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RAILWAY 
 CAPITAL ^ 
 AND VALUES 
 
 PAPER FOR THE 
 
 TRAFFIC CLUB OF NE^V YORK 
 
 BY «, 
 
 W. H. WILLIAMS 
 
 ■- 7^E. ., ■:■■-.* 
 
 ''^ '.4|^;,'*\^" ' ' ^' November 24, 1908 
 
 imiM\ : ■^0' 
 
HE 
 
 ^JJZC'J f 
 
RAILWAY CAPITAL AND VALUES. 
 
 Mr. President, Guests and Fellow 
 
 Members of the Traffic Club : 
 
 The present agitation for a physical valuation 
 of the railways appears to be the result of a mis- 
 conception on the part of the Interstate Commerce 
 Commission some twenty-one years ago of Section 
 20 of the Act to Regulate Commerce. Section 20 
 contains a provision to the effect that the Com- 
 mission may require the carriers to show in their 
 annual reports " the cost and value of the carrier's 
 property, franchises and equipments." Over- 
 looking the permission thus granted, Professor 
 Henry C. Adams, Statistician of the Interstate 
 Commerce Commission, in his First, and again 
 in his Second, Annual Report, after stating that 
 satisfactory and conclusive information respect- 
 ing the cost of railways in the United States 
 could not be obtained, suggested an inquiry by 
 the Government for the purpose of obtaining "a 
 trustworthy estimate of the relation existing 
 between the present worth of railroad property 
 
and its cost," and declared that "the work thus 
 outlined is indeed a prodigious one." 
 
 Subsequently, the desire of Governor Pingree 
 to find a means of increasing railway taxation in 
 Michigan gave Professor Adams an opportunity 
 to experiment with his project within the limits 
 of that State. 
 
 In its Annual Report to Congress for the 
 year 1903, the Interstate Commerce Commission 
 devoted several pages to a discussion of such a 
 valuation as proposed by Professor Adams, con- 
 cluding with the non-committal recommendation 
 " that Congress take this matter under advise- 
 ment with a view to such legislative action as 
 may be deemed appropriate." 
 
 Physical valuations of railway property have 
 been made, or are under way, in Michigan, Wis- 
 consin, Texas, Minnesota, Virginia and Oregon. 
 The Interstate Commerce Commission made an 
 investigation, in 1900, of the value of railway 
 property as expressed by the market quotations 
 for railway securities and, again, in 1904, in co- 
 operation with the Census Office, prosecuted an 
 elaborate inquiry concerning the " commercial 
 valuation." The latter inquiry was under the 
 direct charge of Professor Adams, and its results 
 
3 
 
 are to be found in Bulletin No. 21, of the Census 
 Office. It is, perhaps, dissatisfaction with the 
 results of these inquiries which has impelled 
 the Commission to seek authority to make 
 another and at least equally extensive and costly 
 effort to obtain a valuation by another untried 
 and different method, and in accordance with an 
 entirely different series of definitions. 
 
 The first evidence of ofl&cial interest in this 
 proposal, outside of the ofiice of the Commission, 
 is to be found in a letter bearing the date of 
 March 17, 1906, which President Roosevelt ad- 
 dressed to the Interstate Commerce Commission, 
 as follows : 
 
 " It seems to me that it would be a very desirable thing 
 to have a valuation made of the railroad properties. I do 
 not know how much time this would take or how much 
 money it would cost, and whether or not there are objections 
 to having it done, or even if it could be done without the 
 action of Congress. At your leisure I should like your 
 opinion on these points." 
 
 In reply, the Commission forwarded to the 
 President a letter from Professor Adams, recom- 
 mending an inventory by competent engineers, 
 classifying the physical elements of railway prop- 
 erties, and assigning to each its appropriate pres- 
 ent value, such classification to conform to the 
 classification of construction expenses prescribed 
 
4 
 by the Interstate Commerce Commission. For 
 the valuation of the surplus or franchise value 
 he recommended the plan used by himself in the 
 State of Michigan. It was stated that the prime 
 motive for the valuation would be its bearing 
 upon the work of the Commission in the determi- 
 nation of just and reasonable rates. In this letter 
 Professor Adams gave a year and one-half as the 
 period probably necessary for such a task, and 
 declared that the Michigan experiment cost the 
 people of that State approximately $5.50 per mile. 
 On the same basis of cost, such an inquiry cover- 
 ing the whole United States would require an 
 expenditure of not less than $1,750,000 (exclu- 
 sive of any expenses on the part of the rail- 
 road). 
 
 On December 20, 1906, and again on Decem- 
 ber 4, 1907, Senator La Follette introduced a 
 bill to amend the Act to Regulate Commerce so 
 as to provide for the determination of the "fair 
 value" of the railways. In the Commission's 
 letter of March 25, 1908, to the Chairman of the 
 Senate Committee on Interstate Commerce, it 
 strongly opposed the phrase "fair value," claiming 
 that like the word "reasonable," it involved judi- 
 cial determination, and therefore was not "ex- 
 
actly suitable as a direction to the ofl&cial body 
 in charge of this work concerning the manner in 
 which it shall be prosecuted." They suggested 
 the substitution of a phrase indicating that 
 Congress desired " an inventory valuation of 
 railway property," z. e., that the property of the 
 several railways be listed in detail, and that each 
 kind or class of property so listed shall have 
 assigned to it a valuation to be determined from 
 the point of view of the contracting engineer, 
 and not from the point of view of a court or board 
 of arbitration, which from the nature of the case 
 cannot judge of what is "fair value," except in 
 the light of some specific use to be made of the 
 valuation. 
 
 It is to be noted that in the correspondence 
 with the President the Commission advanced a 
 specific use to be made of the valuation, while in 
 their correspondence with the Senate Committee 
 on Interstate Commerce, they objected to the 
 determination of the " fair value," as it could 
 only be used in the light of some specific use to 
 be made of the results. 
 
 The recommendation of the Commission that 
 the valuation of material in place be ascertained 
 instead of" fair value," is best understood in con- 
 
nection with the following paragraph in the 
 report on valuation of the roads in Michigan : 
 
 "Another poteut reason justifying the plan selected, as 
 afterwards developed, was the necessity of treating the 
 problem strictly as an engineering problem in order to obtain 
 uniform results. It was necessary to employ a large number 
 of engineers expert in railroad work, and while they could 
 agree as engineers they could not agree as experts on taxa- 
 tion. It very soon became necessary to publish an order 
 excluding all thovight of taxation in connection with the 
 results to be obtained. The commissioners required of us 
 only the cost of reproduction and the present value of a 
 road, reserving to themselves any adjustments of these 
 values that might be thought necessary to secure uniformity 
 of taxation." 
 
 This is tantamount to an admission of inability 
 to secure a valuation possessing sufiScient merit 
 to make it useful for a specific purpose. 
 
 The plan advocated by the Commission corres- 
 ponds so closely to that followed in valuing rail- 
 ways in Michigan that a study of the methods 
 followed and the results obtained in that State 
 will throw considerable light on the larger pro- 
 ject, its potential utility or lack thereof. The 
 following allowances were made over the estimated 
 cost of material in place : 
 
 Engineering and Superintendence.. 4 percent. 
 
 Legal Expenses 0.5 " 
 
 Interest during Construction 3 " 
 
 Organization 1.5 
 
 Contingencies 10 
 
 
7 
 
 It should be borne in mind that this valuation 
 was undertaken solely for purposes of taxation. 
 The valuation was obtained in the following 
 manner : 
 
 PHYSICAL PROPERTIES: 
 
 (i) The cost of reproduction was assumed to be what it 
 would cost to reproduce the road at the average prices pre- 
 vailing for the period of the preceding five years, entirely 
 new in every particular, in say, two or three years' lime, if 
 the entire railroad were eliminated — it^ right of way, yards, 
 stations, and terminals passed into other hands and occupied 
 by just such woodlands, waste lauds, farms, industries, and 
 residences as those now existiug in and on the adjoining 
 country and property. 
 
 (2) The present value of the physical properties was 
 assumed to be au amount equaling the cost of its reproduc- 
 tion minus the amount covering the depreciation in value 
 from time, wear, tear, etc. 
 
 (3) In determining the land valuation, the land was 
 classified according to population of the country through 
 which it passed, and where possible, there was obtained the 
 average value of property transferred within five years in the 
 section traversed by the road, and to this an allowance was 
 made for damages to adjoining property. It was estimated 
 the railways would have to pay from 100 to 125 per cent, in 
 excess of the value as determined by adjacent property. 
 
 (4) No attempt was made to take iuto account the 
 economic value of grades and curves or the absence of them 
 — each road was appraised just as if it was a straight line, and 
 as if its grade line were level throughout. 
 
 (5) Industrial tracks were scheduled as the property of 
 the railway company, except where it could be shown that 
 they did not belong to the Company, but the right of way 
 and adjacent buildings were not so scheduled unless the 
 railway owned them outright. 
 
 (5) The rolling-stock was apportioned on the basis of the 
 annual mileage of locomotives, passenger and freight cars 
 and miscellaneous equipment. Where this could not be 
 done it was distributed on the basis of main track mileage. 
 
 The "percentage condition" of rolling-stock was based 
 on an inspection of 50 per cent, of the road's locomotives 
 and passenger cars, and 20 per cent, of each class of freight 
 cars. 
 
(7) To expedite the work and insure more uuiform re- 
 sults, a set of tables was compiled showiug unit prices for all 
 the different elements. 
 
 NON-PHYSICAL PROPERTIES : 
 
 I cannot do better than quote from Professor 
 Adams' report to the Board of State Tax Com- 
 missioners, Lansing, Michigan, under date of 
 October, 1900 : 
 
 "The rule submitted for the appraisal of the immaterial 
 values of railway properties, or what I prefer to term the 
 capitalization of corporate organization and business oppor- 
 tunity, is simple, as follows : 
 
 (i) "Begin with gross earnings from operation, deduct 
 therefrom the aggregate of operating expenses, and the 
 remainder may be termed the 'income from operation.' To 
 this should be added 'income from corporate investments,' 
 giving a sum which may be termed 'total income,' and 
 which represents the amount at the disposal of the corpora- 
 tion for the support of its capital and for the determination 
 of its annual surplus. 
 
 (2) " Deduct from the above amount, that is to say, total 
 income, as an annuity properly chargeable to capital, a cer- 
 tain percent, of the appraistd value of the physical properties. 
 
 (3) " From this amount should be deducted taxes, rents 
 paid for the lease of property operated, provided such prop- 
 erty is not covered by the physical valuation made the basis 
 of the annuity referred to under paragraph 2, and permanent 
 improvements charged directly to income. The remainder 
 would represent the surplus which, capitalized at a certain 
 rate of interest, gives the value of immaterial properties.'- 
 
 In justification of the placing of a valuation on 
 the non-physical property, Professor Adams 
 stated in. his report : 
 
 "It is understood that the object of the investigation in- 
 stituted by the Michigan Tax Commissioners is to determine 
 whether the properties imposed with specific taxes pay, upon 
 their true value, a rate equal to the rate paid by property 
 
taxed under the general tax law. The suggestions here sub- 
 mitted pertain to railways organized as corporations and 
 whose chief business is that of transportation. 
 
 "It is submitted that this non-physical or immaterial 
 element is not a simple commercial element, but includes 
 among other things the following : 
 (i) "It includes the franchise — 
 (a) "to be a corporation. 
 
 [6) "to use public property and employ public au- 
 thority for corporate ends. 
 (2) "It includes the possession of traffic not exposed to 
 competition, as, for example, local traflSc. 
 
 (3) "It includes the possessiou of traffic held by estab- 
 lished connections, although exposed to competition, as, for 
 example, through traffic that is secured because the line in 
 question is a link in a through route. 
 
 (4) "It includes a value on account of the organization 
 and vitality of the industries served by the corporation, as 
 well as of the organizition and vitality of the industry which 
 renders the service; this value, consequently, is, in part, of 
 the nature of an unearned increment to the corporation." 
 
 In Michigan the cost of reproduction when 
 new was estimated at $202,716,262, and the then 
 present value was $166,398,156. The value of 
 the non-physical properties was estimated by 
 Professor Adams at $35,814,043, making the 
 total then present value $202,212,199, or $504,- 
 063 less than the estimated cost of reproduction 
 when new, or 0.2 of i per cent. It is, of course, 
 evident that the method thus outlined makes the 
 estimate of value of non-physical property wholly 
 dependent upon the rates of interest used. In- 
 teresting evidence of this is to be found in the 
 fact that while Professor Adams valued the fran- 
 chises of the Michigan Central Railroad at 
 
$i8,259)88o, another economist, of equal distinc- 
 tion, Professor Bmory R. Johnson, of the Uni- 
 versity of Pennsylvania, and a former Isthmian 
 Canal Commissioner, computed the value of the 
 same franchises as $3,227,000. The methods 
 used in both cases were identical except as to 
 the rate of interest assumed to be applicable. 
 
 There is little, if any, difference in the basis 
 used in the several States for determining the 
 cost of material in place. That basis may, 
 among other things, be criticized as follows : 
 
 (i) No allowance is made for discount on se- 
 curities sold. 
 
 Discount is a partial capitalization of the com- 
 mercial risk had in making the investment, and 
 it increases or decreases in proportion to the 
 probability of the earning power of money under 
 existing conditions. Not only is this practice 
 justified by long established commercial usage, 
 but also by judicial determination. 
 
 (2) The interest during construction (3 per 
 cent.) is less than a fair and reasonable return 
 on the investment. 
 
 (3) No allowance is made for working capital 
 with which to carry on the business. 
 
 (4) No allowance is made for wear and tear of 
 
material during the period of construction. 
 Assuming eight years to be the life of a tie, and 
 three years the period of construction, a substan- 
 tial percentage of the period of i:sefulness is over 
 before the road is in operation. The use of the 
 rails before the track is put in proper line and 
 surface hastens the time when they must be 
 removed. 
 
 (5) No allowance has been made for impact 
 and adaptation. After the line is placed in op- 
 eration, each fill will sink one foot for every ten 
 feet of height. The slope of cuts must be in- 
 creased to prevent landslides and washouts. The 
 ballast will pound into the roadbed, necessitating 
 additional ballast to secure a standard cross sec- 
 tion. 
 
 (6) A uniform price for earthwork was used, 
 thus ignoring the varying character of the soil 
 and length of haul. 
 
 (7) A uniform price list for all materials was 
 used, thus ignoring the source of supply and cost 
 of delivery to point of use. 
 
 (8) No allowance was made for interference 
 with work on account of labor troubles, condition 
 of the weather, etc., which would vary materially 
 in the different counties of the same state. 
 
(9) No allowance is made for carrying charges 
 until such time as the road was placed on a reve- 
 nue basis. 
 
 The basis of the valuation of the non-physical 
 property in Michigan is also subject to criticism, 
 namely : No consideration has been given to the 
 leasehold interests. In some cases the leased 
 property is operated at cost, and all revenue goes 
 to the operating company. In others the road is 
 operated at a loss, while in the case of union de- 
 pot and terminal companies they are usually 
 operated on the basis of cost, and no allowance is 
 made for interest on investment. 
 
 Therefore it will be seen there remain to be de- 
 termined many questions vitally affecting the 
 value of the property without regard to its value 
 as a " going concern." 
 
 There should be no diiference in the basis of 
 arriving at the value, as a "going concern," of the 
 property of a railway and any industrial establish- 
 ment, nor should there be any difference in the 
 basis of valuation for taxation or other purposes. 
 There is common to both the value due to loca- 
 tion, good will, etc. 
 
 In the case of real estate, a corner store will 
 sell for more than the adjoining store, or, if 
 
13 
 
 leased, will bring a greater rental, although the 
 two stores may be part of one building and built 
 on the same kind of soil. That there are other 
 intangible values attached to property was shown 
 in the damages assessed in connection with the 
 construction of the Elevated Railway in New 
 York City. Damages were awarded on account 
 of partial shutting off of light, interference with 
 ventilation, or because of the increased dust and 
 noise. In the manufacturing and commercial 
 pursuits, "good will" frequently is considered of 
 greater value than the tangible assets. That it 
 is which gives value to the trade-mark. 
 
 Railroads maintain industrial bureaus, whose 
 energy is concentrated on the location of new and 
 enlargement of existing industries. As between 
 two roads a decision will largely rest on the 
 treatment of the patrons by the respective man- 
 agements, so that the location of industries in 
 towns served only by one line may be said to 
 depend largely on the good will. At competitive 
 points, and on through traffic passing over the 
 line from one carrier to another, the rates being 
 equal via each of the several roads, the routing 
 of the freight over the intermediate carrier is 
 dependent on service performed, etc., and is an- 
 
14 
 
 other evidence of the good will attached to the 
 railway property. 
 
 Neither the property of a railroad nor any 
 other property is of any value without the right 
 and ability to use it, and to obtain full value 
 there must be the right and ability to use in the 
 manner for which the property is best adapted. 
 
 In purchasing any completed railroad property, 
 at a price greater than the cost thereof of material 
 in place, the additional amount is the capitaliza- 
 tion of the good will or business opportunity. 
 Can we deny to one carrier a right that is given 
 another ? 
 
 In an address delivered at Minneapolis last 
 December, Hon. Robert H. Shields, who was 
 then, and is now, the President of the Michigan 
 Tax Commission, criticized the work of Messrs. 
 Cooley and Adams, in Michigan, and the follow- 
 ing expression of opinion is especially worthy 
 of repetition : 
 
 "The pendulum of unequal taxation in Michigan, so far 
 as the railroads are now concerned, has already pretty nearly 
 swung tlie return limit, aud a strict adherence to this theory 
 in assessing Michijjan railroads, considering the methods 
 employed in assessing other property, -would not only not 
 be a square deal, but would mean nothing more nor 
 less than confiscation." * 
 
 * Bold, ours. 
 
'5 
 
 In 1900, Professor Adams allowed an annuity 
 of 4^ per cent, on the engineer's estimate of the 
 then present cost of reproduction of the physical 
 property of the Michigan Central, and he capital- 
 ized the non-physical property at 6 per cent. 
 
 In 1902, Professor Adams used lower rates 
 of valuation for the Michigan Central, viz., 
 3^ per cent, for physical and 5 per cent, for 
 non-physical — thus by a change in interest rate 
 increasing in two years the value of the Michigan 
 Central to the extent of $20,000,000. On such 
 a basis, as the valuation for taxes increases, the 
 returns to the stockholders would decrease. 
 
 The 1900 figures were based on the operations 
 for ten years, while the 1902 figures were based 
 on the operations for five years, the latter in 
 1902 giving the higher valuation for taxation. 
 
 As to the result of the work in Wisconsin, I 
 have the following information regarding one of 
 the electric railways : 
 VALUATION OF PHYSICAL PROPERTY: 
 
 New $9,000,000 
 
 Present condition 7,000,000 
 
 Cost of property to present holders... 19,600,000 
 Securities outstanding (par value).... 18,000,000 
 Valuation for taxation by Wisconsin 
 
 State Board of Assessment 17,000,000 
 
i6 
 
 on which taxes for 1908 will be approximately 
 $200,000, or about 6^^ per cent, of the gross 
 earnings. 
 
 While they are required to pay taxes on a 
 valuation of $17,000,000, an effort is now being 
 made by the public authorities to have the pas- 
 senger rates reduced on the basis of the $7,000,000 
 estimated value of the physical property in its 
 existing condition. 
 
 Ordinarily we should expect to see the valua- 
 tion for taxation much less than the valuation 
 used as the basis for making rates, or for capital- 
 ization. Generally speaking, the valuation of 
 property for taxation should be its market value 
 regardless of the purpose for which it is used. 
 Capitalization should represent the cost of the 
 property to the present holders thereof. The 
 valuation for rates is dependent among other 
 things both upon the first cost and the present 
 value as a "going concern." 
 
 The following decision by the Circuit Court 
 
 of the United States for the Southern District of 
 
 New York in the Consolidated Gas Co. v. The City 
 
 of New York, is of interest: 
 
 "Property invested — Franchises. 
 
 " Uuder the settled rule of decision, however, that if 
 property protected by a frauchise is condemned and wholly 
 
17 
 
 taken from its owner, the franchise must be paid for, such a 
 state regulation reducing the earning power of property so 
 protected reduces the value of the franchise //'o iaiiio, and 
 the complainant is entitled to add the value of its franchises, 
 if ascertainable, to its capital account before declaring the 
 rate of return permitted by the statute. 
 
 " Property invested— Valuation of Franchises. 
 
 "Complainant having followed the universal custom of 
 American corporations, sanctioned by law, of capitalizing 
 its franchises on its organization by issuing stock in excess 
 of its actual investment in tangible property, and having 
 since then earned fair dividends on all its stock, the aniouut 
 of such excess stock may fairly be taken as the value of its 
 franchises at the time of issuance, and where its business 
 has largely iucreased, such value may be assumed to have 
 incieased since that time in proportion to the increase in the 
 value of its tangible property. 
 
 " Property invested — Title to Franchises. 
 
 "Where complainant on its organization purchased the 
 propertj- and franchises of existing gas companies, and has 
 since enjoyed and operated under such franchises, it acquired 
 the legal owner-hip thereof under the decisions of the Court 
 of Appeals of New York, and, notwithstanding the fact that 
 the original grantees have ceased to exist, it is, for the pur- 
 poses of an inquiry into the legality of a slate statute 
 regulating its rates of charge, entitled to capitalize their 
 value, especially where the slate has, during such time, com- 
 pelled it to pay a franchise tax based thereon." 
 
 Based on the company's capitalization of its 
 franchises in 1884, as $7,781,000, the court 
 ruled that under conditions existing in 1905 
 the franchises were worth over $12,000,000, on 
 which it was entitled to a return of 6 per cent. 
 This is equivalent to about 26 per cent, of the 
 estimated worth of the tangible property, exclud- 
 ing all property not directly operated by the 
 company. The almost vital difference in the 
 
i8 
 
 method of valuation is best understood by the 
 following quotation from the decision in the 
 Consolidated Gas case : 
 
 " As to the realty, the values assigned are those of the 
 time of inquiry ; not cost when the laud was acquired for the 
 purposes of manufacture, and not the cost to the complainant 
 of so much as it acquired when organized in 1884, as a con- 
 solidation of several other gas manufacturiug corporations. 
 
 " It is objected that such method of appraisement seeks 
 to confer upon complainant the legal right of earning a fair 
 return upon land values which represent no original invest- 
 ment by it, does not indicate land especially appropriate for 
 the manufacture of gas, and increases apparent assets with- 
 out increasing earning power. Analogous questions arise as 
 to plant, mains, services and meters ; the reported values 
 whereof are the reproductive cost less depreciation, and not 
 original cost to the complainant or its predecessors. 
 
 " It appears by undisputed evidence that some of these 
 last items of property cost more than new articles of the 
 same kind would have cost at the time of inquiry ; that some 
 are of designs not now favored by the scientific and manu- 
 facturing world, so that no one now entering upon a similar 
 business would consider it wise to erect such machines or 
 obtain such apparatus. In every instance, however, the 
 value assigned in the report is what it would cost presently 
 to reproduce each item of property, in its present coudition, 
 and capable of giving service neither better nor worse than 
 it now does. As to all of the items enumerated, therefore, 
 from real estate to meters, inclusive, the complainant de- 
 mauds a fair return upon the reproductive value thereof, 
 which is the same thing as the present value properly con- 
 sidered. To vary the statement: Complainant's arrange- 
 ments for manufacturing aud distributing gas are reported 
 to be worth the amouuts above tabulated if disposed of (in 
 commercial parlance) ' as they are.' 
 
 " Upon authority, I consider this method of valuation 
 correct. What the court shouhl ascertain is the 'fair value 
 of the property being used' {Smyth v. Ames, 169 U. S., at 
 p. 546 ; 18 Sup. Ct., at p. 434 ; 42 L Ed., 819) ; the ' present' 
 as compared with 'original' cost; what complainant 'em- 
 ploys for the public convenience ' (169 U. S., at p. 547; 18 
 Sup. Ct., at p. 434 ; 42 L. Efi., 819) ; and it is also the ' value 
 of the property at the time it is being used' {San Diego 
 Land Co. v. National City, 174 U. S., at p. 757 ; 19 Sup. Ct., 
 
19 
 
 at p. 8ii; 43 I,. Ed., 1154). And see, also, Stanislaus Co. 
 V. San Joaquin Co., 192 U. S. 201; 24 Sup. Ct., 241; 48 L. 
 Ed., 406. It is impossible to observe this continued use of 
 the present tense in these decisions of the highest court 
 without feeling that the actual reproductive value at the time 
 of inquiry is the first and most important figure to be ascer- 
 tained, and these views are amplified by Sa7t Diego Land 
 Co. v. Jaspar (C. C), no Fed., at page 714, and Cottmg v. 
 Kansas City Stock Yards (C. C), 82 Fed., at page 854, where 
 the subject is more fully discussed. Upon reason, it seems 
 clear that in solving this equation the plus and minus quan- 
 tities should be equally considered, and appreciation and 
 depreciation treated alike. Nor can I conceive of a case to 
 which this procedure is more appropriate than the one at bar. 
 The complainant, by itself and some of its constituent com- 
 panies, has been continuously engaged iu the gas business 
 since 1823. A part of the laud in question has been em- 
 ployed iu that business for more than two generations, dur- 
 ing which time the value of land upon Manhattan Island 
 has increased even more rapidly than its population. So, 
 likewise, the construction expense, not only of buildings, 
 but of pipe systems under streets now consisting of continu- 
 ous sheets of asphalt over granite, has enormously advanced. 
 
 '"The value of the investment of any manufacturer in 
 plant, factory, or goods, or all three, is what his possessions 
 would sell for upon a fair transfer from a willing vendor to 
 a willing buyer, and it can make no difference that such 
 value is affected by the efforts of himself or others, by whim 
 or fashion, or (what is really the same thing) by the advance 
 of land values iu the opinion of the buying public. It is 
 equally immaterial that such value is affected by dilBculties 
 of reproduction. If it be true that a pipe line under the 
 City of New York of 1907 is worth more than was a pipe line 
 under the City of 1S27, then the owner thereof owns that 
 value, and that such advance arose wholly or partly from 
 difficulties of duplication created by the city itself is a mat- 
 ter of no moment. Indeed, the causes of either appreciation 
 or depreciation are alike unimportant, if the fact of value be 
 conceded or proved ; but that ultimate inquiry is oftentimes 
 so difficult that oritjinal cost and reasons for changes in 
 value become legitimate subjects of investigation, as checks 
 upon expert estimates or bookkeeping inaccurate and per- 
 haps intentionally misleading. Cf. Ames v. Union Pacific 
 R. R (C. C), 64 Fed., at pages 17S, 179. If, fifty years ago, 
 by the payment of certain money, one acquired a factory 
 and the land appurtenant thereto, and continues to-day his 
 
20 
 
 original business therein, his investment is the factory and 
 the land, not the money originally paid ; and unless his 
 business shows a return equivalent to what land and building, 
 or land alone, would give if devoted to other purposes (hav- 
 ing due regard to cost of change), that man is engaged in a 
 losing venture, and is not receiving a fair return from his 
 investment, i. e. the land and building. The so-called 
 'money value' of real or personal property, is but a con- 
 veniently short method of expressing present potential use- 
 fulness, and 'investment' becomes meaningless if construed 
 to mean wh^it the thing invested in cost generations ago. 
 Property, whether real or personal, is only valuable when 
 useful. Its usefulness commonly depends on tlie business 
 purposes to which it is or may be applied. Such business is 
 a living thing, and may flourish or wither, appreciate or de- 
 preciate ; but whatever happens, its present usefulness, ex- 
 pressed in financial terms, must be its value. 
 
 "As applied to a private merchant or manufacturer, the 
 foregoing would seem elementary ; but some difference is 
 alleged to exist where the manufacturer transacts his business 
 only by governmental license — -whether called a franchise or 
 by another name. Such license, however, cannot change 
 an economic law, unless a different rule be prescribed by the 
 terms of the license, which is sometimes done. No such un- 
 usual condition exists here, and, in the absence thereof, it is 
 not to be inferred that any American government intended, 
 when granting a franchise, not only to regulate the business 
 transacted thereunder, and reasonably to limit the profits 
 thereof, but to prevent the valuation of purely private prop- 
 erty in the ordinary economic manner, and the property now 
 under consideration is as much the private property of this 
 complainant as are the belongings of any private citizen. 
 Nor can it be inferred that such government intended to 
 deny the application of economic laws to valuation of 
 increments earned or unearned, while insisting upon the 
 usual results thereof in the case of equally unearned, and 
 possibly unmerited, depreciation." 
 
 The Court quoted numerous decisions uphold- 
 ing its decision that in determining the reason- 
 ableness of a rate the valuation to be used is that 
 of a "going concern," and not sach a valuation as 
 is now suggested by the Interstate Commerce 
 
21 
 
 CommissioB. That Congress has recognized that 
 franchises have value is proven by Section 20 of 
 the Act to Regulate Commerce, which provides 
 for showing in the Annual Reports of the rail- 
 way companies " the cost and value of the carrier's 
 property, franchises and equipments." There- 
 fore, to have amended the L,a Follette bill so as 
 to meet the views of the Commission, would 
 have provided for a valuation, the use of which 
 as the basis for rates would be unconstitutional. 
 
 The injustice of the Commission's plan as a 
 basis for determining the reasonableness of a 
 rate, or fixing the capitalization of a railway, is 
 best understood when considered in connection 
 with the manner in which the present railway 
 systems have come into existence. 
 
 Originally the roads were built with varying 
 gauges for track ; some being less and others 
 more than the present standard, and owing to 
 the sparsely settled territory traversed by the 
 railway, the first cost of the line was kept down 
 to the minimum. 
 
 The development of the traffic and the con- 
 struction of competing lines necessitated im- 
 proved facilities and more economical operation. 
 This caused the roads to be rebuilt as standard 
 
22 
 
 gauge lines, and the purchase of rolling-stock of 
 greater capacity (thus necessitating the purchase 
 of additional right of way), the widening of cuts 
 and fills, and the purchase of new ties, bridges, 
 rolling-stock, etc. For the light capacity rails 
 there have been substituted rails 85 to 100 lbs. 
 per yard. Wooden trestles have either been 
 filled with earth and rocks or have given place 
 to iron bridges, or to stone or concrete arches. 
 The single-track line has been superseded by 
 systems of two, three, or four main tracks. 
 
 The cost price of a line originally built with a 
 0.3 grade line would be less than to first build it 
 with a grade of i per cent., and subsequently 
 reduce this under traffic to 0.3. The first cost of 
 a line originally built as double-track would be 
 less than to first build one track and subsequently 
 relocate all or a portion of it in the building of a 
 second main track. The ultimate first cost is 
 also greater where the line is originally built 
 with temporary structures and small equipment, 
 which later give way to permanent structures 
 and modern equipment. 
 
 Had the Government in the early days under- 
 taken to require the railroad companies to build 
 their lines in accordance with modern standards, 
 
23 
 
 the small amount of traffic then moving would 
 not have been sufficient to have paid a reasonable 
 return on the investment, and the building of the 
 railways and the development of the country 
 would have been delayed for many years. Also, 
 there was so much uncertainty regarding the 
 traffic that the financial risk in connection with 
 the construction of the railroads was materially 
 greater than that of ordinary commercial pursuits, 
 and to attract investors it was necessary to sell 
 the bonds at a substantial discount. In some 
 cases, stock was offered as a bonus with bonds, 
 and the value thereof may be considered as a dis- 
 count on securities sold. Whether it be cash or 
 stock, the discount represented the commercial 
 risk. As this risk decreased, the value of the 
 property as a " going concern " increased, until the 
 increased value of the terminals and right of 
 way, and the value of the franchises, good 
 will, etc., more than offset the par value of the 
 securities originally issued on account of the 
 commercial risk. 
 
 To now readjust the securities on the basis of 
 "present cost of material in place" is to ignore 
 the risks assumed by those to whom the country 
 is obligated for the great development of the 
 
24 
 
 transportation systems (as well as the country), 
 and is to place on an equality with them, com- 
 panies entering the railroad field to-day who do 
 not assume such great risks, and who are not 
 responsible in any way for such development. 
 
 In 1848, the Chief Engineer of the Pennsyl- 
 vania Railroad estimated the cost of right of way 
 from Harrisburg to Pittsburgh, 245.8 miles, at 
 $154,294. How much has the Wabash paid for 
 right of way into Pittsburgh alone ? 
 
 The right of way of the Chicago & Northwes- 
 tern for the new passenger depot at Chicago 
 involved the paying of $6,697,236 for land not 
 half a mile in length. Following the construc- 
 tion of the subways in New York Cit}', and the 
 several tubes under and bridges over the rivers, 
 the market value of property in certain sections 
 has increased three- and four-fold in from two to 
 five years. These are not isolated cases, nor do 
 they apply only to the large cities. It is prob- 
 ably even more true in the smaller towns, the 
 prosperity of which is almost wholly dependent 
 on the success or failure of one or two industries, 
 and the prices of land fluctuate accordingly. Can 
 it not be said, therefore, without fear of contradic- 
 tion, that the appreciation of railway property 
 
25 
 
 has more than offset any discount on securities 
 sold? 
 
 Three purposes to be served by a physical 
 valuation have been advanced. These are: 
 
 (ist) the fixing of taxation, 
 
 (ad) the enforcement of reasonable rates, and 
 
 (3d) the control of financial operations. 
 
 TAXATION. 
 
 Railway property is not directly taxed by the 
 Federal Government and is not subject to such 
 taxation. Any interference with this subject on 
 the part of the Federal Government is therefore 
 an unconstitutional interference with a matter 
 reserved wholly to the several states. If this 
 were not so, the impossibility of using the valua- 
 tion of the Interstate Commerce Commission for 
 purposes of state taxation is disclosed by a study 
 of the diverse conditions existing in separate 
 states. The charters of some of the companies 
 make them exempt from taxation. In some states 
 the basis of valuation for taxation is other than 
 the physical property, or its value as a "going 
 concern." In Connecticut it is the value of the 
 capital stock, funded debt and floating indebted- 
 ness; in Delaware the number of passengers 
 
26 
 
 carried, net earnings, equipment, and the cash 
 value of capital stock ; in Maine, the gross 
 receipts ; in Massachusetts, the capital stock ; 
 in Pennsylvania, the capital stock and franchises; 
 in Maryland, Minnesota and Wisconsin, the gross 
 earnings. The constitutions of the several states 
 provide the manner in which the valuation of 
 property for taxation shall be ascertained, and 
 usually this is determined by a State Board of 
 Taxation or local assessors, and these powers can 
 neither be delegated to another state commission 
 such as the railroad commission, nor to a federal 
 commission such as the Interstate Commerce 
 Commission. What assurance have we that the 
 laws of the several states will be changed so as 
 to make use for taxation purposes of a valuation 
 of the railways such as is proposed? Certainly 
 so far as its use for this purpose is concerned, 
 the valuation ought not to be undertaken until 
 the state constitutions have in this respect been 
 changed. 
 
 RATES. 
 
 Although the president did suggest ascertain- 
 ing whether a valuation of the railways could be 
 made, he has expressly disclaimed having much 
 
27 
 
 confidence in its utility. In his speech at Indian- 
 apolis, he said : 
 
 "At the outset, let it be understood that physical valua- 
 tion is no panacea; it is no sufiScient measurement of a 
 road . " 
 
 Similarly, Hon. Charles A. Prouty, a member 
 of the Interstate Commerce Commission, in an 
 address delivered before the National Association 
 of Manufacturers, on May 22d last, said : 
 
 "The popular impression that if the value of our rail- 
 roads were known it would be easy so to adjust rates that a 
 fair return upon that value, and only a fair return, would be 
 obtained, is eutirely erroneous." 
 
 "Fair value" of the carriers' property must be 
 the "basis of all calculations as to the reasonable- 
 ness of rates," said the Supreme Court of the 
 United States in Sviyth v. An/es, and in Fnmklin 
 County V. Nashville^ Chattanooga^ etc., Raitzuay, 
 afterwards quoted with approval (see Cohimbtis 
 Sozithern Ry. v. Wright, 151 U. S., 470, 479) by 
 the Supreme Court of the United States, the 
 Supreme Court of Tennessee said : 
 
 " The value of the roadway at any given time is not the 
 original cost, nor, a fortiori, its ultimate cost after years of 
 expenditure in repairs and improvements. On the other 
 hand, its value cannot be determined by ascertaining the 
 value of the land included in the roadway assessed at the 
 market price of adjacent lands, and adding the value of the 
 cross-lies, rails and spikes." 
 
In Cleveland^ Cincinnati^ Chicago & St. Louis 
 Ry. V. Backus^ the Supreme Court of the United 
 States said: 
 
 " But the value of property results from the use to which 
 it is put, and varies with the profitableness of that use, 
 present and prospective, actual and anticipated. Tliere is 
 no pecuniary value outside of that which results from such 
 use." (154 U. S., 445-) 
 
 Turning to SmytJi v. A^nes (169 U. S., 546), 
 the elements of fair value are found fully enum- 
 erated in the following significant paragraph : 
 
 " We hold, however, that the basis of all calculations as 
 to the reasonableness of rates to be charged by a corporation 
 maintaining a highway under legislative sanction must be 
 the fair value of the property used by it for the convenience 
 of the public. And, in order to ascertain ihat value, the 
 original cost of construction, the amount expended in per- 
 manent improvements, the amount and market value of its 
 bonds and stock, the present as compared with the original 
 cost of construction, the probable earning capacity of the 
 property under particular rates prescribed by statute, and 
 the sum required to meet operating expenses, are all 
 matters for consideration, and are to be given such weight 
 as may be just and right in each case. We do not say that 
 there may not be other matters to be regarded in estimating 
 the value of the property." 
 
 Nothing could be clearer than that this "fair 
 value" is not the aggregate obtained resulting 
 from a physical inventory. For "original cost 
 of construction," " the amount expended in per- 
 manent improvements," "amount and market 
 value of bonds and stock," have nothing what- 
 ever to do with the idea of fair value ; and " prob- 
 
29 
 
 able earning capacity under particular rates pre- 
 scribed by statute," and "the sum required to 
 meet operating expenses," have but the most 
 remote and indirect bearing upon such idea. 
 Indeed, it is evident that, realizing the potential 
 injustice of rigorously applying either method 
 of valuation, irrespective of the special circum- 
 stances surrounding particular cases, the Court 
 intended to establish a permanent rule which 
 would protect valuations specially adapted to the 
 requirements of each case which should arise. 
 Therefore, it enumerated the principal classes of 
 facts, both historical and contemporaneous, which 
 might affect the problem of justice in valuation, 
 and, carefully adding that the list was not in- 
 tended to be exhaustive, declared that each must 
 " be given such weight as may be just and right 
 in each case." 
 
 We have already seen that the courts have 
 ruled that in determining the reasonableness of 
 a rate the cost to the present holders as well as 
 the present value of the property as a " going 
 concern " must be ascertained. In none of the 
 decisions has the Court held that the present 
 " value of the material in place " can be used as 
 the valuation for determining the reasonableness 
 
30 
 
 of a rate. No valuation, however, can become 
 the sole basis for the making of rates. 
 
 Given two roads between New York and Buf- 
 falo — one may be fifty miles shorter than the 
 other ; one four tracks and the other single track, 
 the first approximately four times as valuable 
 and fifty miles longer ; one with seventy-foot 
 grades handling fifteen cars to the train, the other 
 with water grades hauling fifty cars to the train. 
 Physical operation and physical construction 
 are obviously the controlling factors in cost, 
 but so long as the cost of operation does not 
 exceed the gross earnings, even these are 
 disregarded in meeting competition. Physical 
 valuation will not eliminate distance or grades or 
 make the country flat where now are mountains. 
 On the other hand, it will tend to eliminate com- 
 petition. The terminals of the Pennsylvania 
 Railroad in and about Greater New York are 
 probably worth as much as their entire line New 
 York to Philadelphia. In the determination of 
 rates following physical valuation, it is hardly 
 conceivable that they would be required to charge 
 double the rate of their competitor without any 
 New York terminals ; or even permitted to 
 charge double, for then what shall the competitor 
 
charge ? If an average between the two or of all 
 lines be taken, it will be too large for one road 
 and not enough for another. To use the cheaper 
 line as the basis might prevent a fair return on 
 the cost of the other. 
 
 Under the ruling of the courts each case must 
 be determined on its own merits and each rate in 
 itself proven unreasonable for the service per- 
 formed before a reduction therein can be ordered. 
 This makes it necessary to first determine the 
 proportion of the value of the property as a 
 " going concern " to be assigned to its business 
 as a common carrier, and theu assign the proper 
 proportion to passenger and freight service. The 
 assignment as between passenger and freight 
 service must necessarily increase and decrease as 
 the proportion of either to the total increases or 
 decreases. It cannot, therefore, be considered a 
 permanent factor, but will vary from year to year 
 and from season to season, and with the volume 
 and flow of traffic, so that which would be a rea- 
 sonable assignment under conditions existing 
 to-day would not necessarily be reasonable under 
 conditions existing to-morrow. Having, for ex- 
 ample, determined for the freight traffic such 
 assignment of valuation, it is then necessary to 
 
32 
 
 classify the same as between interstate and intra- 
 state business ; then into local and through traf- 
 fic; then into the various classes of commodities 
 handled. The revenues and cost of operation 
 must likewise be classified to determine the net 
 returns from the particular service performed. 
 This is an almost impossible task. Take two 
 roads traversing the same territory and under 
 the same management, over only one of which 
 are fast passenger trains operated — it must set 
 its track up for higher speed, but who can deter- 
 mine the increased cost of maintenance of track 
 that should go to passenger service? 
 
 Hancock has said that the tariff is a local 
 issue. It can be claimed with greater force that 
 the question of freight rates is a local issue. 
 The New England States, which depend on other 
 sections of the country for raw materials such as 
 wool, cotton and leather necessary for their in- 
 dustries manufacturing cotton and woolen goods, 
 and boots and shoes, would welcome the elimina- 
 tion of the tariff on the raw materials, while 
 fighting for the retention and possibly an increase 
 of the tariff on the finished products. For simi- 
 lar reasons Western Pennsylvania would favor 
 the elimination of the tariff on all wearing ap- 
 
33 
 
 parel, while insisting on the retention of the 
 tariff on iron and steel products. The South, 
 formerly strongly opposing all tariffs, now wants 
 retained the tariff on cotton (and on wool, which 
 competes with cotton), because of its enormous 
 cotton industry. Oregon and Washington favor 
 the tariff on lumber because of their immense 
 forests, and in like manner each section of the 
 country favors a tariff on the articles produced 
 therein, while insisting on the repeal of the tariff 
 on articles secured from other sections of the 
 country. The same is true regarding the rail- 
 way freight rates, and the present tendency is to 
 counteract rather than to ascertain the cause. 
 
 To-day, England handles the commerce of the 
 world, not because it is cheaper, for example, to 
 carry freight from the United States to England 
 and thence to South America than it would be to 
 carry it direct from the United States to South 
 America, but because of the regular and frequent 
 service established between the ports of England 
 and the other great ports of the world and the 
 absence of such direct regular service to and from 
 ports of the United States. The South can sell 
 little, if anything, to Panama, not because the 
 cost of production is more than in the Central 
 
34 
 
 and New England States, but because there 
 is no established steamship service between 
 any Southern port and Panama, while such ser- 
 vice does exist between New York and Panama, 
 and this necessitates greater cost to the South 
 in placing its products f. o. b. at the seaboard. 
 
 In the development of a community, there are 
 factors of equal or greater moment than rates : 
 
 DEVELOPMENT OF MANUFACTURING CENTER.— 
 
 The location of a manufacturing center is depen- 
 dent upon the location of the raw materials, and 
 the market for the finished product; the facilities 
 for assembling the raw materials and distributing 
 the product; the labor market, etc. 
 
 This can best be illustrated by a case recently 
 called to my attention. Noting the great devel- 
 opment of the rubber trade, and the success of 
 the factories at Akron, Ohio, some gentleman of 
 another city built what was then considered to be 
 the most up-to-date factory for the manufacture 
 of rubber goods. It cost about $250,000. For a 
 long time, however, it was found impossible to 
 secure skilled operatives; the men claiming that 
 they could get as good wages at Akron, and in 
 event of one plant closing down, work could be 
 
35 
 
 secured at one of the others, whereas, were they 
 to enter the employ of the new plant it would be 
 necessary for them to return to Akron in event 
 the new plant closed down for lack of orders. 
 Difficulty was also experienced in marketing the 
 goods. Everyone knew of the rubber plants at 
 Akron, and the high quality of the output. It 
 was therefore easy to market rubber manufac- 
 tured at Akron. No one had heard af the manu- 
 facture of rubber at the other place, and were 
 unwilling to buy any considerable quantity of an 
 article regarding the quality of which so little 
 was known. The gentleman told me it was for- 
 tunate that the stockholders were wealthy men, 
 as these two facts had necessitated a further 
 expenditure of $500,000 to place the plant on a 
 sustaining basis. 
 
 DEVELOPMENT OF JOBBING CENTER. — The de- 
 velopment of a wholesale or jobbing center is 
 dependent, among other things, upon: 
 
 {a) The needs of the people as deter- 
 mined BY CLIMATIC CONDITIONS, OR THE NATURE 
 OF THEIR EMPLOYMENT — whether in the mines, 
 in the mills and factories, on the farms, or in the 
 woods — and the ability of their customers to buy 
 
36 
 
 what are commonly regarded as luxuries. Eacli 
 trade center, to attain success, must necessarily 
 be governed by these local conditions. 
 
 [b) By the completeness of the market. 
 
 The merchants of the smaller towns only buy 
 from the traveling salesman the articles neces- 
 sary to carry along the trade until they can per- 
 sonally visit the larger trade centers, because of 
 the inability of the salesman to carry with him a 
 complete line of samples and to properly display 
 all the goods. It cannot be expected that the 
 merchant will travel to one trade center for his 
 stock of boots and shoes; to another for his dress 
 goods ; to another for his cloaks and wraps ; to 
 another for his furs, and to still another for his 
 millinery, when he can save both time and ex- 
 pense by going to one market which will supply 
 all, or nearly all, of his needs. Therefore, the 
 success of the market is proportionate to its 
 ability to furnish any and all articles and of the 
 quality desired. This accounts for the semi- 
 annual pilgrimage of merchants from all points 
 in the United States to the City of New York to 
 buy their spring and fall stock of goods ; New 
 York being the only market having a complete 
 line, both as to class and quality. 
 
37 
 
 (<;) Transportation Facilities. 
 
 This can best be emphasized by an illustration 
 of the work of the Pittsburgh Chamber of Com- 
 merce. By reason of the enormous tonnage of 
 the Pittsburgh district, and the extraordinary 
 efforts each railroad made to secure at least its 
 fair proportion of the traffic, it is doubtless true 
 Pittsburgh enjoys rates as favorable, if not more 
 so, than those of its competitors. Other jobbing 
 centers, however, were constantly encroaching 
 on Pittsburgh's territory, and an investigation 
 disclosed the fact that other jobbing centers 
 secured earlier delivery for their less carload 
 freight; and in view of this, a determined effort 
 was made to improve the service from Pittsburgh. 
 The tonnage did not justify improved service, 
 but the railroads agreed to co-operate with the 
 merchants in an earnest effort to regain that 
 which properly belonged to Pittsburgh. Instead 
 of passing the freight through the various trans- 
 fer stations en route, each causing a delay of 
 twenty-four hours in time of delivery, the freight 
 was forwarded in through cars, and at the time 
 the improved service to any one city was estab- 
 lished, the wholesalers and jobbers of Pittsburgh 
 were notified and they immediately placed their 
 
38 
 
 traveling representatives in the territory to 
 solicit orders on the strength of the improved 
 service. The results have been most satisfactory. 
 The less carload tonnage to a number of smaller 
 cities increased from loo to 600 per cent., and 
 this naturally has been followed by an increase 
 in carload shipments. These results were ob- 
 tained without any change in the freight rates 
 either from Pittsburgh or the other trade centers. 
 Co-operation has triumphed where individual 
 effort had failed. 
 
 A couple of instances will serve to illustrate 
 the point that the question of freight rates is a 
 local one. One merchant complained that the 
 rate from Pittsburgh to Bluefield, W. Va., on the 
 Norfolk & Western, was two cents higher than 
 from Cleveland, notwithstanding the fact that 
 the distance from Pittsburgh was less. Investi- 
 gation disclosed the fact that the shortest distance 
 by rail was ten miles less from Cleveland than 
 from Pittsburgh, also that Pittsburgh, Parkers- 
 burg, Baltimore and Washington enjoyed a low- 
 er rate to Norfolk than the rate from Cleveland, 
 while Cleveland enjoyed a lower rate to Bluefield 
 than did Pittsburgh, Parkersburg, Washington 
 or Baltimore. The merchant was informed he 
 
39 
 
 could have the Cleveland rate to Bluefield if 
 Pittsburgh would accept the higher rate which 
 obtained from Cleveland to Norfolk. Inasmuch, 
 however, as the tonnage from Pittsburgh to 
 Norfolk is greater than the tonnage to Bluefield, 
 they asked that no change be made. 
 
 Another merchant felt aggrieved because the 
 rate from Pittsburgh to Altooua was 33 cents, 
 while the rate from Philadelphia to Altoona was 
 38 cents, the distance from Pittsburgh to Altoona 
 being, only 113 miles, while the distance to 
 Philadelphia was 235 miles. He felt the rate 
 should be proportionate with the distance. Re- 
 versing the situation, however, and selecting a 
 station about 113 miles from Philadelphia and 
 about 235 miles from Pittsburgh, it was found 
 the rate from Pittsburgh M^as 38 cents, and the 
 rate from Philadelphia 33 cents. The merchant 
 recognized that the existing rates were equally 
 fair to Pittsburgh and Philadelphia. 
 
 Were the rates between Philadelphia and 
 Pittsburgh proportionate to the mileage it would 
 be equivalent to establishing a wall midway 
 between the two cities, and saying to the mer- 
 chants to the east thereof that they must buy in 
 Philadelphia, and to the west thereof that they 
 
40 
 
 must buy in Pittsburgh, and while it might be 
 easier for the merchants of Pittsburgh and 
 Philadelphia to secure their fair proportion of 
 the trade, it would deprive the merchants of the 
 smaller towns of the privilege they now enjoy 
 of being able to buy in competitive markets. 
 
 If carried to a logical conclusion, would not a 
 rate structure based on valuation ultimately lead 
 to a flat mileage rate ; and if so, will it not 
 benefit the few dealers in the larger cities at the 
 expense of the many in the smaller cities and 
 villages ? 
 
 CAPITALIZATION . 
 
 Much of the present misunderstanding regard- 
 ing the relation between the valuation and cap- 
 italization of railroads and other corporations 
 would be eliminated were it possible to handle 
 the shares of the companies in the same manner 
 as those of joint partnerships. In the latter, 
 each of the partners owns a fractional interest in 
 the partnership, but there is no "par value" 
 assigned to any fractional interest. Each stock 
 certificate of a corporation states that the holder 
 thereof is entitled to shares in the capital 
 
 stock of the company, but also shows the par 
 
41 
 
 value per share. It would, however, be possible, 
 and probably wise, to discontinue showing the 
 par value and only show the number of shares 
 for which the certificate is issued; dividing said 
 number into the total number of shares outstand- 
 ing would give the fractional interest of the 
 holder. Were this position to prevail, it might 
 cause a discontinuance of the present effort to 
 secure a stock of a par value of $ioo, the market 
 value of which will remain at $ioo, regardless of 
 any conditions in the, money market, and regard- 
 less of the earning capacity of the property. 
 
 We all know of roads which have been in 
 existence fifty, sixty, seventy, or eighty years, 
 and know of the improvements that have con- 
 stantly taken place, permitting of more econom- 
 ical operation; and while the return to the stock- 
 holder is little, if any, greater to-day than forty 
 3'ears ago, it cannot be denied that the shippers 
 and traveling public have been greatly advan- 
 taged by the economies that have taken place, 
 as the freight rates and passenger fares have 
 been materially reduced. 
 
 The greater part of the property of the present 
 systems was acquired either through purchase, 
 amalgamation, consolidation, or reorganization of 
 
42 
 
 other companies, and the price paid therefor by 
 the present holder, and not the original cost of 
 the material in place, was the basis on which the 
 capital securities of the existing companies were 
 issued. In some instances this may have been 
 at thirty or fifty cents on the dollar, and in other 
 cases at two dollars for each one dollar originally 
 invested. The price paid was dependent on the 
 then value as a "going concern," and this, of 
 course, was affected by the condition of the prop- 
 erty, its strategical location, its earning capacity, 
 and its probable enhanced value to the new 
 owners b^' reason of control of traffic thus secured 
 to other lines owned by the purchaser. 
 
 Certainly it cannot be denied that a road be- 
 tween New York and Chicago, 950 miles in 
 length, passing through a manufacturing district, 
 is of greater value than a road 1,200 miles in 
 length, between the same cities, but passing 
 through a hilly and undeveloped territory a 
 portion of the distance, and through a farming 
 section for a greater portion of the remaining 
 distance; yet the advocates of a phj-sical valu- 
 ation would have us believe that there is no 
 difference in the value of the two if they can be 
 reproduced to-day at the same cost. They unfor- 
 
43 
 
 tunately overlook the fact that it was not only 
 the early construction of the shorter line, but 
 its progressive management working to secure 
 the location of new industries and build up 
 those already established on the line, that had 
 secured for it the commanding position it holds 
 to-day. The success of these industries was in 
 a measure dependent upon the service rendered 
 on the road ; any enhancement in value by 
 reason of their location on the road would prob- 
 ably be construed by the courts as something 
 which must be reckoned with in determining 
 the " fair value " of the carrier's property. 
 
 We have already seen how the present com- 
 panies came into existence, and wh}' there cannot 
 be established an}' reasonable proportion as be- 
 tween the percentage of material in place and the 
 cost of road and equipment as it appears on the 
 company's books. 
 
 Both the public and the common carriers are 
 more or less familiar with those sections of the 
 .Act to Regulate Commerce which require the 
 Commission to investigate any and all complaints 
 regarding violations of the Act ; and which 
 authorize the Commission to institute inquiries 
 on its own motion; to fix reasonable maximum 
 
44 
 
 rates, to establish through routes and joint rates, 
 and determine the division of rates; to award 
 damages; to regulate the allowance to shippers 
 for service ; and to prescribe the rules and regula- 
 tions governing the issue of tariffs, etc. 
 
 It is doubtful, however, if other than the 
 accounting officers of the carriers are familiar 
 with the provisions of Section 20, and in view of 
 the relative importance of that section to the 
 subject under discussion, it seems desirable that 
 the same be quoted in full.* 
 
 That you may understand the manner in which 
 the Commission is working under Section 20, I 
 desire to quote the following extracts from Pro- 
 fessor Adams' address of October 11, 1907, before 
 the Government Accounting Officers at Wash- 
 ington : 
 
 "The Goverutnent has recently undertaken to do some- 
 thing quite diflfereut from that which it has ever undertaken 
 to do before. It has undertaken to exercise a controlling 
 influence upon the administration of railway properties 
 through the agency of their accounts. 
 
 "I assume, further, that you will not take it amiss if I 
 place some emphabis upon the political aspect of this new 
 step which the Government has seen fit to take, political, 
 not in its party sense, but in the broad sense of political 
 science. What do these orders of the Commission relative 
 to accounts mean for our Government? What do they 
 mean as a form of control of aggregations of capital which, 
 under present conditions, are a menace to the stability of 
 this nation? And I further call attention, in passing, to 
 
 ^For Section 20 of the Act to Regulate Coinmerce, see page 57. 
 
45 
 
 the fact that the sncccess of what the Interstate Commerce 
 Commission is undertaking in this regard, aiming, as I 
 have remarked, at the control of railway accounts, will 
 serve as a model, if it succeeds, for the control of all forms 
 or agencies of consolidated capital which endanger the per- 
 petuatiou of the principles upon which our Government 
 rests. 
 
 "Now, there is one thing in which this Government is 
 woefully deficient, and that is in the development of any 
 governmental administrative agencies, so far as industrial 
 affairs are concerned. The marked difference between the 
 German constitution and the American constitution is that 
 we over-estimate the exercise of judicial functions, and 
 under-estimate the exercise of administrative or supervisory 
 functions, whereas in Germany the reverse is true. They 
 have a perfect administrative supervision, although the 
 expressions at least of the rights of the individual are less 
 definite and direct than in this country. It is with no 
 intent to disparage the importance of judicial administra- 
 tion, or of that method of procedure which aim.s to redress 
 wrongs by passing judgment upon complaints, but if my 
 view of this situation is correct, the other method of making 
 effective governmental control over industrial affairs con- 
 tains the greater hope, and the significance of the Twen- 
 tieth Section of the Act to Regulate Commerce is that it 
 provides a practical means within a limited area of working 
 out the theory of administrative supervision. 
 
 " Call to mind that the aim of the supervision pf account- 
 ing is to exercise influence upon the administration and 
 management of railway property ; call to mind, further, 
 that the function of accounts is to record facts, and that true 
 accounting is nothing more, nor nothing less, than the 
 correct statement of what, in fact, has taken place, and, the 
 measurement of that fact in an appropriate figure. Now, 
 control over the manner in which those facts are recorded, 
 and the assignment of some degree of personal responsi- 
 bility upon some specially designated official must result in 
 a very direct influence upon the administration of railway 
 properties. 
 
 "The method by which it is hoped that this will be 
 accomplished is found in the order promulgating these 
 accounts. 
 
 " The order holds the accounting officer of each railroad 
 responsilile for the proper application of the rules laid down 
 which, in effect and to the extent that the law has jurisdic- 
 tion over this matter, makes every accountant in this country 
 
46 
 
 the agent of the Uuited States Government for the execution 
 of the law. 
 
 " Now, you may say this is setting up a partnership, as 
 it were, wiih the carriers. That is true. If you go back to 
 the fifteenth century and ask what is a corporation, a very 
 significant answer is made. At the time tlie corporation 
 originated, as an entity in English law, the corporation was 
 regarded as an arm of the State. There was some function 
 which the State desired to perform, or to have done, which 
 the stale, for some reason, did not desire to perform direclly 
 and immediately. It, therefore, selected certain men and 
 said : We will incorporate yon, give to you the liberty of 
 doing this thing, and you will be responsible for the doing 
 of it. The East India Company is an illubtration of a cor- 
 poration of this kind, the corporations that established the 
 State of Pennsylvania and all of our plantations are illus- 
 trations of corporations of this kind. Everywhere the 
 corporation was conceived to be a part of the Government, 
 and within the limits that the Government chose to exercise 
 its supervision, the corporate official was responsible to the 
 Government. 
 
 "Now, in the industrial development that has character- 
 ized the life of the English-speaking people the modern 
 corporation seems to be more or less of a purely private 
 affair. Our industrial philosophy led to the complete sep- 
 aration of state and industry. As a result of this policy, 
 while great benefits have accrued, certain evils also have 
 shown themselves, and the time has come when it is neces- 
 sary to select certain of these corporations, at least, and 
 restate for them the old and original theory of the corpora- 
 tion. I do not know that this explanation was present in 
 the minds of Congress when it passed the Twentieth .Section 
 of the Act to Regulate Commerce. I do not know whether 
 what I have said was consciously reco)dnized by the mem- 
 bers of the Interstate Commerce Commission when they 
 framed the order under which the operating accounts were 
 promulgated, but this I do know, that through the agency 
 of accounts and by means of that order which imposes upon 
 certain officials of the railroads the personal responsibility 
 of executing the Commission's orders relative to accounts, a 
 long step has been taken toward the realization of the six- 
 teenth century theory, and to my mind the correct theory, 
 of corporations. Such then, very concisely stated, is the 
 political aspect of this government supervision over railway 
 accounting which marks the most recent phase of railway 
 legislation." 
 
47 
 
 In connection witli this address by Professor 
 Adams, your attention is called to the following 
 clause in the Report of the Interstate Commerce 
 Commission for the year 1907 : 
 
 "If Congress designed by the provision which it made 
 for a prescribed system of accounts that the Commission 
 should do what lies in its power to guarantee the sound 
 financing of railways, the making of an inventory appraisal 
 of railway property cannot longer be delayed." 
 
 There is nothing in the Act to Regulate Com- 
 merce which justifies any one in supposing that 
 Congress expects the Commission to " guarantee 
 the sound financing of railways." Section 20, 
 however, provides a means by which the Com- 
 mission and the public can be kept fully informed 
 regarding the operation and policy of each Com- 
 pany. Their present operations are conducted 
 under contracts with the States ; such contracts 
 being commonly known as charters. Neither 
 party can ignore the provisions thereof without 
 the due consent of the other. Two attempts to 
 have Congress pass a bill providing for a phys- 
 ical valuation of the railways have failed of 
 passage by Congress. It has been stated, how- 
 ever, that the Commission may find it possible 
 to undertake such an investigation under the 
 provisions of the Emergency Currency Act. If 
 this be their position, they are seeking to accom- 
 
48 
 
 plish by indirect means something to the secur- 
 ing of which by direct means Congress has 
 withheld its approvaL 
 
 What Professor Adams (and possibly the Com- 
 mission) has in mind is not a question of 
 regulation^ but a question of control over the 
 operations not only of the common carriers, but 
 of all manufacturing and commercial establish- 
 ments whose business is not confined exclusivel}' 
 to one state. He seeks to secure this control by 
 a physical valuation and a system of accounting. 
 
 The present plan contemplates requiring the 
 carriers to add to their cost of property any and 
 all amounts which, in the past, have been ex- 
 pended for Construction or Additions and Better- 
 ments and charged to Operating Expenses, 
 Income Account, or to Profit and Loss Surplus, 
 thus changing the General Ledger accounts as 
 they exist to-day. 
 
 In the event of a ph37sical valuation of the 
 properties the companies will be required to 
 ignore the facts as set forth on the present books 
 of the companies, and open up a new set of 
 books, using as a basis the figures obtained by 
 means of a physical valuation. 
 
 The present plan does not contemplate any 
 
49 
 
 valuation appearing on the books for franchises, 
 good will, etc., notwithstanding the fact that 
 property is of no value without the right to use 
 it. To carry this theory to a logical conclusion, 
 the book accounts should be ignored from time 
 to time, as the physical value of the plant 
 changes with the commercial conditions ; whether 
 this be due to changes or fluctuations in the 
 price of material entering into the construction, 
 changes in land values, or other causes. No 
 plan has yet been suggested as to the manner 
 in which they purpose making an adjustment 
 between the proposed accounts and the securities 
 outstanding. 
 
 Can we afford to place in the hands of a Com- 
 mission, composed of a few men, the power to 
 write up and down, at will, the value of the 
 carriers' property, especially when we bear in 
 mind that the membership of the Commission is 
 constantly changing ; that different men have 
 different views regarding valuation ; and that we 
 already have the experience of the Michigan 
 Central, where such a Commission, by a slight 
 change in the interest rate, made a difference of 
 $20,000,000 in the value of the property of that 
 company within two years? Shall either the 
 
50 
 
 rates or the capitalization of the companies be 
 dependent on so unstable a basis ? 
 
 The suggestions of the Commission regarding 
 other matters affecting the capital accounts of 
 the companies are equally objectionable and un- 
 fair to the railroads. For example : 
 
 First. — They have established depreciation 
 accounts without setting up appreciation ac- 
 counts ; notwithstanding the repeated rulings of 
 the courts that depreciation and appreciation 
 must be treated alike. 
 
 The depreciation accounts as promulgated also 
 interfere with the ability of the operating officer 
 to analyze his expenses, inasmuch as they re- 
 quire the roads to include in their operating ex- 
 penses amounts other than those actually ex- 
 pended, making it especially difficult for those 
 not familiar with accounting systems to distin- 
 guish as between theoretical and actual expenses. 
 
 Second. — They overlook the right of the rail- 
 roads (and common to all corporations) to capital- 
 ize discounts on securities sold. 
 
 Discounts on securities sold represent the in- 
 creased commercial risk of the investor as com- 
 pared with other investments in commercial pur- 
 
51 
 
 suits, and the right to capitalize the same has 
 been passed on favorably by the courts. 
 
 Third. — Contrary to almost uniform practice 
 of the railroads, they contemplate the charging 
 to Operating Expenses of from 50 to 70 per 
 cent, of the cost of reduction of grades, changes 
 of line, revision of yards, etc. They ignore the 
 fact that the net returns of a property can be in- 
 creased as much by the reduction of expenses as 
 by an increase in revenues. A penny saved is a 
 penny earned ; but usually to earn an additional 
 penny a railroad has to spend six-tenths of a 
 cent for operation. A reduction of $1,000 in ex- 
 penses is equivalent to an increase of $2,500 in 
 gross revenue. In either case the net earnings 
 of the company are increased just $1,000. 
 
 If the Commission maintain their plan, and it 
 be sustained, then the investment of new capital 
 for reduction of expenses will be discontinued, 
 and it will only be employed for purposes that 
 will increase the gross revenue. 
 
 The public are equally interested with the 
 railroads in this question of capitalization. Inter- 
 ference with their ability to secure the necessary 
 capital with which to continue the development 
 of existing lines and construction of new ones 
 
52 
 
 must correspondingly adversely affect their abil- 
 ity to properly serve tlie public. The present 
 tendency is to restrict the ability of the roads to 
 raise new capital, while at the same time increas- 
 ing the expenditures for non-revenue producing 
 property through legislation requiring the eleva- 
 tion of tracks, erection of new interlockings, block 
 signals, new stations, and increased passenger 
 train and other service that is unremunerative. 
 
 The action of the Interstate Commerce Com- 
 mission on the subject of depreciation affected 
 the net earnings applicable to fixed charges, 
 dividends, new construction, etc., to the extent 
 that such charges exceeded the actual expendi- 
 tures during the year. For example, one road 
 showing for 1906 a surplus of $1,400,000, charged 
 for depreciation in 1907 $1,300,000, and the sur- 
 plus for the year 1907 was approximately $200,- 
 000. The actual net returns of the two years 
 were practically identical, the difference being 
 caused by the substitution, under the instructions 
 of the Interstate Commerce Commission, of "theo- 
 retical bookkeeping" for a record of the facts. 
 
 The public, not understanding the cause of 
 the great difference in the performance of the 
 railways, as indicated in reports to the Commis- 
 
53 
 
 sion, became alarmed regarding their investments, 
 and this assisted in hastening the panic of 1907. 
 In an address delivered in 1907, Mr. L. F. 
 Loree stated : 
 
 "In the past the energy, courage and skill of the rail- 
 road officers have been devoted to new construction, to the 
 bettering of the )ine and grade of the old roads, to a great 
 improvement in the structure of the track and equipment, 
 and in methods of operation, particularly in getting better 
 loads for cars and engines and the lowering of cost through 
 reduction of train and ton mileage. 
 
 " The vindication of the wisdom with which the railroads 
 have used the new moneys furnished them is that with a 
 doubling of the capital they have quadrupled the movement; 
 that whereas in 1882 it required a capital investment of 
 more than twelve cents to provide for the movement of a 
 traffic uuit, in, 1905 it required a capital investment of but 
 five and three-quarter cents to provide for this movement. 
 
 "That the public has not been unfairly dealt with is 
 evidenced by the fact that whereas in 1SS2 a charge of one 
 and a half cents was made for the movement of a unit of 
 traffic, in 1905 this charge had been reduced below one 
 cent. 
 
 "The problem which is facing the railroads and the 
 people is not how the railroads will be able to maintain this 
 traffic, but how they will be able to haudle the enormous 
 traffic which they will be called upou to handle. It is hard 
 to convey an adequate idea of the seriousness of this problem, 
 lu the eighties a growth of 10 per ceut. in traffic meant an 
 increase of 5,000,000,000 traffic units per auunin, but now it 
 means an increase of nearly 20,000,000,000 traffic units. With 
 a growth of railroad mileage which even last year, when the 
 quantity constructed was larger thau for many years past, 
 showing an increase over the total of less than 3 per cent., 
 with nineteen-lwentieths of the railroads only single-track 
 lines, and with a large portion of these nearly up to the 
 limit of their carrying capacity ; with an equipment abso- 
 lutely inadequate and being but slowly augmented, owing 
 to the destruction of vast quantities of old and obsolete cars 
 and engines ; it seems clear that neither during these years 
 of the past, nor in the immediate future, will the propor- 
 tionate growth of capital outlays in any way correspond 
 with the proportionate growth of traffic." 
 
54 
 
 In the year 1906, the amount of new securities 
 authorized by the railroads was about $2,700,000,- 
 000, and the amount actually issued was but 
 $1,600,000,000. Of the latter sum, $500,000,000 
 was for conversion purposes, so that the net 
 increase in capital securities outstanding was 
 about $1,100,000,000 par value. This was con- 
 siderably above the amount realized on sale. 
 Some of the proceeds were paid out on discounts 
 on securities sold ; some used to buy securities 
 of other roads ; some used to increase cash on 
 hand or materials in stock, and for other pur- 
 poses. It is probable that not more than 
 $800,000,000 was devoted to construction and 
 equipment. To this latter amount should be 
 added a possible $100,000,000 for construction 
 and betterments contributed by the companies 
 and charged by them to Income or Operating 
 Expenses. This $900,000,000 is probably dis- 
 tributed as follows : 
 
 New lines $200,000,000 
 
 Additional tracks 125,000,000 
 
 New equipment 400,000,000 
 
 Terminal facilities 175,000,000 
 
 Total $900,000,000 
 
55 
 
 Can we afford to vest in any Commission the 
 determination of these great questions, fraught 
 with such vital consequences to the prosperity 
 and development of both the railroads and the 
 country ? Shall not the stockholders be permit- 
 ted to operate the property owned by them, under 
 such governmental regulations as may be deemed 
 necessary to secure equal service to all, and at 
 rates not unreasonable ? 
 
 CONCLUSIONS. 
 
 Now, gentlemen, I think we have proven : 
 
 First. — That a general valuation of railway 
 property such as proposed by the Interstate 
 Commerce Commission cannot lawfully be used 
 for any federal purpose, either of taxation, or of 
 determining the reasonableness of a rate, or of 
 fixing the value of railway securities. 
 
 Second. — That before any valuation of rail- 
 way properties — whether it be the cost of mate- 
 rial in place or the value as a " going concern " 
 — can be generally used for purposes of taxa- 
 tiou, it will be necessary to amend the constitu- 
 tions of several of the states. 
 
 Third. — That the purpose of determining the 
 reasonableness of a rate, the cost of the property 
 to the present holders thereof, and the valuation 
 
56 
 
 of the plant as a " going concern," must be 
 ascertained. 
 
 Fourth. — That the questions of reasonable- 
 ness of rates do not arise with regard to the 
 whole of any carrier's business, but as to parts 
 thereof for particular services, and that the only 
 valuation which could be of utility in solving 
 these questions would be of the particular por- 
 tion of the carrier's property'specially emploj'ed 
 to perform the service. 
 
 Fifth. — That in the determination of the 
 reasonableness of a rate the value to be applied 
 is the then value as a " going concern," and a 
 valuation to-day would not apply to conditions 
 existing to-morrow. 
 
 Sixth. — That before undertaking a valuation 
 for any purpose, it is not only desirable but 
 necessary that a basis fair to all interests be 
 determined, and that the purpose for which it is 
 to be used shall be clearly defined. It otherwise 
 is susceptible of conversion, as Mr. Shields points 
 out, to mean "nothing more nor less than con- 
 fiscation." 
 
 Seventh. — -It is not wise to give any political 
 body the power to write either up or down, at 
 will, the assets of a corporation. 
 
SECTION 20 
 
 OF THE 
 
 ACT TO REGULATE COMMERCE 
 
 As Amended June 29, 1906. 
 
 Section 20. That the Commission is hereby author- amhmi/.ed'io 
 
 . . ^ . . require annual 
 
 ized to require annual reports irom all common earners reports, 
 subject to the provisions of this Act, and from the owners 
 of all railroads engaged in interstate commerce as defined 
 in this Act, to prescribe the manner in which such 
 reports shall be made, and to require from such carriers 
 specific answers to all questions upon which the Com- 
 mission may need information. Such annual reports 
 shall show in detail the amount of capital stock issued, Prescribed 
 
 ^ ' contents of 
 
 the amounts paid therefor, and the manner of payment ^"""^ ''^'^°^ ^' 
 for the same ; the dividends paid, the surplus fund, if 
 any, and the number of stockholders ; the funded and 
 floating debts and the interest paid thereon ; '^ the cost and 
 value of the carrier' s pi operty, franchises and equipments; 
 the number of employees and the salaries paid each class; 
 the accidents to pas.sengers, employees, and other persons, 
 and the causes thereof; the amounts expended for im- 
 provements each year, how expended, and the character 
 of such improvements ; the earnings and receipts from 
 each branch of the business and from all sources ; the 
 operating and other expenses ; the balances of profit and 
 loss ; and a complete exhibit of the financial operations 
 of the carrier each year, including an annual balance 
 sheet. Such reports shall also contain such information 
 in relation to rates or regulations concerning fares or 
 freights, or agreements, arrangements, or contracts affect- 
 
 * Italics, ours. 
 
58 
 
 ing the same as the Commission may require ; and the 
 Commission may, in its discretion, for the purpose of en- 
 abling it the better to carry out the purposes of this Act, 
 prescribe a period of time within which all common 
 carriers subject to the provisions of this Act shall have, 
 as near as may be, a uniform system of accounts, and the 
 manner in which such accounts shall be kept. 
 Time of Said detailed reports shall contain all the required 
 
 filing reports. 
 
 Statistics for the period of twelve months ending on the 
 thirtieth day of June in each year, and shall be made 
 out under oath and filed with the Commission, at its 
 oflBce in Washington, on or before the thirtieth day of 
 September then next following, unless additional time 
 be granted in any case by the; Commission ; and if any 
 carrier, person, or corporation subject to the provisions 
 of this Act shall fail to make and file said annual reports 
 within the time above specified, or within the time 
 extended by the Commission for making and filing the 
 same, or shall fail to make specific answer to any question 
 authorized by the provisions of this section within thirty 
 days from the time it is lawfully required so to do, such 
 parties shall forfeit to the United States the sum of one 
 hundred dollars for each and every day it shall continue 
 Commission to be in default with respect thereto. The Commission 
 
 may require 
 
 monthly shall also have authority to require said carriers to file 
 
 reports. 
 
 monthly reports of earnings and expenses or special 
 reports within a specified period, and if any such carrier 
 shall fail to file such reports within the time fixed by the 
 Commission it shall be subject to the forfeitures last above 
 provided. 
 
 Said forfeitures shall be recovered in the manner pro- 
 vided for the recovery of forfeitures under the provisions 
 of this Act. 
 
59 
 
 The oath required by this section may be taken before 
 any person authorized to administer an oath by the laws 
 of the State in which the same is taken. 
 
 The Commission mav, in its discretion, prescribe the commission 
 
 - ' ^ may prescribe 
 
 forms of any and all accounts, records and memoranda to l°c"^,usand 
 
 11 1 • 1* 1 •■ /-i*Ai_ records of car- 
 
 be kept by carriers subject to the provisions of this Act, riers-oiher 
 
 forms unlaw- 
 
 including the accounts, records, and memoranda of the f"'- 
 movement of traffic as well as the receipts and expendi- 
 tures of moneys. The Commission shall at all times 
 have access to all accounts, records, and memoranda kept 
 by carriers subject to this Act, and it shall be unlawful 
 for such carriers to keep any other accounts, records, 
 or memoranda than those prescribed or approved by 
 the Commission, and it may employ special agents or 
 examiners, who shall have authority under the order of 
 the Commission to inspect and examine any and all ac- commission 
 
 ^ shall have 
 
 counts, records, and memoranda kept by such carriers, records" ^" 
 This provision shall apply to receivers of carriers and 
 operating trustees. 
 
 In case of failure or refusal on the part of any such 
 carrier, receiver, or trustee to keep such accounts, records, 
 and memoranda on the books and in the manner prescribed 
 by the Commission, or to submit such accounts, records, 
 and memoranda as are kept to the inspection of the Com- 
 mission or any of its authorized agents or examiners, 
 such carrier, receiver, or trustee shall forfeit to the United 
 States the sum of five hundred dollars for each such 
 ofiense and for each and every day of the continuance of 
 such offense, isucb forfeitures to be recoverable in the 
 same manner as other forfeitures provided for in this Act. 
 
 Any person who shall willfully make any false entry 
 in the accounts of any book of accounts or in any record 
 or memoranda kept by a carrier, or who shall willfully 
 
6o 
 
 destroy, mutilate, alter, or by any other means or device 
 Penalty for falsify the record of any such account, record, or mem- 
 
 false accounts, 
 
 oranda, or who shall willfully neglect or fail to make 
 full, true, and correct entries in such accounts, records, 
 or memoranda of all facts and transactions appertaining 
 to the carrier's business, or shall keep any other accounts, 
 records, or memoranda than those prescribed or approved 
 by the Commission, shall be deemed guilty of a mis- 
 demeanor and shall be subject, upon conviction in any 
 court of the United States of conipetent jurisdiction, to a 
 fine of not less than one thousand dollars nor more than 
 five thousand dollars, or imprisonment for a term not less 
 than one year nor more than three years, or both such 
 fine and imprisonment. 
 
 Any examiner who divulges any fact or information 
 which may come to his knowledge during the course of 
 such examination, except in so far as he may be directed 
 by the Commission or by a court or judge thereof, shall 
 be subject, upon conviction in any court of the United 
 States of competent jurisdiction, to a fine of not more 
 than five thousand dollars or imprisonment for a term not 
 exceeding two years, or both. 
 Courts That the circuit and district courts of the United 
 
 may compel 
 
 obedience lo States shall have jurisdiction, upon the application of the 
 
 the commerce 
 
 mrndamus." °'' Attorney-General of the United States at the request of 
 the Commission, alleging a failure to comply with or a 
 violation of any of the provisions of said Act to regulate 
 commerce or of any act supplementary thereto or amenda- 
 tory thereof by any common carrier, to issue a writ or 
 writs of mandamus commanding such common carrier to 
 comply with the provisions of said Acts, or any of them. 
 And to carry out and give effect to the provisions of 
 said Acts, or any of them, the Commission is hereby 
 
6i 
 
 authorized to employ special agents or examiners who ^°a"™',fp]°y 
 shall have power to administer oaths, examine witnesses, ^^^"^'^ ^^'^° 
 and receive evidence. 
 
 That any common carrier, railroad, or transportation 
 company receiving property for transportation from a 
 point in one State to a point in another State shall issue 
 a receipt or bill of lading therefor and shall be liable to carriers Uabie 
 
 ^ ° to lawful 
 
 the lawful holder thereof for any loss, damage, or injury j!,°(jf,^g °Jr''i'os°'^ 
 to such property caused by it or by any common carrier, propeny^^' ° 
 railroad, or transportation company to which such prop- 
 erty may be delivered or over whose line or lines such 
 property may pass, and no contracts, receipt, rule, or 
 regulation shall exempt such common carrier, railroad, 
 or transportation company from the liability hereby im- 
 posed : Provided, That nothing in this section shall 
 deprive any holder of such receipt or bill of lading of any 
 remedy or right of action which he has under existing 
 law. 
 
 That the common carrier, railroad, or transportation 
 company issuing such receipt or bill of lading shall be 
 entitled to recover from the common carrier, railroad, or 
 transportation company on whose line the loss, damage, 
 or injury shall have been sustained the amount of such 
 loss, damage, or injury as it may be required to pay to 
 the owners of such property, as may be evidenced by an}' 
 receipt, judgment, or transcript thereof. 
 
 I2491AI 
 
VALUATION OF 
 PUBLIC SERVICE 
 CORPORATIONS 
 
 PAPER BY 
 
 W. H. WILLIAMS 
 
 For Discussion By 
 
 Joint Session of 
 
 AMERICAN ECONOMIC ASSOCIATION 
 
 and 
 
 AMERICAN POLITICAL SCIENCE ASSOCIATION 
 
 Chamber of Commerce, New York 
 
 DECEMBER 30, 1909 
 
Valuation of Public Service Corporations. 
 
 Exchanges of the surplus products of indi- 
 viduals, communities and nations constitute 
 commerce. Formerly local communities had no 
 market for their surplus products and found it 
 necessary to produce all commodities required 
 for the subsistence of their inhabitants. Trans- 
 portation made possible interchanges between 
 communities and nations, and these interchanges 
 have multiplied as transportation has improved. 
 Productive efficiency necessitates local specializa- 
 tion of industrial functions, and, in the propor- 
 tion in which it is successfully obtained, does 
 transportation approach perfection. 
 
 It is not in the original cost of a railway, nor in 
 the condition in which maintained, but in the ex- 
 tent to which it serves to effectuate these inter- 
 changes that a railway has value. The value of a 
 railway lies, then, not in its physical property, but 
 in the use of that property. Value begins with 
 use and increases as use increases. 
 
 " But the value of property results from the use to which 
 it is put and varies with the profitableness of that use, 
 present and prospective, -actual and anticipated. There is 
 no pecuniary value outside of that which results from such 
 use." (C, C, C. & St. L. Ry. v. Backus, 154 U. S., 445). 
 
 The things that secure a broad, extensive and 
 profitable use are, therefore, the things which 
 give value to a railway. Among these are : 
 
The location of the railway with reference to natural 
 resources producing traffic. 
 
 If two men were each to start to construct 
 a railway in a country devoid of transporta- 
 tion facilities, one or the other would, in the 
 exercise of a superior judgment, so locate 
 his railway as to obtain a more profitable 
 traffic. This is an advantage of judgment 
 which should apparently receive proper com- 
 pensation. 
 
 The location of the route selected with reference to 
 economical construction and service. 
 
 Almost any two communities which might 
 exchange traffic are connected by several 
 routes, but there is always one route over 
 which the railway can be built most eco- 
 nomically and perform the service at least 
 cost. The route which is superior today 
 may become inferior in the near future 
 through the development of business to a 
 volume which would warrant construction 
 over a more costly route in order to obtain 
 more economical operating conditions. The 
 selection of the particular route which, 
 while sufficiently adapted to the conditions 
 of the time, also provides as far as may be 
 for future growth, involves a very high type 
 of business judgment and one which cannot 
 be enlisted in the public service, unless the 
 opportunity for reward is left open. The 
 most desirable route at any given time is 
 that which gives the greatest traffic per dollar 
 of necessary investment. 
 
3. Suitable construction and equipment. 
 
 Equipping the railway with such terminal 
 facilities, passing tracks, rolling stock, and 
 other appliances as are best adapted to the 
 needs of the traffic. 
 
 4. Such combination of capital and labor, and efficiency of 
 
 management as Avill secure the maximum traffic per 
 dollar of expenditure. 
 
 This involves good service, a fair wage, 
 reasonable rates, and the maintenance of 
 good relations with the investing public, em- 
 ployees, shippers and connecting lines. It 
 is a combination of all these factors which 
 secures the cheapest cost, the highest wages 
 and the best profits. 
 
 The question is, shall the railways be per- 
 mitted that profit which is the ordinary reward of 
 effective management, and hope of which is the 
 only means of securing the greatest production 
 per dollar expended, or shall they be limited to 
 an investment return on the capital employed ? 
 
 Capital cannot be interested in any undertak- 
 ing if its maximum reward is limited to an in- 
 vestment return unless, at the same time, it is 
 reasonably assured that it will not get less. 
 Such an assurance cannot be had under the con- 
 ditions at present surrounding our railways. 
 
 While the existence of a railway renders the 
 building of another in the same locality less 
 probable, the possibility of rivalry grows as suc- 
 cess becomes assured or increases. Previous 
 
occupancy gives no prescriptive right. This 
 competition is not limited to a parallel line, but 
 maj^ be that of a line seeking to market the sur- 
 plus products of a community not served by both. 
 In either case the original line suffers a re- 
 duction in tonnage and a corresponding loss of 
 revenue unless rates are increased. This loss 
 may not only prevent any return to the investor, 
 but may even cause insolvency. It will con- 
 tinue until traffic increases sufficiently to sup- 
 port both lines. In like manner competition 
 may develop through the combination of two or 
 more existing lines for through service, and with 
 the same disastrous results to the investor in 
 the original railway. Capital, therefore, incurs 
 risks which must be compensated if additional 
 capital is to be secured, either for the construc- 
 tion of new lines or the extension and better- 
 ment of those already constructed — both of 
 which are necessary to handle rapidly increas- 
 ing traffic. 
 
 Further, unless there be a profit beyond the 
 investment return, there is no reward for the con- 
 ception of the undertaking, its economical con- 
 struction, the subsequent additions of improved 
 machinery and appliances, the introduction of 
 economies of operation, nor the maintenance of 
 harmonious relations with the public and con- 
 necting lines, all of which are necessary to 
 
secure the greatest amount of trafi&c per dollar 
 expended. 
 
 No railway can be required to move any traffic 
 at less than the cost of the service performed, 
 plus a fair return on the fair value of that which 
 is employed in rendering such service. 
 
 Thus, in approaching the question of valuation 
 of railways, we must bear in mind that com- 
 merce cannot exist without transportation facili- 
 ties ; that adequate transportation facilities cannot 
 be had unless capital is attracted, and unless 
 sufficient inducements are -offered to secure 
 effective management. 
 
 The following questions present themselves : 
 Can a "fair valuation" be made? By what 
 method should it be reached? For what prac- 
 tical purposes can it be used? By whom should 
 it be undertaken ? 
 
 Accurate nomenclature is the beginning of 
 profitable discussion. No benefit will result 
 from any argument unless the participants have 
 a common understanding of the terminology 
 employed. " Valuation " seems to relate to 
 " value," and a " railway valuation " would seem 
 to be a process of ascertaining " railway value." 
 Value, however, is a ratio in exchange ; that is 
 to say, in commerce. It is the relation which the 
 law of supply and demand has, for the time being, 
 established between one commodity and another. 
 
Value, then, is an incident of commerce, and can- 
 not exist without it, and to qualify the term 
 " value " by the word " commercial " is super- 
 fluous, for all value must be commercial. When 
 it is proposed, therefore, to undertake something 
 which is not to be a " commercial valuation," it 
 is plain that the thing to be ascertained, what- 
 ever it may be, cannot be " value." The thing 
 now proposed is not new, although its advocates 
 have been pleased to give it a new name. What 
 they are really proposing is to ascertain " cost 
 of reproduction less depreciation." 
 
 Through laying undue stress upon the present 
 value of material in place, much confusion has 
 arisen regarding the elements entering into 
 value. This is caused largely by using the 
 term " physical valuation " instead of " present 
 cost of reproduction." This confusion has be- 
 come so great that many regard the present 
 value of material in place as constituting the 
 only element in such value. Little attention has 
 been given to value derived from use. It is un- 
 fortunate that so well-known a phrase as " cost 
 of reproduction " should give place to one which 
 is little understood and has already proved 
 misleading. 
 
 Nothing is clearer than that the present agita- 
 tion does not contemplate an ascertainment of 
 the actual value of the property. 
 
Census Bulletin No. 21 purported to give a com- 
 mercial valuation of railway operating property 
 in the United States in 1904. f In the introduc- 
 tion, Professor Henry C. Adams, Statistician of 
 the Interstate Commerce Commission, stated that 
 it was based on the two fundamental considera- 
 tions by which the market is influenced when 
 property is bought or sold, namely, the expectation 
 of income arising from its use and its strategic sig- 
 nificance. In May, 1906, Professor Adams quoted 
 the conclusions he had expressed in Census 
 Bulletin No. 21, and urged an " inventory valua- 
 tion," which he also called a "physical valua- 
 tion."! 
 
 That the Commission recognized a distinction 
 between what they have erroneously termed 
 " physical valuation " and what the courts have 
 determined to be " fair value," is clearly indi- 
 cated in their correspondence in 1908 with the 
 Committee on Interstate Commerce of the United 
 
 t"The two fundamental considerations by which the market is influenced 
 in placing a value upon property when bought or sold, are the expectation 
 of income arising from the use of the property, and the strategic significance 
 of the property. These two considerations are made the basis of the valuation 
 of railway propertysubmitted in this report, . .... 
 
 "The commercial valuation of railway property, insofar as it depends on 
 income arising from the sale of transportation, is the result, among other things, 
 of an established schedule of freight and passenger rates, from which it follows 
 that such a valuation cannot be used for determining the reasonableness or 
 unreasonableness of the rates in question. The solution of the rate problem 
 demands a separate valuation of the physical properly." {Professor Henry C. 
 Adams, Census Bulletin No. 21, 1904. Page 8.) 
 
 J " If the above distinction be conceded, it is evident that what is needed is 
 an inventory by a competent engineer, which would result in the classification 
 of the physical elements of railway properties and au assignment to each ele- 
 ment of its appropriate present value. ....... 
 
 " It is evident that a physical valuation of railway properties might bemore 
 or might be less than the value computed from earnings on the basis of an 
 established schedule of freight and passenger rates, and it would be highly 
 desirable from many points of view to determine to what extent the physical 
 valuation was more or less than the commercial valuation . " (I^etter of Professor 
 Henry C. Adams to Chairman of the Interstate Commerce Commission, May 24, 
 1906.) 
 
States Senate. A bill was then pending before 
 the Committee directing the Commission to 
 ascertain the "fair value" of railway property. 
 They objected to the use of the term " fair 
 value " and asked to have substituted a direction 
 providing only for " cost of reproduction." 
 
 "The bill in question makes use of the phrase 'fair 
 value.' Unless there is some legislative necessity, which 
 we do not perceive, we question the advisability of using 
 this phrase. 
 
 "It would seem to us preferable to substitute a phrase 
 which indicates the fact that Congress desires an inventory 
 valuation of railway property. By inventory valuation is 
 meant that the property of the several railways shall be 
 listed in detail, and that each kind or class of property so 
 listed shall have assigned to it a valuation to be determined 
 from the point of view of the contracting engineer and not 
 from the point of view of a court or board of arbitration 
 which, from the nature of the case, can not judge of what 
 is ' fair value ' except in the light of some specific use to 
 be made of the valuation." (Letter of the Chairman of 
 the Interstate Commerce Commission to Hon. Stephen B. 
 Elkins, Chairman Senate Committee on Interstate Com- 
 merce, March 25, 1908.) 
 
 The Commission has presented no argument in 
 support of this protest against the determination 
 of the "fair value," nor any definite plan for 
 arriving at the " cost of reproduction," nor have 
 they satisfactorily indicated the use to be made 
 thereof if it can be ascertained. Their letter 
 suggests that the valuation is not wanted for any 
 specific purpose. Their objection to the phrase 
 "fair value" is especially difficult to understand 
 in the light of their own previous statements and 
 
of numerous decisions of the courts. In their 
 second annual report (1888) they state : 
 
 "The present value of a railroad property is necessarily 
 very largely matter of opinion only ; it depends upon a 
 vast number of contingencies and uucertainties, a road 
 apparently of great value to-day may soon become worthless 
 by the opening of a competing line having superior advan- 
 tages, or by the competitive struggles of other lines which 
 operate to reduce the income of all ; the value of a railroad 
 largely results from the personal characteristics of its 
 ofiScials ; the policy pursued by its directors, whether con- 
 servative and economical or aggressive and daring, is a great 
 factor in the determination of the current value of the 
 property ; a railroad property is not necessarily worth what 
 it would cost to replace it, and, on the other hand, it may 
 be worth very much more than that." (Page 64.) 
 
 thus admitting the existence of many elements 
 other than "cost of reproduction" that enter 
 into the "fair value" of a railway property. 
 Possibly it is because they continue to feel that 
 '' the present value of a railway property is 
 necessarily very largely a matter of opinion 
 only " that they do not wish to assume the re- 
 sponsibility of venturing an opinion which may, 
 in its use, be so unfair to the capital and labor 
 affected. 
 
 The importance of ascertaining their objec- 
 tions to the term "fair value " is further empha- 
 sized when considered in connection with the 
 many expressions of the courts in matters 
 affecting the valuation of railway property. 
 
 In the case of Smyth v. Ames, 169 U. S. 466, 
 the Supreme Court, while enumerating a num- 
 
lO 
 
 ber of items entering into the valuation of a rail- 
 wa}'-, said : 
 
 "We do not say that there may not be other matters to 
 be regarded in estimating the value of the property." f 
 
 In the case of the Chicago, etc., R. Co. v. Min- 
 nesota (134 U. S., 418), the Supreme Court em- 
 phasized the necessity of treating the railway- 
 company and the shipper with equal fairness. 
 
 In the case of Metropolitan Trust Company v. 
 Houston & Texas Central Railway (being an ap- 
 peal from rates established by the Commission 
 based on " the estimated cost of reproduction of 
 the road"), the court ruled that the Commission 
 had under-estimated the value of the property, 
 having made no allowance for its favorable loca- 
 tion, and that : 
 
 " In view of the advance in prosperity of the country 
 through which it runs, and the increment to its value due to 
 the settling, seasoning and permanent establishment of the 
 railways, and to the established business and the good will 
 connected with its business, which has been established 
 through a long series of years, and all of which ought reason- 
 
 t"If a railroad corporation has bonded its property for an amount that 
 exceeds its fair value, or if its capitalization is largely fictitious, it may not 
 impose upon the public the burden of such increased rates as may be required 
 for the purpose of realizing profits upon such excessive valuation or fictitious 
 capitalization ; and the apparent value of the property and franchises used by 
 a corporation, as represented by its stocks, bonds and obligations, is not alone 
 to be considered when determinixig the rates that maybe reasonably charged," 
 (Smyth v. Ames, 169 U. S.. 544 ) ,,,.,,. 
 
 ■' We hold, however, that the basis of all calculations as to the reasonable- 
 ness of rates to be charged by a corporation maintaining a highway under legis- 
 lative sanction must be the fair value of the property being used by it for the 
 convenience of the public And in order to ascertain that value, the original 
 cost of construction, the amount expended in permanent improvements ; (a) the 
 amount and market value of its bonds and stock, the present as compared with 
 the original cost of construction, {b) the probable earning capacity of the 
 property under particular rates prescribed by statute, and the sum required to 
 meet operating expenses, are all matters for consideration, and are to be given 
 such weight as may be just and right in each case. We do not say that there 
 may not be other matters to be regarded in estimating the value of the property. 
 "What the company is entitled to ask is a fair return upon the value of that 
 ■which it employs for the public convenience. On the other hand, what the 
 public is entitled to demand is that no more be exacted from it for the use of a 
 public highway than the services rendered by it are reasonably worth." (Smyth 
 v. Ames, 169 U. S., 546.) 
 
II 
 
 ably to be considered in fixing the value of the property and 
 the capitalization upon which at least it is entitled to earn, 
 and should pay, some returns by way of interest or dividends 
 . . . . as popularly expressed, the rights of the people 
 — the rights of shippers who use it as a carrier — have to be 
 regarded ; but, as judicially expressed, these last have to be 
 so regarded as not to disregard the inherent and reasonable 
 rights of the projectors, proprietors, and operators of these 
 carriers. ... In countries conditioned as Texas has been 
 and is, such a railroad property and business cannot be repro- 
 duced, except substantially in the same manner in which 
 this has been produced, that is, by a judicious selection of 
 location, by small beginnings, and gradual advance through 
 a number of years, more or less, of unproductive growth. 
 The particular location of this road, of course, cannot be 
 reproduced, and it cannot be appropriated by another 
 private or quasi public corporation carrier by the exercise 
 of the State's power of eminent domain. And even if 
 the State should proceed to expropriate this property for 
 the purpose of taking the same to itself for public use, 
 the location of this road cannot be appropriated any more 
 than any other property right of a natural person or of a 
 corporation can be appropriated without just compensation. 
 It is, therefore, not only impracticable, but impossible, to 
 reproduce this road, in any just sense, or according to any 
 fair definition of those terms. And a system of rates and 
 charges that looks to a valuation fixed on so narrow a basis 
 as that shown to have been adopted by the Commission, and 
 so fixed as to return only a fair profit upon that valuation, 
 and which permits no account for betterments marie neces- 
 sary by the growth of trade, seems to me to come clearly 
 within the provision of the Fourteenth Amendment to the 
 Constitution of the United States, which forbids that a State 
 shall deprive any person of property without due process of 
 law " (90 Fed., 683 688, 689). 
 
 Thus the court not only clearly set forth that 
 the estimated cost of reproduction of a road is 
 inadequate as a basis of railway valuation, but 
 itself suggested some of the other elements 
 entering into such valuation. 
 
 In the case of Willcox et al. v. The Consoli- 
 dated Gas Company of New York City, the Cir- 
 cuit Court of the United States for the Southern 
 District of New York undertook a very full dis- 
 
cussion of the elements of value,f and in these 
 particulars its views were approved by the 
 
 t" As to the realty, the values assigned are those of the time of inquiry ; not 
 cost when the land was acquired for the purposes of manufacture, and not the 
 cost of the complainant of so much as it acquired when org'anized in 1884, as a 
 consolidation ofseveral other gas manufacturing corporations. 
 
 "It is objected that such method of appraisement seeks to confer upon 
 complainant the legal right of earning a fair return upon land values which 
 represent no original investment by it, does not indicate land especially 
 appropriate for the manufacture of gas, and increases apparent assets without 
 increasing earning power. Analogous questions arise as to plant, mains, 
 services and meters ; the reported values whereof are the reproductive cost less 
 depreciation, and not original cost to the complainant or its predecessors. 
 
 "It appears by undisputed evidence that some of these last items of 
 property cost more than new articles of the same kind would have cost at the 
 time of inquiry ; that some are of designs not now favored by the scientific and 
 manufacturing world, so that no one now entering upon a similar business 
 would consider it wise to erect such machines or obtain such apparatus. In 
 every instance, however, the value assigned in the report is what it would cost 
 jjresently to reproduce each item of property, in its present condition, and 
 capable of giving service neither better nor worse than it now does. As to all 
 of the items enumerated, therefore, from real estate to meters, inclusive, the 
 complainant demands a fnir return upon the reproductive value thereof, which 
 is the same thing as the present value properly considered. To vary the 
 statement ; Complainant's arrangements for manufacturing and distributing 
 gas are reported to be worth the amounts above tabulated if disposed of (in 
 commercial parlance) 'as they are.' 
 
 "Upon authority, I consider this method of valuation correct. What the 
 court should ascertain is the ' fair value of the property being used ' {Smyth v. 
 Ames, 169 U. S., at p. 546 ; i8 Sup. Ct., at p. 434 ; 42 L,. Ed., 8ig); the ' present' as 
 compared with 'original' cost; w^hat complainant 'employs for the public 
 convenience' (169 U. S., at p. 547 ; 18 Sup. Ct , at p. 434 ; 42 X,. Ed., 819 ■ and it is 
 also the ' value of the property at the time it is being used' {San Diego Land- 
 Co. V. National City, 174 U. S., at p. 757 ; iq Sup. Ct., at p. 811 ; 43 L. Kd., 1154). 
 And see, also, Stanislaus Co. v. San Joaquin Co.^ 192 U. S , 201 ; 24 Sup. Ct., 241 ; 
 48 ly. Ed., 406. It is impossible to observe this continued use of the present 
 tense in these decisions of the highest court without feeling that the actual 
 reproductive value at the time of inquiry is the first and most important figure 
 to be ascertained, and these views are amplified by San Diego La^id Co. v. 
 Jaspar {C. C), no Fed., at page 714, and Cotting v. Kansas City Stock Yards 
 (C. C), 82 Fed., at page 854, where the subject is more fully discussed. Upon 
 reason, it seems clear that in solving this equation the plus and minus quan- 
 tities should be equally considered, and appreciation and depreciation treated 
 alike. Nor can I conceive of a case to which this procedure is more appropriate 
 than the one at bar. The complainant, by itself and some of its constituent 
 companies, has been continuously engaged in the gas business since 1823, A 
 part of the land in question has been employed in that business for naore than 
 two generations, during which time the value of land upon Manhattan Island 
 has increased even more rapidly than its population. So, likewise, the con- 
 struction expense, not only of buildings, but of pipe systems under streets now 
 consisting of continuous sheets of asphalt over granite, has enormously advanced. 
 
 "The value oi the investment of any manufacturer in plant, factory, or 
 goods, or all three, is what his possessions would sell for upon a fair transfer 
 from a willing vendor to a willing buyer, and it can make no difference that 
 such value is affected by the efforts of himself or oihers, by whim or fashion, 
 or (what is really the same thing) \>y_ the advance of land values in the opinion 
 of the buying public. It is equally immaterial that such value is affected by 
 difficulties of reproduction. If it be true that a pipe line under the City of 
 New York of 1907 is worth more than was a pipe line under the City of 1827, 
 then the owner thereof owns that value, and that such advance arose wholly 
 or partly from difficulties of duplication created by the city itself is a matter 
 of no moment. Indeed, the causes of either appreciation or depreciation 
 are alike unimportant, if the fact of value be conceded or proved ; but 
 that ultimate inquirj' is oftentimes so difficult that original cost and reasons 
 for changes in value become legitimate subjects of investigation, as checks 
 upon expert estimates or bookkeeping inaccurate and perhaps inten- 
 tionally misleading. Cf. Atnes\. Union Pacific R. R. (C. C), 64 Fed., at pages 
 178. 179. If fifty years ago, by the payment of certain money, one acquired a 
 factory and the land appurtenant thereto, and continues to-day his original 
 business therein, his investment is the factory and the land, not the money 
 originally paid ; and unless his business shows a return equivalent to what 
 land and building, or land alone, would give if devoted to other purposes (hav- 
 ing due regard to cost of change), that man is engaged in a losing venture, and 
 
'3 
 
 Supreme Court of tlie United States, the latter 
 court saying : 
 
 "And we concur with the court below in holding that the 
 value of the property is to be determined as of the time 
 when the inquiry is made regarding the rates (212 U. S., 52). 
 
 "There is no particular rate of compensation which 
 must in all cases and iu all parts of the country be regarded 
 as suflBcient for capital invested in business enterprises. 
 Such compensation must depend greatly upon circumstances 
 and locality ; among other things, the amount of risk in 
 business is a most important factor, as well as the locality 
 where the business is conducted and the rate expected 
 and usually realized there upon investments of a some- 
 what similar nature with regard to the risk attending 
 them. There may be other matters which in some cases 
 might also be properly taken into account in determining 
 the rate which an investor might properly expect or hope to 
 receive and which he would be entitled to without legislative 
 interference. The less risk, the less right to any unusual 
 returns upon the investments. One who invests his money 
 in a business of a somewhat hazardous character is very 
 properly held to have the right to a larger return, without 
 legislative interference, than can be obtained from an 
 investment in Government bonds or other perfectly safe 
 security. The man that invested in gas stock in 1823 had a 
 ri{;ht to look for and obtain, if possible, a much greater rate 
 upon his investment than he who invested in such property 
 in the City of New York years after the risk and danger in- 
 volved had been almost entirelv eliminated " (212 U. S., 48). 
 
 is not receivinga fair return from his investment, i. e., the land and building. 
 The so-called ' money value ' of real or personal property is but a conveniently 
 short method of expressing present potential usefulness, and 'investment' be- 
 comes meaniugless if construed to mean what the thing invested in cost 
 generations ago. Property, whether real or personal, is only valuable when 
 useful. Its usefulness commonly depends on the business purposes to which 
 it is or may be applied. Such business is a living thing, and may flourish or 
 wither, appreciate or depreciate; but whatever happens, its present useful- 
 ness, expressed in financial terms, must belts value. 
 
 " As applied to a private merchant or manufacturer the foregoing would 
 ■ seem elementary ; but some difference is alleged to exist where the 
 manufacturer transacts his business only by Governmental license 
 — whether called a franchise or by another name. Such license, however, 
 cannot change an economic law, unless a different rule be prescribed by the 
 terms of the license, which is sometimes done." No such unusual condition 
 exists here, and, in the absence thereof, it is not to be inferred that any Ameri- 
 can Government intended, when granting a franchise, not only to regulate the 
 business transacted thereunder, and reasonably to limit the profits thereof, 
 but to prevent the valuation of purely private property in the ordinary eco- 
 nomic manner, and the property now under consideration is as much the 
 private property of this complainant as are the belongings of any private 
 citizen. Nor can it be inferred that such Government intended to deny the 
 application of economic laws to valuation of increments earned or unearned, 
 while insisting upon the usual results thereof in the case of equally unearned, 
 and possibly unmerited, depreciation." (Consolidated Gas Companv v. City 
 of New York et al., 157 Fed. Rep.. 849, 854.) 
 
In Judge Taft's letter accepting the nomina- 
 tion for the Presidency, he said : 
 
 " It is clear that the physical value of the railroad audits 
 plant is au element to be given weight in determining its 
 full value ; but the value of the railroad as a going concern, 
 including its good will, due to efficiency of service and 
 many other circumstances, may be much greater than the 
 value of its tangible property, and it is the former that 
 measures the investment on which a fair profit must be 
 allowed. Then, too, the question what is a fair profit is one 
 involving not only the rate of interest usually earned on 
 normally safe investments, but also a sufficient allowance to 
 make up for the risk of loss both of capital and interest in 
 the original outlay. The question of rates and the treatment 
 of railroads is one that has two sides. The shippers are 
 certainly entitled to reasonable rates ; but less is au injustice 
 to the carriers . . . The proper conclusion would 
 
 seem to be that in attempting to determine whether the 
 entire schedule of rates of a railroad is excessive, the 
 physical valuation of the road is a relevant and important but 
 not necessarily a controlling factor. . . ." 
 
 Therefore, it would seem only wise and pru- 
 dent to determine, before incurring the enormous 
 expense incident to ascertaining the cost of 
 reproduction, what relation, if any, it will have 
 to the valuation of the railway, that is, to deter- 
 mine how such cost will be used in arriving at 
 value. If it can be used (and I do not to-day say 
 it can), then consideration must be given to the 
 elements that enter into the cost of reproduc- 
 tion. The plan now most generally advocated 
 is that which has been followed by the several 
 states that have undertaken a valuation of rail- 
 ways. Such valuations were undertaken origin- 
 ally for taxation purposes. Minnesota recently 
 undertook a valuation for rate-making purposes. 
 
15 
 
 and Texas for controlling tlie issuance of capital 
 securities. 
 
 There are differences not only in the methods 
 followed by the several states, but there are 
 many items which, as yet, have not entered into 
 the valuation by any of the states and which 
 should receive proper consideration. Among 
 the items that have been ignored or inadequately 
 treated are : 
 
 1 . Cost of Surveys. 
 
 An expenditure of $250,000 for surveys 
 in securing a low-grade line through the 
 Allegheny or Rocky Mountains may save 
 from five million to twenty-five million dol- 
 lars in the ultimate cost of a reasonably low- 
 grade line. This necessitates surveying 
 many routes, only one of which will be used, 
 yet all must enter into the original cost. 
 
 2. Rate of Interest during Construction. 
 
 The allowance of four per cent, is much 
 below the ability of any new railway under- 
 taking to secure capital. This rate can 
 only be hoped for where new construction 
 is undertaken by an existing line whose 
 credit enables it to secure money at such a 
 low rate. 
 
 3. Discount on Securities Sold. 
 
 Discount is a partial capitalization of com- 
 mercial risk incurred and it increases or de- 
 creases in proportion to the probable earn- 
 ing power. This practice is justified b}' 
 
i6 
 
 long commercial usage, and has had 
 judicial samction. The only question is 
 whether discount shall be capitalized and 
 a reasonable return thereon allowed, or 
 whether, during the time the securities are 
 outstanding, the amount shall be charged 
 proportionately each year against Income. 
 Taking for example, $20,000,000 five per 
 cent, bonds, maturing in iifteen years, sell- 
 ing at ninety, this would result in either : 
 
 (a) Adding to capital account, 
 the annual interest charge may con- 
 tinue indefinitely to be 5 per cent. 
 
 on $20,000,000 or, $1,000,000 00 
 
 or 
 
 (d) Deducting this discount from 
 income account, pro rata, during the 
 fifteen years, the annual charge 
 would be : 
 
 Annual interest charge 
 (5 per cent.), . . $1,000,00000 
 
 Annual amount set 
 aside for fifteen years 
 to overcome discount 
 (not compounded), . 133.333 33 
 
 Total annual charge during each 
 of the fifteen years, . . . . $1,133,33333 
 
 The second plan reduces the ability to pay fair 
 wages, to pay a fair return to capital or to lower 
 rates during the twenty years. 
 
 Which plan is likely to secure the lower charge 
 for services rendered ? Which is the more likely 
 to attract efficient labor or capital ? If the sink- 
 ing fund be not earned, can the deduction be 
 made ? 
 
17 
 
 4. Cost of Material. 
 
 This must include the increased cost of 
 placing material on the ground without rail- 
 way facilities for transportation. It is a 
 serious error to use a uniform price list for 
 all materials. The source of supply must be 
 considered. 
 
 5. Cost of Labor. 
 
 Labor in construction work is paid a much 
 higher rate than other labor in the same 
 community, owing to the temporary charac- 
 ter of the service, and to the limited supply 
 not meeting the increased demand produced 
 by such extensive temporary work. Labor 
 must be brought in from large labor centers. 
 Boarding accommodations must be estab- 
 lished and train service installed to trans- 
 port men between their places of residence 
 and their places of work. 
 
 6. Excavation and Embankments. 
 
 No uniform price of earth work can be 
 used. It ignores the varying character of 
 the soil and length of haul. 
 
 7. Contingencies and Contractor's Profit. 
 
 The allowance of 5 per cent, is too small. 
 Usually the contractor allows not less than 
 ten per cent, profit for himself, in addition 
 to an allowance for contingencies, and, 
 then, his loss in one undertaking may 
 wipe out his entire capital. For this reason 
 some contracting firms organize a subsidiary 
 corporation for each important piece of 
 construction, thus limiting their liability. 
 
iS 
 
 Banks, recognizing the great risk involved 
 in contracting, are extremely careful in loan- 
 ing money to such undertakings. Not only 
 must the item of contingencies, therefore, be 
 sufficiently large to guarantee the contractor 
 against loss, but there must be some reason- 
 able hope of profit for himself. 
 
 8. Effect of Machinery on Cost of Construction. 
 
 There have been many improvements in 
 machinery and other appliances, which tend 
 to reduce the cost of construction, since most 
 of the railways were built, for example, rail- 
 la3'ing machines. 
 
 9. Carrying Charges. 
 
 Interest on investment and depreciation, 
 if any, of plant prior to time it is placed on 
 a self-sustaining basis. Texas makes this 
 allowance in determining the cost price for 
 the purpose of controlling the issue of 
 capital securities. 
 
 The Wisconsin Railroad Commission has 
 admitted the right of the investor to capitalize 
 such interest and depreciation. f 
 
 f " But new plants are seldom paying at the start. Several years are 
 usually required before they obtain a sufficient amount of business or earning^s 
 to cover operatin^r expenses, including" depreciation and a reasonable rate of 
 interest upon the investment. The amount by vphich the earnings fail to meet 
 these requirements may thus be reofarded as deficits from the operation. These 
 deficits constitute the cost of building up the business of the plant. They are 
 as much a part of the cost of building up the business as loss of interest during 
 the construction of the plant is a part of the cost of its construction. They are 
 taken into account by those -who enter upon such undertakings, and if they 
 cannot be recovered in some way, the plant fails by that much to j^ield reason- 
 able returns upon the amount that has been expended upon it and its business. 
 Such deficits may be covered either by being regarded as a part of the invest- 
 ment and included in the capital upon which interest is allowed, or they may 
 be carried until they can be written off when the earnings have so grown as to 
 leave a surplus above a reasonable return on the investment that is large 
 enough to permit it. When capitalized they become a permanent charge on 
 the consumers. When charged off from the surplus they are gradually e::tin- 
 guished. (These facts alone, however, do not always furnish the best or 
 most equitable basis for the disposal of such deficits.) Whether they should go 
 into the capital account, or whether they should be written off, as indicated, 
 are questions that largely depend on the circumstances in each jDarticular 
 case." (Decision and order of^ the Railroad Commission of Wisconsin, issued 
 August 3, 1909, in the case of Hill et al. v. Antigo Water Company. Pages 84 
 and 85.) 
 
19 
 
 We shall, hereafter, call attentiou to the 
 relative replacement cost of a new railway 
 and one in existence twenty-five years, 
 assuming that in each case the securities 
 were issued for the exact original cost, there 
 is then some difference at this time in the 
 relative valuation of the railways as between 
 the capital securities and the replacement 
 value. 
 
 While extensions of an existing line can, 
 during the iirst year of operation, earn a re- 
 turn on the investment, this is almost invari- 
 ably due to the diversion from some other 
 railway of tonnage controlled by an 
 existing line. A new railroad, without 
 the advantage of traffic thus diverted, will 
 not earn a return during its first years of 
 construction, if indeed it be so fortunate as 
 to earn its operating expenses. During 
 these years, therefore, the traffic does not 
 meet this depletion in the replacement value. 
 This depletion of capital has always been 
 considered as a portion of the cost in secur- 
 ing a profitable going concern. This being 
 true, it is the cost of new material that 
 should be used in determining the present 
 valuation of the railways, and not the cost 
 of new material, less depreciation. 
 
 10. Impact and Adaptation. 
 
 Although other states have not made this 
 allowance, Minnesota has done so in its 
 valuation for rate making purposes. 
 
20 
 
 11. Special Conditions Affecting Cost. 
 
 Additions and betterments made under 
 trafEc (and which were made for the pur- 
 pose of increasing the capacity of the line) 
 necessarily increases the cost of the work. 
 
 12. The Cost of Progress. 
 
 Railways in their anxiety to render the 
 most satisfactory and economical service 
 anticipate the future and substitute better 
 facilities and better equipment before the 
 old facilities and equipment actually require 
 renewal or have become obsolete ; also before 
 the earnings from traffic would permit the 
 writing off of the earlier appliances. 
 The following statement by the engineer who 
 
 made the railroad appraisal in Minnesota is of 
 
 especial interest at this point : 
 
 " It is entirely tenable that the value of an economically 
 constructed, judiciously financed and efficiently managed 
 railway property, or the contra thereof, is not measured by 
 its cost, and, for the instant, it seems necessary to recur to 
 the elementary that cost and value are not synonymous and 
 that the determination of the present value of the physical 
 properties, using reproduction cost as a basis, bears no relation 
 to value in the sense of utility, or as an investment." — 
 (Page 31, Supplement to Annual Report of R. R. and Ware- 
 house Commission, year ended Nov. 30, 1908.) 
 
 The following paragraph in the report on valu- 
 ation of the roads in Michigan is also of interest: 
 
 "Another potent reason justifying the plan, selected, as 
 afterwards developed, was the necessity of treating the prob- 
 lem strictly as an engineering problem in order to obtain 
 uniform results. It was necessary to employ a large number 
 of engineers expert in railroad work, and while they could 
 agree as engineers they could not agree as experts on taxa- 
 tion. It very soon became necessary to publish an order 
 excluding all thought of taxation in connection with the 
 results to be obtained. The commissioners required of us 
 
21 
 
 only the cost of reproduction and the present value of a 
 road, reserving to themselves any adjustments of those 
 values that might be thought necessary to secure uniformity 
 of taxation." 
 
 What is the relative value of the physical 
 property of a new railway and that of a railway, 
 say twenty-five years old, each having the same 
 net returns from trafiic, the one being a duplicate 
 of the other? The right of way value would 
 necessarily be the same, but the replacement 
 value of material and equipment on the older 
 railway would only be fifty per cent, of that of 
 the new railway, plus such salvage value as ma- 
 terial may have when retired from service. As- 
 suming that, taking into consideration the 
 changes in cost of labor and material entering 
 into the construction, and the reduction in 
 present market value of material on the older 
 road due to wear and tear, the older road is 
 valued at only ninety per cent, of that of the 
 new railway, is the older railway to receive on 
 its return from traffic only ninety per cent, of 
 the return allowed to the new railway ? 
 
 The cost of reproduction is a matter of in- 
 dividual opinion. No engineer in estimating on 
 the several important items of construction work 
 for the year will come within ten per cent, of the 
 total aggregate cost. Many of the more impor- 
 tant items are frequently under-estimated from 
 twenty-five to fifty per cent. If experienced 
 
22 
 
 engineers, knowing the local conditions, cannot 
 estimate the exact cost, how can those without 
 special knowledge be expected to do so. A 
 very good illustration of this may be had 
 by contrasting the original estimates with the 
 ultimate cost of post offices and other public 
 buildings. An especially good illustration, and 
 one known to all readers of the daily press, is 
 that of the Panama Canal. The original esti- 
 mate of the cost of engineering and construction 
 work was $139,705,200, but the present estimate 
 is $297,766,000 (page 18, President's Message to 
 6ist Cougress), and it is probable this cost will 
 be greatly exceeded. In the case of the Pan- 
 ama Canal, large expenditures have been made 
 for engineering in the selection of a route and to 
 determine whether a water level or lock canal 
 was the more desirable. These expenditures 
 should be added to the cost. 
 
 In building a railroad, several routes are sur- 
 veyed to determine the lowest grade that can be 
 secured for a line that can be constructed within 
 the sum on which a fair return may reasonably 
 be anticipated. These surveys are a necessary 
 part of the cost, as otherwise the line secured 
 would not be adapted to economical operation 
 and the increased operating cost would prevent a 
 reasonable return. Existing lines with prevail- 
 ing heavy grades were economically justified at 
 
23 
 
 the time of their construction. Such would not 
 have been the case had the traffic originally 
 passing over these lines been equivalent to the 
 present tonnage. The economic development of 
 the country has demanded that the cost of service 
 on such lines be reduced. This has necessitated 
 shortening the lines by the elimination of sharp 
 curves and the continued reduction of grades to 
 the extent that the increased traffic secured 
 through increased carrying capacity or decreased 
 cost of operation through increased tonnage per 
 train has been sufficient to pay a fair return on 
 the additional capital required. 
 
 Again assuming, but not admitting, that the cost 
 of reproduction can be approximately ascertained, 
 let us see what its relations would be to the rates 
 charged for handling traffic or to the capital se- 
 curities outstanding, or to taxes : 
 
 RATES. 
 
 The Interstate Commerce Commission, even 
 while advocating valuation, does not contend that 
 after it has been accomplished, the regulating 
 authority can proceed generally to utilize the re- 
 sults as a basis for rate-making. In the report 
 which the commission submitted to Congress on 
 December 24, 1908, the following appears : 
 
 " It is not essential to this line of thought to express full 
 agreement with the extreme advocates of valuation whose 
 arguments seem to imply that, if the value of the property 
 
24 
 
 is known, a reasonable rate can be determined by mathe- 
 matical calculation. Many other considerations are involved 
 in the problem, notably the manner in which the rate pro- 
 posed will affect the industrial development of the country." 
 (Interstate Commerce Commission Report, 1908, pages 83 
 and 84.) 
 
 The foregoing is preceded by the statement 
 that " the amount of profit secured to the invest- 
 ment" may be " one of the most important con- 
 siderations " in determining rates, but this state- 
 ment is specifically limited to those cases, ex- 
 ceedingly few in number, " in which the reason- 
 ableness of a general level or schedule of rates " 
 is challenged. But as the proposed valuation 
 would throw no light upon the amount of the in- 
 vestment, it would shed none upon even these 
 exceptional cases. The real investment at any 
 particular time is the " fair" value of the prop- 
 erty at that time, and it has already been made 
 clear that the proposed valuation would bear no 
 definite relation to this value. 
 
 The vast majority of the complaints submitted 
 to the Interstate Commerce Commission chal- 
 lenge only particular rates, or particular groups 
 of rates. Even the definitely ascertained value 
 of the property would have but small utility in 
 such cases. The question in every one of them 
 must be whether, in view of the value of the par- 
 ticular service, the rate fixed by the carrier bears 
 upon that service with disproportionate severity. 
 Professor Adams himself has defined the ques- 
 
25 
 
 tion in terms which, under the present plan of 
 regulation, leave little, if any, room for the use 
 of the proposed valuation. In an address before 
 the National Convention of Raiload Commission- 
 ers, held in April, 1893, Professor Adams said : 
 
 "The process of rate-makiug, according to this idea, 
 would be as follows : Determine, in the first place, the 
 income which a railway corporation actually needs. Deter- 
 minCj in the second place, the business which rightly belongs 
 to the corporation by virtue of its relation to the source and 
 destination of freight. In the third place, classify all freight 
 according to a uniform classification. The process of rate- 
 making would then be to adjust rates to the various classes 
 of freight in such a manner that the required gross income 
 may be secured to the company and the burden of payment 
 rest as lightly as possible on the customers of the railways. 
 The principles which lie at the basis of just railway schedules 
 arise from a study of the theory of taxation. As in taxation 
 payment for the support of government should be in pro- 
 portion to the ability of citizens, so the contribution of' ship- 
 pers to the fund necessary to meet the legitimate demands 
 of railways should be made from various classes of goods in 
 proportion to their ability to bear the charges. If this 
 theory of rate-making be accepted, or, indeed, any theory 
 which regards the problem from the standpoint of public 
 interest, the determination of rates comes to be a purely 
 statistical problem, or, at least, a problem that calls for 
 decisions that can only be given on the fullest and com- 
 pletest information as to facts." (Page 51, Report of Fifth 
 Annual Convention of R. R. Commissioners.) 
 
 Further, in the same paper. Professor Adams 
 gives the following definition of a just rate : 
 
 "A just rate does not mean a rate which a particular 
 shipper can pay for particular goods, but rather a rate which, 
 when enforced and maintained, entails in a community just 
 and commendable results. The question involved in this 
 controversy is not simply commercial in character, it is at 
 the same time a question of public policy, and as such, like 
 all questions of a political character, demands the fullest 
 and completes! knowledge respecting it." (Page 52.) 
 
 The foregoing extracts express an idea very 
 similar to that conveyed in the annual report of 
 
26 
 
 the Commission for the year 1895, when the 
 Commission said : 
 
 "To some extent the principles upon which taxation 
 rests must be allowed in fixiug a just rate; to some extent 
 the result of the rate upon the development of industries 
 must be taken into the account in all decisions which the 
 Commission is called upon to make ; to some extent every 
 question of transportation involves moral and social con- 
 siderations, so that a just rate can not be determined inde- 
 pendently of the theory of social progress." (Interstate 
 Commerce Commission Report, 1895, Page 59.) 
 
 We see that even in the suggestions of Pro- 
 fessor Adams and of the Commission, this ques- 
 tion of cost of reproduction occupies but a very 
 small place in the process of determining the 
 reasonableness of a rate. There is the classifica- 
 tion of commodities (what some of the traffic will 
 bear), the relative charges for short and long 
 haul, and other elements of cost of service, the 
 effect of competition, etc. Thus again do we 
 realize the importance of determining the manner 
 in which the Commission will use the cost of 
 reproduction, if ascertained. 
 
 Passing over the question whether regulation 
 may properly impose such a limitation upon 
 gross receipts, it must be noted that the ultimate 
 authority, the Supreme Court of the United 
 States, has declared that the minimum income 
 that must be permitted is to have reference to 
 the " fair value " of the property. As it is not 
 proposed to ascertain the " fair value," it is 
 evident that the results of the inquiry would not 
 
27 
 
 even furnish a basis for calculating the minimum 
 income which regulation must allow. 
 
 Perhaps it may somewhat illuminate the dis- 
 cussion to here suggest certain hypothetical 
 questions. Bearing in mind that the power to 
 regulate railway charges rests wholly upon the 
 fact that the railway is a common carrier, and 
 extends no further than the power to control the 
 charges of any common carrier, let it be supposed 
 that an individual operating an express wagon 
 upon a public highway, as a common carrier, 
 has invested in his business the sum of $5,000, 
 and that he performs, within a particular period, 
 five hundred services at a uniform rate of $1 per 
 service, and at an operating expense of fifty per 
 cent, of his gross receipts, thus leaving $250, 
 or five per cent, for the return to capital. As- 
 suming the rate of $1 to be reasonable under 
 these conditions, let us inquire : 
 
 [a) Does the rate become unreasonable if the introduc- 
 tion of operating economies reduces the operating ratio to 
 twenty-five per cent., leaving seven and one-half per cent. 
 for return to capital ? 
 
 [b) Does the rate become unreasonable if, with no in- 
 crease in capital, the number of services and the operating 
 expenses are both doubled, with the result that capital earns 
 ten per cent. ? 
 
 [c) Upon the additional assumption that one-half of the 
 capital was originally borrowed at five per cent., does the 
 rate become unreasonable if the loan is renewed at three per 
 cent., leaving seven per cent, upon the portion of capital 
 actually supplied by the individual conducting the business? 
 
 If any one is disposed to answer the foregoing 
 questions, or any of them, in the affirmative, he 
 
28 
 
 should do so with a full understanding that his 
 answer commits him to the principle that those 
 who engage in public service industries are not 
 entitled to the rewards that naturally spring 
 from superior management. If the rewards of 
 such management are to be confiscated, those 
 who are capable of it would do well to devote 
 their capacity and industry to other lines of 
 activity. If this doctrine should be established, 
 there would be little basis for the hope of further 
 improvement in the methods of public transpor- 
 tation. Perhaps some one will suggest that the 
 proper answer is that the rates do become un- 
 reasonable, but that the required reduction should 
 not absorb all the carrier's gain in either in- 
 stance. This conclusion would, however, ap- 
 prove the confiscation of part of the results of 
 superior management, and involves those who 
 adopt it in the further difficulty that it requires a 
 determination by some government authority of 
 the maximum reward to be permitted. Even 
 under the very simple conditions of our hypo- 
 thetical questions the arbitrary and inexact 
 nature of such a determination is apparent. 
 With the immensely complex and difficult organ- 
 ization of a great railway, it is evident that such 
 a method could not be applied with any degree 
 of accuracy, and that the effort to enforce it must 
 tend to deaden the industry. 
 
29 
 
 Referring in its opinion, in the case of Marten 
 V. The Louisville and Nashville Railway (9 I. C. 
 C. Rep. 581) to the decision of the Supreme Court 
 in Smyth v. Ames, and especially to the state- 
 ment in that case as to the use of " fair value " 
 as a means of testing the reasonableness of rates, 
 the Commission said : 
 
 "It is even difficult to say what constitutes a reasonable 
 rate, and more difficult to give in detail the reasons that lead 
 to that conclusion. Although the Supreme Court of the 
 United States has furnished certain rules by which to test the 
 reasonableness of transportation charges, and although this 
 Commission has endeavored to apply these rules, yet, when- 
 ever it has interrogated railway officials as to whether or not 
 they are governed by them in making rate schedules they 
 have invariably answered in the negative and said that to do 
 so would be impracticable." 
 
 The truth is, as doubtless occurred to the 
 writer of the foregoing opinion, that neither the 
 industries of the country aside from the rail- 
 ways, nor the railways themselves, could exist 
 under rates calculated from a "valuation" upon 
 any such basis as that proposed. No method of 
 calculating rates from "valuation'', as the term 
 is being used in this discussion, could be devised 
 that would result in rates under which either the 
 railways or the industries they serve could con- 
 tinue to exist. It is not meant by this that there 
 is no case in which such a method could be applied 
 without complete disaster, but it is asserted that 
 the general adoption of such a method of rate- 
 making is impracticable. Although prices and 
 
30 
 
 rates in every business not effectively monop- 
 olized tend toward the cost of production, there 
 is no business — either wholly private or quasi- 
 public — in which prices or rates have or could 
 have a fixed and arbitrary relation to cost. The 
 retail merchant may endeavor to add a uniform 
 percentage to the wholesale price of the goods 
 which he sells, but this desire always yields in 
 the face of competitive conditions, for the price 
 must always be one at which the goods will sell. 
 Similarly the railway is obliged to sell its wares, 
 and, while there are certain elements in their 
 cost of production which it cannot ignore, the 
 amount of its investment is not among them. 
 Under some conditions rates must be made 
 which do not produce what on every other 'con- 
 sideration would amount to a "fair return upon 
 the fair value of the property ". 
 
 The phrase "what the traffic will bear " is 
 generally misconstrued to mean "all that the 
 traffic will bear". What it does mean is: "All 
 that some of the traffic will bear". It can be 
 safely stated that "all the traffic will bear" is 
 charged only in cases where it is found necessary 
 to make reductions from the normal rate in 
 order to permit the traffic to move at all, and 
 that the charge of "all the traffic will bear" is 
 not made for the purpose of securing an excess- 
 ive rate for the service performed. 
 
31 
 
 It is a well recognized rule, subject to few 
 exceptions, that rates must be equal upon all 
 routes connecting the same points, although it is 
 quite impossible that the value of the property, 
 the original cost, or the reproduction cost of the 
 property pertaining to the diiferent lines should 
 be the same. The exceptions to the rule tend to 
 support this contention for they arise when 
 a less advantageous line can obtain a satis- 
 factory share of the traffic only by making a 
 lower rate and the most common disadvantage 
 supporting such a differential relation is that one 
 line operates via a circuitous route — a condition 
 implying, along with excessive mileage, higher 
 cost. Again, just as the merchant would Become 
 bankrupt if he allowed his capital to remain in- 
 vested in goods which he refused to sell because 
 the market price had gone below the original cost, 
 so a railway constructed under conditions involv- 
 ing a higher cost than those governing the con- 
 struction of a newer rival, would have no traffic if it 
 insisted upon keeping rates at a level determined 
 by the amount of its own original investment. 
 
 Bconomic efficiency consists in the ability to 
 produce something at a cost which will permit it 
 to be sold, and actually to sell it, at a price that 
 leaves a profit to both the seller and the pur- 
 chaser. Rates for railwaj^ service must be fixed 
 at such a level that the service obtained by the 
 
32 
 
 shipper is worth to him something more than he 
 is asked to pay for it. Efficient railway manage- 
 ment consists in being able to perform the great- 
 est possible number of services at a cost to the 
 railway somewhat lower than the rates charged. 
 It is this margin between cost of producing trans- 
 portation and the rates obtained which determines 
 the value of the railway property, and it is a 
 dangerous delusion which assumes that this re- 
 lationship of cause and effect can be reversed. 
 
 CAPITALIZATION. 
 
 Discussion of the question of capitalization 
 will be somewhat clarified if we bear in mind 
 the difference between capitalization and capital 
 securities. Too often the terms are used as 
 synonyms. During recent years capital stock 
 of some of the leading companies has sold at a 
 considerable advance over its par value. Let us 
 say one hundred and fifty dollars per share is 
 obtained for stock having a par value of one 
 hundred dollars. One hundred and fifty dollars 
 will then represent the capitalization, while one 
 hundred dollars will represent the capital secur- 
 ities. In like manner any surplus earnings 
 which have not been paid to the stockholders 
 as dividends, or for which they have not re- 
 ceived new capital stock will not be reflected in 
 the capital securities of the company, although 
 continuing in the capital account. It is also 
 
33 
 
 erroneous to assume that capitalization per mile 
 of road or per mile of track can be ascertained 
 by dividing the total miles of road or of track, 
 respectively, into the total par value of securi- 
 ties outstanding. The proceeds from the sale of 
 a considerable portion of these securities have 
 been used in the purchase or development of 
 coal lands, timber lands, hotels, or other prop- 
 erty, which do not enter into the cost of the 
 road. The net income of railway companies 
 represents not only the net income from the 
 railway property, but also the income from the 
 securities held, and from coal and timber lands, 
 hotels, and other property not included in the 
 statement of operations of the railway. 
 
 Nor will the value of securities correspond 
 with the cost of replacement where such securi- 
 ties were issued for the purchase of a going con- 
 cern bought at its fair value. The price paid 
 may be more or less than that element of value, 
 "the then cost of replacement." 
 
 While the transportation cost is approxi- 
 mately fifty per cent, of the total operating ex- 
 penses, and, these expenses are directly affected 
 by the train load, it does not necessarily follow 
 that the earnings applicable to dividends are in- 
 creased in proportion as the train load increases. 
 This is only true when additional capital is not 
 required to secure such results, otherwise part 
 
34 
 
 or all of the saving is required to meet the addi- 
 tional fixed charges. The desirability of in- 
 creasing the train load depends upon whether 
 the resulting saving exceeds the cost of the new 
 capital required. It is to realize upon these sav- 
 ings that reductions of grades, the construction 
 of additional main and passing tracks, of terminal 
 and other facilities and increased investments in 
 rolling stock of greater capacity are undertaken. 
 Note the following statistics of railways report- 
 ing to the Interstate Commerce Commission : 
 
 
 igo6 
 
 1896 
 
 Increase. 
 
 
 Amount 
 
 Per Ct. 
 
 
 222,340.30 
 20,981.98 
 73,7<5o.9i 
 
 181,982.64 
 12,439.76 
 44,717.73 
 
 40,357.66 
 8,542.22 
 29,043.18 
 
 22 18 
 
 2d, 3d, & 4th tracks— m. 
 Yard trk. & sidings — m. 
 
 68.67 
 6495 
 
 Total miles 
 
 317,083.19 
 51.672 
 42,262 
 
 1,837.914 
 
 239,140.13 
 
 35,950 
 
 33.003 
 
 1,221,887 
 
 77,943-06 
 
 15.722 
 
 9,259 
 
 616,027 
 
 3259 
 43-73 
 28.06 
 50.42 
 
 Locomotives— number. „ 
 Passenger cars — n'mb'r 
 Freight cars— number... 
 
 
 25,167,240,831 
 215,877,551,241 
 
 13,049,007,233 
 95,328,360,278 
 
 12,118,233,598 
 120,549,190,963 
 
 92.87 
 126.46 
 
 
 
 Inasmuch as the percentage of increased 
 second, third and fourth tracks, of yard tracks 
 and sidings, also of rolling stock, is greater 
 (much greater) than the increased percentage of 
 the mileage of first track, it cannot be denied 
 that the cost per mile of road has increased, 
 especially when we recall that reductions in grade 
 and changes in alignment, installation of block 
 signals, increased weight of rail, heavier bridges, 
 and other betterments, are not reflected in the 
 
35 
 
 mileage ; that the cost per car or locomotive pur- 
 chased in 1906 is fifty to sixty-five per cent, above 
 the cost per car or locomotive purchased in 1896. 
 It would, therefore, be erroneous to conclude that 
 a wrong has been committed simply because the 
 cost of road per mile, or the amount of securities 
 per mile outstanding in 1906 was greater than 
 in the year 1896. 
 
 In the past, the policy of railway managements 
 has been to make additions and betterments when 
 the anticipated return was sufiicient to pay the 
 increased carrying charges, even if such return 
 was not likely to be sufficient immediately to 
 reimburse the stockholders for the old property 
 withdrawn from service, the cost of which would 
 not be reflected by any inventory valuation. Nor 
 would that portion of the capital securities issued 
 for material, have its equivalent in an inventory 
 valuation, which included the material at less 
 than its cost price ; that is, where an appraisal 
 of property is taken before the property is placed 
 on a self-sustaining basis — a difference which can 
 properly be regarded as part of the cost of secur- 
 ing a going concern. 
 
 There are doubtless other elements affecting 
 the relation between par value of securities out- 
 standing and the " cost of reproduction." All of 
 them should receive full consideration. 
 
 The system of accounts promulgated by the 
 
36 
 
 Interstate Commerce Commission makes it im- 
 possible that cost of property and par of outstand- 
 ing securities should be equal. They expressly 
 forbid the capitalization of many construction 
 items amounting to two hundred dollars or less. 
 Some states have recently ordered the equipment 
 of locomotives 'with electric headlights. While 
 one locomotive might be so equipped at a cost of 
 approximately two hundred dollars, to equip five 
 hundred would amount to ten thousand dollars. 
 There are numerous extensions of existing in- 
 dustrial tracks and additions and betterments to 
 existing structures, which amount to less than 
 two hundred dollars for any one item but, in the 
 aggregate, constitute a large expenditure. 
 
 That system establishes depreciation accounts 
 but makes no provision for appreciation. It pro- 
 vides for the arbitrary withdrawal from the 
 accounts of the cost of property prematurely 
 withdrawn from service through additions and 
 betterments, undertaken for purposes of improv- 
 ing the service or more economical operation, 
 and does this without regard to whether capital 
 has been reimbursed for its investment. It does 
 not encourage economical operation but does 
 offer a premium to any road which increases 
 the cost of property per dollar of revenue re- 
 ceived; that is, it encourages a result directly 
 contrary to all economical principles. It does 
 
37 
 
 not encourage competition, but does make the 
 strong roads stronger and the weak roads 
 weaker. This system of accounts is purely 
 academic, and fails to recognize the basis of past 
 practices or present conditions. 
 
 It requires the carriers to pay out of earnings 
 many items which should be capitalized. For 
 such of the items as represent property *^ aban- 
 doned to make way for providing the public with 
 better facilities/' the statistician of the Commis- 
 sion admits that there is merit in the argument 
 of the stockholder that the cost of progress should 
 be capitalized.'^' Notwithstanding this, the Com- 
 mission ignored the claims of the stockholder and 
 did so against the unanimous recommendation 
 of the Railway Accounting Officers, and without 
 granting any formal public hearing. Charging 
 
 *■■ With regard to Additions and Betterments the situation is somewhat dif- 
 ferent. The general facts relative to this clatsification are well known, and 
 the views of carriers respecting them have been compiled. The point of diffi- 
 culty — that is. the point which makes this classification of such paramount 
 importance — pertains to the treatment of abandoned property. Shall the value 
 of abandoned property be kept in the capital accounts, or shall it be charged 
 off? If charged off, shall it be charged to operating expenses or to profit and 
 loss? If charged to operating expenses or to profit and loss, shall it be by a 
 single entry or prorated through a series of months or term of years ? If pro- 
 rated, what principle should govern the determination of the period to be 
 covered by such prorating? 
 
 This is the most serious of the technical questions yet raised in the develop- 
 ment of a uniform system of accounts, and a point in which the public as well 
 as the carriers have a vital interest. On the part of the public, the argument 
 is stronginsupport of the proposition that the Balance Sheet statement of 'Cost 
 of Property ' should cover only that property actually used in rendering the 
 service of transportation, and that abandoned property should therefore be 
 taken out of the accounts ; but the argument of the stockholder also has merit, 
 which is that, inasmuch as the property abandoned was abondoned to make 
 ■way lor providing the public with better facilities (for it must be held in mind 
 that the question at issue arises in connection with additions and betterments), 
 and further, inasmuch as the first investment was necessary in order that the 
 second investment might be made, it is scarcely just to require the stockholder 
 to sustain the entire loss. It seemed appropriate to state this question, not for 
 the purpose of discussion, but to call attention to the fact that the work of this 
 Division in the development of a system of standard accounts for railways has 
 reached a point where further progress requires a definite expression of policy 
 on the part of the Commission. Asense of equity and an appreciation of business 
 conditions rather than legal or accounting technicalities, would seem to be the 
 element out of which such a policy should be constructed." (Statistics of Rail- 
 ways in the United States, 1907, Interstate Commerce Commission). 
 
38 
 
 these items to expenses correspondingly reduces 
 the net returns from the property. 
 
 A good illustration is the question of increas- 
 ing the tonnage capacity of the track. This can 
 be done by either reducing the grades or building 
 additional main tracks. The reduction of grades 
 necessarily involves some changes of alignment 
 and, therefore, the abandonment of portions of 
 the old roadbed. To secure the same increase in 
 carrying capacity, the cost of the second track 
 and the cost of reducing grades may be approxi- 
 mately the same. If the grades are reduced, 
 a large percentage of the cost must be charged to 
 operating expenses. If additional main tracks 
 are constructed, all the cost must be capitalized. 
 By reducing the grades, the capacity of the line 
 can be doubled and the business handled with 
 fewer locomotives and fewer engine and train 
 crews. No such reductions can be obtained 
 through the construction of additional main 
 tracks. 
 
 The system of accounts promulgated by the 
 Commission places a premium on the less eco- 
 nomical method. This impairs the ability of the 
 carriers to pay fair wages to employees, to pay a 
 reasonable return to investors, or to secure the 
 lowest rates for shippers. 
 
 The shippers of the past derived no benefit 
 from these changes, nor would it be possible to 
 
39 
 
 collect the cost from them. The benefit to ship- 
 pers through improved service begins when such 
 facilities are installed, and continues indefinitely. 
 Like the Panama Canal, the charge should, there- 
 fore, be shared by future generations rather than 
 requiring the present generation to pay the 
 entire cost. 
 
 While the public believes that this system 
 secures uniform and accurate results, the oppo- 
 site is true, and theoretical book entries are sub- 
 stituted for entries of actual transactions, which 
 theoretical book entries, raised or lowered at will, 
 can give any result desired, regardless of the facts. 
 We have but to understand the Commission's 
 system of accounting, to realize the necessity of 
 knowing not only the elements which will be 
 permitted to enter into cost of reproduction, but 
 also the uses to be made of such cost before 
 committing ourselves to any general scheme of 
 valuation. 
 
 The suggested future use of the present cost 
 of reproduction without a reinventory but by a 
 process of addition and subtraction, is equivalent 
 to saying that the present cost of reproduction can 
 be ascertained by applying a similar process of 
 addition and subtraction to the original cost of the 
 property. Neither that plan, nor the system of 
 accounts promulgated by the Commission, gives 
 due consideration to the effect on capital caused 
 
40 
 
 by the premature withdrawal of facilities iu the 
 installation of betterments for increasing the 
 productive capacity of the plant. They provide 
 for the systematic taking away from the investor 
 of a portion of the capital which he has invested, 
 without in any way securing to him a commen- 
 surate return. In no instance do they provide 
 for appreciation in either the selling price of real 
 estate or in other elements entering into the 
 value of the railway as a going concern. What 
 could make the risk to capital more extensive ? 
 
 The ultimate plan proposed by the Commission 
 contemplates a continuance of all actual liabilities 
 the same as heretofore, and, some theoretical lia- 
 bilities (or "accountabilities," as they are called 
 by some who recognize the objection to terming 
 them " liabilities "). 
 
 Actual figures will not be continued on the 
 asset side of the balance sheet but some theoreti- 
 cal prices and figures determined by a "rule of 
 thumb." The only actual cost figures to be con- 
 tinued on the asset side will relate to non-physi- 
 cal propert3^ Thus we see that, although the 
 Interstate Commerce Act authorized the Com- 
 mission to prescribe a system of accounts that 
 only contemplated a record of the acts of the car- 
 rier^ they have attempted a systevi of control 
 which would permit them to substitute fictitious 
 for actual transactions. 
 
41 
 
 The Commission has had no duty to perform 
 which has been or is likely to become more im- 
 portant than the preparation of a system of 
 accounts for the carriers. This work was dele- 
 gated to others. While some carriers were 
 consulted by the statistician, those to whom the 
 work was delegated made a number of recom- 
 mendations to the Commission which the carriers 
 believed would seriously affect their ability to 
 interest capital or improve their property to meet 
 the increasing demands of commerce. These 
 recommendations were adopted by the Com- 
 mission against the protest of the carriers, and 
 they most emphatically denied the request of the 
 carriers that a public hearing be had before the 
 promulgation of any system of accounts. 
 
 Professor Adams valued the Michigan Central 
 Railroad in 1900 and again in 1902, and in the 
 latter year increased the valuation to the extent 
 of twenty million dollars by the simple device of 
 a change of one per cent, in the interest rate 
 assumed. Prof. Adams valued the franchises at 
 $18,259,880, while another economist of equal 
 distinction. Professor E. R. Johnson of the Uni- 
 versity of Pennsylvania and a former Isthmian 
 Canal Commissioner, computed the value of the 
 same franchises as $2,327,000. The methods 
 used were identical except as to the interest rate 
 assumed to be applicable. No one has yet sug- 
 
42 
 
 gested that the owners of the property would be 
 justified in thus attempting to fool either them- 
 selves or the public. Is it not more dangerous 
 to place this power with a political body sub- 
 ject to frequent change in its membership and 
 that, in its past work and public utterances, has 
 claimed to represent the public exclusive of the 
 carriers while admitting that such representation 
 interferes with its ability to be impartial ? Even 
 while urging an official valuation in their report 
 to Congress of December 29, 1909, the Com- 
 mission refer to testimony offered by certain 
 railways and declare that until they are permitted 
 to make a valuation : 
 
 "There is no way by which the Government can properly 
 meet this testimony." (Page 6). 
 
 Could there be a plainer statement that the 
 proposed valuation is to be ex parte and adverse 
 to the carriers ? Yet the same report urges that 
 the " value " so " established" "shall be binding 
 upon the Courts and the Commission." Ibtd, 
 page 6. 
 
 TAXES. 
 
 We have mentioned some elements that cause 
 differences between the cost of reproduction and 
 the capital securities outstanding. Such differ- 
 ences must also exist between valuation for tax- 
 ation and the par value of securities outstanding, 
 or between the valuation for taxation and the 
 
43 
 
 cost of replacement, so long as there is continued 
 the present method of assessing property for 
 taxation. 
 
 Apparently Professor Adams concedes that, 
 under present conditions, the cost of replacement 
 is useless for taxation purposes. A new theory 
 of taxation with a new name is, therefore, sug- 
 gested, which, while contemplating a minimum 
 investment return to the weak line, would deprive 
 a stronger line of anything over such an invest- 
 ment return, thus taking away all reward for 
 effective management, superior economies and 
 improved facilities and methods. Any sum over 
 such maximum investment return is not to go 
 to a reduction in the rates, but is to be confis- 
 cated under the guise of taxation. 
 
 Professor Adams maintains that we must 
 follow the English practice of the Fifteenth 
 Century, when the corporation was an arm of 
 the State, f 
 
 t " The Government has recently undertaken to do something; quite differ- 
 ent from that which it has ever undertaken to do before. It has undertaken to 
 exercise a controlling: influence upon the administration of railway properties 
 through the agency of their accounts 
 
 " I assume, further, that you will not take it amiss if I place some emphasis 
 upon the political aspect of this new step which the Government has seen fit to 
 take, political, not in its party sense, but in the broad sense of political science. 
 What do these orders of the Commission relative to accounts mean for our Gov- 
 ernment? What do they mean asa form of control of aggregations of capital 
 w^hich. under present conditions, are a menace to the stability of this nation ? 
 And I further call attention, in passing, to the fact that the success of what the 
 Interstate Commerce Commission is undertaking in this regard, aiming, as I 
 have remarked, at the control of railway accounts, will serve as a model, if it 
 succeeds, for the control of all forms or agencies of consolidated capital 
 which endanger the perpetuation of the principles upon which our Govei:n- 
 ment rests. . . . 
 
 " Now, there is one thing in which this Government is woefully deficient, 
 and that is in the development of any governmental administrative agencies, 
 so far as industrial aflfairs are concerned. The marked difference between the 
 German constitution and the American constitution is that we over-estimate 
 the exercise of judicial functions, and under-estimate the exercise of adminis- 
 trative or supervisory functions; whereas in Germany the reverse is true. 
 They have a perfect administrative supervision, although the expressions at 
 least of the rights of the individual are less definite and direct than in this 
 
44 
 
 EFFECT ON CAPITAL, LABOR AND THE USERS 
 OF TRANSPORTATION. 
 
 While asserting ''that the public is in partner- 
 ship in the public service industries," the scheme 
 fails to recognize that all partners are expected 
 to bring something of value into the partnership 
 and share proportionately in both losses and 
 profits. Professor Adams* scheme, if carried out, 
 
 country. It is with no intent to disparage the importance of judicial adminis- 
 tration, or of that method of procedure which aims to redress wrongs by pass- 
 ing- judgment upon complaints, but if my view of this situation is correct, the 
 other method of making effective governmental control over industrial affairs 
 contains the greatest hope, and the significance of the Twentieth Section of 
 the Act to regulate Commerce is that it provides a practical means within a 
 limited area of working out the theory of administrative supervision. . . . 
 
 " tall to mind that the aim of the supervision of accounting is to exercise 
 influence upon the administration and management of railway property ; call 
 to mind, furtner, that the function of accounts is to record facts, and that true 
 accounting is nothing more, nor nothing less, than the correct statement of 
 what, in fact, has taken place, and the measurement of that fact in an appro- 
 priate figure. Now, control over the manner in which those facts are recorded, 
 and the assig^nment of some degree of personal responsibility upon some 
 specially designated official, must result in a very direct influence upon the 
 administration of railway properties. . . . 
 
 "The method by which it is hoped that this will be accomplished is found 
 in the order promulgating these accounts. . . , 
 
 "The order holds the accounting officer of each railroad responsible for 
 the proper application of the rules laid down, which in effect and to the extent 
 that the law has jurisdiction over this matter, makes every accountant in this 
 country the agent of the United States Government for the execution of the law. 
 
 ' ' Now, you may say this is settiug up a partnership, as it were, with the car- 
 riers That is true. If you go back to the fifteenth century and ask what is a 
 corporation, a very significant answer is made. At the time the corporation 
 originated, as an entity in English law, the corporation was regarded as an 
 arm of the state. There was some function which the state desired to perform, 
 or to have done ; which the state, for some reason, did not desire to perform 
 directly and immediately. It, therefore, selected certain men and said : We 
 will incorporate you, give to you the liberty of doing this thing, and you will 
 be responsible for the doing of it. The East India Company is an illustration 
 of a corporation of this kind, the corporations that established the State of 
 Pennsylvania and all of our plantations are illustrations of corporations of this 
 kind. Everywhere the corporation was conceived to be a part of the Govern- 
 ment, and within the limits that the Government chose to exercise its super- 
 vision, the corporate official was responsible to the Government. 
 
 " Now, in the industrial development that has characterized the life of the 
 English-speaking people the modern corporation seems to be more or less of a 
 purely private affair. Our industrial philosophy led to the complete separation 
 of state and industry. As a result of this policy, while great benefits have 
 accrued, certain evils also have shown themselves, and the time has come 
 when it is necessary to select certain of these corporations, at least, and restate 
 for them the old and original theory of the corporation. I do not know that 
 this explanation was present in the minds of Congress when it passed the 
 Twentieth Section of the Act to Regulate Commerce. I do not know whether 
 what I have said was consciously recognized by the members of the Interstate 
 Commerce Commission when they framed the order under which the operating 
 accounts were promulgated ; but this I do know, that through the agency of 
 accounts and by means of that order which imposes upon certain officials of 
 the railroads the per.«onal responsibility of executing the Commission's orders 
 relative to accounts, a long step has been taken toward the realization of the 
 sixteenth century theory, and to my mind the correct theory, of corporations. 
 Such, then, very concisely stated, is the political aspect of this government 
 supervision over railway accounting which marks the most recent phase of 
 railway legislation." 
 
45 
 
 would not only cause the investor in railways to 
 stand the loss from any possible reduction in the 
 estimated cost of replacement or in the operation 
 of his plant, but would give to the public any 
 profits that might arise over and above an invest- 
 ment return. It does not, however, contemplate 
 that the users of transportation shall share with 
 the railway investors, any profits that may arise 
 in their business over and above an investment 
 return. 
 
 If the plan contemplates that both the mini- 
 mum and maximum return for all lines must 
 be the investment return, then the Government 
 must arbitrarily raise the rate for all lines, in 
 order to secure such return to the weaker lines 
 and these rates must be subject to such modifi- 
 cations as are made necessary by changes in the 
 volume of trafiic, and by changing prices in 
 material. The rates must at all times be sufii- 
 cient to secure fair wages for employees. These 
 conditions would produce unstable rates, the dis- 
 advantage of which, in connection with commer- 
 cial contracts involving prices, is too well under- 
 stood to require discussion here. 
 
 Has capital assumed no risk, and has its 
 reward been unduly high ? The processes of 
 liquidation through which many roads have 
 passed, answer the first part of this question. 
 The average return today on securities outstand- 
 
46 
 
 ing (which members of the Interstate Commerce 
 Commission, the President of the United States 
 and other persons of authority have publicly 
 stated undoubtedly represent approximately the 
 present value of the properties) is not over four 
 per cent. Is this an attractive rate for capital 
 and can the interest of capital be had by limiting 
 its return to the investment return of yesterday 
 or today when we consider the continued dimin- 
 ished purchasing power of a dollar ? The amount 
 of coal purchasable for one dollar in 1907, as com- 
 pared with 1897, decreased approximately 30 per 
 cent, for bituminous and 21.43 per cent, for anthra- 
 cite, and wholesale prices of other necessaries of 
 life, show advances averaging nearly 45 per cent. 
 Reversing the proposition, the selling prices of 
 products of mining, agriculture and manufactur- 
 ing show an increased power to purchase railway 
 freight service equivalent to 47.24 per cent, for 
 fuel and lighting products; 69.19 per cent, for 
 farm products, and an average of 51.97 per cent, 
 for all products. 
 
 A comparison of rates in the United States 
 with those of any other country will show that 
 American railways have not been unduly exact- 
 ing, and it is well known that the tendency of 
 rates for a series of years in this country has 
 been downward. If due weight be given to the 
 decreased purchasing power of the money in 
 
47 
 
 which charges are paid, it will appear that, at 
 no time has this tendency been interrupted. 
 Rates of pay of employees have greatly in- 
 creased and must continue upward as long as 
 cost of living increases. The users of trans- 
 portation and of labor have, therefore, shared 
 in the results obtained from economies in oper- 
 ation, which results have only been secured 
 through the risk taken on the part of capital. 
 
 Money is only a medium of exchange. The 
 investor is not interested in the money return 
 from his investment, but in the result to be ob- 
 tained with that money, i. e., in its purchasing 
 power. With wheat at fifty cents per bushel, 
 the return on a $1,000.00 five per cent, bond, 
 selling at par, would purchase one hundred 
 bushels, while with wheat at one dollar per 
 bushel, it would only purchase fifty bushels 
 With the cost of living continually advancing, 
 the proposed limiting of income from invest- 
 ments in railroads must necessarily result in 
 increased burdens upon those dependent en- 
 tirely upon such income for support. It must 
 make new investment in these securities un- 
 attractive so long as capital in other branches 
 of commerce is permitted greater returns with 
 equal or less risk. 
 
 The real situation now confronting the country 
 was set forth in the reports of the Interstate 
 
48 
 
 Commerce Commission for the years 1906 and 
 1907, in which, they called attention to the fact 
 '^that the facilities of the carriers have not 
 kept pace with the commercial growth of the 
 country." f 
 
 Is it not clear that this situation results from 
 the unfair criticism of railways and that real 
 or threatened injustice in dealing with them has 
 caused investments in their securities to cease to 
 be attractive to capital ? This being true, the 
 need of to-day is, not directly to stimulate com- 
 merce for the purpose of assisting the railways, 
 but to encourage capital sufficiently to enable 
 the railways to at least meet the just demands of 
 
 f"The extraordinary prosperity which everywhere abounds, with the 
 high prices obtainable for all classes of commodities, have so stimulated pro- 
 duction as to yield a volum.e of transportation business which far exceeds in 
 the aggregate the carrying capacity of the railroads. In a word, the develop- 
 ment of private industry has, of late, been much more rapid than the increase 
 of railway equipment . . . ." 
 
 " In some cases it is simply a lack of cars, in others insufficient tracks and 
 motive power, in still others wholly inadequate freight yards and terminal 
 facilities " 
 
 '"Broadly speaking, it does not appear that the existing congestion, 
 amounting in many cases to a virtual paralysis of business, results so much 
 from insufficient car capacity ... as from the lack of adequate tracks and 
 motive power, delays in loading and unloading, and terminals far too small ior 
 current requirements . . . ." 
 
 "A situation of such gravity calls for every remedy that can be usefully 
 applied (Interstate Commerce Commission report, 1906, Page 17)." 
 
 "The general question of the provision of adequate transportation facilities 
 unquestionably merits serious consideration by Congress. The whole problem 
 involving insufficient car and track capacity, congested terminals, slow train 
 movement and other incidents may be said to be due to the fact that the 
 facilities of the carriers have not kept pace with the commercial growth of the 
 country." 
 
 "If business undertakings proportionately increase during future years, 
 the railroads of the country must add to their tracks, cars and other facilities to 
 an extent difficult to estimate. The ability of the carriers to transport traffic 
 measures the profitable production of this vast country, with its ninety millions 
 of people, abundant capital and practically unlimited resources. Manifestly it 
 is an economic waste for the farm, the mine or the factory to put labor and 
 capital inio the production of commodities which cannot be transported to 
 market with reasonable despatch. If the present output cannot in many 
 instances be transported except after ruinous delays, it is not reasonable to 
 presume that capital will readily seek investment in new undertakings. It 
 may conservatively be stated that the inadequacy of transportation facilities 
 is little less than alarmingr ; that its continuation may place an arbitrary limit 
 upon the future productivity of the land, and that the solution of the difficult 
 financial and physical problems involved is worthy of most earnest thought 
 and effort of all who believe in the full development of onr country and the 
 largest opportunity for its people." (Interstate Commerce Commission Annual 
 Report, 1907, Pages 8 and 9J. 
 
49 
 
 commerce and thus to encourage increased pro- 
 duction. 
 
 The Interstate Commerce Commission, or at 
 least a distinguished member of it, has already 
 complained that its functions, combining as they 
 do duties of legislative, executive and judicial 
 nature, are too complicated and inconsistent 
 to be wisely vested in a single tribunal. This 
 embarrassment has been recognized and re- 
 marked upon also, in executive communications 
 to Congress and elsewhere. Further, the Com- 
 mission states in its latest report, that it has 
 already so much work upon its hands that much 
 of it must needs be delegated to subordinate 
 agencies ; and it is certain that if the immense 
 labor of making any sort of valuation of all 
 public service utilities were imposed upon it, it 
 would not be performed by the Commission 
 itself, but by some other persons whom it would 
 employ for the purpose. They did delegate to 
 others so important a matter as a System of 
 Accounts for carriers. 
 
 Apparently the Commission did not object to 
 undertaking an estimate of the "cost of replace- 
 ment," but they did request of Congress that 
 they be not asked to determine the " fair value," 
 thus raising a question as to their ability to 
 use for any specific purpose such "cost of replace- 
 ment," when ascertained. If it were to be ad- 
 
50 
 
 mitted that some kind of valuation of public 
 service utilities should be made, it is not unnat- 
 ural to suggest that the Commission should be 
 spared further confusion of diverse duties by 
 vesting the power to make such valuation in 
 some other agency, whether a committee of Con- 
 gress or a special commission which would be 
 able to give its undivided attention to that duty, 
 which would be found to be of sufficient magnitude 
 to enlist the largest capacit}' of recognized 
 experts. 
 
 It should not be inferred that the railways 
 object to having a valuation placed upon their 
 properties. In effect such valuations are daily 
 attempted with greater or less success by sub- 
 scribers to new issues of securities and even by 
 those who invest largely in securities heretofore 
 issued. There is, however, serious objection to 
 an incomplete and misleading valuation bearing 
 the stamp and carrying the weight of Govern- 
 mental sanction, which can be of no practical 
 advantage to the Government, the public, or the 
 railways; but ma}^ easily injure the public and 
 the railways by disturbing the confidence of the 
 former and hampering the activities of the latter. 
 It seems ver}? clear that such a valuation as is pro- 
 posed would be wholly useless to the Government 
 for any practical purpose, because it would omit 
 so many factors essential to any fair appraise- 
 
51 
 
 ment of the worth of the enterprises as going 
 concerns. The only purposes suggested are for: 
 
 a Rate-making. 
 
 b Control of security issues. 
 
 c Taxation. 
 
 (a) For rate-making. — Unless the Supreme 
 Court overrules its well-considered decisions 
 herein referred to, such partial valuation cannot 
 possibly form the basis of determination of any 
 rate or rates, general or special. 
 
 (b) Control of security issues. — No such con- 
 trol is as yet vested in the Commission, nor can 
 it be under the Federal Constitution. There 
 can, therefore, be no advantage in securing such 
 a valuation to facilitate the performance of a 
 function which does not now and probably never 
 will exist. 
 
 {c) It is assumed that the taxation referred 
 to is Federal taxation, with regard to which it 
 may be briefly said: (i) A partial and unequal 
 valuation could not be the basis of a fair tax. 
 (2) The Congress has already elected to tax all 
 corporations, including railways, upon their net 
 profits ; to which a physical valuation can have 
 no conceivable relation. (3) If in future other 
 methods of taxation should be proposed, to which 
 any valuation is relevant, it will then be soon 
 enough to provide for a valuation which will 
 harmonize with the system under consideration. 
 
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