DR. STEWART AND MEMBERS OF THE PRESIDENTIAL COMMUNICATIONS POLICY BOARD:

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80-01053A000300050028-6
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 5
• Document Creation Date: December 27, 2016
• Document Release Date: March 5, 2013
• Sequence Number: 28
• Publication Date: April 20, 1950
• Content Type: MISC

STAT
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20 April 1950
Dr. Stewart and memBbills of the__ErEftsikkg3tItial Communications Policy Board:
My name is John O'Gara, I am Deputy Assistant Secretary of State for Econo-
mic Affairs and I am appearing before you today to present to the Board the
State Department's views on the question of a merger of international record
communication carriers, which views were requested in the Board's letter to
the Under Secretary of State, dated March 13, 1950. Accompanying me are Mr.
Francis Colt de Wolf, Chief of the Telecommunications Policy Staff, and Mr.
T. H. E. Nesbitt, Assistant Chief of the Telecommunications Policy Staff.
As the Board is undoubtedly aware, the problem of a possible merger of
United Stated international communication carriers has been more or less a
current one ever since the domestic merger of Western Union and the Postal
Telegraph Company took place in 1943. Within the government and particularly
within the State Department, there have been varying and mixed feelings as
to whether or not there should be such a merger and if so, what kind and
under what conditions.
In 1944 the then Assistant Secretary of State Adolf Berle informally
communicated his views to Senator McFarland on the subject of merger and I
am informed that at that time Assistant Secretary Berle advocated that leg-
islation be enacted which would allow permissive merger of record companies,
excluding the Telephone Company. On April 3, 1945, Assistant Secretary of
State Will Clayton, who succeeded Mr. Berle, in testimony before a sub-
committee of the Senate Interstate and Foreign Relations Committee espoused
the sound conviction that monopoly is prejudicial to the withdrawal of un-
economic facilities and to the liquidation of unprofitable companies. He
held that this resulted therefore in higher rates contrary to the public
interests. Mr. Clayton declared more expressly "... no showing has yet
been made that mergers among competing companies is the means best calculated
to protect the general welfare of the people" and that, therefore, "complete
merger into one company of our telecommunications facilities, on the basis
of our experience to date and evidence at hand, is inadvisable".
The Department agrees today with this expression of general basic policy
and would oppose with equal firmness a merger of all telecommunications faci-
lities. However, in light of changed conditions today, with different effect
on the three separate services in this general field - record. companies, tele-
phone, and air mail - and if given continued strong regulatory supervision,
a merger of record companies only (if appropriate) is deemed not necessarily
violative of this philosophy.
In view of the Board's present inquiry, the Department has reviewed the
position formerly set forth by Mr. Will Clayton.
Although the Department does not have detailed financial and traffic data
immediately at its disposal, the data which it has been able to accumulate and
information it has obtained at public hearings before the Federal Communi-
cations Commission in Docket 8230 indicate that the record companies are in a
far different position today than they were when Mr. Clayton testified before
the Congressional Committee. Traffic volumes have decreased considerably
from their wartime peaks and revenues have shrunken. Trade declines with
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Iron Curtain countries; trade barriers arising out of export controls and in-
creased telephone and air mail competition have in no small measure brought
about this condition. Representatives of the record communication companies
have expressed their concern to the DeparLment of State on the present un-
satisfactory situation in their industry and have also made known their
feelings on the subject to Senator McFarland. The telephone industry is not
concerned over its own situation as it feels that its operation is on a
sound basis.
In assessing the Department's primary interests in a merger of the in-
ternational record companies, it appears that they are three-fold and are:
(a) The effect of a merger on the transmission of the Department's
communications.
(b) The relationship of a merger to the Department's co uni-
cation policy.
(c) The compatibility of such a merger with the Department's inter-
national trade policy.
With reference to point (a) "The effect of a merger on the transmission
of the Department's communications", of vital interest to the Department is
the rapid flow of its awn communications to all parts of the world. We are
informed that the Department is the largest single user of international comm-
ercial record communications in the United States. The Division of Communi-
cations of the Department which is charged with the dual responsibility of
expediting the Department's communications and also paying the telegraph bills,
feels that a consolidation or an appropriate merger of the record companies
should produce a number of economics of operation, thus offering a measure of
relief from successive rounds of rate increases. From the operating and tran-
smission viewpoint, the Departmental camuunicators feel that the present
diversity of operating methods would, to a large degree, disappear. Existing
at present are substantial differences in methods and procedures which create
an effective barrier to the efficient exchange of traffic at the gateway
points. There may be regulatory measures which would provide alleviation
of these unsatisfactory conditions. If so, a more thorough-going study than
the Department can undertake would possibly be persuasive. Special arrange-
ments to meet the needs of the Department of State or other federal agencies
would require negotiation with only the single operating company in contrast
with the present multilateral negotiations.
It is generally agreed that commonly technological improvements are
stimulated by sharp competition; however, there is a real limit to this in-
fluence in the face of operating loss conditions.
A vitally important interest within the Department (point b) is re-
flected in its aver-all telecommunications policy. The. Department has long
felt that the maintenance of an economically sound international record com-
munication system capable of providing a good service at reasonable rates,
by the use of radio and/or cable to as many places in the world as is econ-
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omically practicable and politically desirable, is vital to the national in-
terest. In furtherance of that policy the Department has encouraged the
establishment of direct radio circuits for economic and political reasons
which include the desire to aid business and promote better relations with
foreign countries. In advocating the establishment of direct circuits, the
Department has not lost sight of the increasing importance to the national
interest of existing cable facilities. During periods of atmospheric and
political disturbances, the cables have proven their worth. The security
value of a well-rounded cable and radio system is of great importance to
this country, particularly in times of war. This is a peculiarly important
point as to cables in view of probably technological advances in the field
of radio jamming. Seemingly, the present unprofitable situation, particu-
larly in certain parts of the cable industry, constitutes a threat to the
extensive circuits which we desire under this policy. A continuation of the
present condition may lead to a curtailment of the present services or to
costly subsidies either direct or in the nature of higher rates.
Our telecommunications policy is best served by an extensive facilities
coverage. Protection for such coverage is essential and the problem seems
to be whether such protection is best secured through appropriate merger,
reorganization of unprofitable companies or other means. Present conditions
in the industry are generally unsatisfactory and point up the need for con-
structive change.
With reference to point (c) the United States foreign economic policy
is designed to establish and maintain an expanding competitive multilateral
trade between countries. To this end, our policy calls for reduction or
removal of government barriers to international trade such as quotas and
tariffs. It stresses the elimination of private barriers, such as cartel
arrangements, and the stimulation of competitive conditions in industry and
trade. All of the mechanisms being employed or proposed - e.g., the Recip-
rocal Trade Agreements program, the ECA, GATT, AND ITO - are uniformly
directed to the accomplishment of these aims as rapidly as possible. This
policy is predicated upon the basic economic concept that the creation of
a large market free of artificial barriers with accompanying competitive
conditions encourages increased efficiency, greater production and income,
and a higher standard of living.
Clearly this policy stands on its awn feet as an expression of a fund-
amentally desirable position. Our problem here today is to see if there be
any substantial offense to it contained in any potential merger in the field
of the international record communications companies. It is suggested, and
held by us in the Department that such offense does no in fact exist, with
the strong competitive factor arising out of air mail and telephone when
retained as separate services.
Foreign policy is naturally an extension of domestic policy. This sug-
gests that advantage may well be taken of previous related domestic action
as pertinent.
The question does arise as to whether or not the present financial
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conditions of the carriers indicate that it is a declining industry. The
Board may wish to weigh the present financial condition of the carriers in
the light of the ever increasing competition of the air mail and telephone
with the object in mind of determining whether or not a merger would solve
the basic problems of the industry. Further, of course, the financial
structure of these companies may well be a significant factor in today's
profit results.
The Department is much concerned about this complicated problem; its
ramifications extend beyond the area of primary interest to the Department,
the field of international relation, into National Defense, domestic, eco-
nomic and political considerations. The Department does not have the source
material nor the personnel to make its own comprehensive study of the
situation, and it looks forward, therefore, with keen interest to the results
of the study presently being conducted by this Board. The Department would
like to maintain a close liaison with the Board and continue to cooperate
with it in its study of this problem. The Department sincerely hopes that
the Presidential Board will make the necessary recommendations on policies
and practices to be followed by the Federal Government with respect to our
international communication system.
In order that the work of the Board will be facilitated, the Department
has authorized me to state that it will not oppose a permissive merger of the
international record companies if the Board finds it to be in the national
interest. However, in the event there is legislation which will enable some
or all of the companies to merge, the Department feels that the following
conditions should be imposed in addition to the normal regulatory authority
of the Federal Communications Commission:
(a) Preserve the competitive results obtainable by a complete and
continued separation of the telephone from the record services,
which with the addition of air mail will provide three strong
competing services.
(b) Permit no merger which would jeopardize a well-rounded cable
service to as many parts of the world as possible.
(c) Maintain the same or better quality of service as is presently
enjoyed.
(d) Maintain direct communications with as many places'in the
world as is practical and politically desirable.
(e) Require that the prognosticated economics which may be fore-
seen as a result of merger be effected as rapidly as possible
having due and appropriate consideration to the labor problems
which may arise, and that those economics be passed on to the
Users in the form of lower rates and better service having due
regard for the modernization of plant and the improvement of
the Art.
(f) Assure that a merged company will be capitalized on a basis
that will insure long range financial soundness, taking into
consideration long term traffic trends, competition, and ob-
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111 mow
solete and duplicating facilities which should be liquidated.
In closing, the Department desires that upon completion of the Board's
work, the interested agencies of the government be given the opportunity to
comment upon any specific proposal the Board may make which would enable a
merger to be consummated.
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