THE NEED FOR RISK CAPITAL

Where Is the Small Investor?

AMERICANS have risked more money--and with more success--than any other people in the world. Yet in the U.S. today, there is a shortage of risk capital that threatens to slow the pace of industrial progress. In the past five years, corporations have needed $39.3 billion in outside funds for expansion. Of this total, they have raised only $3.9 billion in new stock issues, have had to borrow the rest. The melancholy fact is that only a relative handful of Americans are willing to "take a chance" on the nation's economic might by buying shares in U.S. industry.

The money is there: some $200 billion in savings of one form or another, most of which has been put away by people with incomes of less than $15,000. Yet out of a total population of 159 million, only 6 1/2 million--or one in every 16 adults--own shares in private industry. Families with incomes of $50,000 and up, a mere one-tenth of 1% of the population, own 35% of the stock outstanding; those with incomes of $10,000 or more, about 3% of the population, own 75% of the stock.

Once, U.S. capitalism could count on the wealthy for its life blood of venture capital. Now high taxes have not only made it almost impossible to accumulate giant fortunes, but the growth of organized labor is bringing about a redistribution of U.S. wealth. The share of total personal income (after taxes) going to people on the top 7% of the economic ladder dropped from 27.4% to 18.3% from 1939 to 1948. The bottom 93%, on the other hand, increased their share from 72.6% to 81.7. The purse strings of capitalism are Being passed to the hands of the "little man." Why does he pull the strings so tight when it comes to buying common stocks?

The answer most frequently given is that he is afraid of another 1929-like collapse. But that is not the case; more than half the nation's stockholders are past 50, the very group best able to recall the crash. The fact is that the younger generation, raised in the security-conscious '30s, when speculation and Wall Street became dirty words, seldom thinks of buying stocks. One big reason is that Wall Street has failed in its job of telling Americans about the stock market and the investment opportunities it offers.

Wall Street has a good thing to sell. Common stocks on the exchange are paying close to their highest return in history--an average 6% v. 3.48% in 1929 and 4.87% in the last prewar bull market of 1937. What is more, during an inflationary period, the stock market is "safer" than Government bonds, since stock prices generally go up as the value of the dollar declines. The holder of a Government bond, on the other hand, loses to the extent that the dollar's purchasing power decreases.

These are potent reasons for buying common stocks, and yet Wall Street has done virtually nothing to tell the U.S. public about them. All told, the New York Stock Exchange and brokerage houses spend only $3,000,000 a year on advertising, compared with $22 million spent by the insurance industry and $61 million by commercial banks, largely to boost savings accounts.

There is no doubt that the money--and interest in stock-buying--is there if Wall Street would go after it. This has been proved by such companies as Sun Oil Co. and A.T. & T., which have launched stock-purchase plans for their employees (29% of A.T. & T.'s 700,000 employees are now stockholders). It has also been proved by a handful of Wall Streeters, notably Merrill Lynch, Pierce, Fenner & Beane, the nation's largest brokerage house. For several years, Merrill Lynch has run short, free investment courses in its 109 branch offices; one lecture drew such a crowd during one of Detroit's hottest summer weeks that it had to be repeated on ten subsequent nights. Such courses, plus extensive pamphleteering on "How to Buy Stocks" and "How to Invest" have paid off for Merrill Lynch. In ten years its customer list has doubled to 265,000, its net has increased from $4,854,000 to $6,329,000.

Mutual funds, which hold stock in various companies and hence offer diversified investment for the little man, have had similar success. By selling door-to-door, by telephone and mail, at country fairs, etc., they have built assets from $1,284,185,000 to $3,861,924,000 since the war.

Thanks to such aggressive efforts, people are slowly learning more about common stocks. Four years ago, the Federal Reserve Board asked a broad cross section of consumers how they would like to invest future savings. Only 2% mentioned common stocks. This year, when the same question was repeated, 9% mentioned common stocks. Progress has been slow only because Wall Street, the greatest supermarket of them all, has not yet applied the basic sales techniques of the corner grocer. No one wants Wall Street to sell stocks on a get-rich-quick basis, as in 1929; they should be sold on the basis that everyone should have a dividend-paying stake in U.S. industry. But unless securities men succeed in broadening the ownership of stocks, the private-enterprise system will not find the new risk money it needs.

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