forty-seven of the 48 concerns showed total cash of $244,232, 
total receivables of $758,168, total payables of $923,623, and total 
loans of $221,992 (in addition to one Reconstruction Finance Corpo- 
ration loan in the amount of $250,000). 

Of the 48, 37 had been denied bank credit at one time or another, 
either quite recently or within the past few years; 14 had received 
some bank credit, though the amounts and the time arrangements 
were in many cases declared to be lmsatisfactor3^ Twenty of these 37 



322 CONCENTRATION OF ECONOMIC POWER 

concerns were being partly financed by finance companies. They were 
paying from 13 to 24 percent annually for this type of accommodation. 

Some Specific Cases. 

Among the case studies of small Detroit enterprises, the following 
are selected as illustrative of various conditions recurrently found: 

A long-established concern manufacturing special fabric and towels 
for industrial cleaning and polishing purposes had enlarged its opera- 
tion in 1937 by adding a rental and dry-cleaning service for such fab- 
rics. With total assets of $142,000 at the time of the study, 70 em- 
ployees, and a good record of profits, the company found that its 
inability to take advantage of trade discounts alone was costing it 
$200 a month and that its expansion required the employment of 7 
additional men. Its line of bank credit had, however, been reduced 
within the last 3 years on the ground that its assets were not sufficiently 
liquid. A $6,000 credit line of long standing having been retired, the 
bank, when asked for a $5,000 credit line, had requested receivables as 
security, a plant mortgage, and a $5,000 personal note from the proprie- 
tor. This being declined, the bank recommended applying to a 
finance company. This was done; The finance company required a 
$60 bond or service fee, and made a 1-percent monthly service plus 
6 percent annual interest charge. This was 18 percent annually on 
the money received by the business. The basic need of this concern 
was $15,000 to $20,000 working capital on a medium-term basis which 
the saving in discounts alone would appear capable of retiring.^ 

An industrial engineer, impressed with the value of an automobile 
accessory, bought the patent for $30,000, and, with $40,000 supplied 
by a partner, set up a small plant. Sales and profits proved good, and 
despite a set-back due to local strike conditions, at the end of the 
second year the business was able to show a 10-to-l current ratio. 
Sales expansion being required, additional capital was sought. A 
wealthy Canadian backer was found who consented to endorse the 
proprietor's note in the amount of $60,000. While satisfied with the 
sufficiency of the endorsement, no Detroit bank would grant anything 
but a short-term loan. The deal accordingly fell through. 

A long-established construction firm, specializing in the building of 
additions to factories, had experienced an almost total lack of such 
business for some time. Pending a business revival, income from leases 
of owned factory property was maintaining this firm in skeleton form. 
In an effort to enlarge this income by providing quarters for a new 
tenant, the firm had tried to mortgage for $10,000 a structure ap- 
praised at $75,000. Its bank had refused to take the mortgage, staging 
that it did not desire to hold security that would tie up its funds, oa- be 
taxable. The bank had, however, offered to lend $10,000 without 
tangible security, merely on the personal note of the head of this firm. 

A sand and gravel company in a suburb had the opportunity to buy a 
fleet of trucks at the "distress" price of $18,500, Three Detroit banks 
declined to finance the transaction, though mortgage security as well 
as receivables of public agencies were offered. In the end, a small 
suburban bank advanced the sum on a note at 6 percent; the trucks 
were bought, and the note was retired within 1 year. 

A long-established barrel-manufacturing concern, after passing 
through the depression, was forced to go tljrough a settlement with 

« See hearings before the Temporary National Economic Committee, Part IX, pp. 3883-3890: Testimony 
of Norman E. Gallagher. 



CONCENTRATION OF EOONOMIC POWER 323 

creditors in 1935. Thereafter, it found bank credit for working capital 
unavailable. This was an extremely serious condition, since a barrel 
must be 65 percent paid for in cash by the time the staves reach the 
factory, whereas the proceeds from sales do not come for some time 
thereafter. The closing of two distilleries, which were steady cus- 
tomers, precipitated a further emergency. An enterprising plant 
manager, however, saw the opportunity to convert the business to the 
cleaning and renovating of used barrels and gradually shifted the plant's 
operation to this work. This change had apparently saved the day. 
No other plant in Detroit was renovating old barrels, and there was a 
demand for this service. Capital was sought to expand this operation, 
since orders were being rejected for want of resources; but no capital 
could be obtained. For each $1,000 in added renovating equipment, it 
was stated, 10 new men could be employed, this operation being 40 
percent hand work. Further, a survey of the demand had indicated 
that an expansion from the 25 employees presently employed, to 250 
employees, might be justified. The concern was cuiTently obtaining 
some warking capital from a finance company, which discounted its 
receivables on a 75-percent basis at 1 percent a month. 

A small plumbing supply concern which had formerly been engaged 
in sizable operations, had been forced into bankruptcy in 1931. Since 
then, it had got along with little or no credit, banks having consistently 
refused loans because of the 1931 experience. Of late, an arrange- 
ment had been effected under which all its receivables were regularly 
assigned to a Detroit bank, the bank having given the head of the 
concern its power of attorney to collect such receivables. Under this 
arrangement (a variation of the "nonnotification" practice) if the 
bank were holding, say, $6,000 in receivables, the enterprise could 
draw about $1,000 for 30 days. Thus it was enabled to obtain a 
trickle of working capital. But recently a good-sized purchase of 
inventory at a 60-percent "distress" price had had to be abandoned 
because it could not be financed. 

A potato-chip and shoestring-potato-canning manufacturer, starting 
from small beginnings, had experienced a 25-percent annual increase 
in business in each of the past 5 years; sales had reached $400,000 
annually.^ Since the potatoes and the cans had to be paid for in cash, 
working capital was perpetually short. In 2 months prior to the time 
of the study, $10,000 in prospective business had been turned down. 
The need was for $25,000 as mediym-term working capital and 
$15,000 as permanent equity capital. This, it had been calculated, 
would effect 4-percent to 5-percent savings in total costs of production 
annually, and enable volume to be increased. Detroit's banks had 
refused the required aid on a number of occasions, the sole reason 
cited being their policy of granting only short-term credits. 

A concern manufacturing insulation for residences, organized in 
1930, had experienced both profits and expansion, but was unable to 
obtain necessary funds from either a bank, a factor, two credit com;? 
panics, or the R. F. C, for the reason that residential construction 
itself is paid for on a long-term basis. A finance company, however, 
was extending some accommodation on the basis of receivables, 
charging for its services approximately 24 percent per annum .^ 

' See hearings before the Temporary National Economic Committee, Part IX, pp. 3909-3913: testimony of 
Ernest.L. Nicolay, 
« Idem: Testimony of Edward J. Trinklein, pp. 3916-3922. 



324 CONCENTRATION OP EOONOMIC. POWEJR 

A concern manufacturing floor polish was caught with excessive 
inventories in 1937. Three banks had decHned eid, and finance 
companies were resorted to ; their high charges precipitated a situation 
where the Association of Credit Men took over the concern in behalf 
of certain creditors. A bank loan of $15,000 was then obtained by 
pledging $35,000 in receivables and subordinating the claims of 
certain creditors. 

The representative of both this concern and the creditors' committee 
testified before the T. N. E. C.^ that he personally knew of at least 25 
Detroit companies in urgent need of credit and capital, with forced 
liquidation threatening if such aid was not forthcoming. In 1938, 
this witness testified, 35 liquidations were handled; in the first 2 
months of 1939, 12 liquidations. "If financial assistance could have 
been obtained at a reasonably early period of time, a number of these 
businesses could have been saved." 

MIDDLE WESTERN AREA: OMAHA, NEBR. 

The basic source of consumer and business income in Omaha is 
agriculture. More than 80 percent of the population of the State 
resides outside of its two major cities. Of Nebraska's 1,400,000 
people, Omaha has about 200,000 and Lincoln, the only other city of 
size, has 75,000. The farm population in 1930 was close to 600,000, 
occupying nearly 135,000 farms of 48,000,000 total acreage. 

The Union Pacific Railroad, the meat packing industry, and manu- 
facturing arising from agriculture, are important employers of labor 
within the city. At the time of the study, railroad operations were 
low as compared with predepression years and therefore the railroad 
was not contributing as formerly to the community. Nebraska 
livestock received by the packing plants was running 80 percent 
below the usual amount. Underlying both these cotiditions was the 
fact that 5 years of drought had created an estimated loss in the farm 
purchasing power of the State of $100,000,000 per annum. These 
conditions had exerted a marked effect upon the total volume of 
business. 

The observations of one local businessman, the head of an electrical 
firm, serve to describe the situation. He observed that 'the farmer's 
order, which a few years ago would have called for an electrical instal- 
lation amounting to $120, was now pared to a $40 installation; and 
that if his concern had done all the new installation work available in 
the city during the past year, it still would have operated on a part- 
time schedule. In general, the enterprises closely dependent on local 
consimier income were in a difficult position. 

Manufacturing in Omaha. 

Various forms of the processing of agricultural and livestock prod- 
ucts are represented in the manufacturing field in Omaha, but 43 out 
of a total of 1,154 manufacturing firms of every class accounted for 
about two-thirds of all employment in manufacturing. These firms 
employed approximately 8,500 out of a total of 12,500 factory workers. 
The number of plants, however, was being reduced, partly because 
the city is at a marked disadvantage with respect to freight rates. 
The case of a local cough-drop company, with a national market and 
more than 100 employees, which had moved to Chicago a few months 

» Idem: Testimony of Louis F. Davis, pp. 3965-3971. 



CONCENTRATION OF ECONOMIC POWER 325 

before the inquiry, was cited repeatedly as an instance of this fact. 
This concern had moved its plant because it was cheaper to haul beet 
sugar from the western Nebraska beet fields all the way to Chicago 
on the through rate, than to deliver the beets at Omaha itself, neariy 
500 miles nearer the point of production. 

The Cash Basis in Enterprise. 

Considering the depressed economic circumstances, a large part of 
small and intermediate business was found to be remarkably sound 
financially. This was explained by the fact that a very large per- 
centage of existing concerns, both in manufacturing and in wholesale 
and retail trade, were long-standing establishments which had been 
conducted on policies marked by caution and conservatism. Con- 
cerns not so managed had tended to be shaken out in the past. The 
ability of conservative management to weather an emergency was 
being emphatically demonstrated in this community. 

As a general practice, inventories had been held low, credit was 
conservatively extended or requested, and maximum liquidity was 
being maintained. Many firms invariably paid cash; trade debts 
were rigidly held down; and the ratio of both receivables and payables 
to volume of sales was markedly low. It is not too much to say that 
ordinary credit practices, especially in the relatively important lines 
of groceries and hardware, were to a large degree absent from the 
dealings between consumers and retailers and between retailers and 
wholesalers. 

Jobbers and wholesalers were found to be making their collections 
from retailers weekly or semiweekly. In serving rural areas, Omaha's 
jobbers, making deliveries on Mondays and Thursdays, were collecting 
for each bill of goods on the succeeding trip. Similarly, wholesale and 
jobbing inventories were maintained at low volum