representation on the board that controls the activities. When the Government ceases to have that controlling interest in that capital it seems to me that the controlling representation on the board should pass to the people who do have the majority of the stock. That would mean the cooperatives who put their money into the banks. I do not mean by that that you should then turn these banks loose and say, "You can just go off here and go into any kind of business that you want to go into, to run a railroad or a pawnshop." I think that they would certainly still be subject to all of the controls of this bill and of the REA basic legislation which prescribes the kind of loans that they make. I am not suggesting that we turn these people loose or these banks loose. I am suggesting that the operation of the banks should pass into the hands of the people who own them. I think that is one of the indicia of ownership, and it is one of the things for which I think the people will invest their money who would not invest their money if they are not going to have that opportunity to control their own investment. I am simply throwing this out, because I think the failure to write this in-and I know that I was told at one time, at least, that it had not been written in because it was hard to write and it would just take more time. I know that, of course, since I undertook to write it. I do not claim to have done a job of any great proportions, but I did outline something that I hope this committee can follow, following the precedent that we have in the Farm Credit Administration, telling people who invest in these banks what they can expect in the way of control of their own money. Because most people do not part with their money voluntarily unless they know what their control is going

to be over it in the future.

I do not believe that they will do that here. I think that you will move this into private hands much faster if you take the trouble to write this out now instead of wishing it off on somebody 15 or 20 or 40 years from now. I think that people would just like to know what is going to happen. And that is my only criticism here.

The CHAIRMAN. Mr. Belcher?

Mr. BELCHER. I had a question back there: What is the objectionable part on the part of the Department of Agriculture against the type of operation that was set up in H.R. 14000?

Secretary FREEMAN. Really, no strong objection, Congressman Belcher. We felt that the procedure was somewhat cumbersome. I think there is a clear understanding in the record-it is sharply clearthat both bills' objective is to move as fast as possible into private control, ownership, and operation. We have no strong feeling as to the mechanics of this. I am sure that the committee can work it out, so that as long as the Government has a significant amount of money invested, it can carry out the obligations it has to the public. The transition is one that I think is a matter of detail. I am sure that something can be worked out.

Mr. BELCHER. There would be no serious objection, as I understand it, if this committee did make a provision which would transfer the majority control to the private investors at the time they are the owner of as much as 51 percent of the stock. Is that right?

Secretary FREEMAN. I have no objection to this. The committee, in its wisdom, may want to consider very carefully whether the Gov

ernment will want, when 51 percent private ownership is reached, to relinquish effective control at that time. It would be my general feeling that the Government ought to have a significant amount of control so long as it has a heavy capital investment. When the Government has 49 percent, it ought to have a say as to what might take place. I think that is a matter of degree which can be determined as we get into working out the actual formula.

Mr. BELCHER. If I understood Mr. Poage correctly, what he wants is some kind of a guarantee in this bill that at some future time the control will pass and not just leave it open to the administration and the Congress some 15 or 20 years from now.

Mr. POAGE. That is correct.

The CHAIRMAN. Will you yield there?

Mr. BELCHER. Yes.

The CHAIRMAN. Why could we not look at the language used in these other programs? How did we handle it in the case of the land banks? Mr. BAGWELL. You may recall that in the Farm Credit Act of 1953 we rewrote the law with reference to the boards of directors for the land banks, and it was at that time when the law provided for the gradual shifting of ownership and control from Government hands into private hands as the Government capital in the other banks was replaced with private capital. I am sure that we can work this out in this bill.

The CHAIRMAN. You can look at that language.

Mr. BAGWELL. We will be happy to work on that.

The CHAIRMAN. They would pay the Government out, and then they would own the business. The PCA's have already paid out; have they not?

Mr. BELCHER. As a matter of information, what incentive is going to be offered for private investors to buy stock in this REA bank that would cause it to be a good investment?

Secretary FREEMAN. Will you repeat that, please? I am sorry I did not hear. Maybe the reporter could read it back.

Mr. BELCHER. I say what inducement will be offered by the banks to induce investors to buy stock in this bank? Will the dividends on the stock be sufficient in nature to encourage private investors to buy their stock? Is that the way that you will get them into it?

Secretary FREEMAN. I think, primarily, it will come because of the requirement that the borrowers buy class B stock to the extent of 5 percent of their loans. They will buy in as they borrow, which is comparable to the provision in the farm credit system. In addition, we would hope that many REA borrowers would come in and buy stock because they want this program to work as a source of future financing. Mr. ABERNETHY. Will you yield there?

Mr. BELCHER. Yes.

Mr. ABERNETHY. Let me see if I understand this. If a cooperative, a borrower, let us say, wants to borrow $100,000, does that mean that they will be advanced $95,000 in money and $5,000 in stock? Secretary FREEMAN. That is correct.

Mr. ABERNETHY. Thank you.

Mr. BELCHER. Then, the stockholders of this bank will be an association themselves, and private capital outside of the asociation will make investment?

Secretary FREEMAN. It is expected that a good deal of the private capital will come from outside, from the sale of debentures which will be purchased because they pay a sound rate of interest and because they carry with them a Treasury backing, so that their security is guaranteed.

Mr. STALBAUM. Will you yield there?

Mr. BELCHER. Yes.

Mr. STALBAUM. Mr. Secretary, on that point: Is it not true that the debentures are no part of the capital structure of the bank? Secretary FREEMAN. That is correct.

Mr. STALBAUM. That is just to keep the record straight.

Secretary FREEMAN. The debentures are not stock. These are like bonds in a private business corporation; they are bought for investment.

Mr. BELCHER. In order for any debenture or stock to pay sufficient dividends, those dividends will have to be paid out of the loans made by the banks of the various associations, would they not? Secretary FREEMAN. Yes; that is correct.

Mr. BELCHER. That is the only source of their income?
Secretary FREEMAN. That is correct.

Mr. BELCHER. The charges to the association will have to be high enough to make it a good investment for a private investor, will it not?

Secretary FREEMAN. Yes.

Mr. BELCHER. What rate of interest do you contemplate being necessary to provide that type of incentive to the private investor? Secretary FREEMAN. First, that would depend upon the money market at a given time and place, but since the bank debenture is carrying with it a Government backup, it may go at a rate below the socalled prime rate, and as such it is a workable rate.

Mr. BELCHER. It would be at least sufficient to meet the rate of return.

Secretary FREEMAN. As Government bonds, I would say.

Mr. BELCHER. Yes, the rate of return on Government bonds or any other type of similar investment.

Secretary FREEMAN. Or any other secured debenture or Government paper. Otherwise it would not sell.

Mr. BELCHER. Thank you.

The CHAIRMAN. Mr. Gathings?

Mr. GATHINGS. According to your statement, there are some 330,000 customers that are now being served by the REA-is that correct330,000 commercial enterprises that are receiving REA power? Secretary FREEMAN. Commercial enterprises? Yes.

Mr. GATHINGS. When did the system start? That is, to say, when did the REA embark upon a program of that kind?

Secretary FREEMAN. I think right from the beginning. The area which an REA borrower services includes nonfarm as well as farm establishments. When commercial or business enterprises operate within the rural service area where the lines run, the system properly serves all of the potential customers within that area, and that has included from the beginning commercial and business enterprises. Mr. POAGE. Will you yield there?

Mr. GATHINGS. Yes.

Mr. POAGE. The very first time I had an argument about the REA was in a store in my district in 1936. The storekeeper was asking me whether he ought to let the power company wire his store or not, because they were not going to serve anybody else there except those right down the road. On the other hand, he said the REA people said that if they came in that they would serve not only the store but all of the neighbors back in the country. I urged him to let the co-op serve all of them. That was a commercial enterprise. Mr. GATHINGS. What year was that?

Mr. POAGE. 1936.

Mr. GATHINGS. How many, Mr. Secretary, of the general stores would be included in this 330,000 figure?

Secretary FREEMAN. I do not know.

Mr. GATHINGS. That is, those who get service that would be considered industrial enterprises?

Secretary FREEMAN. To be perfectly frank, I would have to check. I really do not know the exact number.

Mr. GATHINGS. According to your statement, 150,000 additional enterprises each year will of necessity be required to be served by this newly created setup in the years ahead, in 15 years. Is that your estimate?

Secretary FREEMAN. That is our estimate of the number of new consumers added annually by REA-financed electric systems. Mr. STALBAUM. Will you yield?

Mr. GATHINGS. Yes.

Mr. STALBAUM. Those are all types of consumers, are they not?
Secretary FREEMAN. That is on what page?

Mr. STALBAUM. On page 5 of your statement.

Secretary FREEMAN. I do not recall the exact wording.

Mr. STALBAUM. In other words, these are not just commercial or business consumers, but all consumers if I read your testimony correctly.

Secretary FREEMAN. Yes. This would cover not just commercial enterprises but all consumers.

Mr. STALBAUM. Thank you.

Mr. GATHINGS. And these are additional customers, are they not? Secretary FREEMAN. Yes, sir.

Mr. GATHINGS. The 150,000 are additional?

Secretary FREEMAN. That is correct-additional consumers. That would be broader than just commercial enterprises.

Mr. GATHINGS. And you estimate that there will be required for both the electric and the telephone banks $11 billion of new capital in the next 15 years?

Secretary FREEMAN. That is the estimate for both the electric and telephone systems.

Mr. GATHINGS. And of that figure, $8 billion would come from the electric bank and $3 billion from the telephone bank?

Secretary FREEMAN. That is correct.

Mr. GATHINGS. That is a sizable increase over the $5,100 million that has been pumped into the present REA system in the past 15 years! Secretary FREEMAN. That is correct.

65-357-66- 5

Mr. GATHINGS. So that it would be better than double?

Secretary FREEMAN. That is right.

Mr. GATHINGS. To anticipate the needs in the next 15 years?
Secretary FREEMAN. That is right.

Mr. GATHINGS. At this time, Mr. Secretary, how many of the farms in America are electrified?

Secretary FREEMAN. About 99 percent of the farms are electrified. We have about 3,300,000 farms in America, so that it would be more than 3 million farms that are electrified.

Mr. GATHINGS. So that under this new authority that is being sought here, we are going to do something else besides carry electricity to the farmers and construct telephone lines?

Secretary FREEMAN. I think that there are two tasks, carrying service to new consumers, and taking care of greatly increased loads. The bigger part of it will be the greatly increased loads.

Mr. GATHINGS. There is a necessity for increased loads?

Secretary FREEMAN. Yes, there is more use of electric power and electric equipment.

Mr. GATHINGS. There is more than just turning on the light in the barn. There is quite a lot of electricity needed for other purposes? Secretary FREEMAN. That is right.

Mr. GATHINGS. I wanted to ask you about a provision of the legislation which you support. It is the same system that is now in vogue with reference to the payment of taxes by the REA?

Secretary FREEMAN. That is correct.

Mr. GATHINGS. You do not anticipate any change whatever?

Secretary FREEMAN. No, sir. The REA-financed systems pay taxes like everybody else.

Mr. GATHINGS. They pay taxes on what?

Secretary FREEMAN. They pay taxes on all of their property just like everybody else.

Mr. GATHINGS. Would you furnish for the record, Mr. Secretary, just what taxes the co-ops are paying?

Secretary FREEMAN. Surely.

(The information requested follows:)

TAXES PAID BY ELECTRIC AND TELEPHONE SYSTEMS FINANCED BY REA

In the most recent five-year period for which composite data are available, the following aggregate amounts of taxes were paid by REA borrowers. Figures shown cover all borrowers, cooperative and commercial; separate cooperative data are not available.