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chapter 5 Small Business Financing in Mid-Twentieth-Century New England A campaign for economic development was one of the principal responses to the demise of textiles and other established industries in New England. Regional leaders encouraged the expansion of existing industries and the emergence of new ones, thereby seeking to create jobs to replace those lost in declining sectors. Business elites initially headed New England’s drive for growth. The private sector’s development push began in the mid-1920s with the formation of the New England Council and continued steadily in the years thereafter. In seeking to stimulate growth in New England, development advocates engaged in a wide range of activities. Most of the development possibilities that were pursued had little impact. In one domain, however, the push for growth achieved significant results. This was an attempt to improve the financing available to the region’s new and small companies. Efforts to improve small business financing in New England started in the 1920s, shifted into high gear in the late 1930s, and continued during the 1940s. The shortage of finance for small business was an important concern of the American corporate sector as a whole in the early twentieth century. Privatesector initiatives to address the problem were mounted throughout the country beginning in the 1920s. A desire to legitimate capitalism and prevent the longterm stagnation of the national economy motivated most of those working on the issue. The need for added employment in New England gave the small business finance question greater urgency there. To make more money available to small firms, New England businessmen conducted studies on the sources of financing, established some of the country’s first venture capital organizations, and pressed local commercial banks to provide additional small business loans. Small New England companies obtained significant new financing as a result of these efforts. The increased availability of small business finance contributed in important ways to the area’s subsequent economic growth. Confronting Decline 140 The Nationwide Shortfall in Financing for Small Businesses Beginning in the 1920s, small companies throughout the United States confronted significant difficulties in obtaining adequate finance. Established firms with a record of profits and a sound credit history could generally raise needed funds from banks and the securities markets. Smaller companies, by contrast, faced obstacles in attracting both equity and debt financing. The problems were particularly grave for small firms that had been established recently or that sought to expand. The trouble on the equity side stemmed from a shortage of what was known as venture capital—funds that would take an ownership stake in risky but potentially very profitable enterprises. On the debt side, difficulties arose because commercial banks and other lenders were reluctant to provide sufficient credit to smaller borrowers, who were perceived as unduly risky. Lenders were particularly wary of giving small firms longer-term loans that could be used to pay for equipment or the expense of developing new products. The shortfall of finance for small companies generated considerable concern in national business circles in the 1920s and would become much more worrying, and highly controversial, in the years that followed. Attempts to alleviate the problem produced a range of experimental initiatives that laid the groundwork for the modern venture capital industry—a key innovation in twentieth-century capitalism. The shortage of finance for American small business was a byproduct of the country’s economic modernization and first became apparent in the years after World War I. Before that time, long-established, usually local arrangements seem to have provided a sufficient flow of funds to small companies. One veteran of the New England machine tool industry recalled that before World War I numerous firms had been set up by “young men with energy and ideals who received the backing of local capital in amounts ranging from a few tens to a few hundreds of thousands of dollars.” The establishment in the 1920s of Massachusetts chemical company Dewey and Almy exemplified the traditional routes of small business finance that were in decline during this period. According to one of those involved, to raise startup equity the company’s backers “practically passed the hat around among 20 people and asked for $5,000 or $10,000 apiece and got it.” The investment banks scattered across the country were an important avenue for securing this kind of financial backing. The institutions often raised funds for promising local entrepreneurs or gave references to people who could provide the needed money. In...

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