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year than it would have been last year because of the increase in interest in the meantime.

But there is still a very substantial saving to the Government in this bill and it seems to me now, I know it seems otherwise to others, but to me, it seems that the question is, Are you going to deny the Government the opportunity to make a substantial saving simply because economic conditions are such that you cannot eliminate all of the subsidy? This bill does not attempt to eliminate all of the subsidy nor do any of its authors claim it will eliminate all of the subsidy but it will eliminate a very substantial part and some of us believe that we had better take part of something than to keep geting all of nothing, and those who are opposing this bill now on the grounds that it does not go all the way must admit that they are getting all of nothing, because they are doing absolutely nothing to improve the situation of the Government.

We are offering an improvement in the situation. We are offering a savings to the Government. It is not 100 percent of what you may want, but I think that that background ought to be in mind when we are considering the very fundamental questions that Mr. Goodling is asking because they are fundamental and they do go to the crux of the thing, but I think that we should understand both viewpoints

Mr. GOODLING. Mr. Chairman, do we have any current information on the need for rural telephones? I mean, how much area has not been covered? Do we have anything current on that at all?

The CHAIRMAN. We had testimony yesterday that about 80 percent of the rural homes now had telephone service but again, I think that one of those differences of viewpoint-again, I think that that is an erroneous concept of the thing because this money that most of these companies are spending is not primarily to give initial new service. It is, as Mr. Peterson so well explained yesterday, primarily to improve existing service.

In 1920 we had far more telephones than we had in 1940 but the service had gotten so poor that nobody would pay even the 50 cents a month that most of them were charging. The service had gotten to where you could go out and holler and get more results than you could by hollering over the lines.

Now we are giving a vastly improved type of service in the rural areas. The testimony yesterday was that 97 percent of these telephones could talk to anybody in the world. Now, that is a great improvement in service, but 50-some-odd percent, I believe he said, were still on eight-party lines.

Now, the only way to bring that down, first to four-party, then two, and ultimately sometime in the future we hope to one, is to spend a whole lot of money, not to bring service to somebody out here on a ranch who is 30 miles from a line. He will get it by shortwave radio anyhow. And he can talk by radio telephone in all probability.

Big expenditures of the future are not going to be to provide service to people who have never had service but they are going to be to improve service, and these people who are borrowing, and most of them, as the testimony has brought out, most of them are private corporations, established for profit, just like Bell was, but Bell does not borrow from REA, not because there is anything in the law to keep them from borrowing, but it is simply company policy. They do not borrow from REA. But Bell does spend vast sums of money upgrading their service. They do it right here in Washington year by year. Why, Bell Telephone Co. is spending right here in Washington hundreds of millions of dollars upgrading their service all the time.

Well, you cannot say that there are areas in Washington that are not served with telephone service, but you can say that the Bell Co. as well as every other company, has to keep upgrading their service. These rural companies have to keep upgrading their service and it takes a lot of capital that they can only get in one of two ways.

Mr. Teague suggested the way to get it is to increase the rates. And, of course, that is one of the ways of getting it. But as was pointed out here, and I have forgotten who it was who testifiedAdmiral Mott—but you cannot increase these rural rates very much. In the first place, you are certain to lose a substantial number of your customers because, remember, you are dealing with people whose gross income, and I am not talking about net, whose gross income has only increased 3 percent in the last 20 years. Now, you cannot greatly increase the cost of conveniences to those people when they do not have the increased income that people here in the city have.

So, you do not have the opportunity of increasing rates in those rural areas such as you have here.

Now, the income of people in the cities has been increased by 37 percent during that same period of time. So they have more with which to pay a higher telephone rate. But those rural people do not have the money with which to pay a higher telephone rate. So to me, that is not a very good solution.

I am not trying to condemn those who suggest that that should be the solution, but that is one of the solutions. The other solution, of course, is to bring new capital in, borrow new capital.

Now, you can only borrow new capital without increasing your rates if you are getting it at a cost that enables you to maintain your rates. And the only way we have been able to do that is to put some Government subsidy in. We have put some Government subsidy in it. We would continue to put some Government subsidy in it under the terms of this bill but not as much as we are now putting in. You would have some people paying all that the economics of the thing would require under the terms of this bill where you do not have anybody dealing with REA today that is paying the full economic rate of money. You would have some paying under the terms of this bill. You would still have some who were not.

Mr. GOODLING. Mr. Chairman, when you and I were in York last week we were within 10 miles of a privately owned telephone company which is not rural. The people there definitely are not rural in à strict sense—their income has increased a lot more than 3 percent because they are practically all factory workers and can afford to pay additional rates.

The CHAIRMAN. But unfortunately, the statistics for the whole United States, including those fortunate areas around York, the total gross income of rural people in the United States has increased only 3 percent in the last 20 years. That means obviously that whereas your people undoubtedly have increased their income substantially more than that, Mr. Kleppe's rural income has, probably gone down. Mine has probably gone down. Mr. Zwach's has probably gone down. I think that yours have gone down rather than up.

Mr. BELCHER. Population density.

The CHAIRMAN. That is right. The density of population has gone down and the cost of building telephones per station in those rural areas increases in those areas where your income and population is going down.

Now, I agree that in those areas around these cities that are fortunate enough to have people living in rural areas and working in towns, that your population increases and that your cost of building telephones per station is less rather than more. But taken over the United States as we have got to--we are here to represent all the United Statesthere has been only a 3-percent increase in gross income.

Mr. BELCHER. The way that you are going to get at it is through the banks. Those people in York would have to go to the banks.

The CHAIRMAN. That is right. Those people in York would have to pay the higher interest rate. What we are trying to say, the man out in Tom Kleppe's district whose income is less and whose number is fewer would probably still be able to get the 2-percent money. Now, that is what we are trying to do here, is to see that these rural people are able to move along with the tide of an improved America whereby they will get the same kind of improved service that the people in the more populous areas get. We are not asking

you to pay anything more. We are not trying to put any burden on anybody's people. We are trying to say that we will relieve the United States of a little burden, but at the same time we will protect those areas where they do not have any other recourse.

Mr. TEAGUE. Mr. Chairman, I was going to ask a question but I am going to make a brief statement and either you or the Admiral can correct me if you consider I am wrong. I know you will not be hesitant to do so.

Certainly, the objective of providing better telephone service to rural America is highly desirable and commendable, but I take exception to the statement that has been made that you are going to save this telephone bank is going to save money for Uncle Sam. You have or will have we will have this year some $500 million, according to the Admiral's testimony, in loan applications under the present 2percent program. As I recall, we have been appropriating-Congress has been appropriating about $125 million a year. That has been the pattern. That leaves $373 million in loans which cannot be made under the present program.

I do not believe it is realistic to think the present 2-percent program will be in any way cut back. Additional borrowing requests will be made under the new program if the bank is established. That certainly is a Government subsidy. So this is an additional subsidy. I want to be sure that is understood. It is not going to do away with the old program. It is not going to save the Government any money at all. It is going to provide and it would provide better telephone service for rural America and I think it should be put on that basis rather than some claim that is going to save money for the Federal taxpayers.

The CHAIRMAN. I think that we have all recognized that the major purpose is to provide better service for rural people. That is generally

recognized here. As I see it from the testimony we have already had and that we had in the past, it is impossible to maintain the standard of rural phones—to move them along like we move along the rest of the phones of the Nation on $125-million-a-year loans. How much the Appropriations Committee will provide if no legislation is passed, I do not know. The Appropriations Committee has stated time and again, as I understand it, or at least the chairman has proposed to provide a reasonable amount of money at 2 percent. They seem to feel that $125 million was about that reasonable amount. As this backlog grows, certainly if they follow that policy of providing a reasonable amount, then they are going to have to appropriate more and more money each year. That does not mean to say they would appropriate $500 million a year which is the amount estimated is presently needed, but if there was a need for $200 million and they appropriate $125 million and when there comes a need for $500 million, I think we could reasonably expect they would appropriate $200 or $300 million.

Mr. GOODLING. I do not want to give the impression that I am opposed to helping people like Mr. Kleppe.

The CHAIRMAN. I did not mean to say that. I recognize that all you have sought is to prevent the well-to-do organizations from getting a free ride.

Mr. GOODLING, But I do object to helping people in my area where I know that they can afford to pay the going rate.

The CHAIRMAN. That is exactly what we are trying to do, keep those people from getting anything at less than the going rate of interest.

Mr. BURLISON. Mr. Chairman, may I ask a question?

Mr. GOODLING. I am thinking of his people, not of Mr. Kleppe personally.

Mr. KLEPPE. Mr. Chairman, I have been referred to here a few times. I am awfully glad to get into the record that density is an important part of this bill, but you did not particularly zero in on that fact. I think this is the difference basically that exists between part of Mr. Goodling's argument and the argument that is covered in the bill.

Mr. BURLISON. Mr. Chairman, may I ask a question?
The CHAIRMAN. Certainly you may, Mr. Burlison.

Mr. BURLISON. I would like to direct this question to Mr. Mott and I think that our distinguished chairman may like to comment on it as well, since he is the author of the bill that we are studying right now.

Is it your understanding of H.R. 7 that an owner of a telephone company, an REA telephone company, would have to have the consent of the Government or the REA in order to sell that company to a purchaser?

Mr. MOTT. I believe there is such a provision that was put in the bill last year. Let Mr. Harmon answer that, if he will, please.

Mr. HARMON. There is a provision in the bill which creates an alternative. It says that a borrower in order to sell his company or his interest must either get the permission of the REA Administrator or pay off his loan entirely.

Now, this provision is addressed to a borrower. A borrower is normally a corporation or a co-op. What an individual stockholder does with his stock there is no way really of controlling. Under the Constitution it is his property. He can do what he wants with it. So if a company changes hands through an exchange of stock, you just cannot stop a stockholder from selling his stock to somebody.

Mr. BURLISON. However—and this would hold true, of course-if you had a closely held corporation where one or two individuals held all the-practically all the stock.

Mr. HARMON. Yes; it would, Mr. Burlison, and I do not think that there would be any way of stopping it.

Supposing you have a family held corporation, mother and father and daughter, and the daughter is the only one left upon the death of the father. Now, with that estate, there would not be somebody has to run the telephone company. So they would want to sell. They would be forced to sell. Death and taxes is the quote.

Mr. BURLISON. What is the practical effect, what is the practical benefit or disadvantage as the case may be, to having such a provision in the bill?

Mr. HARMON. I do not think, frankly, that there is too much of an advantage except when you come into a situation where you are selling pure property rather than stock.

Mr. KLEPPE. Would the gentleman yield?
Mr. BURLISON. Yes; I will.

Mr. KLEPPE. Mr. Harmon, of course the stock you are talking about now is class B stock, is that correct!

Mr. HARMON. No, sir. I am talking about the stock held in the individual company, nothing to do with the bank stock at all.

Mr. KLEPPE. You are not talking about this bank stock?
Mr. HARMON. No, sir.
Mr. KLEPPE. I want to be sure that is clear.

Mr. BURLISON. I would like to ask if our distinguished chairman would care to comment on the question that I have as to your understanding of the bill?

The CHAIRMAN. Well, my understanding of the bill is exactly like the witness has just suggested, that the bill specifically provides for a control over the borrower. The borrower is either an individual, a cooperative, or a corporation. And it requires that if the borrower sells to somebody else that the third party cannot continue the loan without the approval of the REA Administrator. So he has either got to pay it all or he has got to show the REA Administrator why he is continuing

Frankly, that was a Dole amendment put on in this committee by now Senator Dole. I think that is clearly what the law provides here but again, I would have to say that as I understand corporation law, a corporation is an entity and there is no way that we can sit here and change corporation law, and destroy corporate existence. And those who own stock in the corporation, and I am talking about the local operating corporation, have a right to sell that stock. They can trade it, they can give it away, they can do what they please with that stock and we cannot keep them from selling their stock, nor do I think we should try to keep them from selling their stock. So that the individual stockholders certainly are at liberty to sell.

Mr. BELCIIER. That is according to the bylaws.

The CHAIRMAN. Yes, subject to the bylaws of the corporation and the laws of the State in which the corporation is organized and in which it operates. There are corporations, as Mr. Belcher points out, restricted by their own charter and bylaws, but to the extent that

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