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the general corporation laws allow the transfer, I do not think we can sit here and change those.

Mr. BURLISON. But if the owner does not have his business incorporated, if he is an individual owner, then this provision would work against him.

The CHAIRMAN. He can get permission from the Administrator of REA.

Mr. BURLISON. Is not this a rather harsh provision for the individual owner who has not gone through the legal formalities of incorporating?

The CHAIRMAN. Well, they made these loans with full notice of the law. The present law, not the pending bill but section 907 of chapter 31 of the code, provides that “no borrower of funds under section 904 or section 922 of this title shall without the approval of the Administrator sell or dispose of its property rights or franchises acquired under the provisions of this chapter until any loan obtained from the Rural Electrification Administrator including all interest and charges thereof shall have been repaid."

In other words, under existing law, they made those loans with the clear understanding that they could not sell their operation without paying off, and that is what the Dole amendment does to them, to say it again, that the Administrator shall review this thing and if he sees fit, he can continue the loan in the hands of the purchaser, but if he sees fit, he can call the loan just as the present law authorizes him.

Mr. BURLISON. And Admiral Mott, it is your position and the position of your association that in spite of this provision, you favor H.R. 7, is that correct?

Mr. Mott. Yes, Mr. Congressman. Mr. BURLISON. Now, the reason I have asked this question is this. Last night I got a phone call from Mr. Dee Rice, who heads the REA company in my district. I think you mentioned to me a moment ago in our chat here that that is the only REA company in my district in Missouri, 10th Congressional District.

Now, Mr. Rice was concerned, very much concerned, about this provision, and incidentally, he is a member of your association. So, I wanted to get this in the record here, that you and your association do favor this bill in spite of this provision.

Now, I would, if I may, Mr. Chairman, just make a brief request here. Would you, Admiral Mott, be kind enough to write Mr. Dee Rice, of Doniphan, Mo., and tell him of my concern about this matter and, Madam Reporter and Madam Clerk, would you be kind enough to provide me with a copy of this portion of the testimony starting with my question so that I may provide

The CHAIRMAN. Now, Mr. Burlison, the rules of the committee provide about the use of the record, and, of course, you are entitled to see the records, but our rules do not provide for the reporter handing members excerpts or anything of that kind.

Mr. BURLISON. Thank you, Mr. Chairman. I was not aware of that provision.

Thank you.

The CHAIRMAN. You are perfectly at liberty to see it, of course.

Mr. BURLISON. Can it be reproduced ? May a member reproduce the record ?

The CHAIRMAN. Yes. Mrs. GALLAGHER. It will be sent to you for correction. It cannot be reproduced and any other member cannot be quoted until it is corrected.

Mr. BURLISON. Thank you. Mr. Mort. Mr. Congressman, since we are in the telephone business I will do a little bit better than what you suggest. I will call him up as soon as I get back to my office and find out what the source of his concern is and Mr. Payne and I will get on the loudspeaker phone and find out what it is and then I will write him a letter and send you a copy. Mr. BURLISON. Thank you. The CHAIRMAN. Are there other questions of any of the witnesses? Mr. MIZELL. Mr. Chairman, I am interested in the comment that you had to make as to the amount of money that would be attracted for loans by the establishment of the bank and of the 2-percent money. You said that it would be multiplied seven or eight times. If this is the case, the remark was made that there would be application for approximately $500 million a year. Would this not increase the services much faster by making this money

available than we would if we continue on the same procedure?

The CHAIRMAN. We think so. We feel that this is the way, that we can by the use of a minimum of Government money move our systems along most rapidly. We know of no other way, at least I know of no other way, where you can get that multiplication of money except through the banking system.

That banking system has worked through the Farm Credit Administration, through the three sets of banks with which I am sure you are familiar. The land banks for one, and they paid out 20 years ago. There has not been any Government money in the land banks for 20 years. The intermediate credit banks which finance your local PCA's, or production credit associations, were all paid out the first of this year. And the banks for cooperatives were all paid out the first of this year. So that there is no Government money in the whole farm credit system today. It is all farmers money and what they have borrowed by the sale of their debentures and the same type of debentures are provided in this bill on exactly the same basis as we provide for them in the farm credit system, and we provide for the same type of payoff that we used in the land bank system, which was so successful, to require a payoff of 5 percent of each loan shall be used in paying off the Government or the borrowed money.

So that means by the time you have loaned your money 20 times you have paid off all of your original capital.

Now, you will turn this money over 20 times much faster than it seems to the general public. You can expand these things.

Now, the original bill, I believe, provided for a 12 to 1 ratio in the loans and out of an abundance of caution there were members of the committee who felt that we wanted to be absolutely sure that we were safe and they suggested and the committee adopted their amendment that we cut down the ratio from 12 to 1 to 8 to 1, but the same committee came along and we just last year authorized the Farm Credit Administration to make loans at the ratio of 20 to 1.

Mr. TEAGUE. But, Mr. Chairman, not at 2 percent.
The CHAIRMAN. Not at 2 percent, no. That is correct. But

you do not authorize this bank to make loans at 2 percent, either--and I am suggesting that we have experience that certainly indicates that this is the kind of thing that has worked and will work in the future.

Mr. MIZELL. Then, could not it total about $8 or $9 million, $800 or $900 million being loaned out rather than a $125 million?

The CHAIRMAN. Well, there is a limit of $50 million a year that can be put into this bank by the Government.

Mr. MIZELL. All right.
Mr. MOTT. $30 million.

The CHAIRMAN. You are right, we cut the figure from $50 to $30 million. You cannot put all of this money in at any one time under the terms of this bill. It means you might get $2 or $240 million of lendable money a year by investments on the part of the Government of $30 million.

We did cut that down again out of an abundance of caution to make sure we were not going too fast or too far, so we cut it from $50 to $30 million a year. But even at $30 we anticipate it would take care of $240 million a year.

Mr. MIZELL. Thank you very much. That answers my question.

Mr. MOTT. I might just say, Mr. Mizell, that the association looks upon this bill as a weaning process to get as many people away from 2 percent money as can afford to pay more. As I said earlier, we think it is economically unconscionable that those who can afford to pay more do not have a vehicle where they can pay more, and they are really interested, and I have heard them say this in our board meetings many, many times, look, interest rate is not a factor with us. What we want is availability of money and that is what we do not have now.

The CHAIRMAN. Are there any other questions or comments? If not, we are very much obliged to you, Admiral Mott, and to all your associates for what I think was an interesting and helpful discussion.

We will now hear from Mr. J. F. McCarthy, assistant vice president of United Utilities, Inc., Kansas City, Kans., and he will be accompanied by Mr. David Tews and Mr. William Neumeyer.


Mr. McCARTHY, Mr. Chairman and members of the committee, my name is John F. McCarthy, assistant vice president of United Útilities, Inc., a Kansas corporation. I am testifying on behalf of the Central Telephone Co. & Affiliates, the Ellensburg Telephone Co. of Washington State, General Telephone & Electronics Corp., the Geneseo Telephone Co. of Illinois, the Lincoln Telephone & Telegraph Co. of Nebraska, the Rochester Telephone Co., Inc., of Indiana, United Telephone Cos., and the Urban Telephone Corp. of Wisconsin.

Before I read my testimony I would like to introduce my associates who are here with me. On my right is Mr. David Tews, who is counsel

for the Lincoln Telephone & Telegraph Co. of Nebraska, and on my left is Mr. William E. Neumeyer, assistant vice president, General Telephone & Electronics Corp. All three of us have had long and continuing association with the telephone industry.

We welcome this, our second opportunity, to appear before you in behalf of this bill, H.R. 7, a bill to establish a telephone bank. Mr. H. R. Bollinger testified in behalf of these same companies at your hearings on H.R. 12066, a similar bill, during the first session of the 90th Congress. Mr. Bollinger's testimony, in the main, was directed toward the amendment of that bill to incorporate two fundamental principles. They were (1) to limit title II, section 201, 2-percentinterest loans to those telephone operating companies that could not qualify for the higher interest rate loans to be made by the proposed Telephone Bank; and (2) to establish an intermediate loan rate of not less than the Government's cost of money.

First, let me adress myself to the principle that the REA Administrator should only grant section 201, 2-percent loans, after it has been positively concluded that the prospective borrower cannot pay the higher telephone bank loan rate, be it the intermediate loan rate or full loan rate, as proposed in the bill. It is suggested that one way to accomplish this objective would be for the Administrator to require all telephone borrowers to first apply to the bank for a loan and when, and if, the bank turns the application down, they can then apply for a section 201, 2-percent loan. This or any procedure which would eliminate the use of 2-percent moneys in areas that can support bank rate loans would certainly serve the public interest as it would assuredly give the telephone companies serving sparsely populated and depressed areas, such as sections of North Dakota and Texas, for example, and not Pennsylvania, the first call on low-cost money. This is certainly not the case now. The specific language clarification we would suggest to effect this principle is (as suggested in Mr. Bollinger's testimony before this committee during the first session of the 90th Congress), directed toward the purposes for which the assets of the rural telephone account shall be available. This wording follows:

In section 302 (b) (1), page 4, after the semicolon at the end of line 12, insert "and no such loan shall be made if the applicant for a loan under section 201 can qualify under the policies, terms, and conditions established for rural telephone bank loans by the Telephone Bank Board;” and resume with line 13 and continue to the end of the sentence.

Section 302(b)(1) will then read: Loans under section 201 of this Act and for advances in connection therewith, except that no such loans shall be made in any year in excess of the amounts previously authorized therefor in appropriation Acts for such year or available pursuant to section 3 of this Act; and no such loan shall be made if the applicant for a loan under section 201 can qualify under the policies, terms, and conditions established for rural telephone bank loans by the Telephone Bank Board ; the amounts so authorized for loans and advances shall remain

And continue on to the end of that paragraph.

We sincerely believe that this wording supports the intent of Congress which we understand is to only grant 2-percent subsidy loans when the affected businesses cannot possibly afford to pay higher interest rates without seriously impairing their own financial condition and the economic development of the community served.


Next, let me turn to the second principle which we believe is of primary importance. This is the principle of establishing an intermediate loan rate at not less than the Government's cost of money. We believe this principle can best be incorporated in the bill with the following language change as was set forth in the previously referenced testimony of Mr. Bollinger:

Section 408(b) (3), page 19, line 18, delete “(i)", and in line 24, after “loans” change the comma to a period and delete the remainder of that line, "or (ii) 4 per centum.", and in line 25, delete the first five words "per annum, whichever is lower.".

Section 408(b) (3), will then read:

Intermediate loans shall bear interest at a rate equal to a rate determined by the Secretary of the Treasury, taking into consideration the current average market yield, during the month of May preceding the fiscal year in which the loans are made, on outstanding marketable obligations of the United States with remaining periods to maturity comparable to the average maturities of such loans. All other loans made * * *

And this continues on to the end of the paragraph.

It is our firm conviction that this language more fully supports the intent of Congress which we understand is to more nearly relate loan programs to the Government's cost of money which is still significantly Îower than regular commercial loans. We are convinced that an intermediate loan rate, pegged to the Government's cost of money, will enable as many telephone companies to move up out of the 2-percent class as would a maximum rate of 4 percent. Furthermore, we trust that the REA Administrator and the Bank Board would establish terms, policies, and conditions which would make it as easy, for those companies showing need, to obtain cost of money loans as it would be for them to obtain a 4-percent loan. To reiterate, we do not believe that the bank's intermediate loan program with a loan rate of not less than the cost of money would lock any more telephone companies in the 2-percent program than an intermediate loan rate not to exceed 4 percent. Furthermore, we suggest that the cost of money approach would obtain greater support in Congress and elsewhere.

Referring again to the previous testimony in behalf of these several companies, some 17 amendments to the telephone bank bill were suggested. These have been reduced into the two principal and most important amendments as set forth earlier in our testimony in order to maintain harmony within the independent telephone industry.

To conclude, we are suggesting that the same amendments which were set forth by the United States Independent Telephone Association in earlier testimony be incorporated in the bill. We believe that if these amendments are incorporated, then the bill will be a more meaningful and useful piece of legislation and we would have no opposition to its adoption.

Thank you again for this opportunity to testify.
We will be happy to answer any questions at this time.
The CHAIRMAN. Thank you very much, Commissioner McCarthy.

Any one of your associates care to say anything or just all available
for questions?
Mr. McCARTHY. We are all available for questions.
The CHAIRMAN. Are there any questions?

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