3/4 carrying capacity for small small creatures

[Space Coyote]

There are certainly downsides to being Small, but carrying capacity is not one of them. The weight discount for Small-sized items more than makes up for the -2 Str mod and reduced capacity.

A Str 10 Gnome is not at any carrying capacity disadvantage relative to a Str 12 Human.

This is true for equipment that the character specifically gets for themselves. For example when the small character buys their own backpack, sword, armor, food, etc, it weighs 1/4 or 1/2 as much as listed. However, when they gather loot or carry equipment for someone else, that stays the same weight and encumbrance. AND the small character's containers also have less capacity as well.

So for examples (these numbers are just examples), while a medium character using a medium backpack may be able to carry 1000 coins and 2 suits of masterwork chainmail, the small character with a small backpack may only be able to hold 250 coins and 1 suit of chainmail.