than to bring 9,500,000 acres of land into production with the unlimited capacity in agriculture in other areas today.

Mr. WAGNER. If you will say bring low cost power in, whether it is public or private, I think that is an answer.

Mr. SCHWENGEL. Most of our power all over the United States is pretty low cost by comparison, is it not? The increase of cost of the power, percentage increase of power, has been less than any other product.

Mr. WAGNER. Electric power costs have been held in check, yes, sir, in some areas better than in others. My opinion is that all extraneous costs ought to be kept out of electric rates. If you want to use power as a tool for developing some of these pockets of poverty or the tough parts of Appalachia, don't let anything get into your power costs except what must be there and use power as an instrument to help build the economy.

Mr. DAVIS. This is so stimulating that I wish you could talk for an hour or two about it because it is so romantic. Honestly Brother Schwengel, the chickens in the area are eating more grain, and the people are eating more grain that comes from your part of the country. Then the Tennessee Valley has been developed for boating and navigation, freight moves up and down. So this thing is interesting as it has developed. Just think, all of us poor people down there, our income increased from $32 billion in total income, our per capita income has gone up from 45 to 67 percent of average of the Nation as a whole. So all that helps the whole country, the sum total of the whole country.

Now, if Mr. Wagner were working for a private power company, he would make $150,000 a year. But now he does not make as much as a Congressman. That is the truth. But he is a dedicated man. We got him from up in Wisconsin. We will never let him go back. Thank you, Mr. Wagner.

Mr. WAGNER. Thank you, Mr. Chairman.

Mr. DAVIS. Now, Mr. Robert A. Wallace, Assistant Secretary of the Treasury.

We will be glad to hear you, sir.

STATEMENT OF ROBERT A. WALLACE, ASSISTANT SECRETARY OF THE TREASURY

Mr. WALLACE. Mr. Chairman and members of the committee, I appreciate the opportunity to present the views of the Treasury Department on H.R. 11065, the Appalachian Development Act of 1964. With me today is Mr. Edward P. Snyder, Associate Director of the Office of Debt Analysis.

It has been my honor to represent the Treasury Department on the President's Appalachian Regional Commission and to participate in developing the recommendations which are embodied in the "Appalachian Regional Development Act." My statement, and the interest of the Treasury Department, relates primarily to title IV of the bill, and in particular to the financial aspects of this title. This title would establish the Appalachian Development Corporation, which we hope and expect will provide the financial muscle needed to assure the success of local development districts in the Appalachian region.

These local development districts, I firmly believe, will ultimately play a key role in the whole development program.

I would like to begin by saying a little about the general nature of the proposed Appalachian Development Corporation, the key contribution the Corporation can make to the success of the overall program, and the kind of thinking that went into the drafting of the proposal.

The communities in the Appalachian region are badly in need of funds to finance improvements which will contribute to a permanent increase in employment opportunities, the average level of income, and the economic and social development of the area. This problem is particularly serious in the smaller communities, those in which the need for capital improvements is the greatest. Very few of them are able to borrow in the capital markets on any reasonable terms.

There are many factors that contribute to this situation.

First, the cost of floating a small bond issue is usually high in proportion to the amount of funds to be raised. And so the cost of borrowing alone tends to close these communities out of the bond markets. Secondly, many of these communities do not have established credit ratings. They may not have borrowed in the past, or their borrowings may have been so small that ratings were not justified. In any event, their lack of a recognized credit rating raises their costs of borrowing and can restrict the market for their obligations to local investors. I need not belabor the fact that there is not an excess of funds available in Appalachia today. The financing needed for the development of Appalachia must-for the time being-come largely from outside the region, from the national credit markets which deal in large sums and in which established credit ratings are a necessity.

A third reason why municipal borrowing in Appalachia is difficult is the generally depressed state of the whole area. This has tended to erode the tax bases of local communities. More than that, it has created strong expectations of further erosion, with the result that the marketability of local obligations has been reduced and the cost of marketing these obligations has been increased.

I may say, Mr. Chairman, it is virtually impossible for some of these areas to float revenue bonds. They can still float general obligation bonds at a very high rate of interest but it is almost impossible for them to float a revenue bond of any kind.

The purpose of the Appalachian Development Corporation is to break this financial logjam-so that Appalachian communities, through their local development districts, will gain access to sufficient financial resources to take the initiative needed for sustained economic development throughout the whole Appalachian area.

In working out the details of title IV, establishing the Corporation, we tried very carefully to make certain that the operations of the Corporation would remain subject at all times to effective congressional control-through the Appropriations Committees of both Houses of the Congress-until such time as the entire Federal interest in the Corporation is retired.

First, purchases of stock in the Corporation by the Secretary of the Treasury, which would be authorized by section 405 (b) up to a limit of $50 million, could be made only to the extent funds were appropriated by the Congress.

Second, the total borrowing of the Corporation, whether from the public or from the Treasury would be limited to the amounts which are authorized in appropriation acts. The Corporation cannot spend a single dollar to buy the obligations of any local development district without approval of the Appropriations Committees and both Houses of Congress. That is, it must have borrowing authority approved by the Appropriations Committees before any money can be spent. The language of section 406, page 33, of the draft bill is, I think, very specific on this and makes it clear that the aggregate amount of borrowing by the Corporation would be limited to the amounts authorized by appropriations acts. There is no loophole through which the Corporation could borrow, either from the public. or the Treasury, in excess of those authorized amounts. Thus none of the Corporation's financing will be back-door financing.

I would like to digress on that point for a moment.

We are sometimes told that any borrowing from Treasury is backdoor financing. That is not accurate. The back-door financing which has rightly been of serious concern to the Congress and the administration, is that which results when the Congress grants spending authority which does not have to be reviewed by the Appropriations Committees. While borrowing authority has been used for this purpose, other means have also been used. In this bill, the borrowing authority of the Corporation is carefully subjected to the direct control of the appropriations process, through the Appropriations Committees.

The fact that the Corporation is set up with borrowing authority, rather than having it financed by appropriations, reflects the overall philosophy of the Appalachian development program. We believe that the economic development of the Appalachian region can become a self-sustaining process, that the initial Federal assistance will enable the people of Appalachia to solve their own economic problems and fulfill the promise offered by the resources of the area. We feel that the Corporation, with the help of a moderate initial Federal contribution, can demonstrate its viability and become a self-financing businesslike enterprise. For this reason, it seems perfectly sound to base the financing of the Corporation on its future ability to make good, productive loans, not to make it simply a channel for Federal funds by financing it directly through appropriations.

There is a twofold purpose served by a financial backstop as provided in the bill.

First, this authority will enable the Corporation to borrow temporarily from the Treasury pending a public offering of its obligations. This will provide desirable flexibility in the timing of the Corporation's public borrowing operations, which will allow it to take advantage of favorable market condtions and permit it to coordinate its borrowing with the Treasury's own financing operations and the borrowing operations of other agencies.

Second, and more important, the authority to borrow from the Treasury to redeem obligations issued to the public provides a backstop for the public obligations of the Corporation which is essential to assure a favorable public market at a reasonable borrowing cost. In turn, this will allow the Corporation to make loans on reasonable terms to local development districts, while meeting its costs of opera

tion and minimizing the need for direct Federal expenditures. This subsection is, therefore, the key to the effectiveness of the Corporation. The Committee on Federal Credit Programs recommended in its report to the President dated November 27, 1962, and transmitted by the President to Congress on February 11, 1963, that for all programs authorized to guarantee and insure loans, the Congress provide, in advance, reasonable amounts of financial support to meet any foreseeable contingencies arising from actual defaults. This could be either in the form of permanent appropriations or borrowing authority. It appears to us in the Treasury Department that the borrowing authority provisions in the bill are a reasonable and appropriate implementation of the recommendation of the committee.

A question could be raised, however, as to why the borrowing authority from Treasury rather than a standby appropriation.

Since a contingent liability is involved, and one which we believe will not have to be exercised to any considerable degree, we concluded that the borrowing authority is preferable, since it avoids the need for unnecessarily large appropriations. In fact, an appropriation could be misleading, since there is no anticipation that these funds would be spent in anywhere near the amounts that would need to be authorized as a backstop.

To make an appropriation backstop as good as the borrowing authority backstop, it would be necessary to appropriate funds to the whole extent of the public borrowing authorized the Corporation, even though there were no real expectation that such an appropriation would ever need to be used to any great extent.

I should add also that the basic idea of the Corporation and all of the draft provisions of title IV are completely consistent with the report of the Committee on Federal Credit Programs of which the Secretary of the Treasury was Chairman.

To summarize the Treasury position, we believe the proposed Development Corporation is soundly conceived, has ample safeguards for the public interest, and is essential to the success of the Appalachian

Mr. AUCHINCLOSs. I have one question, Mr. Secretary. You point out quite clearly that the area, the Appalachian area, does not have good credit for various reasons. Do you believe that they will be able to raise the necessary funds to balance the amount the Government might offer?

Mr. WALLACE. I think so in the long run-that is our hope and our expectation. In the beginning the Corporation will have to serve as a financial intermediary and actually buy the bonds which are offered by the local development districts. The Corporation in turn will offer its obligations to the public, so that it will, in effect, provide the advantages of the Government's credit to backstop the credit of the local development districts. However, whenever the local development districts sell obligations to the Corporation-it is like a FNMA Corporation-they will purchase stock to the extent of 1 percent of

the borrowing, and we are hopeful that ultimately the stockholders will take over the Corporation and retire the Federal Government's financial interest.

Mr. AUCHINCLOSS. Can you not visualize in your experience that such an operation would eventually result in total Government appropriation for the expense?

Mr. WALLACE. Well, total Government appropriation for expense would mean that every single issue of the local development authorities would fail, and we do not anticipate that. If you authorize borrowing for the Corporation to the extent of 10 times its capital, which would be $500 million and the amount of the Federal contingent liability then if the Corporation itself were to not make enough income or would have to take losses, then this borrowing authority would have to be used to backstop it, but it is in the nature of a contingent liability.

It is our hope that the Corporation, which would have to approve the issues of the local development districts before it could buy them, could protect itself and try to approve only those which had a good chance of being a viable security.

Mr. AUCHINCLOSS. I have just one more question, Mr. Secretary. The Government would have to borrow money to make the advances under this legislation?

Mr. WALLACE. Yes; the Corporation would borrow it.

Mr. AUCHINCLOSS. They have ample margin now within the debt limit; have they?

Mr. WALLACE. This comes under the Corporation Control Act by the terms of the legislation. Borrowing by the Corporation would not be subject to the debt limit.

Mr. AUCHINCLOSS. Thank you.

Mr. DAVIS. Mr. Schwengel.

Mr. SCHWENGEL. Yes.

Mr. Wallace, you are with the Treasury Department. I ask you, have you read the article in the Reader's Digest of May, entitled "Is This the Way to Fight the War Against Poverty?"

Mr. WALLACE. No, sir. I have not read it.

Mr. SCHWENGEL. This is the story of Area Redevelopment Act. Mr. WALLACE. I have heard reference to the article. I am sorry that I have not had a chance to read it. Is this the article which maintains that public aid was given to hurt private business? Mr. SCHWENGEL. Yes.

Mr. WALLACE. Your concern, then, would be whether the Corporation might be used to finance projects which would be in competition with private business?

Mr. SCHWENGEL. Yes.

Mr. WALLACE. Well, the Corporation, of course, would have to approve the issues which would be made by local development districts. If the Corporation were to approve a loan which would do damage to a private business, I think that it would probably be criticized by Congress and quite properly so. I don't know the details of the situation in the article you mentioned, but I would think that this would certainly be something that would have to be taken into account by the Corporation before it approved any loans to the local government districts.