Congress Creates the Small Business Administration

Date July 30, 1953

By ending the Reconstruction Finance Corporation and establishing the Small Business Administration, the federal government tried to ensure that all businesses, not just the well connected, could receive help.

Also known as Small Business Act; Title 2, Public Law 163, 83d Congress; U.S. Code Title 15, sections 631-651

Locale Washington, D.C.

Key Figures

• Wright Patman (1893-1976), U.S. representative from Texas, 1929-1976
• J. William Fulbright (1905-1995), U.S. senator from Arkansas, 1945-1974
• Jesse H. Jones (1874-1956), American businessman and head of the Reconstruction Finance Corporation

Summary of Event

The Reconstruction Finance Corporation (RFC), established by Congress in January of 1932, was an anti-Depression measure implemented, but little used, during Herbert Hoover’s administration. Its original mission was to provide loans to businesses, financial institutions, and railroads, but its powers were later broadened to encompass agriculture and local and state governmental works.

After Franklin D. Roosevelt assumed the presidency in 1933, he installed Jesse H. Jones, a little-educated, successful, and well-connected businessperson, as the agency’s chair. In his tenure at the RFC, Jones was involved in the creation of other federal agencies, such as the Federal National Mortgage Association, the Export-Import Bank, the Federal Housing Administration, and the Federal Home Loan Bank Board. Jones would later be appointed secretary of commerce.

The RFC was widely respected in the 1930’s for its role in aiding businesses and financial institutions. Its influence increased further during World War II, with new subsidiaries and global activities making a substantial contribution to the war’s conclusion. The postwar period saw reversals of many of the agency’s achievements. The Employment Act of 1946 had as its goals the attainment of full employment, promotion of production, and maintenance of purchasing power. The act acknowledged uncomfortable uncertainties as to what would happen after demobilization. It was thought that after the war, during which the unemployment rate had fallen almost to 1 percent, the rate might spring back to the 9.9 percent of 1941 or even to the 14.6 percent registered in 1940.

Pent-up demand caused by wartime rationing and shifts from consumer to military goods was unleashed after 1945. The main economic problem turned out to be inflation, with a prescription of fiscal restraint. Loans made by the RFC nevertheless rose in the period from 1947 to 1950, from $393 million to $500 million, in the face of Congress’s desire to curb lending. Many loans were made to less-than-vital businesses.

Senator J. William Fulbright , chairman of a subcommittee of the Senate Committee on Banking and Currency , started a probe in 1950 that was the start of the slide of the RFC toward oblivion. A litany of testimony about questionable lending decisions convinced the panel that those with “influence” were more likely to get to the government money trough. Fulbright said the “fixers” were in control, while President Harry S. Truman repeatedly said that nothing was amiss. The Republicans used this scandal as a campaign issue in 1952, promising reform and cleanup in Washington. With Dwight D. Eisenhower’s victory, the Reconstruction Finance Corporation’s demise was imminent.

In May, 1953, the House Committee on Banking and Currency began its hearings on the establishment of the Small Business Administration. The counterpart committee in the Senate commenced its hearings to dismantle the RFC. The Republicans thought that, to be certain of support to kill the RFC, they had to offer something in return. The Small Business Act of 1953 was their vehicle. Its purpose was “to preserve small business institutions and free, competitive enterprise.” A new agency, the Small Business Administration (SBA), was to develop a definition of what a small business was, take a census of small businesses’ production facilities and decide upon their best utilization, provide technical and general management assistance, develop a procurement program, and develop a lending program.

There was little opposition to the founding of the SBA. The American Bankers Association, the banking industry’s trade association, was one of few groups to go on record opposing the SBA. Its premise was that the government should not be involved in business lending of any kind, whether made directly or by a financial institution with a government guarantee. The association did support the dismemberment of the RFC.

The Department of Commerce, though not completely disagreeing with the idea of having an independent small business agency, thought that for economy’s sake the proposed activities could be integrated into its own already existing structure. That viewpoint received little sympathy, given the department’s own checkered background and the mixed results of entities that had preceded the SBA.

The Smaller War Plants Corporation (SWPC), established in July, 1942, was the first governmental effort to assist small businesses. It provided loans, both directly and in conjunction with private lenders, and assisted in government procurement, obtaining prime contracts or subcontracts for war materials. About 110,000 prime contracts or subcontracts worth about $6 billion were won by small businesses from 1942 to 1945 through the aid of the SWPC. Approximately fifty-eight hundred loans totaling more than $500 million were received by small businesses, either through direct lending or with private participation. Production pools involving two thousand firms and 140,000 workers received $600 million in contracts through the SWPC’s efforts.

The SWPC was fairly accomplished in meeting its mission, but it was a temporary agency and was disbanded at the end of the war. The Reconstruction Finance Corporation took over its lending and government procurement functions as well as the authority to sell surplus property. The Department of Commerce and its Office of Small Business assumed all other SWPC functions, including educational efforts.

In 1951, the Small Defense Plants Administration (SDPA) was founded to deal with the urgencies of the war in Korea. It was given similar missions and powers as the earlier SWPC except for lending, which remained with the RFC. Most of its activity was centered in government procurement, assisting firms in receiving somewhat more than $50 million in work. The SDPA was of limited benefit to small businesses because its role was limited to defense work rather than the whole spectrum of business activity.

Congress saw that there was merit in assisting small business, given the success of the SWPC and, to a lesser extent, the SDPA and the early RFC. The RFC, rife with corruption, was headed for extinction. The Department of Commerce did little with its education mandate and, it was widely believed, favored the interests of large corporations over those of independent businesspeople. Congressman Wright Patman thought that giving the new SBA, with its millions of dollars in funding, to the Department of Commerce was like “sending a rabbit for a head of lettuce.” The National Federation of Independent Business was also opposed to putting the SBA under the Department of Commerce because of that department’s perceived lack of sympathy for small business.

There was thus little support for a new agency within the Department of Commerce. At about the same time, the administration decided to disband the RFC. Originally, this had not been the intent of the House and Senate, since the RFC’s authority would have expired on June 30, 1954. A budget deficit was projected for fiscal year 1954, however, and elimination of the RFC, it was thought, would contribute greatly in the reduction of the budget problem.

The original House version of legislation on small business did not have any reference to the RFC. The final bill approved by the Senate in July called for elimination of the RFC by June 30, 1954, and establishment of the Small Business Administration as a temporary agency with a two-year life and a revolving loan fund of $275 million. Eisenhower signed this version on July 30, 1953.

Significance

The SBA has expanded its scope since its beginning in 1953. The fundamental purposes of the SBA are to protect the interests of small business, provide counseling to current or prospective business owners, and assist in government procurement to ensure that small businesses receive a fair share of government contracts and subcontracts. The agency also lends money to small businesses, state and local development companies, and victims of disasters or economic injury. It licenses, regulates, and lends money to small business investment companies. Various specific activities help achieve these results.

The SBA provides guaranteed or direct loans to firms to acquire assets or as working capital. It can make direct loans to the disabled and to nonprofit agencies employing them, to Vietnam-era and disabled veterans, and to eligible minority contractors. It also lends to exporters. Much of its financial assistance is through a guaranteed loan program, under which loans are actually made by private financial institutions but repayment is guaranteed by the SBA in case of default. Money is also loaned to victims of natural disasters, riots, or other calamitous events to replace or repair property. Direct loans with low interest rates are available to small businesses and agricultural cooperatives hurt by natural disasters. The SBA licenses, regulates, and lends money to small business investment companies. These provide venture capital and other long-term financing to small, high-potential ventures.

The SBA also provides assistance in contracting. It helps make contract bonding available, guaranteeing up to 90 percent of losses under bid, performance, or payment bonds. The SBA also works with other government agencies to increase the amount of federal government work going to small businesses in general and especially to firms owned by women and disadvantaged people.

The SBA’s mission has a strong emphasis on women’s business ownership. The SBA develops programs to support ownership by women and acts as a liaison with nonfederal business and educational groups to develop women’s businesses. It also has initiated a mentoring program in which women who have been in business at least five years provide long-term mentoring to women with one to three years of business experience. The Women’s Business Ownership Act of 1988 directed the SBA to develop a long-term education program for female businesspeople. This resulted in the formation of the Women’s Network for Entrepreneurial Training (WNET), the first business training program specifically targeted to women.

In addition to overseeing this program, the SBA’s Office of Women’s Business Ownership (OWBO), through the national network of local SBA offices, offers prospective and established female business owners other services, including prebusiness workshops and conferences on obtaining capital, financial and technical information, and access to a national database. Conferences on exporting, government procurement, and how to successfully sell products and services to the federal government are offered to women. Long-term consulting assistance is also available.

The SBA’s Office of Veterans Affairs operates as an advocate for assistance to veterans in starting up or in continuing management of existing firms. It reviews existing assistance programs for special consideration for veterans. This office also is a liaison between federal agencies, local and state governments, and other organizations to ensure utilization of all existing programs and to promote the creation of new and more effective ones.

The SBA’s Office of Private-Sector Initiatives secures state and local government cooperation to use existing initiatives so as to avoid duplication. It also promotes new ways to increase private-sector involvement to provide assistance to the SBA in meeting its goals. The Small Business Innovation Research Program sponsors projects that spark technological innovation, directs federal government research to small businesses, and increases commercialization of governmental research and development efforts.

In general, the SBA acts as an advocate of small business at all levels of government and in the private sector. It coordinates with other agencies to increase small business participation in international trade as well as promoting domestic business development. The SBA provides its services either at no charge or at a nominal charge. Numerous regional offices around the United States help make SBA services available to everyone. Though few data are available on the SBA’s impact, its services undoubtedly have helped many businesses increase their likelihood of success.

Bibliography

Blackford, Mansel G., and Austin K. Kerr. Business Enterprise in American History. 3d ed. Boston: Houghton Mifflin, 1994. Provides a concise coverage of the history of the American business firm and the evolution of government-business relations, from colonial times to the present.

Dwyer, Christopher. The Small Business Administration. New York: Chelsea House, 1991. A short, nontechnical overview of the SBA’s current activities.

Hughes, Jonathan, and Louis P. Cain. American Economic History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Comprehensive history of the U.S. economy from 1607 through 1995. Bibliographic references and index.

Parris, Addison W. The Small Business Administration. New York: Frederick A. Praeger, 1968. A comprehensive history of the SBA from 1953 to 1968. A readable summary of the events that caused the demise of the Reconstruction Finance Corporation and the formation of the SBA. Does provide some detail, but a reader interested in any specific subject will require supplementary material. Includes the text of the Small Business Act of 1953 in an appendix.

U.S. Small Business Administration. The Small Business Economy: A Report of the President. Washington, D.C.: Government Printing Office, 2004. Yearly report on small business compiled by the SBA and released by the president. Includes both a narrative and statistics. An excellent source for data on small business.