Part 30
In supporting valuation as an expedient in taxation of railway property, Mr. Riggs seems to rely on a table made up from Professor Adams' Bulletin No. 21, as expert employed by the Federal Bureau of the Census, which table shows that the assessment of the railways of Wyoming for taxation purposes in 1904 was but 7.5% of their commercial valuation, as estimated by Professor Adams, and that this ratio varied greatly throughout the different States, running as high as 114.4 in Connecticut. Of course, nearly every one knows, even if Mr. Riggs does not, that the relation between the real value and the assessed value of all other kinds of property varies greatly from State to State, and even in different portions of the same State. On account of this variation, no table such as that offered by Mr. Riggs in support of his argument can have any value unless supplemented and explained by data covering the assessment of other kinds of property. It is worth noting, _en passant_, that the so-called "Commercial Valuation," on which Mr. Riggs rests this part of his argument, assigns a value equivalent to $32,054 per mile to the railways of Michigan and one of $45,211 per mile to the railways of the prairie State of Nebraska. Possibly this variation in the estimate of value is partly expressed in the conclusion that Michigan railways are assessed at 70.9% of their value and Nebraska railways at but 18.5 per cent. Obviously, there is no more need of uniformity among the States in the taxation of railway property than in their methods of deriving revenue from other kinds of property.
Also, Mr. Riggs admits that, when the Michigan valuation for taxation was made, it was not diminished, as it should have been, by the use of negative, non-physical value. This is fully equivalent to an admission that the method was unjust to every railway not capable of earning the full return on its replacement cost. He says:
"The use of a negative or subtractive non-physical value was considered, and advised by Professor Adams....
"Professor Adams and his associates, therefore, applied only positive values, where any such were found, although advocating the use of negative values."
And, of the method then used, he says:
"... it fails, in the form in which it was used in 1900 and 1902, to bring out those negative or subtractive elements which may be determined from the income accounts, in the case of properties which do not earn a fair return on the investment."
And again:
"... where the earnings have been fairly uniform and stationary for a period of years, and the property does not earn a sufficient sum to care for depreciation and annuity, it is clear that the value as an earning investment is less than the determined physical value, and that the physical valuation should be reduced by some amount to arrive at the 'fair value.'"
In his argument favoring the use of a valuation in rate-making, Mr. Riggs affords no support to Professor Adams' contention that, for that purpose, only replacement cost should be considered, and that, after fixing the rates on the basis of the least favorably located and least efficient line, so as to afford it a bare return on its replacement cost, the surplus earnings at the same rates of its more favorably located or better operated competitors should be confiscated under the guise of a special tax. This extraordinary proposal, the character of which is so illuminating as to the attitude toward railway property and investments of the most prominent and persistent advocate of so-called "physical valuation," is best stated in Professor Adams' own words, which are as follows:
"I cannot evade the conclusion that equity, as between various classes of roads, can never be attained until all the excess of revenue over the Constitutional limit be made a contribution to the public treasury, and that this contribution be made as a substitute for all taxes of all kinds and all sorts."[38]
On the contrary, Mr. Riggs distinctly upholds the right to earnings in excess of the bare return, at the minimum rate of interest, upon the cost of replacement, saying, _inter alia_:
"It is contended that the determination of rates that will be just and fair to all competing companies involves other consideration than the valuation of either physical or intangible properties, and that when all these rate-making problems are properly solved, there will remain large intangible values on the well-designed plants."
Professor Adams has himself admitted that there is no possibility of utilizing any valuation for the purpose of fixing specific rates, as such a task is far beyond the capacity of any conceivable system of cost accounting. Supplementing this admission, Mr. Riggs' opposition to the plan proposed by the former and its gross injustice, so apparent to every one but its author, destroys the last element of plausibility in the suggestion that any sort of valuation could be of utility in that connection. The writer is not overlooking the fact that the Courts, when under the necessity of repelling efforts to confiscate railway properties under the guise of rate regulation, and in view of the form in which this necessity has commonly presented itself, have accepted "fair value" as an element of importance in their inquiries; but if the railways are entitled to charge rates based on the value of the services they perform, it is clear that the question whether a rate or a schedule of rates is reasonably adjusted to the value of the service or services is very different from the question whether a fair return upon fair value has been allowed. Assuming, however, the need of an appraisement in every litigated case involving railway schedules, it is evident that each case would have to have its own appraisement, for value is ever changing and unstable. Mr. Riggs himself says:
"It is true that the 'value' of a property is an unstable figure, subject to fluctuations due to natural or artificial causes, and that a material change in value may occur suddenly...."
Professor Adams proposed to keep his replacement cost up to date by annual accretions equal to annual expenditures for extensions and betterments; but this plan is illogical and inconsistent, for it proposes to ignore that very essential difference between original cost (less a proportionate allowance for wear and tear) and present worth, which is the very basis of the argument in favor of any valuation at all. Equally obvious objections, growing out of the instability of the ascertained value of any particular date, apply to any plan which does not provide for a re-appraisement every time the aggregate is to be used.
The objections to the use of any valuation for rate-making which have been cited are valid, and should be convincing, but they are insignificant by the side of the fundamental objection that, as Mr. Riggs says, "as a business proposition, the value of any property depends on its earnings," while those who would thus utilize a valuation are attempting to reverse the fact and make earnings depend on the value. Such a reversal is impossible. Ascertain real value and you have a consequence of earnings, past, present, and prospective, nothing else; use this as a basis for a rate schedule and you get, as a mathematical result, the present rates. The only way to derive any other result from this method would be to use as the basis some figure other than the real value, a method which would only be resorted to through moral turpitude or intellectual incapacity. One might almost assume that Mr. Riggs knows this, for he says:
"Value is given to a property, either by reason of the fact that it is an instrument for earning profit, or that it does earn profit or gives promise of profit."
The substance of Mr. Riggs' argument on capitalization control is that American railways are not often over-capitalized, but such evils do obtain in other industries, and therefore railway issues of capital securities ought to be restricted.[39] Unfortunately, he gives no clue to the methods he would have applied, nor as to how far he would go in interference with the normal action and interaction of commercial forces in determining what securities can and ought to be issued. Railways are not over-capitalized. Table 9, a comparison of official valuations and capitalization, originally compiled by Mr. Slason Thompson, is instructive.
TABLE 9.
═════════════╤═════╤═══════════════════════╤════════════════════ State. │Year.│Valuation by commission│State proportion of │ │ or tax board. │ capitalization. ─────────────┼─────┼───────────────────────┼──────────────────── Minnesota │1907 │ $411,735,194│ $334,979,691 South Dakota │1909 │ 106,494,503│ 108,911,000 Wisconsin │1909 │ 284,066,000│ 249,299,060 Texas │1909 │ 413,000,000│ 412,465,743 Washington │1908 │ 186,007,490│ 153,493,940 ─────────────┼─────┼───────────────────────┼──────────────────── Total │ │ $1,401,303,187│ $1,259,049,434 ─────────────┴─────┴───────────────────────┴────────────────────
──────────────────────────────────────────────────────────────── Excess of total valuation over total capitalization $142,253,753 ════════════════════════════════════════════════════════════════
In view of frequent suggestions, in the public press and elsewhere, which indicate that there is a widespread opinion that the securities of railways have generally been watered, Table 10 is given. It is an analysis of the consolidated balance sheet as given in the reports of the Interstate Commerce Commission for 1908 and 1890.
Table 11 shows the length, in miles, of main and other tracks in 1908 and 1890.
The Commission, in its annual report, shows the securities issued per mile of road (first main track), but does not show the results per mile of main track (_i. e._, 1st main track, 2d, 3d, 4th, and other main tracks), nor does it show the results per mile of all tracks (_i. e._, main tracks, yard tracks, passing tracks, and industrial tracks). From the consolidated balance sheet, it will be noted that the securities per mile of road have increased 29%, while per mile of main track they have increased only 24%, and per mile of all tracks they have increased but 14 per cent. However, deducting the investments in stocks and bonds of other corporations, and showing the results only for the securities issued on account of the cost of road and 12% equipment, we have an average per mile of road of $62,388, an increase of 12%; and an average per mile of all main tracks of $56,166, an increase of 8%; and an average per mile of all tracks of $42,864, or a decrease of 0.7 per cent. It will be noted that a considerable part of these increases is due to increased cost of equipment, and the advantageous results obtained from such investment have been clearly shown. Of the investment in the track itself (cost of road), it will be noted that the cost per mile of main track has increased only 5%, while the cost per mile of all tracks shows a slight decrease in 1908 as compared with 1890.
These comparisons are more significant and convincing in the light of the large expenditures since 1890 for the reduction of grades, revision of line, interlocking towers, automatic block signals, increased weight of rail, increased capacity of bridges, improved stations and terminals, elevation of tracks, and the many other items going to make up the additions and betterments, and increasing the book cost of the property. The figures plainly prove that there has been no general practice on the part of the railroads of the country, from 1890 to date, of issuing capital securities without securing full value for the vast amount referred to. Why, then, should any restriction be placed on the form or manner of their future appeal for the very large volume of capital necessary to keep abreast of American industrial development? Why should they be limited as to what form of security they may offer in return for the cash capital which they must obtain if they are to serve the public adequately and properly?
TABLE 10.—CONSOLIDATED BALANCE SHEET FOR RAILROADS OF THE UNITED STATES. EXCLUSIVE OF TERMINAL AND SWITCHING ROADS.
╒══════════════╤══════════════════════════════════════════════════════╕ │ │ ASSETS. │ ├──────────────┼──────────────────────────────┬───────────────────────┤ │ │ Total. │ Per mile of road. │ ├──────────────┼───────────────┬──────────────┼───────────┬───────────┤ │ │ 1908. │ 1890. │ 1908. │ 1890. │ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │RAILROAD: │ │ │ │ │ │Cost of road │$12,035,195,403│$7,333,096,430│ $56,268│ $51,400│ │Cost of │ 1,178,571,137│ 422,290,951│ 5,510│ 2,960│ │ equipment │ │ │ │ │ │Material and │ 226,250,462│ 63,785,950│ 1,058│ 447│ │ supplies │ │ │ │ │ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Total │$13,440,017,002│$7,819,173,331│ $62,836│ $54,807│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │INVESTMENTS: │ │ │ │ │ │Stocks owned │ $2,115,313,379│ $489,049,859│ $9,890│ $3,428│ │Bonds owned │ 1,271,311,512│ 241,115,665│ 5,944│ 1,690│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Total │ $3,386,624,891│ $730,165,524│ $15,834│ $5,118│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │CURRENT │ │ │ │ │ │ ASSETS: │ │ │ │ │ │Cash and │ $1,213,575,272│ $307,871,188│ $5,674│ $2,158│ │ current │ │ │ │ │ │ assets │ │ │ │ │ │Sinking, │ 154,975,409│ 125,095,987│ 724│ 877│ │ Insurance, │ │ │ │ │ │ and other │ │ │ │ │ │ funds │ │ │ │ │ │Total │ $1,368,550,681│ $432,970,175│ $6,398│ $3,035│ │Miscellaneous │ $1,277,458,795│ $710,300,536│ $5,973│ $4,979│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Grand │$19,472,651,369│$9,692,609,566│ $91,041│ $67,939│ │ total—All │ │ │ │ │ │ assets │ │ │ │ │ ├──────────────┼───────────────┴──────────────┴───────────┴───────────┤ │ │ LIABILITIES. │ ├──────────────┼───────────────┬──────────────┬───────────┬───────────┤ │SECURITIES │ │ │ │ │ │ ISSUED: │ │ │ │ │ │Capital stock │ $7,289,597,964│$4,179,156,990│ $34,081│ $29,293│ │Bonds │ 9,441,200,261│ 4,462,577,079│ 44,141│ 31,280│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Total │$16,730,798,225│$8,641,734,069│ $78,222│ $60,573│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │CURRENT │ │ │ │ │ │ LIABILITIES:│ │ │ │ │ │Accrued │ │ $25,341,994│ │ $177│ │ interest │ │ │ │ │ │Other current │ $1,151,233,255│ 440,513,629│ $5,382│ 3,088│ │ liabilities │ │ │ │ │ │Total │ $1,151,233,255│ $465,855,623│ $5,382│ $3,265│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Miscellaneous │ $845,115,552│ $394,918,201│ $3,952│ $2,768│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Grand │$18,727,147,032│$9,502,507,893│ $87,556│ $66,606│ │ total—All │ │ │ │ │ │ liabilities │ │ │ │ │ │Profit and │ 745,504,337│ 190,101,673│ 3,485│ 1,333│ │ loss balance│ │ │ │ │ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Grand │$19,472,651,369│$9,692,609,566│ $91,041│ $67,939│ │ total—All │ │ │ │ │ │ assets │ │ │ │ │ ╘══════════════╧═══════════════╧══════════════╧═══════════╧═══════════╛ ╒══════════════╤══════════════════════════════════════════════════════╕ │ │ ASSETS. │ ├──────────────┼──────────────────────────────┬───────────────────────┤ │ │ Per Mile of main tracks. │Per mile of all tracks.│ ├──────────────┼───────────────┬──────────────┼───────────┬───────────┤ │ │ 1908. │ 1890. │ 1908. │ 1890. │ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │RAILROAD: │ │ │ │ │ │Cost of road │ $50,656│ $48,109│ $38,659│ $40,033│ │Cost of │ 4,961│ 2,770│ 3,786│ 2,305│ │ equipment │ │ │ │ │ │Material and │ 952│ 419│ 727│ 348│ │ supplies │ │ │ │ │ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Total │ $56,569│ $51,298│ $43,172│ $42,686│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │INVESTMENTS: │ │ │ │ │ │Stocks owned │ $8,903│ $3,208│ $6,795│ $2,670│ │Bonds owned │ 5,351│ 1,582│ 4,083│ 1,316│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Total │ $14,254│ $4,790│ $10,878│ $3,986│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │CURRENT │ │ │ │ │ │ ASSETS: │ │ │ │ │ │Cash and │ $5,108│ $2,020│ $3,898│ $1,681│ │ current │ │ │ │ │ │ assets │ │ │ │ │ │Sinking, │ 652│ 820│ 498│ 683│ │ Insurance, │ │ │ │ │ │ and other │ │ │ │ │ │ funds │ │ │ │ │ │Total │ $5,760│ 2,840│ $4,396│ $2,364│ │Miscellaneous │ $5,377│ $4,660│ $4,103│ $3,878│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Grand │ $81,960│ $63,588│ $62,549│ $52,914│ │ total—All │ │ │ │ │ │ assets │ │ │ │ │ ├──────────────┼───────────────┴──────────────┴───────────┴───────────┤ │ │ LIABILITIES. │ ├──────────────┼───────────────┬──────────────┬───────────┬───────────┤ │SECURITIES │ │ │ │ │ │ ISSUED: │ │ │ │ │ │Capital stock │ $30,682│ $27,417│ $23,415│ $22,815│ │Bonds │ 39,738│ 29,277│ 30,327│ 24,362│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Total │ $70,420│ $56,694│ $53,742│ $47,177│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │CURRENT │ │ │ │ │ │ LIABILITIES:│ │ │ │ │ │Accrued │ │ $166│ │ $188│ │ interest │ │ │ │ │ │Other current │ $4,845│ 2,890│ $3,698│ 2,405│ │ liabilities │ │ │ │ │ │Total │ $4,845│ $3,056│ $3,698│ $2,543│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Miscellaneous │ $3,557│ 2,591│ $2,715│ $2,156│ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Grand │ $78,822│ $62,341│ $60,155│ $51,876│ │ total—All │ │ │ │ │ │ liabilities │ │ │ │ │ │Profit and │ 3,138│ 1,257│ 2,394│ 1,038│ │ loss balance│ │ │ │ │ ├──────────────┼───────────────┼──────────────┼───────────┼───────────┤ │Grand │ $81,960│ $63,588│ $62,549│ $52,914│ │ total—All │ │ │ │ │ │ assets │ │ │ │ │ ╘══════════════╧═══════════════╧══════════════╧═══════════╧═══════════╛
It ought also to be borne in mind, in this connection, that, while there could be no lawful mode for the revision of existing capitalization, should it in any instance be found to be too small or too great when measured by the results of such a valuation, the future issue of securities must be controlled by the necessities of the carriers and the state of the market, and is also practically restricted by the Interstate Commerce Commission's accounting system, which declares what expenditures may and what may not be carried into the capital account. The law cannot compel any company to repudiate any existing security, and if it could it is not to be supposed that Congress would compel such an impairment of contract rights; public policy will not permit in practice restrictions that would prevent the issue of securities to meet the actual needs of the public and the carriers; the accounting system prevents issues of any other sort. Further restrictions would be cumulative and superfluous.
TABLE 11.