Part 2

The reasonableness of a rate depends, not alone on the amount of capital invested, but on the volume of traffic, the density of population, the actual cost of service, and many other elements. Rate legislation has been attempted without full investigation. Acts have been passed compelling the establishment of stations and terminals, the improvement of roadway and structures, the purchase of new equipment, the installation of safety appliances and block signals, and many other requirements have been made, some (but by no means all) of which are unreasonable and burdensome. Nearly one-half the States of the Union have by law required a 2-cent, or 2½-cent, passenger fare, regardless of density of population, amount of traffic, or other considerations which might render such rates unreasonable. The regulation of the carriers, by legislature, by railroad commissions, by State officials, and by Courts, the addition of burdens of expense, and the cutting off of revenue, all give considerable ground for the opposition of the carriers to anything that looks like hostile legislation, and compels the student of affairs to admit that there is justice in the claim of the managements, that there is grave danger, not only of seriously crippling many roads, but of so impairing the credit of the railroads as a class that it will be increasingly difficult to secure capital to provide for the necessary extensions and development of the transportation facilities of the country.

On the other hand, perfect frankness compels the admission that the state of public opinion which compelled the passage of these laws has been caused largely by the corporation officials themselves. There is probably no more loyal body of men in America to-day than the officials and employees of railroads. Their loyalty, however, is all to "our company." They enter its service as boys or young men; they grow up to the full strength of manhood working for its good; they take little or no part in public affairs; they have no time for the study of public questions. Their friends are almost exclusively among their own associates in the service of the road, and their development is along the lines of their own special work in the service. As a body of honest, honorable, and worthy men, absolutely loyal to their employers, they have few equals; but it is doubtful if any equal number of men, of equal intelligence, have as limited a knowledge of the fundamental truths of government, or knowledge so colored by bias. It is also doubtful whether any equal number of men have in their ranks so few who bear an active part in the duties and activities of citizenship, or who exercise large influence on their neighbors.

While the foregoing statement is believed to be absolutely true, it will not do to pass over the notable exceptions. Such men as James J. Hill, F. Am. Soc. C. E., M. E. Ingalls, and others of the higher officials, who have taken an active part in public affairs, have had commanding influence. Theirs has been the sound policy, as the property in their hands has not suffered. The short-sighted policy which, in December, 1909, induced the management of one road to compel all its employees holding municipal offices to resign, is bound to react and create hostile feeling on the part of the public.

The entire trend of a training in railway service is to fill a man with prejudice against all things that undertake to regulate or control the corporations, and often goes so far as to enable him to do, willingly and as a matter of right, things which with a broader view of the interest of the whole community he would not agree with at all. The result of this intensive training is that the railway service has in it thousands of men who become impatient with any effort to regulate or control; who permit their irritation to show; and who, by their own attitude, create unnecessary hostility. F. A. Delano, M. Am. Soc. C. E., President of the Wabash, in an address[2] at Hannibal, Mo., on March 25th, 1909, said:

"In ordinary manufacturing or commercial undertakings, every man has his own notions about the conduct of his business, and does not want to be interfered with, or dictated to by people who know less about his business than he does himself. Now, while it may be argued in the case of public service corporations that the people who have put their money into these enterprises, have done it with their eyes open and with full knowledge that they were subject to governmental regulation and control, there is nothing in that argument which makes public interference any more palatable to the man or group of men who are interfered with."

This address well expresses the spirit of the railway managers and employees toward all forms of investigation, and the complete lack of understanding, on the part of these managers, of the legal and moral relations which they bear to the communities which they serve. It is extremely unfortunate that railway and corporation people have not taken the public fully into their confidence, and fully and freely given out correct information as to the operation and depreciation of their properties; also, it is unfortunate that, when a corporation official does feel a grievance, he permits himself to make a partisan speech, or write an unwise article for publication. Much hostility is traceable to foolish, undiplomatic sayings or writings of corporation managers (which are often but half quoted), or to equally foolish speeches or newspaper editorials in opposition to the corporations, which are taken seriously by the managers. Whatever may be the cause, there is a regrettable hostility, and, on the part of the corporation officials, there is an apparent unwillingness to admit right motives to anyone advancing theories regarding corporate regulation and control, due largely to the training and atmosphere surrounding the corporate service.

The public has a large bill of particulars, one of which is the promotion of wildcat companies, such, for instance, as the "New York and Chicago Air Line" project which, only a year or so ago, drew from $2,000,000 to $3,000,000 from the people in a limited territory. These people were "investing" in railway stocks. A Federal control of the issue of stocks and bonds would have prevented this and hundreds of like swindles. Any move to secure such a law has always been opposed by the management of large and legitimately operated corporations, under the impression that they are about to be persecuted, and, naturally, the victim classes these corporations with the alleged one that secured his money.

The issue of stocks and bonds far in excess of any possible cost or value of railroad, street railroad, and other properties, and the making of large personal fortunes by the promoters, are matters of such frequent occurrence that it is difficult, indeed, to dismiss them with a mere denial. There is hardly a community of any size which has not had its example of "consolidation," "combine," or "merger," which has resulted in the issue of excessive securities; and there is hardly a citizen of any intelligence who has not either seen or had experience with some form of corporation promotion carried on strictly within the law, but which, nevertheless, in plain language, was a swindle. These, to say nothing of some gigantic deals involving millions, will sooner or later compel some form of regulation of the issues of stocks and bonds. In the last analysis, it is the money of the people, the hundreds of thousands of small investors, depositors in banks, and owners of life insurance, whose money goes into corporation securities, and, until the officers of the great railroads co-operate in securing such forms of control of stock and bond issues as will make impossible the purely speculative "wildcat" corporations, and thus safeguard minor corporations, as to furnish at least reasonable security to those whose money is invested, all forms of corporation security must be under suspicion with the public, and the agitation for control must continue.

It is not, as Mr. Delano says, a case of put your money in with your eyes wide open; it is an effort on the part of the people to safeguard this form of corporate security in such a way that it can be treated as any other form of sound investment. It should not be necessary to require that all investors in corporate securities be financial experts. It is the writer's opinion, based on his observation and professional practice, that the railroads are not generally open to charges of over-capitalization. While there are flagrant instances, the chief culprits are among other classes of corporations. If such be the fact, it would seem that the interests of the great railway corporations would be in no wise jeopardized by sane and reasonable control.

The theory of taxation is that every one shall bear his proportionate burden of the cost of maintaining the government.

Regardless of any opinions that may be held as to the propriety of the methods adopted in the Interstate Commerce Commission's commercial valuation of railroad properties, it will be conceded that the results gave a set of figures for all the States of the Union, secured by a uniform method of computation and distribution. Table 1, which is a compilation from Tables 1 to 11 of Bulletin 21, shows clearly why, in certain States, corporate taxation is a live issue, and if (as suggested by Mr. Williams in his article, elsewhere referred to) amendment of the Constitutions of some of the States is necessary, it is safe to assume that the condition of inequality shown by this table is such as to compel these changes.

It is needless to cite further instances; enough has been said to indicate:

_First._—That the corporations and the public have such intimate business relations that a blow at either must necessarily injure the other seriously;

_Second._—That the Courts have defined quite clearly the legal relation existing between the two interests;

_Third._—That there is lacking a proper spirit of mutual confidence, and the two interests at the present time are generally hostile;

_Fourth._—That there have been errors and abuses on the part of both corporations and public; and

_Fifth._—That capital invested in corporations is, and should be, the money of the people, and should be safeguarded so as to prevent its loss by manipulation, and insure a fair return.

TABLE 1.—COMPARISON OF ASSESSED VALUATION AND COMMERCIAL VALUE OF RAILWAY PROPERTIES.

═══════════════╤══════════╤══════════════╤═════════════════╤═══════════ State or │ Miles of │ Commercial │ VALUATION FOR │ Ratio of territory. │ single │ value: June │ ASSESSMENT. │assessed to │ track. │ 30th, 1904. │ │commercial │ │ │ │valuation: │ │ │ │Percentage. ───────────────┼──────────┼──────────────┼─────┬───────────┼─────────── │ │ │Year.│ Amount.│ ───────────────┼──────────┼──────────────┼─────┼───────────┼─────────── Alabama │ 4,669.35│ $150,211,000│ 1905│$53,926,026│ 35.9 Arkansas │ 4,126.44│ 124,626,000│ 1904│ 34,709,623│ 27.8 California │ 6,262.54│ 350,694,000│ 1904│ 92,378,550│ 26.3 Colorado │ 4,976.24│ 198,261,000│ 1903│ 49,492,135│ 25.0 Connecticut │ 1,017.72│ 105,369,000│ 1904│120,493,648│ 114.4 Florida │ 3,555.84│ 80,467,000│ 1904│ 21,817,478│ 27.1 Georgia │ 6,304.72│ 156,603,000│ 1903│ 63,105,810│ 40.3 Idaho │ 1,461.53│ 91,877,000│ 1904│ 10,115,378│ 11.0 Illinois │ 11,622.74│ 805,057,000│ 1904│425,709,055│ 63.8 Indiana │ 6,917.85│ 375,541,000│ 1904│165,863,367│ 44.2 Iowa │ 9,859.23│ 344,847,000│ 1904│ 57,535,160│ 16.7 Kansas │ 8,811.43│ 356,356,000│ 1904│ 60,093,534│ 16.9 Kentucky │ 3,253.00│ 155,772,000│ 1904│ 77,658,040│ 49.9 Louisiana │ 3,898.74│ 123,401,000│ 1904│ 29,044,195│ 28.9 Michigan │ 8,660.29│ 277,597,000│ 1904│196,795,000│ 70.9 Minnesota │ 7,811.04│ 466,734,000│ │ │ Mississippi │ 3,480.25│ 107,884,000│ 1902│ 29,847,640│ 27.7 Missouri │ 7,711.05│ 309,768,000│ 1903│ 97,916,869│ 31.6 Montana │ 3,267.10│ 196,209,000│ 1904│ 36,759,827│ 18.7 Nebraska │ 5,820.88│ 263,170,000│ 1904│ 46,082,853│ 18.5 Nevada │ 986.56│ 43,745,000│ 1904│ 13,778,049│ 31.5 New Hampshire │ 1,275.97│ 79,786,000│ 1904│ 22,625,000│ 28.3 New Jersey │ 2,277.85│ 333,568,000│ 1904│231,655,525│ 69.5 New York │ 8,297.29│ 898,222,000│ 1903│229,582,064│ 25.6 North Carolina │ 4,075.00│ 113,146,000│ 1904│ 69,480,974│ 61.4 North Dakota │ 3,190.77│ 689,797,000│ 1904│133,858,945│ 19.4 Oklahoma │ 2,611.03│ 78,668,000│ 1905│ 11,936,317│ 15.2 Pennsylvania │ 11,023.24│ 1,420,680,000│ │ │ Rhode Island │ 211.89│ 25,719,000│ 1904│ 15,832,003│ 61.6 South Carolina │ 3,175.28│ 75,500,000│ 1903│ 29,467,716│ 39.0 South Dakota │ 3,047.14│ 49,646,000│ 1904│ 14,354,930│ 28.9 Tennessee │ 3,480.83│ 131,166,000│ 1903│ 58,536,566│ 46.6 Texas │ 11,848.03│ 237,718,000│ 1904│ 95,209,785│ 40.0 Utah │ 1,779.69│ 90,325,000│ 1904│ 20,682,461│ 22.9 Vermont │ 1,063.25│ 37,311,000│ 1902│ 27,344,020│ 73.3 Virginia │ 3,932.33│ 211,315,000│ 1904│ 63,269,623│ 37.7 West Virginia │ 2,836.83│ 201,799,000│ 1904│ 28,771,358│ 14.2 Washington │ 3,355.83│ 182,837,000│ 1904│ 26,066,949│ 14.3 Wisconsin │ 7,048.76│ 284,510,000│ 1904│218,024,900│ 76.6 Wyoming │ 1,247.70│ 100,307,000│ 1904│ 7,498,232│ 7.5 Arizona │ 1,751.35│ 68,356,000│ 1904│ 6,667,349│ 9.7 District of │ 32.00│ 5,578,000│ 1904│ 2,486,024│ 44.6 Columbia │ │ │ │ │ New Mexico │ 2,504.66│ 8,640,000│ 1904│ 8,511,538│ 9.9 ───────────────┼──────────┼──────────────┼─────┼───────────┼─────────── Total, U.S.A. │213,932.13│11,244,852,000│ │ │ ═══════════════╧══════════╧══════════════╧═════╧═══════════╧═══════════

In concluding this subject, it may not be amiss to quote the language of the Supreme Court in the Knoxville Water Case (212 U. S., 1), as follows:

"Regulation of public service corporations, which perform their duties under conditions of necessary monopoly, will occur with greater and greater frequency as time goes on. It is a delicate and dangerous function, and ought to be exercised with a keen sense of justice on the part of the regulating body, met by a frank disclosure on the part of the company to be regulated. The Courts ought not to bear the whole burden of saving property from confiscation, though they will not be found wanting when the proof is clear.

"The legislatures and subordinate bodies to whom the legislative power has been delegated ought to do their part. Our social system rests largely upon the sanctity of private property, and that State or community which seeks to invade it will soon discover the error, in the disaster that follows. The slight gain to the consumer, which he would obtain from a reduction in the rates charged by Public Service Corporations, is as nothing compared with his share in the ruin which would be brought about by denying to private property its just reward, thus unsettling values and destroying confidence. On the other hand, the companies to be regulated will find it to their lasting interest to furnish freely the information upon which a just regulation can be based."

Footnote 2:

_Railroad Age Gazette_, April 16th, 1909, p. 857.

EXPLANATION OF TERMS.

In order that there may be no doubt as to the exact meaning of the terms used throughout this paper, a few definitions or explanations are submitted:

_Appraisal, or Valuation._—These words are used interchangeably, and refer to the engineering work of determining the present worth of both physical and intangible properties of corporations.

_Cost of Reproduction._—This expression refers to the estimate of cost of reproducing the physical properties as they exist on the date of the appraisal, all elements entering into the cost being considered as new and not affected by the elements of depreciation or obsolescence.

_Cost, or Original Cost._—These terms refer to the actual amount of money paid for the property, either when it was originally constructed, or in its condition at the time of appraisal, the latter case being the original cost plus the cost of additions and betterments, less abandoned, replaced, or worn-out property. This figure ought to be represented by the "book cost," but it is not often that "book cost" and "actual cost" are the same.

_Present Value, or Present Physical Value.[3]_—These terms are used in describing the physical property as reproduced after it is affected by all elements of depreciation or appreciation. The use of the word "value" in this expression is unfortunate, as it may lead to some confusion. It must be kept clearly in mind that, where this term is used, it refers only to physical property as depreciated, and is in no case intended to refer to the final or "fair value" of the property.

_Non-physical, or Intangible, Value._—These terms are used to represent those elements, entering into the final worth of the property as a business concern, which arise out of the operation of the property and are not attachable to the physical property.

All the foregoing terms have to do with the determination of the elements which enter into the final value.

What is "value"? In defining the exact meaning of this term, as applied to the property of a public service corporation, many elements must be taken into account. Standard authorities give many definitions of "value," none of which appears to meet fully the requirements of the term as used herein. Before considering the elements which enter into the value of corporation property, or attempting to determine the methods to be used in fixing proper figures of worth for each of these elements, it is proper and necessary to obtain a clear definition of "value," the thing sought to be ascertained by the inquiry.

The term, "commercial value," has been considered in place of "value," but is not used because it is held to be more properly applicable to the selling or exchanging value of fractional interests in the property, and the methods of computing the commercial value of securities which are in common use cannot be adopted in an engineering valuation. The Standard Dictionary definition of "commercial value" is:

"The source of commercial value, according to different schools of economists, is (1) the degree of want felt for a commodity as shown in the relation of supply and demand, (2) the amount of labor embodied in it, or (3) the cost of reproduction. Practically, commercial value is that for which a thing can be sold or exchanged at a given time and place."

The definition given by Professor Adams is:

"The estimate placed upon the worth of a property, regarded as a business proposition."

Both these definitions are in a measure involved, and the writer considers that the term, "Commercial Value," is too narrow and restricted to be properly used.

As a definition of that estimate of worth which an engineering commission should report as the result of a complete appraisal, the writer submits the following:

The value of a property is its estimated worth at a given time, measured in money, taking into account all the elements which add to its usefulness or desirability as a business or profit-earning proposition.

There are two classes of elements entering into the final value:

_(1) The "Physical Property" Element of Value._—This consists of those things which are visible and tangible, capable of being inventoried, their cost of reproduction determined, their depreciation measured, and without which the property would be unable to produce the commodity on the sale of which income depends. This physical property is considered as an operating entity, and not as collateral of inert and partly worn-out equipment, and, being so considered, carries, as part of the physical value, those costs and charges which are an inseparable part of the cost of construction but do not appear in the inventory of the completed property.

_(2) The "Non-Physical" or "Intangible" Elements of Value._—These are those things which, added to or taken from the worth of the physical property, make up the value, and include whatever accrues to the property by reason of its operation, or by reason of grants, contract rights, competition, or location, which at the time of appraisal affect favorably or unfavorably the worth of the property.

The worth of the physical property is primarily that on which the value of the whole property rests.

While it is clear that the worth of the physical property, being the cost of reproduction less depreciation, is not necessarily the value of the property, it is equally clear that the physical worth must bear some very definite relation to value, and the writer is strongly of the conviction that this relation is such that "value" cannot be ascertained without a determination of physical worth. The physical property element represents the investment on which a fair return is to be earned, and in most cases an appraisal is necessary for the determination of the amount of money actually invested. As illustration of the fact that "physical value" and "value" are not the same, the case of two railroads actually existing and in operation between two cities in Michigan may be cited.

Road "A" occupies a narrow valley through high and abrupt hills. Its alignment is fair for hilly country; its maximum grade is 1 per cent. It has a number of bridges, all short and low. Its cost of reproduction might reasonably be placed at $28,000 per mile. A mining town at one end ships a heavy tonnage down grade to a lake port at the other.

Road "B" was constructed several years later, and, being barred from the only valley, built a line across the hills, involving heavy grading, very long and high steel trestles, a longer line, maximum grades of 2%, and a heavy climb from the mining town to the summit before starting to drop to the lake. The cost of construction was more than double that of Line "A," and the tonnage which can be hauled in either direction is but a small fraction of that which can be hauled with the same power by Road "A." A reasonable figure for cost of reproduction may be given as $60,000 per mile.[4]

Here is clearly a case where the older, less expensively built road has a value as an earning proposition far in excess of that of the new road. The rate on commodities does not affect the relative difference. A higher rate, while permitting Road "B" to live, greatly adds to the value of Road "A," while the latter can operate at a profit on rates which would not permit Road "B" to pay expenses.

This example indicates the existence of non-physical values, not only positive in the case of Road "A," but also negative as to Road "B."