has a lot of criteria set out in the bill by which he determines whether he shall do that or not, and he might not.

Mr. WHITTEN. You don't think his personal endorsement would add anything to the strength of the debentures on the market?

Mr. ELLIS. Somebody seems to stand pretty well with Wall Street around here, and so maybe it would.

In any case, we have had experience in American agriculture with insured loans, and in the American economy with insured loans. How many veterans walk the streets today without finding lenders under the veterans' section of the Federal housing program?

Sure, those loans are insured, but they have got to find the money first, and some of them aren't able to find it very well.

Another significant thing about this bill, and a mystery to us, is why they are virtually abolishing the REA Administrator. They are. The REA Administrator is mentioned all through titles I and II, but these proposed titles III and IV do not mention the REA Administrator.

As you know, the Secretary has been in the process of moving the REA over to the Director of Agricultural Credit Services anyway. This would do the job completely. There wouldn't be any more REA Administrator except to the extent as the Secretary would see fit to delegate something back to the Administrator, but when he did that, it would be outside of the controls, the nonpartisan controls, and the many other controls, of titles I and II. This is a very, very dangerous piece of legislation in my opinion.

Mr. ANDERSEN. Mr. Chairman, I would like to interrupt Mr. Ellis, if I may.

Mr. Ellis, do you think it conceivable that the Congress will fall for anything of this nature?

Mr. ELLIS. No, I don't. I don't think this Congress would.

Mr. ANDERSEN. I don't either. I might say this. I think that this subcommittee has already put into the record sufficient doubt as to any such proposed legislation. I feel we have already done a pretty good job of knocking it in the head. I hope so at least.

Mr. ELLIS. All right, I will bring my comments on it to a very Mr. ANDERSEN. I am glad to see you add to our contribution along that line because I feel the time to kill a thing like this is to kill it at its inception before a lot of unknowing people get enthusiastic about something they don't know about.

Mr. ELLIS. Right.

Mr. ANDERSEN. So I am glad to see you bring this up.

Mr. ELLIS. Just a couple of other sentences.

Mr. ANDERSEN. I think you are absolutely right when you state it will eliminate the power of the Administrator-make him a figurehead.

Mr. ELLIS. The President in the budget estimate message, you know, was asking for $150 million under the old law and indicated elsewhere $150 million would be requested under the new law. If there isn't going to be any new law, we certainly need the full amount of the requirements under the old law.

Mr. ANDERSEN. I might say I criticize the gentleman from the Department of Agriculture for even assuming-bringing in a budget based on the fact of something being adopted by the Congress. I think that is presumptuous on their part.

Mr. ELLIS. Most unusual, too.

Mr. ANDERSEN. It is very unusual, so I believe, Mr. Chairman, you have joined with me in requesting them to send us a budget based upon facts as they exist and not upon the assumption of something to happen in the future.

Mr. WHITTEN. We asked them to give the full figures.

Mr. ANDERSEN. I believe we did.

Mr. VURSELL. Mr. Chairman, may I interrupt at this point and I make the unusual request, because I have a party waiting at 4:30 at my office.

Mr. WHITTEN. I have, too.

Mr. VURSELL. I would just like to associate myself with the remarks of the gentleman from Minnesota.

I can't conceive of this committee approving this new legislation and I can't conceive of the Congress passing this legislation. I think we are pretty much in agreement on this side of the table. I think it was a mistake to bring it up at this time without due study and I just don't believe that it is safe to take a step that might destroy something or probably take a chance on destroying something that has proved so beneficial and valuable to the economy of our country and the farmers as well.

With that I would like to be excused for the rest of the session. Mr. ANDERSEN. I would like to add Mr. Vursell's statement to mine if I may, Mr. Chairman. It enlarges on mine very effectively. Mr. NATCHER. Mr. Chairman, will you yield at that point? Mr. WHITTEN. I yield.

Mr. NATCHER. Mr. Ellis, the people in my home State of Kentucky believe that the sure way to destroy REA is to increase interest rates and to make loans more difficult to secure. There is room in my district and in the State of Kentucky for all power, both private and public. My people certainly do not want to destroy REA.

Mr. ELLIS. Thank you, and I am happy to hear you all say these things. It pleases us very much.

Mr. Chairman, I will wind this up in two words. I think I can shorten it if I may.

Mr. Chairman, I would like to ask to have inserted in the record, if I may, our analysis. It isn't very long.

Mr. WHITTEN. We will be pleased to have it.

Mr. ELLIS. Of this new bill.

(The analysis referred to is as follows:)

ANALYSIS OF ADMINISTRATION REA BILLS

National Rural Electric Cooperative Association, Washington, D. C.

The administration has asked Congress to pass two anti-REA bills which would put Hoover Commission recommendations into effect. The Capehart-Hiestand bill would triple financing costs for all rural electrics. The administration's new Wall Street proposal would provide for Wall Street private financing. Here are some important features you should know about:

1. The proposal sets up an alleged revolving fund. But this revolving fund is not a fund, and it cannot revolve. Congress would still have to au

thorize money, as now, to keep this deceptive fund alive.

2. A so-called loan-insurance scheme is set up, but you would still have to find the money you need; your lender would get the insurance.

3. The Secretary of Agriculture could subordinate your present mortgage in order to give your Wall Street lender a higher lien.

4. The Secretary could sell your mortgage to your enemies.

5. No leniency is provided-if you fall behind you would be foreclosed. 6. No refinancing is provided-once you're on the hook, you're stuck, even if refinancing might reduce your interest costs.

7. Partial advances are out-you would pay full interest on your full loan right from the start.

8. No procedure is set up for deciding who is to get 2 percent money, if any, or 6 percent money.

9. The REA Administrator is, in effect, abolished-he isn't even mentioned in what would be the new parts of the law.

10. The Secretary of Agriculture is the specified official, but by controlling financing and rates, the Secretary of the Treasury could still dominate all REA policies.

In a nutshell, this proposal insures nothing but bankruptcy for you. It revolves nothing but your system.

THE REA WALL STREET FINANCING BILL

On February 17, 1958, Under Secretary of Agriculture True Morse, transmitted to committees of the Congress, for Mr. Benson and Mr. Eisenhower, a proposed bill "to amend the Rural Electrification Act to encourage private participation in financing the loan programs."

This proposed bill calls for the addition of two new titles to the present REA Act-title III, revolving fund, and title IV, insured loans. The insured loans section was described at the Dallas meeting.' The revolving fund section has been added by the administration since then.

The revolving fund.-By adding title III to the present REA Act, the proposed legislation would establish what is deceptively called a revolving fund. Examination reveals that it is neither a fund in the usual meaning of that word nor does it revolve in the manner of a traditional revolving fund. Title III is obviously misnamed to make it more palatable.

Under the proposed legislation, the fund is supposed to contain the following items: loans currently outstanding, collections from borrowers, any new congressional authorizations, and proceeds from private financing operations. The proceeds from private financing operations cannot be more than 50 percent of the total of the other items.

At least two items in the fund are highly deceptive: (a) the loans currently outstanding, and (b) the collections from borrowers. Neither of these can be available for new loans.

Loans outstanding obviously can't be loaned. What is even more significant is this as soon as a repayment on an outstanding loan is made these collections must be sent immediately to the United States Treasury. They are never available for new REA loans.

So, to say collections from borrowers are part of the fund is like teasing a child by putting money in his piggy bank to get him to go to bed; then taking it out again as soon as he's asleep.

Part of this sleight of hand is revealed in the order of priority in which assets of the fund must be used.

According to the proposal, the fund must be used in the following order of priority:

First, private lenders must be paid their interest and principal.

Second, the United States Treasury must be paid principal and interest due it.

Third, the Secretary of Agriculture must discharge other liabilities he had incurred under the act, such as losses in connection with loans and his costs of operation.

Finally, there could be new loans to rural electric and telephone systems. Funds for these new loans would have to come from private lenders and/or from any further congressional authorizations.

By the administration's own reasoning the fund would revolve to an everdecreasing amount as the systems repaid their loans via the fund to the Treasury, unless the Congress, as now, would continue to authorize new money for REAorganized confusion.

1 See printed report of Clyde T. Ellis, general manager of NRECA, entitled "Stand Your Ground." February 4, 1958.

Other provisions. But there are also other and more far-reaching detrimental provisions. For instance, the Secretary of Agriculture, as managing trustee of the fund, would have authority to use any borrowers' notes which are considered as assets in the fund to pay off liabilities such as would develop if a borrower defaulted. In other words, the Secretary could sell these notes to a private lender; the private lender in turn, could sell the paper to a power company or its owners interested in holding a rural electric's mortgage. Thus, a co-op that defaulted could effectively end up in the hands of a power company.

There is no provision for extending payments for delinquent borrowers. Foreclosure is the only course.

There is no provision for refunding or refinancing. Therefore, a borrower would be prevented from taking advantage of any drop in interest rates that might occur in the future.

There is no provision permitting a borrower to draw down partial amounts of a loan. This means money would be advanced as loaned and would draw interest from that date.

If the REA Wall Street bill is passed and the Capehart-Hiestand interestincrease bill is not passed, then loans from the revolving fund would carry different rates of interest depending upon the source of the money. Any loans from new funds appropriated by Congress would still be made at the present 2-percent rate. Any loans made from private sources would be made at the higher rates of interest that the private financiers are expected to demand-plus the service charge.

The proposed legislation does not outline the procedure to be used for selecting those borrowers who would be entitled to the 2-percent money, if any. It could be a selective process, subject to discriminations, or it could be prorated among borrowers as such money may or may not be available at a given time.

And, in keeping with the powers contained in the Reorganization Act of 1953. this bill also removes all effective authority and responsibility from the REA Administrator, and places it in the hands of the Secretary of Agriculture, who, incidentally, is not bound by the nonpolitical requirements of the REA Act.

Bonds and debentures.—In order to bring private money directly into the fund, the Secretary of Agriculture would be authorized to issue notes, bonds, debentures or other obligations in the name of the fund-up to the amount Congress would specify for any given year, but never more in the aggregate than 50 percent of the amount to which the fund might be diminished. Assuming all the systems paid off their loans, this could be 50 percent of zero.

And the Secretary of Agriculture could not act without approval of the Secretary of the Treasury. Thus, the Secretary of the Treasury has responsibility for approving (a) when bonds, etc. shall be sold, (b) the amounts to be sold, (c) how long they shall run, and (d) what rate of interest they shall bear.

Since the proposed bill says the obligations are in no manner guaranteed by the Government, the interest rates would normally run considerably higher than the usual Government obligations. Obviously, administration and other costs would be added, also.

Under terms of the proposal, congressional authorization would still be necessary each year as now, to increase the Federal money in the fund-or even to keep it from diminishing—and congressional action would also be required to specify how much of the borrowed private money may be used in any 1 fiscal year.

Insured loans. Title IV would establish a program of Federal Government insured loans from funds made available by private lenders.

Under this proposal, a rural electric or telephone system needing a loan would have to find a money lender willing to make the loan. If and when the borrower finds a willing lender, he would then apply to the Secretary of Agriculture who is authorized—but not directed-to insure the loan if it qualified under such rules and regulations as he himself deems appropriate.

To be elegible for insurance, a loan must bear interest at a rate approved by the Secretary of the Treasury plus a service charge of at least 1 percent. The loan is also subject to "such other terms and conditions as the Secretary of Agriculture may determine will encourage participation by private lenders." Nothing is said about encouraging rural electrification. As the REA Administrator has stated, without trying to guess the interest rates, interest will fluctuate and vary by regions.

By agreement in the insurance contract, the Secretary of Agriculture will service the insured loans. Thus, the banker takes no risk and does not even have to worry about loan servicing.

The insurance service charge will be set by the Secretary to cover administrative expenses and create a reserve for probable losses. This is an open-end affair. It has a floor but no ceiling. The charge, says the proposal, shall be "an annual charge at a rate equal to at least 1 percent of the outstanding principal obligations of the loan."

The Secretary will put these insurance charges along with other specified receipts into a "rural electrification and telephone loan insurance fund."

Subordination. The proposal to give the Secretary of Agriculture power to subordinate present REA mortgages now totaling about $3 billion in order to give private moneylenders a first mortgage is a part of title IV.

The Secretary is prohibited from subordinating prior liens in connection with the insured loan program. Except for this limitation he may use his authority when he finds that (a) the private money may be obtained at "reasonable rates and terms," (b) the security is "reasonably adequate," and (c) the loans will be repaid "within a reasonable time."

INTEREST INCREASE BILL WOULD TRIPLE FINANCING COSTS

Legislation to at least triple the REA interest rate was sent to the Congress last July by the President's Director of the Budget Percival Brundage who said that raising the interest rate will "encourage substantiation of private financing." Senator Capehart of Indiana introduced this bill in the Senate (S. 2427) and Congressman Hiestand of California in the House (H. R. 8714).

The Capehart-Hiestand interest-increase bill proposes to give the Secretary of the Treasury the power and responsibility to set the minimum rate on loans. He is instructed to fix the rate "taking into consideration the current average market yields of outstanding marketable obligations of the United States having maturities comparable to the loans made by the department or agency."

The bill provides that the agency may charge more than this minimum set by the Secretary of the Treasury, but not less.

The bill also provides that an additional amount shall be added to the interest rate adequate to cover REA administrative expenses and probable losses.

By using long-term maturities as a yardstick for fixing the interest rate, the bill selects the highest priced of the Government paper as the guide. The Treasury's long-term bonds always pay a higher interest than short-term borrowings which account for most of the Government's debt. As of June 30, 1957, only 1 percent of the total Federal debt was in the form of securities with a maturity of 35 years or more.

To tie REA interest rates to the long-term cost of money would be downright dishonest. Government does not finance that way. Moreover, if the administration and Congress are going to insist on regarding REA loans as expenditures out of income (with which we don't agree) then it could be argued just as logically that, with a balanced budget, there is no interest cost at all to the Government.

GENERAL CONCLUSIONS

The administration proposals would emasculate one of the most successful social and economic programs ever initiated by the Federal Government. In two decades this program has succeeded in bringing rural America out of darkness. Now, President Eisenhower would subordinate the welfare and living standards of rural America to the financial welfare of Wall Street-a small group of monopoly interests who, since the beginning of the REA program, have done everything in their power to destroy the rural electric co-ops. and power districts.

For example, the revolving fund is a fraud. To call it a fund or to say that it revolves is outright deception. There will be no more revolving fund under this proposal than we now have. At present, repayments of principal and interest are transferred by REA to the Treasury and this will still be the case under the proposed legislation. Only Congress could make funds available again-just as it does now. So, the only really new feature in this fictitious revolving fund idea is to permit the Secretary to borrow some money from his Wall Street friends.

The cost of financing the rural electric and telephone programs, assuming that private funds would be available—an optimistic assumption, at best-would conservatively be three times what it is today.

Following are some of the initial effects on the rural electrification program which would be created by President Eisenhower's proposed amendments:

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