for isolated rural areas.

Present equipment requires the subscriber to make a connection by voice communication with an operator. The object of the present project is to develop equipment that will work satisfactorily directly into dial telephone switching equipment. REA foresees many uses for the new equipment in rural areas. These include telephone service to isolated ranches and farmhouses where wire lines are costly and impractical; mobile subscriber service for farm, commercial, or industrial use in automobiles, trucks, and boats, and radiotelephone communications between the telephone office and its own mobile units for maintenance and operation. With the development of transistors it may be possible for the fixed station radiotelephone to continue operation in electric power emergencies by use of a recently developed lifetime rechargeable battery. The equipment will be tested by REA engineers for a year or more to determine costs and quality of service. It is hoped that the tests will show costs substantially below those of wire line for isolated rural establishments while providing equivalent quality of service.

Fiscal year 1958

Since the inception of the rural telephone program in fiscal year 1950 loans have totaled almost $400 million. During this period the percentage of farms with telephone service has increased from about 38 percent to about 54 percent. There is an increasing interest in modern telephone service in the remaining unserved areas and in the improvement of service in those areas where present facilities are inadequate and do not meet the needs for modern communications.

Applications.-Applications on hand at the beginning of fiscal year 1958 totaled $63,048,000. It is expected that additional applications totaling $100 million will be received during the fiscal year.

Loans. A carryover of about $32 million in unused funds from fiscal year 1957 added to the new authorization of $60 million for fiscal year 1958 provides a total of approximately $92 million in loan funds for the rural telephone program this fiscal year. Loans of about $80 million are planned for the fiscal year 1958. It is estimated that these loans will provide for new or improved service to about 120,000 rural subscribers on an estimated 40,000 miles of line. Cumulative loans through 1958 will provide new or improved service to about 983,329 subscribers.

Loan funds advanced to borrowers.-With the expected increase in our construction activities, advances of funds are estimated at $90 million in 1958, an increase of more than $17 million over 1957. The number of borrowers authorized for advance of funds will increase from 97 in 1957 to about 110 in 1958. The cumulative amounts advanced will rise to about $316,748,656 by the end of the year.

Subscribers served and construction progress.-Activity is expected to increase substantially during the fiscal year 1958. It is estimated that 100 borrowers will cut over 1 or more of their exchanges in 1958, bringing total borrowers with exchanges cut over to 423; that 40,000 miles of line will be newly constructed or rebuilt, bringing the cumulative total to 143,000; and that 102,000 subscribers will get new or improved service during the year. It is estimated that by the end of 1958, about 429,000 rural subscribers will have received new or improved service through rural telephone loans.

Expedition of construction and new development.-The rate of construction has improved as a result of improved engineering procedures and the requirement for complete area coverage surveys prior to the granting of a loan. Private manufacturers are being encouraged to develop and manufacture self-supporting cable, economical small central offices, and other equipment. New technological developments in carrier systems, microwave equipment, and voice repeaters hold promise for extending service to sparsely settled areas, where costs of wire line and other conventional equipment present difficult situations.

Debt service payments.-The cumulative amounts of interest and principal due will rise from $8,063,166 through June 30, 1957, to about $13 million through June 30, 1958.

Work with borrowers.-The total number of borrowers will rise from 551 on June 30, 1957, to an estimated 650 by June 30, 1958. During fiscal year 1958, REA will have to devote attention to helping borrowers secure and develop the best management available and to attaining their maximum revenue point as rapidly as possible. Attention will be concentrated on delinquent borrowers and on those experiencing unsatisfactory or adverse financial trends. Many of these

borrowers lack experience in the telephone field or with the operation of modern telephone equipment.

Cumulative statistics.-The cumulative figures presented in the following tables show the progress that has been made in the rural telephone program since its inception in October 1949.

Mr. WHITTEN. Mr. Scott, I would like to make mention of the fact that last year the executive branch sent up a message on interest rates on loans by all agencies which was referred to the Banking and Currency Committee. That committee has taken no action to date.

Last year, the Hiestand bill was introduced to raise rates on REA loans. This was referred to the committee also.

PRIVATE FINANCING FOR REA

On February 4, 1958, we are advised that the President sent up an additional recommendation, the purpose of which would be to require the REA to obtain its money from private sources with a Government guaranty on repayment.

Frankly, after looking this matter over myself, I cannot see that it would benefit anybody except the money lenders. It is quite apparent

on its face that it would result in higher cost to REA cooperatives, and as a result to the consumers in the REA system.

Further, it would increase the cost to the Government, in that the liability of the Government would be increased by virtue of the fact that the Government would guarantee loans which would carry a higher rate of interest, all of which would be guaranteed by the Gov

ernment.

In other words, here is a proposal which would give profits to the private money lenders. It would increase the Government's operation, and increase the cost to the REA associations, and thereby to the REA

consumers.

There have been charges that there are many things in recent years that the administration has done which are directed in the same way. I would point out that for a period of time the Commodity Credit Corporation was required to finance itself from private sources at a greatly increased cost to the Government.

I say this in advance because I want you to know my feelings, and I think it is concurred in by this committee. If you have anything to convince us that it would help to pay higher rates on funds fully guaranteed by the Government to the money lenders for the consumers of electrification on REA lines, and which may well increase the Government obligation, I would be glad to have it. I doubt that you can do it.

We would be glad to have your statement.

GENERAL STATEMENT OF THE DIRECTOR OF AGRICULTURAL CREDIT SERVICES

Mr. SCOTT. Thank you, Mr. Chairman.

We appreciate this opportunity to again meet with you and discuss matters pertaining to the Rural Electrification Administration.

LEGISLATIVE PROPOSALS FOR FININCING LOANS

The President in his budget message recommended additional appropriations of $206 million for the rural electric and telephone loan programs and referred to legislative proposals which would be made. He spoke of the growing needs for electricity in rural areas which require additional generating capacity and heavier transmission and distribution facilities. The President stated:

It would be in the public interest to broaden the sources of capital from which REA systems may obtain the financing necessary for continued growth and ade

quate services to consumers.

Mr. WHITTEN. I understand you are correctly quoting the President when he says:

It would be in the public interest to broaden the sources of capital from which REA systems may obtain the financing necessary for continued growth and adequate services to consumers.

That is, of course, the President's statement, but I would like to know if you concur in that opinion; and if so, why do you believe it is in the public interest.

Mr. HORAN. Mr. Chairman, I wonder if we should not have the complete statement read, because if we are going to go through interrupt

ing the witness it is not adding to our enlightenment, and we can interrupt him all through, but I think he should be given the privilege and courtesy of reading his entire statement.

It may be we will have some of these things answered.

Mr. WHITTEN. I might say that when the chairman asks a question, he might profit a little bit if he were not interrupted too. I just asked a question, and I do not think it is a matter of discourtesy to the witness to ask him a question.

Mr. Scorr. Mr. Chairman, I do not know what the President had in his mind in making this statement. I do feel that there is some more information in this statement that certainly so far as I know constitutes the main reasons why these legislative proposals have been made, and I started off by saying

Mr. WHITTEN. My interruption came because that is a statement from the President, and I thought it appropriate to ask that question at this time.

I can readily agree that you would not necessarily know what the President had in mind when he said it would be in the public interest. My question was for you to tell me why it is that you feel, if you do, that it is in the public interest.

Mr. Scorr. Mr. Chairman, this legislative proposal in part provides for authority to set up a revolving fund. That would have the effect of permitting the obtaining of financing in the open money market, based on the assets of this fund, which would include all of the loans that have been made-some $3 billion $500 million, all appropriated funds, the proceeds of the sales of bonds, all new loans made, the undisbursed balances of REA authorizations and all collections on loans.

In other words, it would avoid, to the extent that private money is obtained and used for loans, a further increase in the public debt for additional appropriation of Federal funds.

Mr. WHITTEN. May I interrupt you to point out that, while the listing of the public debt would be changed as a matter of bookkeeping. But you agree, do you not, that it would increase the public liability on the debts that the public actually owed, the potential liability. Under this proposal the Government would be liable for these amounts that might be borrowed from other sources at higher rates of interest?

Mr. SCOTT. Mr. Chairman, in title 3 proposal here, providing for a revolving fund, the securities would be issued against the fund. The collections that would be made from these loans would first be used to meet maturities on the outstanding bonds that are issued.

Now, while there is always implied an obligation on the part of the Government, I believe that in this particular proposal there is no direct obligation on the part of the Government except to the extent that additional appropriated funds are made into this fund. In other words, Mr. Chairman, this is different than the other proposal also in this legislation for insured loans where there is a more definite liability on the part of the Government such as you have referred to.

VOLUME OF REA LOANS

Mr. WHITTEN. Tell me, Mr. Scott, if you can, what is the amount of money that the Government has loaned to various REA associations, approximately?

Mr. Scort. $3,600 million, as I recall.

Mr. WHITTEN. What security does the Government have now? Mr. SCOTT. There are first liens on these rural systems.

Mr. WHITTEN. Under this revolving fund, considering the REA associations which sell bonds, who then would have first priority on this net value of the local association?

Who would have the first lien under that approach?

Mr. Scort. The bondholders.

Mr. WHITTEN. The bondholders?

Mr. SCOTT. Yes; that is my understanding, Mr. Chairman.

Mr. WHITTEN. Thus, the Government would be surrendering its first lien on the $3 billion plus of security that it now has in favor of the purchasers of these bonds, which would be private lenders; is that not correct?

Mr. Scorr. The fund, against which these debentures and bonds would be issued, would include all of the loans which are outstanding now, all new loans that are made from the proceeds of additional Federal funds and bond proceeds, the funds obtained from the sale of the debentures, and loan collections.

In other words, it all goes into the common fund under this proposal. So that while it is true that the Government would be taking a second position on collections that come in from the outstanding loans to meet interest and maturities on the bonds issued. The experience has been so favorable on loan repayments, which I know you recognize, that it would seem that the risk to the Government of issuing these debentures would be a very moderate one.

Mr. WHITTEN. It would be up instead of down, as far as the Government's position is concerned, would it not?

Mr. SCOTT. I believe it would be limited, Mr. Chairman, to the extent that the maturities on these bond issues could not be met by the repayments on the loans made from those proceeds. I think that is rather remote.

INCREASED INTEREST RATE

Mr. WHITTEN. Under this course that you recommend, have you given consideration to what the private utilities now pay for their money? What would be your estimate as to the increase in interest that would be paid by the borrowers-and that would be guaranteed by the Government to the extent that the Government is waiving its first lien on the present equity that the associations have in their faciliies? Can you give us an estimate as to what that would be?

Mr. Scorr. It apparently would be somewhere in the range of a half a percent more than the rate of comparable Treasury issues. That is the best estimate we have.

Mr. WHITTEN. What is that based on, Mr. Scott? That estimate,

I mean.

Mr. SCOTT. It is comments of men in the Treasury Department who are accustomed to handling such securities.