Mr. BUNTING. Unless we revise our contribution to the Federal Government and reduce our income taxes on the individual, there will not be money available to do this job.

The CHAIRMAN. That may be so, but I do not see any proof of it. Mr. BUNTING. Perhaps Dr. Robey may be able to shed some additional light on the subject.

The CHAIRMAN. I will be glad to have him do so.

STATEMENT OF DR. RALPH W. ROBEY, CHIEF ECONOMIST, NATIONAL ASSOCIATION OF MANUFACTURERS, WASHINGTON, D. C.

Dr. ROBEY. Mr. Chairman, what we did was take the amount of capital which we think we need in the coming year, based on the present gross national product and the historical percentage.

The CHAIRMAN. Between $40,000,000,000 and $50,000,000,000 a year, which you show on the other chart?

Dr. ROBEY. Yes. We add together how much we have in the way of business reserves, how much we can anticipate from the excess of Government tax collections over what it spends for goods and services, how much can we get from retained corporation earnings and finally, what will be available as individual savings under the present tax law. Add those together and subtract the total from the estimated amount of needed capital formation, and we get that much difference there.

So, what this amounts to is: How much do we see in sight in the way of savings out of which that capital formation must come, and we find there is this deficiency on the part of savings to provide the necessary capital formation.

Now this venture savings figure involves one complication. On the basis of two studies made by the Bureau of Labor Statistics of the spending and saving habits of the American people at different income groups, it is found that most venture capital comes from those with incomes above $10,000. That means if we are to have the type of venture capital that goes into business, there has to be a sufficient reduction of income tax to permit the larger volume of savings. Otherwise, we will not get the capital formation. In fact, there are only two major sources of venture savings. One is retained earnings of business. The other is savings from the incomes largely above $10,000.

When we compare that with what is needed we get this great deficiency.

The great hump in 1950 and 1951 is because the liquid assets of business which were accumulated during the war will be exhausted. Last year business pulled down its liquid assets by $9,000,000,000. We assume they will continue to pull them down at approximately that rate. As Mr. Bunting has said, they have left approximately $30,000,000,000. When that $30,000,000,000 is gone-that source of venture capital is gone-and if business is going to continue to expand, it must get it from certain areas of individual income.

The CHAIRMAN. It occurs to me strange all the new capital going into housing comes from people with incomes under $10,000. That would be one exception to your general statement?

Dr. ROBEY. We do not consider that as venture capital, unless the building is for business purposes.

The CHAIRMAN. You would have to include all housing?

Dr. ROBEY. In the total capital formation; yes.

The CHAIRMAN. What do you figure? I do not quite see why it is not venture capital, but never mind. But why do you divide venture capital and other capital?

Roughly speaking, of your total capital formation of $40,000,000,000, how much is venture and how much is the other type?

Dr. ROBEY. The difference between venture capital and nonventure capital as it relates to savings depends upon the type of inducement the user of the funds can offer.

Last year many American business corporations had Government bonds. They sold those Government bonds to persons who considered such bonds as being a risk-free investment, but business used the proceeds for venture purposes.

The CHAIRMAN. I am just asking how you divide the $40,000,000,000 or $50,000,000,000 gross capital formation between venture capital and other type of capital.

Dr. ROBEY. Under normal circumstances, the construction industry, as a whole, my recollection is, makes up about 50 percent of the total capital formation of the country. It is a very large item.

We assume that every investment in business is venture capital. In the study by the Bureau of Labor Statistics, they do not distinguish between a bond and common stock of corporations. They distinguish between investments in business on the one side and life insurance, Government bonds, and savings banks on the other. We call all investments in business venture capital, even though it may be triple A bonds.

The CHAIRMAN. It does not seem to be a very good division when you come to the question of how to get it.

There does not seem to be a very sound division between the two. Mr. BUNTING. I might refer the committee to page 22 in this report where this is explained in a great deal more detail. The charts are only prepared to illustrate the actual basis for this report itself.

Now the thing we wish to point out primarily, gentlemen, is that venture capital in the strictest definition of the term cannot come from insurance companies. It cannot come from savings banks and it cannot come from commercial banks because they are not in the business of providing venture money necessary to start an expanding business enterprise.

I would also like to summarize all our recommendations here, Mr. Chairman, if I could, and that is covered on pages 23 and 24 in this report.

In my judgment, there is much reason today for the people of this Nation to look forward to the future with confidence. Production is steadily rising and, equally important, it is becoming better and better balanced. Total wage payments have held up amazingly well in our reconversion from war to civilian production. Prices are high, as compared to prewar, but the increase has been less than the

rise of wages; and during the past 4 months the price level has definitely flattened out. We yet have to see the full effects on prices of the current round of wage increases. But if we can keep production and productive efficiency moving forward, we should be able to hold this potential price rise from getting out of hand.

For the general situation to be this favorable only 2 years after the end of the war, should be a source of real pride to the American people. But it would be a serious error to assume that we are now in a position to rest on our oars. Two major problems confront us and they must be solved if the Nation is to continue to move forward. The first of these problems is to make the necessary changes in our tax laws to provide the capital formation essential to the continued growth of production and the provision of jobs for our growing labor force. This is a problem which must be solved by the Congress. The other problem is for all of us to forget our selfish group interests and, in a spirit of genuine unity, put our shoulders to the wheel.

By "unity" I mean, not only teamwork in the productive activities of our Nation, but unity of understanding of what has made America great; of what is needed to perpetuate this greatness; of what real, wholehearted teamwork means to the future of every worker in this land, the future of our Nation-indeed, the future of the whole world-for only a strong, united America can insure peace in the years to come.

That is why we have approached this presentation with a full recognition of the tremendous import of the problems with which you are dealing. We have confidence that you share this recognition and that you will provide the leadership that will carry the American people safely through the turbulent times that lie ahead of us.

In closing my presentation, Mr. Chairman, I would say that if there are any ways in which any of the members of our staff may be allowed to provide any additional information upon this important subject, requested by this committee or by other congressional committees, we would deem it a tremendous service to the public to be allowed to cooperate with you.

Thank you very much.

The CHAIRMAN. Mr. Bunting, yesterday we had testimony which indicated, or took the position rather, that the question of maintaining capital formation at a fairly equal rate was the key to the whole problem of preventing a depression, not so much the amount but the stability.

Mr. BUNTING. That is right.

The CHAIRMAN. What sort of Federal action can be taken to insure such stability-you are familiar with the ups and downs of the whole economic history of construction, for instance. Also in the willingness of corporations to reinvest.

Have you any suggestions as to Government policy on maintaining some stability of capital formation?

Mr. BUNTING. No. I think you have got to have incentive to venture. That has to be provided. First with high taxes, high to the point of oppression, there is not too much incentive on the part of investors, and there is not an adequate availability of cash.

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Now I think the maximum amount of Government economy is the No. 1 item on the list, then such reduction in personal income tax as may be made so that venture capital may be encouraged to invest itself in these enterprises.

Now we have a lot of people in this country who are talking depression, who are talking about business recession of some kind. Somewhere ahead of us there may such a depression, and I will tell you the fastest and surest way to bring that on is for this country to fail to have the necessary capital formation. Everything which can encourage capital formation on the historical basis of the past will assure at least a long delay before any serious readjustment period sets in. This matter of building is a tremendous item because the construction industry covers, and has, historically, such a very high percentage of the total wealth of the Nation.

There have been many things that have contributed to the present condition in the field. If industry and if labor, if management and labor and capital, can be encouraged to live in an environment of mutual trust and confidence, many of the things that are contributing, at the present time, to what people consider excessive cost of building can be taken out of the picture. It is going to take time, determination, and hard work between all three groups of people.

The CHAIRMAN. Have you any figures on savings on incomes over $10,000 and incomes under $10,000?

Mr. BUNTING. I think that is included in our report or supplement attached to this.

I will ask Dr. Robey to give us the page number on that.

Dr. ROBEY. On page 16 of the appendix, Senator Taft, you will find the estimated amount of venture savings for the coming years. The CHAIRMAN. I wonder where you got the figures?

I just wonder whether you are not going to have to look to savings in the future regardless of the income tax, taking a realistic view of what the income tax will remain, and you are going to have to look to incomes under $10,000.

Certainly there are substantial savings in this field, insurance policies and so forth, apart from direct savings in banks. In the purchase of a house over a period of 10 or 15 years, every capital payment is a savings every year during those 15 years.

Do you not rather underestimate the importance of encouraging savings in the lower incomes, under $10,000?

Mr. BUNTING. When we get into the field of venture capital, Mr. Chairman, we are excluded from the types of savings which are made by people in the lower-income groups. The type of savings which are made in savings banks, the insurance companies, and other fields are not the source of capital formation required to be used for venture purposes in competitive companies of various types and manufacturing concerns.

The CHAIRMAN. I am trying to get some idea how much risk money must be put into this $40,000,000,000 or $50,000,000,000 a year, and how much would the insurance companies put in and the savings banks put in.

Dr. ROBEY. On page 13 of the appendix, at the top, there is an estimate of the total volume of savings in the years ahead and it runs from $19,000,000,000 this year up to $26,800,000,000 in 1956, and the table which I just referred to on page 16 is the proportion of that which we

estimate will be saved by those with incomes over $10,000, which runs from $4,000,000,000 to $6,000,000,000.

So, the overwhelming majority of aggregate savings comes from those below $10,000 according to our study.

The CHAIRMAN. That is what I thought.

Dr. ROBEY. We would like to be able to distinguish between the bond purchasers and the stock purchasers in business, but unfortunately the Bureau of Labor Statistics figures, which are the only figures we have, do not make that distinction, and therefore we had to take that total lump. It is a comparable figure on savings and the type of investments made. We would like more detail if we had it.

In 1946, the institutional investors of the country, savings banks and so on, invested about $5,000,000,000 in American business. Commercial banks contributed $4,000,000,000.

We have assumed this contribution will be continued over the years, at the 3.8 percent rate of progress which we have mentioned. We have allowed for all of that in arriving at our final figure.

We have also allowed for a fairly substantial amount in business reserves accumulating over the years and for a change in the price level which is involved in the purchase of new supplies.

The CHAIRMAN. Recognizing the need for some venture capital we are still concerned to know how we can eliminate the ups and downs in capital formation.

Mr. BUNTING. That is right.

The CHAIRMAN. Almost more than what the volume should be. I suppose we could adjust ourselves to a somewhat smaller capital formation percentage if it were the same every year.

I don't know what is necessary.

Mr. BUNTING. Our theory is, Mr. Chairman, that unless we continue this expansion we are very likely to run back to a decade like the 1930's when investments were so precarious. If we do not continue to progress we will never pay off the $258,000,000,000 national debt. Naturally that is going to require

The CHAIRMAN (interposing). I do not think we are going to pay it off anyway.

Mr. BUNTING. I hope we do.

The CHAIRMAN. I do not see that we need to pay it all off.

We are very much obliged to have these studies on capital formation. They are very interesting to the committee, and if you have any further studies from time to time we would be glad to have them.

Mr. BUNTING. That is fine.

The CHAIRMAN. Particularly on this question of stability of capital and what to do about it.

Mr. BUNTING. We will be glad to furnish anything we have, Mr. Chairman.

STATEMENT OF GEN. R. E. WOOD, CHAIRMAN OF THE BOARD, SEARS, ROEBUCK & CO.

General WOOD. Mr. Chairman and gentlemen, I am not an economist, analyst, or banker, but the company of which I am the chairman of the board distributes consumers' goods of every character, except food and automobiles, in every State of the Union. The company sells