On George Washington's Birthday in 1978, Georgia Gov. George Busbee and Procter & Gamble Co. announced that a subsidiary of the company was going to build a $200 million pulp mill in Montezuma, a city of less than 4,000 population.

By that time the subsidiary had bought the site and let a construction contract. Consequently, the Department of Housing and Urban Development was urged by its area economist in Atlanta to deny an application filed by Montezuma - six days after the announcement - for a $5.8 million grant to build bypass roads to serve the plant.

Despite the plea, HUD approved the outlay under the Urban Development Action Grant (UDAG) program.

Also in February 1978, Corning, N.Y., sought, and later got, a UDAG grant of $1.8 million to improve access roads and storm sewers for a $16.3 million headquarters building to be erected by Corning Glass works.

In keeping with UDAG's aim, this grant did stimulate private investment. But it amounted to only $50,000 - a tiny fraction of the public funds - according to the General Accounting Office, investigating arm of Congress.

The Montezuma and Corning episodes were found by GAO during a three-month review of UDAG, a policy initiative of President Carter's that is intended to increase jobs and tax revenues in distressed cities and urban counties with grants designed to stimulate private investments in amounts several times larger.

The program was authorized to spend $400 million annually starting in fiscal 1978. For fiscal 1980, however, Carter now seeks $675 million - a 70 percent increase. The House is set to debate the request today and to vote tomorrow.

In March, a House Banking subcommittee considered the request at a hearing at which only one question about UDAG was asked of HUD Secretary Patricia Roberts Harris.

Do "specific projects. . . demonstrate the usefulness of this tool?" Rep. William B. Moorhead (D-Pa.) inquired.

HUD has "more than abundant evidence of the validity of the use of the funds already authorized and the need for the additional money," Harris replied.

Thus assured, the committee issued a report on May 15 terming UDAG "highly promising" and the $275 million increase "not only desirable but necessary."

Eight days later, however, a hearing highlighting weaknesses in UDAG was held by Rep. L. H. Fountain (D-N.C.), chairman of the Government Operations subcommittee on intergovernmental ralations and human resources.

The key testimony came from GAO, which, at Fountain's request, had reviewed 17 sample grants among the total of 309 approved by the February.

The Montezuma grant was one of two that can't be credited with stimulating any private investment, jobs or tax revenues, according to data presented by GAO chief economist Dennis J. Dugan.

In recommending denial of the Montezuma application for $5.8 million, HUD area economist Bette A. Jimerson said in a March 1978 memo that Procter & Gamble will proceed "whether or not this application is approved." The site "does not need the boost of a UDAG application to make it either desirable or competitive," she wrote.

At the subcommittee hearing, HUD's Robert C. Embry Jr., assistant secretary for community planning and development, recalled that Gov. Busbee "called me up and told me. . . that but for this [federal] money the project will not proceed." Department files contain neither a memo on the phone conversation nor a written response to Jimerson.

The Montezuma grant was "tantamount to additional revenue-sharing money for the state of Georgia," Fountain said in a letter last Thursday to House Banking Chairman Henry S. Reuss (D-Wis.)

The second grant found by the GAO to have simulated no private investment, tax revenues or jobs was an award of $6.8 million to Cincinnati for an industrial park. Instead of the $39.7 millions in private investment expected by HUD, it produced zero.

In the Corning Glass case, Fountain told Reuss that the multinational corporation, which has annual sales of $1.4 billion, has "very close ties" to the city of about 14,400. The company is "the dominant taxpayer" and the home of the controlling family, he noted.

City agreed to make the improvements at the time that the company made a commitment to erect its $16.3 million headquarters in Corning, but didn't apply for the $1.8 miilion grant until 10 months later, in November 1978.

HUD's Embry testified that the city found itself unable, without the UDAG grant, to keep its promise to build the roads and sewers because it had exhausted its capacity to sell bonds. As a result, he said, Corning stopped construction and warned that it would move its headquarters elsewhere.

"We have the letters" from the company and the city "to submit to you," Embry assured Fountain. But, the congressman said, HUD hasn't replied to his request to document the claim of exhausted bonding capacity. Moreover, he said, the New York state Department of Audit and Control told the subcommittee last week that the city has used "only a small fraction" of its available bonding capacity.

Fountain found it "extremely difficult. . . to draw a conclusion that the UDAG grant influenced" the company's decision to build in Corning.