Speech

For release on delivery Friday, July 25, 1969 2:00 p.m. E.D.T. SMALL BUSINESS AND ECONOMIC DEVELOPMENT IN THE NEGRO COMMUNITY Statement of Andrew F, Brimmer Member, Board of Governors of the Federal Reserve System before the Select Committee on Small Business House of Representatives July 25, 1969 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis SMALL BUSINESS AND ECONOMIC DEVELOPMENT'IN THE NEGRO COMMUNITY By Andrew F. 3rimmer I greatly appreciate the opportunity to share with the Select Committee on Small Business my views on the "role of small business in minority economic development." In responding to the invitation to testify, it occurred to me that I might be able to make a modest contribu- tion to these hearings through an appraisal of the prospects for minority groups in business, based on an economic analysis of the market in which Negro businessmen are attempting to operate profit-making enterprises in the United States today. Thus, my efforts consist of an objective examination in which I set aside questions relating to noneconomic goals (such as enhancing pride of ownership) which other observers may find it worthwhile to pursue. On the basis of my analysis of the economic evidence, I have concluded that we should be extremely cautious in encouraging Negroes to seek careers as self-employed, small businessmen. This is especially true if the expectation of success is based on the assumption that such a business can be conducted in a separate, all-black environment, protected from the competition of firms doing business in a nationwide market. In general, if one wishes to restrict his efforts to small-scale neighborhood retailing and the provision of relatively simple personal services, it is quite possible that he can earn a living -- although it is likely to be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- a modest one. However, if the desire is to engage in manufacturing, construction, transportation or wholesale trade, the prospects of success appear to be extremely dim -- if the firm's output is to be sold mainly in the limited market provided by the Negro community. Between these extremes, the outlook for successful operation becomes less-and-less promising as the scale and technical sophistication of the enterprise increase. Economic Impact of Segregation and Desegregation Before proceeding further with this assessment of the prospects for Negroes in small business, we should pause briefly to review the consequences of economic separatism which resulted as an historical legacy of racia l discrimination aad segregation and the later consequences when some of these barriers were removed. In general, the effects were similar to those produced in international trade when a high tariff wall is erected between two countries. Separate markets prevail in the two areas for items subject to tariff control. For the Negro community in the United States, the greatest barrier imposed by segregation was not in the market for goods -- to which they generally had relatively open access -- but in the market for personal services, such as barber and beauty shops and funeral services. Consequently, a protected market evolved for the provision of these services within the Negro community. Moreover, as one would expect, this wall of protection provided incentives for Negro professionals and entrepreneurs who began to specialize in activities servicing the Negro community. Negro professionals were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3- highly concentrated in fields such as medicine, educatibn, and religion -- all hampered by segregation -- but all of which also provided a protected market. In occupations which were dependent upon unprotected national markets, Negroes were conspiciously absent. For example, in 1960 (the last year for which we have detailed information) engineers, scientists, and technicians comprised only 3.8 per cent of all Negroes classified as professional, technical , and managerial; the corresponding figure for whites was 10.5 per cent. The fraction of Negro professionals who were architects was less than one-fifth the fraction for whites. Clearly Negro professionals were concentrating on servicing the Negro community. In business the same pattern prevailed. Negroes were concentrated in enterprises servicing the protected Negro market. Life insurance provides probably the best example. For years, the major life insurance companies either did not sell policies to Negroes or did so on the basis of different actuarial tables which greatly increased the cost of protec- tion to Negroes. The result was the creation of an environment where Negro life insurance companies were able to grow and prosper. In enterprises that sold to a more general public, such as hardware and department stores , Negroes have not made much headway. The recent progress toward desegregation in the United States (symbolized by the opening of public accommodations) has eroded the position of many Negro businessmen who were dependent upon segregation to protect their markets. For instance, in many large cities in the East and Midwest, most of the hotels and restaurants which previously catered Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -4- to Negroes have encountered hard times, and a few have actually closed their doors. The trend towards desegregation in American life has influenced the Negro businessman in another important manner. Not only have many of his traditiona l customers deserted him to shop in the more diverse stores serving national markets but he hss also encountered an increasing competition for his traditional supply of labor. Large national corpora- tions for some time have been actively recruiting Negro personnel. Initially the aim was to help market their products in Negro areas, but more recently they have also been seeking manpower for their overall operations. Negro businessmen operating from much smaller economic bases are unable to offer competitive salaries or cotrmensurate opportunities and are thus having a great deal of difficulty retaining qualified employees. The adverse effects of these changes on Negro businessmen concentrating in those activities formerly protected by segregation is quite striking. This can be seen most clearly in the income trends among nonwhite men during the 1960fs. For example, between 1959 and 1967, mean income of all self-employed nonwhite males rose by roughly 114 per cent to about $7,200; among all self-employed white men, the rise was only 44 per cent to approximately $8,500. In sharp contrast, income gains for self-employed retail merchants were much smaller for both groups (39 per cent to about $7,400 for whites and 28 per cent to about $4,500 for nonwhites). Expressed differently, in 1959, average incomes of both white and nonwhite retail merchants were well above the average incomes of all Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -5- employed men (13 per cent above all whites for white retailers and 28 per cent above all nonwhites for nonwhite retailers). By 1967, however, the averages for self-employed retail merchants showed smaller rises and were below the averages for all employed men — 9 per cent below all whites fo r white retailers and 12 per cent below all nonwhites for non- white retailers . Economic Environment of Negro Business The legacy of racial segregation is important because it has shaped the economic environment in which Negro businessmen are currently operating -- and in which they are likely to operate for some time. The main economic characteristics of the Negro community are widely known and need not be reviewed in detail here. For example, in 1967, Negroes had a median family income of $4939 which was only 59 per cent of that of white families. These income figures are important because they clearly point up the differences in purchasing power in the two communities -- a matter of fundamental importance to businessmen. However, when we examine the financial assets and liabilities of Negroes compared with other families, the differences in market potential are thrown into even sharper focus. These differences are clearly marked in Tables 1 and 2 (attached), which summarize data on assets and liabilities from the Survey of Consumer Finances conducted by the Survey Research Center at the University of Michigan. The ownership of financial assets is presented in Table 1. As mentioned earlier, Negro life insurance companies emerged as a response to the failure of white life insurance companies to serve the Negro market. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -6- The result of this segregated market is that Negroes at all levels of income appear to have a slightly higher probability of holding life insurance than whites. The picture on other financial assets is quite different. Negroes at virtually all levels of income are less likely to have savings accounts or stocks. The lone exception appears in the over $10,000 income class where Negroes rely heavily on savings accounts but inves t far less frequently in stocks. In fact, although not shown in Table 1, the Michigan Survey reported that in 1966 Negro families obtained only 2 per cent (versus 6 per cent for non-Negro families) of their total money income from dividends, rent, interest and trust funds. The most important data in Table 1 are for the income categories between $5,000 and $10,000. These two categories contain roughly 40 per cent of all Negro families, and it is this range of income which provides the broadest foundations of the Negro market. The asset data for families within this critical income range show that Negroes have considerably less financial accumulation than white families. This finding implies that these Negro families would not be as good potential consumers as the income figures might suggest. The other side of the financial picture is liabilities. (See Table 2, attached) One is immediately struck by the fact that Negroes at all levels of income are much more heavily burdened with installment debt. The repayment of this debt represents a sizable claim on disposable income and thus makes a Negro family a poorer potential consumer for additional goods and services than a family of similiar income who is less encumbered Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -7- by installment debt payments. The case of mortgage debt is a bit more difficult to analyze. The probability of home ownership rises substantially with income and is higher at all levels of income for whites than for Negroes. A single (not fully explained) exception to this general trend is the high tendency for Negro families in the lowest income category to own homes. In part this may reflect older retired families and in part it ma y represent impoverished rural southern Negroes whose home ownership may be quite modest. In general, it is safe to conclude that Negroes of similar income are not accumulating an equity position in housing at the same rate as white families. The tendency to owe mortgage debt, however, appears roughly equal for Negroes and whites of similar income. Since Negroes have a lesser tendency to own a home at a given level of income, this similarity in the fraction of the total population owing mortgage debt suggests clearly that if a Negro does own a home, the chances are greater that he has a mortgage on it than for a white homeowner with the same income. These data on the financial assets and liabilities shed new light on the economic achievements of Negro families. These data show that Negro families of comparable income have greater liabilities and fewer financia l assets to meet these liabilities than whites. This find- ing suggests that the usually observed data on white-Negro income differentials actually understate differences in purchasing power, because the income figures do not indicate the relatively poorer net financial position of Negro families. The figures on assets and liabilities Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3- accentuate the problems of weak markets facing businessmen who limit themselves to the Negro community. The Structure of Negro Businesses and the Outlook for Economic Development Having highlighted some of the limitations inherent in the Negro market, it might be helpful to see what types of enterprises have developed in this environment. For this purpose, only fragmentary information is available. One source relates to Negro owned and operated businesses in Washington, D. C., in 1967. (See Table 3 attached.) These data show a heavy preponderance in the service area. The distribution of businesses within each category is also revealing: - Of the 1,249 businessess classified as services, 555 (or 44 per cent) were barber shops, beauty salons or beauty schools, while 146 (or 12 per cent) were drycleaning establishments. - Of the 473 retail businesses 240 (or 51 per cent) were carryout shops, delicatessens, grocery stores, or restaurants, there were only 2 used car lots in this category and no new car dealers. Of the 84 businesses in finance, insurance, and real estate, there were 2 banks, 1 finance company, 7 insurance companies, 1 title company, and 73 (or 87 per cent) were in real estate. - Of the 35 manufacturing companies, 28 (or 80 per cent) were newspaper publishers, printers, or sign shops. Thus, businessess in the Washington area are highly concentrated in areas such as barber shops, beauty salons, and drycleaning establish- ments where Negroes are servicing Negroes. However, a second -- and more important -- conclusion emerging from these data is that these are not the types of enterprises which can serve as the mainsprings of economic development in the long-run. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -9- This conclusion is also strongly supported by the results of a seven-city survey of Negro businesses conducted by the National Business League in early 1969. (See Table 4 attached.)* Of the 564 businesses reported in the Survey, 329 (or 58 per cent) were concentrated in six out of sixty-seven industry categories. These six categories correspond closely to the local market oriented service operations in Washington,D.C., described above. A carefvl look at the employment patterns within the specific categories of Negro business is useful. Of the 329 businesses in the six-industry group, 268 (or 82 per cent) had four or less employees, while the corresponding figure for the entire sample was nearly as high -- 80 per cent. Thus, these six categories are a good representation of employ- ment patterns for the entire sample. The obvious conclusion from these figures are that Negro businesses are very small, indeed. The small size of the average Negro business is, in part, due to a concentration in the types of enterprises which are traditionally quite small. Barber and beauty shops are small operations, and it is no surprise that 92 (or 90 per cent) of the barber and beauty shops had four or fewer employees. What is more distressing is the tendency for Negro businesses to be small in operations which are not traditionally small. The category labeled grocery stores and supermarkets is a good example. Of the 82 businesses in this category, 70 (or 85 per cent) had four or *I am grateful to Mr. BerkeleyBurrell, President of the National Business League, for permission to use data from the unpublished findings of this Survey. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -10- fewer employees, and only 1 had over twenty-one employees. Clearly the category labeled grocery stores and supermarkets refers to very small grocery stores serving limited markets. Employment figures present only one dimension of Negro businesses, and more information is possible through data on income and profits. (See Table 5 attached.) The income and profit figures reflect the same general trends as the employment data. Of the 329 firms in the six-industry groups, 279 (or 85 per cent) expected gross income in 1967 of $20,000 or less, while 455 (or 81 per cent of the total sample) expected to be in this range. For estimated net profits, the picture was equally poor -- with 290 (or 88 per cent of the businesses in the six categories) and 474 (or 81 per cent of all businesses) -- expecting a net profit of $5,000 or less. Of the 54 restaurants in the sample, 49 (or 91 per cent) estimated net profits of $5,00 0 or less and the remaining 5 anticipated profits of between $5,000 and $10,000. Concluding Comments From this analysis, we can conclude that the prospects for economic development through Negro owned businesses dependent upon the type of infrastructure discussed above are not very encouraging. The asset and liability data presented above reinforce the already familiar income statistics, and together they show clearly that the Negro market is by no means a strong one. Consequently, entrepreneurs who limit themselves to these markets will be denied the economies of scale which are a pre- condition o f long-run economic development. The samll firms spawned by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -11- the se markets offer a limited potential for an expansion in the total number of job opportunities. The high concentration of these firms in service areas does not provide a margin of profit large enough for the accummulation of new capital, and it inhibits the development of the types of skills needed to compete successfully for executive positions in large corporations operating in a modern high technology economy. As mentioned at the outset, my purpose in testifying today is not to demean small businesses which I feel do offer modest opportunities for some potential Negro entrepreneurs. Rather, my purpose has been to point out some of the serious economic pitfalls of a strategy based upon separatism and segregation. Economic separatism has been tried in the past, and it has failed to provide genuine opportunity for Negro business- men -- and it certainly has failed to provide economic well-being for our Negro population. I am personally convinced that the most promising path of economic opportunity for Negroes lies in full participation in an integrated national economy. This holds for Negroes who want to be businessmen as well as for everyone else. The sooner we recognize this important lesson from the past, the quicker we can start to attack the real obstacles to the Negro's economic progress in the United States. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table l FRACTION OF POPULATION HOLDING DIFFERENT FINANCIAL ASSETS, BY INCOME CLASS AND RACE, 1967 Life Savings Stocks Insurance Accounts IInnccoommee Non- Non- Non- CCllaassss Negro Negro Negro Negro Ne^ro Negro Under $3,000 54 49 13 44 0 11 $3,000-5,000 75 68 41 56 1 15 $5,000-7,500 85 80 52 62 5 21 $7,500-10,000 95 92 58 69 5 26 Over $10,000 100 96 89 79 30 45 Total 73 80 38 64 4 26 Source: Survey Research Center, University of Michigan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table 2 FRACTION OF POPULATION WITH DIFFERENT FINANCIAL LIABILITIES, BY INCOME CLASS AND RACE, 1967 Installment Mortgage Debt Income Debt Negro Non-Negro Class Negro Non-Negro Owners Debt Owners Debt Under $3,000 49 19 40 10 52 8 $3,000-5,000 59 39 29 8 54 18 $5,000-7,500 84 52 37 25 54 27 $7,500-10,000 71 60 50 39 68 46 Over $10,000 93 53 70 66 79 55 Total 64 46 40 20 63 37 Source: Survey Research Center, University of Michigan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table l Distribution of Negro Owned and Operated Business in Washington, D. C., 1967 Type of Business Number Per Cent Services 1,249 60.5 Retail 473 22.9 Contract Construction 119 5.8 Transportation 82 4.0 Finance, Insurance, and Real Estate 84 4.1 Manufacturing 35 1.7 Wholesale 20 1.0 Total 2,062 100.0 Source: A Directory of Negro-Owned and Operated Businesses in Washington, D.C., compiled by Small Business Guidance and Development Center, Howard University, 1967 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table 4 DISTRIBUTION OF NEGRO OWNED ENTERPRISES BY NUMBER OF EMPLOYEES, National Business League Survey, 1969. Number of Empl oyees Category of Business 1-4 5-10 11-20 21-30 Over 30 Total Restaurants 44 9 1 0 0 54 Snack & Carryouts 9 4 0 0 0 13 Grocery and Supermarkets 70 4 0 82 Service Station and Auto Repairs 29 10 0 0 40 Laundry and Drycleaning 24 8 3 2 38 Beauty and Barber Shops 92 8 2 0 0 102 Total in Six Categories 268 46 11 2 2 329 Total, All Businesses 452 83 21 3 5 564 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table l DISTRIBUTION OF NEGRO OWNED ENTERPRISES, BY SIZE OF ESTIMATED INCOME AND PROFIT, 1967 National Business League Survey Estimated Gross Income Estimated Net Profit Category of Business Under 20 20-50 50-95 Over 95 Total Under 5 5-10 10-20 20-30 Over 30 Restaurants 48 4 1 1 54 49 5 0 0 0 Snack and Carryout 11 1 1 0 13 13 0 0 0 0 Grocery and Supermarkets 62 10 2 8 82 75 4 2 1 0 Service Station and Auto Repairs 31 4 3 2 40 31 5 4 0 0 Laundry and Drycleaning 30 5 2 1 38 27 8 3 0 0 Beauty and Barber Shops 97 3 0 2 102 95 6 1 0 0 Total in Six Categories 279 27 9 14 329 290 28 10 1 0 Total, All Businesses 455 59 24 26 564 474 58 25 3 4 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Andrew F. Brimmer (1969, July 24). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19690725_brimmer

@misc{wtfs_speech_19690725_brimmer,
  author = {Andrew F. Brimmer},
  title = {Speech},
  year = {1969},
  month = {Jul},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19690725_brimmer},
  note = {Retrieved via When the Fed Speaks corpus}
}